What are SEPs?
Patents, that protect innovations which are fundamental to comply to a standard, are known as a Standard Essential Patents. A given patent is essential to a standard if utilization of the standard results in infringement of the patented technology. In simpler terms, Standard Essential Patents (SEPs) are patents that are inevitable for the implementation of a standardized technology.
According to European Telecommunications Standards Institute (ETSI) and its IPR policy , essentiality is defined as:
“ESSENTIAL” as applied to IPR means that it is not possible on technical (but not commercial) grounds, taking into account normal technical practice and the state of the art generally available at the time of standardization, to make, sell, lease, otherwise dispose of, repair, use or operate EQUIPMENT or METHODS which comply with a STANDARD without infringing that IPR. For the avoidance of doubt in exceptional cases where a STANDARD can only be implemented by technical solutions, all of which are infringements of IPRs, all such IPRs shall be considered ESSENTIAL”
Nowadays, SEPs are important assets and hold strategic value for the companies. Licensing of SEPs forms a substantial part of many companies’ revenue strategy. These assets are used by companies to demonstrate their technology strength to the world and their competitors.
Before getting in the details, let’s first get the hang of terms – Standards and SDOs/ SSOs
Technical Standards - A technical standard is an established norm for a repeatable technical task. It is usually a formal document that establishes uniform engineering or technical criteria, methods, processes, and practices. It means a standard published under an authority that specifies the technical requirements, data, information or guidance relating to an acceptable means of compliance with the technical standard. Standards provide people and organizations with a basis for mutual understanding, and are used to facilitate communication, measurement, commerce and manufacturing. The technical standards play an important role in the globalization, economy and facilitating business interaction. The technical standards are developed by Standard Organizations – SSO/ SDOs
SSOs/ SDOs - A standards organization, standards body, standards developing organization (SDO), or standards setting organization (SSO) is an organization whose primary objectives relate to standards. These organizations develop, coordinate, revise, amend, modify, reissue, interpret, produce or publish technical standards. Standards organizations can be classified based on their role, position, technology and the extent of their influence on the local, national, regional, and global standardization arena. Further, Standards organizations may be governmental, quasi-governmental or non-governmental entities .
Role of SDOs & SSOs:
Standard Development Organizations (SDOs) exist as a platform for industry innovators to cooperate, to recognize and choose the best and most encouraging advancements in technology. These technology advancements when accepted and approved by a committee take the form of a Standard for a technology. These technology standards help the industry move forward and define the way the technology needs to be implemented.
Most of the worldwide SEPs are relating to ICT technology domain especially Telecommunications. There are a number of Regional Standard Organizations which are independent, not-for-profit, standardization organization in the telecommunications industry, among which ETSI (European Telecommunications Standards Institute) being the largest. ETSI produces globally-applicable standards for Information and Communications Technologies (ICT), including fixed, mobile, radio, converged, broadcast and internet technologies. Companies declare their IPRs as Standard Essential in ETSI.
FRAND Agreement for SEPs:
There are a number of companies which contribute patented technologies towards the improvement/ development of a technology standard. SEPs provide immense power to SEP owners which, if not regularized, can be used to unfairly curtail competition and control the growth of technology to their advantage. Therefore, to reduce rivalry concerns and to guarantee that the advantages of standardisation are promoted, SEP owners are required (by SDOs/ SSOs) to focus on authorizing their SEPs on terms which make such patented technology easily accessible to others. Therefore, to ensure that standards can be widely adopted, SSOs created FRAND terms — a requirement that SSO members license SEPs on “Fair, Reasonable, and Non-Discriminatory” terms to other members of the SSO and, very often, non-members who use the standard.
FRAND is sometimes referred to as RAND or even F/RAND, but they are interchangeable and mean one and the same thing. The FRAND requirement facilitates widespread use of the standard and ensures that each SEP owner benefits from use of the patent without gaining an unfair bargaining advantage. FRAND license lays emphasis on providing the license holder with decent and reasonable terms. Therefore, SEP holders are restricted with respect to not extracting unreasonable royalties. FRAND agreement basically focuses on giving access to patents that are or may become basic to the execution of a standard.
General Negotiation terms in FRAND Licensing :
Proprietors of SEPs should make licenses accessible on FRAND terms to any and all interested parties that request a license.
SEP proprietors ought not segregate in the authorizing of those SEPs — by category, industry, or location in the supply chain.
SEP owners should include, with license offers to SEPs, an explanation with factual and legal support sufficient for potential SEP licensees to assess for each SEP whether (a) a license is needed, and (b) the offer is FRAND.
After an SEP owner satisfies its disclosure obligations, SEP licensees should give adequate responses to any bona fide offer, including a clarification and real and legitimate argument about why the licensee believes the offer doesn't comply with the FRAND obligations.
