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Standard essential patents

Standard essential patents exist at the junction of patent and competition law. Patents are all about exclusivity, while standards, by encouraging everyone in a particular sector to do things the same way, are inclusive by design. Making the two work together, promoting standardisation while protecting patent rights, is not an easy job.

In this article, our intellectual property solicitors explain what a standard is and the challenges that licensees and licensors face when licensing standard essential patents.

How does a regular patent become a standard essential patent?

Patent law doesn’t recognise a separate class of standard essential patents – as far as it is concerned, patents are all the same. It’s how the patent and the technology it protects is used, and its impact on others in the industry, that makes it a standard essential patent in practice.

Standards are promoted by standards setting organisations (SSOs), such as the European Telecommunications Standards Institute (ETSI), which are established by businesses in the relevant sector. They do a similar job to familiar public bodies such as the British Standards Institute or the International Standards Organisation. Companies pay many thousands of pounds a year for membership of an SSO, but the benefits of membership – including up-to-date information about the standards and the ability to contribute to their development – usually make the expenditure well worthwhile.

Members of an SSO co-operate to choose the optimum way to implement the technology. Where a standard requires the use of patented technology, the SSO insists that the patent be licensed to other members on fair, reasonable and non-discriminatory terms – referred to as FRAND terms. Working out what those terms should be is difficult, but perhaps even more difficult is identifying which patents are essential to a particular standard in the first place.

Examples of standard essential patents

Standard essential patents are encountered in many areas of technology. The European Commission is currently working on a regulation to reform patent law within the EU, including provisions designed to improve the licensing of standard essential patents, and identifies several areas where standard essential patents are important: 5G. WiFi, audio and video compression and decompression, data storage and exchange, photo formats, and home audio and video interoperability.

In each of these areas, there are likely to be many relevant patents. The 5G standard, for example, encompasses about 26,000 standard essential patent families (nearly 100,000 patents and applications) belonging to hundreds of patent holders.

How long does a standard essential patent last?

There are no special rules about how long standard essential patents last for: like other patents in Europe, including the UK, they can last for 20 years provided renewal fees are paid. How long a patent remains standard essential is another matter, though. The standard for which the patent was essential might be amended so the patented technology is no longer needed, or it might be abandoned. The basic patent will still last for up to 20 years.

Licensing and standard essential patents

Given that standard essential patents have to be used by anyone who wants to comply with the standard for which they are essential, at the heart of the matter is a licensing transaction. The patent owner has intellectual property that another party needs to use, and the legal instrument to grant the necessary permission and to impose appropriate conditions is a licence. But a licence of what, and at what royalty rate?

What are the challenges of licensing standard essential patents?

Licensing standard essential patents raises a number of issues that you don’t encounter in ordinary patent licensing transactions. Some of these arise from the sheer number of patents that might be involved.

Challenges for the Licensee

For the licensee, the challenge is dealing with a vast number of licences owned by multiple parties that may be needed to comply with a standard. Taking a licence of standard essential patents will often involve lengthy negotiations and, with numerous patents being involved, cumulative royalty rates.

Discovering too late that a licence is needed can be enough to make a business non-viable. Although FRAND rates should not be exorbitant – as we explain below, the principle is that the rate should prevent “hold-up”, where the licensee could even be prepared to pay an extortionate fee because they are committed to the standard – it is extremely expensive to challenge them.

If the licensee can take a single licence for a patent-owner’s whole portfolio of standard essential patents, avoiding need to take multiple licences, that will simplify the process and probably make it cheaper – although the package might contain many patents (on which the licensee will have to pay royalties) and even cover territories that are not actually needed.

FRAND terms should in theory make the licensing transaction much easier, but challenging the terms that are offered is a difficult and expensive undertaking.

Challenges for the Licensor

The challenge for the licensor – the owner of standard essential patents – is that they have to declare all their patents and applications that might be essential to complying with a standard, and usually to undertake to licence those essential patents on FRAND terms. Identifying all the patents that have to be declared is a big job in itself, and requires a high level of organisation to relate all the company’s patents and applications to a growing and changing collection of standards.

