Federal Judge Breaks New Ground with Ruling on When a Patent is “Standard-Essential”

bethShaw-0580editConvertedProfile-e1360002102239Featured Expert Column

Beth Z. Shaw, Brake Hughes Bellermann LLP

Standard-setting organizations play an important role in helping consumers. For example, by establishing a “802.11” standard, the Institute of Electrical and Electronics Engineers (“IEEE”) has helped guarantee that wireless devices of various manufacturers are interoperable, and that consumers can therefore buy wireless devices from a variety of manufacturers without worrying if the devices will be compatible with each other. As a result, consumers experience no switching costs if they choose to buy wireless devices from different manufacturers, leading to greater price competition.

Yet, while the standard-setting process has these potential benefits, there are also potential problems. For example, every manufacturer of standard-compliant products must use the technology stated in the standard. If one particular company owns a patent covering that technology, the standard can effectively force all others to buy that company’s technology if they want to practice the standard. This requirement allows the company to charge inflated prices that reflect an inflated value attributable to its technology’s designation as the industry standard. This is sometimes referred to as “patent hold-up.”

Innovatio IP Ventures, LLC (“Innovatio”) has sued hotels, coffee shops, restaurants, supermarkets, and other commercial users of wireless internet technology located throughout the United States (collectively, the “Wireless Network Users”). Innovatio alleges that the Wireless Network Users provide wireless internet access to their customers or use it to manage internal processes, and by doing so infringe various claims of twenty-three patents owned by Innovatio.

Cisco Systems, Inc., Motorola Solutions, Inc., SonicWALL, Inc., Netgear, Inc., and Hewlett-Packard Co. (collectively, the “Manufacturers”) each manufacture devices used by the Wireless Network Users to implement their wireless internet networks. The Manufacturers filed declaratory judgment actions against Innovatio to find the patents invalid and not infringed.

Before claim construction, however, the parties and the court agreed to first evaluate the potential damages available to Innovatio if the Defendants are found to infringe Innovatio’s patents. The court noted that it hoped that addressing damages first could help speed settlement.

Each of the previous owners of Innovatio’s patents agreed to license any standard-essential technology covered by their patents on RAND terms. Yet, Innovatio disputed which patent claims were “essential” under the standard.

The Defendants argued that Innovatio’s patents are all essential to the operation of the 802.11 wireless standard, and that Innovatio is therefore subject to the promises of the prior owners of the patents-in-suit to license the patents on reasonable and non-discriminatory (“RAND”) terms. The Defendants asserted that, at most, Innovatio  can  recover  no  more  than  a  reasonable  and  non-discriminatory  royalty  if  the Defendants are found to infringe the asserted claims.

The judge held in In re: Innovatio IP Ventures LLC Patent Litigation that a defendant has the burden to show, on a claim by claim basis, which claims of the patents are essential to the standard. In this case, the court used a standard from the IEEE Bylaws to determine essentiality. To prove that a patent claim is standard-essential, an accused infringer must establish by a preponderance of the evidence that “(1) at the time of the standard’s adoption, the only commercially and technically feasible way to implement a particular mandatory or optional portion of the normative clauses of the standard was to infringe the patent claim; and (2) the patent claim includes, at least in part, technology that is explicitly required by or expressly set forth in the standard.” Here, the defendants carried the burden.

The court found that any “extra” elements in Innovatio’s patent claims represented the only “commercially feasible” way of implementing the standard in the particular devices at issue.  It also found that a RAND obligation on an independent claim “would be meaningless if the patent holder could charge an exorbitant fee for a claim dependent on the standard-essential independent claim and reciting only a technically basic additional element.”

The decision is significant in part because it appears to be the first ever to address the question of how to determine which asserted patent claims are standard-essential. As the court noted, the early determination of licensing terms and, consequently, potential damages, may have an important effect on early settlement of cases, thereby potentially reducing the cost of litigation.

Earlier this week, the Senate Committee on the Judiciary held hearings on standards-essential patents and antitrust law. The committee discussed  the use of standard-essential patents at the International Trade Commission, the role of injunctions as related to standards, as well as the part that Congress or other regulatory agencies can play in preventing or resolving potential threats from patent hold-ups. A webcast of the entertaining hearing is available here.

Related Legal Pulse Commentary:

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s