Ajit Jillavenkatesa
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the cost of the phone plus the monthly services, but do not necessarily care how those costs are
allocated between the phone and the services. The service provider, however, profits more when
the phone is very inexpensive, so that the consumer has more money to pay for monthly
services.° The cost of the phone can be reduced when the phone does not require licenses to use
patented technology. Of course, the service provider can provide new features and sell new
services only when the phone can support those services. Service providers naturally want to
encourage phone and components developers to incur large research and development costs to
develop new technologies (including interoperability standards), which are typically patented by
the phone and components developers. But the service provider does not want the cost of these
advancements to be incurred by consumers who are willing to pay a certain price for the phone
plus the subscription services because it will mean less profit for the service provider. The
tension between the business models of the phone/components developers and the
telecommunications service providers results in more robust competition and choices for
consumers.

The mobile phone market is not the only market where such business models compete. ICT
support services that might include services such as installation, maintenance, and consulting,
have business models that compete with ICT product developers, such as software developers
and developers of various data storage media. Similarly a systems integrator provides value to
its customers by combining ICT components (e.g., chipsets, software, electrical connectors, etc.)
together to form a final end user product or system, relying on others to invest in the
development of the ICT components. Service providers, integrators, and others with similar
business models (“service-oriented businesses”) that rely on mass marketed products and
infrastructure often have patent portfolios,’ even large patent portfolios, but the value in those

° See, e.g., Chris Ziegler, Editorial: The American Phone Subsidy Model Is a RAZR Way of Thinking in an iPhone
World, ENGADGET, Feb. 23, 2010, available at http://www.engadget.com/2010/02/23/editorial-the-american-phone-
subsidy-model-is-a-razr-way-of-thi/; Sascha Segan, Your Free Phone Cost $240, PCMAG.COM, Nov. 19, 2009,
available at http://www.pemag.con/article2/0,2817,2356098,00.asp#; Press Release, Consumer Reports, Cell Phone
Services Improves (Dec. 1, 2008), available at http://pressroom.consumerreports.org/pressroom/2008/12/verizon-a-
standout-carrier-in-survey-of-23-cities-five-ways-to-cut-cell-bills--yonkers-ny-cell-phone-service-has-become. html;
Elizabeth Woyke, Calculating Your Phone Bill, FORBES.COM, June 16, 2008, available at

http://www. forbes.com/2008/06/15/calculating-phone-bill-tech-wireless08-cx_ew_0616bill.html; Laura M. Holson,
New iPhone Pricing Model Is a Step Backward for Consumers, N.Y. TIMES, June 11, 2008, available at
http://bits.blogs.nytimes.com/2008/06/1 1/new-iphone-pricing-model-is-a-step-backward-for-consumers/; Crayton
Harrison & Connie Guglielmo, Apple Analysts Say to Buy As iPhone Goes Mainstream, BLOOMBERG, June 10,
2008, available at http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aEp_LHAUOqdo&refer=.

T See, e.g., Press Release, IBM, IBM Awarded Contract to Modernize the U.S. Government’s Acquisition and
Procurement System (Feb. 18, 2010), available at http://www-03.ibm.com/press/us/en/pressrelease/29436.wss
(“The project will include the integration of nine key GSA applications into a single system -- based on open source


Ajit Jillavenkatesa
March 4, 2011
Page 8

RAND commitment. They will want to negotiate other types of business terms, e.g.,
indemnification, co-development, dispute resolution, payment methods, etc.'’ In practice, the
most likely outcome of having a patent holder post a set of license terms for its essential patent
claims for a hypothetical licensee is that prospective licensees will collectively take that
opportunity to negotiate the patent holder’s terms and conditions down to terms and conditions
that are acceptable to all — the least common denominator. The least common denominator in
many cases will be no royalties or fees and no restrictions. If the patent holder refuses to license
for free and without restrictions, the group of prospective licensees simply can threaten to select
other technology to include in the standard.

