There is a pivotal patent case in the U.S. District Court that involves standard-essential patents (SEPs) and fair, reasonable, and non-discriminatory (FRAND/RAND) licensing terms. In Microsoft v. Motorola, U.S. District Judge James Robart will be deciding what is a "fair and reasonable" rate for the license fees Microsoft should pay Google-owned Motorola for use of patents tied to H.264 video and Wi-Fi standards. These patents are used in Microsoft’s Windows PCs and Xbox 360s.
Referring to this case in a Wall Street Journal article, Stanford Law School's Mark Lemley says, "We may for the first time ever get a judge to decide the fundamental question of what a RAND patent license is worth."
“Judge Narrows Google Patent Suit Against Microsoft” (Reuters) explains the decision’s impact:
Motorola had sought up to $4 billion a year for its wireless and video patents, while Microsoft argues its rival deserves about $1 million a year. If U.S. District Judge James Robart decides Google deserves only a small royalty, then its Motorola patents would be a weaker bargaining chip for Google to negotiate licensing deals with rivals.
SEPs, FRAND and RAND: Explaining the Terms
The FRAND and RAND acronyms basically try to answer this question: how much is a patent really worth when the patent is one that’s tied to an industry standard?
Let’s break the acronyms down, and start with SEP or standards-essential patent.
Standards are all around us. Time zones, money, bolts fitting into nuts –these are all standards. Technical standards are used in: wireless communication, computers communicating with external devices such as printers and scanners, location-based technology, and RFID technology – those radio-frequency identification tags that are used for inventory management, mobile phone payment systems, and animal tracking, to name a few.
Below is an excerpt from the conference write-up on “Rand Revisited: Current Developments in the Law of Standard-Essential Patents.” It explains how a patent becomes a standards-essential patent (SEP).
The modern world relies on technical standards. In order for one device to interoperate with another, certain norms must be set in place. The two devices must use the same standardized products and processes to enable communication; much in the same way that human conversation requires participants to agree on which language to speak. Standard setting organizations (SSOs) exist as one way for market actors to agree on which products and processes will become standardized. But what happens when the SSO choses a standard that is covered by patents? The patents are now standard essential patents (SEPs) and therefore all implementors are required to obtain a license from the patent holders. (New Developments in RAND and Standard-Essential Patents – A Conference Recap, TAP Blog)
In “The RAND Commitment,” Professor Doug Lichtman of the University of California, Los Angeles, explains the importance of reasonable and nondiscriminatory terms, or RAND, for technology innovators utilizing standards-essential patents. Note that the acronym FRAND adds one more classifier to license agreement terms: fair, reasonable, and non-discriminatory.
The protocol that governs how information is stored on DVD-R media is known to implicate at least 342 different patents. The encoding, decoding, and transmission protocols relevant to just one type of cellular telephony touch well over 1,000. And RFID technology is at this point rumored to labor under the weight of over 4,000 issued patents in the United States alone.
Those large numbers are problematic because it takes substantial time and money to evaluate a patent. To do the job right, consensus would have to be achieved as to whether the patent is valid, whether it covers a truly essential aspect of the standard at issue, and exactly how much the patent contributes as compared to next-best alternatives. Worse, all of that would need to be done in a context where patent holders have strong incentives to exaggerate; where information about pending patent applications is understandably hard to come by; and where there will often rage an independently contentious debate over non-patent issues like the specifics of what should and should not be included in the standard.
Thus enters the RAND commitment. Instead of undertaking the difficult task of evaluating asserted patents, most standard-setting organizations simply keep a running list of patents that have been asserted to be relevant by one or another patent-holding participant. Those participants are then required to agree that, ultimately, they will make available to the public, on “reasonable and nondiscriminatory terms,” any truly essential patent. The need for careful patent analysis is thereby diminished. If a given patent turns out to be irrelevant, no one will need a license for its use anyway. But if a given patent turns out to be essential, at least the relevant patent holder has promised to license at a reasonable and nondiscriminatory rate.
To sum up so far: a patented technology that is determined to be an essential aspect of a technology standard is called a standards-essential patent (SEP). When innovators create products that tie in with technology standards, they will most likely utilize standards-essential patents. The innovator needs to license the use of these SEPs. Within standard-setting organizations (SSOs), FRAND and RAND terms are established so that the licensing rates are made available on fair, reasonable, and non-discriminatory terms.
Complexity of FRAND and RAND
Though FRAND and RAND can be explained fairly clearly, putting them into practice gets complicated. Doug Lichtman’s “The RAND Commitment” sheds light on this:
Hidden in that simple solution, of course, is enormous complexity. Is the RAND commitment a license, such that firms can go ahead and implement the technology subject only to a later obligation to negotiate the price? Is it a promise to license, which would mean that implementing firms in fact have no right to use the patented technology until they cut a specific deal? And what happens if, as seems enormously likely, an essential patent holder ultimately thinks one price is reasonable whereas the implementing firms think a much lower number is appropriate? Is that dispute a contract dispute, litigated using traditional contract-damages measures, or a patent dispute, meaning that the patent system’s damages regime controls the process?
