©2013. Published in Landslide, Vol. 6, No. 2, November/December 2013, by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association or the copyright holder.
In many industries, the formation of standards-setting organizations (SSOs) and the promulgation of technical standards can be considered critical to promoting the widespread adoption of various technologies. SSOs function as the mechanism in which a variety of companies collaborate to agree upon a common set of technological implementations embodied as technical standards. Once adopted, such technical standards can ensure that standards-compliant devices are interoperable, regardless of manufacturer. Additionally, technical standards beneficially increase product manufacturing volumes and mitigate switching costs between similar standards-compliant devices. Accordingly, standardization provides various companies/entities in a value chain—component providers, manufacturers, service providers/implementers, consumers—significant advantages from an engineering and business perspective.
The evolution of SSOs and technical standards related to wireless telecommunications exemplifies the engineering and business benefit of standardization. In the telecommunications industry, each major release of technical standards was commonly referred to as a separate generation of wireless standards, and the promulgation of standards relating to digital wireless telecommunications began with the second generation of technical standards.1 However, the second generation technical standards were often limited to adoption in specific geographic regions, with little or no collaboration between regions. For example, in the United States, wireless service providers had to select one of three second generation technical standards, which were incompatible with one another and with service providers in other regions. Thus, wireless devices compliant with Japanese technical standards were not operable in the United States or Europe, which conformed to different technical standards. Likewise, wireless devices compliant with technical standards adopted in the United States were not operable in Japan or Europe. Such incompatibility resulted in unsatisfactory experiences for the service providers and consumers alike. Accordingly, during the planning of future generation wireless standards, the regional SSOs focused on increased, global collaboration. The result of such collaborations was embodied in the more global, third and fourth generation wireless standards, which more likely reflect the intended benefit of standardization.2
While SSOs are driven primarily by the engineering and business benefits achieved by standardization of technology, the assertion and enforcement of patents related to standardized technology also play a significant role in the marketplace. More specifically, it is very common that a number of organizations may have patent rights that would be infringed, or alleged to be infringed, by devices compliant with technical standards. Such patents are commonly referred to as “essential patents.” For example, it has been estimated that as many as 8,000 patents have been asserted as essential to the third generation wireless standards.3 As such, it can be difficult for any company, such as a manufacturer, service provider, or vendor, to appreciate the number of required patent licenses or to appreciate patent position between essential patent holders.
In addition to the consideration of all the potential essential patent holders, because the very goal of technical standards is to achieve widespread adoption within an industry sector, the standards provide every essential patent holder with substantial leverage in licensing negotiations or litigation involving the essential patents.4 Situations where an essential patent holder demands value greater than the specific patented technology of its essential patent, such as trying to capture value of the standardized technology as a whole, are generally referred to as “patent holdup.” The commonly understood explanation of patent holdup is that an essential patent holder faces much lower resistance to charging for access to essential patents after incorporation of the patented technology into the standards, because the existence of alternative technological implementations is limited by the adopted standards.5
To address issues related to patent holdup, many SSOs have established policies that encourage SSO participant companies and other entities to publicly acknowledge the existence of essential patents, generally referred to as “patent declarations.”6 Additionally, many SSOs encourage the essential patent holders to make contractual obligations to the SSOs as to whether the essential patent holder is willing to grant patent licenses to other member organizations in a reasonable and nondiscriminatory (RAND) manner.7 In theory, if an essential patent holder declares an essential patent, but refuses to make a RAND licensing commitment related to essential patents for a particular technical standard, the corresponding SSO can consider choosing an alternate technical implementation to avoid providing the essential patent holder holdup power. While SSOs have remained consistent in encouraging RAND declarations and contractual obligations from member organizations, the SSOs provide little guidance defining RAND terms for essential patents. In addition, SSOs have generally refused to assess whether or not declared essential patents are in fact essential to one or more technical standards.
Although there have been countless essential patent licenses and numerous litigations involving essential patents, until recently there have been very few judicial opinions that evaluate whether an essential patent holder’s licensing terms comply with a RAND obligation or that set forth a larger framework for defining RAND terms of a standardized technology.
Who Benefits from a RAND Commitment?
