What the Round Rock Settlements Mean

By Mark Roberti

Motorola and Smartrac signed settlement agreements with Round Rock Research, which sued several retailers for patent infringement.

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On Nov. 4, Motorola Solutions and Smartrac announced they had concurrently signed settlement agreements with Round Rock Research, a patent licensing firm that sued several Motorola customers and other companies adopting passive ultrahigh-frequency radio frequency identification technology for patent infringement. This development could have far-reaching implications for the RFID industry and adoption of RFID technology (see Motorola Solutions, Smartrac Settle Patent Litigation by Round Rock).

Illustration: iStockphoto

The terms of the deal have not been disclosed, but RFID Journal has learned that retailers who have been sued by Round Rock Research will be given a period of time to comply with the settlement terms. This means retailers will have to use a high percentage—our source would not reveal the number—of readers from Motorola and tags from Smartrac (and other RFID vendors, if more settle). Retailers using RFID for the first time will be exempt from lawsuits by Round Rock if they use the same percentage of licensed RFID technology.

It is unusual for two companies to announce separate agreements together. The reason Motorola and Smartrac each issued a press release stating both companies had settled concurrently with Round Rock is that under the Round Rock lawsuit, an “RFID system” consists of tags and readers, so Motorola could not settle alone. And retailers would not move forward with deployments if they could use licensed readers but not licensed tags.

The deal is likely to impact RFID adoption—but before we explore that, let’s discuss the background. Round Rock Research is a patent-licensing firm with several thousand patents and pending applications. The company does not manufacture, sell or market any products or services. Instead, it operates as a non-practicing entity (NPE), or what is sometimes referred to as a “patent-assertion entity” (PAE) or “patent troll,” earning revenue solely by licensing and enforcing its patents.

On Dec. 14, 2011, the Mount Kisco, N.Y., firm filed lawsuits against nine companies using passive UHF RFID products provided by Motorola, Smartrac and other RFID vendors, charging that the solutions infringed on five of Round Rock’s RFID patents granted by the U.S. Patent and Trademark Office. Those companies were American Apparel, Dole Food, Fruit of the Loom, Gap, HanesBrands, JC Penney, Macy’s Retail Holdings, PepsiCo and VF Corp.

A week later, Round Rock filed a similar lawsuit against Amazon, claiming the online merchant infringed on nine Round Rock U.S. RFID patents. In March 2012, the company added Walmart to its list of defendants, claiming the retailer violated 10 of Round Rock’s U.S. RFID patents. In all 11 lawsuits, Round Rock asked that it be awarded damages adequate to compensate for the alleged infringement, that such damages be determined by a jury and be trebled, with interest, and that it be reimbursed for its legal expenses.

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.”

The settlement does several things. It ends the suit for Walmart and Macy’s if they comply with the agreement (both already use mostly Motorola readers). The framework of the settlement, which calls for Motorola and Smartrac to pay licensing fees, is nonexclusive, so other UHF RFID solution providers could sign similar agreements. In fact, at press time, Alien Technology, Avery Dennison RBIS and Invengo announced they had signed a licensing agreement with Round Rock (see Avery Dennison, Alien Technology and Invengo Sign Licensing Deals With Round Rock).

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.

An inlay is the transponder and antenna mounted on a substrate. Label makers buy inlays from a variety of manufacturers and convert them into RFID labels or hangtags for garments. To comply with the settlement terms, retailers must require their suppliers to use tags with inlays from licensed suppliers. One retailer expressed disappointment at the settlement, saying: “The patents are not legitimate, and there was no reason to impose this extra burden on us.”

Walmart and Round Rock
In March 2012, Round Rock Research sued Walmart for patent infringement. A source tells RFID Journal that the retailer had some initial discussion with Round Rock regarding agreement to pay a licensing fee. But Round Rock overestimated Walmart’s use of RFID and the benefits it was achieving. Round Rock asked for tens of millions of dollars per year. “It was outrageous,” the source says, without being more specific.

