United States: SEPs and FRAND – litigation, policy and latest developments
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Over the past few months, new policies and policy actions, from both the United States government and non-governmental standards setting organisations (SSOs), have highlighted the continuing struggle governments, non-governmental organisations and courts face in trying to balance the interests of patent owners on the one hand and implementers on the other. The most recent policy changes swing the pendulum once again. These changes concern the key question of whether and under what circumstances the owners of standard essential patents (SEPs) who agree to license essential technology on fair, reasonable, and non-discriminatory (FRAND) terms should be entitled to injunctive relief.
First, on 8 June 2022, the US Department of Justice, US Patent and Trademark Office (USPTO) and the National Institute of Standards and Technology (NIST) formally withdrew a 2019 policy statement on remedies for SEPs subject to voluntary FRAND commitments. This decision effectively rejects both the 2019 policy and a new draft policy that was circulated in December of 2021, and results in these organisations having no formal policy. The 2019 policy had expressed support for the possibility of injunctive relief against patent ‘hold-out’, and had replaced a 2013 statement that instead leaned against the availability of such relief – the draft 2021 policy generally returned to the 2013 policy. But the government’s decision to withdraw all policies leaves the question of injunctive relief in somewhat of a vacuum.
Second, in September 2022, the Institute of Electrical and Electronics Engineers (IEEE) announced that it was revising its policies for patents essential to standards such as WiFi to releases after 1 January 2023, to remove limits on the abilities of SEP owners to seek injunctions. In doing so, the IEEE explicitly removed the provision it had adopted in 2015, stating that reasonable rates for SEPs could only include licences that ‘were not obtained under the explicit or implicit threat of a prohibitive order’.
The US government agencies’ policy shifts
On 6 December 2021, the DOJ announced a request for public comments on a new ‘Draft Policy Statement on Licensing Negotiations and Remedies for Standards-Essential Patents Subject to Voluntary F/RAND Commitments’ (the 2021 Draft Statement). The 2021 Draft Statement is a joint policy statement of the DOJ Antitrust Division, USPTO and NIST, issued in response to President Biden’s 9 July 2021 executive order on promoting competition in the US economy. In that order, President Biden encouraged the attorney general and the secretary of commerce to consider whether to revise the DOJ-USPTO-NIST 2019 ‘Policy Statement on Remedies for Standards-Essential Patents Subject to Voluntary F/RAND Commitments’ (the 2019 Statement), which, in turn, had replaced a withdrawn 2013 DOJ-USPTO policy statement by the same title (the 2013 Statement).
The 2021 Draft Statement signals a return to the general policy of the 2013 Statement, leaning against the availability of injunctive relief where certain implementers – or ‘willing licensees’ – agree to take licences on FRAND terms. In the 2013 Statement, the DOJ and USPTO had emphasised the risk of ‘patent hold-up’, in which a patent owner asserts the SEP and a threat of an injunction to exclude competition from the market or obtain a higher price than would otherwise be available. To minimise this risk, the agencies concluded that ‘the public interest may preclude the issuance of an exclusion order’ so long as the infringer agrees to a licence on FRAND terms.
In 2019, during the Trump administration, however, the agencies withdrew the 2013 Statement and replaced it with the 2019 Statement, which expressed a concern about perceived ‘hold-out’ behaviour by implementers, and that appeared to be more open to the prospects of patent owners obtaining injunctive relief in certain situations. In particular, the 2019 Statement explained that ‘[a]ll remedies available under national law, including injunctive relief and adequate damages, should be available for infringement of standards-essential patents subject to a F/RAND commitment.’ The 2019 Statement also explicitly rejected ‘a special set of legal rules that limit remedies for infringement of standards-essential patents subject to a F/RAND commitment’.
Seeking to encourage good-faith licensing by both SEP holders and potential licensees, the 2021 Draft Statement largely echoed the 2013 Statement – at least in situations where negotiations fail and parties seek judicial remedies. In particular, the 2013 Statement noted that, ‘[w]here [an] SEP holder has made a voluntary F/RAND commitment, the eBay factors, including the irreparable harm analysis, balance of harms, and the public interest generally militate against an injunction.’ In setting forth that position, the 2021 Draft Statement presented a more balanced overview of the SEP licensing environment, describing the negative effects of both hold-up and hold-out conduct.
The DOJ sought comments, including through responses to 11 enumerated questions, on the 2021 Draft Statement. Among other things, these questions sought information about specific experiences with SEP licensing negotiations and the impact of injunctive threats on those negotiations. For example, Question No. 4 asks: ‘In your experience, has the possibility of injunctive relief been a significant factor in negotiations over SEPs subject to a voluntary F/RAND commitment? If so, how often have you experienced this?’ The DOJ also sought information on the effect of its own policy statements, such as in Question No. 10: ‘Have prior executive branch policy statements on SEPs been used by courts, other authorities, or in licensing negotiations? If so, what effect has the use of those statements had on the licensing process, outcomes, or resolutions?’
