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Recent Decision Highlights Complex Interplay Between Standard-Essential Patents and FRAND Licensing Terms

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Patents confer upon the owner of the patent the right to exclude others from making, using, offering for sale, selling or importing the invention for a set period of time.  Tensions arise when patented technologies are included as part of industry technical standards, creating standard-essential patents that are required for system interoperability for certain technologies.  In such cases, patent owners can make contractual commitments to an industry standard-setting organization (SSO) to license technology on fair, reasonable, and non-discriminatory terms (known as FRAND or RAND) to promote such interoperability and provide lower product costs and increased price competition. 

Standard-essential patents, however, pose the problem of granting increased market power to the holders of the patent.  For example, once a patent is declared to be an essential part of an international standard in a particular industry, use of the patent is effectively required and the holder of the standard-essential patent could demand unreasonably high royalties for the use of the patent, thus creating a phenomenon known as a “patent holdup.” 

In order to avoid a “patent holdup” — and in exchange for a hand in setting the industry standard — members of SSOs must agree to abide by the organization’s bylaws.  These bylaws generally require that members must license any intellectual property rights included in a standard on FRAND terms.  The agreement to abide by FRAND terms, however, is not a license in and of itself, and a party seeking to use patented technology must still come to its own agreement with a patent holder as to what constitutes FRAND licensing terms before it uses the protected technology.   The inability of parties to reach agreement on  FRAND terms — and the high stakes involved in certain industries – have  sparked a flurry of recent litigation not only in this country, but in other jurisdictions across the world. 

In several recent cases in the United States, courts have taken divergent approaches to FRAND disputes.  For example, in Apple, Inc. v. Motorola, Inc., Judge Posner of the United States Court of Appeals for the Seventh Circuit, sitting by designation on the U.S. District Court for the Northern District of Illinois, denied injunctive relief to a plaintiff alleging infringement of a standard-essential patent.  The court held that it would not “be justified in enjoining Apple from infringing the [patent at issue] 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 [patent] 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.”  2012 WL 2376664 (N.D. Ill. 2012) at *12. 

Similarly, In eBay Inc. v. mercExchange, L.L.C., 547 U.S. 388, 396-97 (2006), Justice Kennedy, in a concurring opinion, signaled his view that injunctions against patent infringement “may not serve the public interest” where “the patented invention is but a small component of the product the companies seek to produce and the threat of an injunction is employed simple for undue leverage in negotiations.” 

Another strategy for a plaintiff seeking to enforce FRAND terms for technology is to assert a breach of contract claim against the patent owner.  This approach was taken by Microsoft in litigation against Motorola in the Western District of Washington and the International Trade Commission (ITC).  The District Court case arose when Microsoft filed a complaint seeking contract damages for Motorola’s breach of FRAND licensing terms after Motorola asked Microsoft for 2.25% royalties for licenses of certain of Motorola’s standard-essential products for various Microsoft products, including the Xbox.  Alleging that these terms were unreasonable, Microsoft’s based its breach claim on the grounds that it was a third party beneficiary of Motorola’s contractual commitments to the IEEE, which was the relevant SSO for the technology in question. 

In an interlocutory appeal, the Ninth Circuit affirmed the district court’s injunction against Motorola pursuing relief in Germany related to the German patents on the ground, inter alia, that the anti-suit injunction did not offend international comity because Microsoft’s contract claim in United States District Court could resolve licensing of patents under FRAND terms on a worldwide basis, as opposed to the piecemeal approach taken by Motorola.  See Microsoft Corp. v. Motorola, Inc., 2012 U.S. App. LEXIS 20359 (9th Cir. Sept. 28, 2012). 

In a related case, the ITC in early 2012 granted Microsoft’s motions for summary adjudication, holding that Motorola’s RAND commitments were enforceable promises and that Microsoft, as an industry participant making the standard compliant products, had standing to assert breach as an intended third-party beneficiary.  Certain Gaming & Entm’t Consoles, Related Software & Components Thereof, USITC Inv. No. 337-TA-752 (April 23, 2012). 

Although the fate of Microsoft’s contract claims against Motorola is as yet undecided, it should be noted that third-party beneficiary claims in the FRAND context have not always been successful because plaintiffs have been found not to have standing and had difficulties in proving damages.  In the Microsoft case, the plaintiff’s standing was essentially admitted by defendant – a circumstance that may not be present in other cases.  Litigation over the meaning of FRAND terms is still very much a developing area of intellectual property law and is likely to gain increased scrutiny as incorporating patented technologies become even more prevalent.