Jeffrey I.D. Lewis ’86
Patterson Belknap Webb & Tyler LLP
Most of our daily lives are governed by technological devices — smartphones operating over 3G/4G networks, computers using Wi-Fi, or even the now ubiquitous ear buds playing music from MP3 devices. To function, however, the technology in each component has to work together. That means the devices typically need to comply with standards, i.e., protocols by which devices communicate with each other and other technology to achieve their functionality. These standards, in turn, may implicate hundreds or even thousands of patents that claim (i.e., cover) parts of the technology that combine to make the devices work.
A patent that controls any part of the technology used in a standard is called a standard-essential patent (SEP). And although these standards are critical to the modern world, they pose difficult patent-licensing problems. Once a standard is adopted, for example, the owner of an SEP will have a superior bargaining position that can be used to extract outsized revenues based on the value of the standard rather than the underlying SEP; similarly, a standard-setting organization (SSO) may be reluctant to adopt a standard in the first place if an SEP owner refuses to license it in advance because the SEP’s value is a function of the standard’s level of adoption.
In order to prevent these types of licensing “holdups,” as well as ensure access to SEPs so that standards can be widely adopted, SSOs created FRAND — a requirement that SSO members license SEPs on “Fair, Reasonable, and Non-Discriminatory” terms to other members of the SSO and, very often, non-members who use the standard. (FRAND is sometimes referred to as RAND or even F/RAND, but they are all similar.) The FRAND requirement facilitates widespread use of the standard and insures that each SEP owner benefits from use of the patent without gaining an unfair bargaining advantage. Although I will focus on U.S. law, FRAND licensing and its complications arise across the world.1
There is no statute or regulation imposing a FRAND obligation. Instead, it was created by SSOs (such as the Institute of Electrical and Electronic Engineers, International Telecommunication Union, and European Telecommunications Standard Institute) in response to SSO members asserting infringement claims against other SSO members practicing their SEPs. (During the 1990s, for example, Rambus, Inc. famously withdrew from an SSO for memory chips and began suing SSO members for infringing its SEPs after the SSO adopted a standard using Rambus’ patents.2.) Before adoption of any standard, therefore, SSO members typically are required to agree to license SEPs on FRAND terms to other SSO members and those who use the standard. Those SEPs are then “FRAND encumbered,” which prevents the SEP owner from gaining an unfair market advantage.
The FRAND commitment typically arises in one of two ways: as a function of the SSO’s by-laws or other governing documents that members agree to, or by separate explicit agreements that SSO members execute in connection with the adoption of each standard. (For instance, the IEEE requires that its members declare patents standard essential through “letters of assurance” as part of its process of adopting a standard.) Either way, the FRAND obligation is a commitment that an SEP owner makes to the SSO, not to the general public. Accordingly, thorny issues arise concerning who can actually enforce a FRAND commitment.
Typically, courts have allowed SSO members to enforce FRAND commitments on the theory that they are third-party beneficiaries of the FRAND agreements between the SEP owner and the SSO; but this body of law is still developing and it remains to be seen whether non-members who use the standards will also be considered third-party beneficiaries of the FRAND commitment.3
Because the FRAND commitment arises as a contractual obligation, the governing law will not be uniform. They typically are written under the law of an SSO’s home jurisdiction, which means the FRAND obligation is not standardized — even assuming the wording is the same from one FRAND commitment to the next (perhaps an unfair assumption), each jurisdiction’s law still may be different. In some jurisdictions, for instance, a contract is not enforceable unless all terms are definite, including price; but price is the open term subject to negotiation under a FRAND obligation. Similarly, some jurisdictions may not recognize that a third-party beneficiary has standing to sue.4
In addition to third-party beneficiary doctrine, commentators have suggested other possible theories to enforce a FRAND obligation.5 Each has its own infirmity. One theory is promissory estoppel, but to prevail on this theory a potential licensee must show knowledge of the FRAND commitment, reliance on that commitment, and that the SEP owner had reason to know that the user expected to benefit from the owner’s FRAND commitment; presumably owner and user will have different mental states about the expectations of the user-infringer. Another theory is implied license, where a court could find that the SEP owner invited the infringing use by agreeing to the FRAND commitment; but this theory requires highly specific supporting facts and generally is hard to satisfy. Similarly, equitable estoppel may apply if the SEP owner’s conduct was misleading and the potential licensee shows both reliance and material prejudice; but the FRAND commitment by definition is not misleading because it signals the SEP owner’s intent to enforce the patent on FRAND terms. Therefore, third-party beneficiary doctrine is likely to remain the most promising of the proposed avenues of enforcement.