Moreover, RAND has some real drawbacks. Consider, for instance, the fact that the RAND commitment separates the negotiation over the details of a technology from the negotiation over its cost. At my house, that would be an obvious and unacceptable blunder. I can only imagine what my wife would say were I to choose an expensive piece of home electronic equipment – say, a new flat-screen television – without having an estimate of what that hardware and its accessories would ultimately cost. Yet sophisticated companies like Nokia, Ericsson, Nortel, Sony, InterDigital, Texas Instruments, Alcatel, DirecTV, and NEC did exactly that when they hammered out the details of the recently launched Long Term Evolution (LTE) telecommunications standard. They made hundreds of nuanced choices about how LTE-compliant devices will decode, encode, and transmit data, but they did so without any real understanding of what the various options would cost in terms of patent fees. That sort of economic blindness is par for the course in the standard-setting process. But it is still jarring, and it still represents a real downside to the RAND approach.
RAND has another significant drawback as well: It forces courts to take a more active role when it comes to pricing patents. Judges and juries are unlikely to be very good at valuing patented inventions. ... If the parties cannot agree as to what “reasonable” means, a judge or jury will ultimately have to wade through the evidence and pick a number. Moreover, even if the parties in the end agree on what “reasonable” means, their agreement will unavoidably have been influenced by what each party expected a court would do if agreement had not been reached. RAND, then, takes a task that courts perform poorly and makes that task a central driver in the ultimate economic interaction.
Clarifying FRAND and RAND Commitments
The ambiguity of FRAND/RAND commitments clearly requires clarification. Below are a few proposals from scholars and agency experts on this issue.
Economics Professor Richard Gilbert, University of California, Berkeley, calls for a shift of emphasis from the “fair and reasonable” prong of FRAND to the “non-discrimination” prong in “Deal Or No Deal? Licensing Negotiations By Standard Setting Organizations.” Professor Gilbert explains that if the “non-discrimination” prong is clearly defined, it can “provide protection from ex post opportunistic conduct without the risk of abuse of buyer market power that may occur with joint negotiation of licensing terms by members of a SSO [standard-setting organization].”
Law Professor Jorge Contreras, American University – Washington College of Law, proposes an SDO-driven approach. SDO refers to standards-development organizations. In “Rethinking RAND: SDO-Based Approaches to Patent Licensing Commitments,” Professor Contreras identifies seven “first principles” that underlie the licensing and enforcement of standards-essential patents.
Based on these first principles, I propose an SDO-driven approach to addressing the uncertainty of RAND commitments that is based on certain beneficial attributes of patent pools. I call this a “pseudo-pool” approach, as it draws on pooling strategies, but is adapted for use in the more flexible and prolific world of SDO standard-setting. … This proposal requires the adoption of joint ex ante negotiation of royalty rates near the outset of a standardization project, conduct that has been viewed with favor by several regulatory agencies and acknowledged as offering various procompetitive benefits.
Furthermore, in a post for PatentlyO last fall, Professor Contreras summarized the recent efforts of regulators in the U.S. and Europe to pursue FRAND clarification. “Good Things Come in Threes? DOJ, FTC and EC Officials Wax Eloquent About FRAND” reports on the speeches from officials within the Department of Justice (DOJ), Federal Trade Commission (FTC), and European Commission (EC).
It is no coincidence that these officials each came forward with comments regarding FRAND within a few weeks of each other. As suggested by Dr. Scott-Morton [DOJ Deputy Asst. Attorney General for Economic Analysis], this effort was at least loosely coordinated within the three agencies, each of which is actively involved in matters involving the licensing of patents essential to industry standards.
Professor Contreras summarizes the FTC, DOJ and EC officials' statements regarding FRAND in the following areas:
Injunctive Relief. If the agency viewpoints share on one thing, it is a strong aversion to injunctions that seek to block the use of a standard after a FRAND commitment has been made.
Antitrust and Competition Law Claims. Several of the agency officials suggest that violation of FRAND commitments could, under certain circumstances, constitute violations of antitrust or competition law.
Magnitude of FRAND Royalties. Not surprisingly, the agency representatives do not speak much about the complex question of the magnitude of FRAND royalty rates. … perhaps Judge Robart's upcoming judicial intervention in Seattle may shed light on how best to conduct this analysis.
SDO-Based Solutions. Unlike the FTC and EC representatives, the DOJ officials strongly encourage SDOs to implement policies that are likely to alleviate some of the risks and uncertainty currently associated with FRAND commitments.
Additional work by all SEP stakeholders (standards-development organizations, standards-setting organizations, patent holders, product vendors, and regulators) is required for a common understanding of FRAND/RAND commitments.
As Robert Barr, executive director of the Berkeley Center for Law & Technology, stated in The Wall Street Journal’s, “Pivotal Patent Case Heads to Court:”
Not just the parties, but all the companies who negotiate these things need the guidance.