[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
----------
U.S. GOVERNMENT PRINTING OFFICE
88-369 PDF WASHINGTON : 2013
-----------------------------------------------------------------------
For sale by the Superintendent of Documents, U.S. Government Printing
Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800;
DC area (202) 512-1800 Fax: (202) 512-2104 Mail: Stop IDCC,
Washington, DC 20402-0001
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
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Prepared Statements of Hon. Patrick Leahy
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Prepared Statement of Suzanne Munck, Chief Counsel for Intellectual
Property, and Deputy Director, Office of Policy Planning, Federal Trade
Commission, Washington, D.C.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Prepared Statement of A. Douglas Melamed, Senior Vice President and
General Counsel, Intel Corporation, Santa Clara, California
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Supplemental Prepared Statement of A. Douglas Melamed, Senior Vice
President and General Counsel, Intel Corporation, Santa Clara,
California
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Prepared Statement of Donald J. Rosenberg, Executive Vice President,
General Counsel, and Corporate Secretary, Qualcomm Incorporated, San
Diego, California
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Supplemental Prepared Statement of Donald J. Rosenberg, Executive Vice
President, General Counsel, and Corporate Secretary, Qualcomm
Incorporated, San Diego, California
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Prepared Statement of John D. Kulick, Ph.D., Chair, Standards Board,
The Institute of Electrical and Electronics Engineers Standards
Association, New York, New York
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Questions submitted by Senator Grassley for Suzanne Munck
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Questions submitted by Senator Grassley for A. Douglas Melamed
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Questions submitted by Senator Grassley for Donald J. Rosenberg
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Questions submitted by Senator Grassley for John D. Kulick, Ph.D.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Questions submitted by Senator Klobuchar for Suzanne Munck
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Questions submitted by Senator Klobuchar for A. Douglas Melamed
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Questions submitted by Senator Klobuchar for Donald J. Rosenberg
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Questions submitted by Senator Klobuchar for John D. Kulick
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Responses by Suzanne Munck to questions submitted by Senators Grassley
and Klobuchar
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Responses by A. Douglas Melamed to questions submitted by Senators
Grassley and Klobuchar
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Responses by Donald J. Rosenberg to questions submitted by Senators
Grassley and Klobuchar
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Responses by John D. Kulick to questions submitted by Senators Grassley
and Klobuchar
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Miscellaneous Submissions for the Record
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]