Reasonableness Of Licensing Royalties Is On Trial As Courts And Standard-Setting Organizations Wrestle With Standard-Essential Patents

By David Golden

The ongoing battle over what constitutes a “reasonable” licensing royalty for standard-essential patents has now been joined by the U.S. Court of Appeals for the Federal Circuit with its decision in Ericsson, Inc. v. D-Link Systems, Inc., concerning the alleged infringement of patents essential to the ubiquitous Wi-Fi networking technology.

This definitional battle is also being fought in standard-setting organizations, such as the Institute of Electrical and Electronics Engineers (“IEEE”), the promulgator of Wi-Fi standards, which recently adopted a resolution that defines the calculation of a “Reasonable Rate” for standard-essential patents.

Many modern electronic devices, such as smartphones and tablets, incorporate voluntary industry-wide communication and networking standards, such as Wi-Fi, cellular data, and Bluetooth technologies. Generally, the members of organizations that create and maintain such standards compete in the markets for these products, and frequently own patents that are essential to the implementation of the standards. Thus, the member companies’ collective selection of technologies to include in the organization’s standard can prove advantageous in both product and technology licensing markets. It is not surprising then that the Supreme Court has described private industry standard-setting organizations as “rife with opportunities for anticompetitive activity.”

One type of anticompetitive conduct is patent hold-up. Patent hold-up occurs when the owner of a standard-essential patent demands unreasonable royalties after companies are already locked into the using the standard. To address this problem and others like it, standard-setting organizations can require members to license their patents on reasonable and non-discriminatory (“RAND”) terms; some add a requirement that the terms be “fair” (“FRAND”). However, standard-setting organizations rarely define “fair,” “reasonable” or “non-discriminatory.”

The anticompetitive aspects of RAND licensing and patent hold-ups have been the subject of several government investigations and litigations, including two FTC actions against Motorola Mobility/Google and Bosch to stop those companies from seeking injunctions as negotiating leverage against companies that were willing to enter into licensing agreements on RAND terms. Also, the FTC has advised that standard-essential patent royalty rates should be capped at “the royalty at the incremental value of the patented technology over alternatives available at the time the standard was chosen.”

In its Ericsson decision, the Federal Circuit rejected a lower court’s jury instructions in a patent infringement suit over standard-essential patents for the IEEE Wi-Fi Standard in which Ericsson had sued D-Link, Dell, Toshiba, Intel, and Belkin. After the U.S. District court for the Eastern District of Texas refused to include specific instructions on Ericsson’s RAND licensing commitments to the IEEE, the jury returned a $10 million verdict for Ericsson. The Federal Circuit ruled that trial courts, in formulating jury instructions for royalty awards, must consider the patentee’s specific RAND commitments to license its patents under reasonable rates and without discrimination. The district court’s jury instructions did not take into account Ericsson’s RAND obligations to IEEE during the Wi-Fi standardization process, and accordingly, the Federal Circuit reversed and remanded on this issue.

Two days after the issuance of the Federal Circuit’s opinion, the IEEE Board of Governors adopted a resolution that defined “Reasonable Rate” for a standard-essential patent for the first time. This definition excludes any value from the inclusion in the IEEE standard and limits the value of the invention or feature to the “smallest saleable” component that practices the patent claims, rather than the value of the entire device that incorporates that component. The definition also requires the consideration of existing licenses to the patent, but only those licenses that were not obtained “under the explicit or implicit threat” of an injunction by the patentee. The IEEE has submitted its policy to the Antitrust Division of the U.S. Department of Justice for review.

Together, the recent Federal Circuit and IEEE decisions are cause for some optimism for companies that build products based on industry standards that are encumbered by standard-essential patents. Nevertheless, the intersection of competition and intellectual property law continues to evolve rapidly, and companies affected by these issues would be well advised to seek counseling and guidance from law firms with deep knowledge and expertise in both areas of the law.

– Edited by Gary J. Malone