Licensing Standard Essential Patents

FRAND and the Internet of Things

Igor Nikolic

• Publisher: Hart Publishing
• Year: 2021
• ISBN:
  9781509947560
• Edition: 1
• Topic: Derecho
• Subtopic: Derecho de la propiedad intelectual

What is the licensing framework of standard essential patents (SEPs) for connectivity standards such as 5G and Wi-Fi? How will the framework change with the Internet of Things (IoT)? This book provides comprehensive answers to these questions. For over two decades, connectivity standards have been the subject of litigation and controversy around the globe. Now, with the introduction of 5G and the emergence of the world of connected objects, or the IoT, the licensing framework for SEPs is becoming even more contentious. In order to bring clarity to the debate, this book analyses and explains key components of a fair, reasonable and non-discriminatory (FRAND) licence for SEPs; clarifies the economic, policy and market background of SEP disputes; examines the interrelated application of contract, patent and competition laws; and describes the approaches by courts and regulators in the EU, US and the UK. Importantly, the book also assesses how the experience from the smartphone and ICT industries can be applied in a new environment of the IoT, and considers what needs to be changed in the future SEP licensing landscape. The book provides a holistic coverage of SEP licensing issues in an attempt to reduce uncertainty within this highly complex and technical area, and will be useful to practitioners, policy makers, SMEs and large technology companies in the IoT, as well as academics interested in the field.

PART I

The Standard-Development Environment

1

Standards, Standard-Development Organisations and Standard Essential Patents

This chapter will explain the standard-development environment, providing context to SEP licensing issues discussed in the rest of the book. It will first explain what standards are, their role in the economy and different types of standards. Next, the chapter will analyse the standard-development process within SDOs that are primarily responsible for developing technical interoperability standards such as 3G, 4G, 5G and Wi-Fi. It will examine how companies with different business models cooperate in the development of standards, the assessment and inclusion of technology in a standard, and the difference in technological contributions by SDO members. Finally, the chapter introduces the notion of standard essential patents. It will first explain the legal responsibilities of companies holding patents that may be essential to a standard, and will then clarify the meaning of essentiality and explain how not every patent declared as essential is not necessarily truly essential for a standard. The over-declaration of SEPs has a significant effect on licensing and impacts FRAND royalty determinations.

I.Standards

In simple terms, a standard can be defined as a set of technical specifications which provides a common design for a product or process.¹ Standards are all around us and come in various shapes and forms – from A4 paper size, the size of the railway tracks, the shape of electrical plugs to complex technical interoperability standards in the ICT sector. Examples are compact disc (CD) and Blue Ray data storage standards; Wi-Fi, Bluetooth, GSM (2G), UMTS (3G) and LTE (4G) communication standards; USB device connectivity standard and MPEG and PDF software standards.

Standards generate numerous benefits and play an important role in a modern economy.² They promote innovation, increase the quality and safety of products, enable jobs and growth and support to the global value chain.³ Standards allow for the early market adoption of innovative products and services, make products less costly for companies to produce and more valuable to consumers.⁴ If products contain the same technology, manufacturers may be able to achieve economies of scale more efficiently, reducing costs and price. Further, standards allow for interoperability or compatibility between products from different manufacturers to work together. For example, technical interoperability standards allow consumers to use their smartphones in different countries across the world, as well as to make and receive calls from smartphones from different manufacturers. Furthermore, interoperability leads to increased network effects where products are more valuable as the number of users increases.⁵

Studies have shown that standards produce positive benefits for the whole economy. In the EU, standards are estimated to have an impact on GDP growth between 0.3 per cent to 1 per cent.⁶ In the UK standards are estimated to generate annual growth of around £8.2 billion or a third of annual GDP growth,⁷ and in Germany standards contribute to annual growth of up to €17 billion or between 0.7 per cent and 0.8 per cent of GDP.⁸

However, standardisation may also have negative effects.⁹ Because standardisation results in the adoption of one uniform solution it inevitably leads to the elimination of alternatives and the loss in variety. The costs associated with migration to a different or an improved version of a standard may slow down the implementation of better technologies. Countries may also use different national standards to erect barriers to trade and deter market access.¹⁰ Nevertheless, positive effects are considered to outweigh any potential negative effects of standardisation.

