Patent Challenges for Standard-Setting in the Global Economy: Lessons from Information and Communications Technology (2013)

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Summary Background Standards are technical specifications describing means of achieving certain beneficial features of products and services. To become “standards,” such specifi- cations undergo some process of examination and approval, whether through regu- latory systems, private industry bodies, or simple market acceptance by consum- ers, that recognizes they are sufficiently effective to merit wide adoption. Standards are ubiquitous in today’s markets and serve multiple purposes— to assure minimum levels of safety, health, and environmental protection, to provide information to consumers, and to reduce transaction costs between pro- ducers and users in the selection of inputs and products. One of the most im- portant functions of contemporary standards, and the focus of this report, is to enable components and products designed and produced by different firms to operate and communicate with one another. Such interoperability standards are increasingly important for domestic and international commerce by helping to achieve economies of scale and scope within and across borders. The technologies that enter into standards are often protected by patents or are the subject of patent applications at the time standards are developed. Incor- porating patented or patent-pending technologies in standards is virtually inevi- table and generally beneficial, but there is a tension between owners and users of a patented technology. Inventors generally seek economic returns on their R&D investments while users of technologies want access to them on affordable terms. This tension is even more pronounced in the realm of standards, which by their nature are intended to have widespread acceptance and use. To manage this tension, the wide variety of entities, domestic and interna- tional, that are dedicated to developing standards (termed “standard-setting organ- izations” or SSOs in this report) have generally adopted policies regarding the disclosure and terms of licensing of patents essential to the standards they create (so-called standard-essential patents or SEPs). In general, SSOs encourage or re- quire member firms to disclose SEPs and license them to standards implementers under terms commonly referred to as fair, reasonable, and non-discriminatory (FRAND). These policies vary in content and specificity, are in many cases in flux, and often lack guidance for increasingly common occurrences—litigation 1 

2 Patent Challenges for Standard-Setting in the Global Economy over SEPs and changes in SEP ownership. In particular, SSO policies often do not address whether a SEPs holder that has made a FRAND commitment should be able to seek injunctive relief or an order excluding the allegedly infringing product from the United States and whether FRAND licensing commitments by patent holders in an SSO transfer with changes in patent ownership. At the same time that the voluntary standards development system com- mon in most respects to the United States, Europe, and Japan is evolving, it is also adjusting to the rise of large developing economies that are major markets for new technologies and show promise of becoming important sources of them. There is uncertainty about how standards policies will evolve in China, India, and Brazil in particular and how they will treat intellectual property incorporated in standards. In a world of rapid technological change and diffusion, proliferat- ing patents, and frequent litigation over patents, the relationship of patents to standards obviously has enormous implications for firms, national economies, and global trade. Study Origin, Methods, and Focus In 2011, the U.S. Patent and Trademark Office (USPTO) asked the Na- tional Academies to examine and report on the role of patents in standard-setting processes in an international context. The Academies appointed a committee composed of academic economists and social scientists, legal scholars, standards professionals, and technologists and charged them with documenting and evalu- ating the policies and practices of different types of SSOs in different geograph- ical contexts, focusing on such matters as patent disclosures, terms of licensing, and provisions for the transfer of obligations when patents are traded, sold, or disposed in bankruptcy proceedings. The committee held four meetings, including a workshop with presentations selected by the committee as well as public commentary and commissioned origi- nal research and analysis, including a study of a dozen SSOs operating in the in- formation and communications technology (ICT) sector. The committee, in con- sultation with the sponsor, chose ICT as the project’s focus because of its techno- logical dynamism and heavy reliance on standardization, and because of the esca- lation of patenting and salience of issues involving patents and standards in those industries. SSO Approaches to IPR Issues The committee’s selection of SSOs to examine represents a diversity of organization types (both formal standards organizations and consortia) and geo- graphical foci (U.S., European, and global) and encompasses standards activity across the range of ICT technologies—consumer electronics, microelectronic products and their associated software and components, and communications networks including the Internet. These organizations and their salient character- istics are listed in Table S-1. 

