SEPs and FRAND: A Break Down

Our Associate, Nikita Lakhani discussesSEPs and FRAND: A Break Down”

With the ever-increasing penetration of technology in our day-to-day lives, life without gadgets and electronic devices is hard to imagine. Right from the WiFi in our homes to the Bluetooth in our mobiles, technology surrounds us wherever we go. In such a thriving digital age, it becomes indispensable for inventions and technology to adhere to standards to enable electronic gadgets/ devices to communicate effectively and efficiently. Patents protect such inventions and incentivize their creators by conferring on them monopolistic rights over the patented invention. This blog discusses the need for striking a balance between Standard Essential Patents (“SEPs”) and their licensing on fair, reasonable and non-discriminatory (“FRAND”) terms to safeguard public interest.

The usefulness and practicality of complex electronic products, such as smartphones and tablets often depends on the interoperability of components and products. To enhance the value of these complex products, competing manufacturers, customers and suppliers participate in standard-setting practices to set technological standards for use in designing products or services. Standards are technical requirements which provide a common design for a product or a process and enable the use of multiple devices at the same time. Standardisation is a voluntary process in which a number of market players reach a consensus for setting “common technology standards” under the support of a Standard Setting Organisation (“SSO”). These SSOs focus on developing and implementing globally applicable technical standards for technologies.

To satisfy the industry guidelines and ensure compatibility with one another in gadgets, SEPs are utilised. SEPs are, in essence, patents that protect technologies that are necessary or essential to standards. This implies that, to manufacture gadgets which are standard compliant, one will have to use technologies that are protected as SEPs. Once a patent is declared as an SEP, it faces no competition from other patents until that patent becomes obsolete due to new technology/inventions. In order for entities to utilize an SEP in the production process of standard compliant products, they need to obtain a license to utilize the SEP from the SEP holder in exchange for royalty.

Since the SEP holders may charge an exorbitantly high price for granting such a license, in order to protect the interests of manufacturers, the licenses for SEPs are provided on FRAND terms. This ensures that manufacturers providing technology compliant products are able to utilize the SEP in their products on reasonable terms. In other words, FRAND terms are a method to ensure that SEP implementors are able to license and use standardized technology on fair grounds. FRAND licences are primarily intended to prevent Patent Hold-up and Royalty Stacking. Patent Hold-up is essentially a demand by the patent holder for higher royalties or more costly or burdensome licensing terms than could have been obtained before the standard was chosen. Ultimately, the high costs of such patents get transferred to the final consumers. Similarly, royalty stacking is when a single product uses many patents, of the same or different licensors, resulting in exorbitantly high royalties after adding each level of the standard technology, which makes the end product expensive.

That being said, what is fair to one may not be fair to another. Due to the lack of standardised data, the determination of royalty rates for obtaining a license of an SEP is a challenge. The monopoly of rights enjoyed by an SEP holder and the subjectivity of royalty rates results in disputes on the question of fairness of these terms. SEP holders are often charged of demanding exorbitant royalty rates that are not in compliance with FRAND terms, being fully cognizant of the lack of an alternative technology available. Disagreements over royalty rates often give way to delayed negotiations, which is mainly left to the parties to such a license. Indian courts and the chief antitrust regulator in India often witness disputes arising from licensing of SEPs on non-FRAND terms.

In the absence of any entity designated to enforce FRAND terms, it becomes all the more important for SEP holders to view SEP licenses as a means to make advancements in technology for the larger public interest, rather than viewing them as profit-making assets. SEP holders must not forget about their commitment/ declarations before SSOs to making their patented technology accessible under FRAND terms in exchange for an agreed royalty. The re-evaluation of the role of SSOs and a well-defined procedure in defining royalty rates will go a long way in harmonizing the interests of SEP holders and the larger public good.