Earlier this year, Qualcomm and InterDigital, two major
contributors to the development of wireless telecommunications
standards, announced they would not be making licensing commitments
under the new patent policy introduced by the Institute of
Electrical and Electronics Engineers (IEEE). Among other changes,
the IEEE's new patent policy makes it much more difficult - and in
some cases impossible - for patent owners who have contributed
their patented technology to the development of an IEEE standard to
seek an injunction or other "prohibitive order" against the
implementers of that standard who are using their patented
technology without a license. A few weeks after Qualcomm and
InterDigital's announcement, Ericsson and Nokia followed suit.
This may be just the beginning. A number of important recent
court and agency decisions may cause other major contributors to
opt out of standards-setting activities. A brief review of these
decisions suggests there is a growing concern over what has come to
be known as "patent hold-up" - when owners of standard essential
patents or "SEPs" (allegedly) try to extract a higher royalty rate
for the use of their SEPs once the standards into which those SEPs
are incorporated have become widely adopted, than they otherwise
would have been able to obtain for the patents on their own. As
Administrative Law Judge Theodore R. Essex of the International
Trade Commission (ITC) has cautioned, however, a singular focus on
patent hold-up, and the attendant restriction on the ability of SEP
holders to seek injunctive relief, may ultimately make it more
likely that innovators will simply decide not to participate in
standard-setting activities in the first instance, potentially
retarding the pace of innovation in this country and abroad.
A Word on Standards
Industrial standards play an important role in the modern world.
Among other functions, standards ensure that our various
mechanical, electrical, and telecommunications systems and devices
are compatible and interoperable - that smartphones made by Apple
and Samsung, for example, have the same Wi-Fi capability and can
communicate with each other on the same network. Standards are
often set by standards setting organizations (SSOs), which
typically comprise voluntary, private sector associations of
businesses. Many SSO participants contribute their patented
technology to the development of standards. Because they stand to
benefit from the adoption of standards that include their patented
technology, contributors often agree to license their SEPs on fair,
reasonable and non-discriminatory (FRAND or RAND) terms. The
question then arises whether and under what circumstances SEP
owners who have undertaken a commitment to license their patents on
FRAND terms may be permitted to seek injunctive relief against
unwilling licensees - i.e., against infringers of their patented
technology who refuse to take a license. Three recent decisions try
to address this question.
Three Recent Decisions of Interest
1. The ITC: In June, Administrative Law Judge
Essex issued the public version of his Initial Determination on
Remand in ITC investigation No. 337-TA-613, In the Matter of
Certain 3G Mobile Hand-sets and Components Thereof (the 613
Investigation), in which he elaborated an evidence-based framework
for adjudicating the increasingly frequent allegations of patent
hold-up at the ITC, and the concomitant argument that SEP owners
should not be entitled to an exclusion order - an order enjoining
the adjudicated infringer from importing infringing goods into the
United States - which is the only meaningful kind of relief the ITC
is empowered to grant, because by filing a complaint with the ITC,
SEP owners have violated their obligation to license their patents
on FRAND terms.
After evaluating the parties' submissions and other data in the
613 Investigation, Judge Essex observed that while patent hold-up
is a theoretical possibility, there is no evidence it has ever
occurred in the real world. Without evidence of actual patent
hold-up, he said, there is no justification for depriving an ITC
complainant of the statutory remedy to which it is otherwise
entitled.
Federal Trade Commission (FTC) Chairwoman Edith Ramirez
disagreed. Writing on her own behalf, Ramirez submitted a public
statement to the ITC, which was reviewing Judge Essex's Initial
Determination, arguing that patent owners should have to prove they
did not engage in patent hold-up before they may be entitled to
relief. Two of Ramirez's colleagues disagreed. In their own public
statement to the ITC, FTC Commissioners Maureen K. Ohlhausen and
Joshua D. Wright noted they "support [Judge] Essex's evidence-based
approach," which requires accused infringers to prove actual
hold-up before a patent owner may be deprived of its statutory
remedy.
