Time to save standards
Both sides of the standards wars are threatening to destroy our future. It is time to step back from the brink and take action to ensure a standards system fit for the 21st century
There are these two young fish swimming along and they happen to meet an older fish swimming the other way, who nods at them and says:
“Morning, boys. How’s the water?”
The two young fish swim on for a bit, and eventually one of them looks over at the other and says:
“What the hell is water?”
From the 2005 Kenyon Commencement Address by David Foster Wallace
Sometimes the most important realities are the hardest ones to see. It is easy to become so accustomed to things that, like water to fish, we no longer even notice that they are there.
So it is with standards. Standards are all around us and play an important role in our lives every day and yet we rarely notice them.
I cannot speak for fish, but I would be willing to bet that they rarely think about water. However, if you pull a fish out of water, I can pretty much guarantee you that the one thing that is going through his little fish brain is “water, Water, WATER”.
In the modern era, we have had standards for so long that we hardly even notice them. However, there is a risk that the complex systems which create and sustain technology standards could collapse. If that happens, we will all wish that we had them back.
Before we dive into the current standards crisis, let us take a moment to remind ourselves how we got to the position we are in today.
A brief history of standards
The need for standards is as old as human civilisation itself. As soon as people began to live in communities and to communicate and trade, there was an incentive to create standards. The first standards were for basic units of measurement. Calendars were created to keep track of the seasons, while units of measurement for distances, weights and volumes were created to facilitate construction and trade.
It is hard even to imagine a world without agreed-upon standards for measurement, but for most of recorded history there were competing units for the simplest measures of length and distance. The length of a man’s foot (the foot), a king’s arm (the yard) or the distance covered by 1,000 strides of a Roman soldier (the mile) were as close to a standard as was available. The basis of measurement varied by person and different units were used in different geographies.
One can only imagine the kinds of dispute that arose in commerce or construction when there was no agreement or accepted standard for the amount of wheat in a barrel or the length of a piece of cloth. In pre-revolutionary Europe, each country had its own system of measurement and disputes were common – some even consider the dispute over units of measurement to be one of the causes of the French Revolution. As international trade grew, the need for standardisation increased. The British exported the English system to their far-flung empire, while the French developed and formalised the metric system.
The Industrial Revolution increased the need for standards as home-based craft production was supplanted by factories and mass production. Increasingly precise and standardised units of measure were needed to enable the use of interchangeable parts and make the division of labour possible. The steam locomotive – the quintessential example of the Industrial Revolution – is an excellent example of this.
Early railroads were designed to serve a particular city or town and little thought was given to the fact that they might someday need to interconnect. As a result, track gauges proliferated with at least a half-dozen different gauges being adopted across the United Kingdom and state or regional gauges being adopted across the United States. In the United States, President Lincoln issued an order that all rail gauges be set at five feet. Typically, this order was ignored; but eventually the railroad companies agreed to a compromise and adopted a standard of four feet, eight and one-half inches which closely matched the common English gauge, which was becoming the standard in the United Kingdom. It is a curious historical note that this strange measurement of four feet, eight and one-half inches was based on the standard dimensions of a cargo wagon, which in turn was based on the wheel ruts left behind by the standard dimensions of a Roman chariot. A standard selected by chariot makers in the ancient world has come all the way down to us in modern times and is still reflected in the gauge of our modern railroads.
Although there were early versions of some standards which we would recognise as technical standards, the standards movement really took off with the advent of electricity and electrical communications around the turn of the 20th century. The well-documented war of currents between alternating and direct currents in the 1880s resulted in the adoption of AC current for electricity generation and transmission. Three phase, 60 Hertz (Hz) at 120 volts became the dominant system in North America, while the 50 Hz standard was used in Europe. Even today, international travellers have to carry adaptors with them to deal with the incomplete standardisation which occurred more than a century ago.
The arrival of electrification ushered in the era of long-distance communication, with telegraph, telephone, radio and television arriving in turn. Each technology began with proprietary technologies deployed by competing companies, but eventually coalesced around an agreed-upon standard. The adoption of communications standards was a necessary step to move from small, closed communication systems to the large, interconnected systems that we enjoy today.
