The Fall season brings not only football, changing leaves and pumpkins, but also many program opportunities on your favorite legal issues — ours being standard essential patents.  Here are some program opportunities in the coming weeks to consider:

Today, Tuesday Oct. 13 at 2pm – 3pm Eastern, Intellectual Property Owners Association IP Chat Channel online webinar program on Standards and FRAND: Recent Developments in the U.S. and Europe.  This program will look at recent developments in the U.S. and Europe concerning standard essential patents, including the Ninth Circuit’s decision in the Microsoft v. Motorola case (see our July 31, 2015 post), the European High Court’s ruling in Huawei v. ZTE (see our July 16,2015 post), and developments in the U.S. International Trade Commission after the U.S. Trade Representative’s disavowal in 2013 of exclusionary relief in the Samsung v. Apple investigation (see, e.g., our Aug. 31, 2015 post where full Commission again dodges FRAND issues).   Speakers for this program include our own David W. Long, who is a Vice-Chair of IPO’s Litigation Committee.  More information and registration can be found at this IPO website link.

Oct. 19 – 20 in Reston, VA, The 15th Annual Sedona Conference on Patent Litigation: Improving the Efficiency of Handling Patent Litigation.  This in-person program will focus on three main areas of patent litigation: (1) patent litigation case management in light of patent legislation efforts and recent case developments; (2) litigating standard essential patent cases; and (3) coordinating parallel proceedings in district court and inter partes review in the U.S. Patent and Trademark Office.  There will be three panels discussing standard essential patent issues in the areas of patent owner and prospective licensee obligations based on standard setting commitments, determining what is a fair, reasonable and non-discriminatory royalty rate, and efficiently managing cases before district courts and the International Trade Commission.  Our own David W. Long is a Co-Chair for the overall conference and a speaker.  More information and registration can be found at this Sedona Conference website link.

Oct. 22 – 24 in Washington, DC, American Intellectual Property Law Association’s 2015 Annual Meeting.  This year’s AIPLA Annual Meeting offers two programs on standard essential patents.  On Thursday, Oct. 22, at 3:30 pm, AIPLA’s Antitrust Committee and Standards & Open Source Committee are sponsoring a joint program on Antitrust Law/Standards.  This program will focus on the intersection of antitrust law and patent law, such as the U.S. and Chinese competition agency investigations and standardization reform.  Speakers include Renata Hesse, a Deputy Assistant Attorney General in the U.S. Justice Department’s Antitrust Division, and Dina Kallay, the Director of Intellectual Property & Competition at Ericsson.  This program will be moderated by our own David W. Long, Chair of AIPLA’s Standards & Open Source Committee.  On Friday, Oct. 23, at 10:30 am, there will be a program on Antitrust Challenges: The Interface Between the Competition Law and IP Law that will address those issues being faced in Europe and China.  Speakers include Mathew Heim of Qualcomm and Mark D. Whitener of General Electric.  More information and registration for AIPLA’s Annual Meeting can be found at this AIPLA website link.

Yesterday, Qualcomm issued a press release announcing resolution of the investigation under China’s Anti-Monopoly Law by China’s National Development and Reform Commission (“NDRC”) of Qualcomm’s licensing practice for standard essential patents.  In addition to Qualcomm paying a $975 million fine, the China’s NDRC approved Qualcomm’s proposed rectification plan, summarized as follows:

  • Qualcomm will offer licenses to its current 3G and 4G essential Chinese patents separately from licenses to its other patents and it will provide patent lists during the negotiation process.  If Qualcomm seeks a cross license from a Chinese licensee as part of such offer, it will negotiate with the licensee in good faith and provide fair consideration for such rights.
  • For licenses of Qualcomm’s 3G and 4G essential Chinese patents for branded devices sold for use in China, Qualcomm will charge royalties of 5% for 3G devices (including multimode 3G/4G devices) and 3.5% for 4G devices (including 3-mode LTE-TDD devices) that do not implement CDMA or WCDMA, in each cae using a royalty base of 65% of the net selling price of the device.
  • Qualcomm will give its existing licensees an opportunity to elect to take the new terms for sales of branded devices for use in China as of January 1, 2015.
  • Qualcomm will not condition the sale of baseband chips on the chip customer signing a license agreement with terms that the NDRC found to be unreasonable or on the chip customer not challenging unreasonable terms in its license agreement.  However, this does not require Qualcomm to sell chips to any entity that is not a Qualcomm licensee, and does not apply to a chip customer that refuses to report its sales of licensed devices as required by its patent license agreement.

Qualcomm also gave a presentation to investors with further explanation of the agreement reached, including the following:

  • Qualcomm will not pursue further legal proceedings contesting the NDRC’s findings that Qualcomm violated China’s Anti-Monopoly Law
  • Requires no licensing changes outside China with limited exceptions
  • Allows Qualcomm’s licensing business to fully participate in growing China opportunity
  • Qualcomm does not believe that other competition agencies will interpret their laws to reach conclusions similar to China’s NDRC

 

The Antitrust Division of the U.S. Department of Justice (“DOJ”) has published a business review letter that it will not challenge the Institute of Electrical and Electronics Engineers (“IEEE”) adopting changes to its IPR Policy discussed in our Feb. 3, 2015 post. In a related DOJ press release, DOJ states that it does not dictate patent policy choices of standard setting organizations (“SSOs”), and did not believe the proposed IPR policy change “is likely to result in harm to competition”, stating:

“The department supports standards setting organizations’ efforts to clarify their patent licensing policies,” said Acting Assistant Attorney General Hesse.  “IEEE’s decision to update its policy, if adopted by the IEEE Board, has the potential to help patent holders and standards implementers to reach mutually beneficial licensing agreements and to facilitate the adoption of pro-competitive standards.  Where, as here, the department does not believe that adoption of a policy change is likely to result in harm to competition, IEEE and other standards setting organizations are free to adopt those modifications to their policies that they believe will benefit their standard setting activities.  The U.S. government does not dictate patent policy choices to private standards setting organizations.”

DOJ also explained the limited import of its business review letter as a current intent not to bring an antitrust challenge against the business activity, though it may do so later if there are anticompetitve effects:

Under the department’s business review procedure, an organization may submit a proposed action to the Antitrust Division and receive a statement as to whether the division currently intends to challenge the action under the antitrust laws based on the information provided.  The department reserves the right to challenge the proposed action under the antitrust laws if it produces anticompetitive effects.

Below is a summary review of DOJ’s action here.

IEEE Request for Business Review Letter

DOJ was responding to IEEE’s request for a business review letter.  IEEE stated it was requesting such a review because some comments in response to the proposed IPR Policy change “voiced either vague or specific antitrust concerns,” including concerns that revisions “to the term ‘reasonable rate’ … could amount to ‘buyer-side price-fixing.'”  The IPR Policy change generally is directed to four areas:

  • A definition of “Reasonable Rate” that includes reference to “the smallest saleable Compliant Implementation”
  • A definition of “Compliant Implementation” as being a component, sub-assembly or end-product so that any such implementers along the chain may seek the benefits of a RAND-commitment
  • A blanket preclusion on seeking injunctive relief prior to adjucating through appeal reasonable license terms even as to unwilling licensees
  • Reciprocity provisions that may condition providing a license in return for a cross-licensee to the licensee’s SEPs on that same standard, and permitting voluntary flexibility with other reciprocity terms.

