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Licensing Standard-Essential Patents

September 16, 2013

Monica BaroneSr Legal Counsel(mbarone@qualcomm.com)

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Overview of Presentation

Why Is the Licensing of Standard-Essential Patents a Hot Topic?

The Basics of Standard-Essential Patents (“SEPs”)

Four Key Questions About Licensing SEPs

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Why Is the Licensing of SEPs a Hot Topic?

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The Proliferation of Standards

• Standardization is critical to the success of many industries, including the telecommunications industry• The creation of industry standards allows different companies’ products to interact, which is

fundamentally pro-competitive• There are thousands of standards; IEEE alone has over 900 active standards and more than

500 standards under development • Some of the more familiar and widely used standards include: WWAN; WiFi; Bluetooth; and

Video and Audio Codecs• Standards continue to evolve over numerous releases and iterations with a number of

companies contributing throughout the process

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Evidence of Hold-Up

• Patent litigation itself is not an indicator of hold-up2

• Patent litigation might well be indicative of hold-out• CSIRO v Buffalo – A refusal to negotiate

• There are many reasons why there has been an increase in patent litigation; e.g. driven by the economic interests of new market entrants• Increase in so-called “smartphone patent litigation” in the USA starting in 2009

• Is there objective evidence of hold-up – missing evidence on indicators that economists routinely use• Economic experts in Microsoft v Motorola case – no evidence3

• If hold-up was rampant, wouldn’t we see drop in market entry? – Instead we observe late and successful downstream implementer entrants in the wireless industry4

• Wouldn’t we see reduced number of products? – In contrast, the wireless industry is the most vibrant and fast-changing industry of our time

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SEPs Have Been in the News

Antitrust regulators in both the US and Europe have recently focused on SEP licensing, particularly in the ICT sector, citing a need for regulatory intervention:

“One issue in these cases [against Samsung and Motorola] is the use of court injunctions that can infringe the principle of effective access inherent to FRAND. We need to find good answers soon, because consumers cannot be held hostage to litigation. Both competition authorities and the courts should intervene to ensure that standard-essential patents are not used to block competition.”(Vice President Almunia, IBA Antitrust Conference, Madrid, 15 June 2012)

“Specific circumstances affecting some industries like the information and communication technology (“ICT”) sector may limit the effectiveness of intellectual property rights” to “stimulate innovation, and to benefit consumers”. (Kai-Uwe Kühn, Chief Economist, DG Competition, European Commission; Fiona Scott Morton, former Chief Economist, Antitrust Division, US Department of Justice; Howard Shelanski, Director, Bureau of Economics, Federal Trade Commission. CPI Antitrust Chronicle, March 2013.)

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SEPs Have Been in the News

• Others have urged caution in intervening in this highly innovative sector:“If you go back a hundred years or a hundred and fifty years, to the telegraph and the telephone and manufacturing technology, there was really significant debate at the time around the appropriateness of patent protection in those spaces, and courts and industry worked through it and moved forward…Eventually this will normalize and sort itself out, so we don't believe any special measures are needed beyond good focus on applying the law correctly and understanding the law” Microsoft's chief patent counsel Bart Eppenauer*

“The current argument presumes a tension between the interests of innovators (traditionally protected by patent law) and competition (traditionally protected by antitrust law). Recent actions and statements by the FTC have been perceived as taking sides in this false dichotomy, diminishing the rights of patent holders in license negotiations and increasingly tasking judges and arbitrators to become royalty “rate regulators,” with royalty rates for SEPs set by judicial dictate instead of by commercial market-based negotiations between industry participants. If this direction continues, it inevitably will reduce incentives for the investments necessary to produce the next generation of innovations.”Christine Varney, Former Assistant Attorney General for Antitrust and David Kappos, Former Director, U.S. Patent and Trademark Office**

*‘We believe our patent laws have served the country very well,’” Bart Eppenauer, The Verge, Nov. 7, 2012.**“Balanced regulation help innovation, US interests,” Christine Varney and David Kappos, Politico , April 10, 2013

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The Basics of SEPs

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The Standards-Setting Process

• The development of industry standards often occurs within standards-setting organizations (“SSOs”) such as TIA, IEEE, and (in the wireless communications industry) ETSI

• Prominent SSOs like these typically have dozens or hundreds of different companies as members

• The member companies work together to develop a standard (the SSO itself usually does not participate); they can submit their technology as a proposed contribution to the standard and send their representatives (usually engineers) to SSO meetings to discuss, debate, and ultimately vote upon the standards

