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1. Does the IEEE need to define “reasonable rates, terms and conditions?”
A definition of the kind that Don has suggested would be a critical clarification of IEEE’s existing policy of asking patent owners to make a statement about their licensing intentions. If the IEEE were to require disclosure of and commitment to actual licensing terms as part of each RAND commitment, a definition of “reasonable rates, terms and conditions” would be significantly less important. But without such license term disclosure, going forward without a definition of “reasonable rates, terms and conditions” greatly limits the value of much of the current effort by PatCom. The IEEE bylaws seek an assurance in terms of “reasonable rates, with reasonable terms and conditions”; it is, important that the IEEE be clear as to what it is asking, and therefore, it is entirely appropriate that the IEEE to say what it means when it asks for such an assurance. This is not a matter of rewriting patent law; it is about enhancing the quality and utility of information that IEEE now expects patent owners to provide.
A definition of the kind Don has suggested is an important adjunct to policy changes that encourage (but do not require) ex ante disclosure of a maximum royalty rate and/or ex ante provision of a proposed license agreement. If a standard is adopted in a manner that makes a given patent essential to its implementation after the patent owner’s maximum royalty rate and other material terms have been disclosed to SDO participants who are also prospective licensees, the disclosed terms are likely to be viewed as “reasonable” based on the implied conclusion of the informed voters on the proposed standard in question. However, where patent owners decline to disclose their terms prior to voting, improved clarity in the meaning of the words used in the assurance could reduce the likelihood of subsequent complex litigation over ex post license demands. In these circumstances, a definition of the kind Don has suggested would become a desirable aid to dispute resolution. It would be a test distinctly different from existing case law that is used to determine “reasonable royalties” for assessment of damages in infringement litigation under the so-called “Georgia-Pacific” factors, which many legal commentators agree can be less than helpful, and which are generally applied at the time infringement begins, which is misplaced in the standards context. That test is not appropriate for determining what is “reasonable” in the context of a patent essential to implement what is intended to be an “open” industry standard adopted at a time when (a) alternatives to the solution being considered for the standard were available to the decision-makers; and (b) those decision-makers expressly relied on the patent owner’s RAND commitment in rejecting those alternatives in favor of the patented solution.
The IEEE PatCom should not presume that its adopted definition is necessarily appropriate for All US SDOs or for the rest of the world; rather, the Committee should adopt a definition that suits its own purposes as guidance on the meaning and intent of patent assurances for the IEEE’s standards. The greater transparency and reduced litigation risk that these measures would bring to IEEE proceedings as compared to other SDOs lacking such measures would become a distinct competitive advantage for the IEEE, strengthening its status as an important forum for IT standard-setting activities.
It is undesirable to let “each judge in each court in each case define” what is meant in the assurance statements made to the IEEE. Like clarity in the specification of the standards themselves, predictability regarding costs entailed in adopting any given solution, prominently including required license fees, is critical to the evolution and growth of new markets based on new technologies that IEEE standards are intended to enable. Unpredictability and the resulting heightened risk of litigation that can stall market development are contrary to the IEEE’s fundamental objectives as a forum for IT standard-setting activity.
2. If the IEEE does define it, what should the definition be?
Don’s definition makes good sense. Prominent economists who have written extensively about patent issues in IT standards contexts have suggested similar definitions. See, for example, Shapiro & Varian, Information Rules: A Strategic Guide to the Network Economy at p. 241 (1999): reasonable royalties are “the royalties that the patent-holder could obtain in open, up-front competition with other technologies, not the royalties that the patent holder can extract once other participants are effectively locked in to use technology covered by the patents”; Farrell & Shapiro, Intellectual Property, Competition, and Information Technology at p. 30 (Berkely Working Paper, 2004): fair and reasonable licensing terms are “normally best measured by adopters’ willingness to pay . . . when they know their alternatives and have not yet made investments specific to that technology.” See more generally the excellent new article by Daniel Swanson and William Baumol on Reasonable and Nondiscriminatory (RAND) Royalties, Standards Selection, and Control of Market Power, 73 Antitrust Law Journal 1 (2005).
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Scott
______________________________
Scott K. Peterson
Senior
Counsel
Hewlett-Packard Company
scott.k.peterson@hp.com