Imagine your company designs, manufactures, or sells products that implement commonplace technologies like Wi-Fi, 5G, or video streaming. Did you know you might need a license to incorporate these technologies into your products?
A huge portion of everyday technologies is based on technical standards, and that portion is growing at a rapid clip. With this growth has come increased patenting activity related to those standards and increased litigation enforcing those patents. This article provides background on patents covering technological standards (sometimes referred to as standard essential patents or SEPs), the obligations that apply to licensing SEPs, the practice of pooling SEPs, and why SEPs matter to your business.
What are standards and SEPs?
To ensure interoperability of products manufactured by different companies, industries have come together to adopt standards that prescribe guidelines for technologies in those industries. Standards provide a number of collaborative and economic benefits. For example, in the United States, electrical outlets are generally the same shape and voltage, allowing companies to manufacture products that can reach consumers universally without having to worry about the shape of the power interface. Ethernet, Wi-Fi, Bluetooth, and cellular technologies like 3G, 4G, and 5G are similarly standardized technologies. As a result of the success of standards, all kinds of devices — cellphones and computers, automobiles, and smart-enabled home appliances — have components that implement standards to allow them to interoperate with other devices and components.
These technical standards are designed and published by standards setting organizations, or SSOs. Common examples of SSOs include the American Institute of Electrical and Electronics Engineers (IEEE), which publishes the Wi-Fi standard that defines how devices must be designed to communicate with each other using Wi-Fi; the European Telecommunications Standards Institute (ETSI), which develops cellular standards; and the International Telecommunication Union-Telecommunication (ITU-T), which develops standards for cyber security and video compression, among other things.
The standard-setting process is collaborative; companies and individuals attend meetings, participate in discussions, and submit proposals regarding how best to design the standard to improve the industry. Take Wi-Fi, for example: Standards participants meet to discuss how to improve the performance of Wi-Fi, including how to organize the communications to travel faster, with higher fidelity, lower power usage, and over longer distances. Importantly, the requirements for these technologies change over time. A user with a 1999 Apple iBook laptop, which offered Wi-Fi then, had different needs than a user of a modern laptop today. Video streaming and other innovations have changed what Wi-Fi devices must support and, as innovation continues, the standards themselves are continually updated.
Through this incremental standard-setting process, many SSO participants develop new approaches to address technological challenges in their fields. Naturally, the participants file patent applications on the technologies they invent and, in some instances, those inventions are incorporated into the standard. A patent on technology used in a technical standard — i.e., the standard by which everyone using that technology must abide — can be quite valuable. These patents are often referred to as standard essential patents (SEPs) because they are alleged to be “essential” to practicing the standard, even though the standard body never makes such a determination. SEPs are often “declared” to be essential by the patent holder to the SSO. Complex technological standards like Wi-Fi and cellular have thousands of patents relevant to each of the standard’s iterations.
What are FRAND obligations and terms?
SEPs present a classic potential “hold up” scenario. Patent holders that participate in the standard-setting process advocate for the inclusion of their solutions into the standard. If those solutions are accepted into the standard, then every industry member’s products must be designed to practice those solutions. This gives the SEP holders the opportunity to demand any royalty for a license, assuming the solution is in fact the same as the SEP, threatening that, if the implementor does not pay up, it cannot sell products in the industry. Conversely, implementors can also hold out by refusing to pay a fair price for SEPs.
To solve these issues, many SSOs require participants to commit to offering licenses to their SEPs on fair, reasonable, and non-discriminatory (FRAND) terms. For example, ETSI’s Intellectual Property Rights Policy § 6.1 requires that owners of SEPs provide “an irrevocable undertaking in writing that it is prepared to grant irrevocable licences on fair, reasonable, and non-discriminatory (‘FRAND’) terms and conditions.”
Exactly what terms are FRAND and whether an offered rate complies with an SSO’s FRAND obligations is often hotly disputed between parties to license negotiations or during litigation. Standards are typically viewed as contractual obligations granting rights to implementors as third-party beneficiaries. These standards are governed by laws of different nations, depending on where the standards are based, and have different operative language. Accordingly, courts around the world, including in the U.S., the United Kingdom, Germany, and China, have provided sometimes competing interpretations for what makes an offer FRAND.
That said, some general trends have emerged. Courts have advised that FRAND must be evaluated as a “composite whole,” meaning that what might be fair and reasonable might also depend on what is non-discriminatory. In evaluating whether the non-discrimination requirement has been met, courts have looked to whether a rate is comparable to the rate paid by a “similarly situated” firm, which is determined by analyzing several different factors, including geographic scope, the license sought, and sales volume.