Illustration: iStockphoto

Walmart apparently had serious concerns about the case, because Round Rock was not asking for a flat royalty fee but a percentage of the benefits from RFID. This was a potential nightmare if it lost the case. It would have to account for the direct benefits of RFID, which might require hiring an army of accountants. The benefits could be in the hundreds of millions of dollars annually, once the solution was fully deployed. And no doubt other technology companies would follow the precedent and ask for a percentage of the benefits of their technology.

In March 2013, Walmart sent a letter to suppliers tagging goods, saying it still believed RFID could deliver value and would defend the lawsuit vigorously, but it was “curtailing its EPC program pending resolution of the existing litigation.” Walmart’s intention was not entirely clear, and many were shocked that the retailer appeared to be walking away from EPC RFID. The CEO of one RFID company said Walmart kicked the RFID industry in the teeth when it said the return on investment from RFID, when the lawsuit defense cost was factored in, was not good enough to justify expanding the RFID program.

Our interpretation of this move is that Walmart was sending a signal not just to Round Rock but to other technology companies that it would rather not use a promising new technology than pay a percentage of the benefits. The comment related to the ROI could hurt the industry, but it was simply a legal strategy to downplay any potential damages the retailer might have to pay if it lost the suit.

At the time of this writing, Walmart’s lawyers are examining the terms of the deal between Round Rock and Motorola and Smartrac to understand what the retailer is required to do to comply with the agreement. But it is highly likely that Walmart will resume its RFID efforts sometime in 2014.

More Patent Litigation?
Round Rock Research’s decision to sue 11 end-user companies for infringing on passive ultrahigh-frequency RFID patents cast a pall over the RFID industry for nearly two years. Some potential users of the technology put their RFID efforts on hold. Others continued their deployments apace, but refused to talk about them publicly for fear of being sued. That problem is being resolved. The settlements by Motorola and Smartrac free many end user companies from the threat of a suit, and other RFID vendors are also likely to settle. But are there any more non-practicing entities (NPEs), or “patent trolls,” lurking in the shadows?

Roger Stewart, former CTO of Alien Technology and president of Sourland Mountain Associates, an intellectual property consulting firm, says the U.S. Patent and Trademark Office has issued more than 15,000 RFID patents and continues to issue roughly 500 RFID patents annually. Given these numbers, it’s likely the patent issue will not die with the resolution of the Round Rock lawsuit.

Illustration: iStockphoto

Not all patents are equally important, Stewart points out. But some, he says, are seminal to how RFID works, and there is no easy way to engineer a work-around to avoid infringing on the patent. According to a presentation Stewart did at the Massachusetts Institute of Technology in October, Intermec Technologies has seven of these critical patents and Motorola has three, while Alien Technology, Checkpoint, Texas Instruments and several others each have one.

To date, RFID solution providers have not aggressively asserted their patents. That’s because they have a vested interest in seeing the RFID market grow. There might be more suits once the technology achieves widespread adoption.

RFID Journal asked several RFID solution providers whether there are other NPEs that could assert their patents in the next few years. One told us there are many patents, but most are held by technology companies or small RFID companies. “We don’t see anyone on the horizon that has the sophistication and resources of Round Rock,” he said.

Another vendor agreed, but pointed out that the patent situation can change quickly. “If some struggling RFID company needs to cash in whatever assets it has before closing down, and they sell their patents to an NPE, then you have another Round Rock.”

The good news is that the industry is quickly learning how to address patent issues. The bad news is that royalties add to the cost of RFID products. “Based on related industries, such as semiconductors and displays, the RFID industry cannot sustain IP costs of more than 20 percent of profits or 10 percent of sales,” Stewart says. “I remain concerned about whether the industry would be able to carry the cumulative burden of ‘stacking’ 20 or so Round Rock royalty rates, if the Round Rock settlement becomes the template for the other major patent owners.”