5. Transfers of Patents with Licensing Commitments

5.1 Introduction

A number of technical standards have encountered instances in which standard-essential patents (SEPs) subject to the owner’s licensing assurance have been transferred to a third party. As noted earlier, patents and patent portfolios are becoming more frequently transferred assets. In turn, it will be increasingly important and complex for standard-setting organizations (SSOs) and regulators to address transfer issues in the context of FRAND-encumbered standard-essential patents (SEPs).

Patents may be transferred for several reasons. The patent owner may be no longer active in an area of technology, seek to recognize monetary value for its R&D investment through patent sales, exchange patents or patent portfolios with other entities, be insolvent or in bankruptcy proceedings leading it to sell assets, or may have other purposes. Buyers may acquire patents for any number of reasons including for defensive purposes, financial opportunities in owning patents, or a desire to ensure access for themselves and others to the patented technology, among others.

As SEPs are transferred, the following issues arise. First, does a licensing commitment or assurance made by an SSO participant remain valid for implementers after the SEP is transferred to another party? Second, would specific licensing terms and conditions offered by a prior owner apply to a successor-in-interest? Third, will the new owner be able to enforce the SEP against implementers of the standard without adhering to the fair, reasonable, and nondiscriminatory (FRAND) constraints imposed by the prior owner’s licensing commitment? Would injunctive relief be available to the transferee and would an antitrust, estoppel, laches, or other defense be available against a transferee? We address these issues in this chapter by considering the interests of the patent transferor, transferee, and future implementers.

Depending on the issue, considerations such as the firm size, market share, prior relation to the transferor, and nature of the transferee’s business may be involved. Uncertainty as to patent transferee rights and the expectations of standards implementers can undermine a vibrant standards environment, a risk



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5. Transfers of Patents with Licensing Commitments 5.1 Introduction A number of technical standards have encountered instances in which standard-essential patents (SEPs) subject to the owner’s licensing assurance have been transferred to a third party. As noted earlier, patents and patent port- folios are becoming more frequently transferred assets. In turn, it will be in- creasingly important and complex for standard-setting organizations (SSOs) and regulators to address transfer issues in the context of FRAND-encumbered standard-essential patents (SEPs). Patents may be transferred for several reasons. The patent owner may be no longer active in an area of technology, seek to recognize monetary value for its R&D investment through patent sales, exchange patents or patent portfolios with other entities, be insolvent or in bankruptcy proceedings leading it to sell assets, or may have other purposes. Buyers may acquire patents for any number of reasons including for defensive purposes, financial opportunities in owning patents, or a desire to ensure access for themselves and others to the patented technology, among others. As SEPs are transferred, the following issues arise. First, does a licensing commitment or assurance made by an SSO participant remain valid for imple- menters after the SEP is transferred to another party? Second, would specific licensing terms and conditions offered by a prior owner apply to a successor-in- interest? Third, will the new owner be able to enforce the SEP against imple- menters of the standard without adhering to the fair, reasonable, and non- discriminatory (FRAND) constraints imposed by the prior owner’s licensing commitment? Would injunctive relief be available to the transferee and would an antitrust, estoppel, laches, or other defense be available against a transferee? We address these issues in this chapter by considering the interests of the patent transferor, transferee, and future implementers. Depending on the issue, considerations such as the firm size, market share, prior relation to the transferor, and nature of the transferee’s business may be involved. Uncertainty as to patent transferee rights and the expectations of standards implementers can undermine a vibrant standards environment, a risk 81

