United States: SEPs and FRAND – litigation, policy and latest developments
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So far in 2023, there have been several important developments that impact standard essential patents (SEPs), both in terms of US SEP holders and SEP litigation in the United States. First, new policies and proposed legislation directed at reforming the patent system in the United States may have a significant impact on standard essential patent (SEP) litigation. Additionally, US companies and companies doing business in the US should monitor developments relating to the recently launched Unified Patent Court (UPC) and the proposed European Commission regulatory scheme for SEPs, as this has the potential to alter the balance of US SEP litigation in regard to Europe. Last, SEP litigation continues an upward trend in frequency in the United States. As 5G continues to rollout, this trend is expected to continue in years to come.
The proposed PREVAIL Act aimed at reforming the PTAB for the benefit of patent owners
In June 2023, Senators Chris Coons, Thom Tillis, Dick Durbin, Mazie Hirono, and separately Representatives Ken Buck and Deborah Ross introduced the Promoting and Respecting Economically Vital American Innovation Leadership (PREVAIL) Act, designed to reform invalidity proceedings at the US Patent Trial and Appeal Board (PTAB). The PREVAIL Act, if passed in its current form, has the potential to be the most significant reform of the PTAB since it was created as part of the America Invents Act more than a decade ago. Notably, Senators Coons and Hirono introduced the STRONGER Patents Act in 2019, which ultimately was unsuccessful.
The primary purpose of the PREVAIL Act is to ‘better secure and advance US technological leadership,’ including to prevent the United States from ceding technology supremacy to China. In particular, the proposed act’s fact sheet cites a US State Department study that found that the US lags behind China in 37 of 44 emerging technology areas, including defence, space, robotics, energy, biotechnology, artificial intelligence and advanced materials manufacturing.
The PREVAIL Act seeks to protect and increase the value of US intellectual property rights. The fact sheet notes that about 80 per cent of instituted PTAB proceedings that reach a final written decision result in the invalidation of at least one challenged patent claim, with 65 percent of those proceedings invalidating all challenged claims. Thus, the PREVAIL Act seeks to reform the PTAB in a way that favours US SEP holders by making it more difficult for patent challengers, such as SEP implementers, to succeed at the PTAB.
In essence, the proposed legislation includes 10 problems and potential solutions designed to prevent the high invalidation rate at the PTAB, including several notable changes as follow.
- Standing: limit PTAB challenges to those entities who have been sued or threatened with a patent infringement lawsuit.
- Close the statutory bar joinder loophole: prevent time-barred entities from joining instituted IPR proceedings. For context, the America Invents Act (AIA) created a statutory one-year time bar where an alleged infringer is limited to filing a petition at the PTAB within one year of service of a complaint alleging patent infringement. But an entity who is otherwise time barred by statute frequently is permitted to join an ongoing IPR proceeding initiated by another party.
- Prevent serial petitions: at present, estoppel attaches when the PTAB issues a final written decision, allowing entities the potential to file serial petitions. The PREVAIL Act would limit serial petitions by applying estoppel at the time the challenge is filed.
- Change the standard of proof: require patent challengers to meet the higher ‘clear and convincing’ standard applied in district courts.
- Prevent ‘multiple bites at the apple’: require the PTAB to deny a petition or dismiss a proceeding if another forum has already upheld the validity of the patent at issue.
While the PREVAIL Act is not yet law – and only time will tell whether it becomes law – it is clearly designed to benefit patent owners and promote US innovation by reducing the chance of invalidation of a patent and the cost of maintaining a patent when challenged. But it is clear that if enacted, the standing proposal and limits on serial petitions will impact SEPs directly, as there have been PTAB campaigns against SEPs filed by non-implementers and the complexity of SEPs often requires more complex petitions and filing strategy.
Patent Eligibility Restoration Act of 2023 for clarifying patent eligibility
Also in June 2023, Senators Chris Coons and Thom Tillis introduced the Patent Eligibility Restoration Act of 2023, aimed at reforming the law of patent eligibility under 35 USC § 101. Senator Tillis stated that the proposed legislation will maintain ‘the existing statutory categories of eligible subject matter, which have worked well for over two centuries, and addresses concerns regarding inappropriate eligibility constraints by enumerating a specific but extensive list of excluded subject matter.’
The Patent Eligibility Restoration Act is squarely aimed at the Supreme Court decisions addressing Section 101 starting in the early 2000s up through the 2014 Supreme Court case of Alice Corporation v CLS Bank International, the most recent section 101 Supreme Court case. Senator Tillis explained that since the 2014 Alice decision, the law on patent eligibility has become ‘confused, constricted, and unclear,’ leading to inconsistent case decisions and uncertainty about the types of innovation that are eligible for patent protection. Indeed, Senator Tillis recognised that all 12 judges of the specialised US patent appeal court, the US Court of Appeals for the Federal Circuit, have lamented the state of the law.
The ultimate impact of this legislation on SEPs is unclear as many SEPs have historically been less vulnerable to a section 101 attack. But this proposed legislation could improve the overall patent system in a way that will promote innovation. It may also benefit SEP owners by providing clarity about what is and is not patent eligible, creating a clearer line where recent case law has made the line murky. But it also may benefit SEP implementers in challenging patents that were issued before any regulatory change.