Although essential patent declarations and accompanying RAND licensing commitments are generally provided to SSOs, most SSOs have maintained a neutral position with regard to attempting to enforce a RAND license commitment in connection with a private dispute. However, there have been a number of recent litigations in which the enforcement of a RAND license commitment has been considered. In Microsoft Corp. v. Motorola, Inc.,8 Microsoft sued Motorola on the basis of breach of a RAND license commitment. The alleged breach was based solely on two letters sent by Motorola to Microsoft indicating Motorola’s royalty rates for an essential patent license. Before addressing the substantive issue of whether the royalty rates set forth in Motorola’s letters to Microsoft were, in fact, compliant with a RAND licensing commitment, the Western District of Washington first had to consider whether Microsoft was entitled to allege breach of a licensing obligation made by Motorola to the appropriate SSOs. In granting partial summary judgment to Microsoft, the district court held that Motorola entered into a binding contractual commitment to license its essential patents on RAND terms with two respective SSOs, and that Microsoft was a third-party beneficiary of Motorola’s RAND commitments as a member organization of the two SSOs.9
The Northern District of California and Northern District of Illinois have made similar determinations with regard to third-party beneficiaries of RAND licensing commitments to SSOs.10 In In re Innovatio IP Ventures, LLC Patent Litigation, the Northern District of Illinois also held that a RAND commitment by a previous patent owner applied to the current owner of the patent.11 Thus, it appears that contractual enforcement of RAND licensing commitments by third parties is a viable cause of action related to essential patents.
A Framework for RAND
Having established that Microsoft was a third-party beneficiary of Motorola’s RAND licensing obligation in Microsoft, Judge Robart could have simply determined a RAND royalty for Motorola’s asserted essential patents and evaluated the RAND royalty rate vis-à-vis Motorola’s RAND obligation. Instead, Judge Robart issued a 207-page opinion setting forth what is arguably the first reproducible framework for determining RAND royalty rates for any essential patent or set of essential patents.12 Judge Robart’s framework focused on the core economic principles associated with the purpose of requiring RAND licensing obligations for essential patents: (1) furthering the overall goal of an SSO in promoting adoption of the standards by the relevant industry, (2) providing reasonable value to the essential patent holder for licensing the essential patent to all licensees, (3) preventing essential patent holders from realizing value based on the standardized technology as a whole, and (4) considering aggregate royalties that may be applicable to other essential patent holders.
Generally adopting Motorola’s suggested approach, Judge Robart rejected the creation of new legal doctrine to determine the meaning of RAND. Rather, he adopted a RAND framework embodying a hypothetical bilateral negotiation between the parties in accordance with the 15 factors set forth in Georgia-Pacific Corp. v. United States Plywood Corp.13 as applied to essential patents.
In considering each of the Georgia-Pacific factors, the RAND framework first requires the examination of the technological benefit of the patented technology relative to the technical standard as a whole. In some situations, Judge Robart suggested that if a patent was directed to relatively unimportant improvement to the technical standards or to a technical implementation that had a number of viable technical alternatives, the technological benefit provided by patented technology may be close to zero. Under the RAND framework, the examination and consideration of the technological benefit of the patented technology should prevent the essential patent holder from extracting additional value associated with other technical aspects of the standards or the standard as a whole.
In addition to the technological benefit of the patented technology, the RAND framework also requires a determination of whether the hypothetical licensee in fact implemented the patented feature and, if so, the value provided to the hypothetical licensee for implementing the patented technology. As part of this portion of the analysis, the court took into consideration not only whether the hypothetical licensee offers any products or services that implement the patented technology, but also the likely lifecycle of the patented technology. In some situations, the court suggested, if a patented technology has limited adoption in the marketplace, the value of the essential patent will be minimized. The RAND framework again emphasizes that the value of the patented technology should remain separate from the value enjoyed by the licensee by implementing the standards.
As with many of the other factors, in the RAND context, it is critical to consider the contribution of the patented technology apart from the value of the patent as the result of its incorporation into the standard, the latter of which would improperly reward the SEP [standard essential patent] owner for the value of the standard itself.14
Additionally, the RAND framework also requires consideration of royalty stacking, or what the hypothetical licensee would have to pay if all essential patent holders were licensed on the same basis as suggested by the hypothetical licensor.
