[Senate Hearing 112-552]
[From the U.S. Government Publishing Office]






                                                        S. Hrg. 112-552

 OVERSIGHT OF THE IMPACT ON COMPETITION OF EXCLUSION ORDERS TO ENFORCE 
                       STANDARD-ESSENTIAL PATENTS

=======================================================================

                                HEARING

                               before the

                       COMMITTEE ON THE JUDICIARY
                          UNITED STATES SENATE

                      ONE HUNDRED TWELFTH CONGRESS

                             SECOND SESSION

                               __________

                             JULY 11, 2012

                               __________

                          Serial No. J-112-85

                               __________

         Printed for the use of the Committee on the Judiciary














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                       COMMITTEE ON THE JUDICIARY

                  PATRICK J. LEAHY, Vermont, Chairman
HERB KOHL, Wisconsin                 CHUCK GRASSLEY, Iowa
DIANNE FEINSTEIN, California         ORRIN G. HATCH, Utah
CHUCK SCHUMER, New York              JON KYL, Arizona
DICK DURBIN, Illinois                JEFF SESSIONS, Alabama
SHELDON WHITEHOUSE, Rhode Island     LINDSEY GRAHAM, South Carolina
AMY KLOBUCHAR, Minnesota             JOHN CORNYN, Texas
AL FRANKEN, Minnesota                MICHAEL S. LEE, Utah
CHRISTOPHER A. COONS, Delaware       TOM COBURN, Oklahoma
RICHARD BLUMENTHAL, Connecticut
            Bruce A. Cohen, Chief Counsel and Staff Director
        Kolan Davis, Republican Chief Counsel and Staff Director















                            C O N T E N T S

                              ----------                              

                    STATEMENTS OF COMMITTEE MEMBERS

                                                                   Page

Durbin, Hon. Dick, a U.S. Senator from the State of Illinois, 
  prepared statement.............................................    55
Grassley, Hon. Chuck, a U.S. Senator from the State of Iowa......     2
    prepared statement...........................................    71
Leahy, Hon. Patrick J., a U.S. Senator from the State of Vermont.     1
    prepared statement...........................................    76

                               WITNESSES

Ramirez, Edith, Commissioner, Federal Trade Commission, 
  Washington, DC.................................................     5
Wayland, Joseph F., Acting Assistant Attorney General, U.S. 
  Department of Justice, Washington, DC..........................     3

                         QUESTIONS AND ANSWERS

Responses of Edith Ramirez to questions submitted by Senators 
  Leahy, Grassley, Cornyn, Klobuchar, and Lee....................    19
Responses of Joseph F. Wayland to questions submitted by Senators 
  Lee, Cornyn, Grassley, Klobuchar, and Leahy....................    30

                       SUBMISSIONS FOR THE RECORD

American Antitrust Institute, Washington, DC, statement..........    42
Google Inc., Kent Walker, Mountain View, California, July 10, 
  2012 letter....................................................    56
Ramirez, Edith, Commissioner, Federal Trade Commission, 
  Washington, DC, statement......................................    77
Wayland, Joseph F., Acting Assistant Attorney General, U.S. 
  Department of Justice, Washington, DC, statement...............    92

 
 OVERSIGHT OF THE IMPACT ON COMPETITION OF EXCLUSION ORDERS TO ENFORCE 
                       STANDARD-ESSENTIAL PATENTS

                              ----------                              


                        WEDNESDAY, JULY 11, 2012

                                       U.S. Senate,
                                Committee on the Judiciary,
                                                   Washington, D.C.
    The Committee met, pursuant to notice, at 9:40 a.m., in 
room SD-226, Dirksen Senate Office Building, Hon. Patrick J. 
Leahy, Chairman of the Committee, presiding.
    Present: Senators Leahy, Coons, Grassley, and Lee.

OPENING STATEMENT OF HON. PATRICK J. LEAHY, A U.S. SENATOR FROM 
                      THE STATE OF VERMONT

    Chairman Leahy. I apologize for being late. We go through a 
city that will spend millions of dollars to enforce parking 
meters and get fines to pay for speed cameras which mainly make 
out-of-town companies rich and so on, but they cannot 
coordinate their street lights when the street lights are 
broken, and I think they must have decided to have a meeting 
maybe next week to put somebody down there to direct traffic 
when main thoroughfares have a green light that will go on for 
1 second and 10 minutes red.
    Senator Grassley. The problem probably is that they 
purposely do not coordinate them.
    Chairman Leahy. Well, I know the street lights are 
coordinated. They seem not to be coordinated to the benefit of 
either pedestrians or drivers, so I am not sure. Maybe there is 
some other reason. But be that as it may, I do apologize. It 
only took an hour and 40 minutes to go the 11 miles in here.
    In recent months, we have seen a growing number of 
companies engage in what some are calling the next wave in the 
``tech patent wars.'' Companies that previously cross-licensed 
their technologies with other companies in the market are 
increasingly seeking to block their competitors instead. This 
has the obvious potential to harm consumers by preventing 
access to their favorite devices.
    I have long championed the strong enforcement of our 
intellectual property laws because enabling inventors to profit 
from their work encourages innovation. Patent protection is 
particularly important even for my small State of Vermont. The 
Intellectual Property Organization recently announced that in 
2011 Vermont again received the most patents per capita of any 
State in this country.
    But when inventors and developers are willing to license 
their technologies to one another at reasonable rates, then you 
have this cross-fertilization of ideas that benefits us all. 
But I am concerned that the recent trend of seeking exclusion 
orders from the International Trade Commission rather than 
negotiating and seeking license fees is going to have the 
opposite effect.
    Today's hearing focuses on the enforcement of standard-
essential patents at the ITC. Standard setting is important. It 
may seem like a dry subject, but it allows different companies 
to have their products interoperate, giving us important 
developments like the 3G technology used in cellular phones. To 
participate in the standard setting, patent owners often agree 
to license their patents on reasonable terms.
    In March, I wrote to the administration expressing concern 
that ITC exclusion orders can be misused to prevent rival 
technologies when holders of standard-essential patents fail to 
reach agreement on licensing terms. These orders pose a 
significant threat to competition and innovation, especially 
where competitors have developed products based on a mutual 
commitment to license standard-essential patents on reasonable 
terms. You assume you are going to be able to do it. You 
develop your product, and then all of a sudden you see the door 
slammed in your face.
    Senator Lee and other Senators on this Committee have since 
written to the ITC expressing similar concerns. This is not a 
partisan issue. Patent reform is a bipartisan issue. We have an 
interest on both sides of the aisle in ensuring the patent laws 
promote innovation and competition.
    The Department of Justice and the Federal Trade Commission 
play a vital role in protecting consumers and competition by 
enforcing our Nation's antitrust laws. But they also have an 
important role in advising on antitrust issues. Congress 
recognized that role when it required the ITC to consult with 
the FTC and the DOJ on competition issues. So I think today's 
witnesses will give the Committee a chance to further explore 
the competitive impact of ITC exclusion orders and whether more 
needs to be done, because it really is creating a lot of 
concern here on Capitol Hill, but it is creating an even 
greater concern to a lot of industries in this country.
    Senator Grassley, I will yield to you.

