European Commission factsheet on Standard Essential Patents, 2018
More than 23,500 patents have been declared essential to the GSM and the 3G [standards]…The economic stakes are high. The royalty income for 2G, 3G and 4G standards is approx. €18bn per year.
1. What are SEPs? There are many different products sold throughout the world which comply with different common technical standards to ensure that products from different suppliers can work together; eg mobile phones complying with standards set by ETSI. The increasing connectivity of smart devices on 5G networks will make compliance with these standards even more important. Companies who participate in setting these technical standards must usually (1) declare any relevant patents, and (2) license those Standard Essential Patents (SEPs) on terms which are Fair, Reasonable and Non-Discriminatory (FRAND).
2. Who licenses SEPs? The Standard Setting Organisations (SSOs) do not set the licence terms. Nor is there an accepted formula for setting the royalty rate. Owners and implementers must negotiate their own licence terms, but those terms must be FRAND. There are often thousands of relevant SEPs owned by many different owners. Total royalties can add significantly to the cost of a product.
3. Governments recognise that common technical standards are necessary, and patents stimulate innovation, but they also want to ensure, through competition/anti-trust laws and bodies, that the system operates fairly and competitively and the cost of access to the technology is not prohibitive.
4. Who resolves licensing disputes? Most technical standards do not specify how to resolve disputes. Standards, products and licences are usually global. Patents are national legal rights and have to be enforced nationally. The outcome of a national patent dispute only has national effect.
5. Many companies negotiate and agree licences without litigation, especially where they are both manufacturers and both have large portfolios of SEPs. Many of the disputes arise where the SEP owner is not a manufacturer or manufactures components such as chips, but will only license the end product.
6. One of the major areas of dispute is whether the royalty should apply to the value of the component or the finished product and whether the contribution of the patent to the use of the product should be taken into account. This issue is becoming increasingly important as all types of devices and services are being connected for data and signal transmission.
7. Neither the SSOs or the courts can force the SEP owner to sign a licence, nor can they force an implementer to sign a licence. So, if the parties cannot agree licence terms, the SEP owner must enforce its SEPs in the courts and seek an injunction to pressure the implementer to take a licence. Patent cases are expensive, and it is simply not practical to enforce all a company’s SEPs against all implementers in all countries.
8. Could the implementer be injuncted? In Europe, the courts will grant injunctions in relation to SEPs if the SEP owner offers FRAND licence terms and those terms are not accepted. To date the courts have focused on the terms offered by the SEP owner; whether the terms offered by the implementer/licensee are FRAND seems to be irrelevant.
9. Role of courts: Many cases involving SEPs are brought in Germany where the system is generally friendlier to patent owners. The UK court has taken a novel approach by granting injunctions to stop infringement of the UK SEPs unless the implementer signs a global licence on the entire worldwide portfolio of the owner’s SEPs. The UK court is willing to set the terms of the global FRAND licence and has become a key centre for global SEP licensing disputes.
10. Anti-competition arguments: Sometimes the implementer will complain to the court or the competition authorities that the SEP owner’s behaviour is an abuse of a dominant position and anti-competitive. The European Commission has issued Guidance and is monitoring activity. To date, the Commission has not taken action publicly against SEP owners although they have received complaints about SEP owners’ behaviour.
This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.