Typically, the existence of the FRAND obligation is not at issue in litigation; the focus is the exact form of relief that may be recovered. Although a district court has authority to award both damages and injunctive relief, courts are increasingly reluctant to issue injunctions when FRAND-encumbered patents are at issue. As the U.S. Court of Appeals for the Federal Circuit recently explained in Apple Inc. v. Motorola, Inc., there is no per se rule barring injunctions to enforce FRAND-encumbered patents, but the FRAND obligation does create “unique aspects of … establishing irreparable harm.”6
In contrast to a district court, the International Trade Commission (“ITC”) is a regulatory forum that adjudicates patent infringements but can only issue exclusion orders as a remedy — akin to an injunction preventing importation — and cannot award damages. ITC exclusion orders are subject to presidential review, typically delegated to the U.S. Trade Representative (USTR), and the USTR recently vetoed an exclusion order in the Samsung v. Apple investigation involving FRAND-encumbered patents. The ITC had found that there was no per se bar to an exclusion order if a FRAND-encumbered patent was at issue and granted an exclusion order; according to the ITC, a FRAND obligation only requires good faith negotiation and does not require that a license ultimately issue.7 The USTR blocked that exclusion order, the first such veto since 1987, stating that while a FRAND obligation is not a per se bar to an exclusion order, exclusion orders should only be granted where a potential licensee refused to accept a FRAND license or refused to negotiate at all, but are not available where the negotiations simply were unsuccessful.8
Since a FRAND obligation is contractual, enforcement of a FRAND commitment arguably should occur under state law and in state courts (absent another reason for federal jurisdiction) even though such litigation will inevitably affect the underlying patents at issue. In other words, it will be a function of how the complaint is framed — if the SEP owner sues for infringement then it will be a patent lawsuit in federal court and a FRAND “license” might be a defense; but if the party user brings a contract-related action based upon the FRAND obligation then the lawsuit could be heard in state court.9
Moreover, even if there is a basis for federal jurisdiction, parties may not be able to have their appeals heard in the Federal Circuit if they lose at the district court level. As the Ninth Circuit noted in its 2012 Microsoft Corp. v. Motorola, Inc. decision, “not all cases involving a patent claim fall within the Federal Circuit’s jurisdiction … Microsoft’s complaint sounds in contract and it invokes the district court’s diversity jurisdiction.”10 Notably, Microsoft had filed its interlocutory appeal concerning injunctive relief to the Ninth Circuit, but initially appealed the final judgment to the Federal Circuit. In a May 5, 2014 nonprecedential order, however, the Federal Circuit granted Microsoft’s motion to transfer the appeal to the Ninth Circuit over Motorola’s objection. The Federal Circuit held that since the Ninth Circuit previously considered and “rejected the position that [the Federal Circuit] had jurisdiction over the matter,” the Ninth Circuit had already decided jurisdiction under the law of the case doctrine.
All of this begs the question of how a court should set a FRAND rate, which was only recently answered. In April 2013 Judge Robart, in deciding Microsoft v. Motorola looked to the well-recognized Georgia-Pacific factors for that answer.11 Named for the 1970 Georgia-Pacific Corp. v. U.S. Plywood Corp. case, 318 F. Supp. 1116 (S.D.N.Y. 1970), the 15 Georgia-Pacific factors quickly became the go-to guidance for courts setting a reasonable patent royalty (the minimum for patent infringement damages in accordance with 35 U.S.C. § 284). Judge Robart’s decision, however, modified the 15 factors for the FRAND setting:
First, the owner of an SEP is under the obligation to license its patents on [F]RAND terms, whereas the owner of a patent uncommitted to [F]RAND has monopoly power over its patent and may choose to withhold licensing.
Second, the hypothetical negotiation almost certainly will not take place in a vacuum: the implementer of a standard will understand that it must take a license from many SEP owners, not just one, before it will be in compliance with its licensing obligations and able to fully implement the standard.12
Other courts setting FRAND rates have further modified the Georgia-Pacific factors.13
The Georgia-Pacific factors may also need to be modified based on whether the court is setting a royalty rate range for the jury to apply or is actually finding the FRAND rate itself, and whether the court has already determined that the patents at issue are SEP and/or infringed prior to determining the FRAND rate. If the court has not already made a determination that the patent is essential to practice the standard, for instance, the hypothetical Georgia-Pacific negotiation would include skepticism over the patent’s essentiality to the standard; if it has already been determined to be an SEP, there is no need to adjust the FRAND rate in light of pre-litigation uncertainty about whether a given patent is or is not standard essential and infringed.
