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Mintz Levin Patent Litigation Group (MLPG) Newsletter |
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March 2010 Standard Setting and Patent Rights: Navigating Choppy Waters
Establishing product standards by agreement among buyers and/or sellers of products is pervasive in today’s complex economy and is essential to healthy competition in numerous industries. Across a broad spectrum of the economy, competing manufacturers collaborate with one another–often with customers and suppliers included–to establish standards relating to regulatory requirements, safety, interoperability interfaces, and numerous other aspects of product design. The competitive benefits that accrue from the creation of standards are well recognized to reside in increased consumer welfare, enhancement of consumer choice, and lower production costs. While standard setting activities are generally regarded as beneficial, courts and antitrust enforcement agencies have grown increasingly sensitive to the competitive implications of allowing participants in a standard setting process to assert patent rights that may be necessary to implement the standard. It is easy enough to understand the concern. Prior to the collective adoption of a standard, the industry participants often have other options–technologies that compete with one another for collective approval. After the standard is set in stone, however, those options may disappear and patent rights that are needed to practice the standard suddenly become far more valuable as a result. The problem is particularly acute when the patent owner has failed, intentionally or otherwise, to disclose to the other participants that it owns or plans to own patents that might be required to satisfy the standard. This latter situation, when nondisclosure is intentional and knowing, evokes images of fraud. For nearly 40 years, variations on this scenario have played out before different agencies and tribunals, but in recent years the challenges have become more frequent and more intense. No longer does a patent owner enjoy the luxury of sending engineers off to work with standard setting organizations without counseling and supervision. The risks to the enforceability of the company’s patents are real and substantial. Further, the roles played by the standard setting bodies themselves add still another layer of complexity to the mix, because many have rules that are vague and ambiguous as to the obligations of participants. Last year’s denial of certiorari in the Federal Trade Commission’s case against Rambus, after seven years of litigation, left intact the D.C. Circuit’s rejection of the FTC’s monopolization theories as applied to the assertion of intellectual property rights necessary to practice an established standard. See Rambus, Inc. v. Fed. Trade Comm’n, 522 F.3d 456 (D.C. Cir. 2008), cert. denied, 129 S. Ct. 1318 (2009). Rambus presented an extremely complex fact pattern rooted in the Joint Electron Device Engineering Council’s (JEDEC’s) establishment of performance standards for dynamic random access memory (DRAM). Despite the final resolution in favor of defendant Rambus in the FTC matter, the outcome does not dispel the concerns facing companies that participate in the establishment of such standards. Both government and private parties continue to raise this issue in many ways. In the Negotiated Data Solutions LLC matter, FTC File No. 051 0094, 2008 WL 258308 (F.T.C.), an FTC consent decree was entered against the respondent, based on N-Data’s efforts to enforce patents that at one time had been offered for license at a lower rate than the one sought. The agency expressly acknowledged the absence of any basis for a claim of monopolization, and predicated the complaint instead on an alleged violation of Section 5 of the FTC Act as a separate and independent basis for challenging unfair trade practices. The decision to file the N-Data complaint and the accompanying Statement of the Commission leave a powerful impression that the FTC is moving toward a duty to disclose patent rights as a matter of law if the owner wants to maintain enforceability. The Commission gave little weight to the fact that IEEE, which had promulgated the standard in question, had allowed the patent owner to withdraw its original offer to license at a lower rate. In Broadcom Corp. v. Qualcomm Inc., 501 F.3d 297 (3d Cir. 2007), the Third Circuit reversed a trial court’s Rule 12 dismissal of an antitrust case based on Qualcomm’s assertion of patent rights necessary for implementing the Wideband Code Division Multiple Access (WCDMA) standard for data transmission. The Qualcomm case was settled before the trial court considered the accuracy of allegations that Qualcomm had made false representations during the standard setting process and other implications of the Third Circuit’s decision. More recently, in a separate dispute between the same parties, the Federal Circuit ruled that Qualcomm could not enforce certain patents on the ground that the company failed to meet the disclosure expectations of other participants in the standard setting process for a video standard promulgated by an ad hoc group. In Qualcomm Inc. v. Broadcom Corp., 548 F.3d 1004 (Fed. Cir. 2008), the court held that a duty to disclose patents would arise either because of an explicit rule of the standard setting organization or because the participants manifested an expectation of such disclosure. The Court seized upon the equitable concepts of waiver and estoppel to hold that failure to disclose was fatal to enforceability. These rulings, and what they portend, raise an entire panoply of issues that a patent owner must consider before permitting company employees to participate in the development of standards. The bottom line is that patent owners should carefully consider the impact that participation in standard setting activities is likely to have on their patent rights before sanctioning their employees to do so. There are a number of intertwined and related questions that define the dialogue around patent rights implicated in a standard:
Overlaid onto these questions, from a legal perspective, is the issue of which bodies of law are implicated when the patent owner fails to live up to the expectations of others who have begun making products that are compliant with the standard. Is this failure an antitrust problem, a patent law problem, an equitable problem, a contract problem, or something else? Finally, of what importance is the SSO itself in the resolution of disputes that come up in this context? |
Should you wish to receive further information on this or any intellectual property issue, please contact any of the attorneys listed below, or the Mintz Levin attorney who ordinarily handles your legal affairs. Contacts Gene Feher Robert P. Taylor Members Kevin N. Ainsworth Matthew Bernstein Dean G. Bostock Paul J. Cronin John M. Delehanty Richard G. Gervase, Jr Robert R. Gilman Marvin S. Gittes John Giust Geri L. Haight H. Joseph Hameline Paul J. Hayes A. Jason Mirabito Timur E. Slonim
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Endnotes 1 Damages based on a reasonable royalty are commonly established in connection with judicial findings of patent infringement. See, e.g., Panduit Corp. v. Stahlin Bros. Fibre Works, Inc., 575 F.2d 1152 (6th Cir. 1978); Georgia Pacific Corp. v. United States Plywood Corp., 318 F. Supp. 1116 (S.D.N.Y. 1970), modified and aff’d, 446 F.2d 295 (2d Cir. 1971), cert. denied, 404 U.S. 870 (1971). An area of active controversy relates to the royalty base, i.e., when a patented component is placed into a larger product should a royalty be based on the value of the component or the larger product? |
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