In my first article, I posed the question whether the “Smart Phone Patent Wars” were giving IP rights – and more specifically, patents – a bad rap? My conclusion was an unfortunate “yes,” with the villains being a handful of companies that willingly contributed patented technologies to various standard setting organizations (SSOs), encouraged their use in a host of consumer electronics, and years later charge the very producers they encouraged to implement these standards with patent infringement. In my second article, I examined the so-called “Fair, Reasonable and Non-Discriminatory” (FRAND) licensing terms that SSOs require of their participants and concluded the phrase has no clear, widely-accepted definition or standards for determining compliance. Now in this article – the third in a six-part series – I examine the patent policies of certain SSOs to better appreciate why the villains are villainous.
Some of the more widely-recognized SSOs include the Institute of Electrical and Electronics Engineers (IEEE), the Joint Electron Device Engineering Council (JEDEC), the International Telecommunications Union (ITU), and the Telecommunications Industry Association (TIA). Each have a patent policy that addresses “essential patents” – patents with claims reading on technology necessary to make or use a product that is complaint with a standard.
For example, the IEEE Patent Policy, in relevant parts, states:
IEEE standards may be drafted in terms that include the use of Essential Patent Claims. If the IEEE receives notice that a [Proposed] IEEE Standard may require the use of a potential Essential Patent Claim, the IEEE shall request licensing assurance … from the patent holder or patent applicant. [The licensing assurance] shall be: A statement that a license for a compliant implementation of the standard will be made available to an unrestricted number of applicants on a worldwide basis without compensation or under reasonable rates, with reasonable terms and conditions that are demonstrably free of any unfair discrimination.
The IEEE is not responsible for identifying Essential Patent Claims for which a license may be required, … or for determining whether any licensing terms or conditions provided in connection with submission of a Letter of Assurance, if any, or in any licensing agreements are reasonable or non-discriminatory.
In order for IEEE’s patent policy to function efficiently, individuals participating in the standards development process … shall inform the IEEE (or cause the IEEE to be informed) of the holder of any potential Essential Patent Claims of which they are personally aware and that are not already the subject of an existing Letter of Assurance, owned or controlled by the participant or the entity the participant is from, employed by, or otherwise represents.
The JEDEC Patent Policy, in relevant parts, states:
All Committee Members, as a condition of committee membership and participation, agree to Disclose Potentially Essential Patents … and to offer to license their Essential Patent Claims to all Potential Licensees on [F]RAND terms and conditions.
At each committee meeting, the chairperson should call to the attention of all those present the requirements contained in the JEDEC Legal Guides and the obligation of all Representatives to inform the committee of any personal knowledge they have of any Potentially Essential Patents that are owned or controlled by that Committee Member and to call for the Disclosure of Potentially Essential Patents by Representatives.
All Committee Members must Disclose Potentially Essential Patents, known to their Representative(s) to be Potentially Essential Patents that are owned or controlled by that Committee Member to the personal knowledge of the Representatives.
JEDEC makes no representation as to the reasonableness of any terms or conditions of the license agreements offered by such patent rights holders, and all negotiations regarding such terms and conditions must take place between the individual parties outside the context of JEDEC.
The ITU Patent Policy, in relevant parts, states:
[A] patent embodied fully or partly in a Recommendation|Deliverable must be accessible to everybody without undue constraints. … The detailed arrangements arising from patents (licensing, royalties, etc.) are left to the parties concerned, as these arrangements might differ from case to case.
[A]ny party participating in the work of ITU … should, from the outset, draw the attention of the Director … to any known patent or to any known pending patent application, either their own or of other organizations.
If a Recommendation | Deliverable is developed and such information … has been disclosed, [and t]he patent holder is willing to negotiate licenses with other parties on a non-discriminatory basis on reasonable terms and conditions. Such negotiations are left to the parties concerned and are performed outside ITU.
The TIA Patent Policy, in relevant parts, states:
TIA will neither be a party to discussions of any licensing terms or conditions, which are left to the parties involved, nor will TIA opine or judge whether proposed licensing terms or conditions are reasonable or non-discriminatory.
Individual participants are encouraged to notify TIA of any patent(s) or published pending patent application(s) of which they are aware that may be essential to the practice of a proposed TIA Publication … early on in its development to reduce the possibility for delays in the development process and increase the likelihood that the proposed TIA Publication will become a Standard. However, a Patent Holder who has provided TIA with the statement … with respect to the applicable proposed TIA Publication need not (but may elect to) identify its specific patent(s) or published pending patent application(s) that may be essential to the practice of the proposed TIA Publication in question.
A license under any Essential Patent(s), the license rights to which are held by the undersigned Patent Holder, will be made available to all applicants under terms and conditions that are reasonable and non-discriminatory, which may include monetary compensation, and only to the extent necessary for the practice of any or all of the Normative portions of the above Reference Document for the field of use of practice of the Standard.
