In-House Lessons on Standard-Essential Patents from the Smartphone Battles
Recent disputes between Google, Apple, and other smartphone technology owners have sometimes involved patents that are essential for the accused companys smartphone to comply with applicable electronics standards. Recent decisions in such cases by both federal courts and the International Trade Commission may offer in-house counsel at high-tech companies some valuable guidance in charting a prudent course around challenges to participating in standards-setting organizations, commercializing products which incorporate patented standards, and protecting or licensing related standards technology.
Consumer electronics and computers, to function and communicate with each other, increasingly must comply with technology standards that are generally adopted by industries participating in a corresponding standard-setting organization (SSO). SSOs may deem a member's patent "essential" to an industry standard.
Once a patent is declared essential to an industry standard, other parties incorporating the corresponding standard in their products will, of necessity, use that patent in their own products. Thus, to prevent holders of such standard-essential patents (SEP) from charging unreasonable license fees to use SEPs, SSOs require SEP holders to agree that they will license their patent on reasonable and nondiscriminatory (RAND) terms.
Earlier this year, in the ITC patent infringement dispute between Apple and Motorola, the ITC requested briefing on whether, or under what circumstances, it is appropriate to exclude (i.e., enjoin) an infringing product (1) when its infringement was caused by adherence to an industry standard covered by the patent, and (2) when the patent owner had an agreement with the SSO to license such patent to other parties on RAND terms.
Had the ITC addressed these issues in its decision, it could have prohibited SEP holders from litigating in the ITC after an unfavorable district court decision, and it could have created more closure for corporations that have avoided multimillion dollar adverse judgments in federal court. However, since the ITC found no infringement of the SEPs, it did not address these issues, leaving uncertainty as to whether the availability of exclusionary relief from the ITC in the case of SEPs may be questioned again in a future case. In the meantime, corporate counsel should continue to monitor company participation in SSOs to assure compliance with RAND licensing requirements, and to assure that its products are appropriately licensed.
ITC Exclusion Orders
The ITC historically has the power to issue an exclusion order against an infringing product, which prevents that product from entering the United States marketplace. The ITC, on the other hand, does not have the authority to assess damages in patent infringement actions. The ITC's granting of exclusionary orders remained unaffected by the U.S. Supreme Court's decision in eBay v. MercExchange, which requires courts to balance the equities when awarding an injunction for patent infringement and thus curtailed the previous, more liberal practice of granting injunctions except in unusual cases.
The ITC derives its power to issue exclusion orders from 19 U.S.C. § 1337, which requires it to consider different factors from those of a federal court considering an injunction. In a successful case on the merits, the ITC rarely denies exclusion orders, only doing so if the product is critical to the public health and welfare or if there is no alternative available to the infringing product. As a result, in the last half-dozen years, there has been an increase in the number of parties seeking an exclusion order from the ITC, especially when the parties feared that they might have difficulty obtaining an injunction for patent infringement in the post-eBay federal court system.
The FTC and Judge Posner Weigh In
In view of the foregoing, curtailing the availability of exclusion orders in the context of SEPs would mark a departure from the ITC's historical exercise of its injunctive powers. Nonetheless, the Federal Trade Commission recently issued an opinion urging the ITC to do just that. The FTC noted that such injunctions could lead to a patentee making a RAND commitment as part of the standard-setting processand then later seeking an exclusion order against a party for infringing its SEP to secure high royalties that are inconsistent with its RAND commitment.
There has also been at least one district court case holding that injunctive relief should not be countenanced when it was agreed that such SEP was supposed to be available on RAND terms. In Apple v. Motorola, Judge Richard Posner agreed with the FTC's reasoning and held that Motorola could not seek an injunction against Apple for infringing its SEP for mobile phone technology.
The ITC Dodges the Issue
Many believed the ITC would address this issue in its final decision in the Apple-Motorola investigation; however, the ITC avoided this issue after it found that Apple did not infringe any of Motorola's SEPs, and therefore did not have to decide whether it could issue an exclusion order in favor of a SEP holder. As a result, parties that cannot obtain an injunction in the court system may still have the possibility of enjoining the sale of a product infringing an SEP by filing a complaint in the ITC. Depending on how it resolves this question in the future, the ITC may become a favorite forum for SEP holders denied injunctive relief in the federal court system.
Strategies for In-House Counsel to Consider in Light of the ITC's Recent Decision
The fact that the ITC sought briefing, but did not reach the issue of whether exclusion orders were appropriate for SEPs, may lead to uncertainty as to whether such remedy may be curtailed in a future ITC case. In-house counsel for both patent holders and patent licensees may thus wish to consider ways to reduce both the uncertainty as to what constitutes a reasonable royalty, and the risks of disputing such royalty before the ITC.
One measure which in-house counsel may wish to consider is to encourage the range of reasonable royalties for SEPs, or the methodology for determining such royalties, to be more clearly delineated in the agreements governing participation in SSOs. While participating members may wish to consider both the legal, antitrust, and business risks associated with agreeing to more particular royalty obligations, the upside to such an agreement is reduced risk of disputes later and more certainty in estimating costs to licensees and revenue to patentees, respectively. There is a large body of case law on patent pooling arrangements that may be applicable in structuring such terms in SSO agreements.
It may likewise help avoid disputes to make sure that the terms of member participation in a particular SSO require not only good faith and fair dealing, but also reciprocal obligations of reasonableness among SSO members. In this way, if an SSO member insists on a certain royalty rate for its patents, it can well expect to pay that itself when seeking a license from another SSO member. Such reciprocal obligations encourage SSO members to avoid the uncertainties and high costs of litigation, and instead arrive at a reasonable solution for cross-licensing respective SEPs.
The ongoing smartphone patent disputes are likely to touch again on the question of whether and when infringement of an SEP is appropriately remedied by injunctive relief or an exclusion order. In-house counsel may wish to evaluate company strategies vis-à-vis standards and SSOs in light of changing case law to assure that company business objectives are being appropriately addressed.
Richard Gilly is a shareholder with Akerman Senterfitt and a member of its intellectual property practice group. He specializes in patent and trademark law, including litigation and prosecution matters, and has regularly served as the lead attorney and lead patent counsel in patent infringement litigations. A frequent speaker before industry and professional organizations, he was the A. I. Mahan Lecturer at the Johns Hopkins University Applied Physics Laboratory Colloquium, speaking on "Weathering the Storm: Patents in the Cloud." Richard is an active member of the Software Patent Committee for the International Federation of IP Attorneys (FICPI), where he has spoken and advised on current U.S. software patent litigation issues.