The creation of standards in each of these technologies is a story too long for this article. Suffice to say that leading companies, governments and industry organisations found compromise solutions that enabled devices built by different companies to interoperate as part of a connected system.
Note: Compressed time scale
It was during this era that the first standard-setting organisations came into being. In 1901 the Engineering Standards Committee became the first national standards body and was later given a royal charter, becoming the British Standards Institution. Other countries created national standards bodies – the Deutsches Institut für Normung in Germany, the American National Standard Institute and the French Commission Permanente de Standardisation, were all established shortly after the First World War.
This period also saw the beginnings of the international standards movement. The first international standards organisation, the International Electrotechnical Commission, was created in 1906, with the International Federation of National Standardising Associations to follow in 1926. This was suspended in 1942 during the Second World War, but after the war it collaborated with the newly formed United Nations Standards Coordinating Committee to create the International Organisation for Standardisation.
In the period after the Second World War, numerous international, regional and national standards organisations were created, along with a variety of independent standards organisations which arose to create standards for specific industries. Over time, the rise of standard-setting organisations has given us the sometimes confusing plethora of organisations which we know today, including the American Society of Mechanical Engineers, the American Society of the International Association for Testing and Materials, the European Telecommunications Standards Institute, the Institute of Electrical and Electronics Engineers (IEEE), the Internet Engineering Task Force, the Moving Picture Experts Group, the Society of Automotive Engineers and the World Wide Web Consortium, and many more. Together these organisations have created tens of thousands of technical standards, touching every industry from basic materials to electronics, the Internet and aerospace.
Why standards matter
Like the fish who rarely thinks about the benefits of water, we rarely reflect on the many benefits of standards. It is not too extreme to say that without standards, modern technological society would not be possible. Is it even possible to imagine a world where each phone producer and carrier developed its own communications protocols or where websites used proprietary methods to encode web content? What would the world look like without common standards for cellular communications, WiFi, the Internet, audio and video encoding? Would it be possible to create complex technical products such as computers, televisions, automobiles, aircraft or mobile phones without standards for the numerous components that they contain?
At the risk of mixing metaphors, technical standards are the goose that lays the golden eggs. Standards confer so many valuable benefits that it would be impossible to address them in detail here. Instead, a simple list of benefits will have to suffice.
Benefits to consumers
Consumers derive significant benefits from the existence of standards. Here are just a few of the ‘golden eggs’ that they receive:
- Simplified shopping – consumers are not in a position to compare the merits of different proprietary technologies. Instead, they rely on recognised standards to ensure them that a product will meet their requirements.
- Increased reliability – products that comply with a recognised standard are sure to work in the way that consumers expect.
- Reduced risk – consumers avoid getting locked in to the products of a single manufacturer, which reduces the risk of buying expensive consumer products.
- Lower prices – consumers benefit from lower costs as companies with standardised offerings have lower production costs and are forced to compete on either prices or non-standardised features.
- Increased product variety – in products with standards at their core, consumers tend to see more unique product features as manufacturers look for ways to differentiate their products.
- Interoperability – standards enable consumers to buy products from different producers and trust that they will work together.
Benefits to manufacturers
Manufacturers capture many of the benefits of standards as well. Here are some of the ‘golden eggs’ that they get to keep:
- Ease of market entry – standards reduce the barriers to entry for companies and enable more of them to produce products that will be acceptable in the market.
- Simplified supply chains – standard-compliant components are more readily available, easier to source and cheaper than components which include proprietary technology.
- Economies of scale – standardised technologies are more broadly adopted, which leads to higher production volumes and lower unit costs of production.
- Reduced chance of technological isolation – standards reduce the potential that a company’s investment in technology will be stranded, since the future direction of the core technology is more predictable.
- Compatibility – standards make it possible for products from different companies to work together. Compatibility means that a company need not produce all the elements of a system in order to participate in a market.
- Focused competition on differentiating features – in products that incorporate standards, competition shifts to other differentiating features giving companies the opportunity to distinguish their products through novel features.
- Network effects – in many products that incorporate standards, manufacturers’ products become more valuable as market penetration increases. These network effects benefit all producers in the market and increase overall product demand.
- Reduced marketing costs – standards drive down marketing costs as they create a short-hand for communicating to consumers about how a product works.