Such conduct by a group of prospective licensees could raise competition and other legal
concerns. Additionally, the hostile and costly environment for patent holders participating in
SSOs requiring ex ante disclosure of license terms is likely to cause innovators with relevant
expertise to refrain from participating altogether. Such innovators are likely to include patent
holders that may have the most to offer and contribute to the standards setting process.
Consequently, these “ex ante” proposals will also likely delay and harm the standardization
process. While the competition concerns may be mitigated through appropriate counseling from
the parties’ lawyers, it seems that there are few, if any, benefits from such proposals in contrast
to their many identifiable risks. While driving the cost of standardized technology down is
helpful to some business models, especially for patent holders with significant service-oriented
businesses, SSO patent policies need to remain balanced to enable various interests to compete in
the marketplace.

Impact on Foreign Patent Protection for U.S. Businesses

As other countries consider standards policy, the U.S. in particular should likewise consider how
USS. policy, if implemented elsewhere around the world, could impact U.S. businesses. For
example, if another country that is a major U.S. trading partner were to adopt regulations
mandating that all standards for green technology must be implemented on a royalty-free basis
within that country, U.S. automakers and other U.S. businesses might fear that such a country
was attempting to appropriate U.S. IPR. If the U.S. government was to show preferences for
royalty-free policies or other policies designed to achieve a similar goal within the U.S., then the

un Some proponents of “ex ante” policies have employed overly simplistic analogies to message the need for such
proposals, stating that no one would purchase a house if one did not know the asking price for the house. The
proper analogy, however, for “ex ante” disclosure of license terms is that the homeowner can state the price it deems
appropriate for its kitchen, but a purchaser will not purchase just the kitchen alone but rather will want to negotiate
the price and terms for the entire house even if the price of the kitchen is very reasonable.


Ajit Jillavenkatesa
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chose to enforce that patent claim against implementers of an applicable standard, such a
situation could hold-up the industry from implementing a standard. I have not seen such a
“patent hold-up” situation, but I am witnessing growing confusion in distinguishing commercial
patent disputes from true patent hold-ups in the standards context. °

As concerns grow over the fear of patent hold-up, several solutions to this perceived problem
have been proposed. Since in my experience patent hold-up is not a problem, I do not believe
that the proposed solutions are needed, and these commercial disputes can be resolved through
business negotiations and existing legal mechanisms. Nonetheless, others argue that there are
patent hold-up problems that need to be addressed through a variety of proposed solutions that
may thwart a patent holder’s right to obtain a fair return on its investment in research and
development. Such proposals have fueled widespread debate on the topic of patents and
standards, and observers to this debate have been led to conclude that the two sides of the debate
represent patent licensors who want to charge royalties to implementers of standards and
implementers who cannot afford to pay royalties to patent holders. But the debate is not truly
about patent “haves” and patent “have-nots,” but rather about differing business models.

Developing Business Models

New business models have emerged along with the above-mentioned innovation in the ICT
industry. For example, when we purchase a product such as a mobile phone, we purchase it with
a monthly subscription service from a telephone service provider. As consumers, we care about

