Let's say you decide to participate in a working group developing a standard (in the case of an accredited standards developer) or a specification (in the case of a consortium) for a segment of the electronics industry. Your employer pays your salary while you participate, along with your meeting/travel expenses. You work with employee participants from other companies, mostly from your competitors, for many months (or years) and develop respect, friendships, and trust in them. The committee works hard, solving difficult engineering problems, and the results of those collective efforts go into the standard/specification as "essential elements". Your company, and other companies who participated on the working group, then design, test, and begin to market products compliant to the new standard that you and your standards associates worked so hard to complete. Now, it's time for your efforts, and your company's investment, to pay off with sales of these new products. All is well, or so it seems.
In a few months, as your company begins to ship good orders for these new products, you receive a patent infringement notice, from attorneys representing the company of the person that sat next to you in the meetings. He's one of the people whom you respected, befriended, and trusted. The notice claims that their company owns IP (intellectual property) essential to making products compliant to the new standard. They have what's called an SEP, a Standard Essential Patent. You cannot make products compliant to the new standard without infringing on their patent. They demand exorbitant licensing fees and very high royalty rates, or they will sue your company for willful patent infringement in federal court for treble damages. This is called "ex post" patent disclosure: you are informed after the fact, after the standard is completed, that the standard contains their IP. Your heart sinks. No working group member, during the many meetings, ever mentioned that their company had any SEPs on the mechanisms being put in the standard. Your engineering manager tells you that you must explain how this happened to your CEO and company legal counsel. You see your job, and possibly your career, circling the drain. Your CEO must now decide whether to pony-up the exorbitant licensing fees and royalties being demanded, or write-off all the investment in the new products and move on to something else. All because of you.
Welcome to the exciting world of standards in the electronics business. This happens quite often in our industry, mostly in the telecom, cell phone, and computer segments. But, it's a pervasive occurrence across all sectors that rely on industry standards for interoperability of multi-vendor products. You have experienced what the lawyers call an "ambush" in the standards setting environment (Fig. 1). You've been burned. You were duped. You vow to never again participate in the standards process. You start putting together your resume and scanning websites with job openings.
Different accredited standards developers, consortia, and industry technology groups have different rules when it comes to patents. Some disallow any patented elements in their standards. Some have no patent disclosure rules at all. Some have voluntary patent disclosure rules (i.e., you can declare that you have IP in a developing standard if you like). Other groups say you must disclose IP that reads-on their standards during the process, but you don't have to disclose your licensing fees and royalties.
Then there's VITA, an ANSI-accredited standards developer in the critical high-performance embedded computing market. At VITA, it is mandatory that any company representative, in any official meeting, disclose any patents or patent applications owned, licensed, or known by their company that read-on any mechanism in the draft standard as it is being developed (Fig. 2). Not only is disclosure mandatory, but the patent owner is legally bound to disclose their maximum licensing fees and royalties for their SEPs. That way, the working group can look at the patent collectively, evaluate its contribution to the standard, and decide to accept or replace the patented mechanisms with others not hampered by IP. (If a patent holder does not wish to license their SEP, they simply announce that position and the working group can remove the infringing section from the draft standard, and find other non-infringing mechanisms for that function.) This is called "ex ante” patent disclosure: you are informed about any IP in the standard during the process, before the fact, before the standard is completed. These rules eliminate the potential for "internal ambush", where bad actors of the working group game the system. But, these rules do not eliminate the possibility of an external company, one not involved in the standards development process, from asserting patents they may hold, that read-on the products made compliant to the standard.
This raises an interesting point. Patent holders do not assert their SEPs against the standard itself, or against the standards developing organization (SDO). The standard is not a physical implementation of any patent. Patent holders assert their SEPs against physical products, that are made by companies or individuals that rely upon those patented essential elements in order to be compliant to the standard. This brings up an interesting question: Since an SDO is not held liable for patents in its standards, but the users of the standard are for their physical implementations, does the SDO have any fiduciary duty to its members to protect them from ambush? So far, the courts have said no to this question. But at VITA, we believe than an SDO does have a self-imposed duty to its members. Ex post holdup by bad actors destroys the fairness and equity doctrines of the standards process itself. Is ex post holdup behavior illegal? Generally speaking, no. It depends on the patent policies of the SDO. Is it unethical? Yes, for many reasons.
Why does this behavior occur? Several characteristics apply here. In hyper-competitive market segments like cellphones, there are billions of dollars at stake in a new standard. Standards create markets, and those markets offer tremendous growth and profit opportunities. The incentive to retard your competitors from gaining market share, from becoming more efficient, is greater than the incentive to be fair and equitable in the standards process. You can raise your competitor's costs if you make them pay huge fees and royalties to license your patents - to make compliant products. You have a cost advantage if you have SEPs. You can't swing a dead cat without hitting a hoard of attorneys asserting patents in the cellphone segment. Just look at the unending series of lawsuits between Apple, Samsung, Google-Motorola, RIM (Research In Motion), and Nokia.
In mature market segments, like telecom equipment, the incentive for incumbent suppliers to protect their waning revenue streams is greater than their concern for preserving the integrity of the standards setting process. Again, you can drive your competitors out of the market by using your SEPs, to raise their costs in a declining market with exorbitant licensing fees and royalties. At the same time, you can subsidize your declining revenue streams with patent licensing fees and royalties. This scenario occurred as Nortel's fortunes declined, when VOIP and the internet began replacing POTS telecom switches. They began to assert their patents against companies in other market segments to gain revenues. They asserted patents concerning the copper finger-gaskets used to seal the front panels of computer equipment that were used to reduce RFI emissions as required by FCC regulations. They also asserted patents concerning injector/ejector handles on modular computer boards used to squeeze that finger gasket under pressure to seal-off those gaps where RFI emissions could escape.
