NEW DEFINITION IMPOSING A NEW OBLIGATION TO LICENSE INDIVIDUAL COMPONENTS WITH IMPRACTICAL RESULTS
This proposed rule change represents a radical departure from existing industry practice in two ways. First, this change would require patent holders to allow the inventions they contribute to IEEE Standards to be used not only for those standards, but for any purpose. This is because the revised rules require licensing not of a product that implements the standard, but rather of any product that implements even a portion of a clause of a standard. No standards body has ever sought a licensing commitment that would apply to products that do not practice the standard, as this modification would require. Second, the current IEEE-SA Patent Policy permits patent holders to license their standard-essential patents at one level of the product supply chain, typically to the manufacturer of the product that implements the entirety of the IEEE Standard, not just a portion of the standard. This change takes the existing licensing system and flips it on its head. Unlike the current policy, this change would require patent holders to make licenses available to any component that complies with even a “portion” of an IEEE Standard—however small that portion might be.
What does this mean in practical terms? It means that the holder of a patent that is infringed upon by an assembly of components or a product that implements an IEEE Standard must offer to license its patents to the makers of the components, even if that component does not itself directly utilize all aspects of the patented technology or implement the complete IEEE Standard. In other words, if there is a filter, an RF chip, or some other minor component in a wireless router that contributes to just a portion of the implementation of an IEEE Standard by that router, but does not itself implement the entire Standard, a patent holder must provide a license to the component supplier.
In most cases, this one-size-fits-all requirement makes no sense, because it will require patent holders to license to potentially dozens of component suppliers for a single product, when the final product itself is the device that utilizes the patented technology. Consider a novel amplifier specified by a standard that can constructed of discrete transistors, resistors, and capacitors. Each of these components by itself does not implement the standard, but—when brought together in the right way—creates an amplifier with special characteristics. What is essentially being asked is that the manufacturer of the transistors, resistors, and capacitors increase their prices (or absorb the costs) when these parts are sold to manufacture this specific amplifier, but when these parts are sold for other uses, the price is the normal price. Patent owners already have a hard enough time getting companies whose products use their inventions to pay for the use of their patented technology. Now it will be even harder if they must chase numerous companies, each of which may deny infringement. With the increased number of licensees and corresponding administrative costs and overhead, it will create inefficiencies that will drive up costs for all.
Unsurprisingly, the European Commission has raised concerns that the effects of this change have not been properly considered by the IEEE to date. MLex, an independent media organization, recently published an article detailing the EC's specific concerns. See Leah Nylen and Lewis Crofts, “EU warns of impact of IEEE's patent policy change,” MLex (Jan. 27, 2014).
FOR GOOD REASON, NO STANDARD-SETTING ORGANIZATION HAS EVER SPECIFIED HOW A REASONABLE ROYALTY SHOULD BE CALCULATED
For the first time, the IEEE is proposing to dictate how to determine a reasonable royalty, demonstrating that the proposed changes are not a mere clarification of the existing policy. The changes proposed here will set the IEEE apart from other major standards-developing organizations (e.g., ISO, IEC, ITU, ETSI), which leave the negotiation of royalties to the individual companies. The IEEE would therefore, without precedent, substitute its judgments regarding a proper royalty for the determinations of the negotiating parties, imposing constraints on their negotiating freedom in favor of only one side of the negotiation —i.e., standards implementers. As a result of this new restriction on the rights of inventors, some contributors to IEEE Standards will not contribute their most valuable patented technology.
ESTABLISHING A NEW VALUATION METRIC THAT IS AT ODDS WITH PATENT HOLDERS’ RIGHTS UNDER EXISTING LAW
This change (requiring licensing based on the “smallest saleable Compliant Implementation”) raises the impracticalities identified in Comment 1 above. Furthermore, patent law allows patent holders to obtain value for their inventions where that value is best realized in products. The value for many technologies goes beyond the cost of an individual component that might be the physical embodiment of the technology. This change will have the radical effect of divorcing the royalties payable for inventions from the actual value of the capabilities and uses they enable, arbitrarily limiting the value an inventor might obtain for their technology, contrary to the legal rule that patent holders are entitled to the value of their invention when receiving reasonable royalties. As one U.S. court recently observed, this “is like valuing a copyrighted book based only on the cost of the binding, paper, and ink needed to actually produce the physical product. While such a calculation captures the cost of the physical product, it provides no indication of its actual value.”