• SSOs typically have an IPR policy and members are required to agree to it when they join the SSO – thus the IPR policy becomes a contract between each member and the SSO

• Once a standard is adopted, typically anyone (not just members) can use it (i.e., make a product that implements the standard)

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SSO IPR Policies

Typically two components:• Disclosure

• Each member may be asked to disclose (to other members) any patents or patent applications it has that are, or may be, “essential” to the standard

• SSOs do not determine whether a patent is valid or is actually essential to the standard• Both the standard (technical specification) and patent applications evolve and undergo revisions

• Licensing• Member may be required, or given an opportunity, to make a commitment regarding the licensing

of any patents it has that are essential to the standard (if a member refuses to make a voluntary commitment, other members may vote against its proposed contributions to the standard)

• In some instances, a royalty-free licensing commitment; more commonly, a commitment to offer a license on “fair, reasonable, and non-discriminatory” (FRAND) terms (sometime the “fair” is omitted and it is just “RAND”)

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The ETSI IPR Policy

• Two Fundamental Objectives

• Fair compensation for those who contribute their technology to the standard

• Access to essential patents (IPR) for those who wish to use the standards

• A FRAND commitment is voluntary, not mandatory

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The Nature and Meaning of a FRAND CommitmentWhat exactly is a FRAND licensing commitment?• A FRAND commitment is:

• A contractual commitment (from the member to the SSO; other members and implementers of the standard may be third-party beneficiaries)

• The terms of this contractual commitment depend on the IPR policy of the SSO in question, and thus can vary from one SSO to the next

• One must examine the text, and if necessary the “negotiating history”, of the SSO IPR policy to understand the terms

• For example, under the ETSI IPR policy (Article 6.1):• It is an obligation to offer a license on FRAND terms to anyone who wants to make equipment compliant

with the standard, subject to reciprocity• This is an intentionally flexible – but binding – concept that allows for license terms to be determined

through bilateral negotiations

•A FRAND commitment is not:• A creation of statute, economic theory, or public policy• An agreement that SEPs are less valuable than other patents

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Four Key Questions about the Licensing of SEPs

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Four Key Questions About Licensing SEPs

• What are “FRAND” terms?

• Can you choose the level of the manufacture/distribution chain at which you will license?

• Can you include non-SEPs when licensing SEPs subject to a FRAND commitment?

• Can you seek an injunction against an implementer who refuses to accept a license?

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What Are “FRAND” Terms?

• Not aware of any SSO IPR policy that specifically defines FRAND terms• Under the ETSI IPR policy (which is representative of many others):

• “FRAND” applies to the terms of a license agreement as a whole• It is incorrect and misleading to focus on the royalty rate (or any other term) alone• The monetary terms of a license can include up-front license fees, fixed annual/quarterly fees,

running royalties in fixed per unit amounts, running royalties as a percentage of gross or net selling price (perhaps subject to minimums and caps), or any combination of the foregoing; there is no basis to dictate the use of one structure over another or to dictate one parameter independently of others

• There can be, and often are, other forms of consideration as well (such as cross-licenses, product development and marketing commitments, and equity grants)

• A range of terms can be FRAND for any given deal; it is incorrect to assume that there is only one specific set of terms that is FRAND

• The “non-discriminatory” portion of “FRAND” does not require that all licensees must receive identical terms

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Microsoft-Motorola (W.D. Wash, Apr. 25, 2013)

• 207-page decision (findings of fact, conclusions of law)• Factual backdrop: Motorola offered Microsoft a license to two groups of Motorola

patents claimed to be essential to two different industry standards: 802.11 (WiFi) and H.264 (video codec). Motorola’s offer included a royalty of 2.25% of the price of the end product (e.g., the Xbox). Microsoft sued Motorola for breaching its obligation to offer a license on RAND terms.

• Motorola’s RAND commitments were made pursuant to the IPR policies of the IEEE and ITU.

• Judge Robart held a bench trial to determine both a range of RAND royalty rates for the Motorola patents and also a specific RAND royalty rate for the Motorola patents (rather than letting the jury decide).

• Jury is to decide whether Motorola breached its RAND commitment by not making a good-faith initial offer (initial offer need not be within RAND range if made in good faith).

