Standard Essential Patents & Their Significance

July 29, 2022
- Intellectual Property (IP)
- Standard Essential Patents (SEP)

What is a Standard Essential Patent?

A Standard Essential Patent or SEP is a patent that claims a technology required to comply with a technical standard. We are surrounded by standards in our daily lives- A4 sheets, USB, LTE, etc are all examples of standards. When an industry recognizes a component of a patent as essential, it becomes a SEP and this is the simplest standard essential patent definition. Below we elaborate on the standard essential patents meaning and their importance to the market and consumers.

Standards

Any understanding of a SEP requires knowledge of standards. The ISO/IEC Guide 2:2004 Standardization and related activities – General vocabulary, defines a standard as- a document, established by consensus and approved by a recognized body, that provides, for common and repeated use, rules, guidelines or characteristics for activities or their results, aimed at the achievement of the optimum degree of order in a given context.  

Standards are of two types:

De jure standards: Refers to standards that have been set by the Standard Setting Organisations or SSOs. SSOs are organisations entrusted with the task of developing and facilitating the standard-setting process.
De facto standards: The technology which becomes a standard due to its widespread application in the market is a de facto standard. It may or may not have been adopted by an SSO.

SEP v/s Regular Patents

SEPs are patents that protect a technology implied in a standard. All patents are not essential to a standard. Design patents for example are not SEP as businesses may create alternative designs that do not infringe on the patent. This is not possible in the case of SEPs one cannot ‘design around’ the technology. Patent holders are required to declare essential patents to SSOs, which then decide if the patent is truly ‘essential’. Another difference is that while patent rights are absolute in nature, SEPs are subject to regulations like FRAND.

SEPs are powerful patents that hold core technology that is mandatory for other businesses to follow. As a result, the SEP patent holders are able to earn significant royalties on their patents. The key nature of SEPs also means that they are the most litigated patents.

SEP And Frand

The almost monopolistic powers granted by a SEP may prompt companies to behave in anti-competitive ways. This may be done by manner of charging hefty and inconsistent royalty fees or setting up unreasonable licensing terms. In order to keep a check on such tendencies, the FRAND rules were set up.

FRAND stands for Fair, Reasonable, and Non-discriminatory. These are terms that a SEP holder must honour when licensing the SEP to other companies. The FRAND terms ensure:

The technology protected by the SEP is available to other manufacturers of standard-compliant products at reasonable fees.
The SEP holder receives fair royalties for his invention.

However, it must be noted that FRAND terms are neither obligatory in nature nor mandatory for the license holder to follow.

SEP Challenges

The linking of technology and interoperability offered by SEPs leads to issues and challenges in the highly competitive market. Some of these are discussed below:

Patent Holdup

Once a standard is set and accepted by the SSOs, all manufacturers are obligated to apply the technology to their products. It is not possible to ‘invent around’ the technology in the case of SEPs. Such a scenario bestows immense powers on the SEP holder and they might use it to prevent other businesses from manufacturing the product. While SSOs and FRAND terms exist to deal with such situations, they are mostly vague and not legally enforceable.

Royalty Stacking

If more than one SEP technology is used in the same product then it leads to more than one royalty being added. This high amount of aggregate royalty may at times exceed the sale price of the product.

Infringement laws

If a manufacturer does not adhere to the terms laid down by the SEP holder, then they face the risk of infringement. Patent holders use injunctive relief as a tool to force licensing terms and conditions on the license.

Calculating Royalty

Reaching an agreement on the method to calculate royalty is also a bone of contention when it comes to licensing. It is common practice for patent owners to calculate royalty based on the net end price of the product and not the value of the patented part.

Overdeclaration

This happens when a patent owner asserts that a standard is ‘essential’ when actually the product can be manufactured without infringing on the patent.

Patent Pools

Given the complex and tricky licensing scenario for SEPs, the concept of patent pools is gaining strength. A patent pool consists of two more SEP holders who agree to jointly cross-license technology to other businesses. They act as an effective mechanism for both the licensee and the patentee for quick resolution of licensing issues. Patent pools are an excellent solution for minimising litigation, increasing cost efficiencies, and lowering the transaction costs for the licensees.

Summing Up

SEPs offer a multitude of benefits both to manufacturers as well as the consumers. The standard essential patents explained above make superior technology accessible to all manufacturers so it may be implemented in products. This enhances interoperability, incentivises R&D, and facilitates smooth transfers of technology between companies. For users, this translates to standardisation of technology and uniformity of use across products.

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