DOJ Issues Favorable BRL on Proposed Revisions to IEEE s Patent Policy

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1 In this Issue: WRITTEN BY BRENDAN J. COFFMAN AND KOREN W. WONG-ERVIN DOJ Issues Favorable BRL on Proposed Revisions to IEEE s Patent Policy FEBRUARY 2-7, 2015 EC to Closely Watch Proposed Revisions to IEEE s Patent Policy, Noting the Need for a Careful Balance Between Access to SEPs and Appropriate Remuneration ABA Sections Recommend that China s MIIT Not Issue a Single Template on Highly Disputed Issues Best Left to Individual SDOs and Their Members FTC Commissioner Ohlhausen Testifies on Antitrust-IP Issues Before the U.S.-China Economic and Security Review Commission House Judiciary Committee Chairman Goodlatte Introduces Patent Litigation Reform Bill STANDARD-ESSENTIAL PATENTS DOJ Issues Favorable BRL on Proposed Revisions to IEEE s Patent Policy On February 2, 2015 the Department of Justice (DOJ) issued a favorable Business Review Letter (BRL) on the IEEE-SA s (an operating unit of IEEE) proposed revisions to IEEE s Patent Policy. The BRL addresses proposed changes concerning: (1) the availability of prohibitive orders [injunctive relief]; (2) the meaning of Reasonable Rate ; (3) permissible demands for reciprocal licensing; and (4) the production levels to which IEEE licensing commitments apply. (BRL at 1.) The DOJ concluded that the proposed revisions (referred to as an Update ) have the potential to benefit competition and consumers by facilitating licensing negotiations, mitigating hold up and royalty stacking, and promoting competition among technologies for inclusion in standards. (Id. at 16.) The DOJ clarified that its analysis applies only to the Update s impact on future Letter of Assurances (LOAs), and offers no statement on its intentions regarding retroactive application of the Update to previously submitted LOAs. (Id. at 17.) (Under IEEE s Patent Policy, any holder of potentially essential patent claims is asked to submit a LOA in which the holder chooses one of four options for licensing those claims.)

2 The DOJ specified that its task was to advise on its present antitrust enforcement intentions regarding the proposed revisions, and not to assess whether IEEE s policy choices are right for it. Furthermore, according to the DOJ, [i]t is unlikely that there is a one-size-fits-all approach for all [standard-setting organizations] SSOs, and, indeed, variation among SSOs patent policies could be beneficial to the overall standards-setting process. Other SSOs, therefore, may decide to implement patent policies that differ from the Update. (Id. at 2.) Process Concerns The DOJ began by noting that some critics of the Update contend that parties desiring lower royalty rates commandeered IEEE-SA and that the Update was the product of a closed and biased process antithetical to the consensus-based goals of open SSOs. Many of these concerns centered on the composition, formation, and conduct of the Ad Hoc, which was responsible for generating the Update. (Id. at 7.) Relying on the Supreme Court s decision in Allied Tube, the DOJ noted that [i]f a standards-setting process is biased in favor of one set of interests, there is a danger of anticompetitive effects and antirust liability. (Id.) The DOJ then concluded that, [d]espite these concerns, it appears that the overall process afforded considerable opportunity for comment on and discussion of the Update, and the duly constituted governing bodies of IEEE-SA and IEEE will have approved the Update before it takes effect. (Id.) Prohibition on Injunctive Relief The proposed revisions provide that the submitter of a LOA who has committed to make available a license for one or more Essential Patent Claims agrees that it shall neither seek nor seek to enforce a Prohibitive Order... unless the implementer fails to participate in, or to comply with the outcome of, an adjudication, including an affirming first-level appellate review... by one or more courts that have the authority to determine Reasonable Rates and other reasonable terms and conditions; adjudicate patent validity, enforceability, essentiality, and infringement; award monetary damages; and resolve any defenses and counterclaims. (IEEE-SA Proposed Revisions 6.2.) The DOJ noted that [t]his provision may place additional limits on patent holders ability to obtain injunctive relief in a U.S. court, but it appears that, in practice, it will not be significantly more restrictive than current U.S. case law, and the added clarity may help parties reach agreement more quickly. Although this provision is more restrictive than recent guidance on this issue from the U.S. government, the U.S. government does not dictate patent policy choices to private SSOs. (BRL at 10.) Ultimately, the DOJ concluded that the provision furthers the procompetitive goal of providing greater clarity regarding the IEEE RAND Commitment, and is unlikely to result in competitive harm because it is consistent with the direction of U.S. case law and patent holders can avoid its requirements by declining to make a RAND commitment. (Id. at 11.) Definition of Reasonable Rate The proposed revisions would amend the definition section of IEEE s Patent Policy to provide that a Reasonable Rate shall mean appropriate compensation... excluding the value, if any, resulting -2-