TABLE S-1 Organizations and their Salient Characteristics GEOGRAPHICAL TECHNOLOGY NOTABLE TITLE TYPE FOCUS FOCUS IPR POLICIES International Organization for Standardization (ISO) formal global broad share common policy but permit adjustments International Telecommunications Union (ITU) formal global/UN Affiliated communications International Electrotechnical Commission (IEC) formal global electrical, electronics-related permits but does not technologies require ex ante disclosure of the terms Institute of Electrical and Electronics Engineers formal professional global broad electronics reviews ipr policies as part Standards Association (IEEE-SA) association of accreditation process American National Standards Institute (ANSI) SSO and standards- U.S. broad accreditation organization (not a standards developer) Internet Engineering Task Force (IETF) consortium of individuals global internet preference for non-patented technology Organization for the Advancement of Structured consortium global e-business and web service multi-modal ip policy Information Standards (OASIS) VMEBus International Trade Association (VITA) consortium global avionics, military and ex ante disclosure of industrial applications licensing terms; binding of electronics arbitration of disputes World Wide Web Consortium (W3C) consortium global internet & web royalty free license High Definition Multimedia Interface consortium global digital audio/visual non-assertion Forum (HDMI) transmission Nearfield Communications Forum (NCF) consortium global data exchange among consumer devices European Telecommunications formal European-based but ICT broadly Standards Institute (ETSI) international 3 

4 Patent Challenges for Standard-Setting in the Global Economy All of these standard-setting organizations have a diverse set of stakehold- ers and constituents. Some participants are technology owners whose business models depend on sales of products or services, less so or not at all on royalties for SEPs, although they may want their patents to have sufficient value to offset the rights held by others in the same technology area. Other participants are technology sellers whose models are based on royalties from implementers for SEPs and even non-SEPs. Others are technology users seeking low or no royal- ties for the SEPs they license from others. And still others are both technology users and sellers, who may assume different postures in different standards- setting processes. SSO IPR policies are shaped both by the interests of existing members and by the need to attract new participants who may be technology sellers, users, or both. This divergence of interests and the difficulty of reconcil- ing them may account for the fact that very few SSO articulate a clear set of objectives for its IPR policies, making it difficult to evaluate their effectiveness. For most SSOs, however, the minimum goal of their IPR policies is to en- sure that all essential patent claims are reasonably known to the participants and are available for licensing under a FRAND or a similar framework minimizing the potential for ex post hold-up and royalty stacking. Beyond that there is wide variation and often considerable ambiguity in the rules regarding Disclosure:  Whose patents must be disclosed; what qualifies as an “essential” pa- tent or patent claim; when disclosures must be made in the standards development process; whether blanket (non-patent specific) disclosures suffice; to whom the disclosed information is provided; and whether there is a requirement to update disclosures, for example, as a standard evolves and as patents are issued or denied. SSO policies regarding Licensing are, if anything, even more varied and in some instances ambiguous:  What specific terms or limitations are imposed by a commitment to FRAND licensing; what is meant by the individual terms “fair,” “rea- sonable,” and “non-discriminatory”; whether a maximum royalty must be posted before the standard is adopted (“ex ante”); how FRAND ap- plies to portfolio licenses and cross-licenses; how non-royalty licensing terms (e.g., grant-backs, geographical or field of use limitations, etc.) are treated; and whether royalty-free licensing is encouraged or re- quired. Inasmuch as patents and patent portfolios are now more frequently traded, sold, or acquired through bankruptcy, it is becoming increasingly important and complex for SSOs to address the Transfer issues surrounding FRAND- encumbered SEPs. Concerned that standard implementers could be at risk of hold-up by a new SEP owner, competition authorities have generally taken the position that SSOs should create contractual commitments that, subject to local 

Summary 5 law, bind successors to original FRAND obligations. Some SSOs have taken or are in the process of taking such steps but the legal issues are complex. On the other hand, few SSOs have addressed the controversial question of whether and how a FRAND commitment should affect a SEP owner’s ability to seek or threaten to seek Injunctive Relief (or, in the case of an imported prod- uct, an exclusion order by the U.S. International Trade Commission) as a reme- dy for patent infringement. Again, competition authorities are generally agreed that in the case of a FRAND-encumbered SEP an injunction should be an in- fringement remedy of last resort. But industry views are divided, as might be expected; and as a result, none of the SSO policies the committee examined im- poses any restrictions on what legal remedies a member or third-party benefi- ciary of a licensing commitment may pursue in court or in the International Trade Commission. Recommendations for SSO and Government Policies Having studied the experience of the dozen SSOs examined in the com- missioned paper, the positions of government regulators, the evolving case law in areas of legal uncertainty and contention, and economic theory, the committee recommends that SSOs consider a number of policies with regard to intellectual property, while recognizing the diversity of stakeholder interests and their varia- tion from organization to organization. In some cases, the committee also rec- ommends actions by government authorities supportive of these principles. Interpretation of FRAND The committee believes that a FRAND licensing commitment represents more than the patent owner offering a license on terms of its own choice. A FRAND commitment is also mutual in the sense that both the SEP holder and any prospective licensee are expected to negotiate in good faith towards a li- cense on reasonable terms and conditions that reflect the economic value of the patented technology. Recommendation 3:11 The committee urges SSOs to become more explicit in their IPR policies regarding their understanding of and expectations about FRAND licensing commitments. SSOs should clarify the various effects of a FRAND commitment by formulating certain statements of principle. These principles could include, among other conditions for compliance with FRAND, guidance regarding royal- 1 The first numeral of each recommendation indicates the chapter of the report in which it is discussed. 

