Standard setting organizations (“SSOs”)1 attempt to foster innovation and enable interoperability through the development of industry standards. To establish those standards, an SSO generally relies on the innovations and contributions of its members. In exchange, its members’ technology may be incorporated into the standards. SSO members that participate in the standard-setting process thus often seek to have their patented technology included in the standards.
Some allege, however, that standardizing patented technology raises concerns over anticompetitive conduct.2 One concern is that owners of standard essential patents (SEPs) will abuse any power they acquired from the adopted standard.3 For example, an SEP owner may engage in a patent “hold-up” by demanding exorbitant royalties from companies that have made significant investments to design and develop standard-compliant products.4 Alternatively, an SEP owner may attempt to eliminate competition by refusing to license its SEP to implementers of the standard.5
To combat these concerns, SSOs generally require members both to disclose relevant patents and patent applications during the standard-setting process and to agree to license those patents on fair, reasonable, and non-discriminatory terms (FRAND) if the patents are declared essential to the adopted standard.6 Thus, once a disclosed patent is deemed standard essential, the patent owner is contractually obligated to license that patent on FRAND terms. But what happens if the patent owner later transfers the SEP? Are the patent owner’s FRAND obligations binding on future owners? At least some courts have suggested that the answer is yes.
For example, in In the matter of Negotiated Data Solutions LLC, the Federal Trade Commission (FTC) implicitly found an owner of patents that are essential to the IEEE standard bound by a previous owner’s licensing commitment to IEEE, including the terms set forth in the licensing commitment.7 The FTC had instituted an investigation against Respondent N-Data alleging that N-Data engaged in unfair methods of competition by “break[ing] a licensing commitment that its predecessor, National Semiconductor (“National”), made to the Institute of Electrical and Electronics Engineers (‘IEEE’), a standard setting organization, in 1994.”8
In particular, National promised to license its patented technology to any requesting party “on a nondiscriminatory basis” and for a one-time fee of $1,000 if that technology was incorporated into the IEEE standard (which it later was).9 In 1998, National assigned the patents to Vertical Networks.10 Before the assignment, National gave Vertical a copy of its IEEE licensing commitment.11 In addition, the assignment agreement provided that Vertical take the assignment “subject to any existing licenses and other encumbrances that [National] may have granted,” and defined existing licenses as including “patents that may be encumbered under standards such as an IEEE standard.”12 In 2002, Vertical attempted to alter the terms of National’s IEEE licensing commitment by submitting a letter to the IEEE promising to license any SEPs “on a non-discriminatory basis and on reasonable terms and conditions including its then current royalty rates” (rather than the above-mentioned one-time fee of $1,000) and stating that the assurances in that letter supersede any assurances by National.13 Then, in 2003, Vertical assigned the patents to N-Data, a non-practicing entity.14 At the time of the assignment, N-Data had a copy of National’s licensing commitment and was familiar with the circumstances and terms of the commitment.15 Nevertheless, N-Data refused to honor that commitment.16
The FTC held that N-Data engaged in unfair methods of competition by reneging on National’s licensing commitment and ordered N-Data to either honor that commitment or stop enforcing the patents.17 In reaching that decision, the FTC necessarily found N-Data bound by the terms of National’s licensing commitment.
In Rembrandt Tech. LP v. Harris Corp., Rembrandt sought a declaratory judgment that it was not required to offer Harris a license to the patent at issue on reasonable and non-discriminatory (RAND) terms, despite a predecessor-in-interest of the patent at issue having committed to license any SEPs on RAND terms.18 Rembrandt initially alleged that it was neither bound by the predecessor’s commitment nor required to offer a license on RAND terms until the patent at issue was determined to be standard essential.19 After discovery later revealed that Rembrandt had notice of its predecessor’s commitment at the time Rembrandt acquired the patent at issue, Rembrandt conceded that it was bound by that commitment.20 Nevertheless, the court still explicitly held that, “according to the clear and unambiguous terms” of the predecessor’s commitment, Rembrandt owed Harris a RAND license to the patent at issue “to the extent the patent is ‘essential’ to the implementation of the HDTV standard,” binding a successor in interest to a prior owner’s commitments to an SSO.21
In In re Innovatio IP Ventures, LLC Patent Litig., Innovatio accused several wireless network users of infringing patents essential to the IEEE standard.22 In turn, several manufacturers of devices used by the wireless network users brought declaratory judgment actions against Innovatio alleging, among other things, breach of contract.23 In particular, the manufacturers argued that Innovatio was bound by the prior patent owner’s contractual obligations to IEEE to license its SEPs on FRAND terms and that Innovatio breached those contractual obligations through its patent infringement lawsuit.24 Innovatio did not dispute that it was subject to the prior patent owner’s contractual obligations, but rather argued that the manufacturers did not have standing to bring the breach of contract claim because they had not been denied a RAND license and therefore were not the intended beneficiaries of the IEEE contract.25 The court disagreed, finding the prior patent owner’s FRAND commitments binding and enforceable by the manufacturers “as potential users of the 802.11 standard and thus third-party beneficiaries of the agreements between Innovatio's predecessors and the IEEE.”26 Although the issue in Innovatio centered on whether a third-party beneficiary has standing to bring a breach of contract claim, the court seemed to suggest that the FRAND commitments of a prior patent owner are binding on future patent owners and are enforceable by all users of the applicable standards.27
Based on the above cases, precedent exists that a future SEP owner is bound by a prior owner’s FRAND commitments, at least where it had notice of those commitments. But absent a bright-line rule, SSOs and members with declared SEPs should consider taking steps to ensure that FRAND obligations are always binding on future owners of SEPs. One possible solution is for an SSO to include a provision in its Intellectual Property Rights (IPR) Policy that requires its members to bind all future transferees of declared SEPs to prior FRAND agreements.28 In fact, some SSOs have already done so.29 Another possible solution is for members with declared SEPs to include provisions in patent transfer agreements that require transferees to take the assigned patents subject to any existing FRAND encumbrances, whether or not the member is bound by agreement with an SSO to include such a provision. By taking these types of steps, SSOs and SEP declarants can reduce the risk of future transferees of FRAND-encumbered SEPs engaging in anticompetitive conduct.