3 from the inclusion of [the patent claim s] technology in the IEEE standard. (IEEE-SA Proposed Revisions 6.1.) The DOJ concluded that this mandatory factor aligns with generally accepted goals of RAND commitments and reduces the possibility that a patent holder that has made an IEEE RAND Commitment could hold up implementers of a standard and obtain higher prices (or more favorable terms) for its invention than would have been possible before the standard was set. (BRL at ) The proposed revisions also provide that determination of such Reasonable Rates should include, but need not be limited to, the consideration of : (1) the value that the functionality of the claimed invention or inventive feature... contributes to the value of the relevant functionality of the smallest saleable Compliant Implementation that practices the Essential Patent Claim ; (2) the value that the Essential Patent Claim contributes to the smallest saleable Compliant Implementation that practices the claim, in light of the value contributed by all Essential Patent Claims for the same IEEE Standard practiced in that Compliant Implementation ; and (3) [e]xisting licenses covering use of the Essential Patent Claim, where such licenses were not obtained under the explicit or implicit threat a Prohibitive Order [injunctive relief], and where the circumstances and resulting licenses are otherwise sufficiently comparable to the circumstances of the contemplated license. (IEEE-SA Proposed Revisions 6.1.) Compliant Implementation is defined as any product (e.g., component, sub-assembly, or end product) or service that conforms to any mandatory or optional portion of a normative clause of an IEEE Standard. (Id.) The DOJ concluded that these should factors constitute mere recommended factors that are [c]onsistent with U.S. case law. (BRL at 14.) Any Compliant Implementation The proposed revisions would obligate patent holders bound by the IEEE RAND Commitment to license their patents for any Compliant Implementation, meaning the patent holder cannot refuse to license at certain levels of production. The DOJ concluded that [e]ven if this provision entails a departure from historical licensing practices for some licensors (who, for example, may prefer to license manufacturers of the end product, not manufacturers of the input), the Update does not mandate specific licensing terms at different levels of production. (Id. at 15.) Thus, according to the DOJ, the royalty rate need not necessarily be the same at all levels of production. (Id.) The DOJ also noted that [i]f a patented invention s value is not reflected in the current price of upstream implementers, due to historical licensing practices, some adjustments may be necessary. (Id.) Reciprocity Grantbacks The proposed revisions would prohibit licensors from demanding cross-licenses for patents that are not essential to the same standard and from forcing an applicant to take a license to patent claims that are not essential to the same standard. The DOJ concluded that these prohibitions will reduce the possibility that a holder of a RAND-encumbered patent could leverage that patent to force a cross-license of, among other things, a potential licensee s differentiating patents and limit the potential for anticompetitive tying. (Id. at 15.) Sources: -3-

4 United States Department of Justice, Business Review Letter to IEEE (Feb. 2, 2015), available at Press Release, Department of Justice Will Not Challenge Standards-Setting Organization s Proposal to Update Patent Policy (Feb. 2, 2015), available at IEEE-SA Proposed Revisions (June 10, 2014), available at EC to Closely Watch Proposed Revisions to IEEE s Patent Policy, Noting the Need for a Careful Balance Between Access to SEPs and Appropriate Remuneration Following the DOJ s issuance of its Business Review Letter on the proposed revisions to IEEE s Patent Policy, the European Commission (EC) issued a statement saying that [t]he Commission is closely watching the... developments at the IEEE, and is mindful about the need for a careful balance between guaranteeing full access to standards at the same time as ensuring appropriate remuneration for intellectual property. (EC Statement.) Source: EC Statement, available at (subscription required). ABA Sections Recommend that China s MIIT Not Issue a Single Template on Highly Disputed Issues Best Left to Individual SDOs and Their Members On January 29, 2015, the ABA Sections of Antitrust, Intellectual Property, International, and Science & Technology Law (referred to as the ABA for ease of reference) submitted comments on a Draft Template for Intellectual Property Rights Policies in Industry Standards Organizations, which was issued by the Electronic Intellectual Property Center (EIPC) of China s Ministry of Industry and Information Technology (MIIT). Among other things, the draft template would prohibit injunctive relief on FRAND-encumbered SEPs except under limited circumstances and require SEP holders to calculate royalties based on the smallest salable patent practicing unit and account for the possibility of royalty stacking by taking into account the total aggregate royalties that may apply if other patent holders demand similar terms. In its comments, the ABA recommend[ed] against issuance of a single template to serve all [standard development organizations] SDOs and circumstances, particularly on highly disputed issues that are best left to individual SDOs and their members to decide. (ABA Comments at 1.) According to the ABA, [i]ssuance of a template by a governmental agency, or an entity sponsored by a governmental agency, may unduly influence private SDOs and their members to adopt policies that might not otherwise gain consensus support within a particular SDO and that may not best -4-

