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].

[1] Western District of Washington.
[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”.
[6] High-tech product scan comply with dozens or even hundreds of different standards.
[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).
[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.
[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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