In a bitterly contested and controversial move, the IEEE Standards Association (IEEE-SA) adopted a proposed Patent Policy regarding what represents Fair, Reasonable and Non-Discriminatory (FRAND) licensing terms for standards-essential patents (SEP) required for implementing new IEEE standards. The major changes include:
(a) Defining “reasonable rate” royalties based on the SEP contribution only to the “smallest saleable” Compliant Implementation, as opposed to valuation methods based on the market value of the contribution of the SEPs to the standard-compliant end-products—the interpretation federal courts gave that term as used in previous IEEE Patent Policy;
(b) Limiting SEP owners ability to seek district court injunctions or exclusionary orders at the International Trade Commission against users who refuse to license the SEP under FRAND terms;
(c) Limiting SEP holder’s ability to receive compensation by requiring reciprocal licensing from a SEP license requestor and attaching on such SEP holder an obligation to take a license on patents that requestor declared as SEPs.
An explanation is given why this Patent Policy is a substantial deviation from IEEE’s traditional neutrality on FRAND terms. The new Patent Policy replaces a set of well-functioning private coordination rules in the standards IP marketplace with a new set of rules that will essentially take the side of implementers/licensees on issues that are presently before the courts, and that are best left for resolution by the courts.
The Patent Policy’s operational pitfalls are reviewed with respect to changes (a) and (c) above. First, under IEEE-SA’s interpretation of “reasonable royalties,” patent owners who will provide Letters of Assurance ("LOA") will receive an order of magnitude lower royalties on their SEP as those will be computed on the chips rather than the products complying with the standards. Second, change (c) turns on its head the traditional FRAND reciprocity system: normally, an implementer is not required to take a license from the SEP holder; here, the SEP holder is required to take a license from the implementer who declared a patent essential, whether or not it is essential. These two major deviations from established FRAND practices will likely disrupt most FRAND negotiations surrounding IEEE standards and may double the number of disputes on whether patents are standard-essential.
The pitfalls of disharmony between the IEEE Patent Policy and the IEEE’s prior policy and those of other SDOs is reviewed, showing that it can severely undermine dynamic efficiencies in innovation where standards incorporate other standards by reference as “normative”. IEEE standards working groups’ future requests for new LOAs from SEP owners of legacy normative standards incorporated by reference in new IEEE standards would not be fulfilled because such legacy SEP owners would be unable to provide the new LOAs. This is because, to be accepted by IEEE-SA under the new Patent Policy, the new LOAs would require additional licensor concessions, which legacy SEP holders could not make due to inherent conflict with their commitment of non-discriminatory license terms under legacy LOAs. As a result, IEEE Societies would not be able to incorporate legacy standards by reference, and many top quality and complex standards projects would grind to a halt.
- Standard Essential Patents,