RE: [PP-DIALOG] Definition of Reasonable Rates

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No Gil, no surprise that you agree with Scott. I do appreciate though the time it takes each of you to present your positions in these e-mails. Thank you.

I wonder how adding the phrase "before the adoption of the standard" in this definition of reasonable rates, terms and conditions would have helped Cisco in the single event Gil mentions so often of receiving some 160 patent license offers of 1% each that more than doubled the cost of the product?

Was that situation for a particular standard? Which one? What was the product?

How would this new definition work for a company, such as TI and others, that typically does not license (as licensee or licensor) individual patents, but often enters into 5-10 year field of use, portfolio licenses with competitors based on several business and technical considerations in addition to royalty rate? These companies enter into these licenses typically after some standards are adopted and before other standards are adopted.

I read the paper by Swanson and Baumol (73 Antitrust L J) and with all the limiting assumptions they made, they did not appear to address the situation described in the preceding paragraph. Are you considering the IEEE using the royalty computing equations suggested in this paper?

Would this definition of "before the adoption of the standard" exclude consideration of the factors from Georgia-Pacific or other factors, including a refusal to take or give a license? Who would decide?

Would this refined definition be required to be used in licensing between only IEEE member companies? How would IEEE know? What would IEEE do if it was not followed? What about an IEEE member company licensing with a company that is not an IEEE member?

As y'all know, TI is not completely against ex ante disclosures. In the WWiSE proposal for IEEE 802.11n, we voluntarily tried to make an ex ante royalty free disclosure so the working group could consider both the technical and business merits of the proposal. We learned however that some people in IEEE considered our ex ante offer improper, because it made the business merits, shall I say, "transparent".

It probably won't surprise observers of this debate to learn that I agree with the points that Scott makes below. To pick up on a point that came up in the discussion of ex ante on the ABA Sci Tech Committee listserv, supporters of ex ante view the definition of RAND as a second-best solution. Defining RAND is necessary only for SDOs that don't "jump the chasm in one leap" by moving to a world in which participants disclosing patents to a standards working group state up front the terms under which they will license those patents. The proposal now in front of IEEE-SA identifies ex ante disclosure as only one of a number of options, and retaining RAND as another option. It therefore becomes necessary to go down the road of defining what RAND means.

I also agree with Scott that atempting to define RAND does not amount to rewriting patent law. Rather it is a recognition both (a) that the existing Georgia-Pacific test for determining the reasonableness of patent royalties is not sufficiently precise to give businesspeople the predictability they need to decide whether to implement a standards-compliant product, and (b) that there is a broad range of views among companies participating in standard-setting as to what obligations a RAND commitment imposes on the patentholder that makes it.

Scott has captured well the first aspect of the indeterminacy of RAND. As to the second, the motion to dismiss recently filed by Qualcomm in the Broadcom v. Qualcomm antitrust lawsuit is instructive. In moving to dismiss Broadcom's antitrust claim, Qualcomm, which both parties agree committed to license certain of its patents on RAND terms in commitments made in various standards bodies, nevertheless characterizes Broadcom's allegation that Qualcomm has imposed allegedly unreasonable licensing term as protesting that Qualcomm is charging too much for the use of its patents. To quote from Qualcomm's motion, "[c]harging what the market will bear, however, is not an anticompetitive or unreasonable act." Broadcom v. Qualcomm, Civil Action No. 05-3550 (MLC), D.N.J., Memorandum in Support of Defendant's Motion to Dismiss at 18 (emphasis supplied) (filed December 9, 2005). I read Qualcomm's argument to be that a RAND commitment imposes no limitation al all on the acknowledged right of a patentholder to "[c]harg[e] what the market will bear."

I am not -- either for myself or on behalf of Cisco -- taking a position on the merits of the Broadcom v. Qualcomm litigation or the correctness as a matter either of antitrust law or patent law of Qualcomm's apparent interpretation of the RAND obligations it assumed. Nevertheless, it seems to me that if Qualcomm's view is vindicated then the question of whether RAND has any meaning is, at the very least, open to debate. Viewed against that backdrop, the proposal under consideration by IEEE PatComm to add definition to the meaning of RAND as used within IEEE should be welcomed by all companies that participate in standard setting.

Gil Ohana

Director, Antitrust and Competition

Cisco Systems, Inc.

300 E. Tasman Drive

MS 10/2

San Jose, CA 95134

United States of America

Phone: +1 408 525 2853

Mobile: +1 408 203 5301

E-mail: gilohana@cisco.com

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).

-- Scott
______________________________
Scott K. Peterson
Senior Counsel
Hewlett-Packard Company
scott.k.peterson@hp.com