Recently, Lawyers Journal republished an article we had
submitted to the Massachusetts Bar Association's Complex Commercial
Litigation Section Quarterly Newsletter late last year entitled,
"The Impact of Recent Decisions Regarding Patent Hold-up on the
Future of Standards-Setting Activities." The article discussed a
number of important court decisions issued in 2015 that affect the
incentives of technology innovators to contribute their patented
inventions to standards-setting bodies. Since then, the law of
standard-essential patents (SEPs) has continued to evolve. In this
piece, we discuss two notable decisions by the Federal Circuit and
the International Trade Commission issued over the past year that
impact the scope and nature of the remedies available for the
infringement of SEPs, and as a result, continue to shape the
incentives of technology innovators to contribute their patented
inventions to standards-setting bodies.
CSIRO v. Cisco (Federal
Circuit)
On Dec. 3, 2015, a few days after our article first went to
press, the Federal Circuit issued its much-awaited decision in
Commonwealth Scientific and Industrial Research Organization
(CSIRO) v. Cisco Systems, Inc., providing meaningful guidance
on a number of open questions pertaining to the calculation of
damages for the infringement of SEPs. Among other things, the
Federal Circuit determined that the district court did not take
sufficient account of the asserted patent's status as essential to
the standard at issue and concluded that this failure may have
resulted in an overvaluation of the patented technology. On this
basis, the court vacated the $16 million damages award won by CSIRO
at trial.
Relying on its 2014 decision in Ericsson, Inc. v. D-Link
Sys., Inc., the Federal Circuit noted that when SEPs are at
issue, two special apportionment considerations apply to ensure
that the patent owner is not improperly compensated for the value
of the standardization of a technology, and is instead only
compensated for the value of the patented invention itself: "First,
the patented feature must be apportioned from all of the unpatented
features reflected in the standard. Second, the patentee's royalty
must be premised on the value of the patented feature, not any
value added by the standard's adoption of the patented
technology."
Critically, the court made clear that these special
considerations apply to all SEPs, not just to SEPs whose owners
have agreed to license them on reasonable and non-discriminatory
(RAND) terms. It explained that regardless of whether an SEP is
subject to a RAND commitment, its value "is distinct from any value
that artificially accrues to the patent due to the standard's
adoption." A patent owner is only entitled to the former, the court
said, but not to the latter. "Without this rule," it observed, SEP
owners "would receive all of the benefit created by standardization
- benefit that would otherwise flow to consumers and businesses
practicing the standard."
The Federal Circuit went on to explain that the district court
"erred because it did not account for standardization." And because
it did not have the benefit of Ericsson, the district
court erred in finding that three Georgia-Pacific factors
favored CSIRO: factor 8, which relates to the accused product's
commercial success and profitability, and factors 9 and 10, which
relate to the advantages of the patented invention over competing
products. In Ericsson, the Federal Circuit had observed
that these three factors are irrelevant or misleading in cases
involving patented technology that has been incorporated into a
standard - especially a widely adopted standard - because products
that comply with a standard are much more likely to be commercially
successful, all else being equal, than are products that do
not.
Conversely, the court noted, competing technology that it is not
incorporated into a standard may be a commercial failure at least
in part because it is not incorporated into a standard. Therefore,
weighing the commercial success of standard-compliant products in
favor of the patent owner, as the district court had, without
taking into account that the commercial success may derive entirely
from standardization itself, opens the door to compensating SEP
owners for the value of standardization, not just for the
incremental value of their patented technology.
The court's observation that the value of standardization itself
should not accrue to the patent owner is based on an unstated (but
mistaken) assumption that standards setting organizations (SSOs)
are agnostic when deciding among different patented technologies
competing for incorporation into their standard. But SSOs typically
make their incorporation determinations on the basis of an
extensive evaluation of which technology is superior in a number of
respects, including workability, ease of incorporation, and
efficiency. Under such circumstances an SEP owner would arguably be
entitled to some compensation for the success of the standard, and
not just the value of the patented technology she contributed to
it.