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82 Patent Challenges for Standard-Setting in the Global Economy recognized by competition regulators, a number of SSOs, and other commenta- tors.1 Some regulatory agencies have “work-in-progress” proposals aimed at minimizing potential competition problems surrounding FRAND-encumbered SEP transfers. Renata Hesse, Deputy Assistant Attorney General of the Antitrust Division, outlines the following considerations in a speech, “Six ‘Small’ Pro- posals for SSOs Before Lunch,” at the ITU-T Patent Roundtable in Geneva, Switzerland in October 2012: … I would like to identify for you some policy choices that standards bod- ies could implement which we believe would promote competition among implementers of the standard, potentially benefiting consumers around the world. A standards body could: … Make it clear that licensing commitments made to the standards body are intended to bind both the current patent holder and subsequent pur- chasers of the patents and that these commitments extend to all imple- menters of the standard, whether or not they are a member of the standards body… The Federal Trade Commission (FTC) took a similar position in the FTC v. N-Data case.2 In the wake of that case, some leading SSOs revised their IPR policies to include a provision whereby the SEP holder must take certain steps to bind its successor-in-interest to the former’s FRAND licensing commitment.3 In assessing this issue it is important to balance the interests of imple- menters, patent transferors and transferees, and other potential stakeholders. If the pendulum were to swing too far towards implementers, patent holders might be discouraged from joining an SSO, leading to more instances in which SEPs are not being covered by any commitment. Patent holders might also avoid in- vesting and innovating in standards, adversely affecting the technical values of specifications. Moreover, there are concerns that overly restricting the ability to enforce patents can reduce the economic value of SEPs and hamper their trans- fer. If the pendulum swings too far in the other direction, in favor of SEPs holders, then firms that have invested in implementing the standard based in part on FRAND licensing commitments could be at risk of patent hold-up, including via injunctive relief, by a new SEP owner not encumbered by the existing li- 1 See EU Horizontal Cooperation Guidelines, Section 285, which strongly recom- mends “a requirement on all participating IPR holders who provide such a commitment to ensure that any company to which the IPR owner transfers its IPR (including the right to license that IPR) is bound by that commitment, for example through a contractual clause between buyer and seller.” 2 Decision and Order, In re Negotiated Data Solutions LLC, FTC File No. 051-0094. 3 See, for example, the Guidelines for Implementation of the Common Patent Policy of ITU-T/ITU-R/ISO/IEC and the IEEE Patent Policy, 2012.

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Transfers of Patents with Licensing Commitments 83 cense terms or commitment. This would undermine the intended effect of FRAND licensing commitments. There is a further possibility that a SEP holder could transfer the patent to a new owner with the intentions of circumventing the FRAND commitment. Ideally, SSO policies should clarify the nature of rights and obligations transferred with an SEP in a manner that promotes widespread implementation of standards without creating additional transaction costs that could impede the otherwise efficient transfer of patent rights. To achieve that balance, SSOs need to consider both the legal implications of their IPR policies and their practical effects on different stakeholders. The next section discusses recent legal cases that involve the status of li- censing commitment after transfer and ancillary issues. The third section out- lines approaches aimed at continuing FRAND undertakings after a committed SEP is transferred (Kesan and Hayes, 2012). 5.2 Cases Regarding Continuing License Commitments In one case, National Semiconductor Corp. (NSC) participated in develop- ing the IEEE’s fast Ethernet Standard (IEEE 802.3).4 NSC submitted a letter to the IEEE outlining how it would license all interested implementers for a set fee of $1000 as an incentive to encourage selection of NSC’s technology for the standard. SEPs owned by NSC were transferred several times and a downstream owner, Negotiated Data Solutions, or N-Data, advised prospective licensees that it would license the patents on FRAND terms, pursuant to the IEEE policy. The N-Data terms differed from those promised by the original patent holder, result- ing in a much higher cost to implement the standard. When the new terms were announced, implementers complained that they were inconsistent with the FRAND licensing commitment. N-Data's employees included former personnel of NSC who were presumably aware of the original licensing terms. The matter was considered by the FTC, which reviewed the facts and en- tered into a consent decree with N-Data based on the specific facts of the case. Under the decree, N-Data was bound only to license on FRAND terms but also to honor the licensing conditions originally published by NSC.5 In a 3-2 deci- sion, the FTC majority found that N-Data’s efforts to charge higher rates, after the standard incorporating the NSC technology was widely adopted, in part out of reliance on the $1000 commitment, was an unfair method of competition un- der Section 5 of the FTC Act. 4 In re Negotiated Data Solutions LLC, FTC File No. 051-0094. 5 No specific finding was made as to whether the royalty requested by N-Data was consistent with some definition of FRAND.