Ultimately, the 2021 Draft Statement suggested that the authoring agencies were favouring a return to a policy akin to the one expressed in the 2013 Statement, in which injunctive relief for FRAND-encumbered SEPs is more difficult to obtain than it is for other patents, provided that implementers signal willingness to take licences on FRAND terms.
However, as the government’s actions in June 2022 demonstrated, the draft, and the whipsawing between the 2013, 2019 and 2021 statements, may instead indicate the lack of a clear sense from the agencies of how best to balance the interests of patent holders and implementers in the context of injunctions for SEPs. In the notice withdrawing the 2019 policy and declining to reinstate the 2013 policy, the agencies merely noted they had concluded that ‘withdrawal best serves the interests of innovation and competition’. In short, the agencies chose to provide no guidance on whether and when injunctions should be obtainable. At an event in October 2022, USPTO director Kathi Vidal stated that the withdrawal recognised that ‘issues related to’ SEPs ‘are international issues’, and are ‘issues that we need to deal with at an international level’.
The IEEE’s policy shift
In September 2022, the IEEE, which is responsible for key technology standards such as WiFi, announced that it was revising its policies for patents added after 1 January 2023 to remove language discouraging SEP owners from seeking injunctions.
In 2015, in a move that in some ways reflected the direction taken by courts in the United States on injunctions, and that was urged by major technology corporations, the IEEE adopted amendments to its patent policy that required SEP owners committing to license patents on FRAND terms to commit not to seek or enforce injunctions ‘unless the implementer fails to participate in, or to comply with, the outcome of, an adjudication’. The IEEE also added the note that determination of ‘reasonable rates’ should include consideration of existing licences – but not when those licences were obtained under ‘explicit or implicit threat of’ an injunction. At that time, the DOJ announced in a business review letter that it did not believe these changes to the IEEE’s policy threatened business competition.
In 2020, under the Trump administration, however, the DOJ issued a supplement to the February 2015 letter, which instead reflected the joint DOJ-USPTO-NIST 2019 Statement, rather than the early 2013 Statement. In this 2020 letter, the DOJ stated that the ‘2015 Letter has been repeatedly and widely misconstrued and misapplied’ as ‘an endorsement’ of the IEEE’s 2015 policy. Instead, the DOJ concluded, ‘injunctive relief is a critical enforcement mechanism and bargaining tool … that may allow a patent holder (including an essential patent holder) to obtain the appropriate value for its invention when a licensee is unwilling to negotiate reasonable terms.’
Just as the Biden administration cast doubt upon, and then withdrew, the 2019 Statement, the DOJ in 2021 reclassified the 2020 business review letter on its website as a piece of advocacy, rather than as formal guidance. In a statement, the former Deputy Assistant Attorney General Richard Powers announced that the DOJ was ‘restoring the 2015 business review letter to its original state by moving the 2020 competition advocacy letter to the competition advocacy portion of our website’.
The IEEE’s decision to amend its patent policy came despite the Biden administration’s change of position, and more closely mirrors the Trump administration’s 2019 Statement in how it views injunctions. In its September 2022 decision, against the urging of major technical companies that implement standards, such as Google, the IEEE removed the language it had added in 2015 regarding injunctions, substituting instead that an SEP owner committing to license on FRAND terms must commit not to seek or enforce an injunction ‘against an implementer who is willing to negotiate in good faith for a license’. Importantly, the IEEE’s change is not retroactive, such that SEP owners’ commitments from 2015 through 2023 will be significantly more restrictive than commitments for patents added to the standards after 1 January 2023.
Implications of government and SSO policy shifts
Rather than demonstrate any changing consensus about the appropriateness of seeking injunctive relief as a negotiating and litigation tool for SEP holders, the whipsawing actions by the DOJ, USPTO, NIST and IEEE over the past decade likely represent continued uncertainty over how best to balance and protect the interests of SEP owners and standards implementers.
For example, while the IEEE’s new policy gives more leeway to patent owners to seek injunctions, it is not meant as an encouragement for SEP owners to do so, further reflecting the continued tug-of-war over injunctive relief. Indeed, the new IEEE policy offers arguments to both sides: patent owners, who will say that the policy recognises that injunctions are on the table, and implementers, who will say that injunctions are not on the table, because they are willing to negotiate in good faith.
In any event, the withdrawal of the agency policy statements, and even the change of policy by the IEEE that affects whether SEP owners can seek injunctions, are likely to have little effect on whether SEP owners get injunctions. Whether injunctions are granted is instead up to the courts. Given the lack of clear direction from the government and mere permission from the IEEE for SEP owners to seek injunctions, it will be difficult to move the overall court system’s view of injunctions in the US. As one example, it is unlikely that these policy developments will do much to affect the reluctance of the US International Trade Commission even to determine whether exclusion orders as remedies are appropriate in SEP cases.
FRAND case law continues to develop in the US
Against this policy backdrop, FRAND principles in US – particularly around FRAND damages – continue to be guided by a relatively small number of important decisions.