The IEEE’s letter states that it does not believe there is “buyer-side price-fixing” for several reasons.  With respect to what IEEE considered the most specific anti-trust issue raised concerning the term “reasonable rate”, IEEE emphasized that the enumerated factors–e.g., the smallest saleable Compliant Implementation–are not required to be considered, only recommended:

1.  The proposed policy does not set a maximum royalty, either for a specific patent or for a group of all patents essential to a particular standard.  It generally defines the term “reasonable rate” and recommends (but does not require) additional factors for consideration in determining an appropriate rate.  The proposed policy does not prevent parties from discussing any other factors that they believe appropriate.

IEEE also stated that the proposed IPR Policy change “does not retroactively amend previously Accepted Letters of Assurance” and patent owners are not required to submit new Letters of Assurance under the proposed IPR Policy change if they don’t want to.

IEEE’s Process In Proposing IPR Policy Change

DOJ received concerns by some entities that “parties desiring lower royalty rates commandeered IEEE-SA” and the IPR Policy revision “was the product of a closed and biased process.”  DOJ does not go into details about those concerns, but states that most concerned an Ad Hoc committee within IEEE that drafted the revision.  Below is a summary of where that Ad Hoc committee fit into the process.  Ultimately, DOJ determined that, “[g]iven the numerous opportunities for comment, discussion, and voting at different levels within IEEE, the Department cannot conclude that the process raises antitrust concerns.”

IEEE is a large non-profit professional technology association.  The IEEE Standard Association (IEEE-SA) is an operating unit within IEEE that develops technical industry standards and which developed the IPR Policy at issue here.  The IEEE-SA is governed by its own Board of Governors, who appoint members to the IEEE-SA Standards Board that oversees the IEEE standards-development process.  The IEEE-SA Standards Board has various working committees, including the Patent Committee (“PatCom”) that oversees the use of patents in developing IEEE standards.

Participants in the IEEE standard-setting process may submit letters of assurance (“LOAs”) for patents that may be essential to a developing standard and indicate their willingness to license such patents, and under what terms, if they ultimately are essential to the finalized standard.  Those terms include, for example, an agreement to license a patent that is essential to the standard on reasonable and non-discriminatory terms (“RAND”).

The PatCom chair appointed an Ad Hoc committee to consider changes to the IPR Policy given divergent views on what constitutes “reasonable rates” under a RAND-encumbered patent.  The Ad Hoc committee then drafted changes to the IPR Policy, which was revised and ultimately approved by the PatCom to forward to the IEEE-SA Standard Board.  The IEEE-SA Standards Board approved forwarding the revised IPR Policy to the IEEE-SA Board of Governors, which then approved the revision conditioned upon receiving a favorable business review letter from DOJ (i.e., this one here) and ultimate review by the IEEE Board of Directors.  The IEEE Board is expected to vote on this revised IPR Policy soon.

“Prohibitive Order” (e.g., Injunctions)

DOJ considered the proposed IPR Policy change that would preclude seeking an injunction until after licensing terms are adjudicated and go through at least a first level of appeal. DOJ observes that a RAND commitment under IEEE’s current IPR Policy does not preclude seeking an injunction against an unwilling licensee, stating that the RAND commitment includes an “[i]nherent … pledge to make licenses available to those who practice such essential patent claims … in other words, not to exclude these implementers from using the standard unless they refuse to take a RAND license.”  DOJ also observes, however, that the proposed amended IPR Policy “place[s] additional limits on patent holders’ ability to obtain injunctive relief” and is more restrictive than current U.S. case law and guidance from U.S. agencies, stating:

This provision may place additional limits on patent holders’ ability to obtain injunctive relief in a U.S. court, but it appears that, in practice, it will not be significantly more restrictive than current U.S. case law, and the added clarity may help parties reach agreement more quickly.  Although this provision is more restrictive than recent guidance on this issue from the U.S. government, the U.S. government does not dictate patent policy choices to private SSOs.

That noticeably understates the point because, as explained in our Feb. 3, 2015 post, there is universal agreement in statements by courts and agencies–including DOJ itself–that injunctive relief should be available in certain circumstances involving unwilling licensees in order to deter patent hold-out.  DOJ does not directly address this issue that the IPR Policy would preclude seeking an injunction against an unwilling licensee.  DOJ does so indirectly, indicating that implementers may be deterred from seeking to “delay payment” or being “recalcitrant about taking a license” because (i) they can avoid uncertainty caused by the absence of a license, (ii) they can avoid the cost of litigation, (iii) they may obtain a pre-litigation discount, and (iv) courts may require them to pay a bond or escrow payments, stating:

Nevertheless, patent holders have expressed concern that this damages remedy is insufficient because it permits potential licensees to benefit by delaying paying reasonable compensation for a portfolio of patents until a patent holder has litigated each patent in its portfolio individually.  The Department encourages patent holders and implementers to negotiate licensing agreements that are mutually acceptable, and there are incentives favoring a negotiated outcome.  For example, implementers have incentives to reach agreement on licensing terms to reduce cost uncertainty as they bring products to market.  In addition, litigation is expensive for both parties and licensees risk that a court will award a higher royalty for a patent that is found to be valid and infringed than a discounted pre-litigation rate offered by a licensor.

… [W]here potential licensees appear recalcitrant about taking a license, courts and other third-party decision makers may seek to ensure payment by requiring alleged infringers to post a bond or make escrow payments.  Moreover, other potential licensees will be less likely to litigate once a patent holder has demonstrated the value of its patents (or a subset of the patents in its portfolio) through successful infringement litigation.

But, again, those considerations always have been present, yet were not deemed sufficient deterrents by courts and U.S. agencies that have consistently stated that injunctive relief should be available against unwilling licensees.  This revision, therefore, actually may increase litigation over IEEE standards even though reducing such litigation is the suggested reason behind these revisions.

DOJ ultimately concludes that the proposed IPR Policy revision “is unlikely to result in competitive harm,” because it “is consistent with the direction of U.S. case law and patent holders can avoid its requirements by declining to submit an LOA.”  As discussed above, however, precluding injunctive relief against unwilling licensees is against current U.S. case law and prior guidance from U.S. agencies.  Challengers of the proposed IPR Policy change may argue this raises questions on the reliability of DOJ’s business review letter.

 “Reasonable Rate”

Mandatory Factor.  DOJ reviewed the defined “Reasonable Rate” as having a “mandatory factor” that “a Reasonable Rate ‘shall mean appropriate compensation … excluding the value, if any, resulting from the inclusion of [the patent claim’s] technology in the IEEE standard.'”  The general concept of apportioning value to the patented technology finds support in current case law, such as the Federal Circuit’s recent Ericsson decision.  DOJ also found that this provision aligns with goals of providing patent holders appropriate compensation without improper “hold-up value” connected with standardization, citing the Federal Circuit’s recent Ericsson v. D-Link decision that “the patentee’s royalty must be premised on the value of the patented feature, not any value added by the standard’s adoption of the patented technology.”  That Federal Circuit decision, however, counseled as being “neither necessary nor appropriate” instructing a jury on patent hold-up based merely on some “general argument that these phenomena are possibilities;” rather, patent hold-up may be considered if there is evidence of actual holdup, such as a patent holder seeking higher royalty rates after the IEEE standard was adopted (see our Dec. 5, 2014 post for a summary of the Ericsson v. D-Link decision).

