SEPs (Standard Essential Patents) - The Status Quo
“There is a misconception—a myth, that the innovation or idea behind the technology becomes more valuable once it has been declared to be standard essential. Such an understanding fundamentally misunderstands the role of Standard Development Organizations and the purpose of Standard Essential Patents.” - Matteo Sabattini, Director of IP Policy for Ericsson
Organizations and research institutes commit a considerable amount of time and energy in the research and development of novel technology and protect the technology as a standard-essential patent (SEPs)—patents that cover industry standards. It is impossible to manufacture standard-adaptive products such as smartphones or tablets without using technologies covered by SEPs. Standard Essential Patents (SEPs) are patents that are destined for the enactment of standardized technology. Standard Development Organizations (SDOs) exist as an apparatus for industry innovators to work together to identify and select the best and most promising innovations that will become the root for the entire industry to build upon for forthcoming years. Those contributing patented technologies to the development of a standard are asked to provide a FRAND (which stands for Fair, Reasonable and Non-Discriminatory) assurance, predominantly committing to providing access to patents that are or may become essential to the implementation of the standard. FRAND principles are fulfilled by SEP holders while determining the license rate under which the SEP holder issues licenses. The SEP license rate should be reasonable means it should not be too high, license rate should not be anti-competitive and should be non-discriminatory means the rate of license should be the same for all licensee organizations.
The bar graph represents the number of SEPs acquired by different companies among different technology domains. Qualcomm being a member of many SSOs regarding telecommunication standards, is leading the race for a number of SEPs. Qualcomm with 1330 declared 5G patent families is also a leading US based firm in having most of the telecommunications based SEPs. Obviously, having the advantage over other companies, Qualcomm has most disputes with its competitors for not obeying FRAND terms.
The bar graph illustrates the distribution of SEPs among different standards. Telecommunications, digital communications, and electromechanical are prominent ones. Standards have been evolving for a long period. For every new standard, different companies become part of SSOs and contribute to drafting standards which results in an increasing number of conflicts between different companies due to practices such as patent holdup and monopoly in the technology markets.
Top SSOs (Standards Setting Organizations)
The bar graph shows the number of patents declared as SEPs by various SSOs around the globe. It can be inferred without a second thought that the European Telecommunications Standards Institute has a clear majority without among other SSOs. ETSI is responsible for drafting various Telecommunication Standards including LTE, GPRS and 5G etc. As telecommunications standards are evolving day by day and world’s leading telecommunications companies like Qualcomm, Ericsson, Broadcom and many more, are a part of ETSI because of which it has outnumbered other SSOs with a large margin on having maximum no. of SEPs. With greater no of SEPs, a greater responsibility also comes in regulating SEPs for a fair trade to abolish monopoly in the market, for which ETSI established Intellectual Property Rights (IPR) policy which regulates FRAND terms for licensing SEPs.
The declaration of patents as SEPs are mostly the voluntary contribution by the patent owner. SEP holders like Qualcomm, Ericsson, and Huawei make large portions of their revenues by developing technologies that form parts of global standards which are then licensed to various market players. In the United States, federal district courts have the disposition to grant a ruling to put a full stop to patent infringement when the balance of traditional equitable factors including a consideration of the public interest bends in favor of granting injunctive relief. Let’s look at some landmark cases which marked their happening in the history of SEP and unfolded the breach of trust.
1. Microsoft Corp. vs. Motorola Inc. (July 2015)
Microsoft alleged Motorola for breaching the Reasonable and Non-discriminatory (RAND) principles and filed a case against it in the district court of the Western District of Washington. The district court found evidence of breachment for RAND obligation and awarded 14 million dollars to Microsoft. According to the SSOs, SEP holders cannot refuse to license their SEPs to an implementer who agrees to pay at the RAND rate. The court acknowledged that patent damages law can serve as guidance in contract cases, the court found that the determination of a RAND rate in a breach-of-contract action requires flexibility and need not strictly follow patent damages law. This case illustrates how courts are viewing the licensing of standard essential patents, enforcing RAND commitments, and assessing damages for breach of those commitments.
Result/Outcome: The district court of the Western District of Washington conducted a bench trial to determine a RAND rate and range for Motorola’s patents. The case then proceeded to a jury trial on the breach of contract claim, and the jury returned a verdict for Microsoft in the amount of $14.52 million. The district court denied Motorola’s motions for judgment as a matter of law.
2. HTC vs. Ericsson (April 2017)
Standard Setting Organizations such as the European Telecommunications Standards Institute (ETSI) decide cellular standards, for example, 2G, 3G, and 4G standards. Both HTC and Ericsson have SEPs related to 2G, 3G, and 4G standards and license their SEPs. HTC and Ericsson had various cross-license agreements on their SEPs in 2003, 2008, and 2014 and their last agreement terminated in 2016 after which both parties were struggling to reach a mutually beneficial agreement. Ericsson offered a license at a rate of $2.50 per 4G device which HTC rejected and counter-offered $0.10 per 4G device. Later Ericsson offered a license at 1% of the net price of HTC’s end product device with a $1 floor and a $4 cap which remains open. After this, HTC filed suit against Ericsson in the United States Court Of Appeals for the Fifth Circuit, alleging Ericsson for breaching FRAND commitment to license its SEPs on FRAND terms and for which a jury trial was held and HTC failed to prove the allegations because of the evidence came out to be in Ericsson’s favor.