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84 Patent Challenges for Standard-Setting in the Global Economy The FTC observed in its public statement The Complaint in this matter alleges that N-Data reneged on a prior licens- ing commitment to a standard-setting body and thereby was able to in- crease the price of an Ethernet technology used by almost every American consumer who owns a computer… But if N-Data’s conduct became the accepted way of doing business, even the most diligent standard-setting organizations would not be able to rely on the good faith assurances of re- spected companies. The possibility exists that those companies would exit the business, and that their patent portfolios would make their way to oth- ers who are less interested in honoring commitments than in exploiting in- dustry lock-in…There is little doubt that N-Data’s conduct constitutes an unfair method of competition… We also have no doubt that the type of behavior engaged in by N-Data harms consumers. The process of estab- lishing a standard displaces competition; therefore, bad faith or deceptive behavior that undermines the process may also undermine competition in an entire industry, raise prices to consumers, and reduce choices. The dissent of FTC Chair Majoras in the N-Data case observed that the subsequent patent owners had, after the standard was approved, submitted their own licensing statements to IEEE that did not reflect the $1000 licensing fee NSC had offered to all implementers. (Majoras, 2012).6 However, IEEE had received and published these new licensing statements without any objections or caveats. Also, as the dissent noted, “from the time National submitted its letter of assurance in 1994 and at least until 2002, some patent holders changed or clarified the terms of their letters of assurance – even after the relevant standard was approved.”7 (Majoras, 2012). This dissent questioned whether there was sufficient evidence to support a requisite intent by N-Data: “Even if N-Data were motivated by a desire to strike a better bargain than National made several years earlier, that alone should not be considered a competition-related offense.” The dissent further stated that the FTC’s discretion in applying Section 5 should be “bounded with limiting principles,” for example, a linkage to antitrust law, which is an issue that is still under debate. Majoras also observed that, while the transfer was pending, during the time NSC’s original licensing terms were wide- ly available, many implementers chose to operate as infringers without taking a license, in all likelihood because the stated fee ($1000) was so low as to be less than the related transaction costs of executing a formal license. In Rembrandt v Harris, SEPs owned by AT&T and subject to a FRAND license assurance, were transferred multiple times, ending up with Rembrandt, a 6 Order at http://www.ftc.gov/os/caselist/0510094/080122do.pdf and dissent at http:// www.ftc.gov/os/caselist/0510094/080122majoras.pdf. 7 Id.

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Transfers of Patents with Licensing Commitments 85 patent licensing entity.8 Although Rembrandt initially questioned whether it was subject to AT&T’s commitment, it later acknowledged that it was bound to grant FRAND licenses for patent claims essential to the standard because it had actual or constructive knowledge of the commitment when it acquired the SEPs. The defendant sought a FRAND license and a determination of FRAND terms, although it did not concede that the patent claims were “essential.” The lower court initially concluded that a FRAND license must be offered. However, this decision was revoked when a multi-district litigation put the patent’s validity at issue and the district court expressed concern over the parties’ conduct in the case. The issue of whether a transferee is bound by the FRAND commitment made by a prior owner has also arisen in connection with the acquisition of pa- tent portfolios that include FRAND-encumbered SEPs. In 2011, insolvent Cana- dian company Nortel proposed the sale of numerous assets, including approxi- mately 4000 patents, in the bankruptcy proceeding on a “free and clear” basis. A number of companies, together with IEEE, filed objections to the “free and clear” nature of the sale, noting that some of the patents being auctioned were subject to unspecified SSO licensing commitments. Ultimately, a group of com- panies, including Apple, RIM (now BlackBerry), Microsoft, Sony, and Ericsson, formed an entity they called Rockstar Bidco LP to acquire the patents and agreed to abide by Nortel’s standards licensing commitments.9 Not long after, Google acquired Motorola Mobility, and its sizable patent portfolio, including numerous FRAND-encumbered SEPs. Google similarly stated that it would agree to be bound by Motorola’s commitments. The U.S. Department of Justice examined both the Nortel and Motorola Mobility situa- tions and found that the acquisitions were not likely to substantially lessen com- petition, recognizing both the business importance of patent sales to transferors and transferees and the importance of standards licensing commitments being respected after FRAND-encumbered SEPs are transferred.10 8 Rembrandt Tech. LP. v. Harris Corp., 2008 Del. Super. LEXIS 400. Del. Super., 2008. 9 The recent bankruptcy of Kodak also involved SEPs. In the bankruptcy Sales Agreement, SSO commitments are described as encumbrances to which the sale is sub- ject as follows: “The promises, declarations and commitments granted, made or commit- ted, in each case, in writing by Kodak to standards-setting organizations (“SSOs”) con- cerning any of the Assigned Patents pursuant to the written membership agreements, written by-laws or written policies of SSOs in which Kodak was a participant, in each case solely to the extent that (a) Kodak is required pursuant to such promises, declara- tions or commitments or applicable non-bankruptcy law to bind the Person to whom Ko- dak transfers the Assigned Patents to such promises, declarations or commitments, and (b) such promises, declarations or commitments constitute interests in property under applicable U.S. federal bankruptcy Law.” 10 As noted in a speech by then acting DOJ Assistant Attorney General Joseph Way- land, “[t]he commitments made by Apple and Microsoft substantially lessened the Anti-