* For example, I do not view recent patent lawsuits involving a few telecommunications and wireless standards to
constitute patent hold up situations because those lawsuits involve disputes over license terms, and are therefore
commercial disputes that are either settled or adequately vetted through litigation. The relevant telecommunications
and wireless standards continue to be widely adopted notwithstanding the litigation among parties who can not agree
on license terms. Only a few of these cases even raise issues concerning SSO obligations. See e.g., Complaint,
Motorola Mobility, Inc. v. Apple, Inc., No. 1:10-cv-06381 (N.D. Ill. Oct. 6, 2010) (patent infringement litigation
where patents in suit relate to wireless communication technologies like 3G, GPRS, and 802.11; dismissed without
prejudice November 2010); Complaint, Wi-LAN Inc. v. Alcatel-Lucent USA Inc., No. 2:10-CV-408 (E.D. Tex. Oct.
4, 2010) (patent infringement involving 3GPP standard; dismissed LG entities December 2010 presumably pursuant
to a settlement); Complaint, Innovative Sonic Limited v. Research in Motion LTD, No. 6:10-cv-00455 (E.D. Tex.
Sept, 2, 2010) (patent infringement litigation purporting to cover 3G wireless communications technology);
Complaint, U.S. Philips Corp. v. Motorola, Inc., No. 7:09-cv-07820 (S.D.N.Y. Dec. 7, 2009) (patent infringement
litigation involving 3GPP standard; settlement reached October 2010); Complaint, Adaptix, Inc v. Clearwire Corp.,
No. 6:09-cv-00562 (E.D. Tex. Dec. 21, 2009) (patent infringement litigation involving WiMAX-related patents
related to IEEE 802.16 and 802.16e standards; dismissed by motion of Adaptix in March 2010); Complaint, Nokia
Corp. v. Apple, Inc., No. 1:09-cv-00791 (D. Del. Oct. 22, 2009) (patent infringement litigation involving ETSI and
IEEE standards); First Amended Complaint, Wi-LAN, Inc. v. Research in Motion Corp., No. 2:08-cv-247 (E.D. Tex.
July 3, 2008) (patent infringement litigation involving CDMA2000 and 802.11 standards; settlement with RIM
August 2008 and UTStarcom August 2010).


Ajit Jillavenkatesa
March 4, 2011
Page 6

portfolios may not be concentrated in the standardized technologies that enable their businesses
to succeed. Such service-oriented businesses are therefore financially motivated to create the
impression that the inclusion of patented technology in standards is a significant problem, that
patent hold-up is a significant problem, and that governments and SSOs must find ways to curb
perceived patent holder abuses.

First, they argue that RAND is too uncertain because the details of the license are not sufficiently
defined by the commitment to RAND licensing. Consequently, implementers of a standard
cannot know in advance how much they will be required to pay to implement the standard. This
is simply a red herring as far as standards are concerned. ICT products often include dozens if
not hundreds of standards and other technology.® No one purchasing an ICT product can
negotiate a license with a patent holder only for the patent holder’s essential patent claims on one
standard without expecting to need licenses to additional patent claims that will cover the
relevant product or at least other related features. Even if an SSO were to define the license
terms and conditions for all participant patent holders, products that implement the standardized
technology would almost certainly infringe other patent claims owned by the participant patent
holders. If the defined terms and conditions are royalty-free and unrestricted, the patent holders
could pursue licenses for their non-essential patent claims for fees that would offset what they
had agreed to give away for free. In practice, however, patent holders and licensees do not
separately license essential patent claims and non-essential patent claims, they license portfolios
that include both, or enter cross-licenses that include both, or form business relationships that
involve transactions that expressly or impliedly involve both essential and non-essential patent
claims.? Furthermore, such arrangements typically are in regard to multiple standards, although
they may be related within a given field of use.

software -- designed to simplify the entire acquisition and procurement process”); Chris Preimesberger, Red Hat
CEO Likens Company to Facebook, Wikipedia in Collaborative Innovation, eWeek.com, Aug. 18, 2009, available
at http://www.eweek.com/c/a/Linux-and-Open-Source/Red-Hat-CEO-Likens-Company-to-Facebook-Wikipedia-in-
Collaborative-Innovation-489559/ (Red Hat CEO discusses its business model of monetizing enterprise and
technical services based on software that is licensed for free).

8 Brad Biddle, Andrew White & Sean Woods, How Many Standards in a Laptop? (And Other Empirical Questions),
Soc. Sci. RES. NETWORK, Sept. 10, 2010, available at http://ssrn.com/abstract=1619440 (identifying 251
interoperability standards that are embodied in or directly used by a laptop computer).

