Clearing Up Confusion on SEPs: A Line-by-Line Response to a Problematic Essay

I recently became frustrated after reading an essay in the AIPLA newsletter by an attorney with Taft Stettinius & Hollister LLP. I have seldom seen a writing where I disagree with everything a man writes, with the exception of a joke and his name. I took it apart paragraph by paragraph; my comments are in red while the author’s original text is in black. The article can be read in full here.

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“Smartphones can operate together with other smartphones because hundreds of the inventions powering those smartphones are covered by Standard-Essential Patents (SEPs).”

This is not accurate, and the premise can cause distorted reasoning that matters. Smartphones can operate together because they share specifications, hardware and software that function together. Whether those components of functionality are covered by patents, and whether the patents that may cover it are essential to the standard set for the area is not established, though certainly it is very likely that some patents in the functional area will cover the standards needed to operate. Until there is litigation, there is no body or organization that determines if a patent is essential to a standard or not. The most accurate statement that can be made is that those working with the standard setting organization have a duty to declare to the organization that a patent they own may read upon the standard. As standards may go through many versions or proposals, over a period of years, and neither the organization nor its members tests patents to determine if they read upon a standard, we do not know which, if any, patents read on the standard or cover the technology in question.

“On Dec. 19, 2019, the United States Patent and Trademark Office (USPTO) joined the Department of Justice’s (DOJ) new policy permitting injunctive relief in SEP cases, giving SEP owners a lot more leverage when licensing their inventions to other companies.”

This is also not true. The policy letter from January 8, 2013, stated only: “A patent owner’s voluntary F/RAND commitments may also affect the appropriate choice of remedy for infringement of a valid and enforceable standards-essential patent. In some circumstances, the remedy of an injunction or exclusion order may be inconsistent with the public interest.” It did not forbid injunctive relief, and indeed it could not, such remedies are reserved for congress. The letter, while concerned with the potential of a “hold-up” goes on to say: “This is not to say that consideration of the public interest factors set out in the statute would always counsel against the issuance of an exclusion order to address infringement of a F/RAND-encumbered, standards-essential patent.”  The new policy letter simply acknowledges what time has taught, that all remedies allowed by law may be considered, based on the facts and evidence.

“SEPs are patents that claim an invention that must be used to comply with industry standards. Generally, these industry standards are set by standards organizations.”

Standard setting organizations (SSOs) do not determine if an invention must be used to practice a standard, nor do patent owners claim the invention must be used to comply with industry standards. Declarations that patent owners submit to standard setting bodies typically do not declare that patents are essential to the standard but identify patents that may be essential to the standard and what licensing terms, if any, they would offer if the patent actually is essential. I know of no SSO that deems inventions essential or even examines inventions or patents with regard to the standard, let alone ensuring they will work together on the same network.

“Because SEPs must be used to comply with industry standards, owning an SEP can be quite lucrative. As a tradeoff, standards organizations require SEP owners to license their inventions on “FRAND” terms — terms that are fair, reasonable and nondiscriminatory.

Abusing an SEP can have anti-competitive effects, especially when SEP owners are negotiating FRAND licenses with and threatening injunctions over companies poised to sell technology that incorporates SEP inventions.”

While these arguments have been made over years, the evidence generally suggests that “patent holdup” has not created problems in the industries where it was cited as a risk.

With respect to FRAND, while the term FRAND is used, the organizations do not define what “fair reasonable and non-discriminatory” means, or how to achieve it, so this has been less than useful as a standard. And what evidence we do have as to the meaning of non-discrimination relates to equal ability to obtain a license, not equal license rates or some kind of most favored licensee interpretation that treats all licensees, even recalcitrant licensees, as similarly situated.

Finally, while “abusing” an SEP might have anti-competitive effects, the cases have not borne out that the risk was great.  This lack of “hold-up” certainly seems one reason why the USPTO and DOJ rethought their positions regarding injunctive relief.