DOJ does not refer to any actual evidence of hold-up for patents involving IEEE standards,  it is not clear that IEEE itself had considered such actual evidence, and IEEE standards (e.g., the 802.11 WiFi standard) have comprised the bulk of standard essential patent litigation, but they have no provided any actual evidence of patent holdup.  We have reported on one instance where a patent owner–that had not participated in the standard-setting process or made any associated commitment–argued its royalty rate could be enhanced by the fact that the defendant could not practice the standard absent a license to the patent, but the court in that case unsurprisingly precluded the patent owner from seeking such “hold-up” value. (See our Apr. 23, 2014 post).  Challengers of the revised IPR Policy may argue that the lack of any evidence of actual hold-up for patents involving IEEE standards raises questions about reliance on DOJ’s position here that seeks to justify a significant IPR policy change in order to address a problem for which there is no evidence actually exists.

Three Optional Factors.  DOJ also considered the remaining “three recommended factors” that include considering the “smallest saleable Compliant Implementation” and limiting consideration of comparable licenses to those not entered under threat of an injunction or in circumstances not consistent with the defined “Reasonable Rate.”  The DOJ found comfort from these factors not being required and no specific methodology being mandated:

Significantly, the Update makes clear that the determination of Reasonable Rates ‘need not be limited to’ these factors.  The Update, then, does not mandate any specific royalty calculation methodology or specific royalty rates.

Not mandating a specific methodology is consistent with developed case law, the Federal Circuit’s Ericsson v. D-Link decision rejecting a specific methodology for all RAND-encumbered patents, but relying instead on the particular facts presented in any given case:

To be clear, we do not hold that there is a modified version of the Georgia-Pacific factors that should be used for all RAND-encumbered patents.  Indeed, to the extent D-Link argues that the trial court was required to give instructions that mirrored the analysis in Innovatio or Microsoft, we specifically reject that argument.  We believe it is unwise to create a new set of Georgia-Pacific-like factors for all cases involving RAND-encumbered patents.  Although we recognize the desire for bright line rules and the need for district courts to start somewhere, courts must consider the facts of record when instructing the jury and should avoid rote reference to any particular damages formula.

Although the factors are not exclusive or required to be considered, DOJ found that they “focus attention on considerations that may be likely to lead to the appropriate valuation.”  This “focus”, however, might lead to the precise “rote reference to any particular damages formula” that the Federal Circuit counseled to avoid.

DOJ found that the “smallest saleable Compliant Implementation” factor “may be appropriate … particularly when the product is complex and incorporates many patented technologies.”  DOJ supports this by citing to three Federal Circuit decisions on the smallest saleable patent practicing unit (see our blog posts on LaserDynamics, Virnetx and Ericsson).  But those cases make clear that the “smallest saleable patent practicing unit” is solely a creature of  U.S. jury litigation under evidentiary Rule 403 that seeks to limit confusion of lay jurors considering a hypothetical negotiation and, thus, may not be applicable to real world, bilateral negotiations between sophisticated market participants (see our Feb. 3, 2015 post).  DOJ does not mention this limited applicability of the smallest saleable patent practicing unit, which challenges of the IPR Policy may argue raises questions about reliance on DOJ’s analysis.  But DOJ may have taken some comfort in that this factor is not mandatory nor does it preclude considering the end product, stating:

This factor does not mandate the use of the smallest saleable Compliant Implementation as the correct [royalty] base.  For example, the provision does not exclude evidence of the role of the relevant patented functionality in driving demand for the end product, or bar using end-product licenses to help determine the appropriate value to attribute to the technology.

DOJ also considered the second non-mandatory factor regarding apportioning value of all SEPs on a standard “addresses royalty stacking, which may hamper implementation of a standard,” relying in part on the Federal Circuit’s Ericssson decision that discussed royalty stacking concerns.  As with patent hold-up, the Federal Circuit’s recent Ericsson decision eschewed reliance on theoretical royalty stacking concerns in favor of actual evidence of such royalty stacking, stating that “[t]he mere fact that thousands of patents are declared to be essential to a standard does not mean that a standard-compliant company will necessarily have to pay a royalty to each SEP holder.”  As with patent holdup, DOJ does not state that it considered any actual evidence of royalty stacking or that IEEE had either, and the numerous litigations involving IEEE standards have not provided such evidence.  So challengers of the revised IPR Policy may argues this raises questions about relying on DOJ’s position here that is premised on a problem for which there is no evidence exists.

Regarding the third non-mandatory factor on what constitutes comparable licenses, DOJ found comfort that “[t]he Update does not prevent consideration of licensing agreements other than those specifically identified therein.”  The ability to consider a broader swath of comparable licenses is consistent with U.S. case law, which permits differences from the instant license negotiation to be factors a jury can consider without necessarily excluding those comparable licenses altogether (see our Sep. 17, 2014 post on Virnetx and Dec. 5, 2014 post on Ericsson).

Any “Compliant Implementation”

DOJ considered a revision based on the definition of “Compliant Implementation” as “meaning that a patent holder making an IEEE RAND Commitment cannot refuse to license its patents for use in IEEE-SA standards at certain level of production.”  DOJ observes that this may “entail[] a departure from historical licensing practices”, but “the Update does not mandate specific licensing terms at different levels of production,” stating:

For example, the royalty rate need not necessarily be the same at all levels of production.  In each case, the RAND royalty should reflect the value of the patented technology.  If a patented invention’s value is not reflected in the current price of upstream implementations, due to historical licensing practices, some adjustments may be necessary, and the Update does not prevent such adjustments.

DOJ’s point here is not entirely clear.  Does DOJ mean that separate licensing agreements can be entered and accumulate at each of level of the vertical supply chain so that, by the end of the supply chain, the cumulative total royalty provides full compensation for the patented technology (and can that be done given patent exhaustion concerns — see, e.g., our June 25, 2014 post considering Federal Circuit staying action against retailers while case proceeded against manufacturer).  Or does DOJ suggest, per its last sentence above, that the price of a component used to implement a standard should be increased to account for the benefits that an invention provides to each particular end product in which the component is used.

For example, how would DOJ’s proposal work in the hypothetical presented in our Feb. 3, 2015 post for patented technology that provides power savings in a wireless standard that is implemented in a microchip used (1) in a stationary end product that derives no benefit from the patented power-savings because it is powered from a wall outlet and (2) a mobile end product that substantially benefits from the patented power-saving:

  • Does the microchip vendor raise the price of the microchip across the board to pay the entire patent licensing fee so that manufacturers of the stationary end product (that do not need the patented technology) pay the same licensing fee as manufacturers of the mobile end product (that greatly benefit from the patented technology)?
  • Or does the microchip vendor sell the same microchip at different prices based on what end product within which the microchip will be implemented to account for the different value patented technology provides to different end products?
  • Or does the microchip vendor sell a different microchip to different manufacturers to exclude technology not needed by the end product?

