Six months after the Department of Justice (“DOJ”), United States Patent and Trademark Office (“USPTO”), and the National Institute of Standards and Technology (“NIST”) issued a Draft Policy Statement on Licensing Negotiations and Remedies for Standards-Essential Patents Subject to Voluntary F/RAND Commitments, the agencies have yet to issue a final statement, and have been silent as to whether or when such a statement may issue.1 The 2021 Draft quickly attracted substantial criticism and has not been included in recent agency updates and speeches.
Following a 2019 Policy Statement which emphasized that owners of standard-essential patents (“SEPs”) may freely seek, and courts may appropriately order, injunctive relief for SEP-infringing products, the 2021 Draft purports to clarify that injunctive relief will seldom be the appropriate remedy.2 This article addresses the 2021 Draft and provides a primer on standards, SEPs, Standards Setting Organizations (“SSOs”), and FRAND negotiations, including the antitrust concern over SEP policy, and the potential impact the proposed policy could have on the current SEP landscape.
I. Standards, SSOs, SEPs, and FRAND
Standards are industry established criteria or specifications that facilitate compatibility and uniformity across devices and services.3 Standards benefit manufacturers and consumers by promoting interoperability, efficiency, and further innovation.4 Standards are set by Standards-Setting Organizations (“SSOs”),5 which develop, promulgate, and revise technical standards for industry participants to adopt.6 SSOs generally embody companies that are active in the relevant industry, particularly SEP owners and implementers who seek to manufacture products using those standards.7
Among the companies comprising the SSOs and participating in the standard setting process are entities that own patents covering the potential standards.8 If included in the resulting standard these patents may be essential to manufacturing compliant products, and thus standard-essential. A manufacturer implementing the standard cannot make a conforming product without practicing the invention and infringing the SEPs. Consequentially, these entities must obtain a license from the SEP holder or risk patent infringement.
Many SEP holders are also market participants, and their enforcement of SEPs against implementers who seek to make or sell competing products could restrain competition.9 Once standards become established and switching impractical, the holders of the underlying SEPs gain considerable leverage.10 This necessitates disclosure to prevent entities that co-develop standards from blindsiding implementers with patent claims arising from that standard.11 Disclosure alone, however, does not remove the leverage SEP owners have to “hold up” competition by demanding inflated royalties or refusing to license their SEPs altogether.12 To combat this risk, SSOs require that participants disclose any patents that are potentially essential to a standard and commit to license those SEPs on fair, reasonable, and non-discriminatory (“FRAND”)13 terms.14
While FRAND obligations seek to balance the interests of SEP holders and implementers, controversy remains. After all, the phrase “fair, reasonable, and non-discriminatory” is inherently ambiguous and complex.15 SEP holders may seek unreasonable or unfair terms that they attempt to pass off as FRAND, and force the SEP-infringing implementer into patent litigation. Enforcement may raise antitrust concerns when the SEP owner targets competing products and seeks to prevent that product from reaching the market via an injunction.
FRAND obligations also create the potential for patent “holdout,” which occurs when an implementer chooses to reject an SEP holder’s offer because they claim, even if unreasonably, that it is not FRAND or that they are not infringing the SEP.16 Sometimes, the implementer will leverage for more favorable license terms, and sometimes it will force the SEP owner to litigate. Either way, without the threat of an injunction, the risk is asymmetric in favor of the implementer. If the implementer prevails, it does not require a license, whereas if it loses, it should pay a reasonable royalty, similar to a FRAND rate. The only way for an SEP owner to prevent the implementer from launching at risk is with an injunction.
II. Brief History of SEP Policy
In 2012, SEP remedies policy gained prominence when former Deputy Assistant Attorney General Renata Hesse, of the DOJ Antitrust Division, delivered her Six “Small” Proposals for SSOs Before Lunch remarks at the ITU-T Patent Roundtable (“2012 Remarks”).17 The 2012 Remarks articulated the Obama administration’s belief that limiting an SEP holder’s right to an injunction when they have made a FRAND commitment “would promote competition among implementers of the standard, potentially benefiting consumers around the world.”18 Hesse suggested that an injunction should only be available when the implementer is unwilling to accept a FRAND rate as determined by a neutral third-party.19
The administration followed in 2013, with the DOJ and USPTO Policy Statement on Remedies for Standards-Essential Patents Subject to Voluntary F/RAND Commitments (“2013 Statement”).20 Although the 2013 Statement dealt specifically with the availability of exclusion orders in investigations under Section 337 of the Tariff Act of 1930, it largely echoed the anti-injunction sentiment of the 2012 remarks.21 It also cautioned that factors beyond an implementer’s refusal to negotiate are relevant when determining whether public interest considerations preclude an exclusion order.22
U.S. policy subsequently turned away from the anti-injunction sentiment of the Obama administration. In 2019, the DOJ, USPTO, and NIST issued an updated Policy Statement on Remedies for Standards-Essential Patents Subject to Voluntary F/RAND Commitments (“2019 Statement”).23 Driven by concerns that the 2013 statement was being misinterpreted as suggesting that injunctions and other exclusionary remedies should not be available in SEP cases, the 2019 Statement emphasized the importance of these exclusionary remedies to a carefully balanced patent system.24 In doing so, the 2019 Statement clarified that the framework adopted in eBay Inc. v. MercExchange, L.L.C. should govern the issuance of injunctions in cases involving SEPs, as it does in any patent case in federal court.25 That being said, “the particular F/RAND commitment made by a patent owner, the SDO’s intellectual property policies, and the individual circumstances of licensing negotiations between patent owners and implementers all may be relevant in determining remedies for infringing a standards-essential patent, depending on the circumstances of each case.”26 In sum, the 2019 Statement sought to neutralize any concerns that the 2012 Remarks and 2013 Statement precluded the availability of injunctions in cases involving SEPs.