“In 2013, fearing that SEP owners would take advantage of their right to obtain injunctive relief in patent-infringement cases, the DOJ issued a policy statement cautioning courts from enjoining alleged infringers of SEPs from importing or selling goods in the United States.”

This is not true; the author is confusing the specific, targeted advice that was directed at the ITC, which only has remedies that exclude importation, or sale of items already imported, with the courts, specifically the Federal District Courts, which do not forbid importation but could enjoin a party from activity in the United States. While there was caution issued by the Federal Trade Commission regarding exclusion orders, there was no advice from the DOJ to the ITC directly.

“With that 2013 policy hanging over their heads, courts abdicated from enjoining alleged infringers in FRAND cases, and on that basis, SEP owners took a less-aggressive approach to licensing their inventions. This less-aggressive approach, according to some experts and scholars, had weakened intellectual property rights for United States companies by limiting the leverage for SEP owners when negotiating FRAND licenses. It also created a rule that did not exist for other types of patents: no injunctions for SEPs — or an uphill battle to obtain one.”

This is not accurate and does not go with the first part of the paragraph on importation. In general, the ITC did not consider the policy letters in a substantive way and continued to review cases based on the evidence presented in the hearing. The courts that dealt with SEP issues were able to deal with the issues of FRAND, as parties in the Western District of Washington and Northern District of Illinois both waived jury trials. In neither case did the presiding judge cite for any purpose the policy letters. In addition, a policy letter does not hang over the head of a court, it has no effect in law, and only expresses the view of the agencies involved.

“On Dec. 19, 2019, the USPTO and the DOJ departed from the old policy, issuing a joint policy statement advising that all patent owners, including owners of SEPs, can obtain injunctive relief when their patents are allegedly infringed.”

Neither the USPTO or the DOJ can permit or ban injunctions; what the new policy said was: “Today’s Policy Statement recognizes that when licensing negotiations fail, appropriate remedies for patent infringement, including injunctive relief, should be available to SEP holders. The availability of the full range of remedies is necessary in order to preserve competition and incentives for innovation, and for continued participation in standards-setting activities, which can produce substantial benefits for American consumers.”   Dec 19, 2019.

While the full range of remedies was always available in trials or ITC hearings, the revision of the policy statement acknowledged what the facts have shown—that patent hold-up was not common and the courts were in the best position to hear the evidence and fashion a remedy.

Furthermore, the letter did not say “all patent owners, including owners of SEPs, can obtain injunctive relief”. The 2019 policy statement by the USPTO, DOJ and National Institute of Standards and Technology (NIST) set forth the observations and beliefs of these Executive Branch Agencies.

“According to the USPTO and the DOJ, courts had been misinterpreting the 2013 policy all along. Under the old policy, courts were improperly using an SEP owner’s FRAND commitment as a basis to limit their injunctive relief.”

The letter did say “The Statement follows the Justice Department’s withdrawal from the 2013 SEP policy statement, which had been construed incorrectly as suggesting that special remedies applied to SEPs and that seeking an injunction or exclusion order could potentially harm competition.” The language of the 2013 letter did not forbid injunctions, but rather more mildly stated: “Although, as described above, an exclusion order for infringement of F/RAND-encumbered patents essential to a standard may be appropriate in some circumstances, we believe that, depending on the facts of individual cases, the public interest may preclude the issuance of an exclusion order in cases where the infringer is acting within the scope of the patent holder’s F/RAND commitment and is able, and has not refused, to license on F/RAND terms.” While the policy letter in 2013 did focus attention on injunctive relief, there were no cases I am aware of that used or cited the letter to bar any particular relief; it simply did not do it.

“SEP owners looking for more leverage in negotiating SEP licenses should start writing thank-you cards to the USPTO and the DOJ. Because SEP owners can now obtain injunctive relief in FRAND cases, they can expeditiously move to enforce their intellectual property rights and secure FRAND rates for their inventions. From an SEP owner’s perspective, then, the new policy strengthens intellectual property rights for United States companies.”