None of these may be practical options.  This may be particularly true with the latter option given (1) costs in having many different microchip versions, (2) some nominal need for the patented technology in an end product (i.e., its needed, but is not as valuable as it is in other products) and (3) end products may be required to have the patented functionality–even if no benefit to that product–in order to state that they are fully compliant with the wireless standard (important where the fundamental premise of having standards is interoperability among disparate products that comply with the standard).  These various considerations may indeed be why, as DOJ and courts have observed, actual license negotiations often are based on licensing end products, rather than components thereof.

 Reciprocity–Grantbacks

DOJ considered a provision of the proposed IPR Policy amendment that “permits a licensor to require a potential licensee to grant back a license to its own patents essential to the same standard.”  But the proposed amendment would “prohibit[] licensors from demanding licenses to applicants’ patents that are not essential to the same standard … and from forcing an applicant to take a license to patent claims that are not essential to the referenced standard.”  This is intended to prohibit “forc[ing]” a cross-license to a licensee’s differentiating patents, which might “decrease incentives to innovate.”  DOJ found that this provision still “leaves parties free to negotiate these types of terms voluntarily.”

DOJ’s Conclusion

DOJ ultimately concludes that the proposed IPR Policy amendment has “potential to benefit”, and cannot conclude it is “likely to harm competition”, stating:

The Department concludes that the Update has the potential to benefit competition and consumers by facilitating licensing negotiations, mitigating hold up and royalty stacking, and promoting competition among technologies for inclusion in standards.  The Department cannot conclude that the Update is likely to harm competition.  Further, to the extent there are any potential competitive harms, the Department concludes that the Update’s potential procompetitive benefits likely outweigh those harms.  Accordingly, the Department has no present intention to take antitrust enforcement action against the conduct you have described.

DOJ was careful to note that its conclusion did not express views as to applying the amended IPR Policy retroactively to existing LOAs, where IEEE indicated the proposed IPR Policy would not be retroactive:

The Department’s analysis in this letter applies only to the Update;’s impact on future LOAs; the Department offers no statement regarding its intentions concerning the application of the Update retroactively to previously submitted LOAs.

*****

The import of DOJ’s action here and the proposed IEEE IPR Policy amendment is yet to be seen.  If the IEEE Board of Directors does adopt the amended IPR Policy, DOJ’s letter here may not prevent others from challenging the IPR Policy change on antitrust or other grounds and DOJ itself indicated it may take action in the future if the changed policy “produces anticompetitive effects.”  As discussed above, those challenging the IPR Policy change may raise questions about the DOJ’s positions here given conflicts with existing law, lack of evidence that problems sought to be solved even exist and other issues.  This may give the IEEE Board of Directors pause about whether to adopt or amend the proposed IPR Policy amendment when they consider the issue.

Further, the impact of the IPR Policy if adopted is not clear.  It plainly has anti-patent overtones, which is disappointing given how much we all have benefited from the innovations fueled by patents every step of the way over many decades in telecommunications and other standards-driven technology.  An important part of DOJs conclusion was the choice patent owners have whether to submit a LOA having the new IPR Policy provisions and flexibility to not be bound by various factors when negotiating a RAND-encumbered patent under that new IPR Policy.  But, in practice, will refusing to submit such an LOA be a viable competitive option for a patent holder?  For example, in the CSIRO case, Judge Davis observed that the patent holder who at first gave an LOA later expressly refused to provide an LOA for later versions of the standard, yet IEEE did not change its standard to avoid that patent. (see our July 28, 2014 post for summary of the CSIRO decision, currently on appeal to the Federal Circuit).  And if a large number of innovating patent holders refuse to submit the new LOA, will IEEE find that the cost of constant consideration of whether and how to revise standards to design around those patents as well as foregoing innovative technology warrants more flexibility in the LOA?   But the uncertainty of such an experiment might be better tested in a brand new standard setting organization, rather than an established ubiquitous one like IEEE .

We also will see if other standard setting organizations consider a similar IPR Policy change or await the aftermath of this one if adopted.  DOJ itself noted that its role was not to assess whether the IPR Policy is right for IEEE and that having different IPR Policies among different standard setting organizations can be beneficial:

The Department’s task in the business review process is to advise the requesting party of the Department’s present antitrust enforcement intentions regarding the proposed conduct.  It is not the Department’s role to assess whether IEEE’s policy choices are right for IEEE as a standards-setting organization (“SSO”).  SSOs develop and adjust patent policies to best meet their particular needs.  It is unlikely that there is a one-size-fits-all approach for all SSOs, and, indeed, variation among SSOs’ patent policies could be beneficial to the overall standards-setting process.  Other SSOs, therefore, may decide to implement patent policies that differ from the Update.

We will continue to monitor developments here.

The IEEE apparently is considering an unusual change to its intellectual property rights (“IPR”) policy that in many ways is contrary to developing U.S. law on determining a reasonable royalty rate and the availability of injunctive relief for standard essential patents (“SEPs”).  The IEEE provides a link to the current draft of this proposed IPR policy change that shows the proposed redline revisions to the current IPR policy.  The proposed IEEE revisions have even caught the attention of the popular press and others, such as Sen. Coons’ letter to the U.S. Attorney General Holder that calls the proposal an “unprecedented move by an international standards body to weaken the value and enforceability of  patented technology.” (see Bloomberg article).

Below is a summary of some key issues raised in the proposed IEEE IPR policy amendment that we have touched on in our blog posts discussing developing case law.

Smallest Saleable Compliant Implementation

The proposed change to IEEE’s IPR policy injects a new term called the “smallest saleable Compliant Implementation”, where a “Compliant Implementation” means “any product (e.g., component, sub-assembly, or end-product) or service that conforms to any mandatory or optional portion of a normative clause of an IEEE Standard.”  The specific langauge of the proposed IPR amendment is as follows:

Reasonable Rate” shall mean appropriate compensation to the patent holder for the practice of an Essential Patent Claim excluding the value, if any, resulting from the inclusion of that Essential Patent Claim’s technology in the IEEE Standard.  In addition, determination of such Reasonable Rates should include, but need not be limited to, the consideration of:

  • The value that the functionality of the claimed invention or inventive feature within the Essential Patent Claim contributes to the value of the relevant functionality of the smallest saleable Compliant Implementation that practices the Essential Patent Claim.
  • The value that the Essential Patent Claim contributes to the smallest saleable Compliant Implementation that practices that claim, in light of the value contributed by all Essential Patent Claims for the same IEEE Standard practiced in that Compliant Implementation.
  • Existing licenses covering use of the Essential Patent Claim, where such licenses were not obtained under the explicit or implicit threat of a Prohibitive Order, and where the circumstances and resulting license are otherwise sufficiently comparable to the circumstances of the contemplated license.

This changed policy apparently was derived from the “smallest saleable patent practicing unit” concept for the entire market value theory in U.S. patent damages law.  But IEEE’s proposed adoption of that concept into real-world arms length negotiations between sophisticated market players may be misplaced, because the “smallest saleable patent practicing unit” concept is an evidentiary principle for avoiding undue prejudice and confusion of lay jurors in U.S. jury trials under evidence Rule 403 (see our Aug. 30, 2013 LaserDynamics post and Dec. 5, 2014 Ericsson v. D-Link post).