Nortel asserted those specific patents against member companies of VITA in the early 2000's. One of VITA's standards required both the finger gaskets and the injector/ejector as essential elements to meet FCC requirements. Now that Nortel had SEPs on that standard, they could demand exorbitant fees and royalties. This situation raises another defense against such assertions: prior art. Prior art is physical evidence that the claims in a patent, the techniques and methods, were in common use prior to the patent application date, and would prove that the patent is thereby invalid. VITA issued a "call for prior art" associated with the two patents in question. From that request, prior art and physical implementations that read-on the claims in both patents were discovered, that predated and anticipated the patents. VITA staff conducted an engineering evaluation, establishing that the prior art was relevant and did in fact read-on the patent claims in both cases. Attorneys were engaged to render a legal opinion, that the prior art found reads-on the claims in the patent, and that the patents were invalid. VITA formed a JDA, a Joint Defense Agreement, where member companies who received assertion notices concerning these Nortel patents could join and collectively defend themselves and reduce their legal costs. At a meeting of attorneys, VITA informed Nortel of the legal opinion that their patents were invalid, a JDA had been formed, and that if Nortel continued to assert those patents or sued any member of the JDA, VITA would go to a federal judge and ask for a declaratory judgment, that the patents were indeed invalid, and Nortel must pay all legal expenses and certain damages to VITA. Nortel dropped their assertions against VITA members and just went away. To my knowledge, this is the first time any SDO has undertaken the task of the prior art search, the engineering evaluation, the formation of a JDA, the legal opinion, and the invalidation of SEPs in defense of its members.
There are a number of legal cases to read about the malfeasance going on in the standards community. The landmark case is “American Society of Mechanical Engineers v. Hydrolevel Corporation, 456 U.S. 556, 1982” where ASME (an SDO) was held liable for treble damages in a patent holdup case involving boiler standards. If you're going to participate in any standards committee, you need to read this case and understand the principals involved.
When you go to any standards meeting, especially for the first time, you need to develop a "sixth sense". Count the number of people on the committee from each company. Large companies, who send multiple people to the meetings (under the guise that they are experts in the different aspects of the standard), have an agenda (and probably some IP). Count the number of times certain participants in the meeting speak. They have an agenda (and probably some IP). Watch for the thought-leader to develop, the person who influences the direction of the standard and the elements in it. His company has an agenda (and probably some IP).
Note if and when the management of the SDO or consortia attend the meetings. If the management people do not attend and monitor the process, there's a problem. The ASME case mentioned above is a perfect example of this gross negligence on the part of the SDO. Document all these statistics in your trip report to management. That will make your presentation to the CEO, when you get the patent infringement notices, much easier to explain and may save your job.
Why don't all SDOs and consortia follow the VITA example and adopt ex ante mandatory disclosure rules for patents and fees/royalties? The prevailing excuse is that the SDO or consortia would lose members and go out of business. The companies who leave would them form a new industry consortia, with loose patent disclosure rules, and continue gaming the standards process and the markets. That didn't happen at VITA. One might expect Congress would pass legislation to tighten-up the SDO patent disclosure rules, but no, they have avoided getting involved. They believe that it's up to the courts to sort-out this mess. Additionally, there's a hint of nationalism going on. Countries with a big stake in the outcome created by a new standard, especially the U.S., want their home companies to have an advantage in the world markets. Those governments have a disincentive to fix the standards process and make it fair and equitable.
Something you need to understand here: all profits are made on the inefficiencies in the markets. Standards make markets more efficient, so companies in high potential growth markets (like cellphones) or in declining markets (like connectors and telecom equipment) must use their patents to make the market inefficient, especially markets created by a standard. That is why we see the most standards malfeasance in cellphones (a high growth market) and in connectors and telecom equipment (a declining market). The first group is greedy, and the second group is in survival-mode. In both cases, the involved companies will do all they can to game the system. Before you get involved in any standards committee, you must know the basic condition of the industry, where the standard is targeted.
Will this situation get any better? No, it will probably get worse as many electronic market segments decline in sales or become commoditized (i.e., where the advantage goes to the low-cost producer and not the IP holder). This is what happened in the connector and telecom equipment segments (the Chinese have taken major market share in both). EIA (Electronic Industries Alliance) used to be the primary SDO for the connector industry, writing the standards for most of the connectors used in the computer industry, like the Sub-D RS-232 connectors. This was back when data signals ran at a few megahertz. We are now moving data through connectors at 10 GHz and above today. We're networking our computers and peripherals today with Wi-Fi, not cables and connectors. Connector companies decided that they no longer wanted to standardize their devices across the markets and must use their patents to survive in a declining industry segment. The EIA went out of business in 2011.
A similar situation developed in the telecom equipment industry, where internet VOIP and wireless communications eradicated the need for the old POTS switches and PBX equipment. Nortel went bankrupt, Alcatel and Lucent merged, and Ericsson is a shadow of its former self. But those SDOs, involved in the previous generations of telecom standards, just moved on to the standards needed for cellphones, and you can see where that's taken us.
In spite of the negative history, and the present mess in the standards process, it can be very rewarding to participate. You will learn a tremendous amount about the technology and the new developing concepts involved. You will get to work with some of the smartest people in the world, and learn from them. You will get to be an innovator in your market segment, and gain the respect and admiration of your peers and associates. But to survive it, you will have to develop that "sixth sense" of what is going on in those meetings. And, if you can survive and thrive in a standards committee, you should also become one hell of a poker player.
* This article is not to be considered legal advice concerning patents, standards committees, or legal opinions of situations involving intellectual property. Consult your intellectual property attorney for guidance and counsel.