American standard setting organizations (SSOs), which are private sector-based associations through which businesses come together to set voluntary industrial standards, confer great benefits on the modern economy. They enable virtually all products we rely upon in modern society (including mechanical, electrical, information, telecommunications, and other systems) to interoperate, thereby spurring innovation, efficiency, and consumer choice.
Many SSO participants hold “standard essential patents” (SEPs) that may be needed to implement individual SSO standards. Thus, in order to promote widespread adoption and application of standards, SSOs often require participants to agree in advance to reveal their SEPs and to license them on “fair, reasonable, and non-discriminatory” (FRAND) terms. Historically, however, American SSOs have not sought to micromanage the details of licensing negotiations between holders of SEPs and other patents on the one side, and manufacturers that desire access to those patents on the other. These have been left up to free market processes, which have led to an abundance of innovative products and services (smartphones, for example) that have benefited consumers and spurred the rapid development of high technology industries.
Unfortunately, this salutary history of non-intervention in licensing negotiations may be about to come to an end, if the Institute of Electrical and Electronics Engineers (IEEE), one of the largest and most influential SSOs in the world (“the world’s largest technical professional society”), formally votes on February 9 to change its patent policy. As detailed below, the new policy would, if adopted, reduce the value of SEPs, discourage involvement by innovative companies in IEEE standard setting, and undermine support for strong patents, which are critical to economic growth and innovation.
In a February 2, 2015 business review letter, the U.S. Department of Justice’s Antitrust Division (DOJ) informed the IEEE that it had no plans to bring an antitrust enforcement action regarding that SSO’s proposed patent policy changes. Although it may not constitute an antitrust violation, the new policy would greatly devalue SEPs and thereby undermine incentives to make patents available for use in IEEE standards. Key features of the proposed policy change are as follows. The new IEEE policy requires a patentee to provide the IEEE with a letters of assurance waiving its right to seek an injunction against an infringer, in order to have its patents included in an IEEE standard. The new policy also specifies that an analysis of comparable licenses for purposes of determining a FRAND royalty can only consider licenses for which the SEP holder had relinquished the right to seek and enforce an injunction against an unlicensed implementer. Moreover, under the change, an SEP holder may seek an injunction only after having fully litigated its claims against an unlicensed implementer through the appeals stage – a process which would essentially render injunctive relief highly impractical if not futile. In addition, the new policy precludes an SEP holder from conditioning a license on reasonable reciprocal access to non-SEP patents held by the counterparty licensee. Finally, the new policy straitjackets licensing negotiations by specifying that royalty negotiations must be based on the value of the “relevant functionality of the smallest saleable compliant implementation that practices the essential patent claim.” This ignores the fact that the benefit that a claimed invention provides to an end product – which is often key to determining reasonable licensing terms – depends on the specific patent and product to be licensed, and not necessarily the “smallest saleable compliant implementation” (for example, a small microchip). All told, the new IEEE policy creates an imbalance between the rights of innovators (whose patents lose value) and implementers of technologies, and interferes in market processes by inappropriately circumscribing the terms of licensing negotiations.
The press release accompanying the release of the February 2 business review letter included this statement by the letter’s author, Renata Hesse, DOJ’s Acting Assistant Attorney General for the Antitrust Division regarding this matter: “IEEE’s decision to update its policy, if adopted by the IEEE Board, has the potential to help patent holders and standards implementers to reach mutually beneficial licensing agreements and to facilitate the adoption of pro-competitive standards.” Regrettably, this may fairly be read as a DOJ endorsement of the new IEEE policy, and, thus, as implicit DOJ support for devaluing SEPs. As such, it threatens to encourage other SSOs to adopt policies that sharply limit the ability of SEP holders to obtain reasonable returns on their patents. Individual contract negotiations, that take into account the full set of matter-specific factors that bear on value, are more likely to enhance welfare when they are not artificially constrained by “ground rules” that tilt in favor of one of the two sets of interests represented at the negotiating table.
In its future pronouncements on the patent-antitrust interface, DOJ should bear in mind its 2013 joint policy statement with the U.S. Patent and Trademark Office, in which it stated that “DOJ and USPTO strongly support the protection of intellectual property rights and believe that a patent holder who makes . . . a F/RAND commitment should receive appropriate compensation that reflects the value of the technology contributed to the standard. It is important for innovators to continue to have incentives to participate in standards-setting activities and for technological breakthroughs in standardized technologies to be fairly rewarded.” Consistent with this pronouncement, DOJ would be well-advised to clarify its views and explain that it does not support policies that prevent SEP holders from obtaining a fair return on their patents. Such a statement might be accompanied by a critique of SSO policy changes that place ex ante limitations on SEP holders and thus threaten to undermine welfare-enhancing participation in standard setting. It would also be helpful, of course, if the IEEE would take note of these concerns and not adopt (or, if it is too late for that, reconsider and rescind) its proposed new patent policy.