° For example, a cross-licensing agreement between Samsung and Ericsson, analyzed during patent infringement
litigation after the parties were unable to agree on renewal terms, included both essential and nonessential patent
claims for WCDMA cellular technology. Michele K. Herman, Negotiating Standards-Related Patent Licenses:
How the Deal is Done, Part II, LANDSLIDE, Nov.-Dec. 2010, at 33, available at
http://www.dwt.com/LearningCenter/BooksPublications?find=364461.


Ajit Jillavenkatesa
March 4, 2011
Page 9

U.S. government could have a difficult time persuading other countries to avoid similar policies
or regulations.

Conclusion

As the government becomes more focused on interoperability standards in areas such as smart
grid, healthcare IT, green technologies, cloud computing, and cybersecurity, it should recognize
that these debates over patent hold-up are often theoretical and are often motivated by
competition among parties with different business models rather than concerns about anti-
competitive behavior. In short, SSOs should remain free to define their own patent policies as
long as there is no empirical data showing that patent hold-up problems are impeding the
development and adoption of standards. SSOs also may wish to experiment with new policies,
and as long as those policies are lawful, such experimentation would add to the diversity and
flexibility of the global standards ecosystem. Government preferences for certain policies over
others may skew the competitive standards landscape that has generated substantial innovation,
new business, and many jobs in recent years. And equally important, any U.S. government
preferences concerning standards and patent policy may negatively impact U.S. business
opportunities for growth abroad, if not carefully devised or considered with all potential impacts
in mind.

The current standards ecosystem in large part works well to foster innovation and permit the
development of voluntary consensus-based standards that meet both private and public sector
needs. While there is an important role for government in articulating public sector standards
requirements and participating in the development of relevant voluntary consensus-based
standards development, caution should be exercised in promoting “one-size-fits-all” solutions or
responding to rhetoric not supported by empirical data that could distort competition among
business models. As governments around the world become increasingly involved and interested
in interoperability standards and look to the U.S. as a potential model, the exercise of caution
becomes even more important.

Very truly yours,

Michele Herman
Davis Wright Tremaine LLP


Suite 2200

Davis Wrig ht Seale, WA. 981013045

Michele Herman
(206) 757-8203 tel
206.757.7700 fax

micheleherman@dwt.com

March 4, 2011

Dr. Patrick Gallagher

Co-Chair, Sub-Committee on Standards

National Science and Technology Council

Director, National Institute of Standards and Technology
100 Bureau Drive, Stop 1000

Gaithersburg MD 20899-1000

Re: Standardization Feedback for Sub-Committee on Standards (75 FR 76397)

Dear Dr. Gallagher and Members of the Sub-Committee:

I appreciate this opportunity to respond to the National Institute of Standards and Technology
(“NIST”) Request for Information regarding the Effectiveness of Federal Agency Participation in
Standardization in Select Technology Sectors dated December 8, 2010 (“RFT”). I am writing to
urge NIST and the Federal Government to continue its current policy in support of voluntary
consensus-based (“VCB”) standards developed by standards setting organizations (“SSOs”), and
in particular, in support of such SSOs continuing to develop and adopt their own patent policies.
In my view, such patent policies are most appropriate when defined by the relevant stakeholders,
and when based on market needs, the technology involved, the relevant SSO’s structure and
governance, among other factors.

I am a partner with Davis Wright Tremaine LLP and I represent a number of SSOs as well as
clients who participate as members in SSOs in connection with the development of technical
standards. I am a patent attorney whose practice has focused on standards setting issues for more
than a dozen years. I am also an adjunct professor at Seattle University School of Law where I
teach a class on industry standards and open source software. I have held or currently hold
leadership positions in standards committees in the American Bar Association, American
Intellectual Property Law Association, and the Intellectual Property Owners Association. My
response to the RFI offers background based on my personal observations and experience
representing numerous clients in matters that involve patents and standards, and in particular,
standards-related patent licensing issues.

