Issues To Consider Before Monetizing Standard-Essential Patents By Sale Or Enforcement

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Companies that participate in standard setting organizations (“SSOs”) typically agree to license any patents essential to practice the standard on reasonable and non-discriminatory terms (“RAND” or, adding fair, “FRAND” terms). Often, those patents are submitted to a related group patent licensing effort, and licensed with other patents that are deemed essential to the standard. Alternatively, as with other intellectual property assets, patents that are subject to a FRAND commitment can be sold, transferred, or enforced through litigation.

However, FRAND patents are not always treated the same by the courts as ordinary patents. Are there risks to a patent owner if it decides to sell a FRAND patent and the purchaser later decides to ignore the FRAND commitment? Should a patent owner or its assignee be able to obtain injunctive relieve when bringing an infringement action to enforce its FRAND patent? What impact should the FRAND commitment have on potential damages? The developing law in this field is addressed below.

Considerations for Assigning Standard Essential Patents

The developing case law supports the view that FRAND commitments will not be trumped by the assignment of a standard-essential patent. Courts have recognized that the assignment of a patent does not alter any license or other rights conferred by the patentee. See, e.g., In re Access Beyond Technologies, Inc., 237 B.R. 32, 38 n. 5 (Bankr.D.Del.1999) (recognizing “that federal law regarding the assignment of patents makes patent assignments subject to the conditions of any licenses or other rights previously conferred by the patent holders”)(citing Waterman v. Mackenzie, 138 U.S. 252, 256 (1891);1 see American Dirigold Corp. v. Dirigold Metals Corp., 125 F.2d 446, 452 (6th Cir. 1942) (noting that “any person acquiring by assignment or license an interest in [a patent] takes title subject to prior assignments or licenses”). Accordingly, a patent holder’s rights have been found to be subject to any license agreement executed by its predecessor in interest. In re Access Beyond Technologies, Inc., 237 B.R. at 38.

Other district courts have recognized that a legally binding obligation that attaches to a patent will not be altered by an assignment. In re Novon Int’l., Inc., No. 98–CV–0677E, 2000 WL 432848, at *5 (W.D.N.Y. Mar. 31, 2000) (“While the assignee of a patent becomes vested with the rights of the patentee, he also takes subject to the legal consequences of the patentee’s previous acts, and subject to the licenses previously granted by assignor.”); Barnes & Noble, Inc. v. LSI Corp., 849 F.Supp2d 925, 932 (N.D.Cal. 2012) (“Novon states that not only licensing agreements, but also any of “the patentee’s previous acts” that have “legal consequences,” flow to the new assignee of a patent.”).

Another issue is the potential consequence to a patent seller if the patent buyer does not abide by such FRAND obligation. One case that suggests there could potentially be antitrust issues if the assignor and the assignee colluded to charge royalty rates in excess of the FRAND obligations for the assigned patent. Visio, Inc. v. Funai Elec. Co. Ltd., 2010 WL 7762624, at *2 (C.D.Cal. Feb. 3, 2010). The transfer of the patent from the assignor to the assignee does not in itself present harm to competition which would raise antitrust concerns. Id, at *4 (noting that “the transfer of a valid patent has no antitrust significance but merely shifts a lawful monopoly into different hands”). However, allegations that the assignor and assignee conspired to charge royalty rates in excess of the FRAND obligations could be sufficient to provide for an antitrust claim against the assignor. Id, at *6. In light of the case, patentees who sell their standard-essential patents should exercise caution in situations where they continue to be involved with the new patent owner on issues involving royalty rates.

Considerations for Enforcing Standard-Essential Patents

When attempting to enforce a standard-essential patent, the patent owner may face challenges seeking injunctive relief for the patent due to its FRAND obligations to the SSO. In one recent International Trade Commission case, however, the patentee was successful in securing injunctive relief for a standard-essential patent. In re Certain Electronic Devices Including Wireless Communication Devices, ITC Inv. No. 337-TA-794, Doc. No. 510578 (June 4, 2013). The Commission issued an exclusion order and cease-and-desist order despite the fact that the asserted patent was a standard-essential patent for the UMTS standard. Id. The Commission also rejected the argument that the patent owner forfeited any right it might otherwise have to obtain an exclusion or cease-and-desist order when it made its FRAND commitments for the standard-essential patents. In re Certain Electronic Devices Including Wireless Communication Devices, ITC Inv. No. 337-TA-794, Doc. No. 512742 (July 5, 2013).2

In contrast, the district courts have generally been reluctant to grant injunctive relief for the infringement of standard-essential patents, and the Federal Trade Commission has taken the position that injunctive relief should be disfavored when dealing with standard-essential patents. Each is addressed below.

District Courts Decisions Addressing Injunctive Relief for Standard-Essential Patents

In a recent district court case, one court held that injunctive relief is not available for infringing a standard-essential patent because monetary relief is an adequate remedy. Apple, Inc. v. Motorola, Inc., 869 F.Supp.2d 901 (N.D.Ill. 2012) The court held that:

“[G]iven [Motorola’s] FRAND [commitment], [the court would not be justified] in enjoining Apple from infringing the ‘898 [the standard-essential patent] unless Apple refuses to pay a royalty that meets the FRAND requirement. By committing to license its patents on FRAND terms, Motorola committed to license the ‘898 to anyone willing to pay a FRAND royalty and thus implicitly acknowledged that a royalty is adequate compensation for a license to use that patent.” Id. at 913-914.