Another example that highlights why this concept is unworkable: consider a patent covering a new, safer design on car brakes. The components used to make the brakes are reasonably inexpensive components: brake pads, actuators, and housings. But the value of improved brakes far exceeds the costs of those components, allowing the car company to obtain a significantly higher price. The value is being able to stop more effectively and should not be limited to the parts that make up the product, yet very little of the increased revenue to the car manufacturer would go to the inventor.
VALUING INDIVIDUAL PATENTS BASED ON AN UNKNOWN AND UNKNOWABLE AGGREGATE OF ALL STANDARD-ESSENTIAL PATENT CLAIMS
This new text states that patent owners must value their technology by valuing all other “Essential Patent Claims” practiced by the “Compliant Implementation.” This approach is entirely hypothetical and impossible to implement. It is indisputable that each and every patent is unique and contributes different value to the compliant product. The value of a patent for a car’s cigarette lighter differs in kind and value from that of a patent for the car’s suspension system, and adding the cigarette lighter to the car does not reduce the value of the car’s suspension—the values are independent. Yet, under this proposed rule, the value of each patented technology will be based on an unspecified proportionality to the summation of a larger number of unknown values. The proposed rule fails to recognize that the number of patents implemented in a "Compliant Implementation" will vary considerably over time and the rule provides no guidance on how to deal with a time-varying number of patents in this calculation, which indicates how poorly this proposed rule was thought out.
DISCARDING THE BEST EVIDENCE OF THE VALUE OF A TECHNOLOGY
It is a foundational principle of patent law that the best evidence of the value of a patented technology is what others have paid for it. This is a market-driven valuation method. This proposed change would allow infringers to argue that the best evidence should be ignored. Every patent license that has ever been negotiated was done so under the threat of a so-called “Prohibitive Order” (an “injunction” in legalese, akin to keeping trespassers off real estate) because a patent provides the inventor the fundamental right to obtain an order that compels users of the patented technology to license the patented invention. In recognition of this, courts in the United States even look to settlement agreements in previous patent litigation as an appropriate measure of patent value. Under the proposed rules, that market-based evidence would be precluded for consideration by parties negotiating a license for an IEEE Standard-essential patent. Is the IEEE substituting its knowledge in royalty valuation for that of the marketplace?
INFRINGERS CAN FREE-RIDE FOR YEARS BEFORE HAVING TO PAY ANYTHING
This proposed change would allow an infringer—particularly a well-financed infringer—to use a patented invention for years without paying for it. Indeed, this proposed rule allows infringers to act in bad faith and refuse to negotiate indefinitely without consequence. The patent owner could not even seek an order prohibiting such infringing use—this is akin to evicting someone who refuses to pay rent—until after (1) winning at trial against the infringer, (2) going through an appeal of the case and getting the decision affirmed, and (3) the infringer continues to refuse to take a license on the same terms it was offered years before the litigation began. Only bad-faith behavior after a trial and an appeal (typically a multi-year process) would matter; there would be no consequences whatsoever for bad-faith behavior before that point. This would impose tremendous expense upon patent owners seeking to reach a just outcome for the use of their patents. Many small technology companies and individual patent owners will be unable to afford these costs to enforce their patents. This could cause small companies seeking to incorporate their inventions into standards to look outside the IEEE as a venue for standardization.
IMPOSING ADDITIONAL UNNECESSARY COSTS AND INEFFICIENCIES ON PATENT OWNERS
This change would prohibit patent owners from negotiating licenses under which they receive from the licensee rights to the licensee’s patents for all IEEE Standards. This is inconsistent with common industry practice. There has been no demonstration of harm that should lead to this proposed change. Companies often license all their patents, or portfolios of patents, to each other to reach “patent peace” and avoid repeated disputes. This new rule threatens to change industry practice.