Setting terms for the licence that comply with the FRAND requirement is tricky in itself, and mistakes can be expensive. On the other hand, licensing should be a fairly profitable activity in itself (and if the patent owner didn’t want to expose their patents to licensing in this way, they could have worked to ensure that the standard was not based on their proprietary technology). Remembering that in the world of standard essential patents licensees are also frequently licensors, engaging with the process might lead them to devise their own inventions, which could lead to standard essential patents that can earn royalties

Standard essential patents and competition law

It has long been recognised that the way intellectual property rights, including patents, are exercised must be subject to competition rules. For example, exclusive patent licences entail a restriction of competition (because there can only be one exclusive licensee); and some draconian uses of intellectual property rights can amount to an abuse of the dominant position that owners of those rights often occupy.

Can standard essential patents be used to stifle competition?

Owning a patent that it is essential for other businesses – especially competitors – to use is a very powerful position to be in. Owners of standard essential patents could potentially engage in what is referred to as “hold-up”, using their very strong bargaining positions to extract excessive royalties from licensees who are locked in to the standards for which the patented technology is essential. Patents are, of course, inherently anti-competitive, with the trade-off that they encourage innovation: essential patents are stronger by orders of magnitude, with no additional redeeming virtues.

When a patent is infringed, the classic remedy, in addition to damages, is an injunction to stop the infringement and prevent it happening in the future. It’s well-established, though, that if the patent owner is in the market to sell licences it’s unlikely that the judge will grant an injunction: the owner is prepared to take a royalty, and the court will award financial compensation only. With a standard essential patent, the patent owner is invariably in the business of granting licences – so the court will often view an attempt to get an injunction as an abuse of dominant position, which competition law will prohibit.

What can be done to ensure that standard essential patents are used fairly?

As we mentioned earlier, the inherent anti-competitive nature of standard essential patents is mitigated by SSOs requiring their members to undertake to grant licences on FRAND terms. Usually the arrangement provides for adjudication of any disputes about the terms by a neutral third party. This removes the possibility of “hold-up” and ensure that the royalties, whatever they might turn out to be, are not excessive. If the owner of a standard essential patent refuses to grant a FRAND licence, it could amount to a breach of the contract between the owner and the SSO or its other members, and of competition rules.

Over-declaration

SSO members are required to declare patents that might be essential, but what is essential is often fluid. Standards will develop over time, and in due course will be abandoned, so what was an essential patent no longer is. Unless they are weeded out, this process leads inexorably to over-declarations.

There’s also an incentive to maximise your holding of standard essential patents: the more you have in your portfolio, the more royalties you will generally be able to charge.

All this means that there are many non-essential standard essential patents – estimates suggest that a majority of declared standard essential patents might in fact not be essential. As challenging the essentiality of a patent is costly (challenging a portfolio, of course, many times more expensive), and many different patents and owners might be involved, it is not a process to be undertaken lightly.

There is also the question, whether the patent is actually essential. It may, for example, claim exclusive rights over only an optional part of the standard. All the elements of at least one valid claim must map to a coherent portion of a standard that is actually practised. Determining essentiality requires a highly-skilled patent attorney with a high level of expertise in the technology in question.

The majority of affected businesses are afraid of infringement

Responses to the UK government’s consultation about standard essential patents revealed that being on the receiving end of an injunction was a concern for all the small and medium-sized businesses who replied and who had faced a dispute over a standard essential patent licence. Fear of being sued for infringement is understandable, and isn’t unique to standard essential patents: as technology gets more and more complex, and the patents protecting it harder and harder for a layperson to understand, this fear will become greater – the government’s aim has to be to keep it from stopping SMEs, and indeed larger business, from engaging in innovation.

Summary

There is no more complicated and controversial area in patent law at this time than standard essential patents. The length and complexity of the judgements coming out of the courts is testimony to this. Taking any case to court is likely to be extremely expensive, requiring highly specialised legal knowledge and experience. If you are working in a field where there are standards to comply with, and patents that you have to licence to be able to do so, come and talk to our patent experts.

About our expert

Lindsay Gledhill

Lindsay Gledhill

Intellectual Property Partner
Lindsay Gledhill is an Intellectual Property Partner at Harper James. She has specialised in intellectual property exploitation and dispute resolution since 1997. She trained and qualified in Cambridge’s top intellectual property firm during the 'dot com boom', then spent four years at top 50 firm, Walker Morris.


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