STATEMENT OF HON. CHUCK GRASSLEY, A U.S. SENATOR FROM THE STATE 
                            OF IOWA

    Senator Grassley. Thank you very much. Mr. Chairman, thank 
you for holding this hearing on the competition impact of 
exclusion orders relative to standard-essential patents. 
Industry standards are crucial to allowing the myriad of 
electronic and mobile devices consumers use and rely on every 
day to interface and connect with other consumers and the 
Internet. Recently there have been questions and increased 
litigation over the way standard-essential patents are utilized 
and enforced.
    When companies agree to contribute their patents to become 
an industry standard, they usually commit to making them 
available on fair and reasonable and non-discriminatory 
licensing terms. By having access to these standards, companies 
can create new technologies, products, and services, and the 
different electronic devices have the ability then to 
seamlessly interface for lower prices, better quality, and more 
consumer choice.
    Consumers want to use different products and technologies 
made by different companies. They want choice and more options 
in what they buy or use, and they do not want to be limited to 
using devices or services from just one company. And it is not 
as expensive to exchange different kinds of devices when they 
can interoperate with each other. Competition is good for the 
consumer and the choice the consumer has and satisfaction as 
well as benefiting from innovation and technological advances.
    Consequently, there is a real question as to whether it is 
anticompetitive or anticonsumer when standard-essential patent 
holders that have agreed to license their products under RAND 
terms seek injunctive relief against or exclude companies that 
have implemented their standard. Companies that have relied on 
standard-setting organization RAND agreements and incorporated 
standard-essential patents into their products expect to be 
able to negotiate reasonable royalties with patent holders.
    At the same time, when there is patent infringement, we do 
not want to restrict the ability of patent holders to protect 
their products from infringers. We do not want to 
disincentivize participation in standard-setting bodies or 
hamper the ability of companies to generate new products and 
technology.
    I am interested in learning more about what are the issues 
surrounding standard-essential patents and RAND commitments, 
what are the obligations of standard-setting-organization 
participants, as well as what is happening in the courts or 
even at the International Trade Commission. So I want to hear 
about what our extensive hold-up problem is and how it has and/
or will impact innovation and competition.
    I am interested in hearing more about how we can best 
balance the interests of standard-essential patent holders, 
standard-essential patent implementers, and consumers who use 
the products and standard-essential patents.
    I will put the rest of my statement in the record. Thank 
you, Mr. Chairman.
    [The prepared statement of Senator Grassley appears as a 
submission for the record.]
    Chairman Leahy. Thank you, Senator Grassley.
    Our first witness is Joseph Wayland. He is the Acting 
Assistant Attorney General for the Antitrust Division. He was 
appointed to that in April. He joined the Department of Justice 
Antitrust Division in 2010. He was responsible for all the 
Division's civil litigation. He was also Chief Trial Counsel. 
Before joining DOJ, he was a partner in Simpson, Thacher & 
Bartlett and focused on complex business litigation. He was 
elected as a Fellow to the American College of Trial Lawyers in 
2009. He previously served in the U.S. Air Force and has a law 
degree from Columbia.
    Mr. Wayland, we are delighted to have you here. Please go 
ahead, sir.

   STATEMENT OF JOSEPH F. WAYLAND, ACTING ASSISTANT ATTORNEY 
     GENERAL, U.S. DEPARTMENT OF JUSTICE, WASHINGTON, D.C.

