Feds Green-Light Institute’s New Patent Policy For Wi-Fi Standards, Finding It Potentially Procompetitive

By David Golden

The Antitrust Division of the U.S. Department of Justice announced on Monday that it would not challenge recent revisions to the Patent Policy of the Institute of Electrical and Electronics Engineers Standards Association (“IEEE-SA”)—giving the green light to new Wi-Fi standards that computers, smartphones and tablets will follow in connecting to the Internet.

The Antitrust Division’s decision removes one of the last barriers to the implementation of the revised Patent Policy, which governs the licensing of patents essential to IEEE standards, such as the ubiquitous Wi-Fi networking protocols.  The changes could lead to cheaper devices for consumers.

We blogged about the IEEE-SA’s preliminary adoption of the changes earlier this year, following a Federal Circuit decision that required trial courts to consider a standard-setting organization’s patent-licensing policy when calculating patent royalty rates and damages.  The IEEE-SA submitted its revised policy to the government under the Antitrust Division’s Business Review  program.

The debate over the IEEE-SA’s Patent Policy is only one front in a long-running struggle between hardware manufacturers and patent holders over the royalty rates associated with technical standards.  Hardware manufacturers, such as Intel, Apple, and others, build products that incorporate standardized technologies.  For years, they have complained about excessive royalties for standard-essential patents. Many of those same companies have argued that the changes to the IEEE-SA Policy will lead to lower prices for popular electronic devices and increased competition.  Not surprisingly, the companies that control vast portfolios of standard-essential patents claim the revisions will result in reduced investment and innovation.

Electronic devices like smartphones, tablets, and laptops incorporate dozens—and sometimes hundreds—of technologies that are standardized by private industry organizations. These standards can determine which technologies are successful in the market and generate millions (or billions) of dollars in licensing revenue for patent holders.  Most standard-setting organizations are staffed and funded by industry competitors, and these competitors collectively decide which technologies are included and excluded in the standards.  Accordingly, private standard-setting organizations “have traditionally been objects of antitrust scrutiny.”

To help avoid antitrust scrutiny, standard-setting organizations frequently encourage or require their members to declare their standard-essential patents and commit to licensing those patents on reasonable and non-discriminatory (“RAND”) terms.  However, most RAND policies, such as IEEE-SA’s pre-revision Patent Policy, do not explicitly define a “reasonable” rate, and hardware manufacturers and the patent holders regularly disagree on what is a “reasonable” royalty rate, which sometimes leads to costly litigation.

The revised Patent Policy does not set a “reasonable” royalty rate.  Rather, it requires assessing the invention’s value based on the “smallest saleable” implementation and excluding the consideration of any value resulting from the inclusion of the invention in the IEEE standard.  The revisions also include recommendations as to other factors that should be considered in private negotiations.  Those factors include evaluating the value of the invention in light of all other standard-essential patents and in light of existing licenses that were not obtained under threat of a court-ordered injunction or restraining order.

In its business review letter, the Antitrust Division found that the revised Patent Policy likely would not result in anticompetitive harms and, by providing a more specific definition of “reasonable,” could help promote competition and benefit consumers by providing greater clarity to licensing negotiations.  The Division also found the other proposed revisions, such as limiting a patent holder’s ability to refuse to license its patents for only certain levels of production and requiring reciprocal licensee grantbacks, could help foster greater competition and facilitate licensing negotiations.

The IEEE-SA’s revised Patent Policy is not yet final, and the debate between manufacturers and patent holders will continue.  Even with the Antitrust Division’s implicit imprimatur, the IEEE could face legal challenges to its revisions, including antitrust challenges for alleged buyer-side price fixing or claims of undue bias in the approval process for the revisions.  We’ll continue to watch this area of policy and the law and post updates as the situation develops.

– Edited by Gary J. Malone