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By Tony Dutra
Witnesses at a July 30 hearing in the Senate debated the extent of the problem in which companies holding “standard-essential patents” (SEPs) extract exorbitant royalties from companies implementing the standard, to the detriment of consumers of standard-compliant products.
The central question is whether the owner of an SEP, having committed to license its patents on reasonable terms, should retain the ability to seek injunctive relief or an exclusion order against a standards user that does not agree that the offer is reasonable.
The session, titled “Standard Essential Patent Disputes and Antitrust Law,” was held by the Senate Judiciary Committee's Subcommittee on Antitrust, Competition Policy sand Consumer Rights, and featured a debate between general counsel at Intel Corp. and Qualcomm Inc. Both companies participate in standards development organizations (SDOs), but Qualcomm's activities have been more scrutinized and Intel is now more concerned about its use of standards than its own SEPs.
As subcommittee chair Sen. Amy J. Klobuchar (D-Minn.) noted in her opening remarks, the hearing was being held just before the president's expected announcement by Aug. 3 on whether to invoke the public interest and overturn a decision by the International Trade Commission that would bar Apple Inc. from importing some iPhone and iPad models. Certain Electronic Devices, Including Wireless Communication Devices, Portable Music and Data Processing Devices, and Tablet Computers, No. 337-TA-794 (Int'l Trade Comm'n June 4, 2013)(109 PTD, 6/6/13).
The case is a significant battle in the so-called smartphone wars, related to Samsung Electronics Co.'s patent on a portion of the Universal Mobile Telecommunications System standard for wireless communications. If the president reverses the decision, or if Congress chooses to proceed with legislation to curb SEP holders' access to injunctions and exclusion orders, other players in that market such as Google Inc., with its Motorola Mobility subsidiary being a significant SEP holder, will likely step into the ring as well.
Conflicts arise when a standards-setting organization convenes for the purposes of agreeing on a technology standard and at least one of the options for that standard relies in part on a patented technology for successful implementation. Litigation in the mid-2000s tended to focus on the silence of the SEP holder during the SDO decision-making process, with later requests for royalties taking the SDO members and standard implementers by surprise.
Probably the best known alleged abuser was Rambus Inc., a participant in the SDO responsible for devising computer memory standards known as JEDEC. The FTC invoked Section 5 of the Federal Trade Commission Act in 2006 against the company. In re Rambus Inc., No. 9302 (F.T.C. 8/2/06) (150 PTD, 8/4/06). But the U.S. District Court for the D.C. Circuit overturned the FTC's ruling. Rambus Inc. v. Federal Trade Commission, 522 F.3d 456, 86 U.S.P.Q.2d 1539 (D.C. Cir. 2008) (79 PTD, 4/24/08).
In contrast, the U.S. Court of Appeals for the Federal Circuit determined that Qualcomm had a duty to disclose its patents to an SDO that eventually adopted a standard that infringed the patents. Qualcomm Inc. v. Broadcom Inc., 548 F.3d 1004, 89 U.S.P.Q.2d 1321 (Fed. Cir. 2008)(233 PTD, 12/4/08).
Virtually all SDOs now require members to sign intellectual property rights agreements as a condition for participation in setting a standard. The agreements require any member whose patents underlie a selected standard to offer the patented technology on fair, reasonable, and non-discriminatory terms (FRAND, sometimes RAND without the first word), to anyone who wants to implement the standard.
But even if the problem of silence during the standards selection is largely resolved, at least two other problems remain:
• Hold-up. “[H]old-up describes the potential that a SEP holder can use the leverage it may acquire as a result of the standard setting process to negotiate higher royalty rates or other favorable terms after the standard is adopted than it could have credibly demanded beforehand,” according to testimony in the July 30 hearing by Suzanne Drennon Munck, chief counsel for intellectual property in the Office of Policy Planning at the Federal Trade Commission, Washington, D.C.,
• Hold-out. “Absent the ability to obtain an injunction or an exclusion order, holders of standard essential patents would be forced to internalize the costs of litigating for damages against each potential licensee that refuses to pay reasonable licensing rates,” according to Sen. Michael S. Lee's (R-Utah) opening statement.
Joining Munck on the panel were John D. Kulick, chair of the Standards Association Board for the Institute of Electrical and Electronics Engineers, New York, and A. Douglas Melamed and Donald J. Rosenberg, general counsel for Intel and Qualcomm, respectively.
Melamed previously wore the SEP owner's hat, when he represented Rambus in the D.C. Circuit case before he joined Intel. Rosenberg claimed that, in his prior stint with IBM Corp., he was more likely to be on the side of the licensor than the SEP holder.