    Mr. Wayland. Thank you very much, Chairman Leahy and 
Ranking Member Grassley and members of the Committee. It is a 
pleasure to have this opportunity to discuss the Antitrust 
Division's experience with standard-essential patents.
    The issues that I will discuss today involve three 
important inputs to our modern innovation-based economy: patent 
rights, competition, and jointly set standards. Antitrust and 
intellectual property function together to provide high-quality 
products and services at competitive prices and preserve strong 
incentives for the innovation that creates and improves those 
products.
    Standards provide a range of benefits, from helping to 
protect public health and safety to promoting efficient 
resource allocation and production by allowing for 
interoperability among complementary products. Indeed, 
interoperability standards paved the way for the telecom 
networks and mobile computing devices that have become 
hallmarks of the modern age.
    The Antitrust Division has worked closely with the FTC, the 
PTO, and other Federal agencies to better understand the 
interface between standards and antitrust and to promote 
intellectual property practices for standard-setting activities 
that preserve competition and protect consumers.
    In particular, we have found that when a standard 
incorporates patented technology owned by a participant in the 
standard-setting process and that standard becomes established, 
switching can often become difficult, and the particular 
technology may gain market power. This creates the potential 
for patent holders to take advantage of that market power by 
engaging in one form of what is known as patent hold-up--
excluding a competitor from a market or obtaining a higher 
price for its invention than would have been possible before 
the standard was set.
    Patent hold-up can cause a number of problems such as 
inducing others to postpone or avoid incorporating standardized 
technology in their products, and consumers could be harmed if 
companies implementing a standard pass on the costs in the form 
of higher royalties.
    Standard-setting organizations often try to limit 
opportunities for their participants to engage in hold-up 
through patent policies that set forth patent disclosure 
obligations and licensing commitments. The Antitrust Division 
has stressed that SSOs that set forth well-defined patent 
policy rules can effectively promote competition.
    For example, the Division has issued business review 
letters in which we advised that SSOs may require or permit 
patent holders to disclose the most restrictive terms on which 
they are willing to license their essential technology in 
advance to provide notice to competitors of the terms on which 
they can compete and thus avoid unreasonable licensing terms 
that might harm the successful adoption and implementation of 
that standard.
    The Antitrust Division has also pursued enforcement where 
appropriate. Notably, the Antitrust Division has conducted a 
number of investigations involving standard-essential patents 
involving mobile devices. In many of these investigations, the 
Division had concerns about F/RAND-encumbered standard-
essential patents. Earlier this year, the Division closed its 
investigation of the acquisition of two significant patent 
portfolios: Rockstar Bidco's acquisition of patents and patent 
applications from Nortel, and Google's acquisition of Motorola 
Mobility patents and patent applications.
    The Division's investigations focused on whether the 
acquiring firms would have the incentive and ability to exploit 
ambiguities in the commitments that sellers made to license 
their patents on F/RAND terms to hold up implementers of the 
standard and to obtain higher royalties from their competitors, 
particularly by using the threat of an injunction or exclusion 
order, or exclude them from the market entirely.
    Although we concluded that the acquisitions of these patent 
portfolios were not likely to substantially lessen competition, 
the Division noted its concerns about the potential 
inappropriate use of F/RAND-encumbered standard-essential 
patents to disrupt competition and specifically limited our 
conclusion to the transfer of ownership rights and not to the 
exercise of those transferred rights. We have continued closely 
to monitor the use of F/RAND-encumbered standard-essential 
patents in the wireless device industry to ensure that they are 
not used to stifle competition and innovation in this important 
industry.
    The Antitrust Division is also closely monitoring a number 
of pending matters before the ITC involving F/RAND-encumbered 
SEPs. The Division is concerned about the circumstances in 
which an exclusion order may be inappropriate, in particular, 
where a product implementing a standard has been determined to 
have infringed a valid F/RAND-encumbered patent that is 
essential to that standard. I commend the ITC for seeking the 
types of information necessary to evaluate whether the 
statutory public interest factors counsel against the 
imposition of an exclusion order in such cases. In an era where 
competition thrives on interconnected, interoperable network 
platforms, these considerations merit special attention.
    That concludes my prepared remarks, Mr. Chairman. I would 
be happy to answer questions that the Committee may have.
    [The prepared statement of Mr. Wayland appears as a 
submission for the record.]
    Chairman Leahy. Thank you.
    Before we go to questions, because some of our questions 
will actually go to both the witnesses, we will ask 
Commissioner Ramirez to speak. She has served as a Commissioner 
of the Federal Trade Commission since 2010. Prior to that, 
Commissioner Ramirez was a partner in the Los Angeles office of 
Quinn Emanuel Urquhart & Sullivan--I know the law firm; I 
cannot believe I blanked on that--where she represented clients 
in intellectual property, antitrust, and trademark matters. 
Commissioner Ramirez clerked in the U.S. Court of Appeals for 
the Ninth Circuit, served as the Vice President and member of 
the Board of Commissioners for the Los Angeles Department of 
Water and Power, received her undergraduate and law degrees 
from Harvard.
    Commissioner, we are delighted to have you here. Please go 
ahead.

STATEMENT OF THE HONORABLE EDITH RAMIREZ, COMMISSIONER, FEDERAL 
               TRADE COMMISSION, WASHINGTON, D.C.

