March 1, 2009 (Vol. 29, No. 5)
Steven B. Pokotilow
Amy E. Wilson
Benjamin P. Liu
Before Joining an SSO, Firms Need to Be Fully Cognizant of the Established Policies
During the standard-setting process, it often is advantageous to incorporate the latest technological advances into the standard. In the pharmaceutical and biotechnological fields, standardization of laboratory techniques (such as ultrahigh-throughput screening) may involve patented fluid delivery systems, vessel design, genetic markers, antibodies, or bioinformatic tools.
A standard is captured when a rogue member of a standard-setting organization (SSO) influences the SSO to select a standard requiring the use of that member’s intellectual property, with the intention of extracting excessive royalty payments from the industry once the standard is adopted industry-wide.
Once the standard is widely adopted, the rogue member may assert its patent rights against industry participants, thus holding up the industry that adopted the standard. This can be a no-win situation for the industry as it could force participants to agree to arguably excessive royalty payments, incur the cost and delay of adopting a new standard, or face costly patent litigation.
Struggle over Standards Capture
Given the fact that SSOs depend on the full cooperation of, and disclosure by, each participant, it is not hard to see why several industries have struggled with standards capture—as documented in patent infringement and unfair competition litigations. For example, in the computer memory chip industry, Rambus, a participant of the SSO, allegedly modified its pending patent applications to cover the computer memory chip standard being developed by the SSO without disclosing the pending patent application to the SSO. It later withdrew from the SSO and sought to enforce the patents against manufacturers who adopted the standard.
A jury verdict found the manufacturers not liable for patent infringement on the theory that a patentee’s participation in an SSO creates an implied contractual relationship that grants manufacturers permission to practice the patents covered by the standard. However, the Court of Appeals for the Federal Circuit, the second highest court on patent matters reversed, finding that because the SSO policy statement concerning patent disclosure and licensing was unclear, and the SSO members did not explicitly consent to any contractual relationship between the SSO and its participants, no such relationship existed to immunize manufacturers from patent infringement.
In a December 2008 decision by the Court of Appeals for the Federal Circuit Qualcomm Inc. v. Broadcom Corp., Qualcomm sued Broadcom for patent infringement after Broadcom manufactured a product that adopted a video signal encoding standard developed by the SSO of which Qualcomm was a member. The court determined that, although the SSO policy did not explicitly impose a duty to disclose any intellectual property rights that “reasonably might be necessary” to practice the standard, it was sufficient to impose such a duty where the other SSO participants understood that the SSO policy did, in fact, impose such a duty.
Although Qualcomm contended that its participation had occurred after the standard had been set, evidence at trial revealed that Qualcomm had actively participated in the SSO during the standard-setting period, but had not disclosed the relevant patents to the SSO. The court held that because Qualcomm had concealed its patents during the standard-setting process and had concealed its participation in the SSO during trial, it was in breach of this duty of disclosure and had waived its right to enforce the patents against any standard-compliant products.
Contemplating Participation in an SSO
Before deciding to participate in an SSO, a company should make sure the SSO policy adequately addresses the intellectual property concerns of its participating members. Among the provisions to look for are the following:
A Provision that Unambiguously Ties Standard-Setting Power to Disclosure Obligations
The ability to participate in the standards-selection process should be tied to the disclosure requirements. Full disclosure should be the quid pro quo for standard selection and voting rights. Such an arrangement will create a set of obligations that is more likely to be recognized by the courts. Although the Qualcomm court found a duty of disclosure despite a lack of explicit language in the SSO policy, because the court found that the SSO participants understood there to be a duty of disclosure, an explicit and detailed duty of disclosure provision in the SSO policy obviates the need for a court to determine what members of the SSO understand the policy to mean.
Clearly Defined Scope of Disclosure Covering Patent Applications
The disclosure requirement should explicitly cover patents and patent applications filed during the period in which the standard-setting process takes place. A patent application is less visible to the industry, and thus, less likely to be noticed by members of the SSO, making explicit disclosure all the more essential. In addition, the capture via a patent application is possibly more costly because its impact remains hidden until it matures into a patent—possibly several years after the standard has been set. In the interim, the adoption of the standard spreads the hidden licensing cost across the unsuspecting industry.
For example, the patent applications for the intellectual property that was at issue in the Rambus case were filed when the standard was being debated. Unfortunately, the SSO policy did not explicitly require the disclosure of applications. The court noted that if the SSO wanted its members to disclose their application portfolio, it could have explicitly required them to do so.
A Requirement to Disclose the Most Restrictive Licensing Terms
The SSO policy also should require members to disclose the most restrictive licensing terms they would seek if their intellectual property were incorporated into the standard. To help avoid disagreements, and the potential for litigation, an SSO policy should require the disclosure of the maximum royalty and most restrictive licensing terms that the member intends to impose. This enables the SSO members to factor in the intellectual property cost when adopting the standard.
A Provision Imposing a Royalty-Free License on Relevant Patents if a Member Fails to Disclose Its Relevant Intellectual Property
Finally, as a fail-safe, the intellectual property provisions of an SSO should require members that fail to disclose essential patents to give a royalty-free license to those that adopt, or intend to adopt, the standard. In Qualcomm, Broadcom prevailed on its argument that Qualcomm had waived its patent rights because it had failed to disclose its relevant patents during its SSO participation.
The Department of Justice has explicitly approved an SSO policy employing this procedure, noting the pro-competition effect of such a policy as long as it does not become a pretext for price fixing. An explicit, enforceable waiver provision gives manufacturers a contractual defense to fend off patent abusers—a less costly and more predictable alternative to patent or fraud defenses.
The enterprise of setting ground rules for an entire industry requires collaboration among market competitors and technology leaders. Companies that participate in SSOs should monitor the signals from the judiciary and review the SSO policy from time to time to ensure that it delivers the protection it promises to manufacturers and users who adopt the standard.
Steven B. Pokotilow (email@example.com) is co-managing partner of the intellectual property practice group, Amy E. Wilson, Ph.D., is an associate, and Benjamin P. Liu is a former associate at Stroock & Stroock & Lavan. Web: www.stroock.com.