Are SEPS Being Properly Evaluated Under Today’s Standards?

CLIENT ALERT

Are U.S. Standard Essential Patents (SEPs) being properly evaluated
under today’s (basically judicial) standards?

In recent years, several cases tried to evaluate the monetary measure of an SEP and the proper behavior patent owners and their adversaries doing licensing negotiations under SEPs and commitments to SSO’s (Standard Setting Organizations).  The likelihood of litigation looms over the semi-conductor and telecommunications industries because of difficult, unresolved issues.

During the week of May 1, the Antitrust America Institute provided a report to the Justice Department and the Federal Trade Commission requiring SSOs to be sanctioned for violations of SEP guidelines by patent owners or potential infringers/licensees.  Although SSOs are not entirely transparent as to how they work, in these industries, their members include impressive public and private sector professionals. 

Lack of transparency resides in their decision making as it remains unclear what the appropriate standard should be for a particular product or system. How they make choices as to which patents to consider within the SEP definition is also unclear but one thing is clear, namely, that they do not appear to be the right party to accuse.

Patent owners and third-party users of patented technology have their own responsibilities and obligations and they do not always match SEP criteria.  Once a patentee commits to contracting with an SSO, issues affecting that commitment may arise and such issues have resulted in notorious litigation, for example, in Ericcson Inv. v. DLink System Inc., 773 F3rd 1201 (Fed. Cir. 2014) and Motorola Mobility v. Microsoft (Case No. 14 – 35393, July 30, 2015 20150 Lexus 1513375.  

Issues include at least the following: (1) proper royalty; (2) voluntariness of commitment; (3) good faith in dealing; (4) use of the well-known factors for determining royalties, Georgia Pacific v. U.S. Plywood, 318 F.Sup 1116, 1125, (S.D.N.Y. 1970); (5) requiring arbitration versus free-for-all litigation present history; (6) jurisdictional questions of court choice; (7) right to jury determination; (8) whether injunctive relief for a patent owner in SEP action should be allowed; and (9) conditioning and licenses with grant-back clauses.

Today, the above issues, being adjudicated in multi-million dollar litigations, seem more appropriately resolved through mediation/arbitration processes.  It may be appropriate for a patent owner who wishes to commit through an SEP standard to be required to go to arbitration to resolve disputes.

It may be more appropriate for a third-party who wants to operate under the standard to be required by contract with the SSO to arbitrate.  The there no sound policy basis why the legal system should be by clogged by the types of litigations we have seen in the past five years.  

In the Microsoft case, for example, litigation in several countries required Microsoft to move its plant facility from Germany to the Netherlands at a cost of $11,000,000 and with consequent loss of employment opportunities in Germany, for no reason other than the improper activities of Motorola (as the court determined).

An interesting issue in royalty calculations is found in Commonwealth Scientific & Industrial Research Organization (CSIRO) v. CISCO Systems Inc., a case decided by the Federal Circuit on December 3, 2015, 809 F.3d 1295, Case No. 2015-1066 Appeal from the E.D. Texas 6:11-CV-00343-LED.  CSIRO presents a good example of difficulties in determining a proper royalty.

The twenty-two page decision, focused solely on damages, was considered controversial and ultimately was returned to the district court, to be adjudicated under a new standard.  Two significant issues in the case were:

(1)     that the Federal Circuit will always apply a “smallest saleable patent-practicing unit” standard to the royalty rate, i.e. never or rarely applying the entire market value rule.  That is, the rule must reflect the value attributed to the infringing features of the product and no more, citing Ericcson, effectively a “principle of apportionment;” and

(2)     that any royalty calculation must not be enhanced because the patents were chosen as the standard by an SSO. The Federal Circuit noted the royalty for SEPs should only reflect the approximate value of the technological contribution — “not the value of its widespread adoption due to standardization.”  Id. at 16.

When evaluating SEPs, there is not much distinction between a RAND encumbered patent and a SEP. Analysis for a royalty rate is going to be similar and cases over the past few years suggest that the parties’ licensing negotiations will be a key element in final determinations and should not be ignored.  Many factors set forth in Georgia Pacific will be used to help make such a determination.  

The problem, however, is that all this is fact-specific — each case will be decided on its own, a good reason to require arbitration and for Congress to consider legislation setting up a proper administrative body to make such rulings for SSOs, particularly given SSOs cannot make them, themselves.  Rather, they can only technologically determine what is necessary under a standard in an industry — and courts are not well-equipped to go through years of litigation on these issues only to come up with potentially contradictory results.

The suggestion is for a separate, administrative or legal body to determine all of these sorts of SEP issues, essentially, a mini-Federal Circuit, for SEP issues.  Reading through cases over the past few years, it seems highly inappropriate to allow these cases to go forward through multiple stages, multiple litigations, and, often, in multiple countries.  It need not be this way.

What say the patent owner when his monopoly is controlled in a SEP environment?  First of all, he need not commit to the SEP environment.  Second, if he does commit, he has to commit with the intention of dealing in good faith.  Bad faith by a patent owner to enhance monopolization against the interest of consumers should be excised from the equation, unless the patent owner wishes to commit to the SSO.

The above fact-specific issues lend themselves to quick results in arbitral bodies, after mediation, under fair conditions.  After all, the patent owner has begun the process of compromising by committing to the SSO.