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3 Key Issues for SSOs in SEP Licensing
Pages 51-70

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From page 51...
... . Neither ANSI nor most other SSOs define "reasonable terms and conditions" or the requirements for a license to be "free of any unfair discrimination."1 Some SSO policies encourage rights holders who have made assurances to reach bilateral agreements with potential licensees.
From page 52...
... For example, the 2008 ANSI Patent Policy states "There is no objection in principle to drafting a proposed American National Standard in terms that include the use of a patented item, if it is considered that technical reasons justify this approach." The FRAND obligations adopted by ANSI and others place limits on the exercise of these patent rights.2 As noted earlier, standards-setting organizations have a diverse set of constituents. Some SSO participants are technology owners and users whose business models are based on the sales of products that implement standards and employ patented technologies.
From page 53...
... These benefits cannot be achieved without widespread licensing of the patented technology that is essential to practice a standard. Promoting non-discrimination In the absence of FRAND licensing obligations, there is a risk that implementers will accede to demands to accept discriminatory licensing terms in order to adopt fundamental ICT standards embodying essential patents that cannot be worked around.
From page 54...
... It also rewards the patent holder via windfall profits reflecting the costs of switching to an alternative technology rather than the economic merit of the selected standard. Because such hold-up is potentially costly to members of SSOs, it is reasonable for their IPR policies to seek to guard against it by requiring FRAND commitments.
From page 55...
... When a standard-using product requires numerous SEPs, a single patentee can demand a disproportionate share of product value even if licensees do not incur costs to switch to a different product. Because all the SEPs are necessary, licensees and customers would switch to a different product only if the total royalty is excessive, which leaves room for individual patent holders to demand a disproportionate share of total royalties.
From page 56...
... A larger quantity of essential patents is also more valuable if the patents are contributed to a patent pool that seeks royalty income and allocates that income in proportion to the number of patents in the pool. Estimates of essential patents and the number of SEP owners could understate the potential for royalty stacking in other respects.
From page 57...
... Courts play a crucial role in this area since judicial decisions both directly set norms for FRAND terms and settle disputes over whether royalty offers comply with FRAND commitments. Thus, courts can contain the risk of royalty stacking and hold-up by ensuring that awards for patent infringement are reasonable, taking into account the contribution of the patented inventions and the costs of obtaining all other intellectual and physical inputs that are necessary to make or sell the infringing product.10 For patents that are essential to a standard and allegedly infringed by an implementing product, this requires allocation of the value contributed by the standard as opposed to the contributions of others, including patents that are essential to other standards.
From page 58...
... In particular, Judge Robart noted that in considering a hypothetical negotiation to arrive at a reasonable royalty "the hypothetical negotiation almost certainly will not take place in a vacuum: the implementer of a standard will understand that it must take a license from many SEP owners, not just one, before it will be in compliance with its licensing obligations and able to fully implement the standard."14 In particular, Judge Robart concluded that "a proper methodology for determining a [F] RAND royalty should address the risk of royalty stacking by considering the aggregate royalties that would apply if other SEP holders made royalty demands of the implementer."15 At issue in the case was the value of Motorola's patents for Microsoft products that implemented the ITU H.264 standard for video processing and the IEEE 802.11 family of standards for wireless communications.
From page 59...
... But it also could be an effort by a particular patent owner to capture a disproportionate share of an ex ante reasonable aggregate royalty. There is little evidence that the existing IPR polices of most large SSOs effectively limit the ability of individual patent owners to negotiate for a disproportionate share of product value in their royalty demands.
From page 60...
... Mandatory ex ante disclosure could also disrupt technical committee work, if participants were asked to review all possible SEPs and related licensing terms, particularly for ICT standards that can reach hundreds of pages in length and implicate dozens or hundreds of patents. Because few SSOs have adopted policies with regard to ex ante disclosure of licensing terms, empirical evidence on these questions remains quite limited.
From page 61...
... If the term does not reflect incremental value one might question whether norms such as economic efficiency should determine the interpretation of fair and reasonable license terms. Incremental value provides a means to assess the ex ante contribution of a patent that covers a discrete technology whose value can be assessed independently from the contributions of other technologies.
From page 62...
... before a standard is approved, can shed light on value. Royalties for comparable patents or licenses that are encumbered by FRAND commitments may also inform the evaluation of reasonable royalties, although recent cases have raised the bar on validating the circumstances and expert testimony on which cases are comparable.22 At the most basic level, a commitment to license at RAND terms should not permit a patent holder to obtain a royalty that reflects standardization effects rather 19 Patent pools have developed "rough and ready" approaches to this apportionment problem, such as allocating royalties in proportion to each firm's count of essential patents.
From page 63...
... He noted that the hypothetical negotiation under a FRAND obligation differs from the typical Georgia-Pacific analysis conducted by courts in a patent infringement action because, among other reasons, the owner of a SEP is under the obligation to license its patents on FRAND terms. For example, the first Georgia-Pacific factor is "The royalties received by the patentee for the licensing of the patent in suit, proving or tending to prove an established royalty" and the second factor is "The rates paid by the licensee for the use of other patents comparable to the patent in suit." Judge Robart concluded that to be comparable, past royalty rates for a litigated SEP or another similar patent must be negotiated under a clearly understood FRAND obligation.
From page 64...
... In his review of the Georgia-Pacific factors to assess FRAND royalties, Judge Robart noted that the fifth factor -- "The commercial relationship between the licensor and licensee, such as, whether they are competitors in the same territory in the same line of business; or whether they are inventor and promoter" -- does not apply in the FRAND context. This is because having committed to license on FRAND terms, the patentee is obligated to license all implementers on reasonable terms and may not discriminate against its competitors in terms of licensing agreements.
From page 65...
... Portfolio licenses and cross-licenses raise challenges for evaluating whether a particular patent license is consistent with a FRAND obligation. The royalty paid for a patent portfolio covers many patent licenses, and it can be difficult, or even impossible, to allocate the portfolio royalty to individual patents in a meaningful way.
From page 66...
... However, one-sided demands by SEP owners that the licensee accept patents other than the SEPs in the standard, as a condition of access to the SEPs, would violate the terms of many IPR policies. These expressly limit cross-license terms, typically under a "reciprocity" provision, to other claims that are essential to the implementation of the same standard.
From page 67...
... As Judge Robart concluded, FRAND obligations may be informed when a formal patent pool is formed, under which implementers pay a single fee referenced in a common fee schedule and sign virtually the same license as all other pool licensees. Because such pools are difficult and expensive to create and of 28 Grant-backs are generally non-exclusive since competition questions could arise where the licensor precludes its licensee from transacting with other firms.
From page 68...
... Within the past few years, however, there have been an increasing number of lawsuits alleging that SEP holders have demanded non-FRAND terms from implementers and used the threat of injunctive relief to try to force these implementers to accept such terms or risk having their product sales halted. This may 30 These points were addressed also in Judge Robart's opinion, cited above at footnote 37.
From page 69...
... A FRAND commitment is also mutual in the sense that both the SEP holder and any prospective licensee are expected to negotiate in good faith towards a license on reasonable terms and conditions that reflect the economic value of the patented technology. Recommendation 3:1 The committee urges SSOs to become more explicit in their IPR policies regarding their understanding of and expectations about FRAND licensing commitments.
From page 70...
... Recommendation 3:3 SSOs should clarify in their policies that prospective licensees may request a license to some or all FRAND-encumbered SEPs owned or controlled by a patent holder. Licensors may not tie the FRAND commitment and the availability of the requested SEPs to a demand that a licensee accept a package or portfolio license that includes non-SEPs or SEPs for unrelated standards.


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