Benefits to technology producers
Technology producers may or may not manufacture products, but they provide technological innovations to the product market. The golden goose of standards expands the range of possibilities for technology producers in the following ways:
- Enables smaller players to participate in the market – in product categories which incorporate standards, small players can participate in innovation since their inventions can be layered on to a standardised product and they are not required to invent or develop the entire product.
- Creates a more efficient market for innovation – standards create a market where technology can be bought and sold as there are more potential buyers and sellers.
- Provides a path to capture value from technology investments – technology producers can profit through the sale or licensing of their technology without having to produce a product. This enables many more companies to invest in innovation and drives the technology forward more rapidly.
- Improves access to capital – the potential to profit from standards-related technology investments gives capital providers a reason to invest, as there is a defined path to generate returns and a clearer path to exit.
How standards are being threatened
With all of these benefits, it is hard to imagine that the era of standards may be under threat, but that is exactly what is happening. Without intending to damage the system of collaborative innovation that brings us standards, parties on all sides – acting in what they see as their own self-interest – are taking steps that could seriously harm, if not kill the golden goose.
Over the last 50 years, a consensus developed that supported the creation and adoption of technical standards. That consensus relied on a set of unwritten, but mutually accepted principles that make the system work.
While it is always dangerous to write down so-called ‘unwritten rules’, I think that most parties that deal with standards would agree with these general propositions.
In areas of technology where interoperability is important, it is better to collaborate in developing an industry-accepted solution than to compete over alternative proprietary solutions. It is okay to pursue your own proprietary solution, but you must accept the risk that you may be run over by the rest of the industry if a different widely adopted standard is created.
In the process of developing standards, it is important to develop a consensus around the direction of technology development. Consensus will naturally be influenced by the relative power of the organisations involved, but the quality of the technical contributions is also important and significant technical improvements can trump organisational power.
If you contribute technology to a standard, you have to commit to let others use your technology on reasonable licensing terms. You cannot set outrageous licensing rates or use your patents to stop others from implementing the standard.
Technology investments deserve to be rewarded and all implementers of a standard must be willing to compensate voluntarily those that contributed technology to the standard on reasonable terms.
To simplify the licensing of standard-essential patents (SEPs), most rights holders will participate in a patent pool, which will offer up consistent and reasonable licence rates to everyone in the industry.
Companies with large portfolios of SEPs may choose to license on their own, but they will also offer consistent and reasonable licence rates to everyone in the industry.
If you sell a product that implements an industry standard, you recognise that you will need to take a licence to the SEPs related to that standard. Although it is fair to push for the best possible licensing rates, in the end, you understand that you need a licence.
Patent pool administrators will carefully vet the patents that they include in their pools to ensure that they are standard essential. Industry participants will accept those determinations and will voluntarily license the pool of patents without requiring significant litigation.
However, this consensus on standards is unwittingly being dismantled through the actions of various market participants.
Table 1. The evolving SEP licensing environment
Threat from licensors
As the chief IP officer of a major technology company, it is important to me that the company be able to generate a return on its vast investments in technology. The licensing of standard-related technology is a critically important element of the standards ecosystem and without it standardisation would cease to work.
Patent owners need to make a return on their investments in technology, but they also need to live up to their commitments to license on reasonable terms. When they set rates that are considered unreasonable or structure their licensing terms in ways that are impractical, it can have a negative impact on the adoption of standards.
There is certainly room for honest disagreement about what constitutes a reasonable royalty rate for a set of SEPs, but there has been an increasing number of instances in recent years where the demanded royalty rates for SEPs were way out of line with prevailing rates in the industry. When this happens, companies inevitably seek other alternatives to adopting the standard, which can lead to several negative consequences. Standards can collapse or be delayed, or non-standard alternatives can take hold.
Although it is unusual for a standard to collapse completely due to high royalty rates, there have been instances in the past where this has happened. One example is the DVB-MHP standard, which seemed set to take off but was ultimately rejected when announced royalty rates were far higher than the market was willing to bear.
In other instances, adoption of a standard is delayed when manufacturers are concerned about the potential for high royalty rates for the underlying patents. There are numerous examples of big technology companies such as Apple and Samsung, among others, delaying the implementation of standards in their products over uncertainty about the cost of technology licensing.