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86 Patent Challenges for Standard-Setting in the Global Economy In Europe, Robert Bosch GmbH transferred FRAND-committed patents to IPCOM, a patent-holding company, in circumstances where continuation of the licensing assurance made by Bosch was at issue. IPCOM had been seeking in- junctions in various jurisdictions against Nokia, HTC, and Deutsche Telekom with mixed results. In the Nokia dispute, Bosch and Nokia had been negotiating a license for Bosch’s FRAND-encumbered SEPs from 2003 to 2007, before Bosch assigned its mobile patents to IPCOM (ipeg, 2011). Ultimately, under the influence of the European Commission’s Competition Directorate, IPCOM de- clared a FRAND commitment in 2009, but some litigation is still pending. In yet another case, a major DRAM manufacturer, Qimonda, filed for in- solvency in Germany. The Qimonda administrator sent letters to the firm’s exist- ing cross-license counterparties terminating those agreements, arguing that un- der German law the administrator is authorized to accept or reject executory contracts in its discretion. In addition, the administrator sought to sell U.S. pa- tents owned by Qimonda, including patents disclosed by Qimonda to the SSO JEDEC with a FRAND license assurance, “free and clear” of encumbrances. The administrator asked the U.S. court not to apply U.S. law allowing patent licensees to reserve their rights, but to apply comity and follow German law, which, it alleged, did not include a license preservation right. The Qimonda case questioned not only whether ongoing license assuranc- es to SSOs were at risk but also whether existing license agreements might be at risk in a non-U.S. bankruptcy.11 At the time of this committee’s report, after District Court remand, a U.S. bankruptcy court supported maintenance of licen- see rights, observing that allowing termination would violate U.S. public policy, which allows IP licensees to preserve their rights, and would not adequately protect the interests of the parties as required by U.S. bankruptcy law. The case is on appeal to the U.S. Court of Appeals for the Fourth Circuit. A related issue arises when a transferee does not know that patents it ac- quires may contain SEPs attached to particular standards, may bear FRAND licensing commitments, or may be restricted by SSO policies. In the absence of actual or at least constructive knowledge of prior specific license terms, as in the N-Data case, it is not clear whether a transferee is bound to fulfill such terms. Moreover, in the absence of explicit price commitments or generally accepted principles for FRAND royalty determination, it is not clear whether a transferee is bound to terms and conditions that would be FRAND for the transferor, who may have different incentives and business interests than the transferee. In another situation, the owner of a portfolio of SEPs for a standard might sell them separately to different transferees, which could result in implementers trust Division’s concerns about potential anticompetitive use of F/RAND-encumbered standard-essential patents. The Antitrust Division observed that Google’s commitments did not provide the same direct confirmation of its F/RAND-encumbered standard essen- tial patent licensing policies.” 11 In re Qimonda, 470 B.R. 374 (E.D. Va., 2012).