III. The 2021 Draft Policy Statement
Consistent with the 2019 Statement, the 2021 Draft emphasizes that effective SEP license negotiations require good faith on both sides, and includes specific recommendations as to how parties on both sides of the potential transaction can proceed in and/or demonstrate good faith.27 In further conformity with the 2019 Statement, the 2021 Draft restates that “courts and other neutral decision makers in their discretion should continue to consider all relevant facts, including the FRAND commitment and the conduct of the parties during bilateral licensing negotiations, when making remedy determinations involving standards-essential patents.”28 It is the next level of consideration where the 2021 Draft deviates.
The issuance of a new, revised statement appears to have one purpose—to limit injunctions in the enforcement of SEPs. This is effectuated through subtle language clarifying how courts should apply their discretion: “As a general matter, consistent with judicially articulated considerations, monetary remedies will usually be adequate to fully compensate a SEP holder for infringement.”29 Going even further, the 2021 Draft argues that the existing framework and public interest, as applied to SEPs, “generally militate against an injunction.”30
The 2021 Draft was open for public comments through February 4, 2022, and received over 150 comments, including from Congressional delegations, former government officials, SEP owners, and implementers.31 Some of the comments supported the Draft and even requested that the revised policy take a stronger stand against injunctions and exclusion orders.32 Other comments criticized the Draft and warned of its potential implications.33 Among the critiques, there were a few key themes.
First, the administration has offered no reason to deviate from the 2019 Statement—the Draft expresses no need for a change. The administration undermines the guidance and predictability of policy statements altogether by dismantling existing policy without pointing to a problem, suggesting that every administration should and will rewrite the policy. The 2019 Statement expressly disavowed the unique legal standard set forth in the 2013 Statement, replacing it with a neutral approach that did not favor injunctions, nor any other remedy.34 The 2021 Draft generally adheres to the same principle, but adds the caveat that in applying the existing framework (all available remedies) to cases involving SEPs, injunctions will generally be unnecessary and disfavored.35
Second, the 2021 Draft would create a weapon for implementers to use in deterring and opposing injunctive relief, and therefore tips the scales towards implementers and away from innovators during the negotiating process. As discussed above, absent the threat of an injunction, implementers face no downside risk by refusing objectively FRAND terms and insisting on terms skewed in their favor. Thus, while the Draft endorses good faith negotiations, and acknowledges that attention is due to the circumstances of each negotiation, the proposed policy would incentivize implementers to refuse to negotiate SEP licenses in good faith. If the fair damages based on a FRAND rate become the default legal remedy, there is little leverage left for SEP owners. Critics also point out that means less incentive to own SEPs, which chills competition at the most important level—standard setting itself.36
Third, critics focus on likely international implications of the proposed policy. In a letter to Assistant Attorney General Johnathan Kanter, a bipartisan group of Senators voiced concerns that the proposed policy will harm U.S. interests in two important ways.37 First, because the U.S. is rich in IP rights and SEPs, policies that weaken SEPs disproportionately undermine U.S. interests. The Senators warned, “[t]he U.S. government should not embrace policy that stacks the deck against domestic SEP owners and encourages strategic infringement by foreign and domestic competitors.”38 Second, lessening the incentive to seek SEPs undermines national security. As explained in the Senate letter, “[t]he 2021 Draft Revision discourages U.S. companies from developing the next round of critical standards technology. That will open the door to Chinese and other foreign standards development, weakening U.S. national security.”39 Similarly, Andrei Iancu, former director of the USPTO, warned that “[w]hen you reduce [the] enforceability and value of intellectual property rights, you reduce the ability to invest in them” and “reduce America’s ability to compete internationally—and domestically.”40
The Biden administration has undertaken an aggressive antitrust agenda, and revising the official position on SEP enforcement remedies would be in line with that. Still, given the interest in this issue, it is surprising that six months after issuing the 2021 Draft and four months after the close of comments, there is still no sign of a final policy statement. Of note, addressing almost any of the criticism would require retaining neutrality with respect to remedies, which means the statement would not change the existing 2019 policy in any substantive way. We are now at the point where it is fair to question whether a new policy will issue at all. We will continue to monitor and provide an update if and when a final policy issues.