In December 2016, the European Commission published two new studies on standard essential patents (SEPs). As regular readers of this blog will know, SEPs protect technologies that are essential to standards such as 4G (LTE) and Wi-Fi, which rely on hundreds of patented technologies to function effectively. For the same reason, SEPs will be crucial to 5G and the nascent “Internet of Things”.
The two studies form part of the Commission’s project to improve the existing IPR framework and to ensure easy and fair access to SEPs. The specific aims of the Commission’s project were outlined in its April 2016 Communication “ICT Standardisation: Priorities for the Digital Single Market”, which we commented on here.
The first new study, titled “Transparency, Predictability and Efficiency of SSO-based Standardization and SEP Licensing”, and prepared by economics consultancy Charles River Associates (CRA), examines a number of issues relating to the standardisation process and SEP licensing. Building on a previous 2014 report on patents and standards, and on the responses to a 2015 public consultation, the authors outline what they see as the main “problems which have real significance and impact ‘on the ground’”. They then go on to consider a number of specific policy options which might help alleviate those problems. Particular focus is placed on “practical and readily implementable solutions” which would, according to the authors, enhance the transparency of the standardisation process and reduce the transaction costs of SEP licensing.
One of the CRA study’s most notable – and doubtless controversial – proposals is the imposition of a ceiling on the aggregate royalty for a given standard. The authors suggest that a commitment by SEP holders to observe a maximum total royalty burden would go a long way to tackling the problems of patent hold-up and royalty-stacking*. While the study recognises that there would be a number of difficulties in implementing such an approach, it arguably underestimates the challenges. The first problem would be determination of the aggregate royalty level. Assuming that can be overcome, allocation of total royalties between SEP holders would be a formidable challenge, even for a ‘static’ standard. The landscape here is far from static, however. Not only do SEPs change hands regularly (as the second report by IPlytics emphasises), but telecoms standards themselves evolve, through the addition of new releases which improve on or supplement existing technologies. When you throw into the mix the lack of public information about licence fees charged across the industry (something which the authors also have in their sights**), and the multiplicity of methods for comparing the relative values of SEP portfolios, it is difficult to see how such a system would work in practice – except, perhaps, as very general guidance.
The CRA study goes on to emphasise the importance of preserving flexibility on issues such as the appropriate royalty base and the level of the value chain at which SEP licensing should occur. In the authors’ opinion, economic analysis of these issues suggests there is no appropriate one-size-fits-all solution. This stands in contrast to the conclusion on royalty-stacking, where greater control is advocated.
The second new report, prepared by the Berlin-based data analytics company IPlytics, uses a dataset of over 200,000 SEPs to paint a more quantitative portrait of the SEP landscape. It provides detailed empirical evidence on a number of issues, including:
- Technology trends – The report shows that most declared SEPs relate to communication technologies, followed by audio-visual and computer technologies. More than 70% of all SEPs are declared as essential to ETSI.
- Regional trends – The proportion of SEPs filed at the Korean and Chinese patent offices has increased in recent years (particularly in the telecommunications sector), reflecting the growing importance of Asian markets in the global economy.
- SEP transfers – More than 12% of all SEPs have been transferred at least once. The study reveals that the top sellers of SEPs are Motorola, Nokia, Ericsson, InterDigital and Panasonic. The most active buyers include Qualcomm, Intel and – perhaps surprisingly, given its recent suit alleging that Nokia evaded FRAND by transferring patents to two PAEs – Apple.
- Comparison with non-SEPs – A comparison with a control group of patents which have not been declared as standard essential suggests that SEPs are more frequently transferred, litigated, renewed and cited as prior art than non-SEPs. This implies that SEPs are generally more valuable than non-SEPs, but the study refrains from considering whether the technology protected by SEPs is intrinsically more valuable than that protected by non-SEPs, or whether the higher value of SEPs is merely a product of their incorporation into a standard.
One striking feature of both studies is their attempt to grapple with the thorny issue of ‘over-declaration’. The authors of the CRA study point to research showing that, when tested rigorously, only between 10 and 50 per cent of declared SEPs turn out to be actually essential. Both studies propose some form of independent essentiality testing to address the problem. The CRA study claims that random testing of a sample of each SEP holder’s portfolio would provide useful information about how royalty payments should be allocated between SEP holders; and that the benefits of such testing would be especially pronounced when combined with the imposition of an appropriate ceiling on the total royalty stack. According to the IPlytics report, patent offices have the requisite technical competence and industry recognition to perform essentiality testing at a reasonable cost.
To conclude, the two studies provide a reminder – if any were needed – that issues relating to the standardisation process and SEP licensing remain high on the Commission’s agenda. The Commission says it intends to draw fully on the studies’ findings when assessing the interplay between patents and standards in the EU Single Market. However, whether the Commission will embrace any of the practical solutions proposed by the studies remains to be seen.
* As mentioned in this December 2015 blog post, royalty-stacking refers to the situation where the royalties independently demanded by multiple SEP holders do not account for the presence of other SEPs, potentially resulting in excessively high total royalty burdens for implementers.
** See pages 71 and 85 of the CRA study.