    Ms. Ramirez. Thank you. Chairman Leahy, Ranking Member 
Grassley, and members of the Committee, thank you for the 
opportunity to testify on behalf of the Federal Trade 
Commission about the competitive effects of injunctive relief 
for infringement of standard-essential patents, including the 
impact of ITC exclusion orders.
    These issues are currently front and center in the markets 
for smartphones and tablets where the risk of competitive harm 
from such orders can be especially acute. Complex, 
multicomponent products are the norm in IT markets. For 
example, a smartphone has hundreds of components and 
technologies that enable it to communicate over wireless 
networks, stream video, access the Internet, and perform all of 
the functions that consumers expect.
    The vast majority of these components and technologies are 
covered by patents. A conservative estimate of the number of 
patents that could be in play in a smartphone is in the tens of 
thousands. Many of these patents are claimed to be essential to 
a standard.
    Standards dictate the design of many parts of a smartphone. 
To make phone calls, a smartphone must be compatible with a 
cellular network. Standards make that possible. They also 
enable many other functions, such as wi-fi communications and 
video streaming.
    Standards in the IT sector are typically set by standard-
setting organizations, or SSOs, whose members include parties 
with a commercial stake in how the standard is written, such as 
patent holders, manufacturers, and large buyers. Through 
standard-setting organizations, these firms engage in a 
voluntary but formal process to reach consensus on technical 
standards that permit technologies to work together.
    While incorporating patented technologies into a standard 
greatly benefits consumers, it also creates competitive risks. 
Patents that cover technology adapted into a standard can 
empower their owners to demand higher royalty rates and other 
more favorable licensing terms than they could have demanded 
before the standard was adopted. This conduct is known as 
``patent hold-up.''
    The risk of patent hold-up is inherent in the complex and 
time-consuming standard-setting process. A wireless 
communication standard can take a decade or more to complete 
and can run many thousands of pages. The final standard is 
often the result of heated battles between key industry players 
and is virtually impossible to change piecemeal. Once a 
technology is embedded in a standard, it is there to stay until 
the standard is revised, which can be many years down the road.
    In addition, after a standard is published, firms begin to 
invest in products and technologies that are tied to the 
standard. As a result, owners of standard-essential patents 
that once faced competition may gain new found leverage solely 
as a result of the standard-setting process. After technology 
is adopted into a standard, companies must use that technology 
to make a standardized product.
    To reduce the risk of patent hold-up, many SSOs require 
members to disclose patents that will read on the standard and 
to agree to license those patents on reasonable and non-
discriminatory, or RAND, terms. RAND commitments are designed 
to mitigate the risk of hold-up and encourage competition among 
standardized products. But a royalty negotiation that occurs 
under threat of an injunction or exclusion order is weighted 
heavily in favor of the patentee--the very situation the RAND 
commitment was intended to combat.
    In the face of an order that will block its products from 
the market, a company may have no choice but to accept the 
patentee's demands, reasonable or not.
    Let me emphasize that this is more than a private dispute. 
Over time, hold-up restricts competition and distorts 
incentives to invest in standardized products and complementary 
technologies. The result for consumers will be higher prices, 
fewer choices, and inferior product quality. Hold-up also risks 
harming the standard-setting process.
    The Supreme Court's decision in the eBay case reduced the 
risk of hold-up by making it difficult for standard-essential 
patent owners to obtain injunctions in Federal court. But while 
Federal courts are bound by eBay, the ITC is not. This raises 
concerns that some patent holders that would be unlikely to win 
injunctive relief in district court will file suit at the ITC 
to obtain import bans.
    But the FTC believes that the International Trade 
Commission also has a way to limit the potential for hold-up. 
We think the ITC can and should take a RAND commitment on a 
patent into account under its public interest analysis before 
issuing an exclusion order. Under its existing authority, the 
ITC can prevent the owners of standard-essential patents from 
sidestepping their licensing commitments to the detriment of 
competition, innovation, and consumers. The ITC's recent Notice 
of Review in its Apple-Motorola investigation suggests that it 
may do just that.
    Let me close by emphasizing that the FTC does not take the 
position that an exclusion order should never issue for 
standard-essential patents. We are instead advocating that the 
ITC prevent patentees from using a Section 337 investigation as 
a way to escape their RAND obligations. In our view, this 
position strikes the right balance between protecting the 
rights of patent holders and safeguarding the pro-competitive 
benefits of the standard-setting process.
    Thank you, and I am happy to answer any questions you may 
have.
    [The prepared statement of Ms. Ramirez appears as a 
submission for the record.]
    Chairman Leahy. Well, thank you. Following on that last 
thing, Commissioner Ramirez, I will ask you this, and then Mr. 
Wayland the same. The ITC has a statutory obligation to 
consider the effect on competitive conditions in the United 
States economy and United States consumers when it issues an 
exclusion order. What factors should the ITC consider in 
determining the effect that an exclusion order would have upon 
competitive conditions and American consumers in these cases?
    Ms. Ramirez. I think that under the public interest 
analysis, which does emphasize the fact that the ITC has the 
ability to consider the impact of exclusion orders on 
competitive conditions in the U.S. economy as well as 
consumers, allows the ITC to take into consideration the hold-
up problem that I addressed in my opening statement. So I think 
there is--under the existing authority of the ITC, there is 
ample room for them to take these issues into account. I 
believe that the ITC in its recent Notice of Review has 
indicated that it also agrees with that position because it 
asks questions posed to this very issue in its Notice of Review 
that raises the questions that you are asking today.
    Chairman Leahy. Would you agree with that, Mr. Wayland?
    Mr. Wayland. I would, Mr. Chairman, and I also agree that 
the public interest standard gives the ITC the writ to look at 
harm to consumers, to consider whether the effect of an 
exclusionary order would be to inhibit competition, to raise 
prices, or otherwise limit innovations, sir.
    Chairman Leahy. Then let me ask you this. Back in, I 
believe, 2005, I think, when most of us just carried 
BlackBerrys in Washington, we were concerned that an injunction 
was going to prevent the BlackBerrys from working. Now, after 
that was resolved, the Supreme Court held that courts should 
weigh the same factors in patent cases that they do in other 
cases, where they issue an injunction rather than awarding 
damages.
    Now, when I receive briefings about what is happening, I am 
wondering, are parties now going to the ITC to avoid the 
traditional four-factor judicial test? Mr. Wayland.
    Mr. Wayland. Mr. Chairman, I cannot speak to the 
motivations of all the parties for seeking relief from the ITC, 
but we are concerned that that is happening. We are concerned 
that they are seeking to get a remedy outside of the Federal 