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Transfers of Patents with Licensing Commitments 87 paying more for the same collection of patents than when the single owner li- censed them as an aggregate. These and other such situations may be addressed to some extent by an SSO’s policy and the restrictions it places on its FRAND- encumbered SEP holders. However, their resolution likely will also depend on specific facts. Whether an SSO sees these scenarios as commercial considera- tions for parties to address or as sufficiently critical and likely topics to warrant SSO guidance would be up to the SSO and its members. A further question worth brief discussion is whether antitrust-related con- cerns may impact the transfer of a FRAND-encumbered SEP. In the competition area, regulators typically consider a patent holder’s market power in determining whether an antitrust violation has occurred. While merely having a patent does not necessarily confer market power,12 the European Commission’s Directorate- General for Competition has held that “[i]t suffices to stress that market power can be conferred by a single SEP” when the standard constitutes a barrier to entry.” 13 The U.S. Department of Justice concurs that SEPs can confer market power, noting that In particular, the agencies found that when a standard incorporates patent- ed technology owned by a participant in the standard-setting process and that standard becomes established, switching in some cases becomes diffi- cult and expensive, and that the particular technology may gain market power (Wayland, 2012). The case of In re Proxim involves the intersection of antitrust and bank- ruptcy.14 Bankrupt Proxim sought to insulate the purchaser in a bankruptcy sale of patents, including SEPs, from allegations that Proxim violated the antitrust laws by manipulating a standard and seeking non-FRAND royalties. The bank- ruptcy court approved the sale, rejecting the FTC’s objection that “the sale [should] not be free and clear of the Commission’s regulatory and enforcement powers.”15 The Bankruptcy Court noted that the sale would not be possible un- less the new owners would be allowed to take the patents free from any concerns about Proxim’s conduct in standardization activities. Whether a prior owner’s inaction or statements, such as a promise to li- cense on specified terms or a posting that it will not assert SEPs, can attach to a 12 Illinois Tool Works Inc., et al., Petitioners v. Independent Ink, Inc., 547 U.S. 126 (2006). 13 Case No COMP/M.6381 Google/Motorola Mobility, Regulation (EC) No 139/2004 Merger Procedure (2012). http://ec.europa.eu/competition/mergers/cases/decisions/m63 81_20120213_20310_2277480_EN.pdf. 14 Case No. 05-11639 (pJW) (Bankr. Ct Del 2005). 15 Case No. 05- 11639 (pJW) (Bankr. Ct Del 2005).

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88 Patent Challenges for Standard-Setting in the Global Economy SEP successor-in-interest may also be governed by traditional law on estoppel, laches, and detrimental reliance and would depend on the facts in question.16 Likewise, whether patent exhaustion or an implied license defense in which cir- cumstances authorize a party to use patented technology without being open to an infringement charge by the transferor, may apply against a SEP successor-in- interest may be governed by the facts and existing case law as well.17 5.3 SSO Approaches to Sustaining Licensing Commitments Some SSOs look beyond traditional contract and competition remedies to continue implementer access to FRAND licenses after a FRAND-encumbered SEP is transferred and to prevent a transferee from asserting SEPs free from the FRAND commitment against implementers. Akin to the notion of a servitude or covenant that “runs with the land,” some have considered a licensing commit- ment that “runs with the patent.” For example, it has been proposed that licens- ing commitments should be interpreted as encumbrances that bind all successors in interest. How that premise will be viewed by a court, and how close the real property analog will be viewed with respect to patents, which are deemed under statute to “have the attributes of personal property” (35 U.S.C. 261) are un- known and speculative (Kesan and Hayes, 2012).18 Although the servitude theory is uncertain, it should be noted that a num- ber of courts and national laws have recognized that patent assignments are sub- 16 A.C. Aukerman Company v. R.L. Chaides Construction Co., 960 F.3d 1020, 1032 (Fed. Cir.1992). See also Radio Systems Corp. v. Lalor, No 2012-1233 (Fed. Cir. 2013) in which a patent holder sent an alleged infringer a letter and took no action for 4 ½ years during which there was detrimental reliance – equitable estoppel was validly raised by the letter recipient’s successor. 17 See TransCore LP v. Electronic Transaction Consultants Corporation, 563 F3d 1271(5th Cir 2009) (covenant not to sue was enforced by successor) and Rembrandt Data Techs., LP v. AOL, LLC et al., Case No. 10-1002 (Fed. Cir. 2011) (patent rights exhaust- ed despite a maze of patent transfers), Pratt v. Wilcox Mfg. Co., 64 F. 589 (N.D. Ill. 1893) (finding that a corporate successor was bound by its predecessor’s agreement not to sue another party). See also Wang Laboratories Inc. v. Mitsubishi Electronics America, Inc., 103 F.3d 1571 (Fed. Cir. 1997) (implied license where Wang had entered into an agree- ment with Mitsubishi to manufacture and then sell Wang-developed SIM cards back to Wang, where Wang did not advise Mitsubishi or JEDEC SSO of Wang’s patent applica- tions). 18 Notwithstanding the novel theory put forward in the Kesan-Hayes presentation, the weight of authority and precedent appears to be against the imposition of servitudes on personal property. See, e.g., Thomas W. Merrill & Henry E. Smith, Optimal Standardiza- tion in the Law of Property: The Numerus Clausus Principle, 110 Yale L.J. 1, 18 & n.68 (2000) (“American precedent is largely, if not quite exclusively, in accord” with the prin- ciple that “one cannot create servitudes in personal property”); and Glen O. Robinson, Personal Property Servitudes, 71 U.Chi. L.Rev. 1449, 1445 (2004).