INFRINGERS WILL REFUSE TO TAKE LICENSES FOR YEARS UNLESS THE PRICE IS ARTIFICIALLY LOW
This change reinforces the problem identified above in Comment 6: the proposed change creates an incentive to infringe upon patents without paying the inventor because the patent owner will not be able to stop infringers for many years, until after an appeal, and even when the infringer in acting in bad faith and is unwilling to license the patented technology. During those years of litigation, and while its litigation costs mount, the patent owner will receive nothing. This rule is also intended to prevent patent owners from seeking the help of the International Trade Commission (ITC) to stop infringers. Under the proposed changes, the ITC may not meet the specified criteria of available courts that can decide disputes, despite today being an important option to enforce patents when infringers are outside the jurisdictional reach of U.S. courts. If patent owners are faced with draconian patent rules that rob them of their rights and the value of their patents, they will cease to contribute their most valuable technologies to IEEE Standards.
The quality of IEEE Standards will suffer and implementer and consumer costs will increase. IEEE Standards will no longer be desirable, and the IEEE’s reputation as a leader in standardized technology will be sorely damaged.
1 6. Patents
2 6.1 Definitions3
4 The following terms, when capitalized, have the following meanings:
5 “Accepted Letter of Assurance” and “Accepted LOA” shall mean a Letter of Assurance that the IEEE-SA
6 has determined is complete in all material respects and has been posted to the IEEE-SA web site.
7 “Affiliate” shall mean an entity that directly or indirectly, through one or more intermediaries, controls the
8 Submitter or Applicant, is controlled by the Submitter or Applicant, or is under common control with the
9 Submitter or Applicant. For the purposes of this definition, the term “control” and its derivatives, with
10 respect to for-profit entities, means the legal, beneficial or equitable ownership, directly or indirectly, of
11 more than fifty percent (50%) of the capital stock (or other ownership interest, if not a corporation) of an
12 entity ordinarily having voting rights. “Control” and its derivatives, with respect to nonprofit entities,
13 means the power to elect or appoint more than fifty percent (50%) of the Board of Directors of an entity.
14 “Applicant” shall mean any prospective licensee for Essential Patent Claims. “Applicant” shall include all
15 of its Affiliates.
16 “Blanket Letter of Assurance” shall mean a Letter of Assurance that applies to all Essential Patent Claims
17 for which a Submitter may currently or in the future (except as otherwise provided for in these Bylaws and
18 in the IEEE-SA Standards Board Operations Manual) have the ability to license.
19 “Compliant Implementation” shall mean any product (e.g., component, sub-assembly, or end-product) or
20 service that conforms to any mandatory or optional portion of a normative clause of an IEEE Standard.
21 “Enabling Technology” shall mean any technology that may be necessary to make or use any product or
22 portion thereof that complies with the [Proposed] IEEE Standard but is neither explicitly required by nor
23 expressly set forth in the [Proposed] IEEE Standard (e.g., semiconductor manufacturing technology,
24 compiler technology, object-oriented technology, basic operating system technology, and the like).
25 “Essential Patent Claim” shall mean any Patent Claim the usepractice of which was necessary to create a
26 compliant implementation of implement either a mandatory or optional portions portion of the a normative
27 clauses clause of the [Proposed] IEEE Standard when, at the time of the [Proposed] IEEE
28 Standard's Standard’s approval, there was no commercially and technically feasible non-infringing
29 alternative implementation method for such mandatory or optional portion of the normative clause. An
30 Essential Patent Claim does not include any Patent Claim that was essential only for Enabling Technology
31 or any claim other than that set forth above even if contained in the same patent as the Essential Patent
33 “Letter of Assurance” and “LOA” shall mean a document, including any attachments, stating the
34 Submitter’s position regarding ownership, enforcement, or licensing of Essential Patent Claims for a
35 specifically referenced IEEE Standard, submitted in a form acceptable to the IEEE-SA.
36 “Patent Claim(s)” shall mean one or more claims in issued patent(s) or pending patent application(s).
