Rethinking RAND: SDO-Based Approaches to Patent Licensing Commitments

So-called “reasonable and nondiscriminatory” (RAND) licensing commitments have been utilized by standards-development organizations (SDOs) for years in an attempt to alleviate the risk of patent hold-up in standard-setting. These commitments, however, have proven to be vague and offer few assurances to product vendors or patent holders. A recent surge of international litigation concerning RAND commitments has brought this issue to the attention of regulators, industry and the public, and many agree that a better approach is needed. In this paper, I identify seven “first principles” that underlie the licensing and enforcement of standards-essential patents (SEP)s. These can be summarized as follows: (1) certainty is preferable to uncertainty concerning the cost of implementing a technical standard, (2) there is a meaningful upper limit on reasonable royalty rates, (3) information regarding RAND terms should be available before adoption of a standard, (4) individual RAND commitments must be constrained by the aggregate royalty burden on a standard, (5) non-SEPs need not be bundled with SEPs, (6) SEPs should not be used to block implementation of a standard unless the recovery of monetary compensation is impossible, and (7) RAND commitments should travel with the relevant patent. Based on these first principles, I propose an SDO-driven approach to addressing the uncertainty of RAND commitments that is based on certain beneficial attributes of patent pools. I call this a “pseudo-pool” approach, as it draws on pooling strategies, but is adapted for use in the more flexible and prolific world of SDO standard-setting. The pseudo-pool approach includes the following elements: (a) SDO participants must declare SEPs in good faith, (b) SDO working groups that include patent holders and potential vendors establish aggregate royalty rates for each standard, (c) patent holders continue to grant licenses on RAND terms, subject to the aggregate royalty agreement, (d) each patent holder is entitled to a share of the aggregate royalty based on a proportionality measure, (e) there is a defined penalty for over-declaration of SEPs, (f) each patent holder is permitted to license its SEPs independently of the pseudo-pooling arrangement, (g) parties must waive their right to seek injunctive relief for infringement of SEPs unless monetary damages have proven impossible to collect, and (h) commitments made with respect to SEPs must bind all future transferees of such SEPs. This proposal requires the adoption of joint ex ante negotiation of royalty rates near the outset of a standardization project, conduct that has been viewed with favor by several regulatory agencies and acknowledged as offering various procompetitive benefits.