To safeguard American leadership in tech-driven markets vis à vis foreign rivals like the Chinese Communist Party (CCP), Congress must recognize the importance of standards. Specifically, U.S. policy should account for the crucial role of standard-essential patents (SEPs) to global commerce, and ensure enforcement of fair, reasonable, and non-discriminatory (FRAND) terms in SEP licensing.
Consensus-based technological standards fuel innovation. Trusted standards-setting organizations (SSOs) develop these standards to promote interoperability between products and services as well as to ensure end user safety. Because standards have this role as a baseline to innovation, small businesses need to utilize them to compete in the market. As a technology standard develops within an SSO, participants voluntarily offer their patented technology to be a part of the standard. A patent needed to practice a standard is generally considered “essential” to the standard. Standards underlie all kinds of technology, like Wi-Fi, 5G internet, Bluetooth connections, and cars. In general, anyone using the standard needs to license SEPs. Unfortunately, some SEP holders take advantage of this dynamic and abuse the standards system in a manner that puts all this innovation at risk. In particular, some CCP-backed companies employ aggressive monetization of their patent portfolios in an attempt to boost profits.
Over the past decade, we have seen SEP abuses like injunctions and unfair licensing terms move from smartphones to automotive manufacturing, and increasingly encroach on healthcare. Ford is a great example—lawsuits drove them to sign a licensing deal to which they may not have agreed otherwise. At the heart of cases like these are aggressive SEP licensors—many of them based in China—refusing to license to component suppliers and then seeking injunctions against the downstream auto manufacturer, resulting in exorbitant license fees that artificially inflate the cost of cars. In addition to the monetary damages these suits cause, such aggressive strategies have a national security component. The CCP has long pursued a strategy of forcing American and other non-Chinese businesses to share their intellectual property with Chinese government-backed companies to market in China. Access to such a large market is understandably tempting for patent holders that wish to grow their sales, and they may discount the long-term dangers of Chinese companies owning so much intellectual property. SEP abuses also threaten supply chains by forcing American companies to rely on fewer producers of essential products like computer chips.
The App Association has long cautioned against allowing SEP abuses and lax enforcement of FRAND terms in licensing.[1] We watched the development of this patent monetization strategy in the cellular market and have consulted with automakers as the same tactics are employed in car manufacturing. The next frontier for SEP abuses is healthcare. The proliferation of internet-connected medical equipment will lead to similar suits, injunctions, and damages for connected device companies—in fact, some suits are being filed in this field already.
App Association member companies depend on standards to build their businesses. Without interoperability and assurance of widespread use, we couldn’t use USB drives or 5G internet. SEPs are a key part of building this interoperability, so they need to be widely available to businesses. Unfair terms and aggressive monetization of patent portfolios will lead to a fractured world. Standards, which will be vital to the development of next-generation networks and the internet of things, will only remain strong if the U.S. standards ecosystem balances the interests of those that work to build standards with those that utilize them to innovate. We urge Congress to conduct rigorous oversight—or even consider legislating—to ensure that enforcement agencies prioritize enforcement of FRAND terms and the fair operation of patent law in standards.
[1] See variety of App Association blog posts, https://actonline.org/category/frand/.