PublishedOctober 21, 2013

Jorge Contreras on Patent Pledges Outside Standards-Setting Organizations

Jorge Contreras is a professor at the Washington College of Law at American University and a contributor at Patent Progress.  He also happens to be one of the world’s foremost legal authorities on the U.S. patent system, particularly in areas of patent law and policy that focus on standards bodies.

Recently, I interviewed Jorge to discuss his new paper, “Patent Pledges” and talk about a new venture that he has been leading aimed at cataloguing the myriad of patent commitments made outside the confines of standards bodies on which market participants rely.

Dan O’Connor (DO): As you have noted in your academic writing, patent pledges have been getting more attention lately – especially in connection with the smartphone wars.  Can you briefly explain the different types of patent commitments and their purpose?  

Jorge Contreras (JC): First are commitments made in formal standards-development organizations (SDOs).  These commitments are often required by SDO rules and require a patent holder to declare that it will license its patents that are essential to a standard on terms that are “fair, reasonable and non-discriminatory” (FRAND).  The ongoing litigation involving Microsoft, Motorola, Apple, Samsung and other companies involves SDO-based FRAND commitments.

But companies make patent commitments outside SDOs as well.  For example, last year Apple, Google and Microsoft all committed to the US Department of Justice that, under most circumstances, they would refrain from seeking injunctions to enforce  standards-essential patents that were subject to FRAND commitments.  The DOJ relied on these commitments in approving some very large patent acquisitions that were under review.  The commitments weren’t embodied in a written agreement or a consent decree, but they were certainly viewed as binding by the DOJ.

Even more interesting are pledges that are being made by companies voluntarily in order to promote the adoption of certain standardized technologies and platforms.  For example, several companies have publicly stated that they will not assert their patents against implementations of the Linux operating system.  IBM publicly pledged not to assert 500 patents against open source software, and Google has made a multi-patent “Open Patent Non-Assertion Pledge”.  In addition to these “non-assertion” pledges, some companies have committed that they will license patents on FRAND terms.  One such pledge is contained in Microsoft’s Interoperability Principles, which relates to a number of open protocols.

DO: In the past, most arguments among lawyers and academics have vacillated between whether antitrust law or contract law is a better vehicle for enforcing FRAND commitments.  In your new paper, you discuss why traditional conceptions of contract law or antitrust law are not adequate tools to enforce these commitments.  Can you briefly explain the deficiencies in each?

JC: Both litigants and courts have started to talk about FRAND commitments as though they were contracts.  While this analogy might hold in some cases, especially in formal SDOs that have signed membership agreements, I believe that these represent only a minority of patent-related commitments.  A unilateral statement posted on a web site has none of the attributes that the law requires of contracts: offer, acceptance, consideration, meeting of the minds, etc.  While I don’t disagree that these patent pledges are promises and that they are intended to be binding, formal contract law is often a poor vehicle for attempting to enforce them.

Promissory estoppel has also been suggested as a theory for enforcing these pledges.  This theory allows someone who has been injured by relying on a promise to enforce the promise against the promisor.  But there’s a glitch there too, in that the company alleging reliance has to show that it actually relied on the specific promise that it’s seeking to enforce.  When a company is operating in a field, like wireless telecommunications, that is characterized by hundreds of standards and hundreds of thousands of patents, it is very hard to prove reliance on one particular patent promise.

Antitrust law also has weaknesses as a general framework for enforcing patent pledges.  To make an antitrust claim against a company that reneged on a patent pledge, you would have to demonstrate either coordination among competitors, which is probably difficult outside of formal SDOs, or some conduct that approaches monopolization, which requires at least some degree of market power.  But we want all patent pledges to be enforced, not only those made collectively or by organizations with market power.  Further complicating the antitrust picture is the need to show harm to competition rather than harm to particular competitors, a standard that has proven difficult to meet in cases involving alleged patent hold-up.

DO: Given these deficiencies, you have proposed a new way to legally deal with patent pledges: the “market reliance theory.”  Can you explain it and where you got the idea from?

JC: My starting premise that that patent pledges need to be enforced.  These pledges are intended to assure the market that a patent holder will refrain from asserting its patents against users of a standard or common platform.  The market should be able to rely on that promise with some degree of certainty, and we shouldn’t have to twist contract law or antitrust law into doctrinal pretzels in order to make that happen.

If you think about the market’s need to rely on patent holders’ public promises, it begins to look a lot like the market’s need to rely on public statements made by listed companies.  Companies traded on Nasdaq or the NY Stock Exchange make public statements about their earnings, profits and prospects. Under the “efficient markets” hypothesis that became widely accepted during the 1980s, the price of a publicly-listed stock will reflect those statements, good or bad, almost immediately.  Investors then buy and sell securities based on the market price, assuming that it accurately reflect all public information about the companies being traded.  If untrue statements are made by a listed company, the investor who suffers a loss does not have to prove that it relied specifically on any particular statement.  The simple fact that he or she bought the stock on the open market gives rise to a presumption of reliance.  This is called the “fraud on the market” theory, and it was validated by the Supreme Court in Basic v. Levinson (1988).

We can use a similar presumption of reliance when dealing with public patent pledges.  If Company A has patents covering an industry standard and makes such a pledge, and Company B develops a product that uses that standard, it should not be necessary for Company B to prove that it relied specifically on Company A’s public statement.  Rather, so long as Company B is operating in a market in which patent pledges are made with respect to industry standards, then Company B is justified in relying on that fact generally, and Company A should be legally bound to honor its pledge, whether or not Company B can show specific reliance on it.

DO: Regulators have clearly taken interest in these pledges, both in the FTC-Google investigation and in a series of major patent transactions.  What role do you think regulators such as the FTC and DOJ should play in enforcing patent commitments?

JC: For various reasons, action by US and EU regulators has become synonymous with antitrust enforcement.  While these agencies certainly have a strong role to play in enforcing the antitrust laws, as I mentioned earlier I’m not sure that antitrust law is a good general solution for the enforcement of FRAND and other patent commitments.  But that doesn’t mean that the regulators, especially the DOJ and FTC in the US and the EC in Europe, shouldn’t have a role.  All of these agencies have broader civil enforcement authority than antitrust, and it might be useful for us to think about a broader enforcement role for these agencies when it comes to market-shaping commitments like these.

DO: Finally, you have been spearheading a new initiative through American University’s Law School, where you are a professor, to catalogue all the non-SDO patent commitments.  In fact, the website launched this month.  Can you discuss the project, what gave you the idea for it and what you hope to see it achieve?

JC: Despite the importance of non-SDO patent pledges, they are not well-understood.  For one thing, they are scattered across the web, residing in company press releases, letters to regulators, open statements, and a variety of other online (and offline) nooks and crannies.  So, as a service to the community, the Program on Information Justice and Intellectual Property (PIJIP) at American University’s Washington College of Law has established a new public web resource listing and describing non-SDO patent commitments.  The web site, which was launched last week, already collects 63 different non-SDO patent commitments by dozens of companies covering thousands of patents.  We hope to continue to add information to the site, and invite the submission of additional non-SDO patent commitments by the public.  We hope that this site will become a useful resource for researchers and companies trying to understand the scope and breadth of these little-understood elements of the patent landscape.

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Dan O'Connor

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