We understand that patent and intellectual property (IP) law can be difficult, confusing, and – dare we say it – a bit dull. However, it is crucial that companies increase their understanding of these issues because IP is the lifeblood of tech businesses – especially for small companies. It enables companies to protect their inventions and allows innovators to build on the ideas of others.
Several major court cases and renewed interest from governments in the European Union, United Kingdom, and the United States means that IP and the impact it has on businesses’ ability to innovate is high on the agenda. We want to equip you with the tools you need to better understand the impact of these cases and legislative proposals on your business. In this blog, we will clarify some of the most-used terms you will encounter in the debate around IP and standard-essential patents.
The purpose of this article is not to define terms or offer legal definitions of them. Rather, we aim to raise awareness and understanding of an area of IP increasingly impacting innovators across the internet of things: standard-essential patents (SEPs). More exact definitions of what could reasonably be expected from a licensee and a licensor are set out in the CEN-CENELEC CWA 95000 best practices document that ACT | The App Association led in developing.
Patents and standards
Patent: A patent is a type of intellectual property that gives its owner the legal right to exclude others from making, using, or selling the owner’s invention for a limited time. Licensing means allowing others (often called licensees) to use the invention after paying a certain fee (also known as royalty).
Standard-essential patent (SEP): A standard-essential patent (SEP) is a patent that is volunteered to be part of a standard technology (e.g., 4G, 5G, or Wi-Fi). If another company wants to use that technology, they have to licence that patent (unless the SEP holder agrees to waive that requirement). In declaring their patent as ‘essential,’ patent-holders make their patent available to a larger market, basically trading their patent’s exclusivity for a higher volume of uptake and relying on fair, reasonable, and non-discriminatory (FRAND) terms to ensure a fair return on investment.
FRAND: FRAND is the acronym for fair, reasonable, and non-discriminatory. FRAND licensing terms are a key concept in the context of standard-essential patents (SEPs). SEP holders volunteer to make their SEPs accessible on FRAND terms to anyone who wants to use the standard. Anyone who uses or relies on standardised technologies (for example Wi-Fi) depends on the FRAND promise to guarantee they can get the licenses they need to use the standards. If SEP holders disregard their FRAND commitments, innovators are unable to use technical standards and are essentially locked out from using certain technologies that their competitors are using, putting them at a disadvantage. Because SEPs are necessary to the successful use of a standardised technology, SEP owners usually have much more leverage over their potential licensees than other patent owners, making negotiations harder for the licensee.
Patent holder/licensor: When a patent application is granted by a government’s patent office, the patent is from then on 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 licence to their patented technology are also called licensors. Licensees are the companies seeking or holding licences from patent holders in order to use the technology in their products.
SEP licensee: Manufacturers and other businesses that use standardised technology will need to license the patented elements of that technology. These businesses are generally called SEP (standard-essential patent) licensees.
Non-practising entities: A non-practising entity (NPE), also sometimes referred to as a patent assertion entity (PAE), is an organisation (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 off of licensing or litigation (lawsuits), rather than generating revenue by producing its own goods or services. Non-practising entities engaging in abusive licencing behaviour are sometimes referred to as ‘patent trolls’. While in most cases the practices of these patent trolls are arguably legal, their often overly-aggressive negotiation tactics and unreasonable licencing terms are issues that policymakers have and continue to address. Abusive behaviour in the context of SEPs is particularly concerning because it can easily lock willing parties out from using open standards that contain SEPs.
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. So if you are making a connected device, you often use standardised 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 standardised technologies, which are the version of a technology that an industry agrees to use. Standardised technologies are everywhere and include things like Bluetooth, 4G, 5G, and Wi-Fi. Some standards, such as Bluetooth, include patents that manufacturers can use for free. Others, such as 4G and 5G, include patented technologies that manufacturers must license for a fee (royalties). The only way to make a product that includes a standardised 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 standardised technology may include hundreds, or even thousands, of patented parts.
Standard-setting organisation: A standard-setting organisation (SSO), standards organisation, or standards body is the organisation where patent-holders work together to develop a standard and eventually declare their patent as “essential” to that standard. The three officially recognised European standardisation organisations are the European Committee for Standardization (CEN), the European Committee for Electrotechnical Standardization (CENELEC), and the European Telecommunications Standards Institute (ETSI), but other stakeholders are involved in European standardisation as well, including national standardisation bodies (NSBs) of EU and EFTA countries.
Essentiality assessment: An essentiality assessment is the process of assessing whether a patent is essential to the functioning of a technical standard. Currently, mainly court cases perform these assessments. The fact that this determination is made late in the process (when there is already a court case) makes it hard for businesses to determine if the patents they are looking to licence are valid and in fact essential. In some cases, standard-setting organisations include guidance on what they consider as FRAND in their own patent policies, which provides clarity for both the SEP holders and the innovators looking to licence an SEP.
