AMERICAN INTELLECTUAL PROPERTY LAW ASSOCIATION Standards and F/RAND Licensing Monica M. Barone Chair, Standards and Open Source Committee April 7, 2014

Overview of Presentation Why Is the Licensing of Standard-Essential Patents a Hot Topic? The Basics of Standard-Essential Patents (“SEPs”) Key Questions About Licensing SEPs 2

Why is the Licensing of Standards Essential Patents (“SEPs”) a Hot Topic? 3

The Proliferation of Standards the Licensing of SEPs a Hot Topic? Standardization is critical to the success of many industries - especially in the mobile communications industry The creation of industry standards allows different companies’ products to interoperate, which is fundamentally pro-competitive There are thousands of standards; IEEE alone has over 900 active standards and more than 500 standards under development Standards continue to evolve over numerous releases and iterations with a number of companies contributing throughout the process of a Hot Topic? s the Licensing of SEPs a Hot Topic? 4

SEPs Have Been in the News Antitrust regulators in both the US and Europe have recently focused on SEP licensing, particularly in the ICT sector.  “One issue in these cases [against Samsung and Motorola] is the use of court injunctions that can infringe the principle of effective access inherent to F/RAND. We need to find good answers soon, because consumers cannot be held hostage to litigation. Both competition authorities and the courts should intervene to ensure that standard-essential patents are not used to block competition.” – (Vice President Almunia, IBA Antitrust Conference, Madrid, 15 June 2012) 5

Others have urged caution in intervening in this highly innovative sector: “If you go back a hundred years or a hundred and fifty years, to the telegraph and the telephone and manufacturing technology, there was really significant debate at the time around the appropriateness of patent protection in those spaces, and courts and industry worked through it and moved forward…Eventually this will normalize and sort itself out, so we don't believe any special measures are needed beyond good focus on applying the law correctly and understanding the law” Microsoft's chief patent counsel Bart Eppenauer* 6

The current argument presumes a tension between the interests of innovators (traditionally protected by patent law) and competition (traditionally protected by antitrust law). Recent actions and statements by the FTC have been perceived as taking sides in this false dichotomy, diminishing the rights of patent holders in license negotiations and increasingly tasking judges and arbitrators to become royalty “rate regulators,” with royalty rates for SEPs set by judicial dictate instead of by commercial market-based negotiations between industry participants. If this direction continues, it inevitably will reduce incentives for the investments necessary to produce the next generation of innovations.” Christine Varney, Former Assistant Attorney General for Antitrust and David Kappos, Former Director, U.S. Patent and Trademark Office** 7

THE BASICS OF SEPs 8

The Standard Setting Process The development of industry standards often occurs within Standards-Setting Organizations (“SSOs”) such as ATIS, IEEE, and (in the wireless communications industry) ETSI Prominent SSOs typically have dozens or hundreds of different companies as members SSOs typically have an IPR policy and members are required to be bound by it as a condition of participating Once a standard is adopted, typically anyone (not just members) can use it (i.e., make a product that implements the standard) standard develop a standard (the SSO itself usually does not participate) ate, and ultimately vote upon standards have their engineers participate in SSO meetings to 9

SSO IPR Policy Common Elements In General, members are asked to do at least two things: Disclosure disclose to other members of any patent or patent application that is “essential” to the standard SSOs do not determine whether a patent is valid or is actually essential to the standard Licensing In most cases, a commitment to offer a license on “fair, reasonable, and non-discriminatory” (F/RAND) terms; in certain instances, a royalty-free (RF) licensing commitment. 10

SSO IPR Policy Objectives Two Fundamental Objectives Fair compensation for those who contribute their technology to the standard Access to essential patents (IPR) for those who wish to use the standards A F/RAND commitment is voluntary, not mandatory 11

The Nature and Meaning of a F/RAND Commitment A F/RAND commitment is: often requested by SSOs for members that participate in the standard-setting process The terms of this commitment depend on the IPR policy of the SSO in question; and thus can vary from one SSO to another For example, under the ETSI IPR policy (Article 6.1): “It is an obligation to offer a license on F/RAND terms to anyone who wants to make equipment compliant with the standard, subject to reciprocity.” This is an intentionally flexible – but binding – concept that allows for license terms to be determined through bilateral negotiations A creation of statute, economic theory, or public policy An agreement that SEPs are less valuable than other patents A waiver of the patent owner’s right or remedies 12