In LaserDynamics, a case concerning patents generally, the Federal Circuit expressed concern about jury confusion “[w]here small elements of multi-component products are accused of infringement, calculating a royalty on the entire product carries a considerable risk that the patentee will be improperly compensated for non-infringing components of that product.”  Further, “disclosure to the jury of the overall product revenues ‘cannot help but skew the damages horizon for the jury, regardless of the contribution of the patented component to this revenue” and may “make a patentee’s proffered damages amount appear modest by comparison [and] artificially inflate the jury’s damages calculation.”  This jury confusion problem is not “avoided by the use of a very small royalty rate.” (See our Aug. 30, 2013 post for a more complete summary of the LaserDynamics decision)

Recently in Ericsson v. D-Link, a case concerning standard essential patents, the Federal Circuit explained that the entire market value rule (“EMVR”) has two considerations: (1) a “substantive legal rule” that the “ultimate reasonable royalty”–i.e., combination royalty rate and royalty base–“must be based on the … value that the patented invention adds to the end product” and (2) an “evidentiary principle” for selecting the royalty base that is intended “to help our jury system reliably implement” the substantive legal rule.  As the Federal Circuit explained, the “smallest saleable patent practicing unit” is an application of the evidentiary principle in U.S. jury trials:

The principle, as applicable specifically to the choice of a royalty base, is that, where a multi-component product is at issue and the patented feature is not the item which imbues the combination of the other features with value, care must be taken to avoid misleading the jury by placing undue emphasis on the value of the entire product.  It is not that an appropriately apportioned royalty award could never be fashioned by starting with the entire market value of a multi-component product–by, for instance, dramatically reducing the royalty rate to be applied in those cases–it is that reliance on the entire market value might mislead the jury, who may be less equipped to understand the extent to which the royalty rate would need to do the work in such instances.  Thus, where the entire value of a machine as a marketable article is “properly and legally attributable to the patented feature,” the damages owed to the patentee may be calculated by reference to that value.  Where it is not, however, courts must insist on a more realistic starting point for the royalty calculations by juries–often, the smallest salable unit and, at times, even less. (emphasis added)

(See our Dec. 5, 2014 post for a more complete summary of the Ericsson v. D-Link decision).

Thus, the  “smallest saleable patent practicing unit” principle is an evidentiary rule to avoid jury confusion in U.S. jury trials that may not be appropriate for real-world arms length negotiations between sophisticated market participants, as IEEE’s amendment proposes.  The Federal Circuit’s recent Ericsson decision recognized that “licenses are generally negotiated without consideration of the EMVR [i.e., entire market value rule with its smallest saleable patent practicing unit evidentiary principle].”  The Federal Circuit ruled that the jury in that case could hear evidence about comparable licenses based on the ultimate end product, rather than the smallest saleable patent practicing unit, because, otherwise, “[m]aking real world, relevant licenses inadmissible … would often make it impossible for a patentee to resort to license-based evidence.”  This follows the Federal Circuit’s rationale in Virnetix that differences between comparable licenses and the hypothetical negotiation for patent damages are circumstances a jury is “entitled to hear … and decide for itself what to accept or reject.” (see our  Sep. 17, 2014 post).

Further, even in U.S. jury trials, the smallest saleable patent practicing unit evidentiary principle is not a blanket rule, the Federal Circuit in Ericsson explaining that, “where expert testimony explains to the jury the need to discount reliance on a given license to account only for the value attributed to the licensed technology, as it did here, the mere fact that licenses predicated on the value of a multi-component product are referenced in that analysis … is not reversible error.”  The IEEE proposed language above, however, appears to limit consideration of existing licenses to those “where the circumstances and resulting license are otherwise sufficiently comparable to the circumstances of the contemplated license,” which relies to some unspecified extent on the smallest saleable Compliant Implementation.  If the IEEE proposed IPR amendment is adopted, then lay jurors considering a hypothetical negotiation in litigation might be entrusted with more relevant real-world information than sophisticated market participants negotiating an actual license for a patent directed to an IEEE standard.  Odd.

While the brightline drawn by a smallest patentable patent practicing unit principle may be appealing at first blush, real world negotiations may require more flexibility to fit the specific patented technology to the specific licensed product.  Consider, for example, a wireless standard implemented within a microchip that is one of many components of an end product where functional benefits of the standard include (1) wireless connectivity and (2) low power consumption.  What benefit a specific licensed product derives from a patent covering that standard may depend primarily on (A) what functionality the patent covers and (B) the importance of that functionality to the licensed product.  A patent covering power savings may be important to the standard generally, but provide little, if any, benefit to a stationary end product that is powered from a wall outlet.  The stationary end product does benefit from wireless connectivity functionality, which avoids the cost and problems of running wires.  That end-product may include the power-saving functionality solely because it is built into the microchip supplied by the microchip vendor or because the end product must have that functionality in order to advertise that the product is fully compliant with the standard.  On the other hand, the patented power-saving functionality may provide substantial benefit to a mobile device by permitting longer use time between charges, smaller battery and hence smaller and lighter device, etc..

So the benefit that a claimed invention provides to an end product–and hence what would be reasonable licensing terms–depends on the specific patent and product to be licensed and not necessarily the “smallest saleable patent practicing unit” (e.g., the microchip in this example).  Thus, Judge Davis in CSIRO used the end product rather than microchip as the royalty base, because “[b]asing a royalty solely on chip price is like valuing a copyrighted book based only on the costs of the binding, paper, and ink needed to actually produce the physical product.” (see our July 28, 2014 post summarizing the CSIRO decision, currently on appeal to the Federal Circuit).

If adopted, the new IEEE IPR policy also may lead to patent owners drafting claims to expand what constitutes a “Compliant Implementation” by claiming, for example, “a mobile phone comprising …. a microchip” or including limitations present in typical implementations beyond a microchip, such as “a mobile phone comprising an antenna, a power supply, an input device, a microchip implementing standard functionality, etc …”  And some may go bigger:  “An automobile, comprising wheels, a motor, a microchip implementing standard functionality, etc.”  So, to avoid putting form over substance, what may be deemed a “reasonable” royalty still may be better determined based on the specific patent and products at issue and not necessarily what is claimed to be the smallest saleable Compliant Implementation.

Given the fact-specific circumstances underlying a FRAND licensing negotiation, perhaps whatever issues the proposed IEEE IPR amendments are intended to address might be better served through continued case-by-case development of what is a “reasonable”, rather than directing sophisticated market participants to view their bilateral negotiations through the blinders of the smallest saleable patent practicing unit designed to limit evidence considered by a lay jury in U.S. litigation.

Injunctive Relief

The proposed change to IEEE’s IPR Policy appears to make an extreme shift in policy by precluding an SEP patent holder from even seeking injunctive relief against an unwilling licensee until after a FRAND royalty is litigated and at least a first level of appeal exhausted, stating:

A statement that the Submitter will make available a license for Essential Patent Claims to an unrestricted number of Applicants on a worldwide basis without compensation or under Reasonable Rates, with other reasonable terms and conditions that are demonstrably free of any unfair discrimination to make, have made, use sell, offer to sell, or import any Compliant Implementation that practiced the Essential Patent Claims for use in conforming with the IEEE Standard.  An Accepted LOA that contains such a statement signifies that reasonable terms and conditions, including without compensation or under Reasonable Rates, are sufficient compensation for a license to use those Essential Patent Claims and preclude seeking, or seeking to enforce, a Prohibitive Order except as provided in this policy.

