Standard Essential Patents Chapter I- Introduction and Fundamentals

Technical Standardization and Standard Essential Patents

Technical standards are established norms or requirements in regard to technical systems. It is usually a formal document that establishes uniform engineering or technical criteria, methods, processes and practices. In the case of Intellectual Property Rights (“IPR”), notably patents, patent holders in the related industry may not always have the necessary means to implement the patented technology into commercialization. If the patented technology is crucial for the industry, initiating vast amounts of independent licensing agreements with different implementers is not cost-efficient. Therefore competitors or government authorities may request the patent holder to negotiate with other players in the relevant market to achieve foundational technology for follow-up inventions.  From the current practice there are three paths to standardization: 1) Emergence or de facto, through fierce competition in the relevant market eventually, creating a technical solution as dominant in the market; 2) Legal Standardization or de jure, which is standardization by government intervention and the regulation of technical aspects of products 3) Standard-Setting, where standardization through industry collaboration via standard-setting organizations (SSOs) are initiated.[1] From these negotiations between competitors in the relevant market/industry and patent holders a Standard Essential Patent (“SEP”) is granted to the current patent holder.

Regarding national and international legislation, there hasn’t been any example of special provisions that regulate Standard Essential Patents (“SEP”). Therefore a systematic interpretation from jurisprudence, Policy Reports[2] , Communique’s/Guidelines[3] and general provisions (Intellectual Property, Competition and Licensing Law) are necessary to identify potential legal dispute that may arise from SEP’s.

Advantages of Technical Standardization and Possible Anti-Competitive Conduct of SEP Holder

The advantages of standardization via SSOs are creation of foundational standards that allow follow-on innovations to take place by SEP licensing and further competition in upstream and downstream markets, therefore the participants and competition authorities encouraged standard-setting due to its beneficial effects. Interoperability standards produce efficiency gains and result in tangible benefits for consumer welfare. The term ‘consumer welfare’ implies economies of scale, cost savings, and gains in productivity and efficiency.[4] Standardization ensures interoperability of standard-based products. It renders these products more comparable for consumers and can help to select the ‘best’ available technical solution for a given task.[5] New opportunities for manufacturers and consumers, particularly in the fields of telecommunications and software-implemented inventions will also become available that rely on foundational technologies. Without standards, devices would need to have to rely on additional connectors, plugs and converters from various manufacturers, increasing cost and decreasing functionality of the devices.

However, possible shortcomings from technical standardization may occur, that can have anti-competitive effect on the market. By obtaining a standard, the SEP holder creates a risk of locking in the market in its ecosystem and violation competition. The lock-in effect causes even greater risk in markets, where network effects are present and the value of the product or technology increases with the number of other persons using it, building an interconnected ecosystem. The SEP holder may prohibit the further use of the protected technology, impose unfair licensing agreements and even force competitors out of the market via anticompetitive conduct.[6]Investigations at the National Competition Boards and/or possible litigation may come into play for SEP infringement or licensing disputes to prevent further anti-competitive conduct. In that case, the investigating authority may initiate compulsory licenses.

Compulsory Licenses: Patent ownership grants the rightsholder a monopoly right to use its technology, within the 20 years’ period, exclusively. However, if certain conditions by law are met SEP holder is required to license the patent to third parties, without its consent, and oblige to the third party request for licensing. Compulsory licensing, as an exception to freedom to contract, is defined by law in the Turkish Industrial Property Act/Sınai Mülkiyet Kanunu (“SMK”) Art.129 and regarding abuse of dominant power by the SEP holder, SMK Art. 129(e) protects implementers against anti-competitive or restrictive behavior by rightsholder.[7] , which derive from European Patent Convention (“EPC”) Art.38 under the same framework. The ratio legis of SMK and EPC are in compliance with the EU Competition Law and aims to protect the public welfare with the use of the patented technology.[8]

Abuse of Dominant Power

Four types of anti-competitive conduct from abuse of dominant power, under Treaty on the Functioning of European Union (“TTFEU”) Art 102 and Turkish Act on Protection of Competition/Rekabetin Korunması Kanunu (“RKHK”) Art.6, exist with regards to unilateral conduct of an SEP holder: Refusal to license, Patent ambush, Patent hold-up and Patent hold-out.

