Small and medium-sized enterprises (SMEs) and policymakers alike often find the standard-essential patent (SEP) licensing landscape to be a difficult, dense, and confusing topic to understand. However, as the Internet of Things (IoT) and artificial intelligence (AI) ecosystems continue to develop a new set of standards to build on, it is crucial that stakeholders in the public and private sectors increase their understanding of SEP licensing issues. Below is a breakdown of some important SEP licensing concepts and a glossary of terms to help navigate the world of SEP policy and legal debates.
What are standards & standard-essential patents, and why is this an SME issue?
A standard is a norm developed by industry participants as a baseline to work from. The specific goal of a technical standard is to provide an efficient and interoperable baseline for any technology developer to use in creating new inventions across markets.
A standard-essential patent (SEP) is a patent that is incorporated into a standard, making these patents “essential” to using the standard. Therefore, developers that build products on top of the standard must take a license from the relevant SEP holder. This dynamic inherently provides a SEP holder with heightened market power in all verticals that depend on the covered technical standard.
To address the existing power imbalances and transparency issues within SEP licensing markets, the App Association has engaged with governments and policy leaders to ensure that the SME viewpoint is fully considered in any new SEP policies that could make or break the global app economy’s growth and success. Through a widespread understanding of a traditionally complex issue, we can ensure that the worldwide digital landscape once again becomes a place where SMEs can contribute to the technological advancements that drive our society forward.
Glossary
Antitrust and competition law: Antitrust laws aim to maintain market competition and prevent monopolistic practices by regulating business conduct. These laws typically prohibit inappropriate collusion and the abuse of dominant market positions. In the context of SEPs, standardization processes create increased market power by selecting specific technologies for use as well as patents as essential for adhering to the standard. Simply put, SEP holders have monopolies within standards.
Connected devices: Smartphones, tablets, and wearable technologies like “smart” watches are examples of connected devices. Sensors and software allow them to connect and share data with each other and to other systems via the internet.
Essentiality assessment: An essentiality assessment is the process of checking whether a patent is truly essential to a technical standard. Problems arise when patents are overdeclared as essential, obscuring which patents are truly necessary, which complicates SEP licensing and potentially leads patent holders to demand unreasonable fees or terms. Currently, these checks are generally only made in court, which is a slow, complex, and expensive process. Greater transparency around essentiality would simplify these evaluations, making the patent landscape clearer and fairer for businesses.
FRAND: FRAND stands for fair, reasonable, and non-discriminatory, a key concept in the context of SEPs. To contribute a patent to a technical standard, an SEP holder voluntarily commits to license their SEP on FRAND terms to enable the development of standardized technologies. Unfortunately, due to unclear and fragmented definitions of FRAND, some large SEP holders have tactfully manipulated the term’s meaning to force licensees to agree to non-FRAND or supra-FRAND terms. Others simply ignore their FRAND commitment altogether. This practice is disproportionately harmful to SMEs, which lack the resources and experience that large multinational corporations have when addressing SEP licensing issues.
Hold-up: Hold-up is the practice of some opportunistic SEP holders refusing, either explicitly or effectively, to offer FRAND license terms to potential licensees to either lock a party out of using a standard or to obtain supra-FRAND licensing terms.
Injunction: An injunction is a court order that prevents a party from starting or continuing actions that infringe on another’s legal rights. Injunctions can be used to stop the use of a patent in products without a license, as injunctions halt the manufacturing or sale of devices using patented technology. While injunctions are a valid legal tool, in the SEP context, they can be used coercively. SEP holders might use them to pressure licensees into accepting unfavorable terms, exploiting the fact that once a standard is successful, industry-wide adoption makes access to SEPs necessary. This practice complicates negotiations, especially since the industry practice is to adopt the standards first and negotiate licenses later, expecting them to be on FRAND terms. This can lead to abuses, where injunctions become a tool to extort supra-FRAND licensing terms. For manufacturers, especially small manufacturers that often rely on only one product, injunctions have severe consequences. Additionally, litigation costs can be extremely burdensome for smaller businesses.
Internet of Things (IoT): IoT describes the network of physical objects (things) that are connected devices. Things that were once not associated with connectivity, like thermostats, toasters, fridges, cars, or home security systems, can now also connect to the internet. To go online, those devices often use patented standards, making it essential for the device manufacturers to acquire a licence to the SEP they need.
