Technology: Can reasonable and nondiscriminatory licensing terms follow a purchased patent?

The industry is divided on RAND terms’ ability to travel

In the modern world of computing and telecommunications, the process of creating standards serves an important role. Standards serve to define precise specifications for components associated with a particular technology, thus facilitating interoperability among components which are covered by the technology. Standard-setting organizations (SSOs), which are responsible for adopting standards for a particular industry, play an important role in governing patent ownership rights that are applicable to standards adopted by the SSO.

Typically, an SSO requires the owner of a patent which is essential to a particular standard (known as a standard essential patents or SEP) to license the patented technologies on reasonable and nondiscriminatory (RAND) terms, or on fair, reasonable and nondiscriminatory (FRAND) terms, when the owner participates in activities associated with adopting the standard. Companies making products meeting these standards can then rely on the availability of licenses to these patents on commercially reasonable terms.

An important issue that has arisen in recent years relates to the question of whether RAND obligations “travel with the patent.” This has increasingly come up  due to the plethora of purchases of patent portfolios. Thus, if an owner of a SEP sells the patent to another company, is that acquiring company required to abide by the RAND obligations which were imposed on the original owner? The answer is not entirely clear.

Two recent transactions involving the transfer of control over sizeable patent portfolios have brought the issue to the fore:

  1. The purchase of Novell’s patents by an alliance of companies including Apple, Microsoft, RIM and others
  2. Google’s acquisition of Motorola Mobility

Novell’s patent portfolio, which included approximately 6,000 patents and patent applications, encompassed SEPs essential to the standards adopted by the European Telecommunications Standards Institute (ETSI). Google’s acquisition of Motorola Mobility resulted in the transfer of control over a sizeable patent portfolio comprising approximately 17,000 issued patents and 6,800 pending patent applications, including SEPs covering the video codec H.264 standard and the IEEE 802.11 Wi-Fi standard. These transactions raised questions of the future of the RAND obligations in the wireless communications industry and ultimately led to investigations by the Department of Justice’s (DOJ) Antitrust Division.

During the pendency of the DOJ’s antitrust investigation, both Apple and Google issued letters to SSOs clarifying the extent of their intended commitment to the RAND obligations and addressing their stance on whether RAND obligations should travel with a patent to a subsequent purchaser of a SEP (at least to some extent). Apple’s letter to the ETSI explains that the telecommunications industry “suffers from a lack of consistent adherence to FRAND principles” and explains that “Apple is committed to a FRAND licensing framework for cellular standards essential patents based on three basic elements – appropriate royalty rate, common royalty base and no injunction”. Notably, the letter also explains that this framework should be applicable to both entities that have made a FRAND commitment and entities that have acquired SEPs which are subject to a FRAND commitment. However, it appears that Apple has avoided any formal commitment to this framework in stating that the company is committed to this framework “provided that other parties reciprocate.”

Google’s letter to the Institute of Electrical and Electronics Engineers (IEEE) states: “while Google has no present intention to transfer any of the acquired MMI patents that include Essential Patent claims to third parties, should Google do so in the future, it will use its best efforts to ensure that the transferees of any such MMI patents including Essential Patent Claims are contractually obligated to comply with MMI’s licensing commitments.” In stating that it would use best efforts to ensure that subsequent transferees comply with MMI’s licensing commitments, the letter implicitly suggests that such transferees might not otherwise be subject to those commitments.

These letters show the lack of clarity in the industry as to whether RAND commitments are imposable on subsequent purchasers of SEPs. The uncertainty leaves the industry a bit nervous about the effects of standards essential patents falling into unfriendly hands that may not live up to the previous owners commitments to license the technology on fair and reasonable terms. 

Contributing Author

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Seth Ostrow

Seth Ostrow is a founder and managing partner of the law firm of Ostrow Kaufman LLP, a patent boutique based in NY which specializes in...

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