There is no statute or regulation imposing a FRAND obligation. Initially, it came into existence and was created by SSOs in response to SSO members asserting infringement claims against other SSO members practicing their SEPs.
FRAND commitment comes about in one of two ways :
1. By separate specific agreements executed by SSO members in connection with adopting standards
2. As a function of SSO bylaws or other documents that members agree on
For disputes that may involve FRAND terms, organizations should try to stay away from litigation and concentrate on other ways to approach such issues, including the most productive approaches to draw in licensors and potential licensees before litigation. Generally, IPR policies of major SSOs require patent holders to pronounce any patent as SEP that may be essential to standard, without any SSO audit of the accuracy of the essentiality declarations. Since SSOs do not necessarily perform essentiality checks, debates whether a patent truly overlaps/ complies with a technical standard must be tackled before entering or during bilateral negotiations. Eventually, a court may decide whether a patent is essential or not for a specific usage of a standard and for a specific utilization of this standard in a particular item. Along these lines, in no way, SEP affirmations are to be comprehended as proof of real essentiality of the stated SEPs, and vitality checks for the asserted SEPs are to be done before entering or during any licensing negotiations.
Cross-licensing of SEPs:
A cross-licensing is an agreement which creates a win-win situation for both the parties. It is an agreement between two or more parties where each party grants rights to their intellectual property to the other parties. An important point to be taken into account for cross-licensing is (considering all other factors constant - such as each company's revenue from sales of its licensed products) the company whose SEP portfolio contributes less value to the relevant standards will pay the net-balancing royalty.
It is normal for SEP holders to cross-license their SEP portfolios to each other, empowering each company to make its standard-compliant items without infringing other's SEPs, and to get remuneration for its contribution to the standard. For example, in 2018, Ericsson and LG Electronics entered into a global licensing agreement to cross-license patent portfolios held by both companies . The patents in these portfolios include standard-essential patents (SEPs) related to 2G, 3G and 4G cellular standards.
Worldwide Scenario - Licensing issues relating to SEPs
For more than a decade, SEP owners and standards technology implementers, have fought with various challenges relating to licensing SEPs. They have struggled with negotiating licenses, seeking or avoiding injunctions, determining FRAND royalties, avoiding discrimination, and seeking recoveries for a SEP owner’s breach of FRAND commitments or the refusal of an implementer to accept FRAND terms. The landscape of SEP licensing has become increasingly intricate and complex as the scope of standards-related technologies has become wider than ever. Nowadays, the standards-related technologies range from wireless and wired communications to video and audio streaming; from block-chain or other security mechanisms to health-data sharing; and from artificial intelligence (AI) to robotics – expand beyond the Internet of Things (IoT) and into other areas. Understanding this scenario, the SDOs/ SSOs and government agencies around the world have started recognizing these issues and converging on approaches to SEP licenses and FRAND royalties by focusing on balance, transparency and reasonableness. Interference of various authorities have provided opportunities for securing licenses or cross licenses that reflect one’s unique circumstances. However, even with FRAND, not all licenses create a win-win situation and are not equal.
Therefore, there are scenarios, where what is fair, reasonable and non-discriminatory to one party, may not be viewed as such by the other one. This has led to a spate of recent litigation world-wide in which courts have been asked to make the determination of what constitutes an appropriate FRAND royalty. These cases are somewhat of a new breed which require the courts to perform economic analysis to determine the specific royalty rate that is fair, reasonable and non-discriminatory on a worldwide basis.
SEP Litigation Cases:
Huawei v. Samsung
The case was about Huawei's SEPs. Specifically, to what degree Samsung was permitted to utilize those SEPs in its products like cell phones, tablets etc. without having acquired a formal license from Huawei. Huawei had filed infringement case against Samsung in Shenzhen Intermediate People’s Court asserting that Samsung's products infringed its SEPs and requested Court to grant an injunction against Samsung. Huawei contended that Samsung, by selling products compliant with the 2G, 3G and 4G standards, had infringed on Huawei's SEPs. In this case, the Court gave judgement in support of Huawei – finding that Huawei had satisfied its commitments under the FRAND principle, however Samsung had not .
Ericsson v. Xiaomi
Ericsson filed suit against Xiaomi before the Delhi High Court claiming infringement of its 8 SEPs. Ericsson submitted before the Court that in spite of being explicitly mentioned to license the SEPs, Xiaomi launched their infringing products in India in July 2014. Ericsson was allowed an ex-parte interim order in December 2014 preventing the sale, manufacture, import and advertisement of Xiaomi's products. However, injunction was challenged by Xiaomi before a Division Bench of the Delhi High Court, asserting that its recent products sold in the Indian market utilized Qualcomm chips, which were licensed by Ericsson. Eventually, the court, in December 2014, permitted Xiaomi to sell its Qualcomm chipset-based devices as a ‘pro tem’ (temporary) measure till the issue of patent infringement was heard and decided by a single-judge Bench of the high court . This litigation served as the trigger for the global license agreement between Ericsson and Xiaomi in 2019.