This is incorrect at several levels. The policy letter was never used to deny injunctive relief that I am aware of; it simply issued a caution that injunctions might change the balance of power in negotiations. The possibility of injunctive relief was not affected by the policy letter; it has been the same before 2013, from 2013 to 2019, and will be the same in the future. eBay has impacted the extent of injunctive relief, but not the 2013 letter. Patent owners were free to request the full spectrum of remedies available to them during the time period in question, and it is and was eBay that is the hurdle against injunctions in Federal District Courts not a policy letter.

Finally, they could negotiate for FRAND rates at all times during this period in patent law that never changed.  The ITC meanwhile continued without regard to the policy the PTO/DOJ espoused and the policy letter was never admitted as substantive evidence in any case I am aware of.

“From an alleged infringer’s perspective, however, the new policy stifles competition for those who must use an SEP invention to comply with industry standards. For instance, SEP owners can now take unfair advantage of the new policy by requesting licensing terms that far exceed FRAND rates, ultimately landing on terms that — from the alleged infringer’s perspective — are not fair, reasonable or nondiscriminatory. For that reason, the 2019 joint policy makes clear that SEP owners cannot use the policy as a basis to offer unreasonable FRAND rates.”

The “new policy” will not stifle competition going forward, any more than the old policy facilitated it. SEP owners are still bound by eBay—the policy letter did not change that. To say they can “take unfair advantage” of the policy by requesting licensing terms that far exceed FRAND rates assumes courts will not enforce 35 U.S. Code §?284. The new policy letter does not change what is allowed in negotiations, let alone greenlight “unfair” advantage to request terms that are not fair. The letter simply states what has always been the case: “As a general matter, to help reduce the costs and other burdens associated with litigation, we encourage both standards-essential patent owners and potential licensees of standards-essential patents to engage in good-faith negotiations to reach F/RAND license terms. All remedies available under national law, including injunctive relief and adequate damages, should be available for infringement of standards-essential patents subject to a F/RAND commitment, if the facts of a given case warrant them.” Note there is not a word about using the policy to offer rates, reasonable unreasonable or otherwise. Indeed, the letter itself warns those reading that it is only the thoughts of the agencies, not any declaration of law:  As it states in footnote 1: This statement offers the views of the agencies only and has no force or effect of law. It is not intended to be, and may not be, relied upon to create any rights, substantive or procedural, enforceable at law by any party.

“With more negotiating leverage for SEPs, it is likely that licensing rates for inventions covered by SEPs will increase, helping SEP owners but harming those who need to use the underlying technology to comply with industry standards.

If you own an SEP, you can now take a more aggressive approach to policing and licensing your technology. But if you want to use an invention covered by one, you better be ready to pay for it.”

As neither the 2013 nor 2019 letters had force of law, it is unlikely to impact the licensing rates for patents covered by patents that potentially read on the standards in a given field. It is unlikely that the change in policy letters will impact the economic behavior of parties at all. Owners of potentially standard essential patents will have no more leverage than before, implementers no less. If two parties cannot agree on reasonable licensing terms, they are just as likely to litigate, and the availability of injunctive relief is still governed by eBay, not agency policy letters. Patents in the United States will still be as encumbered by eBay, the Patent Trial and Appeal Board, patent eligibility uncertainty, efficient infringement, and damages remittitur, for example.

“Only one thing is for certain: the selfie is here to stay.”

In the spirit of allowing the author one win, this statement may well be true. However, nothing else written in his essay is.

Theodore Essex will be speaking on the topics of “FRAND & Willing Licensees: What is Fair, Reasonable and Non-Discriminatory?” and “In Search of Injunctive Relief in Patent Infringement Litigation” at IPWatchdog CON2020 in Dallas, Texas, on March 17, 2020. Click Here to Register.

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