    [Senate Hearing 113-308]
    [From the U.S. Government Publishing Office]

                                                            S. Hrg. 113-308

              STANDARD-ESSENTIAL PATENT DISPUTES AND ANTITRUST LAW

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

                                    HEARING

                                   before the

                           SUBCOMMITTEE ON ANTITRUST,
                     COMPETITION POLICY AND CONSUMER RIGHTS

                                     of the

                           COMMITTEE ON THE JUDICIARY
                              UNITED STATES SENATE

                        ONE HUNDRED THIRTEENTH CONGRESS

                                 FIRST SESSION

                                   __________

                             TUESDAY, JULY 30, 2013

                                   __________

                              Serial No. J-113-24

                                   __________

             Printed for the use of the Committee on the Judiciary

                                   ----------

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                           COMMITTEE ON THE JUDICIARY

                      PATRICK J. LEAHY, Vermont, Chairman
    DIANNE FEINSTEIN, California         CHUCK GRASSLEY, Iowa, Ranking
    CHUCK SCHUMER, New York                  Member
    DICK DURBIN, Illinois                ORRIN G. HATCH, Utah
    SHELDON WHITEHOUSE, Rhode Island     JEFF SESSIONS, Alabama
    AMY KLOBUCHAR, Minnesota             LINDSEY GRAHAM, South Carolina
    AL FRANKEN, Minnesota                JOHN CORNYN, Texas
    CHRISTOPHER A. COONS, Delaware       MICHAEL S. LEE, Utah
    RICHARD BLUMENTHAL, Connecticut      TED CRUZ, Texas
    MAZIE HIRONO, Hawaii                 JEFF FLAKE, Arizona
                Bruce A. Cohen, Chief Counsel and Staff Director
                     David Young, Republican Chief of Staff
                                     ------

       Subcommittee on Antitrust, Competition Policy and Consumer Rights

                       AMY KLOBUCHAR, Minnesota, Chairman
    CHUCK SCHUMER, New York              MICHAEL S. LEE, Utah, Ranking
    AL FRANKEN, Minnesota                    Member
    CHRISTOPHER A. COONS, Delaware       LINDSEY GRAHAM, South Carolina
    RICHARD BLUMENTHAL, Connecticut      CHUCK GRASSLEY, Iowa
                                         JEFF FLAKE, Arizona
                     Craig Kalkut, Democratic Chief Counsel
                   Bryson Bachman, Republican General Counsel

                                C O N T E N T S

                                  ----------

                        STATEMENTS OF COMMITTEE MEMBERS

                                                                       Page

    Klobuchar, Hon. Amy, a U.S. Senator from the State of Minnesota..     1
    Lee, Hon. Mike, a U.S. Senator from the State of Utah............     3
    Grassley, Hon. Chuck, a U.S. Senator from the State of Iowa......     4
    Hirono, Hon. Mazie, a U.S. Senator from the State of Hawaii......     5
    Leahy, Hon. Patrick J., a U.S. Senator from the State of Vermont,
      prepared statement.............................................    36

                                   WITNESSES

    Witness List.....................................................    35
    Munck, Suzanne, Chief Counsel for Intellectual Property, and
      Deputy Director, Office of Policy Planning, Washington, DC.....     6
        prepared statement...........................................    38
    Melamed, A. Douglas, Senior Vice President and General Counsel,
      Intel Corporation, Santa Clara, California.....................     8
        prepared statement...........................................    51
        supplemental prepared statement..............................    72
    Rosenberg, Donald J., Executive Vice President, General Counsel,
      and Corporate Secretary, Qualcomm Incorporated, San Diego,
      California.....................................................     9
        prepared statement...........................................    77
        supplemental prepared statement..............................    98
    Kulick, John D., Ph.D., Chair, Standards Board, The Institute of
      Electrical and Electronics Engineers Standards Association, New
      York, New York.................................................    11
        prepared statement...........................................   108

             QUESTIONS SUBMITTED BY SENATORS GRASSLEY AND KLOBUCHAR

    Questions submitted by Senator Grassley for Suzanne Munck........   176
    Questions submitted by Senator Grassley for A. Douglas Melamed...   177
    Questions submitted by Senator Grassley for Donald J. Rosenberg..   179
    Questions submitted by Senator Grassley for John D. Kulick, Ph.D.   181
    Questions submitted by Senator Klobuchar for Suzanne Munck.......   182
    Questions submitted by Senator Klobuchar for A. Douglas Melamed..   183
    Questions submitted by Senator Klobuchar for Donald J. Rosenberg.   184
    Questions submitted by Senator Klobuchar for John D. Kulick,
      Ph.D...........................................................   185

                         ANSWERS SUBMITTED BY WITNESSES

    Responses by Suzanne Munck to questions submitted by Senators
      Grassley and Klobuchar.........................................   186
    Responses by A. Douglas Melamed to questions submitted by
      Senators Grassley and Klobuchar................................   190
    Responses by Donald J. Rosenberg to questions submitted by
      Senators Grassley and Klobuchar................................   204
    Responses by John D. Kulick, Ph.D., to questions submitted by
      Senators Grassley and Klobuchar................................   215

                    MISCELLANEOUS SUBMISSIONS FOR THE RECORD

    Ericsson, Inc., statement........................................   220
    Letter to Senator Klobuchar and Congressman Lee from Timothy
      Molino, BSA....................................................   226
    Reverend Jeffrey D. Thiemann, President and CEO, Portico Benefit
      Services, Minneapolis, Minnesota; statement....................   234
    Standards Essential Patent Disputes and Antitrust Law, David J.
      Teece, Director, Institute for Business Innovation, University
      of California, Berkeley, California............................   238

              STANDARD-ESSENTIAL PATENT DISPUTES AND ANTITRUST LAW

                                  ----------

                            TUESDAY, JULY 30, 2013,

    U.S. Senate, Subcommittee on Antitrust, Competition
                          Policy, and Consumer Rights,,
                                   Committee on the Judiciary,,
                                                        Washington, DC.
        The Subcommittee met, pursuant to notice, at 10:01 a.m., in
    Room SD-226, Dirksen Senate Office Building, Hon. Amy
    Klobuchar, Chairman of the Subcommittee, presiding.
        Present: Senators Klobuchar, Schumer, Coons, Hirono, Lee,
    and Grassley.

     OPENING STATEMENT OF HON. AMY KLOBUCHAR, A U.S. SENATOR FROM
                         THE STATE OF MINNESOTA

        Chairman Klobuchar. Good morning, and welcome to today's
    hearing about standard-essential patents and antitrust law, or
    as we like to say, ``Why can't we be FRANDs?'' That is just a
    little patent joke to start things out.
        [Laughter.]
        Chairman Klobuchar. We are going to have a vote supposedly
    at 10:15, and so Senator Lee and I will take turns chairing,
    and we may have to recess for just a few minutes, but I thought
    it was more important to get the hearing going.
        This hearing follows one that we had last week that was
    also about the intersection of intellectual property and
    antitrust. That was in the context of pay-for-delay agreements
    to settle pharmaceutical patent litigation. Today we will be
    examining standard-essential patents, patents that are
    necessary components to cell phones, laptops, and other devices
    that have become indispensable to our everyday lives.
        We have heard concerns that consumers can face higher
    prices for these products when disputes occur about what the
    fair, reasonable, and non-discriminatory, or FRAND, rates
    should be to license these unique patents.
        Now, this may seem like a dry and technical subject for a
    hearing, but we will try to keep things interesting. What this
    hearing really boils down to is that antitrust and competition
    issues are increasingly at the center of the so-called patent
    wars, and we are trying to figure out whether standard-
    essential patent holders and implementers, instead of being at
    war, can be ``FRANDs.''
        Last summer, Chairman Leahy held an oversight hearing where
    the DOJ and FTC testified about the harm to competition from
    the use of International Trade Commission exclusion orders to
    enforce standard-essential patents. Since then, we have
    continued to hear concerns about how the market power conveyed
    by standard-essential patents and the ability to seek
    injunctions and exclusion orders can distort competition and
    harm consumers.
        Our hearing is particularly relevant this week because the
    administration is expected to complete its review of a dispute
    over standard-essential patents between Apple and Samsung at
    the International Trade Commission.
        We approach this hearing from the premise that industry
    standards are a valuable public good that foster invention and
    innovation. For example, standards ensures that our cell phones
    and smartphones can connect to each other, cellular networks,
    and Wi-Fi. Once standards are set, they enable competition
    between the businesses that implement the standards into their
    consumer products. That is the reason we have a wide variety of
    competitors selling electronics such as smartphones, game
    consoles, and computers, to name a few.
        But any joint endeavor between potential competitors raises
    antitrust red flags. Standard setting involves competitors
    deciding what technology will become an industry standard, and
    in doing so they convey significant market power to whoever
    holds patents that are necessary to implement the standard.
        To counter this market power, standards organizations
    typically encourage participants to agree prior to setting a
    standard to license any patents that are ultimately included in
    a standard on FRAND terms. Consequently, competition can be
    distorted if a standard-essential patent owner reneges on its
    FRAND commitment by demanding higher royalty rates or more
    costly licensing terms after a standard is adopted than they
    could have before the standard was chosen.
        On the other hand, standard-essential patent owners say
    that sometimes their good-faith FRAND offers are rejected,
    perhaps in part because the potential licensees know the patent
    holder has already committed to licensing their technology.
        So we will examine these dynamics and ask important
    questions about how we can better protect consumers. Should the
    ability to get injunctions and exclusion orders be limited in
    cases when the promise was made to license patents on FRAND
    terms? Should FRAND commitments travel with a patent if it is
    transferred to another owner? And how can unwilling licenses be
    identified and willing licensees be identified and forced to
    the bargaining table? These are just a few of the issues that
    we are going to explore today.
        Cooperative standard setting has a long history in a
    variety of different industries, from the standard railroad
    track gauge and the aviation technology to nuts and bolts and
    every electronic device that we use today. But we need to make
    sure that safeguards are in place to ensure that standard
    setting continues to provide consumers with the most innovative
    products and that antitrust principles make sure consumers get
    them at the best prices.
        With that, I will turn it over to our Ranking Member,
    Senator Lee.

