UIC School of Law UIC Law Open Access Repository UIC Law Open Access Faculty Scholarship 2014 Standard Essential Patents, Trolls, and the Smartphone Wars: Triangulating the End Game, 119 Penn St. L. Rev. 1 (2014) Daryl Lim John Marshall Law School, [email protected] Follow this and additional works at: https://repository.law.uic.edu/facpubs Part of the Antitrust and Trade Regulation Commons, Intellectual Property Law Commons, and the Litigation Commons Recommended Citation Daryl Lim, Standard Essential Patents, Trolls, and the Smartphone Wars: Triangulating the End Game, 119 Penn St. L. Rev. 1 (2014) https://repository.law.uic.edu/facpubs/511 This Article is brought to you for free and open access by UIC Law Open Access Repository. It has been accepted for inclusion in UIC Law Open Access Faculty Scholarship by an authorized administrator of UIC Law Open Access Repository. For more information, please contact [email protected]. I Articles , Standard Essential Patents, Trolls, and the Smartphone Wars: Triangulating the End Game Daryl Lim* ABSTRACT Few legal issues in recent years have captured the public's attention more powerfully than litigation over standard essential patents ("SEPs"). This Article explains how SEP litigation overlaps with two other major centers of patent litigation-litigation involving smartphones and patent assertion entities ("PAEs"). It observes that attempting to pre-empt patent hold-ups by imposing blanket ex ante disclosure obligations and royalty caps on standard setting organizations ("SSOs") is misdirected *Assistant Professor, The John Marshall Law School. I am grateful to Logan Breed, Mike Carrier, Jorge Contreras, Tom Cotter, Sean Gates, Llew Gibbons, Allen Kamp, Josh Samoff, Greg Vetter as well as the participants of the AIPLA Computer and Electronic Summit, the McAndrews, Held & Malloy LLC Comprehensive IP Litigation Update, the IP Scholars' Roundtable, the IP on the Edge Conference, and the Faculty Work in Progress Workshop for their helpful comments and suggestions. I am also grateful to Dean Ralph Ruebner for the summer research grant awarded in support of this Article and to Judge Jim Holderman of the U.S. District Court for the Northern District of Illinois for his encouragement to take this article further. Many thanks also to Susanna Bagdasarova and her team at the Penn State Law Review, including Beth Robinson, Alexandra Cumings, and Emma Snyder, for their outstanding work in bringing this Article to print. All errors and omissions remain my own. PENN STATE LAW REvIEw [Vol. 119:1 and counterproductive. Instead, the solution lies in clear and balanced rules to determine "fair, reasonable and non-discriminatory" (FRAND) royalties and injunctive relief. This solution will help parties make more realistic assessments of their options and help adjudicators resolve SEP disputes. Correctly framed, implementers bear the burden of proving the breach of a FRAND commitment. FRAND royalties should, in the absence of comparable licenses, focus on apportioning the profits based on the relative importance of the patented technology in the covered product. Royalties should be measured at the time the standard is set but generally should not be discounted for the possibility of invalidity and non-infringement. Discriminatory licenses can be hard to detect, but targeted initiatives and improved transparency would make the task easier. Injunctions should be granted based the wording and intent of the relevant FRAND commitment, conduct of the parties, and proof that the technology drove the sales of the component or product on which the relief is sought. More broadly, courts must understand both the limits and opportunities of the antitrust and patent laws. While useful in arresting ex ante misconduct and attempts to elide FRAND commitments through patent assignments, antitrust is largely irrelevant in addressing patent hold-ups; patent law has a role in both improving patent quality and deterring vexatious litigation. Table of Contents INTRODUCTION ................................................................................................ 3 I. STANDARDS, SMARTPHONES, AND PATENT ASSERTION ENTITIES ...... 8 A. Standard Setting and the FRAND Commitment .................. 9 B. The Smartphone Wars and Patent Assertion Entities ................. 14 II. WHY SSO POLICY REFORM Is NOT THE SOLUTION ............................ 22 A. Four Reasons W hy Not .............................................................. 22 B. A BetterW ay ........................................................................... 29 III. A FRAMEWORK FOR FRAND COMMITMENTS .................................... 33 A. Who Bears the Burden of Proof? .............................................. 