standard essential patents

Recently, a federal district court in California granted partial summary judgment for the US Federal Trade Commission (FTC) in an important intellectual property and antitrust case involving standard essential patents (SEP). The court’s decision requires an SEP holder to license its SEPs for cellular communication standards to all applicants willing to pay a fair, reasonable and non-discriminatory (FRAND) rate, regardless of whether the applicant supplies components or end-devices. The decision represents a significant victory for the FTC in enforcing its views of an SEP holder’s commitments to license patents on FRAND terms.

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In testimony before the Senate Subcommittee on Antitrust, Assistant Attorney General Makan Delrahim from the US Department of Justice (DOJ) and Chairman Joseph Simons from the US Federal Trade Commission (FTC) staked out differing interpretations of when antitrust considerations are relevant in standard setting agreements restricted by fair, reasonable and non-discriminatory (FRAND) rates, a rare divergence of opinion between the two antitrust enforcement agencies.

WHAT HAPPENED:

  • Since AAG Delrahim took over as head of the DOJ Antitrust Division in September 2017 he has consistently hinted at a differing interpretation of antitrust law as it relates to standard essential patents and FRAND rates in the context of antitrust. 
  • Standard essential patents (SEPs) are patents that have been incorporated into a standard by a standard setting organization and industry participants to facilitate interchangeability between products. Often, to be included in a standard, patent holders agree to license a patent essential to that standard at a FRAND rate. 
  • With the proliferation of standards, more scrutiny has been devoted to SEPs and FRAND rates, and some companies have brought antitrust suits relating to “patent hold-up” or the refusal to license a patent on FRAND terms (typically seeking higher royalties or fees on patents for widely adopted standards). 
  • In testimony on October 3, 2018, AAG Delrahim indicated his view was that a patent holder’s unilateral decision not to license a patent—even if that patent is part of a standard—is not conduct intended to be reached by the antitrust laws. AAG Delrahim indicated such a dispute would more appropriately be handled by contract law. 
  • This position differs from that of the FTC, where Chairman Simons has indicated that antitrust law can be relevant in patent hold-up cases.
    •  The FTC demonstrated its view in a recent complaint filed against Qualcomm, Inc. The complaint summarizes the patent hold-up concern:

Once a standard incorporating proprietary technology is adopted, the potential exists for opportunistic patent holders to insist on patent licensing terms that capture not just the value of the underlying technology, but also the value of standardization itself. To address this “hold-up” risk, [standard setting organizations] often require patent holders to disclose their patents and commit to license standard-essential patents (“SEPs”) on fair, reasonable, and non-discriminatory (“FRAND”) terms. Absent such requirements, a patent holder might be able to parlay the standardization of its technology into a monopoly in standard-compliant products.

WHAT THIS MEANS:

  • Going forward, US antitrust enforcement with respect to SEP issues may be limited to the FTC. AAG Delrahim’s speeches indicate that it will be the rare case that the Antitrust Division pursues such cases in the future.
  • This divergence between the two US agencies responsible for enforcing antitrust laws will create confusion for SEP holders and their licensees with respect to the risks of US government intervention. Companies dealing with SEPs and FRAND rates will want to be cognizant of which agency is reviewing, as approaches may be different.
  • While there may be divergence in the US government agencies that enforce the US antitrust laws, the Antitrust Division’s new policy has no impact on the body of case law developed by US courts over the years with respect to SEPs and antitrust liability. Private parties seeking to enforce their rights with respect to SEPs and antitrust law in US courts should not be impacted by the Antitrust Division’s change in policy.