37 “Prohibitive Order” shall mean an interim or permanent injunction, exclusion order, or similar
38 adjudicative directive that limits or prevents making, having made, using, selling, offering to sell, or
39importing a Compliant Implementation. [NoIcon Annotation]
40 “Reasonable and Good Faith Inquiry” includes, but is not limited to, a Submitter using reasonable efforts
41 to identify and contact those individuals who are from, employed by, or otherwise represent the Submitter
42 and who are known to the Submitter to be current or past participants in the development process of the
43 [Proposed] IEEE Standard identified in a Letter of Assurance, including, but not limited to, participation in
44 a Sponsor Ballot or Working Group. If the Submitter did not or does not have any participants, then a
45 Reasonable and Good Faith Inquiry may include, but is not limited to, the Submitter using reasonable
46 efforts to contact individuals who are from, employed by, or represent the Submitter and who the
47 Submitter believes are most likely to have knowledge about the technology covered by the [Proposed]
48 IEEE Standard.
49 “Reasonable Rate” shall mean appropriate compensation to the patent holder for the practice of an
50 Essential Patent Claim excluding the value, if any, resulting from the inclusion of that Essential Patent
51 Claim’s technology in the IEEE Standard. In addition, determination of such Reasonable Rates should
52 include, but need not be limited to, the consideration of:
53 • The value that the functionality of the claimed invention or inventive feature within the Essential
54 Patent Claim contributes to the value of the relevant functionality of the smallest saleable
55 Compliant Implementation that practices the Essential Patent Claim.
57 • The value that the Essential Patent Claim contributes to the smallest saleable Compliant
58 Implementation that practices that claim, in light of the value contributed by all Essential Patent
59 Claims for the same IEEE Standard practiced in that Compliant Implementation.
61 • Existing licenses covering use of the Essential Patent Claim, where such licenses were not
62 obtained under the explicit or implicit threat of a Prohibitive Order, and where the circumstances
63 and resulting licenses are otherwise sufficiently comparable to the circumstances of the
64 contemplated license.
66 “Reciprocal Licensing” shall mean that the Submitter of an LOA has conditioned its granting of a license
67 for its Essential Patent Claims upon the Applicant’s agreement to grant a license to the Submitter with
68 Reasonable Rates and other reasonable licensing terms and conditions to the Applicant’s Essential Patent
69 Claims, if any, for the referenced IEEE Standard, including any amendments, corrigenda, editions, and
70 revisions. If an LOA references an amendment or corrigendum, the scope of reciprocity includes the base
71 IEEE Standard and its amendments, corrigenda, editions, and revisions.
72 “Statement of Encumbrance” shall mean a specific reference to an Accepted LOA or a general statement
73 in the transfer or assignment agreement that the Patent Claim(s) being transferred or assigned are subject to
74 any encumbrances that may exist as of the effective date of such agreement. An Accepted LOA is an
76 “Submitter” when used in reference to a Letter of Assurance shall mean an individual or an organization
77 that provides a completed Letter of Assurance. A Submitter may or may not hold Essential Patent Claims.
78 “Submitter” shall include all of its Affiliates unless specifically and permissibly excluded.
79 6.2 Policy80
81 IEEE standards may be drafted in terms that include the use of Essential Patent Claims. If the IEEE
82 receives notice that a [Proposed] IEEE Standard may require the use of a potential Essential Patent Claim,
83 the IEEE shall request licensing assurance, on the IEEE-SA Standards Board approved Letter of Assurance
84 form, from the patent holder or patent applicant. The IEEE shall request this assurance without coercion.
