Patents and the Importance of Reasonable and Non-Discriminatory Licensing in the ATSC 3.0 Transition

A patent issued by the U.S. government grants an entity exclusive property rights to an invention for a limited period of time.¹ A patent holder holds “the right to exclude others from making, using, offering for sale, or selling” the invention in the U.S., and may grant licenses for use of the patented invention to licensees in exchange for royalty payments.²

The justification for requiring RAND licensing agreements is simple: it protects the market by curtailing patent holders’ ability to unilaterally set licensing fees for a patented technology that makes an entire system work, shielding both the industry and consumers from extortion. When the FCC adopts a new broadcasting standard, it implicitly forecloses other standards from being used.³ When the FCC or any other standard-setting body adopts a new standard, the value of the patents essential to that standard is “significantly enhanced.”⁴

Federal courts have addressed the anti-competitive and anti-consumer practices arising from the lack of a RAND licensing requirement for various technologies. The licensing terms around patents critical to the Digital TV standard are the subject of an ongoing antitrust lawsuit in New York federal court. Haier’s complaint in the suit explains the anti-competitive incentives that “lock in” other competitors and customers—in this case, an electronics manufacturer—to the patent holder’s pricing power over royalties:

“Once a standard has been selected, manufacturers will develop products that comply with it. The manufacturer that implements, or is required to implement, a standard therefore becomes ‘locked-in.’ Owners of patents that cover aspects of the standard can take advantage of lock-in by demanding exorbitant royalties from manufacturers because they know it would be less costly for the manufacturers to pay the excessive royalty than incur the cost of litigation, including the risk of an injunction, or developing products that utilize a different technology that does not meet the standard and thus cannot be imported, sold, or offered for sale in the relevant jurisdiction.”⁵

Without a RAND requirement, patent holders are able to cash in on this increased value by charging “supracompetitive royalties” to competitors.⁶ In the Broadcom Corp. vs. Qualcomm Inc. case, the Third Circuit called this practice an “anticompetitive patent hold-up.”⁷ When a standard-setting body fails to require RAND licensing agreements, companies that hold patents are able to extort rents beyond their production costs from other entities using the technology; this mark-up for access to patented technology occurs at the expense of consumers, who—in this case—would likely wind up paying higher prices for broadcast and cable services.⁸

The lack of a RAND licensing requirement is particularly dangerous for other entities in the broadcasting and cable ecosystem given that Sinclair already has significant size (with the potential to grow even bigger if its merger with Tribune is approved) and a critical patent for this new broadcasting standard. These factors could allow the broadcaster to control the market and hike up patent royalties on competitors while also benefiting from using the patent itself. Meanwhile, consumers will largely have to front the bill of these uncompetitive and exorbitantly high patent deals as prices increase to accommodate the growing prices of royalties.