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Microsoft-Motorola (W.D. Wash, Apr. 25, 2013)

• Judge Robart held:• For Motorola H.264 patents, RAND range is 0.555 to 16.389 cents per unit, and RAND rate is 0.555 cents per unit

(low end of range)• For Motorola 802.11 patents, RAND range is 0.8 cents to 19.5 cents per unit, and RAND rate for Xbox is 3.471

cents per unit

• How did he get there?• Adopted hypothetical negotiation analysis (what would reasonable parties have agreed upon?) using modified

Georgia-Pacific factors• Recognized that results of real-world negotiations of licenses for the same patents are relevant – but

disregarded all of Motorola’s other licenses for one reason or another (e.g., litigation settlements)• Acknowledged that patent holders need to be assured of receiving full and fair value for their patents or else

standards might fail to incorporate the best technology available – but never used this in setting the royalty rates/ranges

• Concluded that Motorola’s patents were relatively unimportant to the standards or the Microsoft products in question

• Acknowledged that patent pool royalty rates are not good benchmarks for RAND royalty rates for several reasons – but used patent pool rates as a benchmark anyway

• Also used a license agreement between two third parties (ARM and Marvell) involving different IP as a benchmark for the WiFi patents

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Can You Choose the Level at Which You Will License?

• Does the holder of SEPs have to (or can it choose to) license at the component level, the end device/system level, or both?

• Generally a patent holder has the right to choose the level of distribution at which it licenses; does a FRAND commitment change this?

• When the ETSI IPR policy was adopted, it was assumed and expected based on industry practice and applicable law that licensing would be done at the end device/system level (use of the word “equipment” in the policy reflects this)

• If the holder of SEPs licenses at the end device/system level and is not asserting at the component level, there is no reason to impose an obligation to license at the component level• Component suppliers often have access to the SEPs in other ways such as “have made” rights of end

device/system licensees or non-exhaustive “patent peace” agreements with the SEP holder• For the industry overall, it has been and continues to be more practical and efficient to license at the

device as opposed to the component level

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Can You License Non-SEPs with SEPs?

• In the real world, implementers almost always want portfolio licenses (but the patentee has no obligation to include non-SEPs)• Eliminates multiple negotiations and multiple agreements with the same patent holder• Freedom to operate; do not want to have a license for one set of patents only to be accused of

infringing another (e.g., Nokia/HTC litigation)

• What does licensing patent portfolios entail?• Patents actually or potentially “essential” to the same standard• Patents “essential” to multiple related standards• Only technically necessary or also non-SEPs

• The U.S. case law generally supports portfolio licensing:• U.S. Philips Corp. v. International Trade Commission (2005)• Princo Corp. v. International Trade Commission (2009)• Princo Corp. v. International Trade Commission (2010)

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Can You Seek an Injunction?

• Injunctive relief is a fundamental remedy for patent infringement (since a patent confers the right to exclude others)

• Any waiver of such a remedy must be clear and express• Not aware of any SSO IPR policy that contains such a waiver

• There is no such waiver in the ETSI IPR policy• A bar on injunctive relief was proposed, and rejected, when the ETSI IPR policy was being

formulated and adopted

• However, an SEP holder must be willing to offer a license on FRAND terms• Certain regulators have attempted to sanction patentees for seeking an injunction for infringement

of SEPs• The only U.S. court to address the issue of whether it is unlawful merely to seek an injunction based

on an SEP recognized that under U.S. law, it is a contractual issue, not an antitrust issue, and that nothing in the ETSI IPR policy precludes requests for injunctive relief*

* Apple, Inc. v. Motorola Mobility, Inc., No. ll-cv-178, 2012 WL 5416941 at *15 (W.D. Wis. Oct. 29, 2012).

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Can You Seek an Injunction?

• DOJ and FTC agree that a FRAND commitment does not ban injunctive relief (or similar remedies, such as ITC exclusion order) in all cases

• The recent USTR disapproval of exclusionary relief in a recent ITC investigation made it clear that exclusionary relief remains available in the ITC for SEPs subject to FRAND commitments

• FTC/Google consent decree limits ability of Google/Motorola to seek injunctive relief for infringement of their SEPs• The consent decree was a negotiated resolution of that investigation and is not a general

prescription that other SEP holders must follow

• Generally, a FRAND defense will be heard before an injunction is issued or can be enforced• Standard principles for awarding injunctive relief or the like (e.g., eBay factors in U.S. district court,

“public interest” consideration in ITC) will still apply

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“where a company against which an injunction is sought has shown to be unwilling to enter into a FRAND licence, injunctions should, in line with and as foreseen by the applicable law, be available”

Kramler, DG COMPat the ETSI IPR SC, April 2013

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Thank you!