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What the Round Rock Settlements Mean
Motorola and Smartrac signed settlement agreements with Round Rock Research, which sued several retailers for patent infringement.
In response, some companies being sued demanded defense and indemnification against Round Rock's claims of patent infringement from Motorola, under the indemnification clauses in their contracts with Motorola. In March 2012, Motorola filed a countersuit against Round Rock, challenging its claims. The ongoing litigation created some uncertainty—not only for the end users named in the lawsuits but also for potential customers concerned about being pulled into the patent dispute. Several RFID companies joined Motorola in a joint defense against the patents.
Meanwhile, to settle these claims, Round Rock asked the end users sued to pay a percentage of the benefits RFID delivers to them annually. This is a highly unusual tactic, according to patent lawyers we contacted. Typically, companies are asked to pay a flat licensing fee. The decision to ask for a percentage of the benefits RFID delivers created a problem for other passive UHF companies; potential customers began requesting indemnification. As one systems integrator put it: "If we do a $5 million project for a big retailer, we could wind up indemnifying them for many times that if RFID delivers a lot of benefit. We just can't do that."
As of this writing, a company that wishes to deploy passive UHF RFID in the United States would need to use mostly tags and readers from the RFID firms that have settled with Round Rock, or buy readers and tags through Checkpoint Systems, which settled with Round Rock in May. To avoid losing out on potential new customers, tag and reader makers are now under pressure to sign similar agreements with Round Rock.
One concern some RFID technology buyers have expressed is that paying royalties to Round Rock will drive up the cost of equipment, particularly tags. Round Rock initially was asking for a licensing fee of 1 cent per tag. For a company such as Marks & Spencer, which expects to use 500 million tags annually, that would have amounted to an additional cost of $5 million per year. But a source who has seen the terms of the settlement says the royalty is nowhere near that high, and if a buyer commits to large purchases over a period of time, it can get an even lower royalty rate.
But the deal does create some issues for retailers. They will need to ensure they purchase mainly passive UHF readers from RFID companies that have settled with Round Rock (at least until 2019, when the most important patents expire). That's not so tough. Harder is ensuring a percentage of tags come from inlay providers that are licensed.
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