United States: To Join Or Not To Join: When Membership In A Standard-Setting Organization Is The Question

Participation in standard-setting organizations (SSOs) can be a productive way for companies in a particular industry to influence technical standards that enable interoperability between products. Recently, however, there has been more focus in patent and other litigation on the commitment that companies involved in standard-setting make to license their intellectual property under fair, reasonable, and non-discriminatory terms (FRAND or RAND). For companies, then, is it worthwhile to have employees participate in a standard-setting activity? This article briefly outlines some of the key factors involved in deciding whether to participate in an SSO, focusing in particular on the Institute of Electrical and Electronics Engineers (IEEE) and the International Telecommunication Union (ITU), and on the potential benefits and pitfalls to a company's patent strategy.

As a starting point, the standard-setting process has the risk of "patent hold-up." When SSOs set a technical standard with a single method of compliance, they are ensuring that most, if not all, industry members will use a particular set of technologies. Patents necessary to practice such a standard are known as "standard-essential patents." Other patents on optional or preferable features to the practice of the standard do not present the same set of issues. Because it is rarely clear whether or not new technologies fall within the scope of a patent, whether a given patent's claims are essential, optional, or only preferable to the standard is often a grey area. Therefore, when industry participants agree to a standard, a holder of a potentially essential patent gains a great deal of power. Absent further contractual requirements, industry members must either pay whatever the patent holder demands or find a way to work around the standard.

On the other side of the spectrum, the standards-setting process generates antitrust concerns because competitors in an industry work together to agree on requirements for an entire technical area. The standard-setting organization must therefore tread carefully to prevent the standard-setting process from becoming anticompetitive.

To walk the line between antitrust issues and the risk of patent hold-ups, SSOs take several tactics. Most commonly, an SSO first attempts to have participants identify patents that are essential to proposed standards. Once these patents are identified, the SSO seeks a F/RAND commitment for the essential patents, requiring the member to commit to negotiate licenses for the essential patents with adopters of the standard on F/RAND terms. The non-specific nature of the F/RAND commitment protects the SSO from antitrust violations like price-fixing, but leaves a number of issues for later determination. During subsequent licensing negotiations or litigation, a patent holder's F/RAND commitment may come into question, for example, because employees of the patent holder did not disclose a relevant patent, or the patent owner failed to comply with its F/RAND commitment, either by seeking a non-F/RAND royalty or an injunction.

Despite the challenges involved in navigating the F/RAND commitment, there is a large upside for companies who become involved in the standard-setting process: their technology could be adopted by all implementers of the standard on a worldwide basis. A F/RAND rate is not necessarily small, but it is likely a lower rate than a rate negotiated outside the shadow of a F/RAND commitment. However, if the standard becomes widespread, there may be many potential licensees—often a much larger licensing base than would have been available otherwise. At the very least, members can find it useful to have input into which technology to ultimately adopt as part of a technical standard, even if it isn't covered by the member's own patents.

Thus, companies may want to consider the following points when deciding whether to join an SSO:

Who Is a Member of an SSO?

Members of an SSO can be individuals, individuals representing or affiliated with private organizations, private organizations, or even state governments. Each SSO is different, and some allow multiple types of members. The IEEE, for example, allows only individual engineers as members, who liaise on behalf of their employers and must disclose their affiliation. On the other hand, the ITU, an agency of the UN, has members consisting of private companies and state governments (including all UN member states).

What Is the Obligation to Disclose IP?

Most SSOs require participants in standard-setting to disclose patents that are or might become essential to a standard being developed. The scope of the disclosure obligation is contractually defined by the SSO's policy, and varies across SSOs. The IEEE, for example, has no explicit disclosure requirement. The ITU, on the other hand, requires participants to disclose known essential patents or pending applications.

The SSOs must strike a balance between obtaining useful disclosures of patents that may impact the ability to practice the standard and imposing an undue burden on participants. Searching and assessing essentiality across multiple iterations of proposals could be prohibitively expensive for members. Some organizations, like the IEEE, solve the problem by not explicitly requiring disclosure. Some corporate members of SSOs expressly disclaim any obligation to conduct an internal search for essential claims. For example, the ITU's Common Patent Policy explicitly states "there is no requirement for patent searches."

As a contractual duty, the obligation to disclose patents and other IP is personal to each member, whether the member is an individual or an organization. When the member is an individual participating on a company's behalf, the personal nature of the obligation to disclose means that unless that individual is familiar with relevant patents, they may not be considered during the standards process.

In addition, disclosure of IP is not the same as—and need not be accompanied by—a F/RAND commitment. Disclosure simply allows the SSO to make an informed decision to include that technology in the ultimate standard or to locate a different technological solution to the same problem.

Finally, SSOs typically do not specify whether individual patents must be disclosed or whether a global F/RAND commitment for all IP that may read on the standard satisfies this obligation. Global F/RAND commitments are a matter of common practice because they solve two problems. First, since many companies have large patent portfolios, it eliminates the burden of searching for and assessing essential patent claims. Second, the SSO will usually not, and with a global F/RAND commitment need not, undertake an essentiality analysis itself. See, e.g., ITU Common Patent Policy § 5 ("[H]owever the Technical Bodies may not take position regarding the essentiality, scope, validity or specific licensing terms of any claimed Patents."); IEEE Standards Board Bylaws § 6.2 ("The IEEE is not responsible for identifying Essential Patent Claims for which a license may be required... ."). However, global F/RAND commitments may exceed the scope of the member's contractual obligations and may subject the patent holder to later contentions that nonessential patents are impacted by the commitment. Accordingly, they are a blunt instrument.

When Does a F/RAND Obligation Arise?