Anchorage New York. Seattle
Bellevue Portland Shanghai
Los Angeles San Francisco Washington, D.C.



Ajit Jillavenkatesa
March 4, 2011
Page 7

Proposed Solution: Royalty-Free Licensing

There have been proposals to create detailed definitions of RAND and to require SSOs to adopt
patent policies that are royalty-free for all essential patent claims. Essential patent claims are
typically defined very narrowly, however, under royalty-free patent policies, increasing the risk
that licenses to non-essential patent claims, not subject to any licensing commitment at all (not
even a RAND one), will be needed. There is even a growing effort to require participants to
agree to not assert essential patent claims against implementations of standards, eliminating the
possibility for patent holders and prospective licensees to negotiate terms and conditions. But
such “covenants not to sue” often are not reciprocal and do not have reasonable defensive
termination provisions. In other words, a patent holder is expected to waive its patent rights even
with regard to parties who have not made a similar agreement not to assert against the patent
holder and the patent holder may not be able to revoke its “covenant not to sue” even when an
implementer sues the patent holder for patent infringement. These patent policy proposals are
draconian for companies that invest substantially in research and development in connection with
standardized technology as well as for large companies that use their patent portfolios
defensively and are the targets of many patent infringement lawsuits. Adoption of these
proposals, therefore, would impose disincentives to the very innovation they claim to protect.

Proposed Solution: Prior Disclosure of License Terms

In the same vein, there is increasing interest to have patent holders that participate in standards
setting activities not only declare that they have patents likely to contain essential claims before
the draft standard is adopted (“ex ante disclosure”) but to also disclose their specific license
terms even though they have made a commitment to RAND licensing. Such proposals presume
that the patent holder has a one-size-fits-all license for all product implementations and for all
licensees regardless of their business model, industry, and business relationships. In other
words, the proposal benefits prospective licensees only if all implementers will want to negotiate
the same terms with the patent holder as all other implementers. Otherwise, prospective
licensees still need to negotiate their own licenses.'°

Prospective licensees will not, however, share the same goals and objectives regarding the terms
of the licenses. They will want to cover different products in different fields of use and will want
licenses to different sets of patent claims, not just the essential patent claims subject to the

' Letter from Thomas O. Barnett, Assistant Attorney Gen., U.S. Dep’t of Justice, to Robert A. Skitol, Esq., Drinker,
Biddle & Reath, LLP 9 (Oct. 30, 2006), available at http://www justice.gov/atr/public/busreview/2 19380.htm.


Ajit Jillavenkatesa
March 4, 2011
Page 2

The RFI solicits an array of information concerning intellectual property right (“IPRs”) and
standards. While I have not observed any systemic problems attributed to the inclusion of
patented technology in standards, I have noticed a heightened focus on patents and standards in
recent years that, in my view, is attributable to competitive strategies employed by entities that
have adopted emerging business models.

Background of SSOs

Innovation has and continues to prosper as a result of the diversity and flexibility of the global
VCB' standards system through both cooperation and competition at many levels. Specifically,
SSOs often cooperate by referencing each others’ standards and/or ratifying standards developed
in other SSOs to provide greater visibility and opportunities for adoption. SSOs also compete on
standards, as well as their policies, procedures, operations, and governance. This cooperation
and competition is market driven and successful standards are judged in the relevant
marketplace. Information and Communications Technology (“ICT”) has proliferated into every
industry and every business by building upon the internet, web, and wireless technologies as well
as the wired communications infrastructure in an interoperable world. The development and
global adoption of interoperability standards have brought about many new products and services
in virtually every sector of the economy. This impressive level of innovation has benefited from
the global VCB standards system as that system has demonstrated the flexibility to evolve in
response to ever-increasing market needs.