6 Patent Challenges for Standard-Setting in the Global Economy ty demands that could be a disproportionate share of product value when many patents are necessary to comply with a standard and the relevant product in- cludes multiple technologies. Recommendation 3:2 The committee recommends that SSOs include statements in their policies that implementers and the consumers of their products and services are the in- tended third party beneficiaries of licensing commitments made by SSO partici- pants. Although the enforceability in all courts of such a term may not be guar- anteed (the law in this regard is still evolving), inclusion of such statements would inform courts of the intent of SEP owners participating in SSO working groups. It would also provide greater confidence to potential implementers, and promote greater certainty in the event of a dispute. Several recommendations are aimed at improving clarity within SSOs re- garding the bundling of licensing commitments. Recommendation 3:3 SSOs should clarify in their policies that prospective licensees may re- quest a license to some or all FRAND-encumbered SEPs owned or controlled by a patent holder. Licensors may not tie the FRAND commitment and the availa- bility of the requested SEPs to a demand that a licensee accept a package or portfolio license that includes non-SEPs or SEPs for unrelated standards. Nor may the licensors tie the FRAND commitment and SEPs availability to a re- quirement that the licensee agree to license back unrelated SEPs or non-SEPs. Recommendation 3:4 SSOs should clarify in their policies that a holder of FRAND-encumbered SEPs may require a licensee to grant a license in return under FRAND terms to the SEPs it owns or controls (and those of its affiliates as specified in the SSO’s poli- cy) covering the same standard or, as specified by the SSO, related standards. Recommendation 3:5 It should be understood that SSOs’ IPR policies do not affect the freedom of parties to voluntarily enter portfolio or cross licenses beyond the scope of the standard. This includes situations where prospective licensors offer to license SEPs in a package, such as a fixed pool. Patent Disclosures The committee recognizes that many aspects of transparency are subject to tradeoffs, not only for SSOs but also for member companies. On the one hand, 

Summary 7 more transparency can reduce uncertainty and legal exposure and can be benefi- cial in cases of conflict. On the other hand, achieving transparency through dis- closures can involve significant effort and compliance costs. The committee nevertheless recommends that SSOs consider the following steps to increase transparency of SEP ownership and licensing. Recommendation 4:1 SSOs that do not have a policy requiring FRAND licensing commitments from all participants should have a disclosure element as part of their IPR policy. Recommendation 4:2 SSOs with disclosure policies should articulate their objectives and con- sider whether they sufficiently serve these objectives. In particular, such SSOs may consider separating patent disclosure from licensing commitments and bet- ter define their preferred timing and specificity of disclosures. Recommendation 4:3 SSOs should make disclosed information available to the public. Recommendation 4:4 SSOs should consider measures to increase the quality and accuracy of disclosure data. Such measures might include updating requirements or greater coordination with patent offices. Transfer of Patents with Licensing Commitments and Transparency of Patent Ownership Transfers of standard-essential patents are an increasingly important fea- ture of the high-technology marketplace, as a result both of firms seeking to realize their economic value through sales of assets being disposed in bankrupt- cy proceedings. Such transfers raise complex issues regarding the obligations and rights of transferors, transferees, and existing and potential licensees along what may be an extended chain of transactions. Statutes and judicial rulings so far provide at best partial guidance, and there are significant differences in law across countries. Major competition authorities, on the other hand, see clear val- ue in binding transferees to original commitments. The committee agrees with these authorities that a FRAND commitment should travel with the patent when it is transferred, although there are different means and modalities by which that could occur. Satisfactory resolution of the complex issues of patent transfers may require government action and possibly legislation. First, U.S. law does not require recordation of ownership changes or 

8 Patent Challenges for Standard-Setting in the Global Economy the identity of real parties of interest with the U.S. Patent and Trademark Office. In the committee’s judgment, lack of transparency is no longer acceptable in an era of vibrant markets in intellectual property and frequent bankruptcy proceed- ings in which patents are a principal asset. Registration of SEP ownership changes with SSOs would represent only a partial solution and could become burdensome to some of these organizations. The committee makes the following suggestions for SSO policies and pub- lic policies to advance that proposition and 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- 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 the commitment automatically 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 be required by legislation or regulation. The committee believes that this approach of recording all patent transfers is a practical and effective way of enabling 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. 

