VITA, a non-profi t standard-setting organization, requested a Business Review Letter from the DOJ, stating the Department’s enforcement position on VITA’s new patent policy requiring the ex ante disclosure of essential patent claims and proposed license terms. VITA develops open architecture standards for real-time modular embedded computing systems employed in a wide range of products, including MRI machines, aviation and navigation devices, telecommunication switches, and military/defense and space exploration applications. Drinker Biddle’s Bob Skitol and Ken Vorrasi are VITA’s antitrust counsel and they advised VITA on the development and implementation of its new patent policy and the Department’s business review process. In the past, VITA required its members to license technology incorporated into a VITA standard on “reasonable and non-discriminatory” (RAND) terms. VITA determined that it needed to revise its RAND patent policy after it encountered several episodes of patent holdup conduct, which included patent owners inducing reliance on misleading or meaningless RAND licensing commitments. These instances of holdup conduct caused major delays in the development of affected VITA standards and imposed major costs on the organization.

VITA’s revised patent policy submitted for DOJ’s review is designed to prevent further holdup episodes by providing for the following:

(1) Working group members are required to disclose all patents and patent applications that are owned, controlled, or licensed and that the members believe to contain claims that may become essential to implement a standard.

(2) Working group members agree to grant licenses to all essential patent claims on fair, reasonable and non-discriminatory terms.

(3) Working group members are required to disclose their maximum royalty rate for all essential patent claims. Each member must also (a) provide a draft license agreement or (b) accept prescribed limits on the scope of any grantbacks, nonasserts, reciprocity or defensive termination provisions in its fi nal licensing agreement.

(4) All disclosures are made by completing a declaration, which includes representations that the declaration is enforceable and that licensees and prospective licensees are third-party benefi ciaries entitled to enforce the declaration’s provisions.

(5) Any failure to comply adequately with the policy’s disclosure obligations results in the member company having to license its technology on a royalty-free basis. There is also an arbitration procedure for resolving disputes over disclosure compliance.

(6) Negotiation or discussion of license terms among working group members or third parties at meetings is strictly prohibited.

In a Business Review Letter issued on October 30, 2006, the Department stated that VITA’s new policy does not run afoul of the antitrust laws and achieves important procompetitive benefi ts. The Department made clear that, absent naked price fi xing or bid rigging, the Department evaluates conduct that occurs during standard setting under the rule of reason, given the procompetitive benefi ts of standardsetting activities.

The Department stated that the disclosure of intellectual property and proposed license terms allows members to make informed decisions on alternative technologies to be incorporated into a standard. The disclosure of this information helps to avoid patent holdup conduct by preserving the benefi ts of competition between competing technologies. The patent policy will not, the Department said, permit licensees to depress the price of licenses through collective action because VITA’s policy prohibits joint negotiation or discussion of licensing terms among members. As the Department concluded, “Adopting this policy is a sensible effort by VITA to address a problem that is created by the standard-setting process itself. Implementation of the proposed policy should preserve, not restrict, competition among patent holders.”

Shortly after VITA received its favorable Business Review Letter, another standard-setting organization, the Institute of Electrical and Electronics Engineers (IEEE), requested a Business Review Letter from the Department on its new ex ante patent policy. The IEEE’s new policy permits (but does not require) the ex ante disclosure of proposed license terms. A Business Review Letter expressing the Department’s enforcement position on IEEE’s new patent policy is expected this Spring.

The VITA and IEEE proposals are the latest developments in ex ante disclosure efforts to remedy patent holdup conduct that can occur in standard setting. We should expect to see other standard-setting organizations devise their own means of addressing the holdup problem in light of the Department’s statements that the ex ante disclosure of patents and license terms promotes and enhances competition.