85 The Submitter of thea Letter of Assurance may, after Reasonable and Good Faith Inquiry, indicate it is not
86 aware of any Patent Claims that the Submitter may own, control, or have the ability to license that might be
87 or become Essential Patent Claims. If the patent holder or patent applicant provides an assuranceLOA, it
88 should do so as soon as reasonably feasible in the standards development process once the PAR is
89 approved by the IEEE-SA Standards Board. This assuranceLOA should be provided prior to the Standards
90 Board’s approval of the standard. An asserted potential Essential Patent Claim for which anlicensing
91 assurance cannot be obtained (e.g., a Letter of Assurancean LOA is not provided or the Letter of
92 AssuranceLOA indicates that licensing assurance is not being provided) shall be referred to the Patent
94 A Letter of AssuranceThe licensing assurance shall be either:
95 a) A general disclaimer to the effect that the Submitter without conditions will not enforce any
96 present or future Essential Patent Claims against any person or entity making, having made, using,
97 selling, offering to sell, or importing, distributing, or implementing a compliant implementation of
98 any Compliant Implementation that practices the standardEssential Patent Claims for use in
99 conforming with the IEEE Standard; or,
100 b) A statement that a license for a compliant implementation of the standard the Submitter will
101 be mademake available a license for Essential Patent Claims to an unrestricted number of
102 applicantsApplicants on a worldwide basis without compensation or under reasonable
103 ratesReasonable Rates, with other reasonable terms and conditions that are demonstrably free of
104 any unfair discrimination. to make, have made, use, sell, offer to sell, or import any Compliant
105 Implementation that practices the Essential Patent Claims for use in conforming with the IEEE
106 Standard. An Accepted LOA that contains such a statement signifies that reasonable terms and
107 conditions, including without compensation or under Reasonable Rates, are sufficient
108 compensation for a license to use those Essential Patent Claims and precludes seeking, or seeking
109 to enforce, a Prohibitive Order except as provided in this policy.
110 At its sole option, the Submitter may provide with its assuranceLetter of Assurance any of the following:
111 (i) a not-to-exceed license fee or rate commitment, (ii) a sample license agreement, or (iii) one or more
112 material licensing terms.
113 Copies of an Accepted LOA may be provided to the working group, but shall not be discussed, at any
114 standards working group meeting.
115 An Accepted Letter of Assurance shall apply to the Submitter, including its Affiliates. The Submitter,
116 however, may specifically exclude certain Affiliates identified in the Letter of Assurance, except that a
117 Submitter shall have no ability to exclude Affiliates if the Submitter has indicated Reciprocal Licensing on
118 an Accepted Letter of Assurance.
119 The Submitter shall not condition a license on the Applicant’s agreeing (a) to grant a license to any of the
120 Applicant’s Patent Claims that are not Essential Patent Claims for the referenced IEEE standard, or (b) to
121 take a license for any of the Submitter’s Patent Claims that are not Essential Patent Claims for the
122 referenced IEEE standard.
123 On a Letter of Assurance, the Submitter may indicate a condition of Reciprocal Licensing. If an Applicant
124 requires compensation under Reciprocal Licensing to its Essential Patent Claims, then a Submitter may
125 require compensation for its Essential Patent Claims from that Applicant even if the Submitter has
126 otherwise indicated that it would make licenses available without compensation.
127 The Submitter and all Affiliates (other than those Affiliates excluded in a Letter of Assurance) shall not,
128with the intent of circumventing or negating any of the representations and commitments made in the
129 Accepted Letter of Assurance, assign or otherwise transfer any rights in any Essential Patent Claims that
130 are the subject of such Letter of Assurance that they hold, control, or have the ability to license with the
131 intent of circumventing or negating any of the representations and commitments made in suchand for
132 which licensing assurance was provided on the Accepted Letter of Assurance.
133 The Submitter of aAn Accepted Letter of Assurance shall agreeis intended to be binding upon any and all
134 assignees and transferees of any Essential Patent Claim covered by such LOA. The Submitter agrees (a) to
135 provide notice of aan Accepted Letter of Assurance either through a Statement of Encumbrance or by
136 binding anyits assignee or transferee to the terms of such Letter of Assurance; and (b) to require its
137 assignee or transferee to (i) agree to similarly provide such notice and (ii) to bind its assignees or
138 transferees to agree to provide such notice as described in (a) and (b).
139 This assurance shall apply to the Submitter and its Affiliates except those Affiliates the Submitter
140 specifically excludes on the relevant Letter of Assurance.
141 If, after providing a Letter of AssuranceThe Submitter and the Applicant should engage in good faith
142 negotiations (if sought by either party) without unreasonable delay or may litigate or, with the parties’
143 mutual agreement, arbitrate: over patent validity, enforceability, essentiality, or infringement; Reasonable
144 Rates or other reasonable licensing terms and conditions; compensation for unpaid past royalties or a future
145 royalty rate; any defenses or counterclaims; or any other related issues.
