A Beginner's Guide To Standards-Essential Patent, Standard-Developing Organizations And [F]RAND Terms In The Smartphone Patent Wars.
Last Monday, on August 26, 2013,
the Microsoft Corporation v. Motorola Mobility (a wholly-owned Google
subsidiary) breach-of-FRAND-contract trial kicked off in Seattle [1].
It’s already the second trial in this case; a first trial took place in
November 2010 [2]. The federal jury in Seattle has already rendered a verdict on this case, and Microsoft has won again. Even though a case between two giants is always exciting, this article will
just deal with the meanings of technical legal terms surrounding this case,
such as standards-essential patent (SEP), Standard-Developing
Organizations (SDO) and FRAND/RAND terms [3];
terms which also have significant interest and impact in the smartphone patent
wars.
As we all know, the economic role
of intellectual property rights, more precisely patents, is very significant. The patent system promotes innovation and
economic growth by providing incentives to inventors to apply their knowledge,
take risks, and make investments in research and development and by publishing
patents so that others can build on the disclosed knowledge with further
innovations. These efforts, in turn, benefit society as a whole by
disseminating knowledge and by providing new and valuable technologies, lower
prices, improved quality, and increased consumer choice [4].
In return, the patent holder can exercise some power on the market (exclusion
right) and charge costumers a mark up on the price.
Standards, in particular voluntary
consensus standards set by Standard-Developing Organizations [5]
(SDO), also have come to play an increasingly important role in the U.S economy
and in the high-tech industry [6].
More than ever, in the current smartphone patent wars, where technologies are
growing rapidly and where amassing patent portfolios in order to remain
competitive is fundamental, SDO
are very important in developing technical standards for the high-tech industry [7].
A SDO is primarily concerned with developing, coordinating, and promulging
common standards within a given industry [8].
In other words, these groups produce standards for interoperability and
interconnection that, for example, make it possible for a cellphone user
traveling in Tokyo to call a landline in New York. ‘As work advances on a
particular standard, members of the SDO typically make technical proposals to
implement various intended functions of the standard. These proposals often
originate from the member company’s own R&D, and may have been the subject
of one or more patents or patent applications. If a patented technology is
adopted as part of the standard, and is required to implement the standard, the
underlying patent is called a standards-essential patent’ [9]
(SEP). In other words, SEP are inventions (powerful market tools) recognized
as being critical to being able to implement an industry standard technology [10],
to enable products and services offered by different vendors to interoperate [11].
Examples of such technologies include the Universal Mobile Telecommunications
System (UMTS) - a cellular standard at the heart of 3G data, 4G, USB, IEEE
802.11 (WiFi, or WLAN), and H.264, a video compression format used by YouTube,
Blu-ray disks and Microsoft's popular X-Box 360 game consoles.
When a patent holder declares a
patent essential [12]
(a patent that is necessary in order to implement an industry standard) to a
standard, the patent holder makes an irrevocable commitment to license that
patent on FRAND terms as a quid pro quo for participating in setting industry
standards [13].
These letters F-R-A-N-D are very important, among others, in the mobile
industry (as you all know, Google owns Motorola Mobility and the approximately
17,000 patents related to it). It’s a prime example in which
antitrust/competition law is used to reduce patentees’ market power and to
promote competition. So, it’s not just a random acronym or a cool management
word.
If a standard becomes widely used
in an industry, ‘the holder of an SEP is potentially in a position to exclude
would-be implementers of the standard from the marketplace by means of an
injunction, or to obtain high royalties by threatening to enjoin an implementer
from practicing the standard. As these potential implementers may be industry
competitors, the SEP holder may obtain a significant commercial advantage over
its competition. In order to prevent or mitigate these effects, which are often
contrary to SDOs’ interests in achieving wide implementation of the standard,
SDOs often require their members to state, before any standard is adopted,
whether they will commit to license [14],
on FRAND terms, any patents deemed essential to the practice of a standard
developed by that SSO’ [15].
SDOs often require members to do
several tasks: ‘(1) to disclose (prior to adoption of a standard) any patents
or pending patent applications that might be relevant to the standard the
adoption of which is under consideration; (2) to declare which of their patents
are essential to the practice of the adopted standard; and (3) to agree to
license any such standard-essential patents on “fair, reasonable, and nondiscriminatory”
(FRAND) terms’ [16].
But the issue is that SDOs members are not obligated to determine the meaning
of FRAND terms/commitments in advance and that there are very few judicial
opinions [17]
to turn to for guidance on exactly what FRAND might mean (see below).
The core function of FRAND terms is
clear: to prevent post-standardisation hold-up [18]
by ensuring that a patentee cannot obstruct the implementation of a standard by
refusing licensing or by setting excessive royalties (as you know, patent law does
not award “reasonable” royalties) once the industry has been locked in to the
standard [19].
It is also to encourage widespread adoption of the standard. As clearly
explained by Judge James L. Robart: ‘when the standard becomes widely used, the
holders of SEPs obtain substantial leverage to demand more than the value of
their specific patented technology. This is so even if there were equally good
alternatives to that technology available when the original standard was
adopted. After the standard is widely implemented, switching to those
alternatives is either no longer viable or would be very costly” [20].