WHAT HAPPENED

  • On Friday, October 13, acting FTC chairman Maureen Ohlhausen delivered a speech at the Hillsdale College Free Market Forum titled, “Markets, Government, and the Common Good,” highlighting her view on the intersection between IP and antitrust domestically and abroad.
  • Chairman Ohlhausen’s position, that IP rights must be vigorously protected, is in line with her long-held belief that some enforcement of antitrust laws, especially abroad, has been overzealous when it comes to intellectual property.
  • In 2012, Ohlhausen objected to the FTC’s decision to require Robert Bosch GmbH to refrain from pursuing injunctions on certain SEPs (standard essential patents), and she wrote a dissenting opinion on the commission’s consent agreement with Google Inc. and Motorola Mobility Inc. requiring Google to withdraw claims for injunctive relief on SEPs.
  • In Friday’s speech, she argued that though “foreign [governments] take or allow the taking of American proprietary technologies without due payment,” the US should continue to protect patent rights and avoid punishing a company for “a unilateral refusal to assist its competitors.”
  • Ohlhausen also addressed what she termed the current “age of IP skepticism” as it relates to patent-assertion entities (PAEs).
  • She concluded that while some minor changes may be appropriate to promote innovation in the face of “Litigation PAEs” employing nuisance litigation techniques, these changes should be “narrowly tailored to address observed behavior.”
  • She voiced support for case management practices that could mitigate litigation cost asymmetries between PAE plaintiffs and defendants, increased transparency, and rules encouraging courts to stay litigation by PAEs when parallel proceedings are already underway, but eschewed more drastic measures such as the creation of “new, specialized guidelines to address particular types of IP disputes,” which, she argued, are unsupported by the available evidence.
  • In her view, “the key to addressing the US patent system lies in incremental adjustment where necessary based on a firm empirical foundation.”

WHAT THIS MEANS

  • Ohlhausen’s concern that certain antitrust enforcement “inappropriately morphs antitrust law into a tool for price regulation” is a notable policy direction that could make the FTC less inclined to pursue cases involving alleged violations of SEPs.
  • Under her direction, any changes forthcoming at the FTC are likely to be minor adjustments reflecting the belief that protecting patent rights is “fundamental to advanc[ing] innovation.”

On January 13, 2017, the Federal Trade Commission (FTC) and the Antitrust Division of the US Department of Justice (DOJ) issued updated Antitrust Guidelines for the Licensing of Intellectual Property (the Guidelines). The revised Guidelines follow nearly half a year of consideration and public commentary. According to the FTC, the updates were “intended to modernize the IP Licensing Guidelines without changing the agencies’ enforcement approach with respect to intellectual property licensing or expanding the IP Licensing Guidelines to address other topics.” In that vein, the modest updates to the Guidelines affirm that the antitrust agencies still believe that IP issues do not require an altered analysis and that the licensing of intellectual property is generally procompetitive.”

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Introduction

In a decision written by Judge Marsha S. Berzon, a three-judge panel of the U.S. Court of Appels for the Ninth Circuit affirmed a first-of-its-kind district court judgment relating to royalty rates for standard-essential patents (SEP). As part of the standard setting process, many standards organizations require members who hold patents necessary to implement a given standard to commit to license those patents on reasonable and non-discriminatory terms (RAND). Because inclusion in a standard can increase the importance and value of a patent, parties often differ on what constitutes a reasonable royalty. In this case, district court Judge James Robarts of the U.S. District Court for the Western District of Washington established a multi-factor framework to determine the appropriate royalty rates and ranges for SEPs. Several other courts later employed similar approaches. Motorola’s appeal challenged the district court’s authority to determine the royalty rate at a bench trial. The company also contended that the district court mis-applied Federal Circuit precedent on patent damages. The Ninth Circuit rejected these arguments, finding that Motorola had consented to the bench trial and holding that Judge Robart’s “thoughtful and detailed analysis” was “consistent with the Federal Circuit’s recent approach.” Microsoft Corp. v, Motorola, Inc. et al; Case No 14-35393 (9th Cir, July 30, 2015) (Berzon, J.)

