On February 8, 2015, the Institute of Electrical and Electronics Engineers (IEEE) adopted a new patent policy for standards-essential patents (SEPs) in IEEE standards. This comes in the midst of rapid developments in the high tech industry, where courts and other authorities have been attempting to define the rights of owners of SEPs. The new IEEE policy may reduce the licensing value of patents that are essential to implement a product compliant with future IEEE standards. However, there is reason to believe that the net effect on SEP patent valuation may be small.

By way of background, a SEP is a patent that covers a technical standard set by a standards setting organization such as the IEEE. Such technical standards define specifications by which companies can comply to produce products, or employ processes, that allow for uniformity in the marketplace. Screw thread sizes and railroad track spacing are two examples of early standards. Today, standards are directed to much more complex technologies, such as quality management (ISO 9001), WiFi (IEEE 802.11) and Bluetooth (IEEE 802.15.1).

The IEEE is one of the larger standards setting organizations with many popular standards, such as WiFi, Bluetooth, and even such basic standards as floating point number representation (IEEE 754). The IEEE Standards Association has long had requirements for participants in its standards creation process to declare if they will provide commitments to license any SEPs under reasonable and non-discriminatory (RAND) terms. The meaning and effect of RAND licensing commitments has been contested in recent litigation, such as Microsoft v. Motorola, Apple v. Motorola, and Ericsson v. D-Link Systems.

The IEEE’s new patent policy takes a position on some of the contested issues, and hence may reduce the uncertainty of litigating SEPs relating to IEEE standards. The policy changes may have other benefits as well. For example, the Department of Justice stated in a Business Review Letter that these policy changes have “the potential to benefit competition and consumers by facilitating licensing negotiations, mitigating hold up and royalty stacking, and promoting competition among technologies for inclusion in standards.”

Patent owners, on the other hand, may find that the new policy will reduce the revenue potential of their SEPs. The new patent policy requires patent owners to commit to new licensing terms and enforcement tactics for SEPs. A few of the more notable changes to the policy include:

• The “reasonable rate” patent owners may seek for SEP licenses has been newly defined and may be lower than under the prior policy. A “reasonable rate” should now be based on:
  • a potential licensee’s “smallest salable compliant implementation;”
  • the value of all SEPs from any patent owner in a potential licensee’s product; and
  • any prior existing licenses to other licensees.
• The prior policy largely left “reasonable rate” undefined, and it could have been based, for example, on a percentage of an entire product containing the compliant implementation rather than the smallest salable compliant implementation.
• Limiting the availability of injunctive relief. SEP owners are now precluded from seeking an injunction against infringers of standards-compliant products, at least during good-faith negotiations, and probably until full adjudication, and a first appeal, of a SEPs’ validity, damages for previous infringement, and the on-going royalty rate. The previous policy contained no limitation on the availability of injunctions.
• Addressing the availability of reciprocal licenses to the SEP owner from the potential licensee. Under the new policy, a SEP owner is permitted to require, as a condition of licensing the SEP to the potential licensee, that the SEP owner receive a license under the potential licensee’s patents, but only for the potential licensee’s SEP patents and not for non-essential so-called implementation patents. The prior policy was silent on reciprocal licenses.

It may, at first, seem that the new policy will reduce the licensing value of SEPs. But the practical effect of the above changes may not be as large as they seem. First, the new policy only affects future standards, and only standards from the IEEE. Second, some decisions of the Federal Circuit appear to have endorsed the use of the “smallest saleable patent practicing unit” as a royalty base for damage awards, which in those cases may not be different from the “smallest salable compliant implementation” required in the new policy. Third, while the injunction is generally a strong weapon in a patent owner’s arsenal, some courts are already reluctant to grant an injunction for infringement of SEPs due to, for example, antitrust concerns.

For further information: The new patent policy was approved by the IEEE Board of Directors as a modification of the IEEE Standards Association bylaws, and will become effective in the first quarter of 2015. The full text of the new patent policy is available here. The Board of Directors approved this change soon after the Department of Justice issued a favorable Business Review Letter, available here.

If you have any questions about this alert, please contact any member of BakerHostetler's Intellectual Property Group.

Authorship Credit: William C. Powell

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