35 B. Royalty Valuation ..................................................................... 37 C. The "Non-Discriminatory" Requirement ................................... 47 IV . INJUNCTIONS ..................................................................................... 54 A. Life A fter eBay ......................................................................... 56 B. The Case for Injunctive Relief ................................................... 59 C. A Framework for Assessing Injunctive Relief .......................... 62 D . The End Gam e ......................................................................... 70 V. ANTITRUST AND PATENT SOLUTIONS ................................................ 72 A. The Role of Antitrust Law ....................................................... 72 B. The Role of Patent Law ............................................................ 81 2014] STANDARD ESSENTIAL PATENTS, TROLLS, AND THE SMARTPHONE WARS 3 CONCLUSION .................................................................................................90 INTRODUCTION Modem society depends on standards, but we are often oblivious to them.' Standards allow us to switch seamlessly as our smartphones and tablet PCs connect to Wi-Fi over different hot spots.2 Computer hardware standards like USB ensure that our flash drives work across different devices that march to a common drumbeat drawn up by standard setting organizations ("SSOs"). 3 Standards also foster competition between compliant products, driving innovation and 4 consumer choice. 5 However, these benefits come with the risk of hold-ups. Implementers invest in making their devices comply with a standard, which in turn makes it expensive to switch out of a standard. Owners of patents essential to using the standard-standard essential patents or "SEPs"-may opportunistically target non-licensed implementers with patent infringement suits and reinforce their royalty demands with 1. See Jorge L. Contreras, Implementing Procedural Safeguards for the Development of Bioinformatics Interoperability Standards, 39 N. KY. L. REV. 87, 87 (2012) [hereinafter Contreras, Implementing] (describing Wi-Fi, USB, CD, DVD, PDF and HTML, which "have become household terms, and thousands of others ensure that a vast array of products and services connect and communicate seamlessly in a manner that is largely invisible to the consumer"). 2. The Institute of Electrical and Electronics Engineers ("IEEE") established these standards. See IEEE 802.3: Ethernet, IEEE STANDARDS ASS'N, http://standards.ieee.org/about/get/802/802.3.html (last visited June 28, 2014). 3. See, e.g., Certain Wireless Devices with 3G and/or 4G Capabilities & Components Thereof, Inv. No. 337-TA-868, 2014 WL 2965327, at *74 (USITC June 13, 2014) (Final) (Initial Determination on Violation of Section 337 and Recommended Determination on Remedy and Bond) ("[European Telecommunication Standards Institute (ETSI)]" is an organization that creates globally applicable standards in the information and communication technology industry."). 4. U.S. DEP'T OF JUSTICE & U.S. PATENT & TRADEMARK OFFICE, POLICY STATEMENT ON REMEDIES FOR STANDARDS-ESSENTIAL PATENTS SUBJECT TO VOLUNTARY F/RAND COMMITMENTS 3-4 (2013) [hereinafter POLICY STATEMENT], available at http://www.justice.gov/atr/public/guidelines/290994.pdf (describing how "voluntary consensus standards, whether mechanical, electrical, computer-related, or communications-related, have incorporated important technical advances that are fundamental to the interoperability of many of the products on which consumers have come to rely"). 5. I use "hold-up" to mean a higher rate than what would normally accrue to the SEP owner. See Microsoft Corp. v. Motorola, Inc., CIO-1823JLR, 2013 WL 2111217, at *10 (W.D. Wash. Apr. 25, 2013) ("The ability of a holder of an SEP to demand more than the value of its patented technology and to attempt to capture the value of the standard itself is referred to as patent 'hold-up."'). PENN STATE LAW REVIEW [Vol. 119:1 injunctions that would expel the implementers' devices from the 6 marketplace if they fail to comply. When a standard becomes ubiquitous, such as the 4G LTE (Long- Term Evolution) standard, using an alternative standard may not be an option.7 The market power gained as a result of standardization allows SEP owners to demand a bounty from locked-in implementers in excess of the value of their patented technology-as much as 100 times the adjudicated value of the technology. 8 Hold-ups raise prices for consumers and harm implementers by reducing overall demand for standard compliant products. 9 They also jeopardize the benefits of collective standard setting as the incentive to participate becomes diminished. O SSOs are aware of the risk of hold-ups.