courts that the Supreme Court has recognized ought to be 
limited by the traditional limits on injunctive relief.
    Chairman Leahy. And, Commissioner, while I agree that you 
cannot understand each person's motivation, are you seeing 
enough of a trend that this appears to be a possibility?
    Ms. Ramirez. Yes, and maybe it might help if I can just 
provide a little bit of context about the role that the ITC 
plays.
    Section 337 of the Tariff Act of 1930 is a trade statute, 
not a patent statute, and so the way the statutory framework is 
set out, there is an expectation that once there is a finding 
of patent infringement, an exclusion order would almost in all 
circumstances issue. However, now that the ITC has been seeing 
an increasing number of lawsuits where patent holders may have 
made RAND commitments--and I think the ITC is really facing 
this issue squarely in two current pending investigations--the 
ITC is now looking to see whether it may be able to use its 
public interest analysis to take these issues into account.
    We at the FTC believe that that is, in fact, the case, that 
notwithstanding the different statutory scheme that governs 
what the ITC has been directed to do by Congress, that it still 
has the discretion to take these issues into account.
    Chairman Leahy. We see a lot of companies going to the ITC 
rather than courts. Wouldn't it make more sense to go to 
courts, or the ITC might be a more favorable place?
    Ms. Ramirez. Let me note that the ITC provides relief that 
is a bit distinct from what the Federal courts can provide. The 
Federal courts may provide injunctive relief. They also have 
the ability to provide damages.
    The ITC, on the other hand, cannot award damages, but what 
it can do is it can issue an exclusion order that basically 
places a ban on imports. The order would essentially direct 
U.S. Customs to at the border stop infringing products that are 
coming into the country. So in certain circumstances, it can 
provide more effective relief than an injunction.
    Chairman Leahy. I understand that, but also under their 
statute that set them up, they are supposed to consult with 
both your departments on these. Do they consult with you?
    Ms. Ramirez. I think that the ITC does consult with other 
Federal agencies from time to time. We at the Federal Trade 
Commission have only rarely weighed in, but we did weigh in 
recently in these recent investigations that are pending before 
the ITC because we did consider this to be an important issue, 
one that we believe is of first impression for the ITC, and we 
did submit a statement conveying our concerns and conveying our 
view that they do, in fact, have authority to address this 
under the public interest analysis.
    Chairman Leahy. And, Mr. Wayland, are they consulting with 
you, with DOJ?
    Mr. Wayland. Mr. Chairman, they have invited comment 
through their process from agencies and the public generally, 
and there are a number of opportunities for the Department and 
agencies of the Government to be involved in the process along 
the way, yes. We are particularly concerned, Mr. Chairman, to 
get back to your question to Commissioner Ramirez, about the 
use of the ITC. We are particularly concerned that holders of 
F/RAND-encumbered patents would seek relief at the ITC because 
the relief there, as you have noted, is exclusionary, and the 
premise of a F/RAND commitment is that you will license your 
product, and the issue is at what price, not whether you will 
license.
    Chairman Leahy. And if I might, one more question, and I 
will put the rest of my questions in the record. But in 2011, 
the FTC requested comments. You published a report on the 
evolving IP marketplace aligning patent notice and remedies 
with competition. It referred to those companies that acquire a 
lot of patent portfolios. Their business model seems to be 
focused on purchasing and then asserting patents in litigation, 
not doing any inventing themselves but just having the patents 
available for litigation.
    Now, when we passed the Leahy-Smith America Invents Act, we 
tried to reduce inefficiencies in our patent systems. We did 
address, to the extent we could, the question of patent trolls. 
But I still hear from companies in Vermont--and I think other 
Senators do from companies in their States--that are forced to 
spend an awful lot of money defending themselves in litigation.
    Can we do more to stop the harassing of companies by people 
who just bought up the patents just for the sake of litigation?
    Ms. Ramirez. I will refer to those companies as ``patent 
assertion entities.'' That is how we refer to them in our 
report. In our report, the FTC made various recommendations 
about ways that the rules in the patent system can be applied 
in a way that would reduce the problem of hold-up that does 
tend to incentivize the assertion of patents. And, in 
particular, let me highlight a couple of those issues with 
regard to remedies, which is the subject that we are talking 
about today.
    One of the recommendations that we make is that it is very 
important for courts, when settling disputes, in awarding 
damages, to ensure that the compensation ends up properly 
aligning the reward for a patent right with the actual 
contribution that the IP technology makes rather than allowing 
for perhaps more compensation than the actual contribution--
economic value of the IP technology. So, in other words, if a 
patent holder is seeking compensation for a very small 
component in a multicomponent product, you have to take that 
into account when you are establishing damages. And for some of 
the reasons that we see there being so much litigation, it 
seems to be that patent damages are outsized and larger than 
would be necessary to properly compensate for IP technology. So 
the idea would be that if you properly align the reward with 
the contribution that is being made, that is likely to reduce 
the incentives for parties to end up litigating in court.
    Chairman Leahy. Well, both my staff and I will followup 
with some other questions on this area. And whether they are 
called ``patent trolls'' or whatever they are, you understand 
the problem I am concerned about. An inventor, somebody who has 
worked hard, should be compensated for what they did. Somebody 
who simply buys up patents hoping to make money by litigation, 
I do not have a huge amount of sympathy for.
    Senator Grassley.
    Senator Grassley. My questions will be directed to both of 
you, and I do not care who answers first.
    The first issue I want to bring up, it is my understanding 
that our approach in this country to standard setting works in 
the vast majority of the cases. So two questions associated 
with that premise, and if that premise is wrong, do not be 
afraid to tell me.
    Are we talking about a somewhat confined number of cases 
rather than a widespread problem with the current voluntary and 
consensus approach to standard setting? And if you believe that 
the patent hold-up problem is pervasive, what evidence do you 
have to support it?
    Mr. Wayland. Mr. Grassley, I will begin the answer. I think 
our concern is not so much the volume of matters but the type 
of matters that are involved. So we are talking about 
transactions involving products that affect the lives of 
millions of consumers and involve billions of dollars of 
potential damages. That is somewhat new in the sense that, you 
know, blocking a particular cell phone application could cause 
consumer harm across millions and millions of people. So it is 
the type of the practice that we are concerned about as much as 
the volume.
    Ms. Ramirez. Let me just say that I think there is 
considerable debate about how extensive this problem may be, 
but the fact of the matter is that we have seen an increased 
amount of patent litigation, and a number of companies have 
come to us at the FTC to say that patent hold-up is a concern. 
We have been very active in this area and have conducted 