Procedural Background

The long-running patent dispute between Microsoft and Motorola spans several courts and countries. The crux of the conflict traces back to October 2010 when Microsoft sued Motorola for alleged infringement of certain smartphone patents. Thereafter, the parties explored a possible cross-licensing arrangement to resolve their dispute. Motorola sent letters proposing licenses for 802.11 and H.264 SEP portfolios, with a proposed royalty rate of 2.25 percent of the price of the end product, which Motorola represented was in keeping with its RAND commitments on the patents. Microsoft disagreed. Soon after, it filed suit in the Western District of Washington, alleging that Motorola had breached its RAND commitments to the Institute of Electrical and Electronic Engineers (IEEE) and the International Telecommunication Union (ITU), the standard-setting organizations that developed the 802.11 and H.264 standards. Motorola responded by filing suit in the U.S. District Court for the Western District of Wisconsin, seeking an injunction to prevent Microsoft from using its H.264 patents. The cases were consolidated before Judge Robart in the Western District of Washington. Motorola also brought patent-enforcement actions before the International Trade Commission and in Germany. Microsoft alleged in an amended complaint that the filing of these injunctive orders constituted a breach of contract on the grounds that a RAND commitment bars a patent holder from seeking injunctive relief.

The proceedings before Judge Robart slowly moved forward throughout 2011 and 2012. The district court held that the RAND commitment made by Motorola to the standard-setting organizations created an enforceable contract, which standard users like Microsoft are able to enforce as third-party beneficiaries. Judge Robart determined, however, that, in order for a jury to determine whether Motorola had breached its RAND commitment, it must first know what the RAND commitment meant. In November 2012, Judge Robart held a bench trial to determine a RAND rate and range for Motorola’s H.264 and 802.11 SEPs. The court subsequently issued a 207-page order setting forth its findings of fact and conclusions of law on the appropriate RAND rate and related issues. The royalty rates and ranges determined by the court (ranging from a fraction of a cent per unit up to less than 20 cents per unit) were substantially lower than those demanded by Motorola in its initial offer to Microsoft. The case then proceeded to a jury trial on the breach of contract claim. In September 2013, the jury returned a verdict for Microsoft. The court denied Motorola’s motions for judgment as a matter of law. Motorola appealed the judgment on the breach of contract claim to the U.S. Court of Appeals for the Federal Circuit, which, on Microsoft’s motion, transferred the appeal to the Ninth Circuit (concluding that under the law of the case doctrine, the appeal properly lay with the regional circuit court that had preciously heard an interlocutory appeal in this case).

The RAND Determination

On appeal, Motorola raised two substantive issues. First, Motorola contended that the district court lacked the legal authority to decide the RAND rate issue separate from the ultimate breach of contract issue tried before the jury. Second, Motorola claimed that the district court’s legal analysis was contrary to Federal Circuit precedent as it relates to patent damages.

On the matter of the district court’s authority to conduct a bench trial to determine the RAND rate, the Ninth Circuit held that Motorola affirmatively consented to the bench trial. The court rejected Motorola’s claims that its consent was taken out of context and limited to a court-crafted license rather than determination of the RAND rate and range. The court noted that Motorola never raised, at trial or on appeal, any Seventh Amendment claim regarding its right to a jury trial on the RAND rate matter. Given Motorola’s affirmative stipulation to a bench trial for the purpose of determining the RAND rate, the court did not consider whether a jury should have made a RAND determination.

Motorola also challenged the district court’s legal analysis in its determination of the RAND rate and range. Judge Robart’s decision was the first to attempt to establish an appropriate RAND rate. The district court relied upon a modified version of a multi-factor test established in Georgia-Pacific Corp. v. U.S. Plywood Corp. and used extensively to determine damages in patent infringements cases. Georgia-Pacific lays out 15 factors for a court to consider in establishing the royalty rate that the parties to the dispute might have agreed upon in a hypothetical negotiation. One of the factors requires the court to set the time of the hypothetical negotiation at the time the infringement began. Motorola claimed that the district court incorrectly applied this factor, as interpreted and applied by the Federal Circuit.