Although there has been much activity in this area in recent years, FRAND licensing and its enforcement remain in flux. With several FRAND litigations pending, and some that have already settled pre-litigation, it remains uncertain how the courts will ultimately determine who can enforce the obligations, what type of relief they can seek, how a FRAND rate should be determined, and in what courts these various issues will be decided.
1 See, e.g., James Kanter & Steve Lohr, Europe’s Antitrust Chief Censures Google’s Motorola Mobility Over Key Patents, New York Times, Apr. 30, 2014, at B4.
2 See, e.g., Rambus, Inc. v. Infineon Techs. AG, 164 F. Supp. 2d 743, 772 (E.D. Va. 2001), and In the Matter of Rambus Inc., No. 9302, at 3 (F.T.C. Aug. 2, 2006), available at http://www.ftc.gov/sites/default/files/documents/cases/2006/08/060802commissionopinion.pdf. (“Through a course of deceptive conduct, Rambus exploited its participation in [an SSO] to obtain patents that would cover technologies incorporated into now-ubiquitous [SSO] memory standards, without revealing its patent position to other [SSO] members. As a result, Rambus was able to distort the standard-setting process and engage in anticompetitive ‘hold up’ of the computer memory industry. Conduct of this sort has grave implications for competition.”)
3 See Microsoft Corp. v. Motorola, Inc., 854 F. Supp. 2d 993, 999 (W.D. Wash. 2012) (“Microsoft, as a member of both the IEEE and the ITU, is a third-party beneficiary of Motorola’s commitments to the IEEE and ITU.” (citation omitted)); Apple, Inc. v. Motorola Mobility, Inc., 886 F. Supp. 2d 1061, 1085 (W.D. Wash 2012) (“As a potential user of the standards at issue and a perspective licensee of the essential patents, Apple is a third-party beneficiary of the agreements between Motorola and IEEE and Motorola and ETSI.”).
4 See In the Matter of Certain Electronic Devices, Including Wireless Communication Devices, Portable Music and Data Processing Devices, and Tablet Computers, No. 337-TA-794 (I.T.C. July 5, 2013) (“Samsung v. Apple”).
5 See generally Mark A. Lemley, Intellectual Property Rights and Standard-Setting Organizations, 90 Cal. L. Rev. 1889 (2002).
6 No. 2012-1458, 2014 U.S. App. LEXIS 7757, at *106 (Fed. Cir. Apr. 25, 2014); cf. Realtek Semiconductor Corp. v. LSI Corp., 946 F. Supp. 2d 998, 1006-07 (N.D. Cal. May 20, 2013) (“In promising to license on RAND terms, defendants here admit that monetary damages, namely a RAND royalty, would be adequate compensation for any injury it has suffered as a result of Realtek’s allegedly infringing conduct.”); see also European Commission Decision No. IP/14/489 (Apr. 29, 2014).
7 No. 337-TA-794 (I.T.C. July 5, 2013).
8 Letter from Michael B. G. Forman, U.S. Trade Representative, to Irving A. Williamson, Chairman of the Int’l Trade Comm’n (Aug. 3, 2013), available at http://www.ustr.gov/sites/default/files/08032013%20Letter_1.PDF.
9 See Holmes Group, Inc. v. Vornado Air Circulation System, 535 U.S. 826 (2002).
10 696 F.3d 872, 881 (9th Cir. 2012) (citations omitted).
11 No. C10-1823JLR, 2013 U.S. Dist. LEXIS 60233 (W.D. Wash. Apr. 25, 2013).
12 2013 U.S. Dist. LEXIS 60233, at *53.
13 See In re Innovatio IP Ventures, LLC, No. 11 C 9308, 2013 U.S. Dist. LEXIS 144061 (N.D. Ill. Oct. 3, 2013) (applying the Microsoft v. Motorola modification to the Georgia-Pacific factors; see accompanying table); Ericsson Inc. v. D-Link Sys., No. 6:10-CV-473, 2013 U.S. Dist. LEXIS 110585 (E.D. Tex. Aug. 6, 2013) (instructing jury with all 15 Georgia-Pacific factors without modification, but tacking on a 16th factor: the “obligation to license its technology on [F]RAND terms”). [See TABLE below listing factors.]