In addition to this comparative analysis, adjudicators generally investigate the history of negotiations between the parties. Specifically, judges have placed a premium on evidence of a party’s good faith in negotiations, particularly where it has demonstrated a commitment to reaching a FRAND license. Such evidence can include a showing of continuous progress, addressing key issues between the parties, and a reasonable proposed pricing framework. With respect to pricing, the question of what percentage constitutes a FRAND rate is often just as important as to what quantity that percentage is being applied (e.g., component sales, unit sales, etc.). Jurisprudence across the world varies with respect to the appropriate mechanism for constructing FRAND licensing terms.
Patent pools
Rather than license SEPs individually, some companies contribute them to patent pools, which are organizations created to license SEP rights en masse. The patent holders often retain ownership of the SEPs, but the patent pool is granted the right to seek out licensees and collect licensing royalties for the pool’s patents. Because the patent pool receives a percentage of the license fee, the pool administrator is incentivized to seek out potential infringers and negotiate licenses. In practice, a patent pool often makes the initial outreach to a practicing company, notifying it that, because its products comply with a standard relevant to the patent pool, those products infringe the pool’s SEPs. For patent holders, pools provide a source of revenue while reducing transaction costs associated with seeking out licensees. For implementors, patent pools can reduce transaction costs by providing a “one-stop shop” for licensing of a particular technology.
Patent pools and their contributors are often significant industry actors. For example, Avanci is a well-known patent pool for licensing cellular SEPs to the automotive industry. Avanci’s 4G vehicle pool includes patents from Ericsson, Huawei, Intel, InterDigital, Nokia, Panasonic, Philips, Qualcomm, and others. Sisvel, another well-known pool, licenses several portfolios, including Wi-Fi and video streaming. There can be significant issues surrounding patent pools, namely antitrust; however, FRAND commitments have historically allowed such pools to continue.
The separation between licensing authority and patent assertion rights has important implications in negotiations with patent pools. Most patent holders retain the right to sue implementors at any time, even while the implementor is negotiating with the pool. As a result, implementors can be, and often are, sued by the patent holder while negotiating for a license with the pool. This incentivizes implementors to negotiate quickly with patent pools. On the other hand, by aggregating many patents into a pool and licensing them together, a pool can often seek a higher royalty rate than if only patents identified as infringing were considered.
Why SEPs matter to your business
Any modern business dealing in standard-compliant products must consider the effects of SEPs on its business, its products, and its future litigation risk. If a company’s products comply with a technical standard, there is risk that a pool or SEP holder may seek a license to continue production and for past sales. Some key considerations for implementors include:
- Whether the suppliers of components performing the standard functionality hold a license to the SEPs or otherwise have committed to indemnification;
- Whether there are viable alternative implementations other than the standard, and what the legal, technical, or financial cost of those implementations would be;
- Whether industry competitors have asserted relevant SEPs or had SEPs asserted against them; and
- How past licenses for the relevant products, related technology, related standards, or similar patents might implicate future FRAND licensing analysis
In addition, SEP ownership can be valuable as both an offensive and defensive tool. SEPs can generate licensing revenue, support market influence, and strengthen future standard proposals at SSOs. SEP ownership also facilitates cross-licensing opportunities, allowing SEP holders to expand their product offerings to encompass other companies’ intellectual property portfolios and blunt the blow of offensive SEP assertion.
Failure to consider SEP obligations, on the other hand, is a legal and financial risk. For patent holders, failing to offer FRAND rates for SEP portfolios can be costly in the present and the future. In the present, it can lead to protracted litigation with implementors. These litigations, because they often implicate international SEP portfolios, can result in controversies around the world, including the United Kingdom, Germany, China, South America, and beyond. Some of these courts have shown a willingness to set global FRAND terms for SEP portfolios. These rates may be less than what the patent holder could negotiate privately and are not easily adjusted afterward. These litigations could also result in a determination that the SEP holder’s offer is not FRAND, presenting a significant risk for any future licensing attempts by the SEP holder.
For implementors, failure to negotiate SEP licenses seriously can lead to the same expensive, complex, world-wide litigations. In some cases, juries have awarded large damages for infringement, including both past infringement and forward-looking royalties. Furthermore, litigation removes the implementor’s ability to reach mutually beneficial terms. Leaving it to a court or jury to determine FRAND business terms presents a considerable business and financial risk that is not easily corrected later. Finally, in certain jurisdictions, both in the U.S. and abroad, injunctive relief on SEPs can be a powerful tool against implementors that do not negotiate in good faith.
SEPs have become an important part of modern business. Understanding SEP licensing is key to ensuring that licenses to SEPs comply with FRAND obligations and minimizing the risk of expensive SEP-related litigation.