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Transfers of Patents with Licensing Commitments 89 ject to existing licenses, although this is not necessarily the case in all jurisdic- tions.19 Cascading obligation A common approach, adopted by a number of SSOs, to continuing licens- ing availability after SEP transfer involves a “cascading” contractual obligation, by which a patent holder making a FRAND or other licensing commitment is required to bind its SEP transferee to the applicable licensing commitment. Some policies may be interpreted as covering an unspecified number of succes- sive transfers because the new owner agrees to be bound by the same commit- ment under the terms of the relevant SSO’s IPR policy. This, in turn, imposes the cascading requirement on those agreeing to the commitment. IEEE provides that the original patent owner’s transferee notifies and binds its transferees, meaning that their policy cascades. The common patent policy of ITU/ISO/IEC further provides for the pass- ing down of the licensing commitment with a SEP transfer:20 In the event a Patent Holder participating in the work of the Organizations assigns or transfers ownership or control of Patents for which the Patent Holder reasonably believes it has made a license undertaking to the ITU/ISO/IEC, the Patent Holder shall make reasonable efforts to notify such assignee or transferee of the existence of such license undertaking. In addi- tion, if the Patent Holder specifically identified patents to ITU/ISO/IEC, then the Patent Holder shall have the assignee or transferee agree to be bound by the same licensing commitment as the Patent Holder. If the Patent Holder did not specifically identify the patents in question to ITU/ISO/IEC, then it shall use reasonable efforts (but without requiring a patent search) to have the assignee or transferee to agree to be so bound. By complying with the above, the Patent Holder has discharged in full all of its obligations and liability with regards to the licensing commitments after the transfer or as- signment. This paragraph is not intended to place any duty on the Patent Holder to compel compliance with the licensing commitment by the assign- ee or transferee after the transfer occurs. 19 See, e.g., Spindelfabrik Suessen-Schurr Stahlecker & Grill v. Schubert & Salzer Maschinenfabrik AG, 829 F.2d 1075 (Fed. Cir. 1987) (“the viewpoint of the law in this country [is that] a patent assignee under normal circumstances would be bound as a mat- ter of law by its assignor’s prior grant of a license to a third party”) (quoting court be- low). See also German Patent Law Section 15(3) and Japanese Patent Law. 20 Guidelines for Implementation of the Common Patent Policy for ITU-T/ITU-R/ISO/ IEC 23/04/02.

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90 Patent Challenges for Standard-Setting in the Global Economy Arguably, under these provisions the original SEP holder who binds its successor-in-interest is not responsible for the conduct of that new owner, but there is some uncertainty about this view. Statements within SSO policies that the original participating SEP owner obligates or ensures that future successors will comply with the licensing assurance or that it will provide appropriate pro- visions to achieve that end, could mean that the transferor is not released from this responsibility. In many instances, SSOs are simply silent on whether there is a discharge of the original patent holder. To address any potential risks in this context, a SEP owner who participates in an SSO might consider, in drafting the SEP transfer agreement, retaining the right to comply with licensing commit- ments it has made. Special questions related to cascading obligations may arise where SSOs provide for blanket license assurances and where SEPs may or may not have been specifically disclosed to the SSO. That is, SSO members may commit to licensing, on a FRAND or FRAND-RF basis, all patents that contain essential patent claims, whether or not they have been individually disclosed or declared to the SSO.21 The ITU/ISO/IEC common policy specifically addresses unidentified SEPs. Briefly, for those SEPs that are identified, the patent holder binds its transferee to the same licensing commitment for those specific patents that are disclosed. For those that are not identified, an arguably lesser duty applies and the patent holder must use reasonable efforts to bind the transferee to the commitment for any SEPs that are essential to the standard in question. The policy suggests that this is ac- complished through a contractual provision in the transfer agreement binding the successor to any licensing commitment the original SEP holder has made for any SEPs being transferred.22 An SSO policy featuring the cascading approach may also face the ques- tion of how an implementer may seek a FRAND license if there is a break in the chain of commitment downstream. In this case, an implementer should be able to challenge the party that is at fault on one or both of two grounds – first, that he is not complying with the obligation to license the SEP on FRAND terms, or second, that he is not complying with the requirement to bind the successor-in- interest to the FRAND commitment. However, the party at fault may not be readily determined or found. If located, it may be held accountable to either pro- vide a license or compensate the injured party for provable damages. However, once the patent is transferred, that party may not have the right to grant licenses. One potential problem in locating the current owner of a SEP is that, under current U.S. law, patent transfers need not be recorded and the real owner may 21 While some SSOs allow for blanket assurances, others (like ETSI) focus on declared SEPs. 22 The relevant provision in the Guidelines for the Implementation of the Common Pa- tent Policy currently is under revision to clarify that the holder of a FRAND-encumbered SEP must bind its successor-in-interest and that this obligation will cascade to future owners.

