The risks of standard-essential patents
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The risks of standard-essential patents

The AIPLA Annual Meeting will feature some in-depth discussion about licensing patents, especially around the risks involved in setting royalty rates at reasonable and non-discriminatory (RAND) terms.

Laura Smalley from Harris Beach will be moderating today's licensing track, which will feature presentations from Phyllis Turner-Brim of Intellectual Ventures, Kim Choate of Dow Corning Corporation, Kenneth Frankel of Finnegan Henderson Farabow Garrett & Dunner, and Jeffrey Sheldon of Sheldon Mak & Anderson.

Smalley’s practice involves working with asset purchasing agreements. This includes assessing licensing rights in terms of settling either potential or actual litigation.

“A lot of what you are licensing is really freedom from the suits,” says Smalley. “So if you are giving someone a license you are saying, ‘I am not going to sue you on this particular patent.’ You are not actually teaching them how to do anything. So a lot of times you have to figure out what the parties actually want to transfer. Is it really just a license or do you need to have other rights like an actual technology transfer so you are transferring know-how or particular resources to them so they can actually make the patented object?”

The risks of RAND

The afternoon promises to be especially illuminating about standard-essential patents. Frankel’s panel, called ‘Licensing a Standard-Essential Patent? Beware of the Risks!’, will reveal how some of the standard-essential patent owners have been accused of violating their duty of good faith and fair dealing. The agreement with the standards body merely says that standard-essential patents must be licensed on fair, reasonable and non-discriminatory terms.

“But nobody says what the fair, reasonable and non-discriminatory terms are!” says Frankel. “So it’s kind of hard to hang somebody for violating an agreement. But there is this concept out there and it is very well established in contact law of the duty of good faith and fair dealing. That is what Motorola got hung out for in its litigation against Microsoft.”

In that case, which was the first United States-litigated RAND royalty rate, Microsoft accused Motorola of violating that duty of good faith and fair dealing by having an initial offer that was unreasonably high. It ended up getting not only a lower royalty rate for the standard-essential patents but also $14.5 million damages.

Frankel says this is an example of one of the biggest risks in negotiating standard-essential patent licenses: patent owners that aim too high in their royalty requests could be asking for trouble.

“There are some downsides and it depends upon where your offer starts out,” he says. “The court said that your initial offer does not necessarily have to be RAND but it needs to end up RAND. But the licensees are comparing the RAND rate that is determined by the judge with the much higher rand offer and saying, ‘It couldn’t have be anywhere near good faith and fair dealing to offer such a high rate.’

“So my message is going to be: you have to carefully consider your initial royalty that you’re coming out of the box with and make sure you’ve tried to make it reasonable and you have evidence that you actually have made an attempt to deal in good faith.”

Reaching a consensus

RAND is a tricky area because there has only been four decisions so far (see box). Some consensus is slowly forming around how to approach this area, however. Frankel says one of the things that the judge in the Microsoft/Motorola case did is suggest certain factors to consider for violations of the duty. “I think we are probably going to coalesce round that,” says Frankel.

The Committee educational session will explore in greater detail the issues courts are addressing related to litigating patents alleged to cover an industry standard. It will go over those procedural and substantive issues, including practical insights from The Honorable James Holderman of the District Court for the Northern District of Illinois and The Honorable Theodore Essex of the International Trade Commission.

The session will be moderated by David Long of Kelley Drye & Warren.

Judge Holderman calculated the royalty rate in the In re Innovatio case. “He did what some people call a reverse bifurcation process, in which he determined the royalty rate first because the parties were so far apart as to what they wanted for a royalty on the patent,” explains Long. “This was because if that was decided the parties may settle without going into the other particulars, and in fact, it worked. There are lots of defendants but they have been falling off and settling without going much further. So it is an interesting practical approach in how to deal with a RAND encumbered patent.”

The four cases so far give clues about the consequences of having a judge determine the RAND royalty compared with having the jury do it. Two cases have been determined by a judge and two by a jury.

“I suspect we will see more jury determinations of RAND rate. There are not enough data points yet, but when you look at the decisions the patent owners fared better when the juries determined what the royalty rate will be than when the judge did,” says Long.

Long says much has been learned already. For example, he suspects if Microsoft and Motorola litigated their case again they would take some different approaches, given what they may have learned. “For example, I think we learned from the Microsoft/Motorola case that if it’s a slam dunk that the patents cover the standard you need to get some admission or some court to acknowledge that so you are not spending a lot of time on this,” he says.

Four data points

Four US-litigated RAND royalty rate have so far been set – two of which have been set by a judge, and two of which have been set by a jury.

• In Microsoft v Motorola Judge James Robart for the Western District of Washington determined a RAND rate of 3.471 cents per wifi unit and 0.555 cents per h.264 unit.

• In Ericsson v D-Link a jury in the Eastern District of Texas determined a rate of 0.15 cents per wifi chip.

• In In re Innovatio Judge James Holderman for the Northern District of Illinois determined a rate of 9.56 cents per wifi chip.

• In Realtek Semiconductor Corp v LSI Corp, the jury determined a 0.12% royalty for the ‘958 patent and 0.07% royalty for the ‘867 patent, or 0.19% combined – the lowest US-litigated RAND rate so far.

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