      OPENING STATEMENT OF HON. MIKE LEE, A U.S. SENATOR FROM THE
                             STATE OF UTAH

        Senator Lee. Thank you, Madam Chair. Our hearing today
    focuses on standard-essential patents. Everyone who is
    participating in or watching this hearing can agree that
    cooperative industry standards are good for consumers,
    producers, and for the economy as a whole.
        By enabling interoperability and interconnectivity,
    standards have played a vital role in the development of many
    extraordinary technologies that we now take for granted,
    including wireless networks and cell phones.
        We like standards, and we need them. Everyone here I think
    likewise agrees that our patent system benefits consumers and
    is itself essential to our country's continued economic
    progress. By incentivizing the investment that leads to
    research, development, and innovation, the government's
    recognition and protection of intellectual property provides an
    environment in which Americans can take risks, invent new
    products, and advance our standard of living in this country.
        Consumers thus rely on both a robust system of standard
    setting and dependable protection of intellectual property. Any
    conflict between these two important elements of our economy
    necessarily affects consumers and is a matter of real concern
    for this Subcommittee.
        Companies and individuals that use patents increasingly
    complain of what is called the "hold-up," the scenario in which
    a holder of a standard-essential patent refuses to grant a
    license to use its patent or threatens to refuse to grant a
    license unless the user agrees to pay an excessive royalty. The
    holder of a standard-essential patent has a powerful leverage
    point due to the potentially prohibitive switching costs for
    companies who are already using the standard to make their
    product.
        To avoid such a hold-up, standard-setting organizations
    often require patent holders whose intellectual property has
    been included in a standard to agree to license their patent on
    fair, reasonable, and non-discriminatory terms, also known as
    FRAND terms. But a breakdown in bilateral negotiations over
    what constitutes FRAND may leave in place insufficient
    safeguards to prevent a patent holder from seeking an
    injunction in federal court or an exclusion order from the
    International Trade Commission.
        The result, some argue, is a situation in which holders of
    standard-essential patents can obtain excessive fees due to the
    very threat of a hold-up. Others argue that there is no hold-up
    problem. They point out that standard-setting organizations
    generally do not include terms in their agreements prohibiting
    patent holders from seeking injunctions or exclusion order, and
    for good reason. Injunction provide patent holds necessary
    leverage in negotiations to avoid litigation.
        Absent the ability to obtain an injunction or to obtain an
    exclusion order, holders of standard-essential patents will be
    forced to internalize the costs of litigating for damages
    against each potential licensee that refuses to pay reasonable
    licensing fees. Companies that have invested heavily in the
    development of intellectual property thus assert that, if
    anything, reverse hold-up is the real threat, and any policy
    that discourages injunctions will devaluate standard-essential
    patents and thus reduce the ability and the incentive of
    innovators to invest in future research and development.
        Although these arguments appear to pit innovators against
    implementers, consumers have a real interest at stake here. Any
    policy that reduces participation in standards or that raises
    the cost of patent licenses will ultimately affect consumers,
    potentially limiting their access to new products or raising
    prices that they pay for those products.
        No one is suggesting that patent protection should be
    limited or that deception by holders of standard-essential
    patents should be tolerated. These issues are complex, and any
    potential solution must be carefully considered and weighed to
    take into account that complexity.
        The Federal Government should not intervene where free
    market forces are sufficient to remedy harmful conduct. At the
    same time, where existing laws and regulations create unfair
    incentives that damage our economy or that tend to harm
    consumers, Congress and government enforces must be willing to
    address the situation.
        In the event the evidence points to increased and
    unjustified costs for consumers as a result of a patent hold-
    up, our Subcommittee should seriously consider taking steps to
    discourage such behavior.
        Throughout our consideration of these issues, we must keep
    our focus on protecting competition and not insulating
    competitors. As Robert Bork forcefully demonstrated more than
    two decades ago in ``The Antitrust Paradox,'' the proper focus
    of our antitrust laws is to maximize consumer welfare. By
    carefully evaluating the evidence and applying rigorous
    economic analysis, we can continue to ensure that competition
    and free market forces allocate resources to their most
    valuable use.
        I look forward to hearing from all of our witnesses today.
    I thank them for coming and welcome you to the hearing.
        Chairman Klobuchar. Thank you very much, Senator Lee.
        Senator Grassley, the Ranking Member of the Judiciary
    Committee, we are pleased to have you here. Do you want to say
    a few words?

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

        Senator Grassley. Just a few. In addition to a few words,
    when we have this vote at 10:15, I will have to go to the
    Budget Committee, and I do not know whether I will get back
    here. And if I do not, I will have some questions for answer in
    writing.
        Chairman Klobuchar. Very good.
        Senator Grassley. Thank you for this privilege of
    addressing the Subcommittee and our audience and, more
    importantly, for holding this hearing on standard-essential
    patents.
        Industry standards are critical to innovation and new
    technologies, products, and services. Standards are also
    important to allowing different electronic and mobile devices
    to interface and connect with each other. Consumers like
    competition, interoperability, and choice with respect to their
    devices. When companies agree to make their patents an industry
    standard, they commit to make those patents available on fair,
    reasonable, and non-discriminatory licensing terms. So
    companies that have incorporated standard-essential patents
    into their products expect to be able to negotiate reasonable
    royalties with the patent holder.
        So these are questions that I will be looking for answers
    for. What are the obligations of companies that believe that
    their patents are being infringed or they are not getting a
    fair and reasonable royalty fee? Is it always anticompetitive
    or anticonsumer when standard-essential patent holders exclude
    or seek injunctive relief against companies that have
    implemented their standards? How extensive is the hold-up
    problem? How extensive is the hold-out problem? And how do
    these problems impact innovation and competition?
        I am looking forward to hearing from the witnesses today
    about the standard-setting process and whether it is being
    abused as well as how companies negotiate standard-essential
    patents. I am also looking forward to hearing what is happening
    in the courts with respect to standard-essential patent issues.
        We have seen an increase in lawsuits over the way that
    standard-essential patents are used and enforced, so continued
    oversight by this Committee, as you are doing today, is
    important in this area.
        Thank you.
        Chairman Klobuchar. Thank you very much, Senator Grassley.
        Senator Hirono, do you want to give us a few words?

    OPENING STATEMENT OF HON. MAZIE HIRONO, A U.S. SENATOR FROM THE
                            STATE OF HAWAII

        Senator Hirono. Just very briefly. I know how important
    this morning's hearing topic is for our technology sector, and
    it raises issues that I think most people are not aware of, and
    so I am here to listen to our panelists, and thank you very
    much.
        Chairman Klobuchar. Thank you very much.
        I am going to introduce our witnesses. Our first witness
    will be Suzanne Munck, who I will note is seven months'
    pregnant with twins. And I know this hearing will calm the
    twins down, unless something really exciting happens. She is
    the Chief Counsel for Intellectual Property and Deputy Director
    of the Federal Trade Commission's Office of Policy Planning.
    Before joining the FTC, she was an antitrust and IP litigator
    in Los Angeles, and I would like to point out that she received
    her J.D. from the University of Minnesota Law School.
        We also have with us Mr. Douglas Melamed. He is the senior
    vice president and general counsel for Intel. Mr. Melamed was
    previously a partner at Wilmer Hale. He also served in the
    Department of Justice as Acting Assistant Attorney General in
    charge of the Antitrust Division and as Principal Deputy
    Assistant Attorney General.
        Our third witness will be Mr. Donald Rosenberg. He is the
    executive vice president, general counsel, and corporate
    secretary of Qualcomm. He has also served as senior vice
    president, general counsel, and corporate secretary for Apple
    and has held numerous positions at IBM, including senior vice
    president and general counsel.
        Our final witness to testify will be Mr. John Kulick. Mr.
    Kulick is the Chair of the Standards Association Board of the
    Institute of Electrical and Electronics Engineers and a senior
    consultant for technical regulation and standardization in
    corporate research for Siemens Corporation.
        With that, I ask all our witnesses to stand and raise your
    right hand. Do you affirm that the testimony you are about to
    give before the Committee will be the truth, the whole truth,
    and nothing but the truth, so help you God?
        Mr. Melamed. I do.
        Mr. Rosenberg. I do.
        Ms. Munck. I do.
        Mr. Kulick. I do.
        Chairman Klobuchar. Thank you. Why don't we begin with Ms.
    Munck.

      STATEMENT OF SUZANNE MUNCK, CHIEF COUNSEL FOR INTELLECTUAL
       PROPERTY, AND DEPUTY DIRECTOR, OFFICE OF POLICY PLANNING,
               FEDERAL TRADE COMMISSION, WASHINGTON, D.C.

        Ms. Munck. Thank you very much. Chairman Klobuchar, Ranking
    Member Lee, and Members of the Subcommittee, thank you for the
    opportunity to testify this morning. The written statement
    submitted with my testimony represents the views of the Federal
    Trade Commission. My oral presentation and responses to
    questions are my own and do not necessarily reflect the views
    of the Commission or any Commissioner.
        My testimony focuses on SEPs that a patent holder has
    committed to license on reasonable and non-discriminatory, or
    RAND, terms. In this context, hold-up describes the potential
    that a SEP holder can use the leverage it may acquire as a
    result of the standard-setting process to negotiate higher
    royalty rates or other more favorable terms after the standard
    is adopted than it could have credibly demanded beforehand.
        As outlined in the written statement, the Commission
    recognizes that America's economic growth and competitiveness
    depends on its capacity to innovate. It also recognizes that
    intellectual property and competition laws share the
    fundamental goals of promoting innovation and consumer welfare.
        Collaborative standard setting plays a valuable and pro-
    competitive role in promoting innovation. Firms in the IT and
    telecommunications industries frequently face the problem that
    hundreds, thousands, and sometimes hundreds of thousands of
    different inventions need to work together. They often solve
    this interoperability problem through voluntary consensus-based
    standard-setting organizations, or SSOs. SSOs create technical
    standards to ensure that devices will work together in
    predictable ways. Such standards can create enormous value for
    consumers by increasing competition, innovation, product
    quality, and choice.
        Many standards, particularly in the high-tech sector,
    include a large number of patented technologies. This can
    benefit consumers. However, incorporating patented technologies
    into standards also has the potential to distort competition by
    enabling SEP holders to engage in patent hold-up.
        The threat of patent hold-up arises as a result of the
    standard-setting process. Before a standard is adopted,
    multiple technologies may compete for selection into the
    standard. Once a standard is adopted, an entire industry begins
    to make investments tied to the standard. At that time,
    companies may not be able to avoid the standardized technology
    unless all or most other participants in the industry agree to
    do so in compatible ways.
        Because all of these participants may face substantial
    switching costs in abandoning initial designs and substituting
    a different technology, an entire industry may become locked
    into practicing the standard. In this situation, a SEP holder
    can demand royalty payments and other favorable licensing terms
    based not only on the market value of the patented invention
    before it was included in the standard, but also on the costs
    and delays of switching away from the standardized technology.
        Hold-up and the threat of hold-up involving RAND-encumbered
    SEPs can deter innovation by increasing costs and uncertainty
    for other industry participants. It can discourage adoption of
    standards and reduce the value of standard setting, depriving
    consumers of the substantial pro-competitive benefits of
    standardized technology. It can also harm consumers when excess
    costs are passed on to them.
        Market-based factors may mitigate the risk of hold-up.
    Frequent participants in standard-setting activities may avoid
    engaging in patent hold-up to preserve their reputation. Patent
    holders who manufacture technology may find it more profitable
    to offer attractive licensing terms and promote the adoption of
    the standard, increasing demand rather than extracting hold-up
    royalties.
        Nevertheless, SSOs commonly seek to mitigate the threat of
    patent hold-up by seeking commitments from participants to
    license SEPs on RAND terms, often as a quid pro quo for the
    inclusion of the patents in the standard. A RAND commitment can
    make it easier to adopt a standard, but the potential for hold-
    up remains if the RAND commitment is later disregarded.
        I would like to close by reinforcing the important point
    that competition and intellectual property laws work together
    to promote innovation. Voluntary consensus-based standard
    setting facilitates this purpose; however, including patented
    technology in a standard creates the potential for patent hold-
    up. As outlined in the written statement, the Commission will
    continue to advocate before the federal courts and the ITC for
    policies that mitigate the potential for patent hold-up and
    will bring enforcement actions where appropriate.
        Thank you very much. I am happy to answer any questions
    that you have.
        [The prepared statement of Ms. Munck appears as a
    submission for the record.]
        Chairman Klobuchar. Thank you very much, Ms. Munck.
        Mr. Melamed.

