Standard Essential Patents: The Future of Intellectual Property Regulation on Stifling or Benefiting Innovation
Standard Essential Patents (“SEPs”) are a relatively new type of patent which protects intellectual property that is essential for creating and implementing standards in the technological field. These standards are referred to as a ‘technical standard’ or ‘technical interoperability standard’ and, as the interoperability name suggests, they are crucial for ensuring that different technologies are compatible and able to interact with each other (e.g. setting protocols for Wi-Fi networks which allows connections from any type of device, or ensuring USB ports work with USB cables from any manufacturer). In application, this allows different companies to focus independently on their specialist technological field which, upon implementing these standards, will then be able to work in collaboration with other technologies. However, as is procedure with all patents, patent owners may generate royalties from their patent’s licensing. In the instant case where SEPs are recognised as essential for technological development, the patent holder, who still maintains the exclusive right of whom to licence their invention to and on what terms, holds significant power within the technological market. This essay will investigate the current actions being taken by the government to balance this power and increase transparency in the “SEP ecosystem”, as well as the steps planned to support small and medium-sized enterprises (“SMEs”) and promote, rather than stifle, innovation.
Fair, Reasonable and Non-discriminatory Terms
Standard Setting Organisations (“SSOs”) or Standard Developing Organisations (“SDOs”) are self-governed industry associations responsible for issuing standards, with which all manufacturers must comply. Therefore, before any SEP is incorporated, the relevant SSO maintains the power to mandate that the patent holder give an undertaking to license their SEPs to any third party on fair, reasonable and non-discriminatory (“FRAND”) terms. This procedure is required to comply with European competition law, per Article 101 of the Treaty on the Functioning of the European Union (the “TFEU”) which prohibits agreements that may disrupt free competition and affect trade in an anti-competitive manner.
However, there is no current organisation responsible for informing firms about the identity of key patent holders and the price that is asked for their use. The main protection available to those seeking to license a SEP is simply these FRAND terms. This is arguably ineffective if the implementer is unaware of these principles and their remit, as often may be the case with SMEs. Issues may also arise, for example, when patent holders accept only national but not global licensing agreements, which becomes a significant barrier for businesses looking to expand internationally. The lack of any checking system to ensure patents are true SEPs leaves implementers easy victims to asymmetric information. The great level of uncertainty and lack of a working regulatory framework, although one has now been proposed, has been the root cause of many issues and disputes.
In one such case, Unwired Planet v Huawei, the Supreme Court held that an English court can “(a) enjoin infringement of a UK SEP where the infringer is willing to take a UK licence, but refuses to take a worldwide licence on ‘fair, reasonable and non-discriminatory’ terms, and (b) set the royalty rates and terms of such a licence.” It was established here that the FRAND undertaking could be enforced under contract law without recourse to competition law. This decision highlighted the nature of the patent owner’s undertaking as necessary for a balanced contractual relationship between the interests of both SEP holders and implementers, where the determination of a FRAND licence is entitled to be shaped by both the licensor and the licensee. However, the separation from competition law also allows for a distinction to be made between the Non-Discriminatory element of FRAND and what is described as the ‘hard-edged’ non-discrimination requirement in competition law. In contract law, the Supreme Court found that the ‘ND’ element of FRAND merely required the patent owner to offer a benchmark rate to all licensees that did not discriminate on “any idiosyncratic characteristics of the licensee.” This did not prevent SEP holders from offering lower rates if they wished to do so. In the Unwired Planet v Huawei case, it was found that Huawei was not entitled to the same (favourable) rate as given to Samsung and that patent holders could maintain what may be seen as a “most-favoured licensee”. In order to employ competition law, the Supreme Court maintained that there must be a finding of a harmful effect on the market as a result of price discrimination, which is a decidedly difficult thing to prove, considering that there is no general presumption that differential pricing is problematic.
