The State of the SEP Ecosystem: Eight Takeaway Messages from SEP 2021

Last week, IPWatchdog hosted its annual SEP conference, which once again took place in virtual format. I either moderated or directed/produced all the panels, so I stayed busy throughout the week, but still managed to pay attention to what was being said by the panelists. For some panels I participated more, making it a bit more challenging to take notes, so when I say what follows are statements that particularly piqued my interest, I am by no means suggesting there weren’t many more golden nuggets of wisdom imparted to the over 900 registrants over our four-day program.

Without further ado, here are eight statements that I found particularly meaningful. My own observations follow.

1. “I see a lot of hold-out,” said Robert Dini, Intellectual Property Senior Consultant at Metroconsult, and the founder of Sisvel. “Companies engaging in hold-out behavior should not have a FRAND defense in court.” Dini would go on to point out that German courts have said that implementers are affirmatively obligated to seek out a license.

Dini’s comments were direct, and accurately reflect the feelings of many innovators who are forced to chase implementers to obtain a fair, reasonable and non-discriminatory (FRAND) royalty for the standard essential patents (SEPs) that are being employed. Those contributing patented technologies to Standard Setting Organizations (SSOs) are required to provide a FRAND assurance, in essence committing to provide access to their SEPs on a FRAND basis. What seems to be missing, however, is a concomitant obligation on the part of implementers to license at a FRAND rate. This leads at least some implementers to force SEP owners to sue for patent infringement and proceed down a long, expensive path that ultimately seems too often to wind up with the innovator receiving a FRAND rate that they would have received at the beginning in fair negotiation, or less.

2. “[Implementers] are supposed to ask for a license, but no one ever seems to do that,” said the Honorable Theodore Essex, Senior Counselor at Hogan Lovells and a retired Administrative Law Judge of the International Trade Commission.

Judge Essex is precisely correct, and that is why it has been important for innovators to have German courts recognize the importance of implementers being a willing licensee. In Sisvel v. Haier, the German Federal Court of Justice correctly explained that an SEP owner has no authority to demand that an SEP user take a FRAND license. The Court also explained that there is nothing inherently wrong with an SEP user seeking an injunction against an SEP user. However, if an SEP user wants to prevent the possibility of an injunction it needs to present as a willing licensee. Perhaps not surprisingly, the leveling of the playing field between SEP owner and SEP user in German courts has been harshly criticized by implementers because many do not want to take a license. And why would they if they can string the SEP owner along and then ultimately only pay what a reasonable FRAND would have been without litigation, or less.

3. “Litigation is a licensing tool,” explained Taraneh Maghamé, Vice President, Wireless Programs, Via Licensing Corporation. Of course, it costs so much to litigate and “only so many companies have the resources… so it becomes a battle of the giants.”

This observation by Maghamé is spot on. Patent owners use litigation because the licensing regime has failed to produce an acceptable FRAND, perhaps because of a disagreement on the rate, or as the result of hold-out, which is a growing problem in the SEP space. As the virtual conference repeatedly examined, the FRAND rate achieved through years of litigation is often the same as — if not less than — what a fair negotiated FRAND royalty rate would be at the outset. So, patent owners use litigation to create leverage, and are forced to spend capital to achieve what seems should be their right given the disclosure to an SSO.

4. “There are things you say to settle a case and there are things you say to a judge to win a case,” observed Hasan Rashid, Associate General Counsel for Licensing at GE.

This profound observation by Rashid acknowledges the symbiotic relationship between innovators and implementers. These parties will be doing business with each other over a long period of time, and while things can get heated in the courtroom, at the end of the day, they need to make peace because there will be an ongoing business relationship through the useful life of the technology, if not the life of the license.

5. “There is little incentive to take a license early when [implementers] can take a license late for the same rate,” explained Rashid.

Therein lies a very real problem for innovators, which will remain the case as long as damages at the end of a patent infringement litigation are equivalent to what an arms length negotiated FRAND royalty rate would have been at the start of litigation. However, as was pointed out by Zoë Butler, a litigation partner with Powell Gilbert, what is powerful about litigating SEPs in the UK is that courts are willing to issue an injunction, or the implementer must agree to a worldwide FRAND license rate. Butler also pointed out the cost shifting exposure present in the UK, requiring losers to pay the attorneys’ fees and costs of the prevailing party, which may provide an incentive to some.

6. “If you want to incentivize pools just give a tax break for revenue generated by pools,” said Mattia Fogliacco, President of Sisvel Group.

If designed properly and implemented correctly, tax breaks are an excellent way to incentivize the behavior governments want. Standards are essential for the future development of technology, and we are already seeing in some areas the inability to reach agreement after the establishment of a standard and implementers creating their own technologies, which threatens the fundamental purpose of standardization. “Patent pooling is a long game,” Fogliacco correctly stated. “It is a business solution.”

7. “SSOs are all about developing the best standards for the world,” explained Steve Pepe, a litigation partner at Ropes & Gray. “They are all about the technology.”

Pepe stated this as the question was raised as to whether SSOs should be involved in setting FRAND rates. Pepe definitively said that SSOs should not be involved in setting FRAND rates, but that a “clean slate solution” would be to have SSOs require arbitration of FRAND rates. Nevertheless, Pepe acknowledged that FRAND litigations usually wind up settling.

8. “We will never agree to indemnification because one lawsuit would bankrupt our company,” explained Kent Baker, Head of Intellectual Property at u-blox AG.

The issue of indemnification is closely tied to where in the supply chain licensing of the SEPs occur. In the telecommunications industry, where SEP licensing is mature and the marketplace well understood, licensing occurs at the top of the supply chain where the product or service has the most value, and immediately before it will be sold to consumers. In the automotive industry, however, licensing typically occurs at the supplier level. Suppliers are expected to obtain all rights and pass all rights necessary on to the automobile manufacturers. SEP owners, or at least those in the Avanci pool, do not want to license suppliers, but instead want to license automobile companies. And, what we learned during our Automotive panel is that those selling high end automobiles have all taken an Avanci license – priced at $15 per vehicle – and those selling more moderately priced automobiles have not taken a license.

Indemnification relates to whether a supplier or producer of certain parts or technology that is then passed up to be used in an overall product or service will essentially vouch for all of the intellectual property rights necessary being passed along. And, if not, the supplier stepping in and defending any action. That is a big ask, as licensing occurs down the supply chain, and an even bigger ask as the reality of SEP licensing in the Internet of Things space virtually demands licensing middle market players rather than the myriad of smaller companies and the reluctance of the large entities to engage in the same way as has historically been the case in the telecommunications industry, which is a very different marketplace.