PRIVATE FORUM FOR ROYALTY DETERMINATION:
IPR LICENSE DISPUTES
A New IPR Dispute Resolution Forum is Needed. Exploding international and domestic IP litigation with attendant costs, end result’s delays, uncertainty and dependence on different judges’ views, or juries' complex issue comprehension, necessitates a new, cost-effective and expeditious approach to resolving disputes involving the enforcement, implementation and licensing of Intellectual Property Rights (“IPR”), such as determination of disputed patent license royalty’s range and rate, particularly for standardized technologies.
SDO/ SSO Requirement of F/RAND Royalty. Patent holders belonging to the standards development/ setting organizations (“SDO” or “SSO”), must abide SDO/SSO’s bylaws requiring a grant of “fair, reasonable and non-discriminatory” (“FRAND” or “RAND” in the U.S.A.) royalty rates. F/RAND license terms must be offered to such voluntary organization members (and non-members) for using Standard-Essential Patents and patent applications (“SEP”). These holders financially benefit from their SEP licensed for a minimal royalty (being usually less than same for non-SEP), if the standard is accepted by the industry and incorporated in millions of products. Refusal to RAND license would result in exclusion from the standardized products and thus its technology might quickly become non-competitive and obsolete.
Commitment to SSO Technology Standard is Binding Contract. The patent family holders can identify in their letters of acceptance (“LOA”) hundreds of patents and patent applications as essential to the standard (i.e. reading on at least a portion of the SSO standard) or provide blanket LOA’s without such specific identification. The LOA’s (sent to the SSO/ SDO) promise to RAND license the patents being essential to the SSO standard, which other companies must technically/ commercially use in order to comply with the industry standard. Such commitment, viewed by SSO’s and courts as a binding contract, is a condition of the SSO’s adaption of the patented technology into the SSO’s technical standards. These standards (a common technical protocol of rules, guidelines and specifications) are adapted to reduce risk of “patent hold-up” / licensing abuse, promote the competitiveness/ innovations, protect public health, assure quality, interoperability/ compatibility of components of products and processes for a particular technology, like WIFI wireless communications or video coding technology.
Breach of F/RAND Contracts Is an Infringement Defense. Any user of SSO standard can enforce the SSO contracts as a third party beneficiary, unless the RAND commitment is not applicable to the patent infringer. Patent holders, who made RAND commitments to license on RAND terms to those who wish to adhere to SSO or SDO rules, cannot obtain patent infringement remedies (e.g., an injunction in court proceedings, exclusion orders in investigations under §337 of the Tariff Act of 1930) if they had offered licenses on non-RAND terms or RAND defenses have been adjudicated by courts. An infringer can pursue a determination of the RAND royalty rate while denying infringement or asserting patent invalidity, even though these defenses may ultimately eliminate the need for a license.
F/RAND Terms Disputes Inevitably Arise. Irreconcilable licensor-licensee disputes, as to RAND’s meaning and range/ rate calculations for SEP, non-essential patents or patents being not subject to RAND commitments, arise in license negotiations and/or determination of infringement damages based on “reasonable royalty rate."
Absence of F/RAND Royalty Formulas. SSO’s/ SDO’s in Europe and the United States do not provide any specific/ standard formulas for setting RAND royalties but only require licensor and licensee to agree on undefined “reasonable and/or nondiscriminatory” royalties (a percentage of gross revenue on the end product or patented item). FTC only recommended that courts should apply the hypothetical negotiation framework to determine RAND royalty damages (for RAND-committed patents) and set a royalty cap, but not specific formulas or numbers (e.g. fixed percentages).*
Royalty Determinations Only By Courts. There are no forums, which would ascertain what patentee’s compensation terms are fair and reasonable or what the RAND royalty rate should be for any industry, except the courts. Courts' rulings may conflict with each other with regard to the intertwined legal and complex technical issues requiring specialized expertise. The International Trade Commission gives only an injunctive relief (barring import of offending products) but not money damages, and a patent holder’s ITC enforcement action may not be appropriate for patents that are subject to RAND licensing obligations.
Contradicting Royalty Rate Guidelines. Government agencies (having persuasive but not binding authority) issue recommendations, which also conflict with court decisions. For example, the FTC’s recommendation was that a royalty should be based on the patented technology’s advantages over the technological alternatives available at the time the relevant standard was developed (not at the time of first infringement as per Georgia-Pacific** ruling) and not all of 15 factors (defined by the Georgia-Pacific court decision) should be used as a rate determination guideline.
Practical Option: Private Forum for IPR royalty rate determination by Referees using caselaw, logic, economic guideposts, technical evidence presented by the involved parties, and, if applicable, SSO standards and RAND commitments. Referees issue consistent decisions after their analysis of the standardized key factors, such as cumulative/ stacked royalties, patented invention contribution and its value to the SSO standard (as if in the bilateral negotiations between SEP owner and invention implementer), and existence (and plurality) of substitute/ competitive technologies at the time the SSO standard was developed. The Referees’ objective, uniformed and fair decisions binding on the parties (as per the Referee’s engagement agreement) prevent disclosure of trade secrets, save time and involved parties’ resources, bring clarity and certainty in licensing negotiations, and guide the courts, IP asset owners, attorneys, bankers, and investors.
*FTC, “The Evolving IP Marketplace,” March 2011.
**Georgia-Pacific Corp. v. United States Plywood Corp., 318 FSupp 1116 (SD NY 1970).