***

The Submitter of an Accepted LOA who has committed to make available a license for one or more Essential Patent Claims agrees that it shall neither seek nor seek to enforce a Prohibitive Order based on such Essential Patent Claim(s) in a jurisdiction unless the implementer fails to participate in, or to comply with the outcome of, an adjudication, including an affirming first-level appellate review, if sought by any party within applicable deadlines, in that jurisdiction by one or more courts that have the authority to: determine Reasonable Rates and other reasonable terms and conditions; adjudicate patent validity, enforceability, essentiality, and infringement; award monetary damages; and resolve any defenses and counterclaims.  In jurisdictions where the failure to request a Prohibitive Order in a pleading waives the right to seek a Prohibitive Order  at a later time, a Submitter may conditionally plead the right to seek a Prohibitive Order to preserve its right to do so later, if and when this policy’s conditions for seeking, or seeking to enforce, a Prohibitive Order are met.

This proposed IEEE IPR policy appears contrary to case law and administrative actions that have considered the availability of injunctive relief for standard essential patents and universally agree that injunctive relief should be available against unwilling licensees.  For example, in ruling that there was no per se rule against injunctive relief for standard essential patents, the Federal Circuit in Motorola v. Apple recognized that “an injunction may be justified where an infringer unilaterally refuses a FRAND royalty or unreasonably delays negotiations to the same effect.” (see our April 25, 2014 post for a summary of the Motorola v. Apple decision).  The Federal Circuit ruled that a party may seek an injunction, and the FRAND obligation and other circumstances are what “the district courts are more than capable of considering … when deciding whether to issue an injunction under the principles in eBay.”  But the proposed amended IEEE IPR Policy appears to preclude even seeking an injunction against an unwilling licensee without first filing suit and going through appeals to enforce adjudicated FRAND terms.

In LSI v. Realtek, Judge Whyte held that LSI had breached its FRAND obligation by “instigating an ITC Section 337 action naming Realtek as a respondent prior to offering a RAND license to Realtek.” (see our May 21, 2013 post on LSI v. Realtek).  But Judge Whyte also recognized that “an injunction may be warranted where an accused infringer of a standard-essential patent outright refuses to accept a RAND license” that has been offered (in that case “there is no indication that Realtek is not willing to accept a RAND license.”). (emphasis in original).

When U.S. Trade Representative Froman disapproved of the exclusion order entered by the ITC in the Apple v. Samsung investigation, he noted that injunctive relief may be warranted for an unwilling licensee given concerns about harm caused by “reverse hold-up” or “hold-out” such as “constructive refusal to negotiate a FRAND license.” (see our Aug. 3, 2013 post summarizing USTR Froman’s decision).  In doing so, he quoted favorably from a joint policy statement by the U.S. Department of Justice and U.S. Patent and Trademark Office, which states:

An exclusion order may still be an appropriate remedy in some circumstances, such as where the putative licensee is unable or refuses to take a FRAND license and is acting outside the scope of the patent holder’s commitment to license on FRAND terms.  For example, if a putative licensee refuses to pay what has been determined to be a FRAND royalty, or refuses to engage in a negotiation to determine F/RAND terms, an exclusion order could be appropriate. Such a refusal could take the form of a constructive refusal to negotiate, such as by insisting on terms outside the bounds of what could reasonably be considered to be F/RAND terms in an attempt to evade the putative licensee’s obligation to fairly compensate the patent holder.

Judge Essex’s decision in ITC Inv. No. 337-TA-868 also recognized that a FRAND commitment has obligations going both ways and a prospective licensee should seek a license as part of satisfying its obligations under the FRAND commitment (see our July 2, 2014 post for a summary of that decision).  Judge Essex echoed concerns of U.S. Trade Representative Froman as well as other agencies about “patent hold-out”:

The ETSI IPR policy requires companies that wish to use the IPR covered by the agreements to contact the owner of the IP, and take a license.  By skipping this step, the companies that use the IPR in violation of the policy are able to exert a pressure on the negotiations with the IPR holder to try to make the agreement in the lower range of FRAND, or perhaps even lower than a reasonable FRAND? rate.  They also are able to shift the risk involved in patent negotiation to the patent holder.  By not paying for a FRAND license and negotiating in advance of the use of the IPR, they force the patent holder to take legal action.  In this action, the patent owner can lose the IPR they believe they have, but if the patent holder wins they get no more than a FRAND solution, that is, what they should have gotten under the agreement in the first place.  There is no risk to the exploiter of the technology in not taking a license before they exhaust their litigation options if the only risk to them for violating the agreement is to pay a FRAND based royalty or fee.  This puts the risks of loss entirely on the side of the patent holder, and encourages patent hold-out, which is as unsettling to a fair solution as any patent hold up might be.

The U.S. Federal Trade Commission’s consent decree settlement with Google/Motorola also recognized that injunctive relief should be available against unwilling licensees. (See our July 24, 2013 post summarizing of the FTC/Google Consent decree settlement).

In sum, the proposed amendments to the IEEE IPR Policy, if adopted, would contravene how injunctive relief for standard essential patents has been treated by U.S. courts and other governmental entities and could give rise to concerns about “patent hold-out” by unwilling licensees.  The balanced approach discussed by the Federal Circuit in Motorola v. Apple may be a better approach, where applying the general eBay factors typically will preclude injunctive relief in the usual course for FRAND-obligated standard essential patents, but such relief remains available for the parties to raise and a court to consider in exercising its discretion in extreme circumstances such as actual patent hold-out.

We understand that these are just proposed amendments to the IEEE IPR policy.  We will look for and post any relevant developments brought to our attention.

The European Commission’s Directorate-General (“DG”) for Enterprise and Industry has initiated a “Public Consultation on Patents and Standards“, seeking to gather public input on the relationship between the standardization of technical specifications and related intellectual property rights. The comment period is open now through January 31, 2015 . The public consultation seeks comment from any interested party, particularly those having direct experience with standardization involving IPR, patent transfers, patent pools, and patent dispute resolution, and expresses particular interest in comments on the performance of the current framework governing standardization involving patents and how this framework “should evolve to ensure that standardization remains efficient and adapted to the fast-changing economic and technological environment.”

There are eight “key issues” on which feedback is sought followed by more specific questions (see questionnaire), with the eight key issues as follows:

  1. Standardisation involving patents is common in the telecommunication industry and in the consumer electronics industry. Which other fields of standardisation comprise patent-protected technologies or are likely to do so in the future?
  2. A variety of rules and practices govern standardisation involving patents. Which elements of these rules and practices are working well and should be kept and/or expanded? Which elements on the other hand can be improved?
  3. Patent transparency seems particularly important to prevent [sic] achieve efficient licensing and to prevent abusive behaviour. How can patent transparency in standardization be maintained/increased? What specific changes to the patent declaration systems of standard setting organizations would improve transparency regarding standard essential patents at a reasonable cost?
  4. Patents on technologies that are comprised in a standard are sometimes transferred to new owners. What problems arise due to these transfers? What can be done to prevent that such transfers undermine the effectiveness of the rules and practices that govern standardisation involving patents?
  5. Patent pools combine the complementary patents of several patent holders for licensing out under a combined licence. Where and how can patent pools play a positive role in ensuring transparency and an efficient licensing of patents on technologies comprised in standards? What can public authorities and standard setting organizations do to facilitate this role?
  6. Many standard setting organizations require that patents on technologies included in their standards are licensed on “fair”, “reasonable” and “non-discriminatory” (FRAND) terms, without however defining these concepts in detail. What principles and methods do you find useful in order to apply these terms in practice?
  7. In some fields standard essential patents have spurred disputes and litigation. What are the causes and consequences of such disputes? What dispute resolution mechanisms could be used to resolve these patent disputes efficiently?
  8. How can holders of standard essential patents effectively protect themselves against implementers who refuse to pay royalties or unreasonably delay such payment? How can it be ensured that injunctions based on standard essential patents are not used to (a) either exclude companies from implementing a standard or (b) to extract unreasonable, unfair or discriminatory royalties?