Although it is a case-by-case
analysis (there is no clear definition of what constitutes FRAND terms and
conditions), these terms might be defined as follows [21]:
·
Fair
primarily relates
to the underlying licensing terms. The term ‘Fair’ means terms which are
not anti-competitive and that would not be considered unlawful if imposed by a
dominant firm in their relative market.
·
Reasonable
refers mainly to
the licensing rates. The royalty and other license terms must not be
excessive or extreme. According to some people, a reasonable licensing rate is
a rate charged on licenses which would not result in an unreasonable aggregate
rate if all licenses were charged a similar rate.
·
Non-discriminatory relates to both the terms and the
rates included in licensing agreements. As the name suggests this commitment
requires that the licensor treats each individual licensee in a similar fashion
(the patentee cannot without objective reasons be selective about the firms it
licenses to or discriminate between licensees in the terms it offers or
royalties it charges). This allegiance is included in order to maintain
fairness in the competitive market with respect to existing competitors and to
ensure potential new entrants are free to enter the market on the same basis.
If you interested in FRAND cases,
there is an interesting investigation going on in Europe about Motorola
Mobility's suspected abuse of standard-essential patents against Apple and
Microsoft [22].
[3]
Commentators frequently use the terms interchangeably to denote the same
substantive type of commitment. Although RAND (reasonable and
non-discriminatory) is the common acronym used in the United States, in Europe
the relevant acronym is FRAND, which stands for “fair, reasonable and
nondiscriminatory”.
[7] A
well-known SDO example is the World Wide Web Consortium [W3C] who tries to
enforce compatibility and agreement among industry members in the adoption of
new standards. In the case of high-tech and wireless communications standards,
'SDOs [such as the European Telecommunications Standards Institute], play a
vital role in allowing for the rapid adoption of new technology, increasing the
number of products than can communication with each other, and reducing costs
for consumers by increasing manufacturing volume: Apple, Inc. v. Samsung Elecs.
Co., LTD., 2012 U.S. Dist. LEXIS 67102 (N.D. Cal., May 14, 2012) at *11;
Research in Motion LTD v. Motorola, Inc., 644 F. Supp. 2d 788, 790 (N.D. Tex.
2008).
[8] EDWARD
G. HINKELMAN, DICTIONARY OF INTERNATIONAL TRADE, 8th ed., 2008, p. 572.
[9] Jones
Day, Standard essential patents and injunction relief, April 2013, available at
http://www.jonesday.com/files/Publication/77a53dff-786c-442d-8028-906e1297060b/Presentation/PublicationAttachment/270fc132-6369-4063-951b-294ca647c5ed/Standards-Essential%20Patents.pdf
[12] “A given
patent is “essential” to a standard if use of the standard requires
infringement of the patent, even if acceptable alternatives of that patent
could have been written into the standard”: Microsoft
Corp. v. Motorola, Inc.,
Case No. C10-1823JLR (W.D. Wash. April 25, 2013) (opinion by US District Judge
James L. Robart), p. 21.
[13] Apple
Submission to USTR re 337-TA-794, p.2.
[14]
Licensing is a mechanism for ensuring that a technology or other works
protected by intellectual property rights are commercialized and brought to the
marketplace.
[15] Jones
Day, Standard essential patents and injunction relief, April 2013, available at
http://www.jonesday.com/files/Publication/77a53dff-786c-442d-8028-906e1297060b/Presentation/PublicationAttachment/270fc132-6369-4063-951b-294ca647c5ed/Standards-Essential%20Patents.pdf
[17] If you want to
read a meticulous judicial determination of a "reasonable and
nondiscriminatory" (RAND) royalty rate for patents essential to industry
standards, I strongly recommend you the 207-page opinion released on April 25,
2013, by Judge James Robart in the Western District of Washington in the
Microsoft v. Motorola case; available at
http://www.pijip-impact.org/wp-content/uploads/2012/05/microsoft-v-motoroala-FOF-and-COL.pdf
(Microsoft Corp. v. Motorola, Inc., Case No. C10-1823JLR (W.D. Wash. April 25, 2013) (opinion by
US District Judge James L. Robart)
[18] “The ability of a holder to demand more than the value of
its patented technology and to attempt to capture the value of the standard
itself is referred to as patent “hold up” (…). The essensce of hold-up is that
while ex ante competition constrains what a patent holder can obtain for access
to its patent, ex post, the technology in the standard does not face that
competition”: Microsoft
Corp. v. Motorola, Inc.,
Case No. C10-1823JLR (W.D. Wash. April 25, 2013) (opinion by US District Judge
James L. Robart), p. 21. In other words, the RAND commitment and the whole
apparatus exists to deal with hold-up, see Microsoft Corp. v. Motorola,
Inc, id., p. 22.
[20] Microsoft Corp. v. Motorola, Inc., Case No. C10-1823JLR (W.D. Wash. April
25, 2013) (opinion by US District Judge James L. Robart), p. 20.
[22]
http://europa.eu/rapid/press-release_IP-12-345_en.htm?locale=en and
http://www.fosspatents.com/2012/04/european-commission-investigates.html
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