Following almost two years of debate, public posting of five drafts, and consideration of 680 comments, IEEE-SA preliminarily approved amendments to its Patent Policy to address these and other questions. IEEE-SA is the developer of the Wi-Fi standards (and thousands of other specifications). It is one of the major standards development venues in the information and communications technology industry, and thus a venue within which the question bears great weight. However, final approval of the amendments was made contingent upon receiving a favorable “Business Review” letter from the U.S. Department of Justice.
In a business review letter, the regulator responds to a detailed explanation and rationale for a proposed action, and indicates whether it would, or would not, be likely to challenge that action if implemented. In this case the DoJ expressed its belief that the proposed actions would be procompetitive rather than restricting competition, and that it would therefore not be inclined to challenge the final approval and implementation of the policy changes. That approval will occur later this month when the proposed policy updates are approved by the IEEE-SA Board of Directors.
The most significant change relates to what would need to occur before the owner of an essential claim could seek an injunction or similar relief that would effectively bar the product vendor from selling its product in the marketplace. Such an action is rightly considered to be a “nuclear option,” for two reasons. First, it provides enormous leverage to the party that is successful in securing the injunction. Normally, the defendant in a civil suit can continue to sell their products until a court determines the related issues, since if the plaintiff wins, it can be made whole with monetary damages. And indeed, the insufficiency of monetary damages to “make the plaintiff whole” is one of the requirements to obtain injunctive relief regardless of the matter in dispute.
But in the case of a product that implements a standard, an injunction is even more powerful, since the vendor cannot make a design changes to avoid infringement – by definition, the patent claim in question is “essential.” Moreover, in the case of an essential claim owned by someone subject to a RAND obligation, the owner has already agreed to extend a license, subject to reaching agreement on the terms of license on RAND terms. If the vendor is willing to pay a fee, but not one that is as high as the owner of the essential claim has demanded, providing injunctive relief feels wrong until a court can determine which one is right.
The current debate has its origins in the many suits filed by almost all of the major mobile device vendors (Apple, Samsung, Microsoft, Motorola, etc.) in recent years as each company fought for the largest share possible of this new, enormous and extremely valuable mobile device market. Mobile devices implement hundreds of standards, and practice inventions represented by thousands of essential claims. The amount considered to be “reasonable” under such a situation is therefore a crucial issue: to the owner of the claim, the economic rewards can be enormous, since billions of devices are being sold. But for the vendor (and for consumers) the prices can add up to a number high enough to price such a device out of reach for consumers, resulting in a situation economists and regulators refer to as “royalty stacking.” In such a context, the definition of “reasonable” becomes one of great significance, as well as the subject of vigorous debate.
The situation has become exacerbated by the proliferation of so-called non-practicing entities (NPEs) that develop, or more often buy, patents for the purpose of asserting them. An NPE has no incentive other than to maximize its return. But a vendor may be willing to accept a lower royalty for a variety of other reasons, such as expanding the market for a product or its share of that market. As a result, the range of opinions on what reasonable should mean, as well as when, if ever, the owner of an essential claim can exercise the nuclear option in court, is wide.
This debate has raged in many quarters. But by informal consensus, many industry players have elected to focus the debate in two standards organizations (the other is ETSI, the European Telecommunications Standards Institute, where it is the European regulators that are pushing for action on this issue). For now, most other standards organizations have been content to stand by to see what approach the IEEE-SA may take.
Therein lies the significance of today’s news. While the combatants that did not get their way in IEEE-SA will certainly try to achieve a different result in other standards organizations, there will be many companies and other stakeholders that will be quite happy if other standards organizations simply follow IEEE-SA’s lead. After all, almost all of the major ICT vendors were involved in the debate. And the DoJ has blessed the final result.
Here are the main changes that were presented to the DoJ:
Injunctive Relief: Crucially, IEEE opted to make securing an injunction as difficult as possible to obtain short of forbidding it entirely. Under the policy amendments, anyone that makes a RAND pledge will be prohibited from seeking injunctive relief until a court, and any appeals that follow, conclude that the vendor has refused to pay a fee that is “reasonable.” As a result, the vendor may continue to sell a standard-compliant product that infringes the plaintiff’s essential claim while it pursues all of its legal remedies to their conclusion. Only then can the plaintiff force the defendant to choose between agreeing to pay a royalty the courts have ruled is reasonable or face an injunction.
Reasonable: Intellectual property rights (IPR) policies have for decades shied away from defining reasonability (or discrimination), leaving negotiations relating to price entirely to the parties involved – and to the courts when they fail to agree. This has resulted in very lengthy and expensive litigation, and court opinions running to the hundreds of pages. IEEE-SA will incorporate language that borrows from these recent rulings in one mandatory, and three important but elective factors to be taken into consideration when determining whether an offer is or is not reasonable. Importantly, the mandatory element states that a “Reasonable Rate” will exclude any premium relating to the fact that a patent claim is essential (e.g., a monopoly premium). The three recommended, but not exclusive elements are as follows:
(1) “[t]he value that the functionality of the claimed invention or inventive feature within the Essential Patent Claim contributes to the value of . . . the smallest saleable Compliant Implementation that practices the Essential Patent Claim”;
(2) “[t]he value that the Essential Patent Claim contributes to the smallest saleable Compliant Implementation that practices that claim, in light of the value contributed by all Essential Patent Claims for the same IEEE Standard practiced in that Compliant Implementation”; and
(3) “[e]xisting licenses covering use of the Essential Patent Claim, where such licenses were not obtained under the explicit or implicit threat of a Prohibitive Order, and where the circumstances and resulting licenses are otherwise sufficiently comparable to the circumstances of the contemplated license.”
Given the highly technical nature of these three factors, and the fact that they are neither mandatory nor exclusive, the IEEE-SA updates will only narrow, rather than eliminate the potential for future disputes.
Any Compliant Implementation: Some vendors had recently sought to state that a RAND pledge should allow them to choose what players in a product chain will have a right to a RAND license and which did not, thereby giving themselves a negotiating advantage in certain circumstances. The updated policy states that anyone in the line of production and sale that might need to practice an essential claim has the right to obtain a RAND license for that purpose.
Reciprocity: It has long been accepted that requiring a licensee to provide a license back of its own essential claims in connection with receiving a RAND license is consistent with a RAND obligation. However, some vendors have sought to receive such a “grant back” license with respect to patent claims in addition to those that are essential under the standard in question. This demand is widely regarded as inconsistent with the concept of reasonability, and the IEEE-SA policy will now codify this interpretation.
While it is hard to overestimate the potential significance of these updates to the IEEE-SA Patent Policy, it is worth remembering that this is not the first time that the IEEE-SA has taken a change to its Patent Policy. In 2008, after an equally energetic and protracted debate, it proposed changes to the DoJ that would allow working group members to state not only whether they would or would not provide a RAND license, but also the actual prices they would charge (a very sensitive issue under antitrust and competition law). VITA requested a business review letter around the same time for a change that would require, rather than simply permit, such disclosure.
The DoJ approved both of those requests. But virtually no other standards organizations ever followed their lead by making a similar change to their IPR policies. Given the level of energy that surrounds the injunction and RAND issue and the fact that the mobile device platform patent wars have largely abated, it may be that man standards development organizations will not rush to update their IPR policies this time as well.
Update: On February 8 the IEEE Board of Directors approved the updates. A brief press release is here.