Standards Essential Patents (SEPs) have been involved in several recent high-profile cases that call into question their value and the business model of joining standards-setting organizations.
A patent becomes an SEP when compliance with a standard necessitates licensing or infringing the patent. Standards groups require companies to license SEPs on fair, reasonable, and nondiscriminatory (FRAND) terms.
In one prominent case, Motorola is asking the US Court of Appeals for the Federal Circuit for damages or an injunction against Apple for infringing its SEP No. 6,359,898. Judge Richard Posner of the District Court for the Seventh Circuit ruled earlier that Motorola could not prove damages, because its expert's method was unreliable for determining a FRAND royalty, and Motorola had waived the possibility of an injunction by agreeing to license the patent on FRAND terms.
If affirmed by the Federal Circuit, this decision would devalue most SEPs. A latecomer such as Apple would be free to infringe SEPs, because damages would be too difficult to prove, and injunctions would be waived.
Companies may be reluctant to participate in standards efforts if they view the required FRAND agreements as essentially giving away their technology to nonparticipants. However, the Federal Circuit is likely to reverse Judge Posner's rulings at least partially.
In terms of damages, Motorola may have bitten off more than it could chew by attempting to prove that a high royalty was fair. Motorola had licensed a portfolio of SEPs at a 2.25 percent royalty. Then it asserted that the patent in the suit would be worth 40 percent of the portfolio royalty, because it was the first patent licensed to Apple out of the portfolio. In other words, Motorola argued that the value of the single patent in the suit was based on the value of the portfolio for practicing the standard.
Judge Posner ruled that this theory was unreliable. Therefore, he excluded the testimony of the damages expert. He then ruled that Motorola was unable to prove damages.
Interestingly, Judge Posner made a similar decision regarding Apple's damages expert for a non-essential patent. Both parties argue that Judge Posner was correct in excluding the opposing party's witness but wrong for excluding their own witness. It's possible that the Federal Circuit will send the case back to have the damages experts testify.
In terms of the injunction, Motorola's argument is that Apple is refusing to accept FRAND terms, so the FRAND agreement should not bar an injunction. Apple's position is that the FRAND agreement prevents Motorola from using the threat of an injunction to obtain a royalty based on the value of the standard, rather than the value of the actual patent.
Apple says it cannot be considered unwilling to license on FRAND terms until after a suit has been brought, the reasonable royalty damages have been determined, and it has refused to pay the judgment. The Federal Circuit is more likely to uphold the denial of an injunction, because the FRAND agreement indicates that monetary damages are sufficient to compensate for infringement.
The Federal Circuit may help salvage some value of Motorola's SEP. However, the trend of strictly enforcing FRAND requirements and Apple's success in attacking SEP patents individually should be a warning to reconsider the value of SEPs and a business strategy focused on standardizing technology advances.
— Colin Harrington is an associate in the electrical engineering and business methods group at KramerAmado.