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Standard-essential patents, federal policy guidance, and what it means for startups
Standard-essential patents (SEPs) are getting increasing attention in policy debates. For example, the Biden administration recently withdrew a problematic SEP policy from 2019, but has not yet replaced it with anything. In late 2021, federal agencies published a draft SEP policy that signaled promising steps towards restoring balance—balance that could free up more space for innovation, improve the landscape for competition in connected devices and beyond, and promote affordable consumer access to the latest technology. But the nation is still waiting for a decision on that 2021 draft policy, and it remains to be seen what last week’s withdrawal of existing policy without a replacement means.
This is a complex area of patent law, which big companies (often foreign companies) dominate. It can feel very opaque to outsiders, but everyone, including startups, has a lot at stake in conversations around balanced SEP policy. Especially as we move towards broader adoption of 5G and Internet of Things (IoT) technology, domestic startups have a vital perspective that has to be accounted for as the government moves towards more balanced SEP implementation and enforcement.
A brief primer on standard-essential patents & patent remedies.
A standard-essential patent is a patent that covers, or purportedly covers, some aspect of a technical standard—something that underpins much of our modern life. For example, the reason devices can connect to WiFi, Bluetooth, 4G, or 5G networks is because those devices comply with technical standards that allow them to interact with other devices. They are developed through standard-setting organizations (SSOs), where technology experts get together to decide industry standards. And patent owners can volunteer their patents to be part of standards. When it is not possible for someone else to comply with a standard without infringing a patent—e.g., if you cannot make a connected device without using the patented technology that allows devices to connect to WiFi networks—then the patent is appropriately deemed a SEP.
SEP owners are usually required to license those patents on fair, reasonable, and non-discriminatory (FRAND) terms. Holding a SEP can give the patent owner a lot of power, so the FRAND obligation creates a balance necessary to enable innovation and access to standard technologies. Otherwise, if the patent owner could restrict licenses or charge unfairly high rates, that patent owner would get undue control over who can build or buy products, services, or new innovations that rely on a standard.
To understand SEP policy, you also need a basic understanding of patent remedies. If, at the end of a patent lawsuit, a court decides that a valid patent was infringed, it has to decide what relief is appropriate. The first option is that a court can award damages where the defendant might be ordered to compensate the patent owner’s lost profits or the court can award a reasonable royalty—the cost of a license if the parties had agreed to one before the infringement occurred. Another option is an injunction where a court can order the accused infringer to stop making, using, or selling the infringing product in the U.S. Courts are supposed to consider four factors before entering an injunction: would the plaintiff suffer “irreparable harm” without an injunction; would money be sufficient to compensate the plaintiff; how does the harm to the plaintiff balance against the harm to the defendant; and what impact would an injunction have on the public?
The threat of injunctions in the SEP space creates the risk of “holdup”—where a SEP holder can threaten to sue for an injunction in order to demand supra-competitive license fees. Because an innovator faced with the choice of (a) being banned from making and selling things in a country or (b) paying more than a patent is really worth would understandably agree to inflated license fees and would also agree to purchase licenses to even low-quality patents. This is especially true for startups, because having a single product banned could mean the end of the company altogether.
SEPs touch basically every layer of the innovation economy, including all types of startups. We can use the smart fridge market to illustrate the reach of standards, and therefore the reach of SEPs. One company might develop new technology that’s incorporated into a 5G standard and become a SEP holder. Another company might develop and manufacture components for connected fridges, “implementing” the standard to make the fridge 5G compliant. A third company might develop new apps to run on connected fridges based on the technological capabilities of the fridge. To help customers manage their grocery needs throughout the year, that app developer needs the smart fridge to exist. And finally, customers buy and use smart fridges and grocery apps—that is, if the tech is affordable and accessible.
Current conversations around SEP policy.
SEPs are increasingly prominent in policy discussions, partly because of emerging technology. For example, 5G adoption and IoT revolve around connected devices—which means SEPs are at the center of our discussions about innovation, commercialization, competition, and access to 5G and IoT. Many acknowledge that we need balanced SEP policies for the U.S. to be a leader in those areas. And many have likewise agreed that we cannot allow SEP holders to charge overly high rates, to delay adoption of technology, or to threaten to pull products from the U.S. market in an effort to get inflated license fees. Here is a (non-comprehensive) list of some policy debates that promise to shape the direction of technical standards:
U.S. Agencies’ Policy Statement. For nearly a decade, the Department of Justice (DOJ), Patent & Trademark Office (PTO), and National Institute of Standards and Technology (NIST) have published statements intended to guide SEP enforcement in the U.S., but last week those agencies withdrew all prior policy statements. In 2013, the first such SEP policy statement made a critical observation: because SEPs are supposed to be licensed on FRAND terms, those patent owners have already effectively announced that they want money in exchange for licensing, and therefore they should not be able to threaten to seek injunctions in SEP litigation. However, in a controversial move in 2019, those same agencies unilaterally reversed course, arguing that SEP holders should be able to seek injunctions for infringement.