      STATEMENT OF A. DOUGLAS MELAMED, SENIOR VICE PRESIDENT AND
      GENERAL COUNSEL, INTEL CORPORATION, SANTA CLARA, CALIFORNIA

        Mr. Melamed. Chairman Klobuchar, Ranking Member Lee, and
    distinguished Members, thank you for convening today's hearing
    on abuses of standard-essential patents, or SEPs.
        Intel Corporation is the world's largest semiconductor
    company, and it is a major exporter and manufacturer that
    employs approximately 50,000 people in the United States. Intel
    is also a leading innovator. Last year, Intel spent more than
    $10 billion on R&D, more than any other publicly traded company
    in the United States. Intel invented, among many other
    universally used technologies, the first dynamic random access
    memory, or DRAM, the first microprocessor, and the universal
    service bus, or USB. Intel holds nearly 40,000 patents and has
    been a top-10 recipient of U.S. patents for eight of the last
    10 years. Intel has been instrumental in developing countless
    industry standards, including Wi-Fi standards. Intel cares
    deeply both about protecting legitimate patent interests and
    about ensuring the robust, pro-competitive development and
    implementation of industry standards.
        The high-tech industry is being threatened by the
    increasingly frequent anticompetitive behavior of a few. Some
    patent owners who commit to license their patents for use in
    industry standards on fair, reasonable, and non-discriminatory,
    or FRAND, terms are reneging on those commitments after their
    patents have been incorporated into the standards. FRAND abuse
    has threatened significant harm to competition, innovation, and
    consumer welfare.
        In the standard-setting process, patent holders compete to
    have their patented technologies included in the standard.
    After the standard is adopted and gains commercial acceptance,
    however, this competition is eliminated because to comply with
    the standard, manufacturers must use the SEPs embodied in the
    standard, and using an alternative technology that was
    available before the standard's adoption is no longer feasible.
        As a result, if unchecked, the SEP holder can have enormous
    market power which derives not from the SEPs themselves, which
    are often insignificant, but from their inclusion in the
    standard.
        To prevent this, standard-setting organizations require
    those whose technologies are included in the standards to
    commit to license their SEPs to everyone on FRAND terms. These
    FRAND commitments are, in effect, a bargain. In exchange for
    vastly increasing the number of users of the patented
    technology and, thus, the licensing opportunities available to
    those technologies, the SEP holder voluntarily agrees to forgo
    the market power created by the inclusion of its patent in the
    standard. This bargain preserves the competitive benefits that
    existed before the standard was adopted and ensures that the
    royalty reflects the value of that competition.
        Recently an alarming trend has emerged where some companies
    are reneging on their FRAND commitments and seeking to exercise
    the market power that they previously agreed to relinquish. In
    Intel's written submission, I point out six abuses of FRAND
    commitments. This morning I will briefly address two of
    particular importance.
        First, although companies that make FRAND commitments have
    promised to license every willing implementer, some SEP holders
    refuse to license component manufacturers like Intel. They
    insist instead that it is okay for them just to license our
    customers, manufacturers of PCs and other end products. Aside
    from the obvious breach of a contractual commitment to license
    everyone, these refusals to license chip makers inflicts
    substantial harm.
        SEP holders refuse to license chip makers so that they can
    seek excessive royalties. In one recent case in which we were
    involved in litigation, a SEP holder sought a 50-cent royalty
    on a $2 chip. It admitted at trial that it did so because it
    believed it could get larger royalties by going after the PC
    manufacturer than by going after the chip maker. It believed
    that the jury would reject as excessive a 50-cent royalty
    charged on a $2 chip that consumed the entire technology but
    would not reject a 50-cent royalty as excessive in a $700
    computer. This company has only 50--about three percent of the
    SEPs in the standard, and there are about 250 standards in a
    PC. So the 50-cent royalty it sought implies an aggregate
    royalty burden of more than $4,000 for a $700 computer.
        The second critical FRAND abuse occurs when SEP holders
    threaten injunctions against a willing licensee. They do so not
    to prevent copying of their products but, rather, to gain
    leverage with which to extract from the users of their products
    excessive royalties greater than the reasonable royalties they
    promised to accept.
        FRAND abuse is a serious and growing problem. Intel
    appreciates the Subcommittee's interest in this issue, and I
    thank you for the opportunity to participate in this hearing.
        [The prepared statement of Mr. Melamed appears as a
    submission for the record.]
        Chairman Klobuchar. Thank you very much.
        We are going to recess briefly when I go to vote, and
    Senator Lee will take it up, and I will be back shortly. So
    thank you, everyone. You can have some water or do whatever you
    need to do to get through the hearing. Thank you very much.
        [Recess at 10:26 a.m. to 10:35 a.m.]
        Senator Lee. [Presiding.] Okay. Why don't we go back in
    now. Chairman Klobuchar should be back in a moment, but we will
    resume.
        Why don't we hear from Mr. Rosenberg? Go ahead, sir.

      STATEMENT OF DONALD J. ROSENBERG, EXECUTIVE VICE PRESIDENT,
          GENERAL COUNSEL, AND CORPORATE SECRETARY, QUALCOMM
                  INCORPORATED, SAN DIEGO, CALIFORNIA

        Mr. Rosenberg. Thank you, Ranking Member Lee, for the
    opportunity to testify today. My name is Don Rosenberg, and I
    am executive vice president and general counsel for Qualcomm,
    headquartered in San Diego. Qualcomm is a leading developer of
    wireless communication technologies and the largest producer of
    chip sets for wireless devices. Since our founding in 1985 by
    seven engineers and academics, we have produced and
    commercialized ground-breaking mobile innovations that have
    transformed modern communications. Today we employ more than
    27,000 people, more than two-thirds of whom are engineers and
    scientists, with a majority based in the United States.
        Since our founding, Qualcomm has invested more than $25
    billion in research and development, and our annual investments
    in R&D exceed 20 percent of our revenues.
        Qualcomm is active in more than 100 standard-setting
    organizations around the world, and we broadly license our
    standard-essential patents on FRAND terms. Despite what you may
    have heard, FRAND works well. It balances the rights of
    technology innovations on the one hand with those of
    implementers on the other. And it encourages all participants
    to choose collaboration over litigation.
        Qualcomm licenses virtually our entire portfolio of 3G and
    4G patents to nearly 250 companies, including all major mobile
    device manufacturers. Qualcomm's R&D investments and licensing
    program have lowered barriers to entry, promoted competition on
    prices and features, and significantly enhanced consumer choice
    and welfare.
        Qualcomm's technologies have allowed newcomers to enter the
    mobile industry and compete with great success without having
    made R&D investments of their own in core wireless
    technologies.
        The mobile device in your purse or pocket would not
    function as the powerful, always connected handheld computer
    without Qualcomm's contributions to wireless standards and our
    decision to make our technologies widely available.
        Contrast that with the many companies who develop or
    acquire proprietary technology solely for their own competitive
    advantage. For companies that rely on technology developed by
    others, patent royalties are a cost of doing business. But for
    wireless pioneers, patents provide economic incentives to
    encourage risky, long-term investments in innovation.
        Qualcomm is both a product company and an R&D institution,
    and we appreciate both perspectives. Yet we firmly believe that
    patents are critical to this country's long-term economic
    future and global competitiveness. We are deeply concerned that
    certain policy proposals would devalue patented contributions
    to standards and strip patent owners of important property
    rights, contrary to long-established SSO policies.
        Bear in mind, product makers that implement standardized
    technology are already protected against inappropriate threats
    of an injunction or exclusion order. In the United States, an
    exclusionary remedy will not be granted until an infringer's
    FRAND defense is adjudicated. This is a high bar, leaving only
    unwilling licensees subject to injunctive or exclusionary
    relief.
        As you evaluate the merits of proposed changes to patent
    rights or standards policies, I ask you to consider three
    important questions.
        First, what do the facts tell us about the role of patents
    and standards in today's innovation economy? By all objective
    economic measures, the mobile industry is an incredibly dynamic
    and a competitive ecosystem facilitated by literally thousands
    of licenses, cross-licenses, and other kinds of partnerships.
    Disputes among competitors are to be expected in a vibrant
    marketplace. Patent litigation is common in periods of intense
    technological development and does not signify a breakdown in
    competition.
        Second, would proposed policy changes balance the interests
    of product makers and inventors? FRAND policies serve
    complementary goals of access to patented technologies and fair
    compensation for innovators. Policy changes that unfairly tip
    the balance to infringers would decrease incentives to invest
    in R&D and to contribute to standards. The recent joint USPTO-
    DOJ statement on SEPs explicitly rejects one-size-fits-all
    rules and recognizes the importance of balance and a case-
    specific approach to FRAND disputes.
        Third, and finally, will the proposed policy changes
    encourage respect for U.S. patented technologies abroad? The
    United States has historically pressed foreign governments to
    respect patent rights, to respect the freedom of contract and
    voluntary consensus-based standards. A backward shift in U.S.
    patent policies could encourage foreign governments to adopt
    measures that devalue American technologies through royalty
    rate regulation and compulsory licensing.
        In closing, I urge the Subcommittee to recognize that the
    creation of complex, game-changing technologies requires many
    billions of dollars of R&D investments over a period of several
    years, if not decades. This risk and reward dynamic depends on
    a strong U.S. patent system.
        I thank you, and I look forward to your questions.
        [The prepared statement of Mr. Rosenberg appears as a
    submission for the record.]
        Senator Lee. Thank you, Mr. Rosenberg.
        Dr. Kulick, let us hear from you.

    STATEMENT OF JOHN D. KULICK, PH.D., CHAIR, STANDARDS BOARD, THE
      INSTITUTE OF ELECTRICAL AND ELECTRONICS ENGINEERS STANDARDS
                    ASSOCIATION, NEW YORK, NEW YORK

