It Takes Two to Tango: Gilstrap Frames Implementer Holdout as Bad Faith Justifying “Suspension” of SEP Licensing Discussions

Innovators have long insisted that licensing discussions over standard essential patents (SEP) are one sided: implementers often “hold out” in bad faith by delaying discussions for as long as possible. The theory driving this delay-to-pay strategy is that the worst thing that can happen is that an implementer will end up paying no more than the same FRAND rate it should have paid in the first instance, just later in time, all while continuing to receive the benefit of the patented technology. A recent ruling by Judge Gilstrap in the Eastern District of Texas imposed some needed balance in this debate. In a dispute between a patent owner and Samsung, Judge Gilstrap reinforced notions of fundamental fairness in finding that bad faith negotiation gives both sides the right to suspend licensing discussions—and may also justify penalties such as fee-shifting. 

To get there, Judge Gilstrap interpreted the French law governing the ETSI agreement that guides licensing discussions for 4G/5G SEPs. In short, Judge Gilstrap determined that per French law: (1) parties who fail to negotiate SEP contracts in good-faith may be liable for damages (including attorneys’ fees and cost of litigation) resulting from that breach, and; (2) either party may suspend negotiations based on the other’s bad faith. One caveat Judge Gilstrap added was that after suspension for bad faith, if the bad faith ceases licensing discussions must resume. While questions remain as to how parties can measure, let alone prove, when bad faith begins and ends in SEP licensing negotiations, innovators and implementers should both appreciate the commonsense nature of Judge Gilstrap’s high level rulings, while recognizing the inherent risks that remain for both sides.

Background

G+Communications, LLC (“G+”) recently tried its patent infringement claims against Samsung Electronics Co. LTD and Samsung Electronics America, Inc. (“Samsung”) to a jury in Marshall, Texas. Trial began on January 22, 2024; it concluded five days later with an award of $67.5 million in damages, and a running royalty of $1.50 per unit, against Samsung. Notably, the jury also expressly rejected Samsung’s argument that G+ failed to fairly license its patents.

G+ asserted SEPs related to 5G mobile systems against Samsung’s Galaxy line of smartphones. These SEPs are subject to G+’s commitment to license under terms that are fair, reasonable, and nondiscriminatory (FRAND) through their prior owner’s ETSI membership. The ETSI membership agreement is governed by French law. Prior to trial, Judge Gilstrap resolved questions of French law for issues related to FRAND negotiations. 

Order on French Law
 

Judge Gilstrap’s order interpreting French law found: 

1. In a negotiation for a license to a patent where the patent has been contributed to an adopted standard (which patent is known as a standard essential patent), if either negotiating party (being either the patent holder or the implementer of the adopted standard) fails to negotiate in good faith and thereby prevents a license from being granted on fair reasonable and non-discriminatory terms, then the party who fails to act in good faith is liable to the other party for any reasonable damages which arise from such breach, including but not limited to attorney’s fees and the cost of litigation.
    
2. Where a patent is contributed to an adopted standard established by a standard setting organization, such contribution contractually burdens the patent to thereafter be licensed on fair, reasonable, and non-discriminatory terms. This is known as the FRAND obligation. This obligation is irrevocable, and thereafter runs with the patent. However, if in negotiating for a license to a patent burdened by a FRAND obligation either the patent holder or the implementer of the adopted standard fails to act in good faith and thereby prevents a license from being granted, the other party’s obligation to continue negotiations is suspended. This does not remove the burden of the FRAND obligation from the patent, but avoids obliging a party acting in good faith to continue negotiating with a party who fails to do so. If the bad faith actor ceases its bad faith and begins acting in good faith, the good faith negotiations must also resume.

Order at 11 (emphasis added).   
 

It’s worth noting that Judge Gilstrap previously ruled that Samsung could not “suggest or imply that the act of filing cases…or the act of seeking an injunction is improper or violative of ETSI Rules[,]” while also ruling that the jury could take into the act of filing the lawsuit itself, within the totality of the circumstances, in determining whether G+ had breached its FRAND obligation or failed to act in good faith. Order at 4. 
 

In its verdict form, the jury expressly rejected Samsung’s argument that G+ had breached its FRAND obligation, or that G+ failed to act in good faith:

Takeaway
 

This is a positive development for SEP holders because Judge Gilstrap recognized that SEP license negotiations are a two-way street. In order to get the benefit of a patent holder’s FRAND obligations, implementers have to hold up their end of the bargain by negotiating in good faith, and SEP holders do not have to just take bad faith delay from implementers lying down. On the flip side, SEP holders should also recognize that they have their own obligation to act in good faith or face paying damages. 
 

This opinion correctly recognizes that both sides must act in good faith to reach a deal. This two-way obligation should mitigate both implementers’ tendency to “hold out,” or improperly delay negotiations without punishment, and SEP-holders’ ability to “hold up” licensees in an attempt to extract supra-FRAND royalties. And while Judge Gilstrap introduced some ambiguity into the discussion by noting that discussions should resume once bad faith ceases, this likely does not alter the calculus for how SEP holders should behave: in good faith to achieve a SEP license on terms that are FRAND, regardless of implementers’ behavior. In any event, implementer gamesmanship of flip-flopping from good faith to bad faith and back is likely bad faith of itself.   
 

For more insights on SEP licensing and litigation, including the issues of ‘hold out’ and ‘hold-up’, see Mintz’sprevious articles: here and here.
 

Case Caption:  G+ Communications, LLC v. Samsung Electronics Co. LTD., et al., 2:22-cv-00078-JRG (E.D.Tex.).

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