First published in LES Insights

Standard-essential patents, or SEPs, often bear an obligation for licensing on reasonable and non-discriminatory (RAND, or FRAND with the addition of "fair") terms. While recent court decisions in Microsoft and Innovation1 begin to define the "reasonable" part of RAND, they leave undefined and indicate the still unsettled nature of the "non-discriminatory" requirement.

An analogous context may provide guidance for future SEP-RAND cases. Major music licensing organizations are required to offer non-discriminatory licenses for copyrights. But variations are allowed as long as similar license terms are offered to similarly situated licensees. That may suggest a parallel approach for the "non-discriminatory" part of RAND for SEPs.

RAND Licensing Decisions

Reasonable royalty determinations for patent infringement typically employ Georgia Pacific factors, calculating the royalty that a hypothetical willing patentee and potential licensee would have negotiated.Some factors are specific to the particular licensee's situation, such as rates that licensee paid for comparable patents (Factor 2); the commercial relationship between the licensor and that licensee (Factor 5); the effect of selling the patented product in promoting that licensee's sales of other products (Factor 6); the established profitability and commercial success of that patented product (Factor 8); and the extent and value of that licensee's use of the patented invention (Factor 11).3

Courts recently began to determine reasonable royalties for RAND-encumbered SEPs. Microsoft employed a modifiedGeorgia Pacific analysis, which Innovatio largely followed.These decisions may, however, suggest different interpretations of the "non-discriminatory" part.

Microsoft

Microsoft indicated that RAND-committed SEP licensors may treat different licensees differently. Central to its analysis was the importance of the standard and the SEPs "to the products at issue."5

Microsoft retained many Georgia Pacific Factors specific to the implementer, namely Factors 2, 6, 8, and 11. In particular, it explained that Factors 6 and 8 include the importance of the patented technology to the implementer's sales, and that a reasonable royalty would account for the contribution of the patented technological capabilities "to the implementer and the implementer's products."6

Microsoft further explained that hypothetical negotiators would examine the importance of the patented technology to each of the implementer's products implementing the standard. If they do not use an optional portion of a standard, "the specific SEP may have little value to the implementer." And the negotiators would consider the importance of others' SEPs "to the implementer's products."7

Accordingly, Microsoft examined the implementer's products—Windows and Xbox—alleged to infringe the video coding and Wi-Fi standards SEPs in issue to determine the importance of those SEPs to those products, beyond mere compliance with standards. It concluded that Motorola's SEPs for video coding were of minor importance to those products, and its Wi-Fi SEPs sometimes aided Xbox. Similarly, Microsoft rejected simply using patent pool rates, which do not consider the importance of the patented technology "to the implementer's products."8

Finally, Microsoft set different Wi-Fi SEP rates for Xbox versus other products. It noted that Motorola may contend that other products use the Wi-Fi standard, but Motorola did not present that evidence, which prevented the court from determining the importance of Motorola's WiFi SEPs to those other products. Accordingly, the court set the Wi-Fi RAND rate for Xbox at one rate and for other products at a lower rate.9

Innovatio

Innovatio largely followed the reasonable royalty approach in Microsoft, including most of the Georgia Pacific analysis.10Innovatio implicitly differed, however, on the non-discrimination part by effectively setting the same RAND rate for all implementers. The difference may be due to the evidence in the case, however, rather than a difference in legal approach.

While Microsoft involved only one implementer, Innovatio involved multiple types. The litigations began with Innovatio suing many different Wi-Fi equipment users, ranging from coffee shops to retailers, transport companies, and other commercial Wi-Fi users. Subsequently, several manufacturers of the Wi-Fi equipment sought declaratory judgments challenging the patent. All the suits were transferred for pretrial coordination by Judge Holderman in the N.D. Ill. The parties agreed that, in the initial stage, the court would determine the RAND royalty for the equipment manufacturers, not the users.11 Although unstated by the court, all users likely would pay that rate in the equipment price, because patent exhaustion would protect users of licensed manufacturers' equipment.12