In addition, although Apple rejected a prior Motorola FRAND license offer at a 2.25 percent royalty rate, the court held that it not excuse Motorola from complying with its FRAND obligations and did not mean that Motorola was entitled to an injunction rather than damages in the case. Id. at 914. The court held that in order for an injunction to be granted, monetary relief must be inadequate; however, “[a] FRAND royalty would provide all the relief to which a smartphone manufacturer would be entitled if it proved infringement of its patent, and thus it was not entitled to an injunction.” Id. at 915

In another district court case, the court rejected injunctive relief when the patentee did not offer to license the standard-essential patent. RealTek brought an action against the owners of standard-essential patents, alleging that they breached their obligations to license the patents on RAND terms by filing a complaint with the ITC. RealTek Semiconductor Corp. v. LSI Corp., 2013 WL 2181717 (N.D. Cal. 2013). The court granted a preliminary injunction against enforcement of a potential ITC exclusion order based on infringement of the standard-essential patents, holding that the patent owners breached their RAND licensing obligation by seeking an ITC exclusion order without previously offering a license on RAND terms. Id. at *10. The court reasoned that “the act of seeking injunctive relief (here, at the ITC before proposing a RAND license to RealTek) is inherently inconsistent and a breach of defendants’ promise to license the patents on RAND terms.” Id. at *6. The court noted, however, that injunctive relief may be warranted when an accused infringer of a standard-essential patent outright refuses to accept a license on RAND terms. Id. at *7.

Obtaining monetary relief for the infringement of standard-essential patents may likewise present challenges. In a recent case, one court limited the monetary relief available to the owner of standard-essential patents to less than ten cents per unit. See In re Innovatio IP Ventures, LLC Patent Litigation, No. 11-cv-9308 (D. N. Ill. October 3, 2013). After concluding that the patents-in-suit were essential to practice the 802.11 standard and were subject to RAND obligations, the court determined that the RAND rate to be paid for licensing the patents-in-suit was 9.56 cents per unit, much less than the several dollars per unit sought by the patent owner. Id.

The Federal Trade Commission Opposes Injunctive Relief for Standard-Essential Patents

The Federal Trade Commission has become active in policing standard-essential patents subject to FRAND commitments. In the recent investigation In the matter of Motorola Mobility and Google Inc., FTC File No. 1210120 (January 3, 2013), the FTC indicated that it did not favor injunctive relief for standard-essential patents. The complaint alleged that Motorola Mobility engaged in unfair methods of competition and unfair practices by breaching its commitments to SSOs to license its standard-essential patents on FRAND terms. The complaint further alleged that Google violated its FRAND commitments by seeking to enjoin and exclude willing licensees of its FRAND-encumbered patents.

The FTC ruled that Google and Motorola violated Section 5 of the FTC Act. The FTC held that Google and Motorola were prohibited from obtaining or enforcing injunctive relief on a FRAND patent unless they made qualified offers, under FRAND terms, to the potential licensees against whom injunctive relief was sought. In the matter of Motorola Mobility and Google Inc., FTC File No. 1210120, at 7 (January 3, 2013). Google and Motorola were prohibited from filing a claim seeking injunctive relief based on a FRAND patent against any potential licensee who had not entered into an agreement pursuant to the procedure outlined in the order. Id. at 7. However, the FTC noted that if the potential licensee refused to license the FRAND-encumbered patents, then Google and Motorola may then seek an injunction. Id.

The FTC came to a similar conclusion on a previous occasion. In the investigation In the matter of Robert Bosch GmbH, FTC File No. 1210081 (November 26, 2012), the FTC complaint was directed to Bosch’s acquisition of SPX Service Solutions (“SPX”), the leading competitor with respect to air conditioning recycling, recovery, and recharge (“ACRRR”) products. SPX had previously declared to an auto industry SSO that it believed it held patents essential to the practice of two SAE standards for ACRRR equipment, and that it would agree to license these patents on FRAND terms. However, at the same time, SPX continued to pursue injunctive relief against competitors in patent litigation involving these standard-essential patents. The FTC ruled that Bosch violated Section 5 of the FTC Act, and held that Bosh was required to deliver “a written, unconditional, unilateral, irrevocable offer for a royalty-free, fully-paid-up, irrevocable, perpetual, non-exclusive license” to the patents essential to practice the SAE standards to competitors in the ACRRR business. Id. at 13.

Conclusion

There are different risks applicable to the assignment and enforcement of standard-essential patents due to FRAND commitments. Owners of FRAND-encumbered patents should consider the availability of injunctive relief -- including in a particular forum -- before bringing an action to enforce a FRAND-encumbered patent. Likewise, patent owners should carefully word transactional documents when selling or otherwise transferring FRAND-encumbered patents to a third party in order to be clear that the seller will abide by FRAND commitments, and will be responsible for any failure to do so. 

1Waterman was cited for the general proposition that "the transfer of a particular right or interest under a patent is an assignment or a license does not depend upon the name by which it calls itself, but upon the legal effect of its provisions."

2The United States Trade Representative, acting under the President’s authority, subsequently issued a letter to the Commission disapproving of the Commission’s determination to issue an exclusion order and a cease and desist order, effectively vetoing the orders. See Letter from Ambassador Michael B.G. Froman, USTR, to Chairman Irving A. Williamson, ITC (August 3, 2013) here

*This article first appeared in The AIPLA Antitrust News October 2013 issue, as well as the Bloomberg BNA November 2013 issue.