Result/Outcome: HTC argued that Ericsson’s offers of license are discriminatory in nature as it offers licenses based on licensees such as Apple, Samsung, Huawei, LG, TCL, and ZTE. Judge Gilstrap found Ericsson uses its comparable licenses as a reliable method of establishing rates that are consistent with its FRAND commitment. The Judge also found that Ericsson’s other licenses have running royalty terms which are similar to the rates Ericsson offered to HTC. Hence, the judge declared that “Ericsson complied with its FRAND assurance to HTC, as set forth in its IPR licensing declarations to ETSI and the ETSI IPR policy”.
3) Apple vs. Qualcomm (December 2018)
Apple alleged Qualcomm for its monopolistic nature of issuing licenses as “No license, No chips” and fought over licensing terms and pricing. Apple also has an objection to Qualcomm's pricing scheme in which it uses the total sales price of the entire device in order to figure out what to charge instead of the selling price of the modem chips. Apple uses modem chips or licenses from either Qualcomm or Intel. On considering the fact about 5G technology, Apple believes more in Qualcomm than in Intel and thus agreed to purchase licenses from Qualcomm.
Result/Outcome: The case is centered on the royalties that Qualcomm charged to Original Equipment Manufacturers (OEMs) for its Standard Essential Patents (SEPs). Both the district court and the FTC found that Qualcomm had deployed a series of tactics (rebates, refusals to deal, etc) that enabled it to circumvent its FRAND pledges.
4) Caltech vs. Apple Inc. and Broadcom (January 2020)
Caltech claimed that its patented technology was widely recognized by experts in the communication industry and was also adopted in 802.11 Wi-Fi standards, particularly 802.11n and 802.11ac. In lieu of this, Caltech filed a suit against Broadcom and Apple Inc. in the Central District Court of California where a jury found that both Broadcom (who supplied Wi-Fi chips) and Apple Inc. (who sold products with the Broadcom Wi-Fi chips) infringed on all five claims asserted by Caltech SEPs. The jury found that neither Broadcom nor Apple Inc. had willfully infringed any of the asserted claims and awarded Caltech with the royalty of $1.1B, which is the sum a lot more than in response to infringement than what normally is paid on considering standard set by the RAND principles.
Result/Outcome: The Parties filed post-trial motions in which both Broadcom and Apple Inc. are asking the trial court to enter judgment in their favor and overturn the jury verdict. The post-trial filings also include Caltech’s request for a permanent injunction.
5) Motorola Mobility LLC and Lenovo vs. InterDigital (April 2020)
Both Lenovo and Motorola Mobility filed a complaint against InterDigital in the District of Delaware, alleging InterDigital for violating U.S. antitrust law (“Sherman Antitrust Act” of 1890). InterDigital holds 3G and 4G standard essential patents (SEPs). The complaint alleges InterDigital for refusing to license standard essential patents on FRAND terms and demanding excessive and unreasonable royalties from the complainant. Both Lenovo and Motorola Mobility are the leading providers of wireless devices such as tablets, laptops, and smartphones that rely on technologies related to 3G and 4G cellular standards developed by the Third Generation Partnership Project (3GPP) and adopted by the European Telecommunications Standards Institute (ETSI). This case illustrates the assertion of action against InterDigital related to Restraint of Trade in violation of Section 1 of the Sherman Act, Monopolization in violation of Section 2 of the Sherman Act, and Breach of Contract.
Result/Outcome: InterDigital sued Lenovo in the District of Delaware, alleging infringement by cellular-enabled Motorola and Lenovo devices practicing certain standards (e.g., HSUPA, LTE, and WCDMA) of eight US wireless communications patents. Lenovo has challenged six of the patents in an Alice motion that remains pending before District Judge Leonard P. Stark.
Patents are declared as Standard Essential Patents (SEPs) by the Standard Setting Organizations (SSOs) in order to constrain the acts such as anti-competition, demands of the high license fee and royalties, refusal of trade, and monopolization by the SEPs holders. There are no fixed terms that are considered by the SSOs to declare a particular patent as SEP because anything which we consider as standard is itself in the research stage or is changing by amendments. In order to mitigate the unfair business FRAND terms have been drafted, which is a fair method and approach towards monopolization and malpractices which results in conflicts between multinational companies around the globe. A recent trend in the litigation and monetization of SEPs has proved the worth of SEPs between different technology markets and the author hopes that essential organizations will take optimal steps for the benefit of all.
Sandeep performs search and analysis of inventions, patents, and products to the attorneys and corporations in connection with matters related to Prior-art searches, Analytics, infringement and IP litigation. Sandeep has worked in patents domain for 3 years and has worked extensively on providing patent strategy solutions to corporations, startups and individual inventors.