146 The Submitter of an Accepted LOA who has committed to make available a license for one or more
147 Essential Patent Claims agrees that it shall neither seek nor seek to enforce a Prohibitive Order based on
148 such Essential Patent Claim(s) in a jurisdiction unless the implementer fails to participate in, or to comply
149 with the IEEE, theoutcome of, an adjudication, including an affirming first-level appellate review, if sought
150 by any party within applicable deadlines, in that jurisdiction by one or more courts that have the authority
151 to: determine Reasonable Rates and other reasonable terms and conditions; adjudicate patent validity,
152 enforceability, essentiality, and infringement; award monetary damages; and resolve any defenses and
153 counterclaims. In jurisdictions where the failure to request a Prohibitive Order in a pleading waives the
154 right to seek a Prohibitive Order at a later time, a Submitter may conditionally plead the right to seek a
155 Prohibitive Order to preserve its right to do so later, if and when this policy’s conditions for seeking, or
156 seeking to enforce, a Prohibitive Order are met.
157 Nothing in this policy shall preclude a Submitter and an implementer from agreeing to arbitrate over patent
158 validity, enforceability, essentiality, or infringement; Reasonable Rates or other reasonable licensing terms
159 and conditions; compensation for unpaid past royalties or a future royalty rate; any defenses or
160 counterclaims; reciprocal obligations; or any other issues that the parties choose to arbitrate.
161 Nothing in this policy shall preclude a licensor and licensee from voluntarily negotiating any license under
162 terms mutually agreeable to both parties.
163 If a Submitter becomes aware of additional Patent Claim(s) that are not already covered by an
164 existingAccepted Letter of Assurance, that are owned, controlled, or licensable by the Submitter, and that
165 may be or become Essential Patent Claim(s) for the same IEEE Standard but are not the subject of an
166 existing Letter of Assurance, then such Submitter shall submit a Letter of Assurance stating its position
167 regarding enforcement or licensing of such Patent Claims. For the purposes of this commitment, the
168 Submitter is deemed to be aware if any of the following individuals who are from, employed by, or
169 otherwise represent the Submitter have personal knowledge of additional potential Essential Patent Claims,
170 owned or controlled by the Submitter, related to a [Proposed] IEEE Standard and not already the subject of
171 a previously submittedAccepted Letter of Assurance: (a) past or present participants in the development of
172 the [Proposed] IEEE Standard, or (b) the individual executing the previously submittedAccepted Letter of
174 The assuranceA Letter of Assurance is irrevocable once submitted and accepted and shall apply, at a
175 minimum, from the date of the standard's approval to the date of the standard's transfer to inactive status.
176 Copies of an Accepted LOA may be provided to participants in a standards development meeting.
177 Discussion of essentiality, interpretation, or validity of Patent Claims is prohibited during IEEE-SA
178 standards-development meetings or other duly authorized IEEE-SA standards-development technical
179 activities. IEEE-SA shall provide procedures stating when and the extent to which patent licensing terms
180 may be discussed (see subclause 5.3.10 of the IEEE-SA Standards Board Operations Manual).
181 The IEEE is not responsible for identifying
182 1. Identifying Essential Patent Claims for which a license may be required, for conducting inquiries
184 2. Determining the legal validity, essentiality, or scopeinterpretation of those Patent Claims, or for
186 3. Determining whether any licensing terms or conditions provided in connection with submission of
187 a Letter of Assurance, if any, or in any licensing agreements are reasonable or non-
188 discriminatory.; or,
189 4. Determining whether an implementation is a Compliant Implementation.
190 Nothing in this policy shall be interpreted as giving rise to a duty to conduct a patent search. No license is
191 implied by the submission of a Letter of Assurance.
192 In order for IEEE’s patent policy to function efficiently, individuals participating in the standards
193 development process: (a) shall inform the IEEE (or cause the IEEE to be informed) of the holder of any
194 potential Essential Patent Claims of which they are personally aware and that are not already the subject of
195 an existingAccepted Letter of Assurance, that are owned or controlled by the participant or the entity the
196 participant is from, employed by, or otherwise represents; and (b) should inform the IEEE (or cause the
197 IEEE to be informed) of any other holders of such potential Essential Patent Claims that are not already the
198 subject of an existingAccepted Letter of Assurance.