Legal terms
SEP abuse: Abuse of SEPs exists in many forms, but essentially boils down to breaking the agreement to make SEPs available on FRAND terms. A few of many examples:
- Selective licensing: When SEP holding companies use their power over innovators seeking to license an SEP, they can selectively pick and choose who to license to (rather than licensing to all), based on who is willing to accept the conditions they set. Selective patent licensing can effectively eliminate competition. However, FRAND terms oblige SEP holders to licence it to any willing licensee because there is no alternative available to using this technology.
- Use-based licensing: A pricing methodology that bases the royalty on real or hypothetical end-uses and includes value unrelated to the patent. This would make a chip that is used in a car more expensive to license than the same chip if it’s used in a low-cost device. While the SEP holder should receive compensation for the value of their invention, the innovator should receive compensation as well. An end-use pricing approach does not respect the value that is created by the innovator. SEPs should be value based on their own technical merits and scope, not based on downstream uses or market success of the product.
Injunction: An injunction is an official court order that restrains a party from beginning or continuing an action threatening or invading the legal right of another. In the context of SEPs, an injunction is usually granted to stop the use of an SEP in a product infringing on a patent by virtue of using a standard it is essential to. Simply put, an injunction halts the manufacturing or sale of the device that uses the patented technology. Ideally, SEP holders would only seek injunctions in rare circumstances because the voluntary FRAND commitment represents a commitment to provide a license to any licensee. However, SEP holders sometimes use injunctions to force licensees to the negotiation table, taking away standards users’ negotiating power as their production comes to a halt. For manufacturers, especially small manufacturers that often rely on only one product, injunctions have severe consequences.
Antitrust Law: Antitrust laws regulate competitive business conduct. These laws are generally intended to promote competition between different market players and to prevent abusive monopolies. Examples include laws that prohibit anti-competitive agreements between two or more independent market operators or that address abusive behaviour by companies holding a dominant position on any given market. In the context of SEPs, abuse of the FRAND construct can be anti-competitive, as it locks innovators out from competing if they are unable to use technical standards.
Licensee Willingness/Unwillingness: A willing licensee is a company that has taken reasonable steps to attain a SEP license, consistent with their own legal rights and due diligence. For example, potential licensees of SEPs are free to challenge the validity, essentiality, or infringement of SEPs – that does not automatically make them an unwilling licensee. An unwilling licensee is a term generally determined by the courts but implies that the company has indicated that while it’s using the technology, it is not looking to license the SEP or pay the royalties associated with it. It can also be the case that the court has determined ‘reasonable’ (FRAND) licensing terms (including price), but that the licensee is not willing to comply with this verdict. This could result in a ban to sell the product in the jurisdiction of that court.
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, SEPs should not be withheld based on disagreements on other patents within a portfolio. Moreover, under no circumstance should innovators be forced to take other licences that are part of a portfolio because they are looking to license an SEP that is part of this portfolio. SEPs are individual licences to a technology and should be available to license based on the innovators needs.
Patent pools: Patent pools are agreements between two or more patent owners to license one or more of their patents to one another or to third parties. Often, patent pools are associated with complex technologies that require complementary patents in order to provide efficient technical solutions. While patent pools are meant to help innovators acquire licences for their technologies, these pools can also amplify SEP abuse. Simply said, if the patent pool acts abusively, the concentration of power within the pool will make the effect of that SEP abuse much worse.
Technology and data terms you might encounter
Connected devices & IoT: 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. Internet of things (IoT) describes the network of physical objects (things) like 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, such as Wi-Fi, 4G, 5G, or others, making it essential for the device manufacturers to acquire a licence to the SEP they need.
Big data: Big data is the science of analysing and extracting insights from huge data sets, too large to be dealt with using traditional software. The range of increasingly large and complex sets of data that companies collect are probably the most known examples of big data, such as the data from ‘smart factories’ (factories that are connected to the internet) and apps that can also be used to unlock new efficiencies that are beneficial to business. The more valuable and truthful data is collected over time, the better the insights.
Digitalisation versus digitisation: Digitalisation is the use of digital technologies and data to change how work gets done, transform how companies engage with customers, and create new digital revenue streams. Digitalisation is often confused with digitisation, which is the process of converting analogue data such as documents on paper into digital data.
Fourth Industrial Revolution: The Fourth Industrial Revolution, often shortened to 4iR, represents the next step forward in manufacturing that will leverage efficiencies offered by technologies such as AI, robotics, internet of things, and real-time big data analytics. The key to this is communication. Internet of things is enabling machines to share more data and to be monitored and controlled by software, allowing businesses to take advantage of technologies such as AI, automation, data processing in the cloud, and big data. These advantages enable manufacturers to implement smart factories, which can be more efficient, flexible, and profitable.
Smart Factories: Smart factories are highly digitised, with machines connected by the internet of things. This allows large amounts of data to be collected and analysed, enabling managers to see the status of their machines, their condition, and exactly how work is flowing through the factory. This gives the business the chance for continuous optimisation and flexibility. Some businesses even link their online retail to the factory’s IoT, so the workflow is planned for the moment an order is made.