A technology company is on the verge of introducing a cutting-edge device that builds on a widely adopted industry standard. To do so, it must use patented technology that is technically essential to the standard. The patent owner, despite committing to license its standard-essential patents on fair, reasonable, and non-discriminatory terms to all potential licensees, makes an extreme royalty demand. When the company refuses this offer, the patent owner threatens to seek an injunction in court. The potential licensee is at a crossroads-should it infringe the SEP and risk its product being excluded from further sale, or agree to pay what it believes is an excessive royalty and attempt to pass on the cost to its customers?
In recent years, competition agencies, courts, and scholars have become increasingly alarmed over exactly this scenario. These concerns have been prompted by the ability of SEP owners, using the market power conferred upon them as a result of the standard-setting process and "lock in" nature of SEPs, to distort competition for downstream products implementing that standard.
Although industry standards carry great benefits (consider WiFi, Bluetooth, or HDTV), they also pose risks. Companies owning SEPs might refuse to license them to competitors, or demand exorbitant or otherwise unreasonable license terms. This is known as "patent hold-up."
To prevent hold-up and encourage widespread adoption of the standard, standard-setting organizations typically request participants to promise to license their SEPs on FRAND terms to anyone seeking to employ the standard. Thus, SEP owners voluntarily waive the usual patent-owner's right to seek to prevent others from practicing the patented technology, in return for that technology being incorporated within the standard. Court rulings, enforcement actions, and government policy statements over the past year suggest an emerging consensus on what this FRAND promise means: SEP owners cannot tie the licensing of their SEPs to the licensing of non-SEPs; the threat of injunctions leads to royalty rates in excess of FRAND; and, thus, injunctions for SEPs should be rare.
While the court rulings, enforcement actions and policy statements issued over the last year place important limits on the ability to distort the competitive process, the potential for SEP abuse remains. This article analyzes several problems yet to be thoroughly addressed: (A) whether a patent owner can condition licensing a single SEP on also licensing other SEPs in the standard; (B) when is it appropriate to label a putative licensee as unwilling to enter into a FRAND license, thus arguably permitting a SEP owner to seek an injunction; and (C) to what extent should "royalty stacking"-piling royalties from multiple SEP owners onto each other-be considered when determining FRAND?
Originally published in CPI, 15 October 2013
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