The public consultation follows the recent release of a fact-finding study and executive summary thereof that was commissioned by the DG for Enterprise and Industry in 2013 to analyze the rules and practices developed to ensure efficient licensing of standard-related patents. Drawing upon existing literature, practitioner interviews, and qualitative data surrounding SEP disclosures, the study focuses on standardization and licensing practices across the telecommunications, consumer electronics, automotive, and electricity industries in which adopted standards often incorporate patented technologies. In addition to providing an overview of IPR policies and licensing practice among SSOs in these industries, the study addresses various barriers to efficient licensing frameworks — “patent ambushes and submarining, hold-up and reverse hold-up, categorical discrimination against new entrants and unsolicited bundling of SEPs with other patents” — and provides fifteen specific suggestions for improving the current systems, including the following:

  • Improving the patent declaration system to target lack-of-transparency issues (e.g., update at key events, limit blanket disclosures, notice transfer of ownership, SSO database of licenses);
  • Promoting patent pools for licensing bundles of SEPs;
  • Providing efficient dispute resolution mechanisms (e.g., arbitration, mediation, mini-trials and incentives for using them);
  • Clarifying FRAND royalty rates (e.g., economic value, ex ante value) and royalty bases (e.g., final product or component);
  • Strengthening SSO rules that bind subsequent SEP owners to adopt their predecessors’ FRAND obligations or binding commitment to patent itself; and
  • Improving guidance to standards-adopters regarding the inclusion of patented technologies to avoid over-inclusion and complexity of standard

Interested stakeholders are invited to submit comments via a questionnaire available at the DG for Enterprise and Industry’s website. The public consultation is open now through January 31, 2015.

In the midst of ongoing litigation against Nokia and HTC abroad, German patent monetization firm IPCom’s claim of patent infringement against Apple will be heard before Germany’s Mannheim Regional Court next Tuesday, February 11 (see our Januray 2013 post for some additional information on how patent litigation and RAND issues are handled in Germany).  IPCom is seeking upwards of $2 billion in damages.

The litigation involves a standard-essential wireless patent covering a technology that prioritizes emergency calls placed on overloaded wireless communication networks.  Interestingly, the claimed technology is not only deemed essential to UMTS and LTE wireless standards, but implementation of the technology is required by law.  Despite a joint effort by Apple, Nokia, HTC, and Vodafone to have the patent declared invalid, the European Patent Office issued a decision last month upholding the validity of the patent, albeit narrowed in scope.  The $2 billion sought by IPCom allegedly covers only German sales and the company has yet to indicate whether additional suits would be filed in other jurisdictions.

IPCom GmbH is a German patent holding company founded in 2007 by Bernhard Fohwitter, a former patent attorney for Robert Bosch GmbH.  IPCom apparently purchased the asserted patent from Bosch in 2007 and is reported to own close to 1,200 patents developed by  Bosch and Hitachi Ltd.  Over the past several years, IPCom has successfully litigated a number of patent cases before the Mannheim Regional Court, which has heard more wireless patent cases than any jurisdiction worldwide.

IPCom spokesman Alistair Hammond has said that the company has existing licensing agreements in place with a number of unidentified smartphone manufacturers, asserting that last year carrier Deutsche Telekom AG paid IPCom a three-digit million euro sum as part of such an agreement.

In an order dated January 16, 2014, the Competition Commission of India (“CCI”) ordered another investigation into Ericsson’s licensing of cellular patents that are subject to FRAND obligations, which investigation will parallel a similar investigation of Ericsson that CCI ordered on November 12, 2013 (discussed in our prior post).  The rationale for this new investigation, requested by Intex Technologies, is the same as that for the prior investigation requested by Micromax Informatics and we refer you to our prior post’s discussion thereof.

One difference concerns Ericsson’s refusal to disclose what licensing terms it gave to other licensee’s that the prospective licensee requested to assess whether the license offer to them is fair, reasonable and non-discriminatory.  In the Micromax investigation, the parties were in litigation and Ericsson refused to produce the other comparable licenses in a mediation of that dispute, leading CCI to state that “Refusal of OP [Ericsson] to share commercial terms of FRAND licenses with licensees similarly placed to the informant [Micromax], fortified accusations of the Informant, regarding discriminatory commercial terms imposed by the OP.”

In this new investigation, the rub comes from an NDA required by Ericsson to negotiate a license with requester Intex.  Intex asserts that Ericsonn’s NDA prevents them from consulting with vendors of components that implement the standard, allowed Ericsson to claim it could not produce license agreements with others given similar NDAs entered with them, and required adjudicating any disputes in another country.  CCI found that the NDA was problematic for several reasons, including allowing Ericsson to hide whether its licensing terms were discriminatory as compared to other licenses it granted on the same FRAND-obligated standard essential patents:

Charging of two different license fees per unit phone for use of the same technology prima faci is discriminatory and also reflects excessive pricing vis-à-vis high cost phones.  NDA thrust upon the consumers by OP [Ericsson] strengthens this doubt as after NDA, each of the user of SEPs is unable to know the terms of royalty of other users.  This is contrary to the spirit of ‘applying FRAND terms fairly and uniformly to similarly placed players.’  Transparency is hallmark of fairness.  Both forcing a party to execute NDA and imposing excessive and unfair royalty rates prima facie was abuse of dominance and violation of section 4 of the Act.  Imposing a jurisdiction clause debarring Informant [Intex] from getting disputes adjudicated in the country where both parties were in business and vesting jurisdiction in a foreign land prima facie was also an abuse of dominance.

Concerns about improper NDA requirements are not unique to this CCI investigation.  The recent cable operator lawsuit against Rockstar includes concerns about Rockstar requiring NDA terms in negotiating licenses under patents it acquired from Nortel, which patents include standard essential patents subject to standard-setting organization (SSO) obligations such as RAND, FRAND or  royalty-free licensing obligations.

As with the prior Ericsson investigation, CCI’s order makes clear that these are just initial observations, not final expressions of opinion, and the investigation should proceed without being swayed by the initial observations.

In an order dated November 12, 2013, the Competition Commission of India ordered an investigation into Ericsson’s licensing of cellular patents that are subject to FRAND obligations for certain ETSI standards.  This investigation is based on information provided by Micromax Informatics Limited (“the Informant”)  that had been approached by Ericsson (“the Opposite Party” or “OP”) to take a license under the patents, followed by infringement litigation on those patents.

