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1 September 2013PatentsLaura Beth Miller

Will standard essential patents change the US patent litigation landscape?

An SEP is a patent that is necessary in order to practise an industry standard. While adoption of a common protocol or standard across an industry or technology platform has recognised pro-competitive and pro-consumer advantages, incorporating a patent into that industry standard also has potentially anti-competitive effects.

For example, the value of the SEP may be artificially increased, while the value of competing technology is diminished; and for entities effectively forced to practise the standard to compete in the market, they must license the SEP or risk infringement claims.

To minimise these potential harms, patent owners participating in standard-setting organisations (SSOs) agree to license a SEP to standard users on ‘reasonable and non-discriminatory’ (RAND) terms. In Europe, the obligation and expression is FRAND, which means ‘fair, reasonable and non-discriminatory’. RAND and FRAND are often used interchangeably and treated as imposing the same/similar obligations.

RAND commitments can create enforceable contracts rights and obligations between the patentee and the SSO. They also have raised several questions in litigation, including:

•  Who can claim contractual rights or third party benefits based on RAND commitments?

•  What constitutes a SEP?

•  What constitutes RAND terms?

•  What circumstances, if any, justify issuance of an injunction where infringement of a SEP has occurred?

Increasing scrutiny of these RAND commitments comes at the same time as businesses and Congress are grappling with the competitive effects (both pro and con) of patent litigation initiated by patent acquisition entities (PAEs). Both conversations raise similar concerns—how to protect the stimulus for innovation that patent laws generate, without creating a ‘patent holdup’ in which the patentee’s licensing demands are untied to the value of the innovation.

In the US, RAND commitments generally extend to and are enforceable by standard users, not just the SSO. Notably, this conclusion is contrary to a decision reached by a German court in Microsoft v Motorola, which found that there were no third party beneficiary rights under German law. However, the reach of third party rights is not unlimited.

In In re Innovatio IP Ventures, LLC Patent Litigation, MDL Docket No. 2303, case no. 11 C 9308 (N.D. IL), the court noted that Motorola and other OEMs (original equipment manufacturers—party manufacturers of SSO-enabled equipment) as users of the standard were third party beneficiaries of the RAND commitment, but that it would be improper for these OEMs to sue Innovatio for its breach of RAND obligations to OEM customers (who were also parties to the litigation).

The court allowed the RAND-related claims to go forward, with the caveat that the OEMs could not pursue damages on the theory that they were harmed by Innovatio’s failure to offer RAND licences to OEM customers.

Knowing who has the right to enforce RAND obligations leads to the next question—what is covered by a RAND commitment? SSO members may make RAND commitments without necessarily conceding that a particular patent or patent claim is essential to a standard. The Innovatio court put the burden on the defendants to prove (by a preponderance of the evidence) that a patent was subject to RAND obligations—on a claim-by-claim basis.

The court found that notwithstanding statements in the patentee’s letters of assurance directed to the patents generally, the SSO bylaws mandated that the RAND commitment be evaluated on a claim-by-claim basis. The court relied upon those same bylaws to define an essential patent claim, using a two-part test, as a claim that is, generally speaking, necessary to create a compliant implementation of either mandatory or optional portions of the standard.

One item to take away from the Innovatio ‘essential patent’ claim analysis is that the definition of a SEP and the attendant RAND commitment may vary based not only on the letters of assurance given by the patent owner, but also the rules governing the SSO adopting the standard, as well as the contract law principles applied by the court (which could vary by state or by country).

The Innovatio court conducted this analysis before claim construction and before any infringement findings, with the expectation that such information could assist the parties in settlement discussions. Other courts may develop alternatives for determining what constitutes an essential patent.

The RAND rate

Another key question in the analysis is what constitutes a RAND rate? In Innovatio, the court noted that “the impact of the RAND obligation is a damages question, [entitling the parties] to a jury determination on the issue”. However, the parties agreed that the court should determine all RAND-related obligations, and a bench trial to determine the RAND rate is set for autumn 2013.

"Notwithstanding statements in the patentee's letters of assurance directed to the patents generally, the sso bylaws mandated that the rand commitment be evaluated on a claim-by-claim basis."

A similar approach was taken in Microsoft v Motorola, where the district court held a bench trial to determine a RAND licensing rate and a RAND royalty range for Motorola’s patents. In that case, the Microsoft court set forth a detailed RAND analysis, using a ‘modified’ Georgia Pacific analysis.

In particular, the court determined that the modified Georgia Pacific factors should reflect the realities at the time immediately prior to adoption of the standard, rather than at the time of the alleged infringement; that the RAND rate should reflect the incremental value of the patent over the next best technology at the time of adoption of the standard, and that the RAND rate should take into consideration the totality of essential patents bearing on the standard.

Application of these factors had the effect of downwardly adjusting the licence rate proposed by the patentee manyfold.

A similar rationale was articulated by 7th Circuit Judge Posner in Apple v Motorola, where he recognised the need to “confine the patentee’s royalty demand to the value conferred by the patent itself as distinct from the additional value—the hold-up value—conferred by the patent’s being designated as standard-essential”. In order to meet this need, he opined that “The proper method of computing a FRAND royalty starts with what the cost to the licensee would have been of obtaining, just before the patented invention was declared essential to compliance with the industry standard, a license for the function performed by the patent.”

It remains to be seen whether future litigants will leave these questions with the judge or pose some or all of them to a jury.

The final and perhaps most hotly-contested RAND commitment question involves the right of the SEP owner to obtain injunctive relief, with respected jurists and others recognising an injunction in such cases is “arguably inconsistent with the RAND licensing commitment”—Microsoft v Motorola, 696 F.3d 872 (9th Cir. 2012); see also Apple Inc v Motorola Inc, 869 F. Supp. 2d 901 (N.D. Ill. 2012); Realtek Semiconductor Corp v LSI Corp, 2013 US Dist. Lexis 71311, 2013 WL 2181717 (N.D. Cal. May 20, 2013) (holding that unless the infringer refuses to licence under RAND terms, injunctive relief is not appropriate).

The US Department of Justice along with the US Patent & Trademark Office (January 8, 2013), the Federal Trade Commission, and most recently the Office of US Trade Representative (August 3, 2013 in declining to approve an International Trade Commission (ITC) import ban on infringing Apple products), have voiced similar opinions through various policy statements, namely that injunctive relief should not be made available for RAND-encumbered SEPs, either in the district court or the ITC, unless the licensee refuses (or is unable) to license on RAND terms, or the licensee is beyond the jurisdiction of the court system.

Under this developing framework, courts will be expected to evaluate not only traditional contract-type questions such as the terms of RAND commitments, but also policy considerations behind RAND commitments. To date, this analysis has been applied exclusively to RAND-encumbered SEPs.

However, one could envision an argument that extends the analysis to an SEP for which the patentee has no corresponding RAND obligation (eg, the patentee was not a SSO participant) or where the patent, while not essential, derives substantial benefit from or widespread use based on implementation of a common industry standard or practice, or where the patent owner is in the business of licensing patents, such as a PAE. That result could have an impact on the potential value of such patents.

Laura Beth Miller is a shareholder at Brinks Hofer Gilson & Lione. She can be contacted at: lmiller@brinkshofer.com

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