Patent Hold-up and Patent Hold-Out: These opportunistic mechanisms by the SEP holder, are a result of excessive licensing fees of the standard-essential patent SEP holder, once standard is implemented (patent hold-up). The visa verse may also occur by standard implementer, where a SEP holder exploits a licensee’s costs to switch away from the related standard as a means of obtaining royalties above the Fair, Reasonable, and Non-Discriminatory (“FRAND”) level (patent hold-out).[9]

Refusal to license: Freedom to contract is, by law, a right by SEP holder and other parties. However, freedom to contract can be restricted by law if the SEP holder, as a dominant player in the relevant market, refuses to license its patent to implementers with an intention to distort the market (ex: entry barriers).[10]

Patent Ambush: “Intentional deceptive conduct in the context of the standard-setting process by not disclosing the existence of the patents and patent applications which it later claimed were relevant to the adopted standard. Such behavior is known as a patent ambush.”[11]

Licensing Agreements and FRAND Terms

Standardization agreements are again problematic under Art 101(1) TFEU and RKHK Art.4 (prohibition of anticompetitive conduct, a.k.a cartel agreements). The reason is that any agreement to standardize technology eliminates competition between alternative technologies. However, EU competition law also acknowledges that standards are necessary and, on balance, beneficial. The conditions set out by the European Commission in the Horizontal Cooperation Agreements Guidelines[12], are that these standards must remain open. Accordingly, SSOs must ensure effective access to the standards on FRAND terms. This openness becomes a problem if a patent needs to be used to comply with a SEP. As a result, SSOs typically require their members to make a declaration that they will grant licenses for their SEPs on FRAND conditions.[13]

The meeting point of the interests of contributors and users of the standard is FRAND licensing, based on a commitment to make a standardized technology available on fair, reasonable and non-discriminatory terms. FRAND commitment ensures that standards will remain accessible and implementation unrestricted. “The FRAND commitment ensures implementers that they will not fall victim to opportunistic conduct by SEP holders; have access to third-party technologies on reasonable terms that allow profitable implementation of the standard; and that they will not be discriminated against their downstream competitors.[14]  

As a side note, technical standardization, in the sense of obtaining an SEP, does not necessarily make the SEP owner a dominant player in the relevant market. While SEP owner, in patent law theory, has the right to permit or prohibit use and block the entire market; standards may arise within a shorter timeframe than expected.[15]  Additionally, manufacturing and commercialization capacities of the SEP holder will be the determent to address antitrust measures, where the standard users capacity to challenge infringers via legal action is a parameter to bring competition law into the discussion.[16]

Summary and Further Discussions

The technical standardization requirement for different industries is becoming more essential with the need for more interoperability between devices and services. Monopolist behavior of the SEP holder, costly and time consuming infringement litigation and unfair licensing terms that break FRAND negotiations can lead to sunk costs for investors; leading to an innovative decadence in the relevant market and industry. As stated above, the SEP may not ipso facto lead to anti-competitive conduct. Standards are particularly crucial for emerging technologies, that require the foundations of prior art to have a disruptive effect in the sector. University-industry collaborations, start-ups and technology transfer offices often rely on standardized technology (wireless telecommunications, computer-implemented inventions, etc.) to draw the attention of venture capital and other investors. 

The main focus of the advocacy relies on pre-license negotiation bargaining power between SEP holder and implementer, as well as SSO’s procedural tools to arbitrate in SEP disputes in an unbiased setting. While certain jurisdictions (EU, UK, US) do have experience in SEP litigation and legislative foundations, often the complex nature of the dispute require technical analysis and alternative dispute resolution. Quoting from a recent WIPO Magazine opinion on the current philosophy behind the technical standards: “SEPs, FRAND, injunctions and license terms are not just legal issues; they involve well-informed business strategies and competitive decisions. Decision makers familiar with these developments, both the converged views and continued divergence, may be able to reduce transaction costs and come to mutually-agreeable FRAND terms based on their own unique circumstances.”[17]

Author:Sinan Erkan