In December 2021, the DOJ, PTO, and NIST issued a draft SEP policy statement that would restore balance to SEP enforcement. If adopted, this statement would again confirm that damages—not an injunction—are most often the appropriate remedy in SEP infringement litigation. The draft policy also acknowledged that threatened injunctions over SEPs hurt innovation and consumer access. Last year, the government opened this draft policy statement for public comment (Engine was among those that filed), and a recent survey of the responses shows U.S. businesses and those contributing to domestic R&D favor the 2021 policy statement.
However, the government has not yet adopted this 2021 draft policy (or some version of it). Instead, last week, the relevant agencies withdrew the 2019 policy without any replacement. It is unclear where the government might head on SEP policy, although the administration has committed to avoiding the anticompetitive or abusive problems that can emerge in the SEP context, DOJ has committed to review anticompetitive or abusive conduct on a case-by-case basis, and we can probably expect more SEP litigation.
Essentiality. Another problem that emerges with SEPs centers their essentiality, or a lack thereof. A patent owner can declare its patent is essential to a standard, but often SEPs aren’t actually relevant to practicing a standard. Indeed, one study indicates that purported SEPs that are asserted in litigation are less likely to be infringed. Which means the patent owners can demand licenses, threaten litigation (and threaten to pull products from the market, where injunctions are available), even if no valid patents are infringed. In response to this concern, the UK has considered independently assessing patents’ purported essentiality when it comes to standards. This sort of independent verification would provide greater confidence that SEPs are actually essential, and could cut back on abuses where non-essential (non-infringed) patents are used to extract high royalties and slow down innovation or competition.
Global Competition. The PTO recently issued a report about which companies have declared the most SEPs covering 5G technology. At the moment, there are six companies that dominate that space (Ericsson, Huawei, LG, Nokia, Qualcomm, and Samsung) and only one is a U.S.-based company. On this point, it is also helpful to remember that any inventor or company in the world can apply for a patent from the PTO, but only activity (like manufacturing or sales) in the U.S. can infringe a U.S. patent.
What it means for startups.
Standards are very valuable, especially for startups, because they enable interoperability—meaning scores of innovators can build technology that interacts and communicates with other devices and other technology. A new company entering the market does not have to create everything from scratch. Instead, startups can create new products or services that only work when they can talk to existing hardware, products, or networks. And patents can be a tool to help support those innovative activities. But when the patent system is out of balance, patents can just as easily create substantial barriers to interoperability, and therefore barriers to innovation, competition, and progress.
First, startups might experience SEPs from the perspective of patent owner. Startups do not typically own a large fraction of SEPs covering a given standard—big companies have the resources to amass vast patent portfolios, which for some include a large number of declared, or purported, SEPs. One study found that six companies hold between 1,000 – 3,000 5G SEPs each. Startups cannot afford to acquire patent portfolios of that size. So, while startups might contribute technology to a standard, imbalanced policies that overvalue SEPs favor large, wealthy, often foreign companies to the detriment of those startups. For example, if Huawei and Qualcomm were able to threaten injunctions in infringement cases, and pull all standard technology from the market—then the startups that contributed to the standard would lose out on all licensing revenue while Huawei and Qualcomm tried to get what they wanted.
Likewise, the assessment of essentiality is valuable here. If a startup contributes two really innovative features to a standard, and a large company acquires hundreds of patents that cover trivial ideas or dubious patents claiming unpatentable ideas, that large company still has substantial, arguably unwarranted, leverage in the market for the standard. Ensuring that SEPs are really valid and infringed promotes confidence and balance in the system.
Second, startups might also experience SEPs as downstream implementers who want to use those patents in their own innovations, and if SEP policy is out of balance such patents can operate as a barrier to entry and startup success. Especially for startups, the threat of injunctions can be unduly disruptive. Many startups will only offer a few (or a single) products or services. If any SEP holder can threaten an injunction to remove that product or service from the U.S. market, that would be enough to put a startup out of business. If that startup is looking to implement a standard, and willing to pay a fair license fee, SEP policy should not empower coercive licensing or abusive litigation that shuts them down.
Finally, imbalanced SEP policy can erect barriers to consumer access. Inflated licensing rates or injunctions that pull products from the market due to a SEP owner’s efforts to extract higher fees mean that fewer people can access the standard technology. A startup building new technology to reach those customers depends on them having, e.g., connected devices in the first place. If problematic SEP practices deny consumer access, it shrinks the markets and opportunities available to downstream, startup innovators.
The current administration’s commitments about balance and an indicated interest in reducing SEP holdup are a positive development for startups at each of these points in the innovation ecosystem. But these commitments should also come with policy, creating the certainty and predictability startups need.
Disclaimer: This post provides general information related to the law. It does not, and is not intended to, provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact an attorney directly.