SSOs typically do not require F/RAND commitments of all members or affiliated companies. Instead, the F/RAND commitment is a separate obligation, which typically allows companies to make a desired level of F/RAND commitment. Both the IEEE and ITU ask for a statement, called a letter of assurance (LOA), of the company's commitment and outline permissible forms of the statement:

  • The LOA required by the IEEE can be of two different types: (1) a disclaimer against enforcement of the patent; or (2) a statement that licensing of the patent will be available on F/RAND terms. The LOA may also include a capped rate, a sample agreement, or material licensing terms. Alternatively, the company can indicate that it is not aware of any IP that is or might become essential.
  • The LOA required by the ITU can take several forms: (1) a commitment to negotiate licenses free of charge on F/RAND terms; (2) a commitment to negotiate licenses on F/RAND terms; or (3) an indication that the patent holder is unwilling to comply with the F/RAND commitments, in which case the ITU will exclude standards provisions that would depend on the patent.

Participating companies may provide an LOA to encourage adopting their technology as a standard (for use by everyone) rather than refusing so that their technology is not adopted (and used by no one). In some cases, LOAs may accompany specific standards proposals. When a company or affiliated member makes a proposal for a technical standard, the company will typically come forward with F/RAND commitments at the same time. These commitments may be conditioned upon adoption of the proposal, stating, for example, "if this proposal is adopted, we will license any essential patents on F/RAND terms." Conditional F/RAND commitments may not work in every SSO; the IEEE's Standards Board Bylaws, for example, prohibit discussion of LOAs at a standards working group meeting.

What Is the F/RAND Obligation?

Although specific to each SSO and each LOA, typically the F/RAND commitment is to negotiate a F/RAND license in good faith. See, e.g., Apple Inc. v. Motorola, Inc., 757 F.3d 1286 (Fed. Cir. 2014). F/RAND negotiations may yield different rates for different entities. Although F/RAND obligations often state that the rate must be non-discriminatory, this does not require that all licensees receive identical terms. Different potential licensees are differently positioned, and their products may make different uses of a standard and to different extents.

What Are F/RAND Rates?

SSOs will not set F/RAND rates due to both concerns over price-fixing and the flexible nature of F/RAND. Because rates are not set in advance, F/RAND rates for a license depend upon many factors. The success of the standard, its importance in the marketplace, the licensee's position, the importance of the individual patents to the standard, and the number of patents held by the licensor are just some of the factors that will affect the F/RAND rate and may not be known ex ante.

The case law on F/RAND rates is evolving. The two primary questions—whether a litigant in patent litigation is limited to a contract damages award if the patent is subject to a F/RAND commitment, and whether a litigant can obtain a better contract rate and/or additional damages by suing for breach of contract—have not yet been addressed by appellate courts, although ongoing matters should soon provide some additional clarity in this area. See, e.g., Microsoft Corp. v. Motorola, Inc., No. C10-1823JLR, 2013 U.S. Dist. LEXIS 60233 (Apr. 25, 2013).

Who Has Standing to Enforce the F/RAND Commitment?

Although F/RAND commitments are made by contract, it is not a straightforward process to enforce that contract in the event of breach. It is a matter of state or national contract law whether third-parties have a cause of action when the patent holder fails to make a F/RAND offer. The SSO may select the applicable law in its policy, and that law may define who can enforce a contract. The appellate courts have yet to address this issue, but there may be a difference under both state law in the U.S. and the laws of other countries between the rights of a co-participant in the standards effort and a nonparticipant who subsequently implements the standard.

F/RAND commitments may also be raised in litigation as antitrust causes of action for monopolization or in patent litigation as theories of unenforceability. See, e.g., Broadcom Corp. v. Qualcomm Inc., 501 F.3d 297 (3d Cir. 2007); Qualcomm Inc. v. Broadcom Corp., 548 F.3d 1004 (Fed. Cir. 2008). The Federal Trade Commission and the United States Department of Justice Antitrust Division have also both taken an interest in conduct during standardization efforts. See, e.g., Rambus Inc. v. Fed. Trade Comm'n, 522 F.3d 456 (D.C. Cir. 2008). Most commonly, however, the alleged infringer in patent infringement cases attempts to enforce the F/RAND commitment by using it to oppose the grant of an injunction or to support a lower reasonable royalty as damages.

What Is the Effect of the F/RAND Obligation on Injunctions?

Although no SSO bars a F/RAND licensor from seeking an injunction, the F/RAND obligation is often seen by competitors and courts as undermining the patent holder's need for an injunction against patent infringement. Because the patent holder has committed to licensing the patent on reasonable terms, the argument goes, the patent holder is unjustified in seeking to bar use of the technology. The Federal Circuit, however, has taken a more reasoned view, instead finding that a F/RAND commitment does not create a per se bar against granting an injunction. In Apple Inc. v. Motorola, Inc., the court reversed a determination by Judge Posner who, sitting in district court by designation, held that the F/RAND commitment was inconsistent with injunctive relief. The court stated that F/RAND commitments might create challenges when the patent holder attempts to show irreparable harm, as the F/RAND commitment implies that monetary remedies would be adequate, but an injunction may be appropriate against an unwilling licensee as long as the patent holder engaged in good faith negotiation. The Federal Circuit further noted that a per se bar of injunctions could discourage participation in SSOs.

When faced with the opportunity to join an SSO, companies should carefully weigh what technology they may bring to the table and the chance of its adoption against the potential risks that come with a F/RAND commitment. Membership in an SSO tends to be longer-term than standard-by-standard, so companies should assess what role they imagine playing in a particular industry over the following years or even decades. They should also closely read the patent policy, which in the end will define the scope of obligations. In the end, the decision to join an SSO depends on many factors and should be considered carefully.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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