Summary 9 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. Injunctive Relief for SEPs Subject to FRAND The committee believes that a FRAND commitment limits a licensor’s ability to seek injunctive relief, including exclusion orders, and recommends the following steps to help avoid or resolve disputes, prevent anti-competitive con- duct, and ensure reasonable compensation to SEP holders whose patents are infringed. Recommendation 6:1 SSOs active in
industries where patent holdup is a concern should clarify their policies regarding the availability of injunctions for FRAND-encumbered SEPs to reflect the following principles:  Injunctive relief conflicts with a commitment to license SEPs on FRAND terms and injuctions should be rare in these cases;  Injunctive relief may be appropriate when a prospective licensee refus- es to participate in or comply with the outcome of an independent adju- dication of FRAND licensing terms and conditions; and  Injunctive relief may be appropriate when a SEP holder has no other recourse to obtain compensation. The committee could not reach unanimous agreement on appropriate venues for adjudicating FRAND disputes. However, a majority of the committee members endorse the following: Majority Recommendation 6:2 SSOs should clarify that disputes over proposed FRAND terms and condi- tions should be adjudicated at a court, agency, arbitration or other tribunal that can assess the economic value of SEPs and award monetary compensation.2 2 A minority of committee members endorse this alternative recommendation: Courts, agencies, arbitration bodies or other tribunals (including the USITC) that consider patent essentiality, FRAND determination, or public interest factors should be presented with 

10 Patent Challenges for Standard-Setting in the Global Economy The committee also could not reach unanimous agreement on the scope of any limitations that a FRAND commitment might place on SEP holders’ rights to seek injunctive relief. However, a majority of the committee members en- dorse the following recommendation in that regard: Majority Recommendation 6:3 SSOs should clarify that, before a SEP holder can seek injunctive relief, dis- putes over proposed FRAND terms and conditions should be adjudicated at a court, agency, arbitration, or other tribunal that allows either party to raise any related claims and defenses (such as validity, enforceability and non-infringement).3 SSO-Patent Office Information Sharing As the interplay between standards and patents has increased, so has recognition that the functioning and integrity of the two systems are interde- pendent. Up-to-date information on claims in issued patents and on the status of patent applications can be very useful to standards development working groups. Likewise, the submissions of participants to standards bodies as well as finalized standards documents represent a potentially valuable collection of prior art for consideration by patent examiners. All parties have a stake in the quality of is- sued patents. The European Patent Office has agreements with three SSOs to share such information in standardized format. The agreements with the International Tele- communications Union (ITU), European Telecommunications Standards Insti- tute (ETSI), and Institute of Electrical and Electronics Engineers-Standards As- sociation (IEEE-SA) have these common elements: exchange of information and documentation; collaboration on documentation format and dissemination poli- cies to align them with EPO prior art search needs; standards-education of EPO personnel; and self-funding of the expenses involved. Participants in these ar- rangements agree that their value extends beyond generating patents of higher quality. Improved transparency in the linkages between IPR and standards is seen as a benefit by both SSO members and EPO examiners. The committee finds that arrangements along the lines of the EPO-SSO memoranda could benefit both the U.S. Patent and Trademark Office examina- the facts and render injunctive relief decisions based on existing law, such as the eBay decision and/or ITC Section 337. 3 A minority of committee members endorse this alternative recommendation: SSOs should clarify that a SEP owner that has made an offer and offered to negotiate, with a prospective licensee, a license that will embody FRAND terms should be allowed to include injunctive relief in its pleadings when a FRAND dispute is brought to a court, agency, arbitration, or other tribunal that can consider equities, party conduct, reciprocity, and FRAND factors (including FRAND rates and terms). 