Finally, high royalty rates can cause device manufacturers to pursue proprietary solutions or adopt open-source alternatives to industry standards. When this happens, the industry can become fragmented, with multiple different technologies competing in the market. This fragmentation destroys many of the benefits of standard creation described above: interoperability is lost, costs remain high and everyone – consumers, manufacturers and technology providers – is worse off.
Another way that licensors can disrupt the standards ecosystem is by attempting to license at multiple places in the value chain. Typically, royalties for SEPs are charged to the producer of the end device which implements the standard. As a practical matter, this is the simplest way to structure a licensing programme, as there is a physical product being produced and an observable sale and shipment which can be tracked and audited – royalties are typically not charged on the content that goes over the network. Consider the difference between charging a royalty related to a communication standard for each mobile phone that implements the standard or for each call or bit of data that goes over the network.
In the past, when licensors have attempted to apply a royalty to content, they have faced strong resistance from the industry. Content providers have a lot of influence over the adoption of standards and when they feel that a particular technology solution will affect their profit margins, they have a strong incentive to look for cheaper alternatives.
Finally, licensors can adversely affect the standards ecosystem when they fail to cooperate in licensing. Historically, the SEPs related to a standard were available to license from just a small number of parties. Typically, SEPs were made available through a patent pool and from a small handful of large players which licensed unilaterally. This makes it relatively simple for a manufacturer to obtain all of the licences it needs and increases the likelihood that the market for SEP rights will clear.
Patent pools play a critical role in the standards-licensing market as they can consolidate a significant portion of the SEPs related to a standard and offer them in a single licence. When patent pools function well, the market for SEP rights is dramatically simplified and the transactions costs related to SEP licensing fall significantly. Pools also create a powerful benchmark for fair, reasonable and non-discriminatory (FRAND) terms, which helps to establish a well-publicised, market-clearing price that simplifies negotiations between all participants in the ecosystem. When patent pools fail to attract a significant proportion of licensors and set prices that are not accepted by the market – because they are either too high or too low – then they fail to play their much-needed role in SEP licensing.
However, there has been a trend towards more independent licensing and multiple patent pools. In some instances, a manufacturer is required to deal with two or three patent pools and a dozen or more companies which are trying to license their patents independently. This kind of licensor fragmentation is highly inefficient and makes it much more difficult for a manufacturer to obtain the licences it needs to practise a standard. It also increases the likelihood that all of the licensors will fail.
When there are many licensors, there is increased uncertainty about what the overall royalty stack will look like. Manufacturers dislike this uncertainty and prefer to wait for royalty rates to be set across the entire set of SEPs rather than licensing a small portion of the SEP pool. When each party has an incentive for the others to act first, it becomes extremely difficult to clear the market for SEP rights.
One recent example of where these issues came into play is the HEVC standard. HEVC is the latest generation of the MPEG video compression standards and, like the previous MPEG standards, it will have implications for any device that handles video content. The licensing environment for HEVC patents has become extremely complex, with at least two and perhaps three different patent pools and many of the largest patent holders choosing not to participate in any pool.
Some of the licensors – including the MPEG LA HEVC pool – charge relatively low rates and do not charge a royalty for content providers; others – including the HEVC Advance pool – charge significantly higher rates and have attempted to charge licence fees to both content providers and manufacturers. High prices, uncertainty about the overall cost of the technology, royalties for content and fragmentation of the licensing pool have made it difficult to clear the market for HEVC-related SEPs.
With high costs expected and significant uncertainty in the market, companies began to push back. Some delayed adopting HEVC, while several leading technology companies banded together to begin building a HEVC alternative. Finally, several major television networks in the United States began to lobby against the inclusion of HEVC in the next generation of digital television standards that are under development.
This pushback caused HEVC Advance to change its royalty rates and to cap the royalties that it seeks from content providers. Despite this, adoption of the HEVC standard has been delayed and few licence deals have been struck.
This is just one example of how the actions of SEP licensors can harm the standards regime. Attempts by patent owners to ratchet up their royalty rates and extend licensing to multiple points in the value chain can slow, diminish or even cause a standard to collapse. In the long run, the consequences can be even more dire as companies may choose not to participate in standard development at all. If the incentive system that supports collaborative development of standards falls apart, then the consensus which makes standards creation, adoption and value creation possible may be threatened.