research, and to the extent that we see it in the marketplace, 
we have offered recommendations that we believe can be used to 
alleviate the problem of patent hold-up.
    Senator Grassley. And then on a second question, is it the 
position of your agencies that the exclusionary orders should 
always be prohibited in standard-essential patent disputes 
where the standard-essential patent holder has committed to 
license on RAND terms? And let me phrase it another way. In 
other words, is it your opinion that there should be a blanket, 
one-size-fits-all, no-injunction, no-exclusionary-order rule 
for standard-essential and RAND-obligated patents?
    Mr. Wayland. That is not the position of the Department of 
Justice. The general principles certainly should apply that in 
most circumstances the holders of F/RAND-encumbered patents 
should be able to negotiate or have a court determine the 
appropriate royalty. But there may be circumstances where a 
licensee or someone using a technology refuses to participate 
in a reasonable negotiation or may not be subject to the 
jurisdiction of the U.S. courts.
    Ms. Ramirez. The majority of us at the FTC take a similar 
position. We think that there may be circumstances when an 
exclusion order may be appropriate. However, we think that most 
often when there is a RAND-encumbered standard-essential 
patent, the most likely outcome ought to be that an exclusion 
order does not issue, but it would depend on the particular 
facts of a case.
    Senator Grassley. We had a little bit of discussion between 
you and the Chairman on the International Trade Commission. I 
want to go back to that. A couple questions.
    How much formal consultation goes on between your agencies 
and the International Trade Commission during the public 
interest analysis of a Section 337 case? And is the 
International Trade Commission taking your input serious in its 
decisionmaking process?
    Ms. Ramirez. As Mr. Wayland noted, the ITC on a routine 
basis will invite public comment. As a formal matter, the FTC 
has not weighed in all that often. However, when it is 
appropriate--and recently we did feel that it was appropriate 
for us to weigh in on these issues--we did submit formal 
comments to the ITC.
    I believe that these will be taken into account. It remains 
to be seen what the ultimate outcome is in these pending 
investigations. We intend to be following closely what the ITC 
does. However, as I mentioned earlier, the ITC did issue a 
Notice of Review in the Apple-Motorola case where it indicated 
that it is certainly taking these issues into account because 
it had very specific questions that were directed at these 
issues and these concerns that all of you have raised. So I am 
glad to see that the ITC is taking these issues very seriously.
    Senator Grassley. Before you answer, Mr. Wayland, 
additionally can the process be improved in any way?
    Ms. Ramirez. I think the process does allow for 
consultation, and we are happy to consult with the ITC. In 
connection with our IP report, we did also consult with them. 
So we work very collaboratively with other Federal agencies, 
and I think the existing process does allow for that.
    Senator Grassley. Mr. Wayland.
    Mr. Wayland. Similarly to the FTC, Mr. Grassley, the 
Department of Justice does not typically submit comments 
directly to the ITC in the process, but we do monitor the 
process, and we consider whether it is appropriate at any 
particular time to submit our views. And with respect to the 
standard-essential patent cases now before the ITC, our views 
are publicly known. We have issued a closing statement with 
respect to the acquisitions of patent portfolios recently that 
make clear our concerns about SEPs.
    In addition, we recognize and appreciate the ITC's list of 
questions that they have raised which mirror the concerns that 
the FTC and we have raised previously.
    Senator Grassley. Thank you.
    Thank you, Mr. Chairman.
    Chairman Leahy. Thank you.
    Senator Coons.
    Senator Coons. I want to thank Chairman Leahy and Ranking 
Member Grassley for convening this hearing on this important, 
somewhat complex issue around intellectual property rights 
enforcement and how we can best strike a good balance.
    Mr. Wayland, I appreciated the interplay in your prepared 
remarks, your prepared statement today, recognizing the 
historic importance of protecting intellectual property rights 
but the tension with the procompetitive slant of our antitrust 
laws, but also the benefits of standard setting and how those 
three can interplay in a way that in rapidly emerging 
technologies can have dramatic benefits for consumers and for 
American innovation and competitiveness.
    Commissioner Ramirez, thank you also for your prepared 
comments. I am sorry I was at a meeting with the new President 
of the World Bank, and so I am joining this hearing a little 
late.
    If I might, first to Commissioner Ramirez, after 
experiencing issues with nondisclosure, including in the Rambus 
case, standard-setting organizations have adapted by 
strengthening disclosure requirements. What work is being done 
at the SSO level with respect to requiring a no-injunctions 
promise of some kind as part of participation in emerging 
standards?
    Ms. Ramirez. Thank you for your question. I think it is an 
important one to be asking. Let me just note that there are 
thousands of SSOs, and we do monitor what is happening, and, in 
fact, both the Department of Justice and the FTC do act as 
observers in one particular SSO. However, they are private 
organizations, and I know that a number of them just have a 
wide range of different policies.
    So we are keeping an eye on this. I know that this issue 
has garnered much recent attention, and I know that they are 
looking into this question. I believe that companies have gone 
to ETSI, which is a European standard-setting organization, to 
pose the question about whether or not making a RAND commitment 
will still enable a patent holder to obtain an injunction. So 
it is an issue that I know is being discussed at great length.
    Senator Coons. Do you have any input on whether it would 
help advance competitiveness, innovation, and open market were 
there to be some increased frequency with which there was not 
just full disclosure but also some requirement of a no-
injunction commitment or participating standard?
    Ms. Ramirez. I think what we focus on is we urge them to 
have rules that are clear, but we have not taken any formal 
position about what particular policies should be adopted by 
SSOs.
    Senator Coons. Does the FTC have any reaction to Judge 
Posner's recent advice to district courts to calculate RAND 
royalties on the basis of the value of the patent prior to 
being adopted as a component or critical piece of a standard? 
And does that view align with the position taken by the FTC in 
your 2011 report?
    Ms. Ramirez. Yes, we were actually very pleased to see 
Judge Posner's view on this issue because it is very much in 
line with the position that we took in our 2011 report, meaning 
that the RAND value should be the value that would be 
negotiated prior to the adoption of any particular standard so 
that you could really arrive at what the true economic value of 
the technology is.
    Senator Coons. Thank you.
    Mr. Wayland, we are, of course, discussing things that, as 
Commissioner Ramirez pointed out, are global in scope, these 
technology advances, the standard-setting organizations are not 
just U.S.-specific, and in my view, Chairman Leahy and this 
Committee and the Senate made a significant step forward in 
aligning our patent system with the world by adopting a first-
to-file system.
    Could you comment on any steps being taken by other 
countries to address the issue of injunctions for SEPs? And 
what work is the FTC and the DOJ doing to help the world come 
to some common standard that strikes you as appropriate in 
terms of achieving both pro-consumer competitive opportunities 