The ITC has yet to weigh in on these issues, but whatever
approach it ultimately adopts will likely have a significant impact
on the future participation of many major contributors to
standard-setting activities.
2. The Ninth Circuit: In July, the Ninth
Circuit Court of Appeals issued its much-awaited decision in the
breach of contract action brought by Microsoft alleging that
Motorola had violated its commitment to license its SEPs on RAND
terms. The Ninth Circuit upheld the jury's finding that Motorola
had breached its duty of good faith and fair dealing when it: (a)
offered to license its SEPs to Microsoft at rates above what the
lower court ultimately determined was the RAND range, and (b)
sought to enjoin Microsoft from making and selling products
incorporating standards comprising Motorola's patented technology
in the U.S. and Germany. Motorola had sued for injunctive relief
only after Microsoft "responded" to Motorola's licensing offers by
suing for breach of contract. The Ninth Circuit concluded there was
enough evidence to suggest "that Motorola sought to capture more
than the value of its patents by inducing holdup" and that it had
filed its injunctive actions to further its hold-up strategy.
In arriving at its conclusion, the court did not address, let
alone consider, Microsoft's apparent refusal to engage Motorola in
licensing negotiations (and its decision to "respond" to Motorola's
licensing offer by suing for breach of contract). The court thus
left open the question of what constitutes an "unwilling licensee"
and whether SEP owners facing unwilling licensees are ever
permitted to seek injunctive relief when enforcing their
patents.
3. The EU Court of Justice: Also in July, the
Court of Justice of the European Union (ECJ) took up the question
of whether seeking injunctive relief for infringement of SEPs may
run afoul of Article 102 of the Treaty on the Functioning of the
European Union (TFEU), which prohibits companies that enjoy market
dominance from abusing their dominant position by, among other
means, "limiting production, markets or technical development to
the prejudice of consumers."
Although acknowledging that the owners of SEPs have the
statutory right to bring actions seeking injunctive relief for
infringement, the court explained that SEP owners must first meet
various conditions to avoid being liable for abusing their market
dominance: they must provide alleged infringers with both notice
they are infringing (along with a specification of how they are
infringing), and a specific offer to license on FRAND terms (along
with a description of how the proposed FRAND royalty rate was
calculated). Only after a patent owner has fulfilled these
obligations, and "the alleged infringer has not diligently [and
promptly] responded to [the patent owner's licensing] offer" either
by accepting the offer or by making a specific FRAND counteroffer
in writing, may the patent owner seek injunctive relief without
potentially abusing its market position.
Implications
The future of standard-setting activities is uncertain.
Balancing the competing concerns of innovators and of implementers
is critical. As Judge Essex has noted, without the threat of
injunctive relief, implementers of standards may not have enough of
an incentive to engage in licensing negotiations - let alone an
incentive to pay a royalty for using the patented technology of
others - because they know that, at worst, they will get sued and
will be made to pay the same FRAND rate they would have had to pay
for using the patented technology in the first place. If the
implementers of standards do not have an incentive to pay to use
the patented technology embodied in those standards, then
innovators will no longer have any incentive to contribute their
patented technology to the development of those standards, and the
development of standards will suffer as a result.
A singular concern over patent hold-up may skew the balance to
such a degree that innovators will be incentivized to opt out of
standard-setting activities altogether. Such an outcome will not
only hurt consumers and businesses, who have come to take the
interoperability of their devices and systems for granted, but may
hurt the future of American technological innovation, which relies
on the participation and cooperation of innovators across many
different businesses and organizations working together to develop
and refine the basic platform on which much of the world's
technological development now rests.
This article appeared in the December 2015 edition
of the ComCom Quarterly, the newsletter of the Complex Commercial
Litigation Section. For more articles like these on business
litigation, bankruptcy, and intellectual property topics, check out
the Quarterly at http://is.gd/lFJCJw.