        Mr. Kulick. Good morning. My name is John Kulick. I am the
    Chair of the Standards Board of the IEEE Standards Association,
    known as IEEE-SA. I am also an employee of Siemens, but I am
    here solely in my IEEE-SA capacity.
        I would like to extend my thanks to Chairman Klobuchar,
    Ranking Member Lee, and the rest of the Committee for the
    opportunity to present testimony to the Subcommittee.
        We appreciate the foresight of the Subcommittee in looking
    into this important issue. IEEE-SA is a global leader in
    standards development. For example, probably everyone in this
    room has a laptop or tablet computer with wireless
    connectivity. That functionality is based on the 802.11
    standard, one of the most well-known standards developed by
    IEEE.
        IEEE-SA is the standards development arm of IEEE. IEEE is
    the leading global organization for engineers, scientists, and
    other professionals whose technical interests are rooted in
    electrical and computer sciences, engineering, and related arts
    and sciences. IEEE is a New York 501(c)(3) public charity whose
    mission is the advancement of technology for the benefit of
    humanity. IEEE has more than 425,000 members in over 160
    countries.
        We believe that the intersection of patents with standards
    is becoming a real issue. Therefore, the work of the
    Subcommittee is very timely and may be an inflection point in
    the global efforts to find long-term solutions to the growing
    challenge of patent quality.
        IEEE fully realizes the importance of a comprehensive
    patent policy and has put in place a balanced framework with
    detailed rules and procedures that defined how patented
    technology should be taken into account within IEEE standards.
    A detailed description of the IEEE standards development
    process is provided in the written submission to the
    Subcommittee.
        The strength of the IEEE-SA's patent policies can be
    measured by whether the outcome of the standardization process
    is universally available, that is, broadly affordable to anyone
    and anybody. The success of a standard should be determined by
    the market. A proliferation of strategic standards coupled with
    a concentration of SEPs in the hands of a few corporations,
    individuals, or interest groups has the potential to block this
    governing principle.
        IEEE-SA was the first SDO to realize that the problems
    cannot be tackled anymore by merely applying downstream
    measures, essentially in the form of an SDO's patent-related
    rules and procedures, no matter how good those procedures may
    be. The exponentially increasing number, the decreasing
    quality, and the ongoing concentration of patents, particularly
    in certain fields, in the hands of a few companies are not
    natural phenomena but, rather, the results of a systemic
    problem at the interface of the patent world and the
    standardization system.
        IEEE has taken the lead in influencing the international
    debate regarding the critical interplay between the patent and
    standardization systems. In 2010, IEEE-SA signed a strategic
    MOU with the European Patent Office, the first ever between an
    SDO and a regulatory authority. This cooperation has helped the
    EPO to improve the quality of its prior art searching and,
    thus, of the patents granted in the standardization domain of
    IEEE and beyond.
        Due to the global nature of many ICT standards, a similar
    cooperation between USPTO and IEEE, as well as among other
    leading SDOs, patent offices, and regulators, is necessary. As
    a matter of fact, a paradigm shift is necessary. The governance
    of the process must start with improved self-regulation of
    patenting behavior during the early phases of the
    standardization process through a close collaboration between
    patent offices and SDOs, rather than focusing exclusively on
    how patented technologies should be included into standards
    that are nearing the completion of their development or, as
    some have suggested, the increased regulation of SDOs.
        Simply put, for the standards implementer, it is easier to
    deal with one patent based on an original idea than with many
    more ``me too'' inspirations based on information from within
    standards development communities.
        IEEE-SA's patents policies are well established and
    responsive to ongoing developments. In the forum IEEE has
    created, we strive to adhere to recognized principles of
    standards development through due process, broad consensus
    building across a range of interests, transparency of
    information and records, balance without dominance, and
    openness to all interested parties.
        In closing, I want to reiterate my thanks to Senator
    Klobuchar and Senator Lee for the chance to present testimony
    to the Subcommittee today. We appreciate the opportunity and
    look forward to further dialogue.
        Thank you.
        [The prepared statement of Mr. Kulick appears as a
    submission for the record.]
        Chairman Klobuchar. [Presiding.] Very good. Thank you very
    much. I think I will start with you, Dr. Kulick, as you sort
    of--I like the drama about the juncture in time and how it is
    that our Committee really has an obligation for competition's
    sake to get involved in this. And you talked about a paradigm
    shift because of the fact that we need standards, that would be
    correct, we would start with that, we need standards. But you--
    and I do not want to paraphrase this exactly, but you feel that
    with the concentration of the patents holders and some of the
    demands and things that are happening, the process is getting
    messed up, and you think we need a paradigm shift. You
    suggested self-regulation. What other ideas would you have to
    try to solve this problem?
        Mr. Kulick. Thank you for the question. Yes, I think what
    else could be done, I think, is important. I think the example
    that we have already established with the EPO and trying to
    work more closely with the Patent Office to provide more
    information to make prior art searches more complete so that
    when patent applications are being evaluated, they can be done
    more thoroughly with information that they may not have
    ordinarily had access to. And so in the granting of the
    patents, they can do a more thorough and complete examination.
        Chairman Klobuchar. Very good. Mr. Melamed, do you want to
    comment on the solutions here? You talked about the serious
    implications for competition. You heard from Mr. Rosenberg who
    talked about how reasonableness is the currency of standard
    setting and does not see patent hold-up as a problem. Do you
    want to respond to that and talk about what you see as the
    solutions?
        Mr. Melamed. Thank you, Chairman Klobuchar. Let me begin on
    a point that Mr. Rosenberg made. He said it was critically
    important that we respect patents and that we respect contracts
    and that we set an international standard in doing so. So I
    would start right there and say it is critically important that
    we respect the bargain that is made by a SEP holder when it
    says that in exchange for the vastly increased opportunity to
    license my patent when my technology is included in the
    standard, I commit to license on fair and reasonable terms.
        I think it is critically important that we have a wide
    understanding that is enforced in the courts, that is enforced
    by the antitrust agencies where antitrust violations are found,
    that holds SEP holders to their bargains and gives meaning to
    the FRAND commitment.
        I think in addition to that, we might focus on specific
    remedies that will deal with the problem of hold-out that
    Senator Lee referred to and that I know Mr. Rosenberg referred
    to in his written statement, namely, the notion that there
    might be people who are using a standard and try to avoid
    having to pay for a license. One way we do that is by making
    meaningful the treble damage remedy for willful infringement.
    Another way might be by fee-shifting legislation, which has
    been proposed elsewhere in the Congress, legislation that would
    make it more costly and less attractive to engage in frivolous
    litigation on either the plaintiff side or the defense side.
        Those would be two measures that could deal with the
    problem, and that is a problem, by the way, that I would be
    glad to address at greater length later in this hearing.
        I want to comment again, briefly, as you invited, on Mr.
    Rosenberg's statement that there really is not much of a
    problem because there is robust competition. Yes, there is
    robust competition in most information technology spaces. But
    there is, nevertheless, a very serious problem. The problem is
    the excessive and increasingly frequently excessive taxes
    imposed by SEP holders on innocent implementers of public
    standards.
        We see that not so much in the occasional litigated case
    that a company like Intel or Microsoft can afford to undertake.
    But we see that in the settlements, the licenses that are
    entered into by parties that say, ``I cannot pay millions of
    dollars to litigate. I am going to have to enter into a
    settlement agreement.''
        Now, those are not ordinarily public, but when you go
    through trials such as our trials, a SEP holder says, ``Look at
    all the agreements that parties have entered into. That shows
    the value of my patent.'' But the agreements do not show that.
    They show the coercive power of a threat of an injunction, of a
    threat of excessive royalties, of a threat of an exclusion
    order.
        Chairman Klobuchar. Mr. Melamed, could you talk a little
    bit about how, in your view, this would then affect consumers?
    We know the strong testimony here from you about how it can
    affect competitors, and your point is not just ones the size of
    Intel but also smaller competitors. How does it affect
    consumers?
        Mr. Melamed. It affects consumers, I think, in two ways.
    The most immediate way is the traditional antitrust way in
    which a party that exercises market power it should not have
    can hurt consumers, namely, by raising prices, which, of
    course, restricts output and transfers wealth from consumers to
    SEP holders.
        In the long run, perhaps the more insidious harm is that
    this is a tax on the industry and on innovation. It reduces the
    incentives of parties to continue to innovate and to improve.
    And while to be sure, as Mr. Rosenberg said, there has been a
    lot of innovation, what we do not know is how much more
    innovation there could be if the FRAND commitments are widely
    complied with and how much less there will be if this growing
    problem of reneging on FRAND commitments continues.
        Chairman Klobuchar. So what you are saying is, you know,
    you acknowledge there is competition, but once the standards
    are set and someone is fortunate enough to have their patent
    included in a standard, then you see lessening competition,
    which has an effect on prices for consumers and competition
    going forward.
        Mr. Melamed. Prices and incentives to innovate, yes.
        Chairman Klobuchar. Right. Mr. Rosenberg, do you want to
    respond to that?
        Mr. Rosenberg. Yes. Thank you, Chairman Klobuchar. Let me
    start by saying there have been a lot of words and discussion
    today, mostly about things like hold-up as potential problems
    or the fear of hold-up or the possibility of hold-up. And what
    I ask is that the Committee, the Subcommittee, look at the
    record, look at the facts, the history, the empirical data.
    Look at all the lawsuits.
        Mr. Melamed describes a lawsuit. We can all come up with
    some fringe problems in any number of areas, but those fringe--
    that margin is not where legislation should be focused. If
    there are problems with the patent system, if we want to make
    the patent system more efficient, I absolutely agree with that.
    But that is where we should start.
        And there is also confusion, I think, caused by some
    commercial interests about what standard-essential patents are
    and what they are not. And I cannot take too much of your time
    to explain the process, but the process is a collaborative one
    from beginning to end, and it involves multiple engineers
    collaborating on all kinds of questions about which technology
    is best.
        What we hear is concerns about what may happen. The fact of
    the matter is the mobile communication industry, as I said
    earlier, is healthy and dynamic. This is the second time I have
    heard in a discussion like this that things might have been
    better. Well, I cannot respond to that. There is no way I know
    what might have been. What I do know is that the success of
    this industry is well documented. Prices have fallen.
    Technology has advanced. The phone that you have, as I said
    earlier, in your pocket would not be there if there was not a
    dynamic, competitive industry. There have been multiple
    examples of new entry. How does one enter a market that is the
    subject of things like hold-up and royalty stacking?
        There are multiple examples of entry. There are multiple
    examples of successful companies, and consumers have benefited
    dramatically, to answer your question, because of the
    technological advances and the falling prices.
        Chairman Klobuchar. Okay. With that, I am going to turn
    over to Senator Lee, and I will be back for a follow-up on
    that. Thank you.
        Senator Lee. Thank you, Madam Chair.
        I think I would like to start with Ms. Munck. Ms. Munck,
    first of all, I should tell you you are in good company. Both I
    and Senator Coons are the fathers of twins.
        Ms. Munck. Congratulations.
        Senator Lee. Mine are 18 and his are 14. Mine at least love
    standard-essential patents.
        [Laughter.]
        Senator Lee. In the small town of Alpine, Utah, where I
    live, we speak of little else.
        [Laughter.]
        Senator Lee. They do, of course, benefit from these, as all
    of us do every single day, whether we regard ourselves directly
    as the beneficiaries of the patent, of the intellectual
    property itself or not.
        So in your testimony, you argue that the patent holders'
    failure to abide by the FRAND commitment can be
    anticompetitive. You note that a hold-up can have some
    potential to raise prices for consumers and to distort and
    blunt some of the incentives to innovate.
        I feel the need to ask: Is it always anticompetitive for a
    holder of an SEP to see an injunction or an exclusion order?
    And if not, in what circumstances might it not be
    anticompetitive?
        Ms. Munck. Thank you, Senator Lee. I think that there are
    certain circumstances where the Commission in the past has said
    that it is, you know, generally okay to seek an injunction or
    an exclusion order. Those are situations where you have someone
    who is an unwilling licensee, where you have someone who is
    refusing to pay a rate that has been negotiated, where you have
    someone that is outside the jurisdiction of the U.S., and that
    is important because that would implicate the ITC's
    jurisdiction; and then where you have someone who is unable to
    pay.
        Senator Lee. So certainly in those circumstances it would
    have that. Now, do you think--is it your sense that either the
    federal courts or the ITC failing properly to weigh the public
    interest factors in making these decisions with regard to
    whether or not to issue an injunction or to issue an exclusion
    order?
        Ms. Munck. Sure. So speaking personally, I think there are
    a number of different situations where the courts are looking
    into these issues, and without sort of drawing a broad
    conclusion, I think that it is very important for the courts
    under the eBay analysis to consider whether once someone has
    made a FRAND commitment--and, actually to take a step back,
    there is no requirement of making a FRAND commitment, and so in
    most instances, if you are not dealing with a FRAND-encumbered
    SEP, the patent laws are set up to promote sort of exclusive
    use, and that is why you have eBay not really weighing one way
    or the other. It is mean to be fairly neutral.
        But once someone makes a FRAND commitment, you know, what I
    personally think they are saying is, ``I am willing to license
    broadly; I am willing to accept monetary remedies for any use
    of my technology.'' And so I think that once you have made that
    commitment, under eBay it is very difficult to show that
    monetary remedies would be inadequate.
        Senator Lee. So it does not always follow from the fact
    that one has a standard-essential patent, it does not always
    follow from that that you necessarily make the FRAND
    commitment. But once that commitment is made, you have got to
    stick with it.
        Ms. Munck. I think that is right. One of the very
    interesting things about this area is the variety among SSO
    policies. So some standard-setting organizations require a
    FRAND commitment. Some ask that you license your intellectual
    property on a royalty-free basis. So I think that, you know, as
    with all of these issues, it is fairly fact specific. But once
    one company says, ``I would like to include my technology in
    the standard, I would like to compete for inclusion, I know I
    am going to receive benefits as a result of being included, and
    I am going to make that FRAND commitment,'' then that needs to
    be taken into consideration by the district courts when
    considering whether an injunction should issue.
        Senator Lee. Okay. Thank you.
        Mr. Rosenberg. Senator, may I?
        Senator Lee. Yes, sure. Go ahead.
        Mr. Rosenberg. All true, but, again, I think what
    constantly gets lost in the discussion is the fact that a FRAND
    commitment is a contractual commitment. And for a contract and
    a bargain, you need two sides. The FRAND commitment made by the
    standard-essential patent holder--and we make FRAND commitments
    every day--is one side of that bargain. The other side of that
    bargain is the beneficiary of that contract--which is the