A F/RAND Commitment is Not… A creation of statute, economic theory, or public policy An agreement that SEPs are less valuable than other patents A waiver of the patent owner’s right or remedies 13

Key Questions What are “F/RAND” terms? Can you include non-SEPs when licensing SEPs subject to a F/RAND commitment? Can you seek an injunction against an implementer who refuses to accept a license? 14

What Are “F/RAND” Terms? Not aware of any SSO IPR policy that specifically defines F/RAND terms Under the ETSI IPR policy (which is representative of many others): “F/RAND” applies to the terms of a license agreement as a whole It is incorrect and misleading to focus on the royalty rate (or any other term) alone The monetary terms of a license can include up-front license fees, fixed annual/quarterly fees, running royalties in fixed per unit amounts, etc.ntage of gross or net selling price (perhaps subject to minimums and caps), or any combination of the 15

If F/RAND Agreements Not Reached Litigation may ensue if parties are unable to agree to F/RAND terms or are concerned that F/RAND commitments are otherwise not being met. –Alternative dispute resolution mechanisms, such as arbitration may also be an option upon agreement by the litigants F/RAND disputes are rare in relation to the number of successful license agreements or number of promulgated standards. –Thousands of negotiations involving SEPs subject to F/RAND have occurred successfully. 16

Microsoft v. Motorola, Case No. 2:10-cv (WD Wash.) to Court of Appeals By letters, Motorola offered to license its standards essential patents (SEPs) relating to the ITU H.264 and IEEE standards to Microsoft at a royalty rate of 2.25%. Microsoft commenced a suit alleging, inter alia, that Motorola’s offer was in breach of Motorola’s contractual obligation to offer licenses on reasonable and nondiscriminatory (RAND) terms. By order dated April 25, 2013, the district court determined RAND rates and ranges for Motorola’s SEPs 2013 WL (W.D. Wash. April 25, 2013). 17

Evidence of Hold-Up Patent litigation itself is not an indicator of hold-up Patent litigation might well be indicative of hold-out CSIRO v Buffalo – A refusal to negotiate There are many reasons why there has been an increase in patent litigation; e.g. driven by the economic interests of new market entrants Increase in so-called “smartphone patent litigation” in the USA starting in

Is there objective evidence of hold-up – missing evidence on indicators that economists routinely use Economic experts in Microsoft v Motorola case – no evidence If hold-up was rampant, wouldn’t we see drop in market entry? – Instead we observe late and successful downstream implementer entrants in the wireless industry Wouldn’t we see reduced number of products? – In contrast, the wireless industry is the most vibrant and fast-changing industry of our time 19

Can You License Non-SEPs with SEPs? Acknowledged that patent pool royalty rates are not good benchmarks for 20 In the real world, implementers almost always want portfolio licenses (but the patentee has no obligation to include non-SEPs) Eliminates multiple negotiations and multiple agreements with the same patent holder Freedom to operate; What does licensing patent portfolios entail? Patents actually or potentially “essential” to the same standard Patents “essential” to multiple related standards Non-SEPs

Are Injunctions Available? Injunctive relief is a fundamental remedy for patent infringement (since a patent confers the right to exclude others) Any waiver of such a remedy must be clear and express Not aware of any SSO IPR policy that contains such a waiver There is no such waiver in the ETSI IPR policy A bar on injunctive relief was proposed, and rejected, when the ETSI IPR policy was being formulated and adopted However, an SEP holder must be willing to offer a license on F/RAND terms Certain regulators have attempted to sanction patentees 21

–“where a company against which an injunction is “where a company against which an injunction is sought has shown to be unwilling to enter into a F/RAND licence, injunctions should, in line with and as foreseen by the applicable law, be available” –Kramler, DG COMP (2013) SC, April 2013“where a company against which an injunction is sought has shown to be unwilling to enter into a F/RAND licence, injunctions should, in line with and as foreseen by the applicable law, be available” 22

Conclusions SSOs continue to work well Caution against one-size fits all approaches Litigation allegedly involving SEPs is small in comparison to the success we see today A patent holder does not waive his rights to enforce patents that are deemed to be Standards Essential by making a F/RAND Commitment Courts are well-equipped to handle SEP/FRAND- related disputes that arise 23

24 Thank you!