Not Fair, Not Reasonable: The Status Quo of SEP Negotiations
Ever been refused service at a café or restaurant, just because the owner didn’t like the look of you, or forced to buy products you didn’t need, because the product you did want was only available as part of a package deal?
The answer is probably ‘no’. These kinds of behaviours in a consumer context would be deemed unfair, unreasonable and therefore unacceptable.
But standardised connectivity patent holders promise open access to these technologies on fair terms. Yet, they renege on their promise, which had to be made because of the substantial market power these patent holders possess, enabling them to charge prohibitive rates or exclude innovative products from the market.
Europe urgently needs a regulation to redress the imbalance in the the standardised connectivity technologies markets – or else European businesses and consumers could miss out on the transformative potential of the IoT.
Discover below some of the unfair practices that licensees of standard essential patents can often come up against:
In the past few years, SEPs have been increasingly asserted before the courts against companies that use the protected technology in their products. In many of these cases, the SEP owners have sought injunctive relief against the producing companies. In the case of standard essential technologies, this is often disproportionate, because generally the injunction does not seek to uphold the patent holder’s entitlement to market products that contain its technologies. Explore this issue in more detail in our dedicated position paper.
The use of injunction by SEP patent holders is not used to protect innovation, but rather to maximise the financial benefit of the patent holder.
Harms to Innovators and Consumers
The misuse of injunctions by SEP owners can have a number of negative consequences for innovators and consumers:
- Increased costs: Licensees may be forced to pay higher licensing fees, which can drive up the cost of products for consumers.
- Reduced competition: The threat of injunctions can stifle competition, as companies may be hesitant to enter markets where they could be sued by SEP owners.
- Less innovation: The misuse of injunctions can also discourage innovation, as companies may be less likely to develop new technologies if they fear being sued by SEP owners.
During the early development of the digital cellular telephony market, SEP holders established licenses with manufacturers of all types of equipment when requested. Manufacturers in all parts of the product supply chain were able to obtain SEP licenses. These licensees were then able to offer licensed products, whether they were complete end-use products or intermediate products, to their customers.
Nowadays, however, SEP holders are increasingly refusing to license to manufacturers who aren’t end-product manufacturers. They argue that the value of SEPs is demonstrated in their use in the final product, and therefore this is where the royalty should be collected. However, the main driver for this change appears to be the belief of some SEP holders that they can extract higher royalty payments from the end-product manufacturer than from the value chain. You can explore this topic in more detail in our dedicated position paper.
Why do SEP owners engage in refusal to license?
The principal reason for SEP patent holders’ refusal to license is to extract higher royalty payments from licensees. By making it difficult for upstream manufacturers to gain licenses for standard essential technologies, SEP owners can demand higher licensing fees from end-product manufacturers, knowing that their patents are essential for the product to enter the market.
Negotiations to license standard essential technologies are characterised by an information asymmetry that SEP holders can exploit to their own advantage. SEP holders possess information potential licensees need to assess:
- whether a license is needed from a technical perspective; and
- whether the terms offered comply with the SEP holder’s FRAND obligation.
It includes, among other things, information about the size and strength of their portfolio, the number of other licensees for the same standard and/or portfolio, and the terms and conditions of those other licenses. Explore the practice of NDAs in more detail in our dedicated position paper.
But rather than openly sharing that information with potential licensees, some patent holders routinely impose excessive secrecy obligations to obscure information about their portfolio strength and licensing practices, requiring potential licensees to enter into restrictive nondisclosure agreements (NDAs) to access basic information necessary to facilitate FRAND licensing.
SEP holders have a commitment to license their patents under fair, reasonable, and non-discriminatory (FRAND) terms to ensure everyone can access and use these essential technologies. To ensure that they live up to the non-discriminatory terms, transparency in price negotiations is critical. Monetising SEP holders should not effectively force potential licensees to accept secrecy as a condition of obtaining a license on FRAND terms.
Instead of employing coercive NDAs, SEP holders should be open and transparent about:
- what patents are being licensed,
- their basis for representing the patents as valid SEPs,
- the royalty rates sought, and
- whether other licensees have entered into licenses for the same portfolio.
SEP owners and downstream innovators often choose to negotiate licences on a global basis. But an SEP owner should not be permitted to insist only on a global licence for its entire SEP portfolio. A potential licensee has the right not only to license the technology it uses from an SEP holder, but the right not to license other patents in the SEP holder’s portfolio that are not needed. Coercive global licensing practices dilute that right.
However, if a licence for a needed SEP is conditioned upon agreeing to licensing the rest of the SEP holder’s portfolio on a global basis, the licensee may find it necessary to act against its self-interest and pay for technology rights it does not need or would otherwise challenge. For more on this topic, see our position paper.
Coercive tactics to force licensees into global SEP portfolio licences dilute the rights of licensees, undermine the ability to test patent applicability and quality, tread upon national and international interests in enforcing intellectual property laws, and harm the production and dissemination of standardised technologies to the detriment of consumers.
Such practices are inconsistent with FRAND obligations and general principles of patent and antitrust law for a number of reasons:
- First, they undermine a licensee’s right to pay for only valid and enforceable patents that it uses in the countries in which it uses them.
- Second, they neutralise the SEP holder’s burdens of proof for enforcing a patent and effectively eliminate the ability of a licensee to challenge the legal basis of the patent holder’s other SEPs, including for lack of essentiality, invalidity, and non-infringement.
- Third, they impinge on the rights of national and regional jurisdictions to patrol their own intellectual property environments and discourage innovation through an abuse of jurisdictional limitations and international norms.
- Finally, the use of injunctions to induce global SEP portfolio licences is disproportionate to harm caused by infringement of a patent within a given jurisdiction.
Over-declaration is when patents are declared as essential to a standard but are in fact “ordinary” patents, the claimed innovation is not part of the actual technological specification of the standard.
It’s a very common practice because so-called ‘blanket declarations’ are currently allowed without necessity for sufficient detail, and the lack of transparency in the SEP licensing ecosystem enables players to force businesses take licenses for portfolios where any number of patents are not in fact essential.
The over-declaration of patents as essential to a standard has been a growing problem for many years as the number of patents declared has increased. The over-declaration of essentiality can lead to broader harms, such as injunctions, unreasonable licensing offers, or unavailability of licenses.
Over-declaration makes it harder for companies to know which patents are essential, and which are not. It erodes trust in the system overall as companies attempt to inflate the value of their patent portfolios. It makes the system increasingly cumbersome for companies to navigate and costs hundreds of thousands of euros and thousands of hours in resources to understand the SEP landscape for just a single standard.
Essentiality assessments from an independent, highly qualified agency such as a patent office would be useful to ensure that SEP holders’ claims are valid and to determine reasonable rates in licensing negotiations.