Threat from manufacturers
While overzealous attempts by patent owners to extract returns from their SEPs can damage the standards ecosystem, aggressive attempts by manufacturers to avoid paying for the use of standards can be just as harmful. Product manufacturers which implement standards have an incentive to minimise the cost of accessing the technology that goes into their products. This is a sensible and rational objective for any manufacturer to pursue. However, taken to the extreme, refusal to voluntarily license SEPs can harm and will ultimately destroy the consensus that makes the modern standards ecosystem possible.
As anyone in the IP industry can tell you, patent licensing has become more difficult. Changes in the law have raised uncertainty about validity across entire swathes of the patent landscape, reduced the availability of injunctions, increased uncertainty about the calculation of damages and diminished the incentives for settlement across the board. As a result, it has become more difficult to close patent licensing deals without having to resort to litigation. In this environment of uncertainty, many product manufacturers have made the short-term rational choice to ignore or actively resist offers to license. This tendency has spilled over into the domain of SEPs as well, as companies that are implementing industry standards in their products routinely refuse to license from patent holders and patent pool administrators alike.
There can be no clearer example of this kind of resistance to licensing than the widely adopted LTE standard. In 2012 both Via Licensing and Sisvel launched LTE patent pools, yet to date neither company has been able to sign a single licensee. Despite having nearly 1,000 SEPs which have been judged essential by independent patent evaluators, neither pool administrator has been able to successfully license.
Outside of the two LTE patent pools are more than a dozen significant owners of SEPs which have thus far chosen not to join a pool. Many of these have been actively attempting to license their portfolios and from all indications based on publicly available data, there has been little in the way of success. In the few instances where licences have been publicly announced, they have come only after significant litigation. The most notable of these is the recent settlement between Apple and Ericsson. Ericsson was finally able to close a major licence deal with its LTE patents, but only after filing two lawsuits at the International Trade Commission and seven more in US district court asserting 41 patents.
The old consensus that manufacturers will voluntarily license SEPs for products which incorporate standards seems to be a thing of the past.
Beyond resistance to licensing, some product producers are actively seeking to change the IP rights rules of standard-setting organisations in ways that are unfavourable to patent owners. The most notable example of this is the rule changes instituted at the IEEE, which have set off a very public and often bitter dispute over the role that standard-setting organisations should play in setting rules that effect post-standardisation licensing rules.
Without reiterating the entire history here, I will simply highlight a few of the key events to demonstrate the depth of the dispute:
- The IEEE spent two years considering changes to its IP rights policy and its patent committee approved them by three votes to two.
- Several leading patent licensing companies – including Qualcomm, Interdigital, Ericsson and Nokia – refused to license their patents under the new policy.
- Qualcomm acquired CSR, giving it the ability to license its IEEE-related SEPs under the old policy.
- Alcatel-Lucent, Ericsson and Qualcomm – with support from Fraunhofer, InterDigital, Nokia, Orange, Royal Philips and Siemens – challenged IEEE’s reaccreditation in the United States. The challenge was rejected, but Qualcomm and Ericsson have signalled that they plan to appeal the decision.
It is a subject of significant debate how this dispute will affect the ongoing development of standards at the IEEE and whether other standards bodies will follow suit in altering their policies. Early indications suggest that the number of letters of assurance submitted to the IEEE has fallen and there is at least some indication that the latest version of WiFi has been delayed because of the uncertainty created by the new policy.
What we know for certain is that it would be extremely damaging to the standards consensus if leading companies such as those resisting the policy change at IEEE stopped participating in standards organisations or simply refused to make FRAND commitments related to their patents. Together these companies invest billions of dollars in R&D on standards-related technologies and hold many thousands of patents that are essential to every major communications standard in the world today and many that are still under development. It is naive in the extreme to think that standards organisations could simply avoid using the technology controlled by these companies. The inescapable result would be that standards organisations either would be stopped from creating the next generation of standards or would knowingly incorporate technology that was not subject to FRAND commitments.