but also appropriately respecting intellectual property rights?
    Mr. Wayland. One of the priorities of this administration's 
antitrust policy, Senator, has been to increase international 
cooperation among antitrust authorities, and particularly with 
respect to standard-essential patents and intellectual property 
issues, we have worked closely, particularly with the European 
Commission, on specific matters and on general policy 
principles.
    In the recent review of the acquisition of patent 
portfolios, which we issued a public statement on, at the end 
of the statement we noted that our work came only after close 
consultation with the European Commission and other antitrust 
authorities. There is a shared concern among antitrust 
authorities about these issues, a shared concern that we 
provide consistent guidance to companies operating in this 
area. So I think there has been a substantial amount of work, 
and we are actively involved in seeking international 
cooperation on this issue.
    Senator Coons. That is encouraging.
    Could you clarify, Mr. Wayland, whether the Department 
takes the view that there are unique harms in seeking 
injunctions against rival technologies where a patent holder is 
seeking advantage not through just licensing fees but through 
the exclusion of a competitor from an emerging market segment?
    Mr. Wayland. Yes, Senator, we think there are very 
important harms that arise. These are harms that we are 
concerned about in all of our antitrust investigations, that 
is, increased prices that consumers have to pay and the 
exclusion of technology that would encourage or increase 
innovation in particular products.
    As I said in my response to Senator Grassley earlier, we 
are particularly concerned in standard-essential patents in 
telecommunications, mobile devices, that an exclusion order 
could affect a wide, wide range of consumers who are buying a 
cell phone or a tablet. An exclusion of any particular product 
like an Xbox or an Android-based phone could seriously impact 
consumers.
    Senator Coons. As the father of 13-year-old twin boys who 
are, without preferring any particular brand, really interested 
in Xbox imports, I will suggest that the impact of innovation 
is felt in many homes and at many levels. I will simply put it 
that way. [Laughter.]
    Without asking you to comment on any specific 
investigation, what circumstances is the Department watching to 
determine when seeking an injunction on a RAND-encumbered 
patent would actually violate antitrust laws? Is that something 
you feel comfortable commenting on?
    Mr. Wayland. Obviously, Senator, I cannot comment on 
specific investigations, but we apply our standard analysis in 
these cases, which we look at market power, what sort of power 
the holder of the patent or the standard-essential patent might 
have. We look at the effect on consumers, the potential of 
harm, and the exclusionary effect of the conduct.
    Senator Coons. And last, if I might, would you just comment 
on how given in your prepared statements you recognize the 
historic importance of intellectual property rights and their 
protection, often seeking an injunction is the most effective 
way to protect intellectual property rights? How do you strike 
an appropriate balance between respecting and protecting 
intellectual property rights, sometimes through seeking an 
injunction, and ensuring pro-consumer competitiveness in the 
marketplace, a robust and open marketplace where contractual 
agreements are followed and where we get the best possible 
quality, service, and products for consumers at the most 
reasonable price?
    Mr. Wayland. As a general matter, Senator, we spend a lot 
of time thinking about that issue, the intersection of 
intellectual property rights and antitrust and where the right 
balance is in any particular circumstances.
    With respect to standard-essential patents, which we are 
talking about today, we think the promise made by the holder of 
the patent to license on F/RAND terms really tips the balance 
in favor of seriously questioning why an exclusion order would 
be appropriate in any circumstance. What happens is the holder 
of the F/RAND-encumbered patent has promised to license the 
product on fair and reasonable terms and has recognized that 
money is a proper compensation for the use of the patent by a 
licensee or other user.
    Senator Coons. Did you have any comment then on the 
question I previously asked to Commissioner Ramirez about Judge 
Posner's view on what is the appropriate basis on which to 
assign a royalty given that sometimes these F/RAND standards 
are silent on exactly what is the appropriate percentage?
    Mr. Wayland. I think generally we share Commissioner 
Ramirez's view of Judge Posner's decision, and the appropriate 
way to calculate the value of the patent on the basis of the 
underlying technology.
    Senator Coons. Does the Department take the position in 
your view that the ITC should follow the eBay standard? Or do 
you believe that the ITC public interest consideration already 
incorporates some of the core elements of an eBay-like 
standard?
    Mr. Wayland. We think the public interest factors that the 
ITC should consider do incorporate the same sorts of concerns 
that the eBay court recognized.
    Senator Coons. Forgive me, I was too interested in the 
topic. I have gone well over my time, with my apologies to the 
Senator from Utah.
    Thank you very much to the panel.
    Chairman Leahy. Thank you, and I appreciate the Senator 
from Utah being here, as I noted in my opening statement his 
strong interest in this.
    Senator Lee, delighted to have you here. Take whatever time 
you need.
    Senator Lee. Thank you very much, Mr. Chairman. And I want 
to thank you, Chairman Leahy and also Ranking Member Grassley, 
for putting this hearing together. This is, as you know, an 
issue that has long been of concern to me.
    I was wondering whether either of you were of the opinion 
that an agreement to license an SEP on fair, reasonable, and 
non-discriminatory terms is itself effectively a commitment to 
non-exclusivity?
    Mr. Wayland. As a general matter, yes, that is the whole 
point. You get the benefit of joining the standard-setting 
organization which provides a market that you might not 
otherwise have in return for a commitment to license.
    Senator Lee. OK. So if that is the case, if so, doesn't 
that arguably make an exclusion order inappropriate in this 
circumstance? In other words, once somebody has agreed to non-
exclusivity, is an exclusion order an appropriate remedy?
    Mr. Wayland. In general, Senator, we agree that it would 
not be an appropriate remedy, but we do not think it is 
appropriate to have a blanket rule saying no exclusion ever 
because there may be circumstances in which an exclusion order 
is appropriate. As I said earlier, perhaps an entity that is 
not subject to the jurisdiction of the U.S. courts or that 
otherwise will not participate in a reasonable F/RAND setting 
process.
    Senator Lee. Right, right. But you would not see a problem 
with a rule that would say absent such special circumstances, 
such as those that you have identified, that an exclusion order 
would be inappropriate?
    Mr. Wayland. The general concept we would agree with. The 
devil is in writing the details of any rule, but yes, I think 
the general principle that exclusion orders would not be 
appropriate where the parties are trying to reach an agreement 
on F/RAND terms.
    Senator Lee. OK. Would your analysis on that point change 
at all if an SSO specifically said as part of its SEP agreement 
framework this does not amount to an agreement of non-
exclusivity? Would that change your analysis?
    Mr. Wayland. I am not sure I understand the question.
    Senator Lee. Or that it does not amount to a waiver of any 
right to seek an exclusion order, that you are not--that no one 
is agreeing to waive their right to pursue an exclusion order 
by agreeing to this? Would that change your analysis?
