Cross-posted at WLF’s Forbes.com contributor page
After several preliminary rulings over the past six months, the federal courts are poised to wade directly into the murky waters of the “standards-essential patent” (SEPs) legal debate. What the courts decide will directly influence discussions and decisions regarding SEPs in other forums such as Congress, the International Trade Commission (ITC), and the Federal Trade Commission.
What is a SEP? The connection plugs for ethernet cables above are universally used for communications across many different computing platforms. The standardized plug arose from a voluntary standard-setting process under the auspices of a private organization. Prominent standard setting bodies include the International Telecommunications Union (ITU) and the Institute for Electrical and Electronics Engineering (IEEE). Patented technology or processes are regularly implicated in the practice of such standards. To prevent what is known as “patent holdup,” standard setting bodies require patents owners whose technology is used in a standard to pledge that they will license the use of those patents on “reasonable and non-discriminatory” (RAND; sometimes known as “FRAND”) terms. Without such promises, the SEP holders could demand exorbitant fees from manufacturers whose products utilize a standard.
Court Skirmishes. Two federal district courts, one in Wisconsin and one in Washington, have RAND-related cases before them. Motorola is the defendant in each, with Apple as the Wisconsin plaintiff and Microsoft as the Washington plaintiff. Neither case will address the patents directly; rather, they are both contract claims. The issue: whether in requesting a 2.25% “per unit” royalty for the use of a wireless communication standard (Apple v. Motorola) or of a video coding standard (Microsoft v. Motorola), Motorola violated the respective companies’ contract rights. Apple and Microsoft argue that they are third-party beneficiaries of contracts Motorola entered into with standard setting entities.
In June, Judge Robart in Washington ruled that a contract existed between Motorola and standard-setter ITU requiring Motorola to license its standards-essential patent on RAND terms, and that Microsoft had the authority to enforce that contract. The judge ordered a November 13 bench trial to determine a RAND royalty rate; once the court determines that, it will oversee a jury trial on Microsoft’s breach of contract claim. In a July motion, Motorola argued that the court could not impose contractual terms for a contract that in Motorola’s opinion did not exist. On October 10, Judge Robart denied Motorola’s motion (opinion here and more detail from Alison Frankel’s blog here), writing that “a forum must exist to resolve honest disputes between the patent holder and implementor,” and that his court would be that forum.
The August 10 ruling by Judge Crabb of the Western District of Wisconsin reached conclusions similar to those of Judge Robart regarding the existence of Motorola’s contract with IEEE which Apple could sue to enforce. A trial on the merits will be held on November 5.
Court-Enforced Voluntary Standard? The courts’ rulings will come at a time of intense scrutiny of standards-essential patents. Tech industry giants and policy makers have focused their attention largely on whether SEP holders should be permitted to enforce such patents through an injunction, either in court or at the ITC (the latter being the subject of a recent WLF paper). Some commentators have suggested that the standards setting bodies should set firmer standards regarding how a “reasonable” licensing royalty rate is set on SEPs and how they can and cannot be enforced. A roundtable last week at the ITU offered a forum for discussion of such issues. Views reportedly varied among the participants as to ITU’s further involvement, but a closing speech by the ITU’s Secretary General on these “very difficult subjects” reflected the organization’s discomfort with setting such standards for its members.
With the standards-setting bodies (understandably) unwilling to resolve licensing disputes or ban injunctions, and absent action from Congress (which might be inadvisable), the federal courts have been thrust into the role of enforcing voluntary agreements entered into through third parties. Whether such a role is an appropriate one for the judiciary may be open to debate. But we will soon hear from judges in Washington and Wisconsin regarding what is “reasonable and non-discriminatory,” and their rulings will have a major impact on the so-called patent wars raging in such key economic sectors as high-tech.