Voluntary participation in standards organisations, commitments to license technology on FRAND terms and voluntary licensing of SEPs without the need for excessive litigation are the basic requirements for the continued survival of the standards consensus, which has prevailed for more than 50 years. Today we are at an inflection point where licensors’ and licensees’ interests have diverged to a point where both sides are acting in ways that may kill the golden goose and bring the standards era to an end.
Regaining balance on standards
However, there may be good news on the horizon.
As a result of the many disputes over SEPs, courts and competition authorities around the world are wrestling with the key questions that will determine how standards-based licensing will proceed in the future. Recently there has been a series of important rulings on some of the key issues related to SEP licensing, which have remained unresolved for many years:
- Under what circumstances can an SEP holder which has made a FRAND commitment seek an injunction?
- What is a fair and reasonable royalty rate and how should those rates be determined?
Europe leads the way
Europe, especially Germany, is leading the way in clarifying the rules for SEP licensing. Several recent decisions have begun to offer clarity about whether injunctions and particularly preliminary injunctions are available to SEP holders which have made FRAND commitments.
The key case which provided guidelines for what defendants must do in order to be able to use a FRAND defence against a request for an injunction is Huawei v ZTE. In this, the European Court of Justice (ECJ) set out specific rules that the SEP owner and the accused SEP infringer should follow in the licensing of SEPs. The full opinion is worth reading, but a summary of the requirements includes the following:
- The SEP holder must alert the implementer in writing about the patent and the nature of the infringement.
- The implementer must express a willingness to license on FRAND terms.
- The SEP holder must provide a FRAND offer.
- The implementer must respond diligently.
- If the implementer does not accept the SEP holder’s offer, it must make a counteroffer promptly and in writing.
- The implementer must provide security in respect of any past and future use of the SEP by, for instance, providing a bank guarantee or placing the relevant amount of money in escrow.
- When an agreement is not reached, the parties may, by agreement, request that a FRAND royalty be determined by a third party.
- The implementer can challenge the validity or essentiality of the patents during the negotiation.
These guidelines provide an orderly process for licensing SEPs and, if followed, will result in a FRAND licence being signed unless the implementer can invalidate the patent or demonstrate that it is not essential.
The first case to test these new guidelines (Sisvel v Haier) has now been heard and the ruling went in favour of the SEP holder. Haier was unsuccessful in raising a FRAND defence since it was found not to have complied with the ECJ’s requirements. Specifically, it was found to have failed to respond in a timely manner, provide a written counteroffer and provide an accounting and security for its use of the technology. As a result, Haier was ordered to cease the infringement, render information on past infringement and pay royalties for past damages. Although this case is on appeal, the court’s application of the ECJ requirements creates a new and orderly process for SEP licensing. If this decision is affirmed, it may create an entirely new licensing regime for SEP patents in Europe and open the door for the resolution of many existing disputes over standards-based technology.
China becomes a battleground
In China, all eyes are on the battle between Qualcomm and Meizu. Last year, Qualcomm was hit with a $975 million fine – the largest in Chinese history – for anti-competitive licensing practices. As a result, the company has been ordered to change its licensing practices and will be required to offer licences to its 3G and 4G essential patents separately from its other patents. As part of the settlement, the National Development and Reform Commission laid out specific guidelines for licensing its FRAND-obligated patents.
Qualcomm has begun licensing under these new rules, but has been unable to come to agreement with Chinese phone maker Meizu. Qualcomm has now filed 17 patent infringement complaints in the IP courts of Beijing and Shanghai. The case has attracted a significant amount of attention as it is likely to have wide-ranging implications for the licensing of SEPs in China. From the perspective of Qualcomm, there is reason for optimism as it now has a clear set of guidelines under which to operate. In addition, Beijing’s IP court has been very favourable to foreign plaintiffs, giving them a perfect 65-nil win rate in 2015.
Whatever happens with Qualcomm and Meizu, the rules for licensing SEPs in China are beginning to come into focus. Increased clarity of SEP licensing will help to resolve the current state of uncertainty which clouds the standards licensing environment.
Korea provides more guidance
In late 2014, Korea’s Fair Trade Commission issued amended IP Rights Guidelines, which specifically address the licensing of SEPs. It clarified its position that SEPs do not necessarily confer market power and identified the specific behaviours that may violate the Fair Trade Law. The guidelines provide specific steps that a licensor must take to fulfil its obligation to negotiate a licence in good faith. If those guidelines are met, then it will not be considered a violation if the SEP holder seeks an injunction. The guidelines specifically address concerns over reverse hold-up, where an unwilling licensee fails to negotiate in good faith or delays or avoids paying royalties.