    Mr. Wayland. It would not change it in the sense that the 
commitment is the same, the holder of the patent of the 
technology has agreed to license, and trying to cull back on 
that agreement with some language I am not sure changes the 
general principle that we support.
    Senator Lee. OK. Commissioner Ramirez, do you have anything 
to add to or subtract from what he said in response to my 
questions there?
    Ms. Ramirez. The position of the FTC would be very similar. 
Again, we do not think that there ought to be a blanket rule. 
The majority of us on the Commission do not think that. And, 
furthermore, we also think that the courts using the eBay test 
are well positioned to look at the particular facts of a case 
to decide what is appropriate; and, similarly, that the ITC can 
do the same under its public interest analysis.
    I would say, however, that we do think that in most cases 
an exclusion order or an injunction would be inappropriate if 
there is a RAND commitment that has been made in a standard-
essential patent.
    Senator Lee. OK. And, Commissioner, is there also a risk 
here that if the ITC does not issue exclusion orders in this 
context, that could devaluate these kinds of patents? We want 
to protect the rights of patent holders, obviously. Is there a 
risk of that if the ITC were to say we are not going to issue 
exclusion orders in this area?
    Ms. Ramirez. I agree with you that it is important to 
protect the rights of patent holders, but, again, one has to 
strike the appropriate balance, balancing that against 
competition. I do not believe that, if the ITC were to elect 
not to issue an exclusion order, that would denigrate the value 
of the patent because the patent holder would still have a 
remedy in the district court to obtain damages.
    Senator Lee. So there would be no downside to doing that?
    Ms. Ramirez. Well, unless you have a situation where 
perhaps the district court did not have jurisdiction over a 
foreign defendant, for instance, and then maybe the ITC would 
be the only one who would have jurisdiction over the imported 
goods. That is a situation that Mr. Wayland discussed. So, 
again, it would depend on the particulars of a case, but 
generally speaking, there would be a remedy available in the 
Federal courts.
    Senator Lee. OK. So let us assume for purposes of 
discussion here, assume arguendo that we are dealing with a 
circumstance in which the value of the patent could be 
diminished by virtue of the non-availability of an exclusion 
order. Could that risk of devaluing the patent be mitigated by 
a rule that would say such exclusion orders might be available 
only where an SEP holder has somehow violated its F/RAND 
commitments?
    Ms. Ramirez. I agree that would be a factor to take into 
account. Again, I guess I would take issue with this notion 
that the patent would be devalued. The situation that we are 
discussing is one where the patent holder has voluntarily 
made----
    Senator Lee. It is hard to endorse the hypothetical.
    Ms. Ramirez [continuing]. The RAND commitment. So just 
keeping that in mind, once you make a RAND commitment, you are 
saying that there is a commitment to license on RAND terms. And 
I do believe that the position that the FTC is articulating and 
the one that the Department of Justice is articulating attempts 
to strike the right balance by saying do not say never. There 
may be circumstances where it would be appropriate to issue an 
exclusion order, if, you know, there is a potential licensee 
that is acting in bad faith, for instance, or where there may 
not be a remedy in district court. So I think the general 
principle that we are taking strikes the right balance between 
the rights of a patent holder and competition.
    Senator Lee. But it is certainly going to be difficult or 
maybe even impossible to conclude that those circumstances 
might exist, that is, circumstances where it might be 
appropriate for an exclusion order to issue where you can 
determine that the SEP holder has violated the SEP holder's F/
RAND commitments.
    Ms. Ramirez. I guess I am not sure that I understand why 
you think it would be impossible to make the determination. I 
think courts would be well positioned, I mean, they make 
decisions about disputes every single day. So I believe that 
they would be well positioned to assess the facts of a 
particular case and take into account any licensing commitment 
that has been made during the standard-setting process.
    Senator Lee. Right.
    Ms. Ramirez. So I understand the concern. However, I do 
feel that courts can take this into account and can make an 
appropriate decision. For instance, Judge Posner did that in 
his analysis in that Apple case in Illinois.
    Senator Lee. And I certainly was not trying to suggest that 
a court could not do that. I was just trying to drill down on 
the question. If, in other words, there were a rule in place 
that said an exclusion order is not appropriate where you have 
got an SEP holder that has not honored the SEP holder's F/RAND 
commitments, whether that would be a manageable standard that 
you think would work.
    Ms. Ramirez. I think the standard that would work is the 
one that we are advocating, which is not to have a bright-line 
rule but, rather, to say these are things that you ought to 
take into account and, you know, generally speaking, I think it 
would be in most cases that it would be inappropriate to issue 
injunctive relief. But, again, there might be circumstances 
where that is not the case.
    Senator Lee. OK. Mr. Chairman, I know my time has expired. 
Have I got time for one more question?
    Chairman Leahy. Of course.
    Senator Lee. OK. Mr. Wayland, I read a letter that was 
issued in February 2012. It is a letter closing an 
investigation into Google's acquisition of Motorola's patent 
portfolio. And in that same letter, this February 2012 letter, 
the Antitrust Division stated that it ``will not hesitate to 
take appropriate enforcement action to stop any anticompetitive 
use of SEP rights.''
    Can you give us some sense as to what circumstances might 
warrant such enforcement action and, perhaps more importantly, 
what the Division might consider an appropriate type of an 
enforcement action?
    Mr. Wayland. Senator, we look at the facts and 
circumstances of transactions and activities by SEP holders to 
determine whether there is a violation of any antitrust laws. 
We are particularly concerned about efforts that attempt to 
exclude competitors from entering markets, and to that extent, 
we are looking at a number of transactions. I cannot comment on 
the specifics of ongoing investigations, but we are serious 
about looking at how SEP holders are using the power that they 
have.
    One of the critical factors, Senator, is our examination of 
the market power that might be attributed to any particular 
holder of SEP patents.
    Senator Lee. OK. Thank you very much. Thank you both for 
your testimony.
    Thank you, Mr. Chairman.
    Chairman Leahy. Thank you, and we will put a statement in 
the record from Senator Durbin.
    [The prepared statement of Senator Durbin appears as a 
submission for the record.]
    Chairman Leahy. I will also leave the record open until 
close of business for any other questions to be submitted for 
the record, and I appreciate both of you being here. I do have 
several questions for the record that we will give you, and my 
staff will followup with you on that.
    [The questions of Chairman Leahy appears under Questions 
and Answers.
    Chairman Leahy. Thank you for taking the time. It is 
amazing the amount of interest I have in this subject from my 
State, but certainly from other States, too. Thank you.
    Mr. Wayland. Thank you, Mr. Chairman.
    Ms. Ramirez. Thank you.
    [Whereupon, at 10:39 a.m., the Committee was adjourned.]
    [Questions and answers and submissions for the record 
follow.]






                                 
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