Innovatio recognized that a central part of Microsoft's approach was to "consider the importance of the patent portfolio as a whole to the infringer's accused products." However, Innovatio's "analysis does not include a separate section evaluating the importance of Innovatio's patents to the accused products," and instead merged that determination with the importance of the SEPs to the Wi-Fi standard due to a failure of proof.13 The court explained that Innovatio, which contended that the royalty should vary based on the selling price of the equipment, "did not credibly apportion the value of the end-products down to the patented features. In light of that failure of proof, the court has no choice based on the record but to calculate a royalty based on the Wi-Fi chip."14

Innovatio mentioned the non-discriminatory part of RAND, justifying its use of the chip maker's profit margin in determining the royalty in part because "a RAND licensor . . . cannot discriminate between licensees on the basis of their position in the market."

Thus, the RAND rate for all the equipment manufacturers would be the "same RAND rate that Innovatio could charge to chip manufacturers . . . ."15 That effectively meant that the royalty rate would be the same, regardless of differences in the end use for which the manufacturer designed or sold the equipment.

That justification may simply represent dicta. Speaking at a conference a few months after his decision in Innovatio, Judge Holderman commented that non-discriminatory in the RAND commitment context means that the basic licensing conditions for licensees should be similar, but not necessarily identical. License terms could vary, for example, to account for factors such as volume.16

While Microsoft and perhaps Innovatio (with sufficient evidence) thus may indicate that the non-discriminatory part of the RAND obligation does not require identical RAND license terms, they do not define non-discriminatory. An analogous approach in music licensing, however, may provide guidance.

Different Royalties for Licensees that Are Not Similarly Situated Are Permitted in Music Copyright Licensing

Two major music licensing organizations, American Society of Composers and Performers and Broadcast Music Inc., serve as intermediaries between copyright owners and potential licensees. ASCAP and BMI pool the performance rights of their members and offer non-exclusive licenses to their members' copyrights.17

Both are subject to consent decrees from antitrust litigations decades ago, which expressly prohibit the organizations from discriminating between similarly situated licensees. The decrees were intended to address some of the same competition concerns as RAND licensing is intended to address for SEPs.

ASCAP's consent decree bars it from any license "which discriminates in license fees or other terms and conditions between licensees similarly situated." It defines those licensees as "in the same industry that perform ASCAP music and that operate similar businesses and use music in similar ways and with similar frequency . . . ." Relevant factors include whether the licensees compete with each other and their relative amounts of revenue.18

BMI's consent decree likewise prohibits it from agreements "discriminating in rates or terms between licensees similarly situated . . . ." It further provides that "differentials based upon applicable business factors which justify different rates or terms shall not be considered discrimination with the meaning of this section . . . ."19

Interpreting these consent decrees, courts have found that the licensing organizations may discriminate between licensees that are not similarly situated.20 For example, merely offering a higher licensing fee to one potential licensee than another has been held insufficient to establish improper discriminatory licensing.21 Also, the form licenses ASCAP offers vary depending on the business use, with different terms and rates tailored to the different types of users (e.g., airports, carnivals, and radio) and for different volumes of business.22

These consent decrees were intended to address concerns about the abuse of market power similar to those raised in the SEP-RAND context. According to the Justice Department, the ASCAP consent decree was entered to remedy allegations that "ASCAP and certain of its members had agreed to restrict competition among themselves in the licensing of music performance rights, and had restrained competition by allowing certain members of ASCAP to control the Society and to favor themselves in the apportionment of its revenues."23 Similarly, according to the court in Microsoft, RAND licensing obligations were adopted to address concerns about an abuse of market power and that SEP owners could otherwise "'extort their competitors or prevent competitors from entering the marketplace.'"24

Conclusion

As the case law develops, courts likely will provide more definition to both parts of the RAND obligation. In that development, the analogous context of copyright licensing by music organizations under court orders─addressing similar competitive concerns and permitting different terms for licensees that are not similarly situated─may provide guidance for the non-discriminatory part of the RAND obligation.