A Comparison Of The 15 Georgia-Pacific Factors For Determining A “Reasonable Royalty”
To Their Microsoft/Innovatio Application For Setting A FRAND Royalty
|Georgia-Pacific||Microsoft v. Motorola/Innovatio|
|(1) The royalties received by the patentee for the licensing of the patent in suit, proving or tending to prove an established royalty.||(1) “The royalties received by the patentee for the licensing of the patent-in-suit in other circumstances comparable to [F]RAND-licensing circumstances.”|
|(2) The rates paid by the licensee for the use of other patents comparable to the patent in suit.||(2) SAME.|
|(3) The nature and scope of the license.||(3) SAME.|
|(4) The licensor’s established policy and marketing program to maintain his patent monopoly by not licensing others to use the invention or by granting licenses under special conditions designed to preserve that monopoly.||(4) NOT APPLICABLE. Factor 4 “is inapplicable in the [F]RAND context because the licensor has made a commitment to license on [F]RAND terms and may no longer maintain a patent monopoly by no licensing to others.”|
|(5) The commercial relationship between the licensor and licensee, such as, whether they are competitors in the same territory in the same line of business; or whether they are inventor and promoter.||(5) NOT APPLICABLE. This factor is inapplicable “because having committed to license on [F]RAND terms, the patentee no longer may discriminate against its competitors in terms of licensing agreements.”|
|(6) The effect of selling the patented specialty in promoting sales of other products of the licensee; the existing value of the invention to the licensor as a generator of sales of his non-patented items; and the extent of such derivative or convoyed sales.||(6) “The effect of the patented invention in promoting sales of other products of the licensee and the licensor, taking into account only the value of the patented technology and not the value associated with incorporating the patented technology into the standard.”|
|(7) The duration of the patent and the term of the license.||(7) NOT APPLICABLE. “The analysis concerning Factor 7 is greatly simplified in the context of a dispute over a reasonable royalty for a [F]RAND-committed patent because the term of the license would equate to the duration of the patent. In many circumstances, this factor will have little influence on what constitutes a reasonable royalty under the [F]RAND Commitment.”|
|(8) The established profitability of the product made under the patent; its commercial success; and its current popularity.||(8) “The established profitability of the product made under the patent, its commercial success, and its current popularity, taking into account only the value of the patented technology and not the value associated with incorporating the patented technology into the standard.”|
|(9) The utility and advantages of the patent property over the old modes or devices, if any, that had been used for working out similar results.||(9) “The utility and advantages of the patent property over alternatives that could have been written into the standard instead of the patented technology in the period before the standard was adopted.”|
|(10) The nature of the patented invention; the character of the commercial embodiment of it as owned and produced by the licensor; and the benefits to those who have used the invention.||(10-11) “The contribution of the patent to the technical capabilities of the standard and also the contribution of those relevant technical capabilities to the licensee and the licensee’s products, taking into account only the value of the patented technology and not the value associated with incorporating the patented technology into the standard.”|
|(11) The extent to which the infringer has made use of the invention; and any evidence probative of the value of that use.|
|(12) The portion of the profit or of the selling price that may be customary in the particular business or in comparable businesses to allow for the use of the invention or analogous inventions.||(12) “The portion of the profit or of the selling price that may be customary in the particular business or in comparable businesses to allow for the use of the invention or analogous inventions that are also covered by [F]RAND-committed patents.”|
|(13) The portion of the realizable profit that should be credited to the invention as distinguished from non-patented elements, the manufacturing process, business risks, or significant features or improvements added by the infringer.||(13) “The portion of the realizable profit that should be credited to the invention as distinguished from non-patented elements, the manufacturing process, business risks, significant features or improvements added by the infringer, or the value of the patent’s incorporation into the standard.”|
|(14) The opinion testimony of qualified experts.||(14) SAME.|
|(15) The amount that a licensor and a licensee would have agreed upon (at the time the infringement began) if both had been reasonably and voluntarily trying to reach an agreement.||(15) “The amount that a licensor and a licensee would have agreed upon (at the time infringement began) if both were considering the [F]RAND commitment and its purposes, and had been reasonably and voluntarily trying to reach an agreement.”|
Jeffrey Lewis is a partner in Patterson Belknap Webb & Tyler LLP, New York City, concentrating in patent-related litigation matters. His J.D. is from Benjamin Cardozo School of Law cum laude and his B.S. Ch. E is from the University of Connecticut. Mr. Lewis is Immediate Past President of the American Intellectual Property Law Association, and since 1999 he has been an adjunct professor at Cardozo. The views expressed are solely his and should not be attributed to any client or institution. Thanks go to Don Goodson, of the same firm, who assisted. All rights reserved ©©2014.