Like the rules in Europe, Korea’s new IP Rights Guidelines provide for an orderly process in the licensing of SEPs and clarify the country’s position on fair trade practices and the availability of injunctions as these relate to SEPs.
As discussed earlier, there have been many SEP-related litigations in the United States in recent years, but the courts have failed to provide clear guidance about the rules that must be followed in SEP licensing or the circumstances under which an injunction might be available. Ericsson’s strategy of filing suit in both the International Trade Commission (ITC) and district court with large numbers of patents seems to have been successful in reaching a negotiated settlement, but we still lack clear guidance about how SEP licensing should be handled, and specifically on the availability of injunctions related to FRAND-obligated SEPs.
Apple’s long-standing patent battles over smartphones have provided the context for decisions related to SEP licensing in the United States. Motorola (now owned by Google) was denied an injunction against Apple by a district court because the judge found that Motorola’s FRAND commitment implied that a royalty, not an injunction, would be sufficient to compensate it for use of its patents. Applying the eBay test, the judge found that an injunction was not warranted since Motorola could not be irreparably harmed if an injunction were denied.
On appeal, the Court of Appeals for the Federal Circuit issued as many opinions (three) as there were judges on the panel. On the one hand, we now know that there should be no blanket rule against injunctions for FRAND-committed patents as the district court’s ruling seemed to imply. However, we lack any certainty about when an injunction should be available. Although an appeal to the full court seems likely, in the meantime the prevailing wisdom seems to be that SEP holders are free to seek injunctions and accused infringers are free to argue against them. Unfortunately, this provides little clarity on how SEPs will be treated by the courts.
The situation is little better at the ITC. In an ITC action brought by Samsung against the products of Apple, Samsung won an exclusion order. However, to the surprise of many, President Obama then denied the order at the urging of the Federal Trade Commission. Its reasoning was that Samsung had made a FRAND declaration related to the SEPs and therefore was not entitled to seek an injunction. This was despite the ITC’s recognition that Samsung had negotiated in good faith and Apple had refused to agree to a licence.
Overall, the US rules on injunctions and SEP licensing remain highly uncertain.
Saving the golden goose
The incredible benefits of standards are important to the technological world in which we live. If they were taken away, we would all feel the shock of a fish out of water. Despite the many disputes over IP policies and good-faith SEP licensing, there is reason for hope. The industry has struggled for decades without clear definitions for FRAND or defined guidelines for the appropriate steps to take in licensing SEPs. Perhaps the current battles are a signal that we are finally about to reach a new consensus on standards – one that will allow patent owners to obtain a return on their investments and provide increased certainty for manufacturers about the cost of technology. If this happens, we will all be better off and will continue to enjoy the rewards of industry-adopted technical standards.
To ensure the ongoing viability of the standards system, key players all have a role to play.
Standard-essential patent (SEP) licensors should:
- offer FRAND royalty rates that appropriately consider the contribution of your intellectual property and the entire royalty stack;
- recognise your interest in broad adoption, as well as price optimisation, and act accordingly; and
- understand the new SEP licensing guidelines in each jurisdiction and utilise them to encourage unwilling licensees to come to the table.
Manufacturers of standards-based products should:
- be prepared to license true SEPs;
- understand the new SEP licensing guidelines and your obligations when presented with a formal FRAND offer; and
- look for ways to reach agreement without requiring litigation.
For standards bodies:
- do not set IP rights rules that will discourage participation from important innovators;
- create standards and ensure that FRAND obligations apply to all SEPs; and
- let the courts and competition authorities set SEP licensing policy – do not attempt to set policy through your IP rules.
Patent pool managers should:
- help to clear the market for SEPs by negotiating common ground between licensors and licensees; and
- clarify the role of pool managers within the new SEP licensing environment.
Competition authorities must:
- create clear guidelines for licensing SEPs;
- balance the needs of innovators and implementers; and
- create rules that support ongoing standard development and help to clear the market for SEP rights.