Senate Explores Impact of ITC Exclusion Orders for Standard-Essential Patents

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By Cecelia M. Assam and Tony Dutra  

During a hearing held by the U.S. Senate Judiciary Committee July 11, officials from both U.S. antitrust agencies provided insight on the impact of exclusion orders from the International Trade Commission on competition when standard-essential patents are at issue.

The hearing, titled “Oversight of the Impact on Competition of Exclusion Orders to Enforce Standard-Essential Patents,” included testimony from Acting Assistant Attorney General Joseph Wayland, chief of the Justice Department's Antitrust Division, and Federal Trade Commissioner Edith Ramirez.

Despite the very specific and barely known issue at hand, Judiciary Committee Chairman Sen. Patrick J. Leahy said, in closing the hearing, “It's amazing the amount of interest [I've seen] in this subject.”

Patent Hold-Up in Standards Environment.

There was no argument at the hearing that the ability of patent holders to reap the benefits of their work fosters innovation and is strongly encouraged.

The problem at issue arises when a patent holder is unwilling to license its patent-protected technologies that read on a standard, despite having agreed to offer “reasonable and non-discriminatory” (RAND) or “fair, reasonable, and non-discriminatory” (FRAND) terms under the rules of participation in the relevant standard-setting organization (SSO).

For such “standard-essential” patents (SEPs), once the patent holder obtains or threatens to obtain an injunction or an ITC exclusion order, it is able to “hold up” other firms by blocking those firms' standard-compliant products from the U.S. market.

ITC's Section 337 Exclusion Orders.

Under Section 337 of the Tariff Act of 1930, 19 U.S.C. §1337, the International Trade Commission (ITC) conducts investigations into patent infringement by products imported into the United States. The sole relief available to the patent owner is an exclusion order, “prohibit[ing] a defendant from selling patent-infringing imported articles out of U.S. inventory,” according to Ramirez's testimony.

However, before ordering the exclusion, the commission must consider the “public interest” under Sections 337(d)(1) and (f)(1). On Oct. 3, 2011, the agency highlighted its concerns about its public interest analysis by amending its rules of practice to improve procedures and ensure the completeness of the record.

As backdrop for the July 11 hearing, six senators, including four from the Judiciary Committee, sent a letter to the ITC June 19 presenting their views of the public interest analysis on ongoing cases involving SEPs.

“For the standards setting process to function effectively, companies that commit to license their SEPs on RAND terms must seek to resolve disputes over their patents through a royalty agreement or judicial determination of a reasonable rate,” they wrote.

At the hearing, neither witness had statistics to back up the claim that use of the Section 337 exclusion procedure was becoming a trend, but they were concerned nonetheless.

Leahy Sees Tech Patent Wars at ITC.

Leahy called the current climate, in which companies that previously cross-licensed their technologies with other companies in the market are increasingly seeking to block their competitors instead, “the next wave in the 'tech patent wars.' ”

He cited an increase of companies engaging in such behavior in recent months which, he cautioned, “has the potential to harm consumers by preventing access to their favorite devices.” This recent trend of seeking exclusion orders from the ITC instead of negotiating and seeking license fees may have a detrimental effect by inhibiting innovation and competition.

“As with patent reform, this is a bipartisan issue,” Leahy said. “We have an interest on both sides of the aisle in ensuring the patent laws promote innovation and competition.”

Leahy also highlighted the vital roles of the DOJ antitrust division and FTC “in protecting consumers and competition by enforcing our nation's antitrust laws” as well as “advising on antitrust issues. Congress recognized that role when it required the ITC to consult with the FTC and DOJ on competition issues that would be raised by the issuance of an exclusion order.”

Testimony from the agencies' officials “will give the Committee a chance to further explore the competitive impact of ITC exclusion orders and whether more needs to be done to ensure consumers are not the victims of the tech patent wars.”

Grassley Concerned About Consumer Impact.

Ranking Member Sen. Chuck Grassley (R-Iowa) noted that, “by having access to these standards, companies can create new technologies, products, and services and the different electronic devices have the ability then to seamlessly interface for more prices, better quality, and more consumer choice.”

It is desirable for consumers to have the option of using “different products and technologies made by different companies.” In addition, consumers “don't want to be limited to using devices or services from just one company and it isn't as expensive to exchange different kinds of devices when they can interoperate with each other.”

Grassley said that “there is a real question as to whether it is anticompetitive or anticonsumer when standard essential patent holders that have agreed to license a product under RAND terms seek injunctive relief against or exclude companies that have implemented their standard.”

Companies that have relied on standard setting organization RAND agreements and incorporated standard essential patents into their products expect to be able to negotiate reasonable royalties with patent holders.  

At the same time, when there is patent infringement, we don't want to restrict the ability of patent holders to protect their products from infringers. We don't want…to disincentivize participation in standard setting bodies or hamper the ability of companies to generate the products or technology.  


What's the Hold-Up?

During his testimony, Wayland explained the nuances of patent hold-up.

Although there are various forms of patent hold-up, one type involves “excluding a competitor from a market or obtaining an unjustifiably higher price for its invention than would have been possible before the standard was set. This raises particular concerns when alternative technologies could have been included in the standard.”