The Ninth Circuit acknowledged that the district court had applied a “partial present-day focus” but denied this constituted error. It pointed to the Federal Circuit’s recent decision in Ericsson v. D-Link, which stated it has “never described the Georgia-Pacific factors as a talisman for royalty rate calculations,” and which recognized that some of the factors “clearly are not relevant to every case.” The court noted that the Federal Circuit had even cited Judge Robart’s decision in support of the view that many of the Georgia-Pacific factors are “contrary to RAND principles” and courts thus need to take a flexible approach to such cases. The court highlighted that Georgia-Pacific’s focus on the date of the patent infringement was inapt in a breach of contract case. It also noted the impracticality of tying the value of the patents to a particular moment in time given the evidence the parties presented. Finally the court emphasized that Motorola had neither shown, nor even argued, that it had been prejudiced by the court’s analysis. The court ultimately concluded that, given the need for flexibility in determining royalty rates for RAND-encumbered patents and given no prejudice was shown; the district court properly applied the hypothetical agreement approach.

Practice Pointers

The Ninth Circuit’s decision, coming in the wake of last year’s Federal Circuit decision in Ericsson v. D-Link, further confirms that courts will apply a flexible, fact-specific approach to determine the appropriate royalty rate in cases involving RAND-encumbered SEPs. Both the Federal Circuit and the Ninth Circuit have rejected the view that Georgia-Pacific or any other test can be rigidly applied in all circumstances. The approval of the framework employed by Judge Robarts, however, is likely to encourage its continued use as a starting point in future rate determinations.

Indeed, soon after the Western District of Washington decision by Judge Robart, Judge James F. Holderman also held bench trial (using a variation on the RAND analysis pioneered by Judge Robart) to determine RAND rates for 802.11 SEPs, as applied to manufacturers of Wi-Fi equipment in the case of In re Innovatio IP Ventures, LLC Patent Litig., Case No. 11 C 9308 (N.D. Ill. Sept. 27, 2013), another case where the parties waived a jury trial on damages,. In two other RAND cases involving the 802.11 Wi-Fi standard, Ericcson v. D-Link (ED TX, 2013) before Judge Leonard E. Davis and Realtek v. LSI (ND CA 2014) before Judge Ronald M. Whyte, the RAND determinations were made by a jury.

In light of the Ninth Circuit’s decision in Microsoft v. Motorola, practitioners should be aware that, in a breach of contract claim regarding standard-essential patents, the court may conclude that it must determine the RAND terms as a precursor to the breach of contract. By agreeing to hold a hearing on the potential RAND terms, parties must be aware that any terms devised by the court may then be used during the breach of contract proceedings. Thus, if a party does not wish for such terms to be determined and used during trial, they must clearly and un-ambiguously object to any such determination in advance of the breach of contract proceedings

Additionally, parties must be aware that the courts may not adhere strictly to the Georgia Pacific factors when determining RAND rates. Rather, courts may apply the factors flexibly and view the evidence in light of the particular circumstances of the case. If a party disagrees with the characterization of evidence or application of the Georgia Pacific factors, the party must clearly object to the application of the factors, and explain how the party would be prejudiced from deviation from the factors or consideration of the evidence.

In terms of the jurisdictional issue, it should be noted that Congress recently altered the Federal Circuit’s jurisdiction over patent-related appeals. Previously, jurisdiction was based on the nature of the well-pleaded complaint alone. However, under the America Invents Act (AIA), the Federal Circuit now has exclusive jurisdiction over appeals “in any civil action arising under, or in any civil action in which a party has asserted a compulsory counterclaim arising under, any Act of Congress relating to patents.” Since the AIA had not taken effect when Microsoft filed its complaint, the jurisdictional analysis was based on Microsoft’s breach of contract action alone. In any event, inasmuch as the district court held that Motorola’s patent claims were not compulsory counterclaims, even had the broadened appellate jurisdiction of the AIA applied, it would not have conferred Federal Circuit jurisdiction in this instance.