5 address the particular issues of that SDO, its members, and the public. (Id. at 1-2.) Lastly, the ABA stated that (Id. at 2.) Sources: [i]f EIPC and/or MIIT decide to issue a template, the Sections suggest that they amend the Draft Template to explicitly state that it is provided for informational purposes only and is only one possible starting point, and that failure to adopt the Template, either in whole or in part, will not subject an SDO or its members to legal liability (either under China s Anti-Monopoly Law or otherwise). Without such language (and perhaps even with it), there is a risk that any template endorsed by MIIT, even if only indirectly, may be perceived as government policy. The result could be a de facto, rigid, one-size-fits-all approach, which could make it unnecessarily difficult for SDOs in China to achieve success and thereby impossible for SDOs to deliver the efficiency benefits of standard setting. ABA Comments, available at authcheckdam.pdf. MLex Staff, ABA sections recommend against issuance of MIIT s IP policy template for standards organizations, MLex (Feb. 3, 2015), available at (subscription required). FTC Commissioner Ohlhausen Testifies on Antitrust-IP Issues Before the U.S.-China Economic and Security Review Commission On January 28, 2015, FTC Commissioner Maureen Ohlhausen testified at a hearing on The Foreign Investment Climate in China: U.S. Administrative Perspectives on the Foreign Investment Climate in China before the U.S.-China Economic and Security Review Commission. In addition to raising concerns about due process, transparency, and the use of non-competition factors in competition analysis, Commissioner Ohlhausen also raised concerns about China s Anti-Monopoly Law (AML) enforcement in matters involving intellectual property rights. In particular, the Commissioner observed that China appears to be moving to a system that favors short term economic gain from intellectual property protections, including the right to exclusion and to fair compensation based on free negotiation of licensing terms and marketplace competition. (Testimony at 3.) As examples, Commissioner Ohlhausen pointed to MOFCOM s recent merger decisions in which it has imposed FRAND commitments on patents that are not essential to an industry standard, and several provisions of SAIC s Draft AML-IP Rules. Lastly, Commissioner Ohlhausen also cautioned that American enforcers need to be very clear about the reasoning underlying our decisions, remembering that we have an audience in China that can easily misunderstand, misinterpret, or even misuse our actions when they are unclear. (Id. at 5.) -5-

6 Source: Testimony of Commissioner Maureen K. Ohlhausen Hearing on The Foreign Investment Climate in China: U.S. Administration Perspectives on the Foreign Investment Climate in China (Jan. 28, 2015), available at PATENT-ASSERTION ENTITIES House Judiciary Committee Chairman Goodlatte Introduces Patent Litigation Reform Bill Rep. Goodlatte recently introduced new patent reform legislation, H.R. 9, which would, among other things: impose a loser pays rule unless the court finds that the losing party s positions were reasonably justified in law and facts ; require all patent holders (patent-assertion entities and non) to include specific details in demand letters; increase pleading standards for all patent holders; limit parties from obtaining discovery until after the court has issued a claim construction ruling; require patent holders to bring suits against manufacturers of accused products, not their customers; and require the Patent Trial and Appeal board to construe the claims of patents in American Invents Act reviews using the same standard that is used in district court. Rep. Goodlatte explained that the bill is not designed to lessen patent rights in any way, but rather to prevent extortion and increase transparency. Some patent attorneys contend that the bill would make it much harder for patent holders to bring patent infringement lawsuits, and that this devaluates patents by definition. Some caution that small and midsized companies are unlikely to have the resources to bring patent suits if they have to account for the cost of their opponent s fees. Sources: Proposed legislation, available at Press Release, Goodlatte Introduces Patent Litigation Reform Bill (Feb. 5, 2015), available at Ryan Davis, New Troll Bill Could Hobble All Patent Suits, Attys Say, LAW360 (Feb. 5, 2015), available at (subscription required). UPCOMING PROGRAMS The ASCAP and BMI Consent Decrees Do They Protect Competition? -6-

7 February 11, 2015 Noon-1p.m. EST Details and registration available at m.pdf. -7-