A.Technical Interoperability Standards

Technical interoperability standards specify how different technologies interact with one another and work together successfully.¹¹ Technical interoperability standards are important in many industries but are especially relevant to the ICT sector and the IoT. They enable, for instance, the making and receiving of calls from smartphones from different manufacturers or for computer hardware components from various producers to be combined to create a functional computer. In the IoT they will enable connected devices such as cars, domestic appliances, wearables and industrial equipment to communicate seamlessly with each other, regardless of manufacturer, operating system, or other technical components.¹² Examples of technical interoperability standards are 3G, 4G, 5G cellular standards, WLAN, Wi-Fi and Bluetooth and USB connectivity standards.

There are many technical interoperability standards in the ICT and IoT industries. The Commission considers there are over 600 standards in the IoT sector,¹³ while Baron and Spulber collected almost 800,000 standard documents and found that the majority relate to the ICT sector.¹⁴ Other studies have looked at the prevalence of standards in particular products and found that the average laptop contains at least 251 interoperability standards,¹⁵ while an average smartphone is estimated to contain a minimum of 30 interoperability standards.¹⁶ Interoperability standards will reportedly generate 40 per cent of value in the IoT.¹⁷ The licensing framework of these standards is the subject matter of the book.

B.Classification of Standards

Before going further into the specifics of patent licensing, it is important to recognise the distinction between different types of standards and their mutual relations. We can broadly observe two different classification:

i.Standards based on their source (de facto, collaborative and governmental standards).

ii.Standards based on the access to IP rights and openness in development process (open and closed standards).

i.Standards Based on their Source

a.De Facto Standards

De facto standards originate from one or several firms working together outside any institutional framework, whose products or solutions become widely adopted in the market.¹⁸ Typically a company will develop a certain product or a solution that becomes so widely accepted by the market so as to become a standard. This may be possible in industries with strong network effects, where the value of the product increases as more users use it. Once a critical number of users are reached, the market ‘tips’ to one winner which becomes a standard in the market.¹⁹ An example of a de facto standard is a QWERTY keyboard layout,²⁰ Microsoft’s Windows operating system and Microsoft’s word documents (.doc, .docx).

Sometimes, however, two or more opposing solutions may emerge that will compete to become a de facto standard in a ‘standard war’.²¹ An example is a battle for the video cassette recording standard in the 1980s between Sony’s Betamax and JVC’s VHS format. VHS prevailed in the end and become a de facto standard for video cassettes.²² A more recent example is the battle in the 2000s between Toshiba’s DVD HD and Sony’s Blu-Ray for the establishment of the next high-definition optical disc format. Blu-Ray ended as the most widely accepted format, and Toshiba discontinued the support of DVD HD in 2008.²³

Standard wars are generally inefficient.²⁴ They drain the resources of companies involved, while those that adopted the losing standard will end up with additional costs of switching to the winning format. Standard wars are also costly to consumers. Consumers may wait to purchase products until they see which solution will emerge as a standard. If they purchased a solution that was ultimately not successful, they would need to incur the additional costs of switching to the winning format. Standard wars also do not guarantee that the technologically superior solution will win. The success often goes to the solution that most rapidly reaches a critical mass of consumers and producers of complementary products, resulting in market tipping. For instance, some claim that Betamax offered superior picture and sound quality over the VHS, which prevailed because of an initially lower price and the possibility to record longer than Betamax.²⁵

b.Collaborative Standards

Because of the inefficiencies of standard wars, companies may decide to work together on an industry-wide basis in order to jointly develop new standardised solutions. Collaborative standards can thus be defined as standards established by cooperation between two or more entities working within the framework of standard-development organisations.²⁶ The majority and the most important technical interoperability standards are collaborative standards developed within SDOs, including Wi-Fi, Bluetooth, 3G, 4G and 5G cellular standards.

From a terminological point, collaborative standards in the literature are often referred to as ‘formal’ or ‘de jure’ standards. A designation as ‘formal’ signifies that the process leading to the adoption of a standard is more or less formalised.²⁷ As such, the terms ‘collaborative’ or ‘formal’ standards may be used as synonyms. On the other hand, the term ‘de jure’ is misleading because it implies that there is a legal requirement to adhere to SDO developed standards, which is often not the case. Standards developed within SDOs are voluntary and there is typically no legal requirement to comply with them.²⁸ The term ‘de jure’ standard should thus not be used to refer to collaborative standards but could be better used to describe governmental standards that are mandated by law.

c.Governmental Standards

Governmental standards are technical specifications that are adopted by the go...