    contract between the standard-essential patent owner and the
    standard body. So the third-party beneficiary is the
    implementer. The implementer has to be, as Ms. Munck said, a
    willing licensee. If you do not have a willing licensee on the
    other side, who has obligations as well, then it is impossible
    for the standard-essential patent owner to have a bargain and a
    contract.
        And Intel, I think, is going farther even than the FTC or
    the DOJ in terms of opposing injunctive relief at all, or at
    least opposing the request for injunctive relief. I think both
    agencies agree that there are situations where injunctive
    relief may be appropriate. There is the unwilling licensee.
    Those of who have been in the industry know that there are
    times when the other side is simply saying, ``Sue me. I am not
    going to pay. And if you win, if you happen to sue me and you
    spend a lot of money on litigation and you happen to win, and I
    happen to lose the appeal, then at that point I will pay you
    your royalty.'' Well, that is years down the road.
        There has to be some ability to say, no, you cannot just
    say, I am unwilling to license on any terms, let alone fair,
    reasonable, and non-discriminatory terms.
        Senator Lee. Do you want to respond to that, Mr. Melamed?
        Mr. Melamed. Just briefly, if I may clarify. Mr. Rosenberg,
    I think, misunderstood or perhaps I failed to articulate
    clearly Intel's position. Intel agrees that injunctions might
    be appropriate where the implementer of the standard is not
    willing to pay a FRAND royalty. But we do think that where the
    implementer is willing to pay and to negotiate in good faith
    over a FRAND royalty, the injunction, the threat of an
    injunction, and an ITC exclusion order should be off the table.
        Senator Lee. Okay. Will the increasing consensus within the
    federal courts, Mr. Melamed, increasing consensus to the effect
    that injunctions should not issue in cases involving SEPs,
    would that reduce the prevalence of patent hold-up situations?
        Mr. Melamed. Yes, it is certainly a movement in the right
    direction. I do not know that the law is quite as clear on the
    principle that Ms. Munck and I are articulating as one would
    like. But certainly since eBay, the law in the federal courts
    has moved in the direction that reduces the risk of hold-up
    from the threat of district court injunctions. But there
    remains the risk of hold-up from the threat of an ITC exclusion
    order, and increasingly SEP holders are using the ITC as their
    forum of choice precisely because of the availability of that
    remedy. And there is a risk of hold-up from other strategies
    that are employed by SEP holders such as refusing to license at
    the chip level and in general seeking excessive royalties.
        Senator Lee. Okay. My time has expired. Mr. Rosenberg wants
    to respond on that point, if that is okay. And we will let him
    do that.
        Mr. Rosenberg. Again, I want to try to respond with some
    facts. There is a lot of discussion about standard-essential
    patents that gets conflated with the discussion about patents
    generally, about litigation and related issues, and you should
    focus on the following: The vast majority of the district court
    cases that are referred to commonly as ``smartphone cases'' do
    not involve standard-essential patents. They primarily involve
    nonstandard-essential patents.
        There is not one example of an ITC exclusion order
    involving a stadard-essential patent, including the recent
    ruling in the Apple-Samsung case in which the Commission never
    definitively resolved the question of essentiality of Samsung's
    patent but did find that Samsung's offer to license the patent
    at issue was consistent with FRAND. I am aware of one court
    ruling that involved a standard-essential patent, but it wasn't
    in the 3G, 4G area of technology. And the defendant in that
    case, as the record shows, was clearly an unwilling licensee, I
    think, under anyone's definition.
        So we talk a lot about this problem. As I said earlier,
    words are thrown around, fears are thrown around, hypotheticals
    are thrown around, the use of hold-up, the use of royalty
    stacking, even this, talking about litigation as if it is
    common or as if there are injunctions happening every day
    involving standard-essential patents, when the facts are
    absolutely clear, documented, and can be checked. It is just
    not happening.
        Senator Lee. Thank you. I see my time has expired. I hope
    to get back with some of you on the next round. Thank you.
        Chairman Klobuchar. Very good. Senator Hirono.
        Senator Hirono. Thank you very much.
        I understand that these FRAND commitments are essentially
    contractual, and so there is a question that I have. Perhaps
    you can all respond, but I would like to hear Ms. Munck's
    comments on this. Is there a role for us, for the Federal
    Government, in this arena? Mr. Rosenberg, you seem to indicate
    that things are going pretty well as far as you are concerned.
        Ms. Munck. Thank you very much. So speaking for the FTC and
    also speaking personally, I think that there has been a role
    for the FTC to play here. We have taken, I would say, three
    series of actions.
        One is that SSOs often ask us to monitor their IPR policies
    or their IPR meetings, and we have been very grateful to be
    included in that. I think that is very important, because it is
    difficult for me personally as a person in our Policy Office to
    advise on policy without actually knowing what is happening on
    the ground. So I also frequently meet with members of standard-
    setting organizations and members of the technical community to
    understand what is happening here. So I think that is one role
    that you can play. And I usually classify that as outreach.
        The second role that can be played is advocacy. Examples of
    advocacy are in our written statement. One would be the
    statements that the FTC made last June to the ITC, and the
    second would be the amicus brief that the FTC filed with the
    Federal Circuit in Judge Posner's decision in the Apple v.
    Motorola case.
        And then the third would be our enforcement tools.
        Senator Hirono. Do any of the other panelists wish to
    comment briefly?
        Mr. Rosenberg. Senator Hirono, thank you. I know I, to some
    extent, as you say, sound like I am saying it is not broken so
    do not fix it. And that is largely what I am saying. But I am
    not suggesting that there are not problems, as they say, at the
    margins that appear. But they are all being handled in the way
    that these systems are built to handle them. Both our courts
    and other agencies are involved in helping to deal with the
    marginal problems.
        So, again, I want to emphasize that they are marginal
    problems, and, frankly, I believe in the free market system. I
    believe in the process of bilateral negotiations. What I hear
    here is we need oversight, we need competition law oversight
    over the enforcement of intellectual property rights.
        I have spent over 35 years at what people call the
    intersection of intellectual property and antitrust law, and
    they are complementary, and they can co-exist, and they both
    can foster consumer welfare. We do not need one holding sway
    over the other. We see all over the world. There are over 100
    competition authorities in the world. They are all trying to
    best each other on what is the right way to regulate.
        There are already laws in some of those countries which
    very much focus in their antitrust laws about controlling
    intellectual property rights. That is not some place where I
    want to see us go. I think the systems are working well. I
    think the courts are handling these marginal cases. I think the
    Federal Circuit is doing a good job of defining the law as it
    is developing. And I would urge that we allow that to continue.
        Senator Hirono. And yet at the same time, though, these
    contractual agreements are supposed to be based on a standard
    of reasonableness and fairness, and it often is within the
    negotiating power of the people who are negotiating these kinds
    of FRAND commitments. So it is a moving target, a moving ball.
    Is there any kind of a standard for what constitutes fair and
    reasonable in FRAND agreements?
        Mr. Rosenberg. Well, standards bodies have for years, if
    not decades, debated the question of whether FRAND and RAND
    should be a flexible standard or one that is very much defined
    with very precise borders, and they have unanimously decided
    that they want a flexible standard. They want, as I said, the
    bilateral give-and-take of a negotiation to determine what the
    right terms are.
        By the way, we often talk about FRAND as just royalties,
    but it is terms, fair, reasonable, and non-discriminatory
    terms. There are extensive terms in a lot of these licensing
    agreements that go well beyond the question of what the royalty
    payment is. There are cross-licensing provisions, for example,
    as well as others.
        So, again, I would say, yes, you have an obligation when
    you make a representation to negotiate on fair, reasonable, and
    non-discriminatory terms. The other side has an obligation to
    also negotiate on fair, reasonable, and non-discriminatory
    terms.
        Senator Hirono. Ms. Munck, representing the Federal
    Government and FTC is focused also on consumer benefits, so in
    your advocacy and your monitoring, is that a framework from
    which you operate that the consumer should be benefited from
    these agreements, these discussions that are occurring in the
    private sector?
        Ms. Munck. Yes, absolutely, and I think it is fair to say
    that a large number of FRAND negotiations are working. I think
    that is true. I think that you see disputes in particular
    instances. And I think that even if you have flexible FRAND
    terms, you still need a means to determine what is going to
    happen when there is a FRAND dispute.
        And so if you look at some of the proposals, there is a
    recognition that you need to have dispute resolution
    mechanisms, that the IPR policies themselves are thinking, that
    the SSOs themselves are thinking of, and that is one way of
    dealing with it.
        But, yes, to get back to your question, you want to look at
    the impact on consumers, and that can be the pass-through of
    hold-up rates; that can be a degradation of faith in the
    standard-setting process. And I think to that second point,
    that would be a problem because you have heard everyone on the
    panel talk about the importance of standard setting, so you
    would not want to have a situation where you have the
    degradation of that process.
        Senator Hirono. Did you want to add something?
        Mr. Melamed. Yes, Senator Hirono, thank you. I do want to
    comment on a couple of ideas.
        I believe there is room for the government to improve the
    situation, and I want to start by something Mr. Rosenberg said.
    He said: This really has not been much of a problem. There have
    been only a handful of litigated judgments involving some of
    the issues that we are talking about today.
        I think that is focusing on the wrong question. What really
    is happening is that the threat of onerous provisions extracted
    by the holders of SEPs have enabled them to enter into
    bargains, license agreements, or settlements of litigation and
    to extract in those settlements and in those bargains
    consideration far in excess of and far more onerous than that
    to which they committed with the FRAND commitment.
        For example, a SEP is simply a patent that a patent holder
    claims reads on the standard. In fact, Intel has been sued
    three times on some SEPs in Germany. Not one of them was found
    to be valid and infringed.
        In Texas, we were sued recently on five SEPs. Two of them
    were found not to be valid or infringed. None of those patents
    was an SEP.
        In the KMotorola-Microsoft case, a great number of the
    patents that were asserted by the SEP holder there were found
    not, in fact, to be valid and infringed.
        One party to a major onslaught of SEP litigation reports
    that less than 20 percent of the patents asserted against it
    were found in litigation to be SEPs.
        So you have parties asserting patents that they claim are
    SEPs, claiming the right to injunctions, claiming the right to
    excessive royalties, refusing to license at the chip level, and
    extracting from them onerous settlements and licensing
    agreements. That is where the problem comes from.
        So we cannot rely on the courts. We have to rely on a clear
    understanding of what the ground rules are to inform the
    negotiations in the settlements.
        Senator Hirono. Thank you. My time is up. Perhaps somebody
    else will ask what would be your suggested remedies.
        Thank you.
        Chairman Klobuchar. Thanks. We are going to turn over to
    Senator Schumer, and we are going to do a second round here if
    you are interested, Senator Hirono. Thank you very much.
        Senator Schumer.
        Senator Schumer. Well, thank you. First, I want to thank
    you, Senator Klobuchar, for holding this important hearing. I
    want to thank all the witnesses for being here.
        The issue of how patents are being used and abused to
    inhibit competition and stifle innovation is a critical one for
    us to explore. There is a real problem. It is growing every
    day. The only good news is that our awareness of the problem
    and commitment to solving it is also growing every day. And
    this hearing is focused on one important aspect of the issue:
    standard-essential patent disputes.
        There is certainly a problem in this area, and I am glad we
    are taking a closer look at it. But it is not the only problem
    by far.
        Now, I spend a lot of time talking to high-tech
    entrepreneurs in New York. These folks are an economic engine
    driving growth throughout our city and State. In fact, for
    every high-tech job they create, 4.3 non-tech jobs are created.
    Last year, in terms of venture capital into high tech, New York
    City placed second after San Francisco--no one is here from
    Massachusetts--replacing Boston. Take that, Red Sox.
        [Laughter.]
        Senator Schumer. Since they are about seven games ahead of
    the Yankees, we take what we can get.
        Chairman Klobuchar. That is what we always say about the
    Twins.
        Senator Schumer. And when I talk to them about the
    challenges facing their businesses, they invariably mention two
    problems: first, immigration and the ability to get high-tech
    workers. We are obviously working on that one. And the second
    one that all of them mention is patent trolls. I have talked to
    businesses which have had to stop hiring or, worse, fold up
    entirely as a result of patent troll suits. Technology is
    becoming the engine of New York's economy, and trolls are
    trying to pour sugar in the gas tank. They must be stopped.
        This problem extends well beyond the tech community. We
    hear from retailers, grocery stores, advertisers, basically
    every kind of business you can imagine, who are getting with
    patent lawsuits for having things like Wi-Fi in their stores or
    using scanners.
        It is clear there is a problem. It is clear we need to
    solve it.
        Now, I have a bill that will help clear out poor-quality
    business method patents. Several of my other colleagues have
    bills they are working on. And Senator Klobuchar is making sure
    we are focused on regulatory and antitrust aspects. All of
    these solutions go hand in hand. This problem is big enough
    that we need all of the tools in our toolbox.
        So I want to commend the Chair for having this hearing and
    convening it, and I have a few questions for the witnesses.
        First, Ms. Munck, as I mentioned, we are hearing more and
    more stories about negative effects patent trolls are having on
    small businesses. In many of these cases, the trolls leveled a
    lack of transparency in patent ownership and the cost of
    litigation against small businesses who do not have armies of
    lawyers on their side and cannot afford to litigate out a
    dispute, even when they know they have not infringed.
        What do you plan to do to protect the ability of small
    businesses to compete in the marketplace?
        Ms. Munck. Thank you very much, Senator Schumer. I think
    that there are a number of tools available to protect small
    businesses and other entities that are dealing with ``patent
    trolls,'' as you call them, or as I have been sort of
    indoctrinated to call them, ``patent assertion entities,''
    which I hope is okay.
        Senator Schumer. Patent what?
        Ms. Munck. Patent assertion entities. Forgive me. I have to
    say it.
        So I think that there are several tools----
        Senator Schumer. That sounds worse.
        [Laughter.]
        Chairman Klobuchar. That is quite obvious, Senator Schumer.
        Ms. Munck. So I think that the FTC has several tools
    available to deal with this issue. One is, as you mentioned,
    where you have a situation of someone suing large numbers of
    small entities who may not be sophisticated in understanding
    sort of what is happening. And I think that in certain
    situations, the FTC's UDAP authority, or unfair or deceptive
    acts or practices authority, can step in there. I think if you
    have a situation where you have someone who is claiming
    infringement for intellectual property that they do not have
    the right to enforce, or they are claiming infringement of
    intellectual property that is expired, or if they are
    threatening to sue to get the costs that you are talking about,
    to get that settlement, but they do not actually have any
    intention to sue, I think that all of those categories would be
    under our Section 5 authority.
        But I also agree completely with you that this is an issue
    where multiple solutions are needed, both from Congress, from
    the courts, from the agencies.
        Senator Schumer. Okay. Well, I certainly encourage the FTC