Federal Trade Commission v. Qualcomm
The FTC claimed that Qualcomm was declining to license its patents to some companies, pressuring others into non-FRAND terms, and compelling some like Apple into exclusivity agreements. The Qualcomm patents covered standards for cellular technology. The Court gave the judgement that the TIA (Telecommunications Industry Association) and ATIS (The Alliance for Telecommunications Industry Solutions) IPR policies both require Qualcomm to license its SEPs to modem chip suppliers under the FRAND terms .
Unwired Planet v. Huawei Unwired Planet, a U.S. patent licensing entity, had acquired certain SEPs from Ericsson’s worldwide portfolio pertaining to 2G, 3G and 4G standards. These SEPs included UK patents as well as patents in many other countries. It sued Huawei in the UK for infringement of certain UK patents, two of which were found to be valid and standard essential by the English High Court. Unwired Planet sought an injunction against Huawei in the UK, if Huawei would not agree to take a global FRAND license. Huawei argued that the Court should determine a FRAND royalty based only the two UK patents it found to be standard essential, rather than under Unwired Planet’s worldwide patent portfolio. However, the English High Court ruled that a FRAND license necessarily had to be global, went on to define its terms, and issued an injunction against Huawei in the UK that would be lifted only if Huawei agreed to a global license under the terms set by the Court .
TCL v. Ericsson This U.S. case was remanded for a new trial by the Federal Circuit in Dec. 2019. The Federal Circuit ruled that Ericsson is entitled to a jury trial over infringement of its SEPs while the district court deprived Ericsson of such a right by way of a bench trial . This case arose from a long-standing licensing dispute over Ericsson's assertion of its large portfolio of SEP patents covering 2G, 3G and 4G cellular technologies against TCL, a Chinese telecommunications company. Ericsson’s patented technology had played a key role in the development of these technology standards; and when the relevant standards were being defined by ETSI, Ericsson committed to license its patents on FRAND terms. TCL had been negotiating various licenses from Ericsson for some time. When negotiations ultimately did not go through, Ericsson filed a series of litigations against TCL in various jurisdictions. Then, TCL counter-sued Ericsson in California, resulted in a 10 days bench trial before Judge Selna to determine if Ericsson had met its FRAND obligation during its negotiations with TCL. In December of 2017, Judge Selna issued his Final Judgment, supported by an extensive one-hundred-plus page Memorandum of Facts and Law. The Court found that while Ericsson had negotiated in good faith, its offers to TCL did not meet its FRAND obligation under ETSI. Judge Selna went on to determine what the worldwide FRAND royalty rates should be for Ericsson's SEPs, using primarily a "top down" approach, as generally advocated by TCL, and a “check” based an analysis of comparable licenses as generally advocated by Ericsson .
Highlights of SEP Declarations:
Top Applicants – Qualcomm, InterDigital, Ericsson, Nokia, Huawei, Samsung, LG Electronics Top Jurisdictions – US, CN, EU, KR, JP
The awareness about importance of SEPs as a technology development asset, financial instrument, and as a strategic tool has led most of the major companies to focus on it. Now, with open and fair trade, globalization and interconnection of economies, standardization becomes far more integral for the sustainable growth and development. Today, technology commercialization and licensing are being considered as critical dimensions for growth of industry, the trend of SEPs will keep on rising at a faster rate than ever before.
References:  https://www.etsi.org/images/files/IPR/etsi-ipr-policy.pdf  https://en.wikipedia.org/wiki/Standards_organization  https://www.apple.com/in/legal/intellectual-property/frand/  https://cardozo.yu.edu/what-%E2%80%9Cfrand%E2%80%9D-all-about-licensing-patents-essential-accepted-standard  https://www.ericsson.com/en/press-releases/2018/7/ericsson-and-lg-electronics-sign-global-patent-license-agreement  https://www.eurobiz.com.cn/the-case-of-huawei-v-samsung/  https://www.thehindu.com/business/Industry/delhi-hc-allows-xiaomi-to-sell-qualcommbased-handsets-till-january-8/article6697428.ece  https://jolt.law.harvard.edu/digest/ftc-v-qualcomm-standard-essential-patent-holders-must-license-to-competitors  https://www.twobirds.com/en/news/articles/2018/uk/appeal-decision-in-unwired-planet  https://www.essentialpatentblog.com/2019/12/federal-circuit-rules-sep-owner-entitled-to-jury-trial-on-royalty-for-past-unlicensed-use-of-sep-tcl-v-ericsson/  https://www.essentialpatentblog.com/2018/01/judge-selna-determines-frand-rate-enters-contract-type-injunction-etsi-seps-tcl-v-ericsson/