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Transfers of Patents with Licensing Commitments 91 be unidentified. SSOs and others in the standards community concerned with patent transfer should support legislative, regulatory, or other measures to re- quire recordation of patent transfers.23 The committee recognizes that some parties have raised concerns about mandatory patent transfer recordation. One question involves the burden and cost such a requirement would impose. In this regard, the USPTO provides a simple “check the box” and “attach the transfer document” electronic filing pro- cess. While the fee for USPTO recording has been nominal at $40, a revision to the USPTO fee schedule will eliminate the fee totally for recording a transfer electronically, starting January 1, 2014.24 Some have suggested that recording might be more convenient if linked to payment of periodic fees to maintain the patent, but that would leave several multi-year periods during which ownership could change hands many times without actual ownership being revealed to standards implementers, thereby undermining transparency. Others have raised concerns about how much information may be sought in the recordation process. At this time, the committee proposes that only the transferees be identified. In addition, the committee recognizes that it would be helpful for transparency to identify the “real party in interest.” This might entail more in-depth questions about corporate structure, however, the committee con- cludes that the gains in transparency will benefit the standardization process. Hence, the committee supports legislation or regulation, especially in the United States, under which recordation of transferees and real parties in interest will be free of charge and informative about patent ownership. Such policies would require recordation of all assignments to achieve transparency. Like all other mandates, this requirement could have unintended consequences, including en- couragement of even more opaque ownership arrangements. To the extent pos- sible, such consequences should be anticipated in drafting the regulation statute. Some observers have proposed that SSOs take further steps to track trans- fers, such as establishing their own transfer registry. However, the costs and duplication of efforts in establishing one or more recordation programs and maintaining responsibility for updates and the added burdens placed on mem- bers in managing and monitoring SEPs and on SSOs in securing information as SEPs are successively transferred would make such measures difficult to im- plement. The committee notes that when SSOs publicly post a membership list it can assist implementers in appreciating which patents might be subject to FRAND commitments and what risks there may be regarding patents needed to implement a standard. In the current context, implementers discovering that a patent has been transferred to an SSO member with a FRAND commitment can be helpful. 23 This issue is discussed further in Chapter 7. 24 See 4226 Federal Register/Vol. 78, No. 13/Friday, January 18, 2013/Rules and Regu- lations Table 4 – Patent Fee Changes.

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92 Patent Challenges for Standard-Setting in the Global Economy ETSI is one SSO that addresses a possible break in the chain with both a cascading approach, whereby each transferor must seek to contractually bind its successor-in-interest to the FRAND commitment, and also a statement that it is intended that the commitment should run with the patent and therefore bind suc- cessive transferees.25 Competition authorities may take action on a case-by-case basis to protect implementers in this regard if anti-competitive acts are found. As mentioned above, a bankrupt debtor, who may or may not be a trans- feror along the chain of ownership, can endeavour to sell a SEP free and clear. Although existing patent licenses can be preserved under U.S. law (11 U.S.C. § 365(n)),26 the committee knows of no precedent for holding that a licensing as- surance qualifies as a patent license. As in the Nortel bankruptcy, transferees may agree or be ordered to be bound by the prior licensing commitments as a condition of acquiring the bankrupt company’s FRAND-encumbered SEPs. Bankruptcy is a thorny issue. SSOs should consider how the licensing assurance may be framed to “run with the patent,” support legislation or cases to achieve that end, or both. The cascading approach has been endorsed by competition regulators in numerous speeches and papers. The recent joint DOJ-FTC-DG Competition statement encourages the following “improvements to current IPR policies of SSOs: IPR policies should create as strong a commitment as possible to bind fu- ture owners of the IPR to any FRAND commitments made to the SSO. Clearly a FRAND commitment that becomes weaker or more vague upon the sale of a patent (or undermines a commitment to effective dispute reso- lution) will not to be as effective in protecting consumers as one in which all FRAND obligations must be transferred in a sale (Kühn, et al., 2013). Notification A second approach to addressing SEP transfers involves a patent holder who has made a FRAND commitment “notifying” its SEP transferee that there is or may be a licensing commitment. In this case it is not clear if and how an implementer might force the transferee to grant a FRAND license. Nonetheless, in the N-Data case, where the transferee had knowledge of the circumstances and terms of the licensing commitment, the FTC held the transferee to the com- mitment and the originally stated terms. 25 ETSI IPR Policy at http://www.etsi.org/images/files/IPR/etsi-ipr- policy.pdf. ETSI is taking a position with similarities to ITU/ISO/IEC and IEEE. 26 This general U.S. rule has been questioned by a non-U.S. bankrupt party in the Qimonda case. SSOs might consider supporting case decisions or laws that prevent the termination of SEP patent licenses regardless of debtor location.