While the FRAND obligation may be viewed as unavailing for companies that suffer this price discrimination, the main objective of the FRAND terms may still be seen as fulfilled in regards to preventing ‘hold-up’ behaviour. The danger of patent holders withholding access to their patented technology is the failed implementation of the relevant standard. Where there are no standards, there is no way for technology to interact, and such a restriction will have a significantly negative effect on the market. On the other hand, if patent owners are confined to such limited power over who they may distribute and sell licences to and at what price, there is little incentive for such patent technology to be made. There is also the perception that SEP owners will be less able to enforce their ownership rights at later stages. The Supreme Court considered that “if damages were the sole remedy for infringement, a SEP holder would be required to (arduously) litigate patent-by-patent, country-by-country”. Additionally, if implementers are aware of patent owners’ difficulties in this regard, there is a risk that they will intentionally delay or fail to agree to a licence, a practice known as ‘hold-out’. There is a crucial balance that must be made.
Overdeclaration
Another serious issue that is faced by the SEP ecosystem is the incentive for patent holders to declare their patent as an essential part of a set standard (though it may not be where conformity is essentially required) to gain access to the lucrative market and generate a great amount of royalties. Companies may spend time negotiating and paying for licences which are not as essential as they thought. As a result, the higher production cost is typically passed on to the consumer as a consumer burden.
To more efficiently licence SEPs, patent pools consisting of multiple SEP holders have been formed, allowing a potential implementer to negotiate with the pool instead of engaging in multiple time-consuming negotiations with individual SEP owners. However, there are also many ongoing issues due to lack of validation within these pools, as they too may include patents that are not essential for the implementation of a standard, which leads to the same problem of unnecessary greater costs burdening the consumer.
Forward-looking regulation
The UK has published its forward look for 2024 on newly developed initiatives to improve the SEP ecosystem. Particular focus has been given to supporting SMEs, who are generally more resource-constrained, in lessening the asymmetric information around “licensing, pricing, essentiality, and dispute resolution”. For this, the Intellectual Property Office (the “IPO”) is aiming to launch an online SEPs Resource Hub by May 2024, which will be dedicated to issuing information on patent pools and guidance to dispute resolution and court procedures involving the same. The IPO has further planned to employ an Industry Working Group to represent a range of stakeholders who will advise on the contents of the Resource Hub and will ensure a continuous effort is made to update the guidelines to address new technological developments.
The UK and the EU’s approach is largely similar when it comes to SEPs, recognising the importance of SEPs to global businesses and technologies, and the need to engage at an international level with other patent offices to move forward jointly. The European Commission, on the 27th of April 2023, published the first proposal for a regulation on standard essential patents. A regulatory framework such as this could help facilitate greater transparency for SEP licensing and bolster the FRAND criteria. The proposal has yet to be adopted, but is currently midway through the stages of adoption, having recently just held the committee vote which was in favour of the regulations. One of the key proposals raised is establishing a competence centre, extending the powers of the EU Intellectual Property Office (the “EUIPO”) so that they may set up a register of SEPs with which they may carry out essentiality checks and maintain a status quo for the FRAND terms. As part of increasing transparency, it is also proposed that there should be an electronic database containing detailed information on current SEPs and the criteria which make them essential, that can be accessed by registered users and academic institutions. However, it has been noted that the drive for cooperation and collaboration with national offices may be a laborious task, and the practical administration of this task may not be as timely as would be desired to keep up with the fast-paced technological world.
The shared end goal of both EU and UK policies is to improve “financial and legal predictability” and reduce the currently present high risk of litigation as discussed above. While the principles underpinning the licensing of SEPs have been described as “relatively easy to identify and endorse”, their application “remains much more complex and controversial”. Bearing in mind the importance of SEPs within the technological field for the development of all technology, as well as the emergence of major FRAND disputes in recent years, the need for better policies is evident. However, the rising “fervour with which courts, policymakers, and researchers are tackling these contemporary issues,” shows the emergence of serious discussion and deliberation on SEPs and FRAND terms which, perhaps, brings a more positive outlook on the kind of framework and policies that may arrive to improve the future situation.
Bibliography
Cases
Unwired Planet International Ltd v Huawei Technologies (UK) Co Ltd [2020] UKSC 37, [2018] EWCA Civ 2344, [2019] EWCA Civ 38
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