FTC Urges Limits on Use of Patents to Exclude IT and Telecom Products

"These investigations appear to present an issue of first impression for the ITC that has significant implications for the public interest,” the FTC said. “Simply put, we are concerned that a patentee can make a RAD [reasonable and nondiscriminatory] commitment as part of the standard-setting process, and then seek an exclusion order for infringement of the RAD-encumbered SEP as a way of securing royalties that may be inconsistent with that RAD commitment."

The FTC said firms in the IT and telecom industries often solve interoperability problems through voluntary consensus standard-setting by standard-setting organizations ("SSOs"). “Interoperability standards can create enormous value for consumers by increasing competition, innovation, product quality and choice,” the FTC said. But that agency said incorporating patented technologies into standards also “has the potential to distort competition by enabling SEP owners to negotiate high royalty rates and other favorable terms, after a standard is adopted, that they could not credibly demand beforehand, conduct known as ‘patent hold-up.'"

"Hold-up ... can deter innovation by increasing costs and uncertainty for other industry participants [and] can distort investment,” the FTC said. It also said the threat of hold-up may reduce the value of standard-setting.

Instead of granting an exclusion order, which limits the ability to import a particular product, the FTC said the ITC could decide Section 337’s public interest factors support denial of an exclusion order unless the holder of the RAD-encumbered SEP has made a reasonable royalty offer. Or the ITC could delay the effective date of its Section 337 remedies until the parties mediate in good faith for damages for past infringement or an ongoing royalty for future licensed use, the FTC said.

The FTC comments prompted a posting by Microsoft Deputy General Counsel David Howard on a company blog (http://xrl.us/bna424). He read them in the context of Microsoft’s ongoing patent-royalty dispute with Google’s Motorola Mobility over the Xbox system. Howard said the FTC statement “adds to the growing chorus of regulators and other government officials around the world who agree that injunctions and exclusion orders based on standard essential patents jeopardize competition and the availability and price of consumer technology."

Industry standards “don’t sound like something you should spend a lot of time worrying about,” Howard said, but “industry standards are the behind-the-scenes underpinning to wireless connectivity and the Internet, indeed, a foundation on which virtually all modern electronic devices and networks are built.” He said standards work because companies and inventors promise to make any patents they hold on the resulting standard available on reasonable and nondiscriminatory licensing terms. “The system depends on these promises, and when companies break them, the system breaks down,” Howard said. “Costs go up and popular technology products become less available."

Motorola “decided to break the system by using its standard essential patents to block other companies from selling their products,” Howard said. “Google, Motorola’s new owner, had the opportunity to reverse Motorola’s abusive policies, but has chosen instead to embrace them."

The ITC investigation involves wireless devices, portable music and data processing devices, computers and components. It’s based on a complaint filed by Motorola Mobility that alleges violations of Section 337 of the Tariff Act of 1930 in the import into the U.S. and sale of mobile devices, software and components that infringe patents asserted by Motorola.

The Association for Competitive Technology said the app ecosystem “affects millions of Americans and provides real, tangible benefit to their lives.” Given “the economic and public value of our industry, ACT’s members are deeply concerned about the impact of an exclusion order in a case where a patent is the subject of a commitment to license on ‘Reasonable and Non-Discriminatory’ terms as part of a standard,” the association’s Wednesday filing said. “We believe that granting an exclusion order for ‘Standard Essential Patents’ is against the public interest.”

Microsoft said industry participation in standards-setting is “a risky process” and companies like Motorola that abuse it harm the public interest. Its ITC filing said Motorola promised to participate in the standards-setting on a reasonable and nondiscriminatory basis, and shouldn’t be allowed to profit by convincing the ITC to exclude imports of products that allegedly use its patents.

Apple said an “exclusion order is not an appropriate remedy where the complainant is obligated to license its patents to the respondent on fair, reasonable, and non-discriminatory ('FRAND') terms.” It said “any exclusion order should exempt replacement parts and units so that consumers who have paid for insurance and warranties can continue to obtain the appropriate repair services.”

The Business Software Alliance wants all patentees “free to exercise their intellectual property rights as they see fit,” it said. “But if they make the choice to participate in the creation of technology standards and in the process commit to licensing their technologies on fair, reasonable and non-discriminatory ('FRAND') terms, then they should not be allowed to circumvent their original commitment by using the Commission to obtain an exclusion order which could result in extracting unreasonable royalties.”

Verizon Wireless said an exclusion order involving smartphones could limit consumer choice and national innovation. Hewlett-Packard said such an order “would thwart competition, stifle innovation, and result in higher prices for consumers -- thereby causing precisely the harms that Congress directed Section 337 should not inflict.” The Retail Industry Leaders Association said “exploitation of 337 exclusion orders in this manner to obtain artificially high royalties will inevitably result in reduced competition, stymied innovation of standard-compliant products and artificially inflated prices of products for consumers.”