DOJ’s Approval of Revisions to IEEE’s Standard-Setting Policies Provides Guidance for SSOs, Patent Holders, Licensees and Courts

On Feb. 2, 2015, the U.S. Department of Justice (DOJ) issued a business review letter that effectively approved a proposal by the Institute of Electrical and Electronic Engineers (IEEE) to update the IEEE Standard Association’s Patent Policy (Policy) regarding standard-essential patents (SEPs) (the Update). The DOJ’s approval of IEEE’s Update is an important step in the development of policies that standard-setting organizations can adopt with respect to SEPs while reducing the risk of an enforcement action by the DOJ.

Background

The IEEE encourages holders of SEPs to disclose the existence of SEPs during the standard-setting process. A holder of an SEP is asked to submit a Letter of Assurance (LOA) in which it selects one of four options for licensing its SEPs: 1) providing a zero-royalty license; 2) providing a reasonable and non-discriminatory (RAND) license; 3) promising not to enforce the SEP against companies complying with the standard; or 4) stating that is it unwilling or unable to license the SEP, or agreeing that it will not enforce the SEP.

In 2007, the IEEE submitted a business review letter request to revise its policy to give SEP holders the option of disclosing their most restrictive licensing terms—including maximum rates—in an effort to clarify the IEEE RAND commitment. The DOJ issued a business review letter approving that update.

IEEE explained the current Update is needed because since the 2007 revision, only two out of approximately 40 LOAs SEP holders have disclosed the most restrictive licensing terms for the SEP, and patent holders and potential licensees have taken widely divergent positions on the meaning of “reasonable rates” for SEPs. The current update is intended to clarify 1) the availability of prohibitive orders; 2) the meaning of “reasonable rates;” 3) permissible demands for reciprocal licensing; and 4) the production levels to which IEEE licensing commitments apply.

In approving the Update, the DOJ explained that it “may provide participants in [the] standard-setting process with better ex ante knowledge about licensing terms, potentially broadening ex ante competition among technologies for inclusion in the standard.” In addition, “this information could facilitate both ex ante and ex post licensing negotiations, and reduce patent infringement litigation.” Finally, the new provisions “may further help to mitigate hold-up, ensure access to technology necessary to implement [IEEE] standards, and eliminate certain potentially anticompetitive practices.”

The DOJ’s Analysis

1. Prohibitive Orders

The Update provides more clarity the circumstances in which an SEP holder may seek a prohibitive order, or an injunction. The Policy now will provide that a company agreeing to the IEEE RAND commitment “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, and infringement; award monetary damages; and resolve any defenses and counterclaims.” The DOJ reasoned that although this may limit the availability of injunctive relief, it is not significantly more restrictive than the standards recently being developed in court decisions. In addition, according to the DOJ, the Update will further the pro-competitive goal of providing greater clarity regarding the availability of prohibitive orders, which could facilitate licensing negotiations and limit patent infringement litigation.

2. Definition of “Reasonable Rate”

The revised Policy adds a definition of “Reasonable Rate” that includes a mandatory factor and recommended consideration of three other factors. The mandatory factor states that a Reasonable Rate “shall mean appropriate compensation … excluding the value, if any, resulting from the inclusion of [the patent claim’s] technology in the IEEE standard.” The DOJ said this provision aligns the goal of RAND commitments, which is to provide the SEP holder with appropriate compensation while ensuring that implementers are not forced to pay any hold-up value associated with the standardization process.

The DOJ also found that the three additional non-mandatory factors recommended by the IEEE for consideration in licensing negotiations are not likely to result in competitive harm, and accordingly are acceptable. The three factors are the following: 1) “[t]he value that the functionality of the claimed invention or inventive feature within the Essential Patent Claim contributes to the value of … the smallest saleable Compliant Implementation that practices the Essential Patent Claim”; 2) “[t]he value that the Essential Patent Claim contributes to the smallest saleable Compliant Implementation that practices that 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 of a Prohibitive Order, and where the circumstances and resulting licenses are otherwise sufficiently comparable to the circumstances of the contemplated license.” Again, the DOJ notes that these factors are consistent with emerging damages law, and expressly stated that no specific methodology was required as a result of the IEEE changes.

3. Any Compliant Implementation

The update requires a patent holder who makes a RAND commitment to license its patents for “any Compliant Implementation,” which means it cannot refuse to license its patents at certain levels of production. The DOJ said that this adds clarity regarding who may license the patent and has the potential to facilitate implementation of IEEE standards. The DOJ also explained, however, that changes to existing licensing practices (i.e., higher royalty rates for upstream components) may be warranted in light of this change.

4. Reciprocity – Grantbacks and Package Licenses

The update permits a licensor to require a grant back for a licensee’s patents essential to the same standard. According to the DOJ, this mitigates the concern that a firm taking advantage of the commitments others made to the standard can then engage in hold up of the same standard by asserting essential claims it has refused to license on RAND terms. At the same time, however, licensors are prohibited from demanding a cross license for patents that are not essential to the same standard. Significantly, parties remain free to negotiate these types of terms voluntarily. The Update does not prohibit parties from voluntarily negotiating licenses for entire patent portfolios, but adds clarity to the scope of permissible demands under the Policy. The DOJ concluded that permitting voluntary cross licenses and package licensing seems likely to preserve the efficiencies of these arrangements, while addressing concerns about coercive cross-licensing and tying, and does not appear likely to result in competitive harm.

Conclusion

The DOJ’s IEEE business review letter is an important addition to the guidance that the DOJ and the FTC have provided regarding their enforcement priorities regarding the policies of standard-setting organizations. Although there surely will be disagreement as to whether the lines drawn in the letter are appropriate, the letter at least provides greater certainty about what those lines are and will assist other standard-setting organizations in developing policies that will minimize the risk of triggering concerns at the DOJ. The letter also will provide courts with guidance in helping resolve cases involving standard-setting activity and SEPs.

IEEE’s revised Policy is available here.

The DOJ’s 2015 IEEE business review letter is available here.