With respect to stacking concerns, the parties attempting to reach an agreement would consider the overall licensing landscape in existence vis-à-vis the standard and the implementer’s products. In other words, a RAND negotiation would not be conducted in a vacuum. The parties would instead consider other SEP holders and the royalty rate that each of these patent holders might seek from the implementer based [on] the importance of these other patents to the standard and to the implementer’s products.15
Applying the RAND framework, Judge Robart determined a RAND royalty rate for Motorola’s essential patent that corresponds to an approximate 95 percent reduction from the royalty rate quoted by Motorola in its opening correspondence to Microsoft.16
Essential patents and RAND licensing disputes have existed for some time. Nonetheless, in the wireless industry alone, it appears that significant litigation between companies such as Apple, Motorola Mobility, Microsoft, Samsung, and others have finally created situations in which the district courts, and eventually the appellate courts, may address RAND commitments and possibly the framework for assessing RAND commitments.
It can be argued that because Judge Robart’s framework is based on the Georgia-Pacific factors, the jurisprudence related to his proposed RAND framework may have much wider applicability for assessing patent value or reasonable royalties in general. For example, the discussion in the RAND framework emphasizing that a value associated with a patented portion of a standard should be separate from the value of the standard itself may be considered applicable to any patent feature incorporated in a product having more than one feature.17 Likewise, many of the assumptions made with regard to the modifications of the Georgia-Pacific factors may apply equally to a patent holder that has initiated patent infringement litigation but may not be able to obtain injunctive relief, because such a patent holder arguably has made a commitment through the initiation of litigation to license to the accused infringer (e.g., a damages award). It will take time and additional patent disputes to arrive at additional conclusions.
1. The second generation standards include cdmaOne (United States), GSM (Europe), PDC (Japan), iDEN (United States), and TDMA (United States), all of which were incompatible.
2. The third generation standards include WCDMA (United States, Europe, Asia), CDMA2000 (United States, Asia), and TD-CDMA (China). The fourth generation standards include LTE (United States, Europe, Asia).
3. See, e.g., David J. Goodman & Robert A. Myers, Paper Presented at IEEE WirelessCom 2005: 3G Cellular Standards and Patents (June 13, 2005).
4. In some licensing/litigation scenarios, essential patent holders will take the position that infringement of a standards-compliant device can be shown by establishing that the claims of a patent be read on the standards.
5. See Mark A. Lemley & Carl Shapiro, Patent Holdup and Royalty Stacking, 85 Tex. L. Rev. 1991 (2007).
7. European SSOs typically refer to a licensing commitment as a fair, reasonable, and nondiscriminatory obligation (FRAND). However, there is no discernible difference between a RAND obligation and a FRAND obligation.
8. No. C10-1823JLR, 2013 WL 2111217 (W.D. Wash. Apr. 25, 2013).
9. See Microsoft Corp. v. Motorola, Inc., 854 F. Supp. 2d 993, 999 (W.D. Wash. 2012).
10. See Realtek Semiconductor Corp. v. LSI Corp., No. C-12-03451-RMM, 2013 WL 2181717 (N.D. Cal. May 20, 2013); In re Innovatio IP Ventures, LLC Patent Litig., No. 11 C 9308, 2013 WL 3874042 (N.D. Ill. July 26, 2013).
11. In re Innovatio IP Ventures, 2013 WL 3874042.
12. Microsoft, 2013 WL 2111217.
13. 318 F. Supp. 1116 (S.D.N.Y. 1970). In Microsoft, Judge Robart modified the Georgia-Pacific factors on the basis that an essential patent holder making a RAND commitment can no longer choose not to license a potential licensee or discriminate against its competitors.
Factor 4 considers the licensor’s established policy and marketing program to maintain his patent monopoly by not licensing others to use the invention or by granting licenses under special conditions designed to preserve that monopoly. This factor 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. In fact, as the court has found in this case, the RAND commitment requires the SEP [standard essential patent] owner to grant licenses on RAND terms to all implementers of the standard.
Factor 5 examines the commercial relationship between the licensor and licensee, such as whether they are competitors in the same territory in the same line of business; or whether they are inventor and promoter. Similar to factor 4, this factor does not apply in the RAND context. This is because having committed to license on RAND terms, the patentee no longer may discriminate against its competitors in terms of licensing agreements. Instead, as explained, the patent owner is obligated to license all implementers on reasonable terms.
Microsoft, 2013 WL 2111217, at *18 (citation omitted).
14. Microsoft, 2013 WL 2111217, at *19.
15. Id. at *20.
16. The district court will consider the issue of whether Motorola breached its RAND obligation in August 2013.
17. See LaserDynamics, Inc. v. Quanta Computer, Inc., 694 F.3d 51, 60 (Fed. Cir. 2012).