In all cases, the IEEE, JEDEC, ITU and TIA policies apply to both issued patents and pending applications (regardless of whether such applications are published). Further, all four policies make clear that the SSO will not get involved in the particulars as to what constitutes FRAND licensing practices. Interestingly, and for those paying attention, the IEEE, JEDEC and ITU policies require disclosure of essential patents, whereas the TIA policy simply encourages disclosure of essential patents. Again, there simply is no generally-accepted test to determine whether a particular license offer satisfies the reasonable aspect of an SSO participant’s FRAND commitment. How does this play out in practical terms? A recent case is instructive.
In Microsoft v. Motorola, Seattle-based U.S. District Court Judge James L. Robart was asked to weigh in on the FRAND issue in an infringement case involving patents related to the IEEE 802.11 WLAN standard and the ITU H.264 video coding standard. On February 27, 2012, Judge Robart issued an 18-page Order that found: (1) Motorola entered into binding contractual commitments with the IEEE and the ITU, committing to license its declared-essential patents on FRAND terms and conditions; and (2) Microsoft – as a fellow participant in the relevant IEEE and ITU standard setting processes – is a third-party beneficiary of Motorola’s commitments to the IEEE and the ITU. These two findings were the easy part of Judge Robart’s job!
The difficult issue was whether Motorola’s initial demand letters to Microsoft constituted a breach of their IEEE and ITU FRAND obligations. More specifically, Judge Robart was asked to decide whether Motorola’s request for “a reasonable royalty, of 2.25% per unit for each [801.11 and H.264] compliant product, … calculated based on the price of the end product (e.g., each Xbox 360 product, each PC/laptop, each smartphone, etc.) and not on component software (e.g., Xbox 360 system software, Windows 7 software, Windows Phone 7 software, etc.),” was reasonable!?
As one would expect, Microsoft did not view this offer as FRAND-compliant given the royalty demand was based on the end product’s price and “not tied to [the essential patents’] claimed technological contribution.” Motorola responded to Microsoft’s allegations by arguing that the IEEE and ITU policies require that the eventually-negotiated license be FRAND complaint, but that their opening offer need not be fair or reasonable! Their rationale was that what constitutes RAND terms is highly fact-dependent and unique to each licensing situation, thereby making it impractical to require an initial offer to be on RAND terms when a patentee may not have all of the pertinent information about the potential licensee at the time it makes its initial offer. Judge Robart reacted incredulously by stating:
At this time, the court is not entirely convinced by Motorola’s rationale. … It seems unlikely to the court that either the IEEE or the ITU would deem a patent essential for a certain standard only to permit that patent holder to turn around and abuse that power by seeking outrageously high royalty rates.
Nevertheless, Judge Robart found that the parties’ arguments and briefs “fail[ed] to sufficiently discuss the issues of contract interpretation that are now before the court.” Given the IEEE and ITU policies impose a contractual obligations on Motorola, such issues include what state law applies? Are the IEEE and ITU policies ambiguous? How should the policies’ FRAND obligations be interpreted? Do initial offers have to comply with FRAND or just the eventual executed license? What extrinsic evidence is admissible? The answer to these questions were not addressed by Microsoft nor Motorola. Thus, the judge’s job was a difficult one and he was forced to set a briefing schedule that will eventually result in a mini-trial to dispose of all these FRAND-based issues. Sadly, Judge Robart observed:
[SSOs] play a significant role in the technology market by allowing companies to agree on common technological standards so that all compliant products will work together. Standards lower costs by increasing product manufacturing volume, and they increase price competition by eliminating “switching costs” for consumers who desire to switch from products manufactured by one firm to those manufactured by another.
Because the [SSO patent] policies leave it to the parties to determine what constitutes a [F]RAND license, when such a genuine disagreement arises, it appears to the court that the only recourse for the parties is to file a lawsuit in the appropriate court of law.
While this is just one judge, in just one suit and in just one jurisdiction, this FRAND-based reality will (and has) played out in trial courts all over the U.S., Europe and Asia.
In sum, and as I have previously stated, part of the solution to this problem includes regulators in all affected markets taking action to deter future renouncements of this type that have anticompetitive effects. In fact, the Fair Trade Commission of Korea – home to global handset manufacturers Samsung, Pantech Curitel and LG – has done exactly that by issuing new guidelines, in February 2012, to prevent antitrust violations arising from adoption of patented technologies as industry standards. Yet still, many commentators blame “a broken patent system.” It seems to me, however, that the blame (and part of the solution) is the need for SSOs to overcome their unwillingness to promulgate clearer patent policies which will limit unnecessary and counterproductive litigation.
Future articles (as this is the third in a six-part series) will explore other solutions, the status of the global smart phone patent wars, RAND patent licensing schemes, SSOs and their affects on the IP ecosystem.