Podcast: Conductive Discussions: Recent FRAND & Trade Secret Enforcement Trends Affecting the Semiconductor Industry

This new Ropes & Gray podcast series, “Conductive Discussions,” focuses on legal issues of interest to the semiconductor industry. In the first episode of the series, IP litigation partners Mark Rowland, Dave Chun and Matt Rizzolo, and IP transactions associate Georgina Suzuki, discuss recent FRAND developments that impact supply chain and global patent licensing practices and recent trends in civil and criminal trade secret enforcement. This podcast also includes SiliconSpeak, a report of recent legal news in the semiconductor industry.

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Transcript:

Mark Rowland: Welcome to our first episode of Conductive Discussions, a Ropes & Gray podcast series focused on legal issues of interest to the semiconductor industry. My name is Mark Rowland, and I am a partner at Ropes & Gray in our IP litigation practice, based in our Silicon Valley office. I'll be hosting this episode. With me is Matt Rizzolo, an IP litigation partner in our Washington, D.C. office, whose practice concentrates on ITC investigations. Matt will be sharing his thoughts on recent FRAND developments that impact supply chain and global patent licensing practices. Also joining us is Dave Chun, an IP litigation partner in our Silicon Valley office, who will give us a few introductory thoughts about recent trends in civil and criminal trade secrets enforcement – we expect to dive more deeply into that topic in the near future. And we have with us Georgina Suzuki, an associate in our IP transactions practice, also based with me in Silicon Valley. Georgina will start us off with our SiliconSpeak report of recent legal news.

Georgina Suzuki: In stunning news, German and Chinese courts in December granted American chipmaker, Qualcomm, injunctions against Apple, banning the sale of certain iPhone models in those countries. The decisions are part of a broader global dispute between Apple and Qualcomm, which began in January 2017 when Apple sued Qualcomm over its licensing practices. As part of such dispute, the U.S. International Trade Commission is also reconsidering whether Qualcomm's asserted patent is obvious and whether an import ban against iPhones would be appropriate. In addition, an antitrust trial against Qualcomm by the U.S. Federal Trade Commission is underway in the U.S. District Court for the Northern District of California over whether the chipmaker used its monopoly to force cell phone makers into unfair agreements. Expect more to come in 2019.

In other news, an assistant attorney general recently revealed that the U.S. Department of Justice is planning to withdraw its agreement to an Obama-era policy issued with the U.S. Patent and Trademark Office relating to standard essential patents. The DOJ plans to increase enforcement against manufacturers that use standard setting organizations to coax favorable patent licensing terms from patent holders in exchange for having their technology included in an industry standard. The announcement is the latest example of the DOJ's new emphasis on protecting patent holders and cracking down on standard setting bodies, which some people view as discouraging competition and innovation.

Lastly, China recently announced an array of punishments that could restrict companies' access to borrowing and state funding support over IP theft. The list of 38 punishments comes as a concession from China in the larger trade war between the U.S. and China. Personally, if you ask me, I just wish forced listening of the song, “Baby Shark,” was on the punishment list. Getting “Baby Shark” stuck in your head might be really effective punishment.

Mark Rowland: Thanks, Georgina. Now we're going to transition into our discussion about FRAND. Matt is going to tell us about developments in that area, in the context of supply chain and global patent licensing. Matt?

Matt Rizzolo: Sure, thanks, Mark. The issue of FRAND licensing is seemingly always popping up in the semiconductor industry. Now I'm going to talk here about a few recent FRAND cases and decisions of note. So a common issue in IP licensing is the question of where in the supply chain the license patents. For example, as a licensor, you often want a license as far downstream as possible, in an effort to broaden your royalty base. A computer or a smartphone costing several hundred dollars is a more attractive base than a wifi chip, which costs less than $10. And by contrast, licensees often want a license upstream in the supply chain. A chipmaker may find itself on the receiving end of numerous indemnity letters, so it may be more cost effective for a chipmaker to contact the licensor and obtain a license on behalf of its customers. So this comes up in the context of that FTC v. Qualcomm case that Georgina mentioned earlier. Judge Koh, in the Northern District of California, addressed this very issue in the FRAND context and I think it's worth talking about. This case stems from the wide ranging global dispute between Qualcomm and Apple, but it doesn't actually involve Apple. The FTC is the plaintiff and Qualcomm is the defendant.

Mark Rowland: Matt, can you tell us more about that FTC case?