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Transfers of Patents with Licensing Commitments 93 Non-circumvention A third approach is for an SSO policy to require members not to circum- vent their licensing commitments by the transfer of FRAND-encumbered SEPs.27 This approach provides some protection for implementers, but its exact scope and effect are not known. Although it may prove to be effective, it may be insufficient if interpreted as requiring a specific intent on the part of the trans- feror, where most transfers are effected for multiple reasons, or too burdensome if interpreted as raising possible liability for the transferor if any related down- stream issue arises. The foregoing approaches may not exhaust all of the possible solutions, but they have gained some traction among SSOs. They may be more effective for some SSO models than others. In short, SSOs need to consider the many facets of this issue, as the interests of different stakeholders vary as do the laws in different jurisdictions that may affect implementation of the policy. 5.4 Recommendations for SSOs and Policymakers Transfers of standard-essential IP are an important feature of the high- technology marketplace, whether because firms seek to realize the economic value of their patents through selling them or because SEPs are an asset in bank- ruptcy proceedings. Such transfers raise complex issues regarding the obliga- tions and rights of transferors, transferees, and existing and potential licensees along what may be a long chain of transactions. Judicial rulings so far provide only partial guidance and there are significant differences in law across coun- tries. Nevertheless, major competition authorities generally see value in binding transferees to original commitments. The committee agrees that a FRAND commitment should travel with the patent when it is transferred, although there are different means and modalities by which that could happen. Recognizing the complexity of this legal terrain, the committee makes the following recommendations for SSOs and public authori- ties to advance the proposition that licenses and licensing commitments should travel with the patent to minimize uncertainty and additional transaction costs for licensees. Recommendation 5:1 Where they have not already done so, SSOs should develop meaningful policies by which successors in interest are bound to whatever licensing com- 27 For example, an SSO policy may address situations where a party might seek to cir- cumvent a FRAND commitment in anticipation of joining the SSO or thereafter. An SSO policy also may just specify generally that a SEP holder cannot take any action that would result in circumvention.

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94 Patent Challenges for Standard-Setting in the Global Economy mitment (e.g., FRAND) the SEP owner made to the SSO in question under that organization’s IPR policy. This requirement should apply whether SEPs are in- dividually disclosed or are covered by a blanket disclosure. These obligations should cascade through succeeding transfers. Recommendation 5:2 Legislation, case law, or other legal mechanisms should tie licensing commitments to FRAND-encumbered patents needed to implement SSO stand- ards. This should be done in ways that ensure that the commitment automatical- ly runs with the patents. Recommendation 5:3 It may be difficult to identify patent transfers, because under current U.S. law they need not be recorded. Accordingly, public recordation with the patent office of transfers of all patents, should, as soon as practicable, be required by legislation or regulation. The committee believes that this approach of recording all patent transfers is a practical and effective way of advancing transparency for transfers of SEPs, which may not always be identified as such. The record should identify the real party in interest. Recommendation 5:4 Bankruptcy concerns are especially complex and raise uncertainty about consistency of licensing commitments. SSOs should develop guidelines to en- sure that the licensing assurances made to them remain with the patent in bank- ruptcy proceedings and support legislation, if necessary, to the same end. Recommendation 5:5 Competition authorities and international policy negotiators should, through legislation or regulation, find means to reduce inconsistencies across national legal jurisdictions in patent-transfer issues, including in bankruptcy processes.