    to be vigilant here, because you have on the most ridiculous of
    claims people being put out of business, you know, just, ``We
    can out-lawyer you.'' And for a big company, they can do that
    over a small company.
        Now, we heard Mr. Melamed and Mr. Rosenberg say that these
    are marginal problems. Have you found them to be marginal
    problems? I certainly have not. Talk to a company that has gone
    out of business.
        Ms. Munck. Sure. So if you do not mind, I think that if I--
    I do not want to mischaracterize your testimony, but I believe
    that they may----
        Senator Schumer. I will give them a chance.
        Ms. Munck. Okay. They may have been talking about standard-
    essential patents, and the PAE issue, I agree with you, it is a
    very important issue. It is the reason why the FTC together
    with the DOJ held a workshop last December, because we
    recognized that we did not have a good understanding of what
    was happening in this area. And so we wanted to bring together
    folks who were being affected by PAE activity, the economists
    looking at the harms and the efficiencies of the model, and
    also to understand what antitrust remedies are possible. But I
    agree with you, this is a very important issue.
        Senator Schumer. Yes, Mr. Rosenberg.
        Mr. Rosenberg. Thank you, Senator. And, by the way, before
    I moved to San Diego, I spent the rest of my life in New York,
    where I was general counsel at IBM, and I spent 31 years there.
        Senator Schumer. Very nice.
        Mr. Rosenberg. And I say that for two reasons. I have spent
    a lot of my career--I managed litigation there for about 15
    years--dealing with patent litigation, mostly as a defendant,
    well before people were talking about standard-essential
    patents, or SEPS, and even before people were talking about
    trolls or PAEs. And there is no question that the threat from
    non-practicing entities is a difficult one to deal with, not
    only for the small companies that you talk about, but for large
    companies as well. And I was happy that Ms. Munck added that
    bit of clarification. When you walked in, I was talking about
    standard-essential patents, and I would love to go back to that
    at some point, if you would like, talking about the marginal
    cases.
        You talked about there is a problem, and you said there is
    certainly a problem with SEPs, but there is a bigger problem,
    or at least the problem you are focused on, with trolls. I
    would like to tell you that the so-called problem with SEPs is
    more one perceived than real, and I have waxed on this a while
    here, so I will not go back to that at this point.
        On trolls or PAEs, look, there is no question that
    something ought to be done. What I am asking is that you be
    very careful to operate with a scalpel and not a cleaver. There
    is a tendency--and you know better than I--for sometimes good-
    intentioned legislation to paint with--I am using a lot of
    metaphors here--a broader brush than it was intended to.
        And so, for example, I just want to be careful that there
    are legitimate companies that license technology, such as
    Qualcomm, who also produce enormous benefits and designs and
    products, who should not be painted with a legislative brush
    that talks about non-practicing entities or trolls. And so I
    would ask just for that kind of careful consideration.
        Senator Schumer. I appreciate that. My time is up. And I
    mischaracterized Mr. Melamed. He said there are serious
    problems, so you do not have to rebut yourself. All I can tell
    you, to continue your metaphor, patent trolls do not paint a
    pretty picture.
        [Laughter.]
        Chairman Klobuchar. Okay. Very good.
        Senator Coons.
        Senator Coons. Thank you, Senator Klobuchar. Thank you for
    convening this hearing. Thank you to the panel for your hard
    work and your engaging testimony so far. And to Senator Lee, I
    do not know, your twins might be SEP fans. My twins were having
    a fight the other day about whether it is RAND or FRAND. I had
    to break that up, go to both corners of the rec room.
        [Laughter.]
        Senator Coons. But to the extent that Wi-Fi and video
    compression has literally changed our lives, or at least our
    gaming platforms, I wanted to go to Dr. Kulick, if I could,
    just because bringing SSOs into the conversation, IEEE, AST,
    and others, I think, is an important piece of the structure of
    this hearing.
        I wondered, Dr. Kulick, if you would, whether the IEEE has
    a position about whether a no-injunction commitment should be
    inferred from the RAND commitment in existing standard-setting
    contracts and whether you have any plans to include a no-
    injunction policy in future standard-setting contracts.
        Mr. Kulick. Thank you very much. With respect to an
    injunction, when a patent holder submits a letter of assurance
    to the IEEE stating that it will license it for FRAND
    conditions, then the patent holder has actually stated that it
    is willing to accept a reasonable royalty. However, the
    Standards Association has not expressly at this time adopted a
    policy that actually speaks to whether there are circumstances
    when an injunction would be available.
        However, the Standards Association recently started a
    process to consider potential revisions to our patent policy.
    That process is currently underway right now, and certainly one
    of the topics that is being discussed for consideration here is
    this topic of injunctions. But at the present time, the
    Committee has not reached its conclusion, and I do not want to
    prejudge what the outcome might be at this particular time.
        Senator Coons. One of the things that has made the whole
    practice of standard setting, in my view, so successful is that
    it is a repeat game, that you see lots of cross-licensing in
    the market historically. What are the SSOs thinking about the
    issue of hold-up by NPEs? Do you see this as an increasing
    threat? Is there something being done by SSOs to specifically
    guard against hold-up?
        Mr. Kulick. With respect to hold-up, the SSOs--I mean, as a
    neutral body, we try to avoid taking a position whether any
    particular royalty rate or licensing term is reasonable.
    However, it still can be said that at least within our
    membership and our stakeholders, there is a perception of or a
    potential for potential patent hold-up, and I believe that that
    was the reason that--was a factor in many of the stakeholders
    back in 2005 when we went through our last revision of our
    patent policy, caused them to consider these types of
    conditions and terms.
        So we do not have a position with respect to the
    individual, you know, royalty question because we are neutral
    body. It is always a potential for a problem.
        Senator Coons. Well, if I might, Mr. Rosenberg, I would
    just be interested--I know you have a rejoinder to that, if you
    would, but also I would be interested in hearing something
    about what is the incentive structure for companies to invest
    in technologies that really are advancing standards-oriented
    technologies as opposed to sort of more substantive or
    performance-based? How does this uncertainty or how does this
    current marketplace setting give signals about innovation and
    the potential consequences for investing in purely standard-
    setting technology?
        Mr. Rosenberg. Well, I will address that one first and then
    go back, if I can recall.
        The motivation for invention, lots of people can discuss
    that, but clearly our system has been built around incentives
    to invest the enormous amount of research and development funds
    that companies like Qualcomm invest. And it is not done with
    the expectation of excessive reward, but it is done with the
    expectation that there will be reasonable compensation.
        As you know, Senator Coons, when you invest enormous
    amounts of dollars in R&D, you do not know where they are going
    to lead. And more often than not, they lead down a blind alley.
    So it is the successful ones that once you hit that mark, you
    want to be able to make sure that you have been compensated for
    the expense and the research and development costs and also
    some fair return; but you also, as we have done, want to be
    able to then use that as a virtuous cycle, put those funds back
    into the R&D process. And as I said earlier, we do that to the
    tune of over 20 percent of our revenues every year.
        So that is the incentive, and that is the incentive
    system--at least that is one of the incentive systems that I am
    most concerned about when you look at patent problems and
    conclude that the problems are more serious than we think they
    are, or at least you get confused. There has been a discussion
    here already today about PAEs and trolls and SEPs. It is
    confusing. I live with this every day. I cannot imagine how you
    can follow this. But what I said earlier and I want to repeat
    is that we have to be very careful about not allowing problems
    in one area to allow you to assume that there are greater
    problems in another area.
        And if I can just take a couple more seconds, on the SDOs,
    of course, Dr. Kulick is here, but there are other standards
    bodies all over the world. ETSI is one of the big ones. The
    whole 3G PP standards area, which is the one that we live in,
    which is the connectivity, the 3G, the 4G, the thing that
    allows your phone to be connected all over the world, they have
    looked at these issues as well.
        Multiple standards bodies have said while the theory of
    hold-up is there, we have not seen it. We have not seen it
    actually occur. We have not seen it interfere with the
    acceptance of a standard or interfere with new technology. And
    ETSI has said that, ANSI has said it, and they have said it in
    testimony.
        And, in fact, as you look at some of these lawsuits that
    Mr. Melamed has talked about, even the economists there, while
    they talk about the theory of hold-up, none of them can come up
    with any real-life examples of how hold-up has actually stopped
    a standard or injured technological advancement.
        So we can talk about negotiations that go on and threats,
    as Mr. Melamed did, which, you know, I cannot respond to
    because I am not sure what precisely he is talking about. But
    negotiations happen all the time, and people have leverage and
    other sides use their leverage as well.
        Senator Coons. Thank you, Mr. Rosenberg.
        Would the Chair indulge Mr. Melamed for a response?
        Mr. Melamed. Thank you. I appreciate that, Senator Coons. I
    will try to be brief. I want to respond to two of the points in
    the recent colloquy.
        First, as to the incentives to invest in standards, yes,
    there are enormous incentives. These standards are a part of
    the growing economy. But I can tell you, as a company that
    invests tens of billions of dollars in standards-compliant
    products, we look at the costs and the risks associated with
    intellectual property in deciding how much to invest and what
    to invest. Excessive royalties imposed by those SEP holders
    that renege on their FRAND commitments at the margin reduce and
    distort investment in these technologies.
        Second, with respect to the question of the position of the
    standard-setting bodies, I think you have to look at it this
    way: First, a standard-setting body is an industry-wide
    organization. Ordinarily the antitrust laws would be very
    skeptical of agreements by bodies of that nature, but they are
    allowed to have industry-wide standards because there are lots
    of benefits from standards, to the extent that they act in the
    public interest. So what those standard-setting bodies do needs
    to be constrained by and interpreted in light of the public
    interest.
        The standard-setting bodies agreed on these FRAND
    requirements many years ago. Now we learn about the abuses that
    were not fully anticipated--the threats of injunctions, the
    resulting negotiated excessive royalties and so forth.
        If you go back to the standard-setting body now and say,
    ``What is your position on injunctions? What are you going to
    do about this problem?'' what you find is that these are
    consensus bodies, and the SEP holders who are taking advantage
    of the ambiguities or the apparent ambiguities are preventing a
    consensus cure.
        It is as if you had a contract that was written 10 years
    ago, and then you are in court today litigating what it means,
    and someone said, ``We ought to let the parties decide what
    does it mean.'' They are litigating it because they do not
    agree on what it means. And the standard-setting bodies'
    decision making is constrained by the parties who disagree and
    cannot be relied upon as to the final answer.
        Chairman Klobuchar. All right. Very good.
        I am going to focus on you here, Ms. Munck, because I know
    we could go back and forth here between Mr. Melamed and Mr.
    Rosenberg, and I think it is important to make the point that
    this is more than just a price dispute, more than just a
    lawsuit between companies, that this is also about consumers.
        Could you talk about how these disputes implicate antitrust
    laws, how they affect consumers, and particularly what are the
    potential harms to competition and consumers if a holder of
    FRAND-encumbered SEPs reneges on a FRAND commitment? What is
    the harm to consumers? Ms. Munck.
        Ms. Munck. Thank you very much, Senator Klobuchar. I think
    that, you know, if you do take a step back, you are looking at
    a situation where you have several competitors who are coming
    together. And Mr. Melamed said, that is something that you
    would generally look at under the antitrust laws. But because
    these competitors are coming together in, you know, generally
    pro-competitive ways that lead to all the interoperability we
    have been talking about today, my iPhone on the T-Mobile
    network can call your Samsung phone on the Verizon network, et
    cetera, et cetera. Those are very significantly pro-
    competitive.
        But I think that you also need to take the potential for
    anticompetitive harm into account, and as we have been talking
    about today, that is the situation where you have numerous
    competitors seeking to be included in the standard. One of them
    is ultimately chosen. Then, when you are implementing that
    standard, you then need to use that particular technology. You
    no longer have the choice among technologies if you want to be
    standard essential.
        So that is where you lead to the situation of lock-in and
    the situation where you have someone who is holding that SEP
    has the potential to charge higher costs, higher rates, as a
    result of having the competitors come together in the first
    place. So I think that is the category of antitrust harm that
    you are concerned about.
        Chairman Klobuchar. Exactly, and Senator Schumer came in
    and talked about patent trolls or, as you like to call them,
    ``patent assertion entities.'' Is that correct?
        Ms. Munck. Yes.
        Chairman Klobuchar. All right. I clearly understand the
    difference between them, but I do want to understand the
    intersection, and I know that Chairwoman Ramirez has called on
    the Commission to undertake the 6(b) study to investigate the
    potentially harmful effects of competition of patent trolls.
    And I wrote a letter to the full Commission actually urging
    them to promptly approve such a study.
        Are the concerns about patent trolls and competition any
    different or worse when the patents at issue are standard-
    essential patents?
        Ms. Munck. That is a very good question that many people
    have been thinking about, and to sort of go back to Senator
    Coons' question as well, I think that you see that some of the
    SSOs are looking at transfer obligations. What happens when one
    person, you know, develops the standard--or develops the
    technology, pardon me, patents it, makes the FRAND commitment,
    and then later transfers that intellectual property to a third
    party? And ETSI, for example, has recently tightened their
    rules regarding transfer. I think that is an important point
    because it shows that the SSOs themselves are trying to deal
    with these issues. And I think that robust transfer agreements,
    speaking personally, will carry over to the PAE issue, because
    if you have an implementer who has made a FRAND commitment and
    then transfers that intellectual property to a third party, be
    it a PAE, another implementer, et cetera, if that FRAND
    commitment transfers, then you are binding the PAE to that
    original commitment. And I think that that is very important.
        Chairman Klobuchar. One note on that 6(b) study. I think it
    is critically important. That is why I wrote the letter. And I
    do not want to wait two or three years for this study, so can
    you provide some kind of update on the status of the
    Commission's review of the proposed study and give us any sense
    of how long it will take?
        Ms. Munck. Certainly. I do not have any update from what
    the Chairwoman said last week, but I can sort of direct you to
    studies that we have done in the past. For example, we had a
    generic drug study that took place in 2000. It took about two
    years to complete from beginning to end. And that is because it
    went through the OMB process and we needed to--there are a lot
    of technical issues that I will not go into, but that is a good
    example, I think.
        Chairman Klobuchar. Okay. Very good.
        We also have the issue that has been raised here several
    times today about the recent ITC decision to grant its first
    exclusion order related to a FRAND-encumbered SEP in the
    Samsung-Apple case. A decision by the President whether to veto
    or let the exclusion order stand is due any day now.
        Last year, the FTC weighed in with the ITC in a similar
    case and unanimously said that exclusion orders should not be
    granted on FRAND-encumbered standard-essential patents.
        What was the FTC's basis? And why are exclusion orders
    based on SEPs unique?