The 1020 Investigation (International Trade
Commission)
In our previous article, we discussed Administrative Law Judge
Essex's approach to the enforcement of SEPs, which he outlined in
his Initial Determination on Remand in International Trade
Commission Investigation No. 337-TA-613, Certain 3G Mobile
Handsets and Components Thereof (the 613 Investigation). In
its review of his determination, the Commission did not ultimately
comment on Judge Essex's findings regarding patent holdup and
patent holdup because it concluded that there was no violation of
Section 337 (i.e., no importation or sale after importation into
the United States of products infringing the complainant's patents)
and therefore no remedy for it to issue or to weigh against the
public interest. That is, Judge Essex's findings that the
complainant did not engage in patent holdup but that the
respondents did engage in patent holdout were rendered moot by the
Commission's conclusion that there was no violation. For the same
reason, the Commission did not comment on the viability of the
evidence-based framework Judge Essex elaborated for determining
whether there had been patent holdup or holdout.
The Commission has yet to touch on these questions directly, but
it did recently issue a statement that implicitly reaffirmed its
continuing jurisdiction over and its willingness to investigate
complaints of patent infringement when the patents at issue are (or
are alleged to be) essential to the practice of a standard.
In Certain Industrial Control System Software, Systems Using
Same, and Components Thereof, Inv. No. 337-TA-1020 (the 1020
Investigation), the Commission was asked to invoke the Early
Disposition Pilot Program to direct the presiding Administrative
Law Judge to determine whether the asserted patents are
standard-essential and therefore subject to mandatory licensing
obligations; if so, these would trigger public interest concerns
that may weigh against issuing an exclusion order even if the
patents are determined to be valid and infringed. The Commission
denied 3S's request to invoke the Early Disposition Pilot Program
in this way, explaining:
The Commission assesses the effect of potential remedies on the
statutory public interest factors following an affirmative
determination on violation - once the actual scope of the Section
337 violation is determined, including the scope of valid and
enforceable IP rights that are infringed (or other unfair acts) as
well as the scope of imported infringing articles involved. As
such, this issue is outside the scope of the Early Disposition
Pilot Program as the issue cannot be resolved at the beginning of
an investigation.
In so doing, the Commission implicitly affirmed that allegations
of infringement of SEPs will be investigated just like other
allegations of patent infringement made in Section 337 complaints,
and that owners of SEPs have the full investigative and
adjudicatory authority of the Commission behind them.
Open Questions
The Federal Circuit's opinion in CSIRO clarifies that
what matters for purposes of determining appropriate damages in
cases involving SEPs is the patents' status as standard-essential,
regardless of whether they are subject to any actual commitment to
license them on RAND terms. That said, it remains to be seen how
CSIRO will be applied in cases in which the asserted
patents' status as standard-essential is contested. It also remains
to be seen how CSIRO will be applied in cases in which
there is evidence that the patented technology was incorporated
into the standard at issue at least in part because it was superior
in some important respect to competing technology. Such evidence
would support an argument that the patent owner may be entitled to
some compensation for the success of the standard, and not just for
the incremental value of the patented technology.
At the same time, while the Commission's statement in the 1020
Investigation makes clear that the Commission will investigate
complaints of patent infringement brought by owners of SEPs on the
same footing as owners of other patents, what is not yet clear is
whether the Commission will ultimately issue an exclusion order for
the infringement of SEPs, and if so, under what circumstances.
One thing, however, is clear: the continuing uncertainty about
the scope and nature of the remedies available to the owners of
SEPs for the unauthorized use of their patented inventions fuels
continuing doubt about the wisdom of contributing patented
technology to the development of standards in the first instance.
The doubt is becoming increasingly acute in the face of an ever
more forceful resistance by the implementers of standards to pay
for the use of the patented technology incorporated into those
standards. Many owners of SEPs incorporated into the 4G/LTE
standard for example, have yet to be compensated for the use of
their technology, and there are very real concerns that the
development of the 5G standard will be stymied for want of
contributors. In the long run, unless we can fix and stabilize the
incentives for innovators to contribute their patented technology
to the development of standards - which means ensuring that the
innovators will be able to realize the fair value of their
contributions - we run the very real risk of impeding technological
progress for years to come.