Unlike most standards that specify health or safety requirements to protect the public interest,
interoperability standards are developed based on the pre-existing intellectual property of at least
a few, if not several, different commercial entities. Typically these entities are financially
motivated to have their products and services work together and/or are interested in finding
vehicles for distribution of the results of their research and development efforts. Such entities
often contribute technical proposals based on their own intellectual property to SSOs developing
relevant standards. The resulting standards ofien naturally incorporate patented technologies
from multiple parties. Given the explosive growth of the ICT sector, based on the thousands of
standards that have been developed by SSOs over the past 10-15 years,” it would be difficult to

' References to VCB standards herein are intended to have the same meaning as defined in OMB Circular A-119.

? For example, the International Organization for Standardization publishes 1,100 new standards every year and has
published over 18,500 standards total. International Organization for Standardization, ISO Standards,

http://www. iso.org/iso/iso_catalogue (last visited Mar.1, 2011); INTERNATIONAL ORGANIZATION FOR,
STANDARDIZATION, ISO IN FIGURES FOR THE YEAR 2010 (Jan. 2011), available at
http://www.iso.org/iso/iso_in_figures_2010.pdf. And the U.S. has more than 100,000 standards in place. Standards
Boost Business FAQs, http://www.standardsboostbusiness.org/faq.aspx (last visited Mar. 1, 2011). Another SSO,
the International Electrotechnical Commission, produced 483 international standards in 2008. INT’L


Ajit Jillavenkatesa
March 4, 2011
Page 3

conclude that such patented technology has thwarted innovation, competition, and harmed
consumers.

Patent Hold-up Concerns

Despite this overwhelming evidence of successful standardization, I have observed requests for
government entities here in the U.S. and abroad to interfere with the VCB standards system by
establishing constraints on standards-related patent licensing. The entities making these requests
allege that such constraints are necessary to avoid “patent hold-up” situations, which they claim
are rampant in the ICT industry. In my view, patent hold-up — where a patent holder of an
essential patent claim (one that is necessarily infringed by the relevant standard) refuses to
license an essential patent claim or refuses to do so on objectively reasonable and non-
discriminatory (“RAND”) terms and conditions — should be distinguished from situations where
a patent holder and an accused infringer merely cannot agree on licensing terms with regard to
the infringing technology. The former situation may constitute a true patent hold-up in the
context of standards, while the latter simply constitutes a commercial dispute. Commercial
disputes involving standardized technologies are rarely, if ever, limited to disagreements over
only essential patent claims for a given standard. Rather, such disputes almost always involve
many other non-essential patent claims owned by both of the parties involved in the dispute as
well as other commercial terms and conditions related to the parties’ unique business
relationship.> In addition, such disputes will not necessarily be limited to the implementation of
a specific standard.*

Such commercial patent disputes in the context of standards are no different than commercial
patent disputes in other contexts where the parties cither work out their disagreements by
entering into bilateral licensing arrangements or resolve conflicts through litigation. Market
forces and existing judicial processes are generally sufficient to address commercial patent
disputes. If, by contrast, a patent holder was to refuse to license an essential patent claim and

ELECTROTECHNICAL COMM’N, IEC PERFORMANCE 2008 26 (2009), available at
http://www. iec.ch/about/brochures/pdf/performance/IEC_Performance_2008_LR.pdf.

3 See Michele K. Herman, Negotiating Standards-Related Patent Licenses: How the Deal is Done, Part II,
LANDSLIDE, Nov.—Dec. 2010, at 33-34, available at
http://www.dwt.com/LearningCenter/BooksPublications? find=364461.

* Id. at 34.See also Press Release, Research in Motion, Motorola and Research in Motion Announce Settlement and
License Agreement (June 11, 2010), available at
http://mediacenter.motorola.com/content/detail.aspx?ReleaseID=12922&NewsAreald=2 (settlement involving
cross-licenses of patent rights relating to 2G, 3G, 4G, and 802.11 standards).