        Ms. Munck. Sure, and if it is okay, I would like to talk
    about our basis last June because the current Commission has
    not addressed this issue.
        What we were talking about last June was the importance of
    a flexible public interest analysis, and we were talking about
    the existing authority that the ITC has under 337. As you know,
    if they find infringement and they are going to issue an
    exclusion order, they need to consider the impact on the public
    interest. And one of the factors that they must consider is the
    impact on U.S. consumers and competition.
        And so what we were saying last June was that when they are
    conducting that analysis, it is important to consider whether
    the intellectual property at issue has been committed on FRAND
    terms.
        Chairman Klobuchar. Last year, in a case now on appeal
    before the Federal Circuit, Judge Posner in the Seventh
    Circuit, who was one of my professors in law school at the
    University of Chicago, someone that Senator Lee also knows,
    issued an opinion holding that injunctive relief is not
    available to holders of FRAND-encumbered patents. Many have
    claimed that Judge Posner's opinion goes beyond the Supreme
    Court precedent in eBay and the antitrust agencies' enforcement
    actions and guidance. What are your views of the opinion? And
    are there circumstances in which a SEP holder should rightfully
    have the ability to seek an injunction?
        Ms. Munck. Sure. So speaking personally, I was part of the
    group that wrote the amicus brief to the Federal Circuit, and
    we supported Judge Posner's analysis that when you make a FRAND
    commitment, it will be difficult to show that monetary remedies
    are inadequate. And I think that is because of the broad
    commitment that you are making to license to multiple folks on
    multiple terms.
        As I mentioned earlier, that is different from a situation
    where someone, you know, gets a patent and decides to use it
    for their own exclusive use. So I think you do need to compare
    those two situations.
        Chairman Klobuchar. Very good. I am turning it over to
    Senator Lee. Thank you.
        Senator Lee. Thank you, and I would like to pick things up
    with Ms. Munck. There are those who say that this is more of a
    theoretical problem than a real one. Do you want to just sort
    of respond to that? Do you think this is just a theoretical
    problem? To the extent it is theoretical, does that still have
    ramifications that we ought to be concerned about?
        Ms. Munck. Absolutely. So I do not believe it is only a
    theoretical problem, and my sort of basis for that would be the
    Google and Bosch decisions that the Commission dealt with
    earlier this year and late last year. I do think, however,
    there is a strong theoretical basis for the idea of hold-up,
    and, you know, one of my favorite cases is from the late 1800s.
    It is cited in a case called Hynix v. Rambus, and it talks
    about a situation where--I believe it was the city of
    Pittsburgh laid down patented streets, and then someone came
    along and said, ``Well, I want an injunction because you are
    using my technology.'' Now, this is not in the SEP context. And
    the court said, listen, you know, you can charge an exorbitant
    value for the use of this technology because you are not going
    to pull up those streets. You are already locked in. You are
    already using that technology.
        And so I think that there is a strong theoretical basis and
    a strong basis in the literature for the idea that once an
    entire industry decides to practice a standard, that does
    create leverage for the patent holder, and that that is the
    leverage that is intended to be mitigated by the FRAND
    commitment.
        Senator Lee. Are there ways of keeping that leverage in
    check? For each leverage point, is there a counterpoint?
        Ms. Munck. Absolutely. I think that one situation that you
    can have is, you know, where you have a situation where there
    is a dispute over a FRAND term--because that is something that
    we are seeing recently, right? That has not really been an
    issue in the past, but it is coming up. You can go to a third
    party to decide if someone is willing, if the rate is within
    FRAND, et cetera. I think there are mechanisms for dealing with
    this issue.
        Senator Lee. Okay. Thank you.
        Mr. Rosenberg, if you had a standard-setting organization
    that decided to adopt rules specifically prohibiting the
    holders of a standard-essential patent from seeking injunctions
    with regard to those patents, either in federal district court
    or an exclusion order from the ITC, what impact might that have
    on Qualcomm? And what impact might that have specifically on
    Qualcomm's inclination to participate in standard setting with
    that organization?
        Mr. Rosenberg. Well, I would answer it this way: Certainly
    that particular act, perhaps combined with other attempts to
    limit the ability of a standard-essential patent owner from
    actually being able to enforce its patent, would probably cause
    companies like Qualcomm--and not just Qualcomm--to think hard
    about whether it is best to, in fact, continue to contribute to
    standards bodies or whether one should act in a proprietary
    nature, such as companies that we all know and are quite
    popular who do not contribute to standards bodies.
        Mr. Melamed talked about the fact that Intel has
    contributed a lot to standards bodies and has a lot of
    standards. Not in our area. There are a couple of handfuls of
    patents on the Intel side in the important--what I talked about
    as 3GPP, the telecommunications, important radio frequency, the
    thing that allows what Ms. Munck described as the handing off
    to different carriers throughout the world. That is what we do.
    And we have done that for the entire existence of our company.
    And we want to continue to do that because we think there are a
    lot of benefits. People have talked about them, including the
    interoperability benefit.
        But if the risk, if what you pay, the price you pay in
    contributing your technology to the standards body is not that
    you use leverage to--I disagree--or so-called market power, as
    Mr. Melamed has said, to extract higher royalties, but, in
    fact, what they want is for you to collect lower royalties,
    they want you not to be able to enforce your patents at all, it
    seems to me it stands on its head when you take the critical
    technology--and that is what this is--that is determined by
    this collaborative body to be key to a standard, and then say
    now that critical technology is less valuable than it was
    before or less valuable than patents that are held as
    proprietary patents, there is something wrong with that logic.
        And so anything that, as I said, limits our ability to
    enforce, limits our ability to get returns on the investments
    that we have made, would have to be considered very carefully,
    if we were to continue in the standards.
        Senator Lee. Okay. Mr. Melamed, did you want to respond to
    that?
        Mr. Melamed. Yes. The statement that Mr. Rosenberg made,
    which I think I can quote correctly, is, ``They want you not to
    enforce your patents at all.'' That is simply wrong. That is
    not our position. We are strong believers in the enforceability
    of patents. What we do not want is for people to be able to use
    devices to get more for their patents than they are truly
    worth.
        Senator Lee. More than they could otherwise get precisely
    because of the fact that they have been folded into the
    standard, right? I mean, once it is in there, a little bit
    analogous to the road material that is already on the road.
        Mr. Melamed. Right.
        Senator Lee. Okay.
        Mr. Melamed. Yes, Senator Lee.
        Mr. Rosenberg. May I?
        Senator Lee. My time is up, but if you will be brief----
        Mr. Rosenberg. I will try. You can shut me off if I----
        Senator Lee. Go ahead.
        Mr. Rosenberg. The interesting thing--and I want to go back
    to something Senator Klobuchar asked before about the Apple v.
    Samsung case, and it fits in with all this. And Mr. Melamed
    said before that he has been accused of infringing standard-
    essential patents that turned out not to be standard essential.
    This is a very important point. People declare patents as
    potentially standard essential. The complicated process that I
    have tried to describe a little bit of in the standards bodies
    means that at some point a technology is adopted, and you are
    required as part of your membership in that standard, if you
    have contributed technology or if you know of technology that
    is covered by a patent, to say, ``I have potentially patents
    that read on this standard,'' because nobody really knows.
        And so until something like this gets litigated, that is
    how it is ultimately decided, because in the litigation process
    you look at the product and see how it is performing and you
    look at the patent claims and see whether there is
    infringement. And no one knows until then whether it was
    actually essential to that. But you take your best guess.
        So it is another point of confusion that, I think, gets
    discussed here--not just here but in this whole debate about
    standard-essential patents. There is not a clear-cut instance
    where everybody knows this is a standard-essential patent. We
    only know that it is potentially a standard-essential patent.
    And that is a big difference.
        Senator Lee. And so it requires you to take your best
    guess, your best guess involving not only whether in the
    abstract the patent right at issue is going to be upheld, but
    also how much it is going to cost you to litigate it, how
    likely the other party is to sue.
        Mr. Rosenberg. Very much like other patents. That is just
    what the process is. We used to joke all the time. You get an
    issued patent, but you do not really know if it is a good
    patent until it has been litigated in a court and a court has
    decided that.
        Senator Lee. Right. But under current law, that rather
    diminishes the efficacy, I suppose, of the treble damages
    provision in that you have got to show that it was a willful,
    knowing violation of the patent, and even then there is
    discretion in the judge.
        Mr. Rosenberg. That is a very good point. And, you know,
    obviously litigators will try to show that, well, since you
    assume it is a standard-essential patent, then you must have
    known what you were doing because you were practicing that
    patent--assuming they can prevail on the question of whether
    there has been infringement.
        By the way, the patent that we are all talking about is an
    SEP in the Apple-Samsung ITC case. The Commission never
    concluded that it was a standard-essential patent. The lawyers
    did not get to the point where the Commission had to decide
    that. They said that specifically. They did not have to decide
    that it was a standard-essential patent.
        So it is another example that I am trying to say that we
    have to be careful about allowing others, mostly people who
    have legitimate commercial interests but their own commercial
    interests, to try to conflate all these things into problems
    when, in fact, we have to carefully define what the so-called
    problems are or are not.
        Senator Lee. Okay. Thank you very much.
        Chairman Klobuchar. Very good.
        Just one last thing. Dr. Kulick, you have been sitting
    quietly here at the end, I am sure working on your standards
    and----
        [Laughter.]
        Chairman Klobuchar. But did you want to add anything to
    what you have heard today in terms of the work that you will be
    doing?
        Mr. Kulick. Yes, thank you, Senator, for the opportunity to
    comment. Clearly there has been a lot of interest and
    information shared here today. I did want to set a couple of
    points out, though, that I think actually read on what has been
    talked about today to some extent.
        We mentioned during our testimony about the need for
    perhaps higher-quality patents, and I think there is an
    opportunity there to try to help make some progress there.
    Better scrutiny on the quality of patents that are issued may
    help eliminate many of these causes of concern or confusion and
    perhaps inappropriate claims regarding those patents in various
    litigation cases.
        So to the extent that SSOs can help facilitate that process
    by providing information available to patent offices and
    allowing them to do more thorough and perhaps more exhaustive
    searches as part of their application process, we certainly
    would stand ready and willing to cooperate in that respect.
        There was a brief mention--I think just a couple of
    comments here in general--about the importance of
    transferability of commitment. That is extremely important.
    And, in fact, the current IEEE-SA patent policy actually has a
    clause in it that commitments, once they are made to the IEEE-
    SA, they are irrevocable. So if your patents happen to get
    transferred by another means to another owner, the same
    commitment still binds the new owner to the commitments that
    were made.
        Chairman Klobuchar. I know Chairwoman Ramirez has expressed
    interest in this, and I think referred to it as
    ``privateering'' in some of the work that, if you keep going, I
    thought that was important, too, yes.
        Mr. Kulick. Yes, that is very important.
        And then the last comment--well, two last comments, I
    guess. One was with respect to the current revision that we are
    doing with our patent policy, as I mentioned, we have an ad hoc
    committee that is considering the various issues, going to be
    making proposals. When that comes back, our process is open to
    all stakeholders. The Patent Committee will hold a series of
    open meetings where any interested stakeholder is able to
    attend, and all the views that will be considered by the
    committee will be those views that are brought forward by the
    stakeholders that attend. So, again, it is not necessarily a
    closed circle of people that are going to help develop any
    revisions to the policy.
        Then, finally, we have to consider very carefully as part
    of that process what the implications could be for what the new
    policy will then say to potential participants. And as Senator
    Lee mentioned at the very beginning, I think, in his testimony,
    any actions that potentially limit participation in a standards
    development organization could be detrimental to consumers. So
    we always keep that in mind as we are developing our policy to
    make sure that we are not going to end up doing something that
    is going to end up being detrimental to humanity or to the
    consumers.
        Thank you very much.
        Chairman Klobuchar. Thank you very much, Dr. Kulick. I
    appreciate you ending on that note, and that is one of the
    questions I was so focused on with Ms. Munck, and that is this
    idea that in the end our job up here is to make sure there is
    competition, but it is to make sure there is competition so it
    is good for the people of this country and good for consumers.
        We have had a spirited debate. I do want to assure everyone
    up here that the record will remain open for two weeks, so you
    can respond to each other many times over that time. Maybe you
    could do like a round-robin by email. But we would welcome
    anything people want to submit as well as, I am sure, some of
    the Senators may have some additional questions on the record.
        To me, there are clearly some legitimate antitrust concerns
    here. To me, the risk to consumers is clear. Ideally standards
    organizations, Dr. Kulick, and their members will voluntarily
    take steps to address these concerns by adopting best practices
    or updating their intellectual property rights policies.
        From the testimony we have heard today, it is evident that
    some standard-setting organizations are taking these concerns
    seriously. But if the standard-setting organizations are unable
    to address these issues, then we need to ask ourselves: When do
    we reach this tipping point when the DOJ and the FTC and others
    should step in with their enforcement role in standard setting?
    And that is what we are focusing on Ms. Munck with. Or when
    might Congress need to legislate?
        These are the questions that we are going to be
    considering. I can tell you that I am looking at potential
    legislation to address some of the competition issues in the
    patent world. We have heard a lot of discussion today about the
    appropriateness of injunctions and exclusion orders at the ITC.
    One reform I am considering would be to clarify the right
    standard for getting this kind of relief. I am also looking at
    possible legislation with respect to the FTC's role in the
    patent troll debate and the impact on competition and
    consumers. I think we also know that Senator Leahy is working
    on this, our Chairman, and as has been mentioned, Senator
    Schumer, Senator Cornyn, and a number of other people are
    interested in this issue, in addition to Senator Lee and
    myself.
        And so I think this testimony has been very helpful. The
    debate has been helpful. But in the end, I know that our job is
    to look out for the consumers, and once we are reaching a
    tipping point where we think that Congress needs to be involved
    or we need to up the role of enforcement agencies and have that
    work complementary to the work of the standard-setting agencies
    or standard-setting entities doing their work, I think that
    time may have come.
        So, with that, do you want to add anything, Senator Lee?
        Senator Lee. Thank you, Madam Chair, for scheduling this,
    and thanks to all of you for coming and providing such
    insightful and in-depth testimony. I appreciate it.
        Chairman Klobuchar. Very good. With that, the record will
    be open for two weeks, and the hearing is adjourned. Thank you,
    everyone.
        [Whereupon, at 11:50 a.m., the Subcommittee was adjourned.]
        [Submissions for the record follow.]

