Apple is once again able to sell iPads and iPhones in Germany. Apple Inc. recently won a German appeals court ruling that at least temporarily lifts an injunction that prohibited the sale of some iPad and iPhone models. Apple allegedly infringed on certain technology from Motorola Mobility Holdings Inc. that a standards setting board identified as essential for standards compliance. A major issue in the case is whether or not Motorola Mobility offered to license the patents to Apple on “fair, reasonable and non-discriminatory” terms.
Essential patents are those which are necessary to comply with industry standards. Typically, prior to the adoption of standards, members of standard setting organizations are required to disclose any intellectual property that would be necessary to comply with the proposed standard. The patent holder must agree to license said IP at rates that are “reasonable and non-discriminatory” (RAND) or “fair, reasonable and non-discriminatory” (FRAND, the European counterpart to the U.S.’s RAND). The idea behind RAND and FRAND is to strike a balance between the network effects of standardization and rewards for innovation. Standard setting organizations have adopted these intellectual property policies in order to ensure interoperability and compatibility without conferring total monopoly power on any parties that may own “essential” patents.
Once a company has agreed to license its IP under RAND or FRAND terms, negotiated royalties and any potential reasonable royalty damages should theoretically be at rates that are “fair, reasonable and non-discriminatory.”
The inevitable problem, then, lies in determining what is “fair and reasonable.” Standard setting organizations tend to avoid giving opinions on this issue and often offer insufficient guidance. In a November letter to the European Telecommunications Standards Institute (ETSI), Apple claimed that ETSI lacked consistent policy regarding the interpretation of FRAND and requested that the standard setting organization establish more transparent policies and develop rules for setting FRAND royalty rates.
Given that standards setting boards have not provided clear rules to date, it is unlikely they will do so any time soon, although the high-profile case with Apple and Motorola might provide some new motivation. Until standards setting boards take action on this issue, companies will be left to themselves to determine and defend what sort of rates qualify as “fair, reasonable, and non-discriminatory.” When establishing RAND or FRAND rates, companies may consider a number of factors, including:
- Rates in the same or comparable markets and industries, including those obtained by the patentee.
- The terms associated with the rate.
- The expected profitability of products embodying the relevant IP.
- The objective quality and the pre-standardization value of the patent..
U.S. case law also addresses the subject of “reasonable” royalties. Georgia-Pacific Corp. v. U.S. Plywood Corp., 318 F. Supp. 1116 (S.D.N.Y. 1970) lays out a framework of 15 factors to consider in assessing royalties, commonly described as the “Georgia Pacific Factors”. Unless standard setting organizations start listening to companies such as Apple that are requesting clearer guidance, the issue of what is “fair and reasonable” will remain up to the courts.