Fair, reasonable, and non-discriminatory terms (FRAND) are a voluntary licensing commitment that standards setting organizations request from the owner of a patent that is essential to implement a technical standard. In a world where technology thrives best when it is democratized by not just multiple large enterprises but also small and medium sized businesses, FRAND commitments promise to simplify, expedite and make more cost effective, the licensing process of important inventions. But alas, even as the philosophy behind FRAND is universally accepted to be beneficial for public-at-large, FRAND only continues to increase confusion and uncertainty. Rather than offering fair and reasonable access to key technology – FRAND commitments and the workings of standards setting organizations have often divided technology industry into haves and have-nots – the very situation FRAND seeks to avert. How did we get here? Let’s look at how the process to designate and monetize standard essential patents is wrought with gaps that undermine FRAND – and creates unfairness in the market:
1. Identification of SEP
In theory, the motivation behind FRAND is that standard setting organizations must request permission from patent owners to include technology described in their IP into a standard – so that in return for helping standardize and increase market for the patent owner’s technology, the patent owner agrees to license the patent on reasonable royalty terms. In an ideal world where patents are few and it is easy to identify what patents really are essential, SEPs would serve to harmonize the business interests of patent owners and the public interest of achieving economies of scale through standardization and interoperability. However, in the real world – where technology gets more complex at a breathtaking rate – and may be criss-crossed by hundreds and thousands of patents, standard setting organizations have fallen into a counter-productive SEP identification process that is inherently flawed from the start.
Most if not all standard setting committees are composed of representatives from individual technology companies whose first motivation is to ensure that their own technology becomes essential to the resulting standard. Once the standard is ready, each member company then submits a list of its own patent assets that they think are essential to the standard. The consolidated list can then be included in the standard as SEPs. The SEP process is a voluntary agreement between the standard setting organization and the patent owners, which suffers from major drawbacks.
First, there is no peer review or external due diligence on whether the submitted patents actually are essential to the standard - potentially aiding false advertising of the patent assets.
Second, there is no due diligence on whether there are other standard essential patents held by the member companies other than those they have submitted. Which means a member company can influence the standard to be formulated such that some of its patents are essential to the standard - but can circumvent the FRAND commitments by not declaring the patents as such.
Third, there is no due diligence on whether there are other standard essential patents held by companies that are not actively contributing to the standard. While such a wide ranging exercise would undoubtedly be expensive, it leaves standard complying companies in the dark about future threats of litigation, especially NPE litigation.
2. Differential Pricing
FRAND is based on noble intentions but does little to specify a yardstick on how reasonable and equitable royalties must be negotiated. It simply requires the patent owner to negotiate a reasonable royalty rate in good faith - leaving open the option of volume pricing. More often that not, small players in the market end up paying high per-use royalties which stifles innovation in SMEs. Further, patent owners are under little obligation to charge the same royalty rates from even all licensees of comparable size and can simply base a high asking price on another convenient prior instance of the high asking price. There seems to be no independent review from the standard setting committees on what should be the reasonable or maximum per-use royalty.
3. Product Bundling
FRAND commitments do not preclude the patent owner from negotiating royalties that are bundled with their own product offerings. As a famous example, Qualcomm would often ask a higher royalty rate if the licensee builds it's own standards-compliant chipsets but a lower royalty rate if the licensee purchases Qualcomm's own standards-compliant chipsets. Bundling of products is of course a prevalent and time proven strategy but when it comes to SEPs, it can severely hamper competition and breed antitrust issues.
4. Lack of Iterations for SEPs
Once a particular version of the standard has been formalized and released with the list of underlying SEPs, the list is usually updated only when the next version is released.
Further most lists of SEPs leave out in-process applications and indeed a number of such applications can qualify as SEPs if and when they are granted. There needs to be a parallel process which iteratively maintains track of declared applications as well as continuations, continuations-in-part and foreign family members of the declared SEPs so that complying industry players can obtain the appropriate license and also so that family members of SEPs are awarded the same FRAND treatment.
5. Sale of SEPs
Often, SEPs end up being sold to third parties and NPEs that are able to dilute or even skip altogether FRAND obligations associated with the SEPs.
As a recent example, Nokia sold some continuing applications of their SEPs to Acacia Research which subsequently were granted. While Nokia, had they still held the patents, may have considered the newly granted patents to be existing SEPs - Acacia could term them as fresh new SEPs and thus ask for higher royalties than Nokia would have been able to justify.
Standard setting organizations play no part in regulating sale of SEPs or family members of SEPs by the contributing patent owners. Indeed, an oversight by the strangers setting committees (or any other external stakeholders) on sale of one's patents will likely be seen as an overreach. However, a consensus on regulation or perhaps some form of automatic exit licensing will no doubt prove beneficial across the board for continuing companies.
Just like a patent is a quid pro quo contract with the government which provides the patent owner with the right to exclude others from making, using or selling an invention in lieu of disclosing the invention to the public and advancing the overall state of the art; SEPs should be identified, managed and monetized as a quid pro quo where wider licensing opportunities offset lower, equal and transparent royalties. A more fair and free market would naturally follow.