The Antitrust Division of the U.S. Department of Justice (DOJ) recently issued a business review letter stating that it would not challenge the Institute of Electrical and Electronics Engineers, Inc.’s (IEEE’s) proposed revisions to its patent policy. These patent policy revisions seek to address the “wide divergence” in expectations between holders of patents essential to an IEEE standard and the market participants seeking to implement such standards. The DOJ’s response looked favorably on the IEEE’s proposed revisions pertaining to RAND royalties and limitations on injunctive relief for standard-essential patent holders.

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On November 15, 2013, Chairwoman Edith Ramirez testified on behalf of the Federal Trade Commission (FTC) before the House Subcommittee on Regulatory Reform on the topic of antitrust oversight and enforcement.  Ramirez explained that the FTC “focuses its enforcement efforts on sectors that most directly affect consumers, such as health care, technology and energy.”

The FTC has identified health care provider consolidation as a significant component of increasing health care costs, and overseeing provider combinations has remained a key priority for the agency.  The FTC has also undertaken efforts to promote competition between manufacturers of generic and brand-name drugs.  In addition to litigating “pay-for-delay” settlements, the Commission has filed amicus briefs to advocate against other practices it considers anticompetitive, such as “product hopping,” the practice of altering the formula of a brand-name drug in a minor, non-therapeutic way in order to preserve monopoly power in the face of generic competition.

In the technology arena, the FTC has targeted the problem of patent hold-up.  The Commission has pursued enforcement actions aimed at preventing holders of standard essential patents from rescinding agreements to license the patents on reasonable and non-discriminatory (RAND) terms.  The FTC is also actively looking into the potential harms and efficiencies of “patent assertion entities,” which are companies “with a business model focused primarily on purchasing patents and then attempting to generate revenue by asserting the intellectual property against persons who are already practicing the patented technology.”

The Chairwoman noted that the Commission utilizes “all the powers at its disposal” to police competition in the energy sector, and it considers merger review “essential to preserving competition in these markets.”  The agency also monitors gasoline and diesel fuel prices on a daily basis for unusual pricing activity, which could be a sign of anticompetitive conduct.

by Karne Newburn

On July 30, 2013, Suzanne Munck, Chief Counsel for Intellectual Property at the Federal Trade Commission (FTC), testified before the Senate Committee on the Judiciary, Subcommittee on Antitrust, Competition Policy and Consumer Rights, on the impact of patent hold-up on competition, and standard-essential patents (SEPs).  The hearing covered standard-essential patent disputes and antitrust law. 

Ms. Munck’s testimony focused on SEPs that a patent holder has committed to license on reasonable and non-discriminatory (RAND) terms.  The hold-up, in this context, is the potential that a SEP holder violates its RAND commitment, and then uses the leverage acquired from the standard setting process to negotiate higher royalties or other favorable terms after the standard’s adoption than it could have beforehand.  She explained that patent hold-up is harmful because it can deter innovation, discourage the adoption of standards, reduce the value of standard setting and pass on excess costs to consumers.

To mitigate the threat of patent hold-up she testified that the FTC has “advocated for remedies in district courts and at the International Trade Commission (ITC),” submitted statements to the Federal Circuit and the ITC expressing its concerns, and pursued enforcement actions related to standard setting activity.  Specifically related to enforcement, she commented on the FTC’s ability to use its Section 5 authority when someone claims infringement for intellectual property that is unenforceable or expired, or when someone threatens to sue without any intent to sue.

Ms. Munck concluded with the following remarks: “[T]he Commission believes that competition and intellectual property laws work together to promote innovation.  Voluntary consensus-based standard setting facilitates this purpose; however, including patented technology in a standard creates the potential for patent-hold up.  The Commission will continue to advocate before the federal courts and the ITC for policies that mitigate the potential for patent hold-up, and will bring enforcement actions where appropriate.” 

by William Diaz and Lincoln Mayer

The U.S. International Trade Commission has issued an exclusion order barring importation of certain older model Apple products for infringing a Samsung patent. The case is significant because the infringed patent was standard essential and encumbered by a commitment to license on fair, reasonable and non-discriminatory terms. Patent holders and potential defendants should carefully monitor further developments regarding the availability of injunctive relief for infringement of standard essential patents.

