Our tech-focused world depends on our innovation economy bringing standards like Wi-Fi and LTE to market. Some commentators have suggested that recent Department of Justice statements on intellectual property rights, coined the “New Madison Approach,” threaten to upend this ecosystem.
To the contrary, the New Madison Approach marks a return to the core principles on which the patent laws are predicated.
A viable standard has three primary characteristics: compelling technology, industry consensus and straightforward implementation. These characteristics compel firms with different business goals to collaborate on a standard.
One firm may wish to commercialize a new technology; another may wish to monetize an established technology; and yet another may wish to gain access to a range of technologies for implementation. A smart standardization process attracts all interested firms, including those seeking royalties and those likely to pay most of those royalties.
For over 50 years, standard-setting organizations (SSOs) have maintained this balance by requiring participants to contractually agree to offer to license contributed technology on terms that are “fair, reasonable, and non-discriminatory” (“FRAND”).
SSOs, however, do not articulate what FRAND means. In fact, the meaning can’t be spelled out, given the divergent interests involved. Historically, FRAND is a term of art understood by SSO participants to impose mechanical, not financial, requirements.
The FRAND obligation does not dictate how to calculate royalty rates, it merely requires an SSO participant to bargain in good faith with an implementer (even a competitor) toward a fair license to essential technology.
It has become fashionable to interpret FRAND as including obligations beyond those that the term has traditionally encompassed, in the process upending time-tested licensing practices.
Last year, a California court, concerned that firms would leverage their technology’s inclusion in the standard to extract higher royalties (sometimes referred to as “hold-up”), engaged in rate-setting for a license from Ericsson to manufacturer TCL for LTE technology.
The court’s methodology required thousands of hours of expert review, raising enforcement costs beyond most patent owners’ means.
It also ignored the approach that Ericsson, a foundational contributor to global wireless telecommunications standards, had used for years to determine royalty rates for the LTE technology it licensed to most of the world. To the court, concerns over hold-up justified scrapping and replacing the established market process.
Critics of New Madison overlook how the new interpretations that courts and commenters have ascribed to FRAND threaten the balance that has worked for generations.
The goal of any SSO is to balance the interests of advancing a technology with easing that technology’s implementation, but ease of implementation does not mean making the technology artificially cheap by devaluing standard-essential patents (SEPs).
When the IEEE (a SSO) added contractual obligations to its FRAND encumbrance, Qualcomm — among the most innovative American firms — ended its years-long participation in IEEE. Efforts to devalue essential technology will likewise drive innovators away from standardization.
Assistant Attorney General Makan Delrahim, in speeches setting forth the New Madison Approach, wisely minimizes the role of hold-up in FRAND analysis. As the Department of Justice now recognizes, there is no evidence that hold-up is an actual problem requiring a regulatory solution.
Rather, fears about hold-up are just another iteration of the age-old attempt to use the antitrust laws to protect individual competitors — who benefit from artificially low royalty rates — at the expense of competition, which maximizes consumer welfare when market participants are motivated to innovate in order to maximize royalties.
The realization that courts have fallen for this topsy-turvy application of antitrust principles has resulted in historical levels of free-riding, with implementers emboldened to force SEP holders to incur the delay, cost and risk of enforcement.
New Madison simply argues that we shouldn’t impose obligations on licensors beyond those to which they agreed when joining an SSO. FRAND has worked for decades on basic contract law principles.
The en vogue FRAND theory that the antitrust laws should now be deployed as a patent royalty rate-setting regime perverts the process of invention innovation that forms the very basis of our patent laws.
It encourages free-riding, discourages innovation and increases enforcement costs. The New Madison approach merely recognizes that these outcomes are antithetical to the goals of the antitrust laws.
Michael T. Renaud is an intellectual property litigator and patent strategist at Mintz Law. Robert G. Kidwell counsels clients on the competitive implications of business strategies, regulatory matters, policymaking and litigation at Mintz. Robert J.L. Moore is an associate attorney experienced in patent litigation and licensing at Mintz.