Patent hold-up may lead to a number of problems, Wayland said, including “inducing others to postpone or avoid incorporating standardized technology in their products and consumers could be harmed if companies implementing a standard pass on the cost in the form of higher royalties.”

This is where F/RAND terms come into play, he explained. They are generally implemented by SSOs as an attempt to thwart or reduce “this type of opportunistic conduct.”

Wayland mentioned another area of concern: patent portfolios. In February 2012, the division closed its investigations in two such cases:

• Rockstar Bidco (a partnership that included Apple, Microsoft, Research in Motion, Sony, and Ericsson) and its acquisition of 6,000 patents and patent applications--including a number of patents that Nortel had committed to license on F/RAND terms for uses associated with certain standards--from Nortel at a bankruptcy auction; and

• Google's acquisition of Motorola Mobility, a manufacturer of smartphones and tablet computers and the holder of 17,000 issued patents and 6,800 patent applications, wherein Motorola had made commitments to several SSOs to license hundreds of these patents on F/RAND terms for uses related to the standards, which include both cellular air interface and Wi-Fi standards.


The issue, Wayland said in his written testimony, was “whether the acquiring firms would have the incentive and ability to exploit ambiguities in the commitments the sellers made to license their patents on F/RAND terms to hold up implementers of the standard in a manner that would raise rivals' costs or foreclose competition, to the detriment of consumers.” Ultimately, the division determined that “neither acquisition was likely to substantially lessen competition for wireless devices.” However, the agency

noted its concerns about the potential inappropriate use of F/RAND-encumbered standard-essential patents to disrupt competition and specifically limited [its] conclusion to the transfer of ownership rights and not to the exercise of those transferred rights. [It has] continued closely to monitor the use of F/RAND-encumbered standard-essential patents in the wireless device industry, particularly as they relate to smartphones and computer tablets, to ensure that they do not stifle competition and innovation in this important industry.  

More Than a Private Dispute.

The threat to seek an injunction or exclusion order “is more than a private dispute,” Ramirez pointed out. “Over time hold-up restricts competition and distorts incentives to invest in standardized products and complementary technologies. The result for consumers will be higher prices, fewer choices, and inferior product quality. Hold-up also risks harming the standard setting process.”

Ramirez noted that the U.S. Supreme Court's decision in eBay Inc v. MercExchange LLC, 547 U.S. 388, 78 USPQ2d 1577 (2006), “reduced the risk of hold-up by making it difficult for standard essential patent owners to obtain injunctions in federal court.”

She added that, “while federal courts are bound by eBay, the ITC is not. This raises concerns that some patent holders that would be unlikely to win injunctive relief in district court will file suit at the ITC to obtain import bans.”

The FTC takes the position, Ramirez said, that “the ITC can and should take a RAND commitment on a patent into account under its public interest analysis before issuing an exclusion order. Under its existing authority, the ITC can prevent the owners of standard essential patents from side-stepping their licensing commitments to the detriment of competition, innovation, and consumers.”

Wayland said that “the public interest factors incorporate the same sort of concerns that the eBay court emphasized.”

Ramirez and Wayland, when pressed, argued against a blanket rule that a patent owner that agreed to RAND licenses at the SSO should be denied an ITC exclusion order.

“[T]he FTC does not take the position that an exclusion order should never issue for standard essential patents,” Ramirez said. “We are instead advocating that the ITC prevent patentees from using a Section 337 investigation as a way to escape their RAND obligations.”

According to Ramirez, the agency believes that “this position strikes the right balance between protecting the rights of patent holders and safeguarding the procompetitive benefits of the standard setting process.”

Coons, Lee Looking for Solution.

Sens. Chris Coons (D-Del.) and Mike Lee (R-Utah) joined Leahy and Grassley in questioning the witnesses.

Coons asked whether the DOJ or FTC have been doing any work with SSOs to require that participants not only agree to RAND terms, but also require a “no injunctions promise.”

Ramirez said that the agencies are monitoring SSOs, but that there are thousands of them, and they can only act as observers of SSO policies and actions. However, her observation was that “the issue is being discussed at great length.”

Coons also sought reactions to Judge Richard A. Posner's dismissal of a case in which SEPs owned by Motorola Mobility were asserted against Apple Inc.'s iPhone. Apple Inc. v. Motorola Inc., No. 1:11-cv-08540 (N.D. Ill. June 22, 2012).

Posner said, “Motorola committed to license [its SEP] to anyone willing to pay a FRAND royalty and thus implicitly acknowledged that a royalty is adequate compensation for a license to use that patent.”

Ramirez and Wayland applauded Posner's views, particularly in the way the court addressed how to determine an appropriate royalty.

As Posner wrote, Wayland said, “it is appropriate to value a patent on basis of the underlying technology” in a hypothetical negotiation prior to it become an SEP.

“This issue has long been of concern to me,” Lee--the lead signatory on the senators' letter to the ITC--said at the hearing.

Lee was wary of comments by Ramirez and Wayland that there could be no blanket rule against an ITC injunction. He asked whether that rule could apply “absent special circumstances,” where the ITC and DOJ would define the special circumstances.

“The devil is in the detail of writing any rule, Wayland said, “but in general, yes.”

By Cecelia M. Assam and Tony Dutra  

Wayland's remarks are available online at

Ramirez's remarks are available at

The Senators' letter to the ITC is at