                                A P P E N D I X

                  Additional Material Submitted for the Record

                                  Witness List

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                   Prepared Statements of Hon. Patrick Leahy

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      Prepared Statement of Suzanne Munck, Chief Counsel for Intellectual
    Property, and Deputy Director, Office of Policy Planning, Federal Trade
                          Commission, Washington, D.C.

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      Prepared Statement of A. Douglas Melamed, Senior Vice President and
          General Counsel, Intel Corporation, Santa Clara, California

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      Supplemental Prepared Statement of A. Douglas Melamed, Senior Vice
        President and General Counsel, Intel Corporation, Santa Clara,
                                   California

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     Prepared Statement of Donald J. Rosenberg, Executive Vice President,
     General Counsel, and Corporate Secretary, Qualcomm Incorporated, San
                               Diego, California

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    Supplemental Prepared Statement of Donald J. Rosenberg, Executive Vice
         President, General Counsel, and Corporate Secretary, Qualcomm
                      Incorporated, San Diego, California

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     Prepared Statement of John D. Kulick, Ph.D., Chair, Standards Board,
        The Institute of Electrical and Electronics Engineers Standards
                        Association, New York, New York

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           Questions submitted by Senator Grassley for Suzanne Munck

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         Questions submitted by Senator Grassley for A. Douglas Melamed

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        Questions submitted by Senator Grassley for Donald J. Rosenberg

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       Questions submitted by Senator Grassley for John D. Kulick, Ph.D.

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           Questions submitted by Senator Klobuchar for Suzanne Munck

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        Questions submitted by Senator Klobuchar for A. Douglas Melamed

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        Questions submitted by Senator Klobuchar for Donald J. Rosenberg

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          Questions submitted by Senator Klobuchar for John D. Kulick

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    Responses by Suzanne Munck to questions submitted by Senators Grassley
                                 and Klobuchar

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      Responses by A. Douglas Melamed to questions submitted by Senators
                             Grassley and Klobuchar

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      Responses by Donald J. Rosenberg to questions submitted by Senators
                             Grassley and Klobuchar

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    Responses by John D. Kulick to questions submitted by Senators Grassley
                                 and Klobuchar

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                    Miscellaneous Submissions for the Record

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