Klobuchar began with a joke: “Why can't we be FRANDs?” But neither Melamed nor Rosenberg was inclined to take the issue lightly, as they repeatedly differed on whether a hold-up problem exists at all.
Rosenberg said there were precious few examples of litigation involving accusations of hold-up, but Melamed said that unbalanced settlements between parties, with all the power with the SEP holder, represent the true scope of the problem.
“Once a technology is selected for inclusion, the widespread adoption of a standard has the potential to confer enormous market power upon SEP holders,” Melamed said. Rosenberg countered that words such as “potential,” “possibility,” and “fear” fail to point to actual evidence that the problems are real.
And they further differed on the status of the mobile communications industry, where the conflicts with SEP holders have been most pronounced recently.
Rosenberg characterized the market as “healthy and dynamic. … The phone in your pocket wouldn't be there if this wasn't a dynamic industry. The technology has advanced and prices have fallen.”
“Yes, Mr. Rosenberg is right that there's been a lot [of improvement],” Melamed said, “but we don't know how much improvement there should have been,” and whether that growth will continue going forward.
“Things might have been better?,” Rosenberg echoed, “There's no way I can respond to that.”
There is no legislation currently before Congress on the topic, but SEPs were the subject a year ago of a hearing in the IP subcommittee of the House Judiciary Committee, and the problems were referenced in a prior Senate Judiciary Committee hearing on the ITC.
The general tenor of legislation discussed then and in the July 30 meeting was explained succinctly in Klobuchar's opening statement, “Should the ability to give injunctions and exclusion orders be limited?”
On behalf of the FTC, Munck was certainly against a blanket ban on injunctions and exclusion orders. She pointed to an amicus brief the agency filed with the U.S. Court of Appeals for the Federal Circuit in Apple Inc. v. Motorola Inc., No. 2012-1548. “The Commission took the position that, '[eBay] provides a framework that courts can use to mitigate the risk of patent hold-up,' ” she said, referring to eBay Inc. v. MercExchange LLC, 547 U.S. 388, 78 U.S.P.Q.2d 1577 (2006) (97 PTD, 5/19/06).
And the administration has generally been more active than Congress elsewhere also:
• Munck noted that the FTC joined the Department of Justice's Antitrust Division in a December workshop that addressed the SEP problem in the more general context of patent litigation abuses by patent assertion entities.
• According to Rosenberg, “Congress should endorse and encourage adherence to the policy statement issued by the DOJ and [the U.S. Patent and Trademark Office] on SEPs and remedies,” referring to a Jan. 8 jointly prepared document. While the agencies said in that document that they “recommend caution in granting injunctions or exclusion orders based on infringement of voluntarily F/RAND-encumbered patents essential to a standard,” they added that they “strongly support the protection of intellectual property rights and believe that a patent holder who makes such a F/RAND commitment should receive appropriate compensation that reflects the value of the technology contributed to the standard.”
The session covered a wide area of related issues and suggestions:
• Munck gave four examples of when an injunction should still be available: an unwilling licensee; a licensee who refuses to pay a rate that's been negotiated; a licensee outside the jurisdiction of U.S. courts; and “someone unable to pay.”
• Melamed cited the problem of the SEP owner going to an end-product manufacturer rather than to the maker of the smallest component incorporating the standard. So, for example, he said, it may seem like a small percentage to ask 50 cents from the maker of a $700 computer, but if the patent is directed only to a $1 chipset, the net is a 50 percent royalty.
• He also said there are other remedies for the hold-out problem. For a company using a standard and trying to avoid paying a license, he said, the treble damages available for willful infringement is a significant penalty. He further pointed to fee-shifting if the unwilling licensee forced the SEP owner to engage in frivolous litigation.
• Kulick preferred a solution leaving both the government and the courts out of the picture. He said that the IEEE agreed with the European Patent Office to share information that “has helped EPO to improve the quality of its prior art searching.” He said that similar cooperation with the USPTO is necessary. “As a matter of fact, a paradigm shift is necessary,” Kulick said, in which there is “close collaboration between patent offices and SDOs.”
• Committee members and witnesses alike addressed whether the SDOs could otherwise do more to prevent problems. Kulick said that the IEEE is looking into revising its IPR policy and is considering whether to make a commitment not to pursue injunctive relief a part of the new policy.
This last point gave Rosenberg and Melamed one more chance to disagree.
Rosenberg said that all SDOs have asked themselves whether their policies should be more specific, including whether a reasonable royalty should be defined, but they have always eventually agreed that flexibility in a bilateral negotiation between an SEP holder and a potential standards user is preferred.
But, Melamed said, SDO participants are “now seeing threats that weren't anticipated” when the SDOs made those decisions years ago. If you ask them again now, he said, the answer may be quite different.
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