Matt Rizzolo: In June 2017 the FTC sued Qualcomm, alleging that Qualcomm's licensing practices for SEPs it owned relating to cellular communication standards violated Section 5 of the FTC Act. It harmed competition in the provision of baseband processors and modem chips that enable cell phones and other devices to communicate with the cellular network. The FTC alleged that Qualcomm was refusing to license its SEPs to other chip suppliers, which are competitors of Qualcomm, and maintained “exclusive dealing arrangements” with downstream handset companies, including one that the FTC considered to be a particularly “important” cellular device manufacturer, so we can guess who that may be. The FTC argued that Qualcomm's licensing policies were designed to prohibit these other chip suppliers from entering the baseband processor market altogether, enabling Qualcomm to maintain its position as the leading supplier of modem chips and compel cell phone manufacturers and other customers to pay allegedly “excessive” royalties for Qualcomm's SEPs.

Georgina Suzuki: So Matt, you're saying that the FTC wasn't licensing to its competitors, so what?

Matt Rizzolo: The FTC was alleging that Qualcomm's decision not to license to its competitors was an unfair trade practice under the FTC Act, based on Qualcomm's agreements that it had with two standard setting organizations that required Qualcomm to license its SEPs on FRAND terms to all applicants for a license. Qualcomm argued there was no requirement existing that required them to license to competing chip suppliers because these chip suppliers don't “practice” the “entire relevant” standards. Those standards describe the operation of a mobile device in relation to a cell network, not necessarily just the baseband processor operating alone. The FTC said, “Well, by declaring your patents essential to the LTE standard, for example, Qualcomm, you're required to license to “all applicants” under the relevant SSO IPR policies.” And these IPR policies didn't limit this commitment to any particular type of product, or particular company or level in the supply chain.

David Chun: So Matt, this is kind of a fundamental issue for all SEPs. What did the court decide?

 

 

 

 

Matt Rizzolo: In early November, the court granted FTC's motion for a partial summary judgment and held that Qualcomm was, in fact, required to license its SEPs on FRAND terms, not just to downstream cell phone manufacturers, but to everyone, including their competitors in the chip-making space. The court noted that in cases like the Microsoft v. Motorola case from the Ninth Circuit, the FRAND promises had previously been characterized as very “sweeping” and applying to “all applicants,” and this was the same language at issue in the patent policies here. And the court also explained that the “non-discrimination” part of FRAND prohibited Qualcomm from distinguishing between the types of applicants – an interpretation that the court determined was further reinforced by the respective SSO policy language.

Mark Rowland: I don't recall hearing about a court addressing this particular issue before, is that right?

Matt Rizzolo: Yes, that's right. This decision from Judge Koh seems to be the first one to expressly require an SEP holder to license its patented technology to its competitors and not be able to just pick and choose where to license along the supply chain. Now, I will note, and as Georgina pointed out earlier, the parties, FTC and Qualcomm, are currently in the midst of a jury trial that's scheduled to wrap up near the end of this month, so it's too soon to know whether this particular issue might be ultimately appealed to the Ninth Circuit. But if it's upheld, this is something that will present both licensors and licensees, as well as their attorneys, with some very thorny questions relating to global licensing practices, FRAND compliance, even royalty adjustment or patent exhaustion issues.

Mark Rowland: Speaking of global licensing practices, I'm aware that there was a decision from an appeals court in the United Kingdom recently, in a case brought by a company called Unwired Planet against Huawei, that could have major implications for global FRAND licensing negotiations. Can you tell us about that case?

Matt Rizzolo: Sure. So Unwired Planet is a non-practicing entity and it sued Huawei and several others entities in the UK, alleging infringement of about a half-dozen telecom-related standard and essential patents. Many of the parties settled, but Huawei did not. During the course of the litigation, Unwired Planet and Huawei engaged in licensing negotiations, made offers and counteroffers to each other, but no license was ultimately reached. So the case proceeded to trial and the lower court found infringement by Huawei and issued an injunction, but because of some of the unique FRAND issues in play in the case, that ruling was stayed pending appeal to one of the UK appellate courts.

Georgina Suzuki: So Matt, what specific FRAND issues were at play?

