Justice Department Will Not Challenge Revised IEEE Standards Patent Policy

In a February 2, 2015, business review letter (the Letter), the U.S. Department of Justice informed the Institute of Electrical and Electronics Engineers (IEEE) that it has no present intention to challenge IEEE's proposed Patent Policy Update (the Update), which would change IEEE's policies regarding Standards Essential Patents (SEPs). The Update, if implemented, will impose one mandatory, and three suggested, changes to IEEE's SEP licensing policies for participants submitting "Letters of Assurance" (LOAs) to IEEE, generally eroding SEP holders' interests in favor of implementers' interests.  Indeed, the European Commission reportedly issued a response statement calling for "careful balance between guaranteeing full access to standards at the same time as ensuring appropriate remuneration for intellectual property." DOJ acknowledged that the IEEE proposed Update was controversial, and that IEEE members claimed that the process was hijacked by implementers seeking changes at the expense of SEP owners. Nonetheless, DOJ accepted that the process IEEE followed was consensus-oriented and transparent, and thus DOJ would make no challenge on the basis of the process itself being unfair.  Rather more curious, however, was DOJ's failure to discuss whether IEEE possesses market power in any relevant market, and whether the Update might harm competition in one or more possible markets because of IEEE's unique role in establishing standards critical for modern communications (such as WiFi and Internet standards). While the EC and DOJ have mostly converged their views on how antitrust laws apply to standard-setting organizations, the DOJ Letter suggests that there remain some, potentially material, differences in approach between them.

In September 2014, IEEE submitted the Update for DOJ review, which will implement new terms for submitters of LOAs. While a holder of SEPs is not required to submit an LOA, if it does so and commits to license on reasonable and non-discriminatory (RAND) terms, under the proposed Update, it could not to seek an injunction against implementers except in rare circumstances. The proposed Update also provides suggestions for best practices with respect to establishing RAND royalties, the scope of the duty to license, and the scope of permissible grantback licenses. 

Injunctions. The Update would provide mandatory limits on when a holder of an SEP making a RAND commitment to IEEE may seek an injunction. Specifically, a patent holder would be prohibited from seeking an injunction unless the implementer failed to participate in an adjudication of a rate setting determination. DOJ approved this revised IEEE position on injunctions, despite noting that it is more stringent than what U.S. law presently requires, simply noting that such an express limitation will "reduce any remaining uncertainty among implementers." DOJ did not address the potential impact of a more stringent rule on the incentives innovators would otherwise have to develop new technologies, or to participate in IEEE processes under the terms of the proposed Update. 

Rates. The DOJ again cites "clarity" in approving the new IEEE definition of a "Reasonable Rate." The updated term would exclude any value from inclusion in the standard; in this respect, the proposed Update merely reflects recent decisions that seek to clarify that the reasonableness of the royalty for an SEP must derive from the value the patent provides, and not from its inclusion in the standard. More controversial, however, is the proposal to establish the reasonableness of the royalty based on the smallest saleable unit incorporating the technology, rather than the end product embodying the patented claims. This change would reverse what is, at least today, widespread industry practice and is almost certain to reduce overall returns to patent holders. In fact, last month the EC sent a letter to Nokia stating that IEEE's smallest saleable unit proposal "would constitute a change in the IEEE policy" and "may risk having a significant impact." DOJ concludes, however, that the proposal would provide "additional clarity" and accepts IEEE's assertion that it would "speed licensing negotiations" and "limit patent infringement litigation."  

Duty To License. For multiple business reasons, including costs of enforcement and management of taxation issues, many patent holders historically have elected to license a specific level of production in the value chain, and have insisted that upstream or downstream producers must deal with licensed customers or suppliers to avoid infringement claims. The Update, however, proposes to obligate patent holders bound by the IEEE RAND commitment to license patents for "any Compliant Implementation," which means that the patent holder cannot refuse to license its patents for standard compliant use at any particular level of production. In practice, this change denies the patent holder the right to choose the point in the value chain to license. Indeed the DOJ notes that "this provision entails a departure from historical licensing practices for some licensors," and as applied, the Update eliminates the patent holders' right to select the level of licensing. DOJ stressed "clarity as to who is entitled to a license" in support of its approval.

Reciprocity. The proposed Update prohibits licensors from demanding licenses to applicants' patents that are not essential to the same standard, and also from forcing an applicant to take a license to non-essential patent claims. DOJ concludes that "the Update leaves parties free to negotiate these types of terms voluntarily." As a practical matter, however, this may make it more difficult for holders of "commercially" essential patents to obtain full value for patents that are not, technically, required to implement a given standard.  

Ultimately, DOJ based its approval of the Update on the perceived value of "better ex ante knowledge about licensing terms" resulting from the Update. According to DOJ, by providing a clearer standard, the Update would facilitate more efficient licensing and decrease litigation. Time will tell.

DOJ's analysis does not appear to consider the effects on technology innovation and future standard-setting that may arise from the Update. Notably, the Letter expresses a view that there may be "variation among SSOs' patent policies," and that such variation is likely to be pro-competitive. In so doing, however, DOJ does not provide any analysis of IEEE's role in the SSO universe, and does not assess whether IEEE's adoption of the Update is likely to have a domino effect on other SSO's. Given IEEE's apparent balance in favor of patent implementers, the Letter may encourage other implementers to drive changes in other SSOs, pushing the pendulum across the board towards more implementer-friendly practices, possibly producing widespread harmonization among SSOs—rather than the expected competition DOJ foresees. These dynamics inside and outside IEEE should be closely watched in the standard-setting arena at large to assess their impact on both the willingness of patent holders to participate in, and submit LOAs to, SSOs, as well on the pace of innovation more broadly.