The order provides a background of the negotiations and litigation between the parties, including Ericsson’s requested royalty rate, an interim royalty agreement and mediation between the parties.  Such mediation did not succeed, which the order indicates was based in part on Ericsson’s refusal to reveal licensing agreement terms under the patents with similarly situated parties.

The order touches on several issues, many of which have been considered in U.S.-based standard essential patent disputes.

SEPs.  The order describes standardization as “a voluntary process” between market players for “developing and implementing technical standards.”  And “[s]uch technological standards are termed as Standard Essential Patent, when they are patented and for which there are no non-infringing alternatives.”  Thus, “[o]nce a patent is declared as Standard Essential Patent, it faces no competition from other patents until that patent becomes obsolete due to new technology/inventions.”

Patent Hold-Up/Royalty-Stacking.  The order expresses concern about patent “hold-up” and “royalty-stacking”, but does not provide an analysis at this point of how much those concerns come into play here (U.S. courts have raised these concerns with varying views of their actual verses theoretical impact):

When … standard technologies are protected by patent rights, there is a possibility of “hold-up” by the patent owner–a demand for higher royalties or more costly or burdensome licensing terms than could have been obtained before the standard was chosen.  Hold-up can subvert the competitive process of choosing among technologies and undermine the integrity of standard-setting activities.  Ultimately, the High costs of such patents get transferred to the final consumers.  Similarly, royalty-stacking is when a single product uses many patents, of same or different licencors.  As such, from the perspective of the firm making the product, all the different claims for royalties must be added or “stacked” together to determine the total burden to be borne by the manufacturer.

Discrimination/Royalty Base.  The order indicates concern that Ericsson may have violated its FRAND obligations–particularly the “non-discriminatory” requirement–by using the selling price of the entire GSM-capable phone as the royalty base, rather than the price of the GSM chip (an issue that U.S. courts deal with concerning what constitutes the smallest-salable patent practicing unit), stating:

The allegations made in the information and not refuted by OP [Ericsson] concerning royalty rates make it clear that the practices adopted by the OP were discriminatory as well as contrary to FRAND terms.  The royalty rates being charged by the OP had no linkage to patented product, contrary to what is expected from a patent owner holding licences on FRAND terms.  The OP seemed to be acting contrary to the FRAND terms by imposing royalties linked with cost of product of user for its patents.  Refusal of OP to share commercial terms of FRAND licenses with licensees similarly placed to the informant, fortified accusations of the Informant, regarding discriminatory commercial terms imposed by the OP.  For the use of GSM chip in a phone costing Rs. 100, royalty would be Rs. 125 but if this GSM chip is used in a phone of Rs. 1000, royalty would be Rs 12.5.  Thus increase in the royalty for patent holder is without any contribution to the product of the licensee.  Higher cost of a smartphone is due to various other softwares/technical facilities and applications provided by the manufacturer/licensee for which he had to pay royalties/charges to other patent holders/patent developers.  Charging of two different license fees per unit phone for use of the same technology prima facie is discriminatory and also reflects excessive pricing vis-a-vis high cost phones.

The order makes clear that the forgoing were just initial “observations” that should not “sway” the investigation: “Nothing stated in this order shall tantamount to a final expression of opinion on merit of the case and the DG shall conduct the investigation without being swayed in any manner whatsoever by the observations made herein.”

An investigation and report thereon is to be provided within 60 days of the order.

Yesterday the European Commission started soliciting public comments on Samsung’s proposed commitment that, during the next five years, Samsung would not seek injunctive relief within the European Economic Area (EEA) on standard essential patents (SEPs) in the field of mobile communications against companies that agree to a particular framework for determining fair, reasonable and non-discriminatory (FRAND) licensing terms either by agreement, by court determination or by arbitration (the default forum).  Interested parties should submit comments within a month.

This relates to an investigation that the European Commission opened in January 2012 on whether Samsung honored FRAND commitments given to ETSI by seeking injunctive relief in Europe against Apple mobile products on Samsung 3G UMTS SEPs. In December 2012, the European Commission gave initial views (in both a press release and supporting memo of frequently asked questions) that seeking injunctive relief is a legitimate remedy, but may be “an abuse of a dominant position in the exceptional circumstances … where the holder of a SEP has given a commitment to license these patents on FRAND terms and where the company against which an injunction is sought is willing to negotiate a FRAND license.”  The European Commision expressed concern that seeking injunctive relief in those exceptional circumstances “may distort licensing negotiations unduly in the SEP-holder’s favour.”  The European Commision took no position on what would be a reasonable royalty rate, stating that “courts or arbitrators are generally well equipped to do this.”

In response, Samsung submitted Proposed Commitments a few weeks ago (Sep. 27, 2013) that provide a framework over the next five years where, before Samsung would seek injunctive relief on mobile communication SEPs in the EEA, Samsung and a willing licensee may negotiate licensing terms and, if they reach no agreement within 12 months, then the FRAND terms would be decided in court or arbitration (the default forum).  This approach is similar to the framework proposed in the settlement earlier this year between the U.S. Federal Trade Commission and Google/Motorola.

The European Commision thus issued its press release yesterday seeking public comments on Samsung’s proposal along with a supporting memo addressing frequently asked questions on the issues presented.

The National Academy of Sciences has published a 140-page report entitled “Patent Challenges for Standard-Setting in the Global Economy: Lessons from Information and Communication Technology.”  The report presents several suggestions to standard setting organizations (SSOs) or government bodies regarding standard essential patents (SEPs) in a few topic areas:

  • Interpretation of FRAND: Suggests that SSOs clarify FRAND obligation, such as guidance on royalty, intended third-party beneficiaries, bundling SEPs in a portfolio, and license grant back provisions.
  • Patent Disclosures:  Suggests that SSOs adopt IPR policies that require participants to disclose SEPs and to make such disclosures publicly available.
  • Transfer of FRAND Encumbered Patents: Suggests that SSOs and governmental bodies develop policies or rulings that require FRAND obligations to follow SEPs when transferred, including transfers in bankruptcy.
  • Transparency of Patent Ownership:  Suggests requiring all patent ownership transfers to be recorded in the Patent Office and identify the real party in interest.
  • Injunctive Relief for FRAND Encumbered Patents: Suggests that SSOs clarify availability of injunctive relief–such as when prospective licensee does not accept independent adjudication of FRAND or there is no other recourse to SEP holder–but could not reach unanimous agreement on the scope of any limits on injunctive relief.
  • Sharing Information Between SSOs and Patent Offices:  Suggests that SSOs share draft/final standards with patent offices for prior art databases and that patent offices provide SSOs with current information on issued patent claims and pending applications, such as in existing information sharing agreements between the European Patent Office and three SSOs (ITU, ETSI and IEEE).
  • Standards in China, India and Brazil: Suggests that U.S. government entities take steps to educate, monitor and report on SEP development in these emerging economies.

Some of these topics are more controversial than others.  For example, limiting injunctive relief until after a judicial determination of RAND mirrors provisions in the FTC’s Consent Decree with Google/Motorola, which had mixed reactions.  Some also have questioned whether recording all patent ownership transfers is justified by the associated costs and burdens.  And SSOs have resisted proscribing RAND license terms in deference to bilateral negotiations that allow individual parties to define licensing terms that fit their particular circumstances, including their chosen balance of monetary and non-monetary licensing terms.

You can download the NAS report, or purchase a paper copy, from the National Academy Press website.