Summary 11 tion process and SSO functioning at relatively modest cost. That would likely entail agreements separate from the EPO’s with ITU, ETSI, and IEEE-SA. The committee did not fully explore two legal issues raised in its discussions: 1) how in the wake of the America Invents Act the legal definition of prior art varies across jurisdictions and between the EPO and the USPTO in particular; and 2) whether the form of the USPTO’s cooperation with individual SSOs could rep- resent a conflict of interest for the agency. The committee recommends that the USPTO take the following steps: Recommendation 7:1 In the wake of the passage and implementation of the America Invents Act, the USPTO should  Clarify how the legal definition of prior art varies across jurisdictions, particularly as between the EPO and USPTO. Specifically, when is art “publicly available” in a standards context?  Explore with leading SSOs, including possibly ETSI, IEEE-SA and ITU, information-sharing arrangements similar to those concluded by the EPO;  Work with other patent offices to establish uniform fields and templates for standards-based prior art documents, such as early drafts of specifi- cations, published minutes, and the like and deliberate with other offic- es on the definition of sharable information in this context;  Improve standards technology education for U.S. patent examiners. For example, when standards developers convene in Washington, D.C., they could be asked to instruct and update USPTO examiners about standards processes and recent developments; and  Develop joint education programs with SSOs on the pros and cons of standards-based prior art, especially early drafts, and the benefits from including it in patent office search databases. Standards Processes and Policies in China, India, and Brazil Although a larger number of countries are significant players in global ICT markets—among them Korea, Taiwan, Hong Kong, and Singapore—the USPTO asked the committee to focus its study on three emerging players for the following reasons. China, India, and Brazil represent three very large, rapidly growing economies that, until recently, have been reliant on imported technolo- gies subject to the standards developed in the institutions described above which are dominated by the United States, Europe, and Japan. But in all three cases national governments are making significant new industrial policy commitments intended to foster national innovation capabilities and push their economies into higher value-added, more knowledge intensive production. Their approaches to 

12 Patent Challenges for Standard-Setting in the Global Economy standards development and IPR should be seen in the context of these broader industrial policy goals. But they are also conditioned by membership in the World Trade Organization (WTO) and adherence to the Agreement on Tech- nical Barriers to Trade (TBT) and Agreement on Trade-Related Aspects of Intel- lectual Property Rights (TRIPS), which compel a degree of harmonization with international norms. In all three countries, policies and institutions are in transi- tion or development and could take a more nationalistic turn. Given the size of these economies, how these policies develop will have important implications for the norms and institutions by which international standardization and IPR affairs evolve. China Chinese approaches to standardization, including policies for essential pa- tents in standards, have evolved in ways that show sensitivity to international norms and the interests of international stakeholders, including multinational corporations, in some circumstances, although in other cases have excluded for- eign companies’ participation. At the same time, the government is strongly committed to building a standards regime to serve Chinese national interests, including reducing dependence on imported technology and the associated li- censing fees and building domestic innovation capacity. This is evident in ef- forts over the past decade by the Standards Administration of China (SAC) to formulate national policy guidelines, most recently the “Regulatory Measures on National Standards Involving Patents (Interim).” These guidelines endorse dis- closure and FRAND licensing norms but leave a number of definitional and procedural ambiguities that suggest a bias against the interests of rights holders. Meanwhile, China is experiencing a huge increase in patent litigation, some of it involving SEPs-related cases. India In contrast to China, India has shown less of a strategic orientation to standards development and intellectual property and more inclination to follow the policies for IPRs in standards of the established international standards bod- ies. However, there are signs of a growing appetite for government-supported indigenous Indian standards development efforts incorporating Indian intellectu- al property. In particular, the 2012 National Telecom Policy calls for numerical targets for the growth and self-sufficiency of the industry and the creation of “… a roadmap to align technology, demand, standards, and regulations for enhanc- ing competitiveness of domestic manufacturing…” through establishment of “standards to meet national requirements, generate IPRs, and participate in in- ternational standardization bodies… making India a leading nation in the area of international telecom standardization.” 

Summary 13 Brazil Like India, Brazil has shown less of a strategic orientation towards stand- ards and IPR development and its standards institutions, lacking well-developed policies for dealing with IPR in standards, are only beginning to come to grips with the complex issues involved. In all three countries reviewed, the development of a modern technical standards regime is still a work in progress. This is true even for China, where its learning curve is notably steep and it has shown a far more robust approach to building a national standardization system than has India or Brazil. While there are limits to how much the U.S. government can contribute to the development of these standards regimes, the fact that they are all in varying stages of formation suggests that there are possibilities for mutually beneficial interactions, especially with regard to education, training, and raising awareness on the importance of developing IPR policies in the early stages of building SSO capabilities. Recommendation 8:1 The U.S. government should explore ways to promote awareness of the importance of developing IPR policies at an early stage of the development of SSOs in these and other emerging economies, and should, in conjunction with non-governmental standards entities, explore ways to offer training programs for those working to develop their organizations and policies needed for successful national standardization. Recommendation 8:2 In the meantime, the relevant agencies of the United States government, such as the United States Patent and Trademark Office, the Office of the United States Trade Representative, and the National Institute of Standards and Tech- nology, should closely monitor and report on continuing developments in these countries and other major emerging economies regarding standard-setting and the management of intellectual property.