[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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