This article is the third in a four-part Ocean Tomo Insights series focused on strategies for managing standard essential patent (SEP) portfolios, litigation, and licensing. Each installment addresses a specific stakeholder group, including implementers, innovators, outside counsel, and suppliers. The articles explore how understanding SEP-related technical analysis and FRAND royalty rates can support proactive risk assessment, strategy, and positioning in SEP disputes.
In this third article, we examine how outside counsel (representing implementers or innovators) can leverage patent, technical, and economical expertise to understand SEPs, prepare for SEP-related cases, assess risk, and better manage their SEP cases.
Standards and Industry Bodies
Many technical fields are only commercially viable if devices from multiple vendors can interoperate with each other. This can include semiconductor devices, wireless internet, cell phones, video and image compression, and many other fields. Innovative technology companies in these fields participate in SSOs to propose, debate, and decide on aspects of the technology to be implemented in compliant products. Examples of SSOs include:
- 3GPP– 5G cellular networks
- IEEE– WiFi (IEEE 802.11™) wireless networking (Institute of Electrical and Electronics Engineers)
- USB– Removable memory (standards for the Universal Serial Bus specification used for compatible USB peripherals and devices.
- ISO– MPEG-4 video compression (International Standards Organization)
- SAE– Electric vehicle charging.
For litigation in these fields, representing participants in SSOs with SEP patents leads to requirements for “fair, reasonable and non-discriminatory” (FRAND) licensing terms and meeting certain expected time frames for presenting and evaluating offers compliant with FRAND terms. Both sides may be required by the court to show that they have negotiated in good faith. Failure to do so reduces your ability to receive injunctive relief and gives an advantage to the other side.
Participation in SSOs and SEP Declarations
Companies developing new, leading-edge products may participate in SSOs that define the standards for next-generation products. Though time-intensive, this gives innovators the ability to propose features and solutions, to influence the technology, and get a head start on implementing new products. In the past, there were occasions when companies participating in SSOs defining standards would propose a solution to a technical problem and then secretly file a patent on it. If the patented solution were later adopted by the SSO as part of the standard, every compliant product would have to pay a royalty to them. This clearly went against the spirit of the standard-setting process and constituted an abuse of the monopoly obtained through the patent.
To counter this, most SSOs include patent policies that require participants to declare patents that may be essential to implementing the standard to the standards body. Declarants are also required to offer licenses to their patent in a “fair, reasonable and non-discriminatory” (FRAND) manner.
SEP Declarations
SSO participants are obligated to declare essential patents to the SSO and thereby abide by their patent policy rules. As an example, the European Telecommunications Standards Institute (ETSI) states: “During the proposal or development of a standard, ETSI members must inform the Director-General in a timely fashion if they are aware that they hold any patent that might be essential.” During the standards-setting process, proposed solutions will change, and patent claims will change during the multi-year prosecution process. Therefore, a patent that appeared essential at some point in time and was declared as essential by the patentholder may not be essential to implementations of the final standard. There are other companies that do not participate in SSOs that will independently patent inventions that end up being essential to a standard. These patents may be declared as SEPs; however, they are often not declared and there is no obligation to declare them.
The process and requirements for making SEP declarations vary from SSO to SSO. However, most have flexible rules on what must be declared. Individual patents and patent families may be declared, but often a declaration may be made without listing any specific patent numbers. Furthermore, it is common that the essentiality of a patent to the standard is never verified, and many SEPs are not actually essential or are only essential to implementing an optional feature. These concerns around over-declaring SEPs have been discussed for years. Though in some cases, courts have ruled that a SEP declaration has a presumption of essentiality, it is estimated that only about 20% to 47% of all ETSI-declared 2G/3G/4G patents are essential (Unwired Planet v. Huawei, TCL v. Ericsson), and that only about 10% to 15% of all ETSI-declared 5G patents are essential.
FRAND Obligations when Negotiating and in Litigation
Courts have developed FRAND compliant offers, deadlines, and the ability to obtain injunctive relief, all of which complicates cases. Notification letters from SEP owners should consider including some level of technical infringement analysis to inform alleged infringers of the patent infringement, specifying how it has been infringed. As part of negotiations, offers and counter-offers are typically made and submitted relatively quickly. Plaintiffs that provide more extensive technical proof of infringement may put additional pressure on a defendant to respond to offers in a timely manner to be generally consistent with FRAND principles.
Demonstrating Infringement of SEPs
As part of a good faith notice letter of infringement, an offer to settle, or a counter-offer, a claim chart based on accurate, technical analysis should be considered. SEPs offer the advantage of allowing infringement to be documented under the published standard rather than a particular product. For example, a claim chart for a video compression or decompression patent documented on the standard can be asserted against any product that successfully plays (decodes) a suitable video. This process can be repeated for several products quite economically. The alternative is to purchase and test several products, one by one, producing different claim charts for each product, which can be a labor-intensive and potentially expensive process.
