Markets Wired

The Federal Trade Commission expressed concern to Congress about the prospect that companies that own “standard-essential” patents which are subject to commitments to license on reasonable and non-discriminatory terms may be able to “hold up” other firms by obtaining an injunction or exclusion order blocking those firms’ products from the U.S. market.

In Commission testimony delivered before the Senate Judiciary Committee, Commissioner Edith Ramirez discussed the potential negative impact on competition and innovation if owners of standard-essential patents can threaten to obtain injunctive relief by either a federal court or the U.S. International Trade Commission (ITC). “Simply put, the FTC is concerned that a patent holder may use the threat of an ITC exclusion order, or an injunction issued in district court, to ‘hold-up’ or demand higher royalties or other more costly licensing terms after the standard is implemented than could have been obtained before its [intellectual property] was included in the standard,” the testimony states.

The ITC is an independent federal agency responsible for investigating a wide range of trade-related matters, including cases involving imports that allegedly infringe intellectual property rights. The ITC has the authority to ban a defendant from selling patent-infringing imported articles out of U.S. inventory. The agency also can direct the U.S. Customs Service to bar infringing articles from entry into the United States.

An injunction or exclusion order by the ITC enables a patent holder to block the sale or import of infringing products that rely on these standard-essential patents, even if the patent holder previously agreed to license its patent on reasonable and non-discriminatory terms.
The testimony notes that companies in the information technology and telecommunications industries frequently face the problem that thousands of different patented inventions need to work together in a single device or in multiple devices operating together within a network. To solve this problem, companies work within standard setting organizations to create standards that ensure devices within a system will work together and communicate with each other in standardized, predictable ways. Such standards can create enormous value for consumers by increasing competition, innovation, product quality, and choice, the testimony states.

While standard setting organizations offer significant benefits for consumers, “[i]ncorporating patented technologies into standards has the potential to distort competition by enabling [standard-essential patent] owners to use the leverage they acquire as a result of the standard setting process to negotiate high royalty rates and other favorable terms after a standard is adopted that they could not have credibly demanded beforehand. This is one form of ‘hold-up,'” the testimony states.

“Hold-up and the threat of hold-up can deter innovation by increasing costs and uncertainty for other industry participants, including other patent holders. The threat of hold-up also may reduce the value of standard setting, leading firms to rely less on the standard setting process and depriving consumers of the substantial pro-competitive benefits of standardized technology,” the testimony states.
To mitigate the risk of patent hold-up, companies often enter into commitments to license their patents on “reasonable and non-discriminatory” terms, known as RAND commitments, the testimony states. Under RAND commitments, a company that wants to implement the technology can then negotiate a royalty or, in the event they are unable to agree, may seek judicial determination of a reasonable rate, the testimony states.

Consistent with its Congressionally mandated consultative role, the FTC submitted public comments to the ITC in June in connection with two patent infringement investigations. The FTC expressed concern to the ITC “that a patent holder can make a RAND commitment as part of the standard setting process, and then seek an exclusion order for infringement of the RAND encumbered SEP as a way of securing royalties that may be inconsistent with that RAND commitment,” the testimony states.

“Federal district courts have the tools to address this issue, by balancing equitable factors or awarding money damages, and the FTC believes that the ITC likewise has the authority under its public interest obligations to address this concern and limit the potential for hold-up. If the ITC finds that its public interest authority is not flexible enough to prevent hold-up, then Congress should consider whether legislative remedies are necessary.”

The Commission vote authorizing the testimony was 5-0.

The Federal Trade Commission works for consumers to prevent fraudulent, deceptive, and unfair business practices and to provide information to help spot, stop, and avoid them. To file a complaint in English or Spanish, visit the FTC’s online Complaint Assistant or call
1-877-FTC-HELP (1-877-382-4357). The FTC enters complaints into Consumer Sentinel, a secure, online database available to more than 2,000 civil and criminal law enforcement agencies in the U.S. and abroad. The FTC’s website provides free information on a variety of consumer topics.  Like the FTC on Facebook, follow us on Twitter, and subscribe to press releases for the latest FTC news and resources.

(SEP Testimony)