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by Nick Grimmer and Stefan Meisner

Last week in Microsoft v. Motorola, the U.S. District Court Western District of Washington became the first U.S. court to set fair, reasonable, and non-discriminatory (FRAND or RAND) royalty rates and range for standard-essential patents (SEPs).  See Findings of Fact and Conclusions of Law, Microsoft v. Motorola, 2:10-cv-01823-JLR (W.D. Wash. Apr. 25, 2013). The suit stems from Microsoft’s allegation that Motorola’s offers to license certain Wi-Fi and video compression SEPs was too high and therefore violated Motorola’s contractual RAND commitments.   This issue is arising with greater frequency in antitrust/IP matters when patent licensing is involved with licensors who are standards setting organizations as well.

Microsoft v. Motorola is important because it is the first thoroughly reasoned decision by a U.S. federal district court that developed a framework for courts to assess FRAND terms for SEPs.  In setting forth the basic principles at issue, the court stated that “a RAND commitment should be interpreted to limit a patent holder to a reasonable royalty on the economic value of its patented technology itself, apart from the value associated with incorporation of the patented technology into the standard.” Id. at 25-26.  So, the court focused its analysis on its conclusion that “the parties in a hypothetical negotiation would set RAND royalty rates by looking at the importance of the SEPs to the standard and the importance of the standard and the SEPs to the products at issue.” Id. at 7.  The court’s analysis employed a modified-version of the Georgia-Pacific factors, which courts use to calculate “reasonable royalty” damages in patent infringement actions.  Of note, the court modified the first Georgia-Pacific factor (the royalties received by the patentee for the patent(s) at issue) to include consideration only of certain types of royalties, i.e., those “comparable to RAND licensing circumstances,” including both “license agreements where the parties clearly understood the RAND obligation, and … patent pools.” Id. at 35-36 (emphasis added).  Another of the court’s noteworthy modifications to the Georgia-Pacific factors is that the fourth factor (the licensor’s policy and marketing program to maintain its patent monopoly via selective licensing), “is inapplicable in the RAND context because the licensor has made a commitment to license on RAND terms and may no longer maintain a patent monopoly by not licensing to others.”  Id. at 36.  Finally, as relates to the final factor (a hypothetical negotiation), the court concluded that “reasonable parties in search of a reasonable royalty rate under the RAND commitment would consider the fact that, to induce the creation of valuable standards, the RAND commitment must guarantee that holders of valuable intellectual property will receive reasonable royalties on that property.” Id. at 40.

Concluding that several of Motorola’s patents provided only minimal contribution to the standards and played only minor importance in the overall functionality of some of Microsoft’s products, and that the characteristics of a similar patent pool (of which Microsoft and Google, Motorola’s parent, are members) “closely align with all of the purposes of the RAND commitment,” id. at 166, the court set RAND royalty rates far lower than Motorola requested and only slightly higher than Microsoft’s proposed rates.  The case is slated to proceed to trial later this year on the issue of whether Motorola’s offer violated its RAND obligations. 

Microsoft v. Motorola is precedential only in the Western District of Washington, but at 207 thorough and well-reasoned pages, it provides a valuable roadmap and will likely be quite influential in future RAND cases in other U.S. and foreign jurisdictions.  However, it might not always be licensee-favorable.  This case presented substantial and potentially-unique evidence, for instance, of patent pools relating to the standards at issue, that the SEPs at issue were not particularly valuable as compared to other patents essential to the standards (particularly for the uses at issue), and of similar (low) valuation analyses commissioned by the patent holder.

In any event, both licensors and licensees of SEPs should take serious note of Microsoft v. Motorola.