The analysis starts with identifying the standard and the relevant version. Standards have both mandatory and optional features. Analysis will map the patent claims to the standard and identify whether it is a mandatory or optional feature. If the SEP claims can be mapped to mandatory features, any compliant product should infringe. If the mapping requires an optional feature, further testing or reverse engineering can be used to determine if the optional feature is implemented in a particular product or enabled in a particular environment.
Even for mandatory features, there have been cases where a manufacturer did not implement the feature, so if you are basing your licensing or litigation activities on a small number of patents, you may also want analysis to verify that mandatory features are implemented as required by the standard.
Technical analysis can be done on standards, devices, or field testing to conclusively show compliance with a standard. Patent claims are compared to standards to illustrate which sections of the standards map to the claims. For infringement analysis, the claims can be mapped to the latest version of a standard. For validity analysis, they can be mapped to previous versions. By comparing versions of a standard, it can be determined when a feature was first introduced. If any claim elements are mapped to optional features, this will be noted. If optional features are identified, testing of target devices may be performed to demonstrate that the device supports those features or practices the claimed method. Field testing can be used to demonstrate how a network is configured, such as for a specific base station or a network provider in a particular area. This is particularly useful for method claims when the standard may allow for different options to be configured.
Determining FRAND Royalty Rates
When determining FRAND royalty rates, consideration should be given to (among other factors) whether other license agreements have been executed between the same or similarly situated companies for comparable technologies. Importantly, the “non-discriminatory” portion of FRAND does not require that all licensees to a given patent holder’s technology receive identical terms but rather only that patent holders should offer to license similarly situated companies on comparable terms.
While there is no consensus on the required factors which should be considered when assessing whether a prospective license is with a “similarly situated adopter” such that it is sufficiently comparable to the subject license, there are certain factors which often are analyzed and considered. Below includes a list of nine economic principles, some or all of which, depending on the circumstances, are considered when evaluating the comparability of an existing SEP license agreement:
- Whether the subject patents are subject to a FRAND commitment.
- Whether the license was entered into under the threat of injunction.
- Whether the royalty base in the comparable license is aligned with the license being reviewed.
- Whether the license under consideration is a portfolio license.
- The range of the extent and type of use of the technology in specific standards implementations.
- Whether the licensor makes licenses available on non-discriminatory terms.
- The product volume (projected and/or actual).
- The use of technology at issue by the licensee within the scope of products covered by the license.
- The robustness in terms of the number of SEPs contained or covered by the license.
The consideration of existing SEP “patent pools” may also prove to be informative as a datapoint to consider in determining SEP FRAND royalty rates and/or assessing whether an SEP holder’s offer for licensing its patents is consistent with FRAND.
Patent pools reflect programs through which two or more patent owners group their technology rights together and offer licenses to prospective licensees (either uniform licenses across all licensees or sometimes separated into different tiers or types of licenses depending upon the licensee and/or type of licensed products). Licenses to patent pools may be more useful to consider under certain contexts than others, for example depending upon the total portion of patents under a given standard which are pooled. As one example, a substantial portion of patents in the H.264/5 video codec space are pooled, making rates from these pools more informative and relevant to consider in examining any comparability analysis for video codec related technologies.
Outside of an evaluation of comparable licenses, a “Top-Down” approach is at times performed, as a separate commonly accepted method for determining FRAND royalty rates. Under a Top-Down approach, an aggregate royalty for all declared SEPs covering a particular standard is proposed. After determining a total aggregate royalty burden for products practicing that standard, an allocation of the appropriate portion of that aggregated royalty burden to the at-issue SEPs is analyzed. In doing so, both the SEP holder and the potential licensee may look to the number and the strength of both the specifically asserted SEPs and the entire SEP patent portfolio held by the licensor when compared with other SEPs related to the standard.
The overall aggregate royalty burden typically attempts, as a starting point, to determine the contribution of the functionality covered by the standard to the overall sale of the end product. It then looks to, as discussed above, the “at issue” SEP portfolio being evaluated for RAND royalty rate determination to other SEPs declared essential to the “at issue” standard. It is lastly worth noting that the application of a Top-Down approach has been endorsed previously by courts. As one example, in InterDigital v. Lenovo, Mr. Justice Mellor opines that “…in [his] view, judicial statements as to appropriate total aggregate royalty figures…can be useful guidelines.” 1
To explore this topic and how patent analysis and reverse engineering expertise can be used to demonstrate that a SEP or non-SEP is essential to a standard and demonstrate patent infringement, contact David Fraser at +1 403 229 9192 | [email protected], or Gabriel Weintraub at +1 917 364 9285 | [email protected].
1Interdigital v Lenovo (Case No: HP-2019-000032), Approved Judgement – Public Version, ¶244vi.