Matt Rizzolo: One of central importance here was the fact that Unwired Planet was attempting to negotiate not just a license to UK patents, but a worldwide global license that would cover all of its SEPs relating to 2G/3G/4G standards. Huawei had objected to this and argued to the court that Unwired Planet didn't have SEPs everywhere, and that really the court was only empowered to set a FRAND rate for the UK based on that geographic basis. The court rejected this argument and noted that licensing on a worldwide portfolio basis was common for SAPs and other types of patents, and that the FRAND undertaking, under ETSI’s patent policy, ETSI was the standard setting organization at issue in that case, had an international effect. This finding was specifically affirmed on appeal – the UK appellate court expressed concern that requiring FRAND licenses to be negotiated on a country-by-country basis would be more likely to lead to patent “hold-out” on the part of implementers of the standard – they might simply decide to negotiate on just UK patents, and Germany patents, or U.S. patents, for example.

David Chun: So if I'm remembering right, there were some issues raised relating to the “non-discrimination” prong of FRAND, right?

Matt Rizzolo: Yes, that's right. Huawei had also argued that the license rate offered to it by Unwired Planet was discriminatory, so it violated the non-discrimination prong of FRAND because the global royalty rate offered to Samsung, another large telecom equipment provider, was much lower. And a lower court judge agreed that Samsung and Huawei were similarly situated, but found that the specific circumstances surrounding the execution of the Samsung license made it not particularly useful as a direct comparable on which to weigh non-discrimination. This is an issue that the Court of Appeal dove into in a bit more detail on appeal and it took a little bit of a different approach. The Court of Appeal decided that the transaction itself, rather than the circumstances surrounding the transaction, should be the focus of the analysis. In the end, though, both the lower court judge and the appeals court agreed that the non-discrimination prong of FRAND doesn't equate to a so-called “most-favored nation” rate. There may be transactions where, for some reason, a patent owner might offer a royalty rate to a licensee that is lower than the so-called benchmark FRAND rate, but that doesn't mean that that patent owner would then be obligated to offer that low rate to all subsequent or even former FRAND licensees. Ultimately, to me, the major takeaway of this Unwired Planet case, both the lower court decision and the appellate court decision, is that a court, at least in the UK, is willing to set a global FRAND rate for a complex license involving multiple standards – here, 2G/3G/4G standards promulgated by ETSI.

Mark Rowland: Well, thanks, Matt, for telling us about the FTC v. Qualcomm case and the Unwired Planet v. Huawei case. Any other case you want to tell us about relating to licensing?

Matt Rizzolo: Yes, there was a really interesting complaint, I think, filed this past week by U-Blox, which is a fabless semiconductor company. U-Blox filed this complaint against another well-known non-practicing entity, InterDigital, who may be very familiar to some of you out there. U-Blox has brought some claims of FRAND violations, as well as declaratory judgment claims of non-infringement of a couple patents against InterDigital.

Mark Rowland: Oh, I heard about that case. It was filed in the Southern District of California, and interestingly, that's where Judge Selna's landmark “top-down” FRAND decision came down. Is that a coincidence?

Matt Rizzolo: Yes, that's right. I don't think that's a coincidence, that last year that decision came down in the Ericsson v. TCL case, and U-Blox is represented here by the very same group of attorneys who represented TCL in that case. TCL was the one there who had sought that FRAND rate determination from Judge Selna. So here, in this case, U-Blox is alleging that it is a ready and willing licensee, but that InterDigital is demanding unfair and unreasonably high rates, and that InterDigital is also discriminating against U-Blox by demanding rates that are higher than those that are charged to InterDigital's other licensees. A lot of the complaint is redacted, due to the confidential nature of licensing negotiations, so unfortunately, many of the specifics aren't known at this time, but I would say this is going to be one to watch over the course of this year and perhaps maybe even into next year. U-Blox included claims of breach of contract, promissory estoppel, as well as unlawful monopolization under Section 2 of the Sherman Act. And to tie things together to Unwired Planet, U-Blox is asking the Southern District of California to set the terms of a 2G/3G/4G FRAND license between the parties – presumably, a global one. So we'll see if the Southern District of California agrees with the Unwired Planet rationale.

Mark Rowland: Well, thanks Matt. Thanks for that interesting discussion of FRAND issues. Georgina mentioned earlier that China has recently identified what it called “punishments for IP theft.” Dave, I know we're going to dive more deeply into trade secrets in another episode, but you had some introductory thoughts that were interesting about trends in trade secret enforcement and that might also interest our listeners. Is there a rising trend in trade secret enforcement?

