Out of the approximately 300,000 patents declared to ETSI as potentially "essential" to a standard, how many are actually essential?

This controversial question has been obsessing many of those who negotiate Fair Reasonable and Non-Discriminatory (FRAND) licenses, be it under the ETSI organisation or in relation to other SDOs (Standard Developing Organisations). It has also become a concern for the European Commission.

The fairground of essential patents

To determine a "reasonable" license fee rate for exploiting the technology patented by patent holder “A”, stakeholders and jurisdictions could favour the "top down" approach, which involves looking at the proportion of standard essential patents (SEPs) owned by that holder. Under this approach, a royalty rate for A's patents may depend on, among other things, A's share of the pie, i.e. the ratio , where NA is the number of SEPs held by A and NT is the total number of SEPs which read onto the standard relevant to the technology concerned.

How much are NA and NT worth?

The answer is not trivial. One can start by taking an inventory of all of the patents declared to the SDO, which itself is not a simple task[1]. Furthermore, a number of practitioners have raised the fact that between the time when a patent application is declared as potentially "essential" to a standard, and the time when that patent is granted and a version of the standard is finalised, several years may have passed - during which the scope of the patent claims may have evolved and may no longer read onto the standard, the patent may have lapsed or been assigned to another owner, or the technology may have been rendered as optional in the standard. A precise evaluation of NA and NT would therefore involve at least a thorough analysis of the standard in view of each and every declared patent, which is often not practically feasible.

Moreover, the two negotiating parties rarely agree on the outcome of the analysis. The implementer will sometimes wish to reduce the relative size held by A (NA:NT ratio) [2], by trying to minimize the number of essential patents held by A (NA) and/or by considering that the whole pie (NT) is much bigger than A contends. In other situations[3], the implementer may wish to treat all of A's patents as essential in order to impose FRAND obligations for each patent onto A.

Statistical approximations may be useful but they also have their limits, since cases have shown that essentiality rates (i.e. the ratio of the number of SEPs over the number of assessed patents) may vary substantially across patent owners and technologies.

The determination of the relative portion of SEPs held by a patent owner is therefore challenging.

The European Commission's quest for transparency

In a November 2017 communication[4], the European Commission identified this situation as detrimental to licensing negotiations and a potential brake on the development of the Internet of Things (IoT). In order to create a balanced IP rights framework that supports a sustainable and efficient standardization ecosystem and SEP licensing environment within the Single Market, the Commission created a working group tasked with investigating possible solutions to this problem.

Since its inception, the working group conducted a study and has made a number of recommendations to enable SEP owners, implementers and courts to have a better view on the actual essentiality of the patents declared before the SDOs. [5]

A pilot experiment and a stakeholder workshop

To assess the practicability of an essentiality assessment system, the authors of the study conducted a pilot experiment in which more than 200 independent essentiality assessments were performed on patents registered with ETSI. In parallel, the working group also organised meetings and a workshop with numerous stakeholders (SDOs, patent owners, SMEs, patent offices, …) to help determine the institutional feasibility of such a system.

Some of the findings of this work are as follows:

  • in order to allow the implementer to determine whether a specific product or technology implements a SEP, the essentiality assessment should publicly disclose an adequate amount of information about the category of product concerned (e.g. handset devices vs. infrastructure), whether the essentiality was found on a mandatory or an optional feature, and on which version of the standard the assessment was conducted;
  • achieving a widespread acceptance by stakeholders will require a high level of reliability, thoroughness and impartiality;
  • the essentiality assessment should be seen as a continuous process, meaning that new assessments may need to take place when new patents are granted or new releases of a standard are issued;
  • making a claim chart available for an independent essentiality assessment is a good way to significantly improve both the efficiency of the assessment and its quality; the claim chart may be provided by the patent owner or a patent pool;
  • the essentiality assessment may, to a certain extent, be replaced by a novelty assessment (i.e. would the patent be novel if the standard were published earlier?) which might be a suitable approach if patent offices were to participate in the assessments;
  • larger scale essentiality assessments are technically feasible (considering an average of about seven hours spent per patent); and
  • AI-based systems will not replace human assessment within the short to medium term but may be useful as supportive tools.

Recommendations

Based on these observations, the authors made a number of recommendations on establishing an independent essentiality assessment system, including:

  • the creation of a small supervising body to design and define the assessment procedures, oversee the system;
  • involving third parties in the assessment tasks, such as patent offices, law firms and patent attorney firms; certification of third parties could be implemented to ensure harmonization, quality, reliability, and impartiality;
  • in order to be fully effective, at least “numerator data” (number of SEPs owned by a specific owner for a specific standard), “denominator data” (total number of SEPs for that specific standard), “validated summary claim charts” (one-page summary mapping the patent to the relevant parts of the standard), and current ownership data should be made available to the public following the assessment process;
  • a preferred scenario to reach an accurate assessment while keeping the costs within reasonable bounds is to assess the essentiality of patents voluntarily chosen by the patent owner (allowing a view to be reached on the “numerator data”). That data should then be complemented with an assessment of sampled disclosed SDO patents (to determine “denominator data”);
  • the system would not issue legally binding results but would aim to earn the status of being an industry standard level of quality that is generally accepted;
  • the system should be self-financed, with all benefitting stakeholders contributing. The study highlights how both SEPs owners and implementers could benefit from such a system; and

SDOs should continually look to improve data quality and specificity and keep it up to date to maintain the functionality of such a system.

The project is ambitious. Whether it can be achieved in the medium term remains uncertain. Would patent owners agree to publicly share validated claim charts? Would implementers be willing both to acknowledge the assessments made under such a system and to contribute to its financing?

As highlighted by the study, all stakeholders would have to adopt a collaborative stance towards the creation of a system for essentiality assessments. A path towards “smoother and faster SEP licensing negotiations” is laid out, but there is still a long way to go.