To date, relatively few cases in the United States have involved setting a FRAND rate. Interestingly, each of the courts has utilised different techniques for setting those rates.
In the first FRAND rate case, Judge Robart in Microsoft v Motorola adopted a modified hypothetical negotiation based on a subset of the Georgia-Pacific factors, a framework for setting reasonable royalties in patent cases. This seminal case provided the early foundation for FRAND rate setting in the United States. Later, Judge Holderman in the Innovatio IP Ventures case largely adopted this framework, but his analysis differed in a few important ways. For example, Judge Holderman set only a single rate for the SEPs rather than a range of rates, as Judge Robart did in Microsoft v Motorola. And, significantly, Judge Holderman determined the royalty base as the smallest saleable unit – the WiFi chip – instead of the net selling price of the accused products, as in Microsoft v Motorola. In the end, the royalty rate in Innovatio IP Ventures was approximately three times that set in the Microsoft v Motorola case for the same standard.
Following these two decisions, US courts continue to refine the FRAND rate-setting process. In Ericsson v D-Link, the Federal Circuit reversed and remanded the jury’s FRAND determination. The Federal Circuit focused on how the Georgia-Pacific analysis should be performed in the FRAND context, stating that ‘many of the Georgia-Pacific factors simply are not relevant; many are even contrary to RAND principles’ and ‘courts must consider the facts of record when instructing the jury and should avoid rote reference to any particular damages formula.’ Thus, the Federal Circuit generally endorsed the modified Georgia-Pacific approach used in Microsoft v Motorola and Innovatio IP Ventures, but did not identify a specific set of factors that must be analysed by a district court.
Conventional SEP valuation methodologies
Another tension in the FRAND space concerns whether it would be better to employ a ‘bottom-up’ or ‘top-down’ approach. Judge Selna in TCL v Ericsson employed a ‘top-down’ approach, in which the court or jury identifies the proportional value attributable to a particular SEP out of the aggregate royalty attributable to the standard as a whole. In contrast, other courts traditionally have employed a ‘bottom-up’ approach, in which the value of particular SEPs is assessed in isolation by evaluating the alternatives that could have been incorporated into the standard in place of the existing patented technology.
Each has its own strengths and limitations, regardless of whether they are applied to a lump-sum or running royalty model.
Bottom-up: patent-focused valuation
The bottom-up approach focuses on a particular set of patents within an SEP portfolio (or the relevant portfolio of a given patent owner or licensor). Valuation of these patents typically involves the modified Georgia-Pacific factors set forth by Judge Robart in Microsoft v Motorola: comparable FRAND licensing rates; the value of the technology apart from incorporation in the standard; the contribution of the patent to the technology standard; and the value of the technology to a product without reference to the value of the standard. Though fact-intensive, this methodology allows parties to arrive at a valuation for a specific set of patents in the context of a familiar patent damages analysis.
Top-down: standard-focused valuation
The top-down approach first attempts to value the standard as a whole (rather than individual patents). Once an appropriate total royalty for all SEPs for the standard is determined, parties then distribute that royalty across the patents essential to the standard. While seemingly more straightforward, this analysis is not without criticism. In particular, determining the number of actually essential SEPs for a given standard is challenging. This is, in part, because standards do not confirm SEP essentiality, which often results in over-declaration. Thus, the number of SEPs used in a given top-down calculation is often smaller than the set of anticipated total SEPs for that standard.
Like the bottom-up approach, the top-down approach comes with benefits and limitations. By approaching the set of total SEPs holistically, the top-down approach lowers the risk of royalty stacking. And it potentially decreases the front-end work of identifying and evaluating particular patents – by spreading a given royalty across all SEPs, it yields an average patent value for all such SEPs. Therein lies a key limitation, however: particularly valuable patents may be undervalued if further adjustments are not made (while less relevant patents can be overvalued). And, like the bottom-up approach, the fact and industry specific nature of royalty calculation can lead to difficulty in assigning an overall value to the royalty stack.
With policy continuing to shift, and new technologies continuing to develop in the market, FRAND issues will continue to influence companies developing and implementing these technologies in their products.
WiFi 6, the latest commercial WiFi release from the IEEE is enjoying growth and widespread adoption. As licensing continues, disputes will likely arise and parties could start looking for support for their positions in the recent policy debates. WiFi 6 may also present an interesting opportunity to revisit FRAND royalty determinations, as historically WiFi rates have trailed those for cellular technologies, like LTE or 5G. But with significant performance improvements, WiFi 6 may be one place where the royalty gap narrows, particularly if parties try to leverage injunctive relief.
 The 2013 Statement at 4: https://www.justice.gov/atr/page/file/1118381/download.
 id at 9.
 The 2019 Statement at 4–5: https://www.justice.gov/atr/page/file/1228016/download.
 id at 6.
 The 2021 Draft Statement at 5–6: https://www.justice.gov/atr/page/file/1453471/download.
 id at 9.