In particular, the proposed bill will eliminate all judicial exceptions and creates a series of statutory exclusions, including some that are similar to those in judicial exceptions:
- mathematical formulas that are not part of a useful process, machine, manufacture or composition of matter;
- economic, financial, business, social, cultural or artistic processes – unless the process cannot practically be performed without using a machine or manufacture;
- mental processes performed solely in the human mind;
- natural processes occurring in nature absent human activity; and
- unmodified human genes and natural materials – unless they are isolated, purified, enriched or otherwise altered by human activity or otherwise employed in a useful invention.
If the proposed bill is enacted as law in its present form, it will no doubt provide at least some clarity for the patent system. But the proposed bill is not without its limitations. It is a short eight pages in length with little depth or explanation, which may create issues with how it is applied by the courts. Indeed, without further details and direction from Congress, it is possible that we wind up in the same place we are now – as Senator Tillis described it, a confused, constricted and unclear place with inconsistent case decisions and uncertainty about the types of innovation that are eligible for patent protection.
At bottom, many (including both SEP holders and implementers) are pleased to see proposed legislation attempting to reform and clarify section 101, even if it ultimately is not enacted into law. This proposed legislation hopefully is one step forward in providing much needed clarity and certainty to collection of inconsistent section 101 jurisprudence.
The position of US governmental agencies concerning SEPs
Over the past decade, the position of US governmental agencies, including the DOJ, USPTO, and the NIST, has shifted several times. In particular, the pendulum has swung with changes in administrations from being pro-SEP holder to being pro-SEP implementer. The 2013 policy statement issued during the Obama administration, for example, recognised that SEP holders could exclude others from practicing its SEPs, but expressed the view that there should be some limits on injunctions when the SEP owner had voluntarily committed to license the SEP on FRAND terms. This was replaced with a 2019 policy statement during the Trump administration that was perceived as being much more favourable to SEP holders. This policy statement was then withdrawn in June 2022 during the Biden administration. Notably, it was not replaced with a new statement even though a draft statement was issued for public comment in 2021. This draft statement was seen as much more favourable to SEP implementers. The lack of any statement from any governmental agencies during 2023 concerning SEP/FRAND policy indicates a more neutral stance by the government in which SEP issues must be governed on a case-by-case basis under controlling law. If there is a change in administration as a result of the 2024 election, US SEP holders will want to closely monitor any changes in SEP policy and their implications.
The European patent system has also gone through recent changes that may affect US companies with SEPs and companies that do business in the US. These changes may alter the balance of SEP enforcement between the US and European forums.
First, the UPC officially launched in June 2023 after years of planning and preparation by EU member states. It has the potential to reshape global patent law and uniformly apply patent infringement and revocation actions across the 17 EU member states, becoming one of the largest, and potentially influential, patent courts throughout the world. Since the UPC is still in its infancy, there are many unanswered questions about how SEPs will be litigated at the UPC (eg, can the UPC determine a FRAND rate, will it be a global rate, and what methodology will it use?) and its impact on the global patent landscape remains speculative for now. Answers to these questions (any many others) may be on its way. In June, Philips asserted three patents relevant to the Qi standard against Belkin and in August Panasonic initiated a major SEP campaign at the UPC against Oppo and Xiaomi. These are cases all SEP holders should be watching.
Second, the European Commission proposed a novel and broad-sweeping SEP regulatory scheme, including a substantial SEP registration system and rate setting scheme. While the proposed regulation is not in effect – and it may never be adopted – it creates a unique approach to managing SEPs. Of particular interest for US SEP owners and implementers, the proposed regulation would create a registration system SEPs for all standards. In essence, the essentiality assessment and registration would operate like patent pools (without the licensing component), though the cost and time involved with registering and conducting essentiality assessments of SEPs may be an unachievable aspiration. Regardless, if this proposed EC regulation is adopted, it will likely impact US SEP litigation by increasing transparency with essentiality determinations and cataloguing of SEP registrations.
Increase in 5G SEP litigation
FRAND litigation in the United States continues to be robust with 5G SEP litigation emerging as a new and increasing category of FRAND-related cases. As of December 2021, there were over 200,000 declared 5G SEPs and applications for SEPS. This number has likely grown considerably over the last 20 months. In contrast, there have been only 146,000 4G/LTE declared SEPs and, given that 4G/LTE has been around for over a decade, this number has likely peaked. And with the emergence of the Internet of Things and the continued rollout of 5G, the number of 5G SEP implementers has increased significantly and has expanded into industries that, historically, did not utilise telecommunication functionality (eg, smart meters, remote sensors) and expanded in others (eg, automotives, smart watches, connected consumer devices)). Given the significant number of declared 5G SEPs and the significant increase in 5G usage (plus the technical improvements that 5G provides), a rise of 5G SEP litigation in the coming years seems inevitable.
FRAND case law continues to develop in the US
FRAND principles in the US – particularly around FRAND damages – continue to be guided by a relatively small number of important decisions. To date, relatively few cases in the US 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.