Licensee willingness/unwillingness: A willing licensee is a company that has taken reasonable steps to attain a SEP license that is consistent with its own legal rights and due diligence. This includes the ability to challenge an SEP’s validity, essentiality, or whether the offered terms are truly FRAND. An unwilling licensee uses the patented technology but refuses to license the SEP or pay due royalties, even if reasonable FRAND terms are set by the court. Defining a willing licensee is important as it impacts whether SEP holders can rely on an injunction; injunctions can only be issued against unwilling licensors.
Non-practicing entities: A non-practicing entity (NPE), also sometimes referred to as a patent assertion entity (PAE), is an organization (e.g., a company or university) that obtains the rights to one or more patents (through research or acquisition) and then asserts them to profit from licensing or litigation (lawsuits) rather than generating revenue by producing its own goods or services. NPEs engaging in abusive licensing behavior are sometimes referred to as “patent trolls.”
Patent: A patent is a type of intellectual property protection that gives its owner the legal right to exclude others, for a limited period of time, from commercially making, using, distributing, importing, or selling their protected invention, unless their consent is otherwise given. Licensing is the practice of allowing others (often called licensees) to use the invention under certain conditions and after paying a certain fee (also known as royalty).
Patent holder/licensor: When a patent application is granted by a government’s patent office, the patent is owned by its applicant until the patent expires. The term ‘patent holder’ is used because patents can be transferred or sold to others. Patent holders that provide a license to their patented technology are also called licensors. Licensees are the individuals or entities that hold licenses from patent holders in order to use the technology in their products.
Patent pools: Patent pools are formed when two or more patent owners agree to license their patents to third parties. The patent pools act as an agent of the patent owner, making it easier for businesses to access the technology they need. Patent pools are particularly useful in technologies requiring multiple complementary patents (such as those in SEPs) to deliver efficient solutions. If a pool operates in an abusive manner, the combined power can exacerbate the negative impact of such abuse. This is why there are specific rules under competition laws to oversee patent pools.
Portfolio licensing: In some cases, SEP holders that own several different SEPs group them together in a portfolio – a collection of patents. A portfolio licence is a licence to all the patents that are part of such a portfolio. While in some cases, parties can mutually and voluntarily agree to a portfolio license, a SEP holder that has made a FRAND commitment cannot require licensees to take or grant licenses to other patents not essential to the standard, invalid, unenforceable, and/or not infringed.
Royalty stacking: The result of SEP royalties individually set by each SEP holder adding up to prohibitively high levels (i.e., in excess of the value of creating/building the product) for innovators using standards that need FRAND licenses.
Smallest saleable patent practicing unit (SSPPU): A widely-used and leading SEP pricing methodology that bases SEP values around the smallest component of claimed invention that implements the standard, which is the most logical patent-practicing sub-component of an end product. The SSPPU method does not include value unrelated to the SEP, avoiding harmful royalty stacking.
Standard-essential patent (SEP): A standard-essential patent (SEP) is a patent that is contributed to technical standard to enable the interoperability and efficiency of standardized innovation. If a developer wants to use the standard, they have to take a license from the relevant SEP holder.
Standard-essential patent (SEP) licensee: Manufacturers and other businesses that use standardized technology need to license the patented elements of that technology. These businesses are generally called SEP licensees.
Standard-setting organization (SSO): A standard-setting organization (SSO), standards organization, standards development organization (SDO), or standards body is the organization where patent holders work together to develop a standard and eventually declare their patent as ‘essential’ to that standard. Some prominent standard-setting organizations are the International Organization for Standardization (ISO), International Telecommunications Union (ITU), Institute of Electrical and Electronics Engineers (IEEE), the European Telecommunications Standards Institute (ETSI), and Society of Automotive Engineers (SAE) International.
Supra-FRAND – Supra-FRAND describes SEP licensing demands and terms that do not adhere to the SEP licensor’s/holder’s voluntarily FRAND commitment. Demands for supra-FRAND SEP licensing terms facilitate holdup and often represent anticompetitive behavior on the part of the SEP licensor/holder.
Technical standard: A technical standard is a document established through a consensus process that provides for common and repeated use, rules, guidelines, or characteristics for activities or their results. For example, standards are developed to cover technology interoperability protocols. If you are making a connected device, you often use standardized technologies (often referred to simply as “standards” but should not be confused with quality and safety standards) to enable it to interact with other devices. Technical standards create standardized technologies, which are the version of a technology that an industry agrees to use. Standardized technologies are everywhere. Some standards, such as Bluetooth, include patents that manufacturers can use for free. Others include patented technologies that manufacturers must license for a fee (royalties). The only way to make a product that includes a standardized technology is to license the patents essential to that standard – unless it is free, companies need to pay the license fee. What complicates that process is that a single standardized technology may include hundreds or even thousands of patented parts.