David Chun: Yes, so in addition to the “Baby Shark” reference, I smiled when Georgina mentioned punishments for IP infringement in China. Ironically, China is one of reasons why there's been a significant increase in trade secret enforcement, in both the civil litigation and criminal prosecution context in the United States. This rise coincides with a number of factors, including:

• a high degree of employee mobility, in combination with the relative ease at which large volumes of information or data might be transported electronically;
• there's also been an actual or maybe just a perceived weakening of other forms of IP protection, including patents in recent days; and
• pertinent to China, there has been a greater U.S. government emphasis on protecting U.S. developed technologies and domestic companies.

So for all these reasons, as a result, there have been some really well-known companies involved in trade secret cases, both on the giving end and on the receiving end, including the likes of Uber, DuPont, Boeing, Tesla and many others. Recently, and pertinent to the audience of this podcast, Micron was identified as the injured party in a highly publicized indictment by the Department of Justice in recent months.

Matt Rizzolo: I heard about that case – that Micron case wasn't brought by Micron, though. Wasn't it brought by the federal government? Who else was involved in that?

David Chun: Yes, Matt, so that's exactly right. So Micron was identified as the injured party, but the indictment was handed down by the Department of Justice in the Northern District of California. Micron, of course, is an Idaho-based technology company, who's a leading supplier of DRAM. And the defendants, or the alleged wrongdoers in this case, included five different entities: one state-owned entity in China, a Taiwanese corporate entity, and as well as three individuals who previously worked for Micron. The allegations in the indictment were that these individuals stole trade secrets from Micron and brought them directly to the competitors in China.

Georgina Suzuki: So Dave, was it unusual to go after the employer in such a case?

David Chun: Yes, not at all. In Micron, in particular, we see allegations of misappropriation that were allegedly sponsored, or otherwise encouraged by the Chinese or Taiwanese entities. But even in cases where the misappropriation might end up being the actions of a rogue employee, the injury to the original technology holder or developer is coming from the competitor in the marketplace. And there are a number of tools or legal theories that an injured party might utilize, but this is something that we'll go into next time.

Mark Rowland: Dave, when I hear injury in the marketplace, I think about civil cases. Is there also an increasing enforcement trend on the civil side?

David Chun: So the short answer is yes, absolutely. More often than not, in these criminal cases, there's going to be a corresponding or companion civil litigation brought somewhere at some time. And I also alluded to earlier the actual or perceived weakening of other forms of IP enforcement, and in particular, patent infringement cases over the years, but the opposite is actually true in civil trade secret cases. There's been a marked increase in recent years – again, I think there are a number of factors, most notably just the recent number of high-profile trade secret litigations that have resulted in large awards or settlements. But more importantly, I think, there is the Defend Trade Secrets Act, which created for the first time, a federal statutory enforcement scheme for civil enforcement of trade secrets. It's now given a greater predictability to trade secrets versus the old regime, where you had 50 not necessarily consistent state jurisdictions for trade secret actions, as well as the attractiveness of going to a federal rather than a state court.

Mark Rowland: Do these developments suggest more cases might be brought against bigger companies?

David Chun: Sure. So the size of the company matters, in that for larger companies, obviously there's larger risk – both because there's a larger number of employees who might leave or join the company, but also because they have greater interactions with third parties, including consultants, suppliers, manufacturers, what have you. And then, of course, there's also the appeal of a pretty large potential for huge damages award. But at the end of the day, I think the size of the company is not that big of a factor. Any company that has trade secrets that are stolen has little choice but to try and protect its trade secrets.

Mark Rowland: Okay, I know we're going to talk about this more at a later date, but at this point, have you got any takeaways for our listeners?

David Chun: Sure, just a few, but I won't go into too much detail. First, protect your own IP – make sure your internal controls are robust, both on the compliance and employee training side, and also, more importantly I believe, in the information technology and security side. Coupled with that is to avoid infection of your own products, or your own developed technologies from third parties, or information that might be brought in by new employees. And finally, this might be painfully obvious, but today, your IP assets are not just patents with ribbons or famous trademarks that everybody knows – think about trade secrets, as well.

Mark Rowland: Thanks, Dave and Georgina and Matt, as well, for joining me today, and for sharing these insights. Subscribe to Conductive Discussions and other Ropes Talk podcasts in the newsroom page of ropesgray.com. If you have any questions or comments, just drop us a line. For more information about our practice, specific to semiconductors, just type "semiconductors Ropes Gray" to get to our semiconductors page. Thank you for listening, and we hope you join us next time.