FRAND & SEPS

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The positive role of patents in standardisation

Standardisation is the act of a market agreeing to limit the range of available products by removing incompatible non-standard devices. This benefits the user by ensuring interoperability, and removing any user concerns that products will work. Examples of successful standards include Compact Discs (CDs), DVD, and USB interfaces – consumers making buying decisions just know any CD will play in any CD player; a DVD will play in a DVD player, and any USB peripheral will connect to a USB interface.

So, standards have a positive impact on society, but not just for the consumer, manufacturers and those involved in R&D also benefit:

  • In the case of high-tech products, the benefits that a consumer derives is greater the larger the network effects
  • The economies of scale on the demand side implies that the benefits to society are greater when standardisation allows for widely adopted compatibility
  • Standards also reduce manufacturing costs for compliant products; and further reduce marketing costs through simpler information diffusion.

The first challenge for Standards Setting Organisations (SSOs) is to open the standards setting process to attract the best technology from all organisations, including SMEs, technology providers, academia, as well as large vertical multi-nationals.

The second challenge for SSOs is open access to the standard – the concept that the standard, once agreed, should be open for all to practice – even by companies that were not part of the standards setting process.

A balanced solution

The vast complexity of modern standards, particularly in telecommunications, risks alienating small and medium size firms (SMEs) as only large verticals organisations have the capacity to exploit such global markets. Other Non-Practicing Entities (organisations that do not manufacture products, but may be involved in research and development of the technologies, and holds related patents) also face potential barriers to the adoption of their solutions.

Those large verticals that have the capacity to engage with the standards setting process, but do so at their own cost. Performing technical R&D, sending people to standards meetings, drafting reports etc, are significant investments.

There is a balance to be found: most SSOs limit their mandated to the identification of the best technical solution to meet the market needs; while maintaining policies which exclude activities that could be called into question as anti-competitive, such as negotiating the costs or licensing terms of those technologies.

A virtuous circle of innovation and reward

If the standards setting process is successful then the resulting technical specifications have the beneficial effect of lowering the barriers of entry for anyone to then become manufacturers of standards compliant products and to compete directly with those organisations that invested in the SSO process.

There must therefore be mechanisms to reward the investments made, and the risks taken in order to stimulate future investment; to encourage SSO members to drive the technology forward; and to attract new members to the SSO. Licensing of patents included in the standard is one such approach.

Patent licensing gives companies involved in R&D and standardisation some confidence for new investments. Patent licensing also maintains the balance, and ensures a virtuous circle of innovation and reward, where continuous innovation is maintained in a competitive market environment

Willing licensee / licensor

Cubicibuc believes that in line with recent legal judgements both licensee and licensor should act as in a “willing” manner. Licensee as a “willing licensee”, and licensor as “willing licensor”. Both as good IP citizens.

For the licensor acting as a willing licensor implies providing the necessary information to potential licensees to allow them to make informed judgements on the asserted portfolios. Many do not. Many licensors leave the complex analysis to the licensee, expecting them to behave as “willing licensees”.

It is Cubicibuc’s experience that SEP licensing entities, whether operating companies or patent licensing platforms such as patent pools, tend to leverage the information asymmetry in negotiations.

This has been the case in the telecoms sector as large patent holders have sought to assert their portfolios against smaller, less sophisticated handset makers. It is even more relevant in the current environment as telecoms patent holders are beginning to assert their IP against organisations from other sectors, due to adoption of communications technologies. Organisations from non-telecoms sectors may not have any experience of patent licensing in general, let alone SEPs and FRAND related negotiation.

We believe it is vital for potential licensees to be able to understand and manage the assertions of patent holders from an informed position. In the first instance this means having the language to fully engage with the negotiation process. Such “Awareness” means having a deep understanding of the issues: the background to standards essential patents, the relevance and scope of the technical standards and an understanding of how this relates to the alleged infringing products.

We believe two elements are necessary:

  1. Build awareness of the issues in the decision making team within the business
  2. Develop a FRAND model (http://www.cubicibuc.com/frand-model) for use in internal discussions and external negotiations

Training and awareness building

Cubicibuc regularly delivers training sessions for our clients that “sets the scene” for SEP analysis and builds a common language within our clients’ organisations for FRAND negotiation.

This typically includes:

  • Discussion of standards relevant to the context. This will involve reviewing all standards related technologies in the products – not just those identified by asserting organisations. This allows organisation to begin to plan for a Total Cumulative Royalty (TCR) of the product – sometimes called the Royalty Stack.
  • Discussion of the standardisation process, including SEP declarations, the IPR Policies and implications, eg the difference between SEP and non-SEP and declared vs non-declared patents; reasons for over declarations and Top-Down modelling.
  • The overall SEP landscape and share of declarations. A top-level view of companies involved in each standard, the total landscape size, and share by company (by declarations) by technical standard. This provides organisation a view of the potential patent claims that may be made, and allows organisation to prioritise licensors in terms of the potential risk they present.
  • A discussion of other related topics and the view of, the industry and courts as appropriate, eg Top-down approaches to FRAND theory, patent exhaustion, SSPPU.

Benefits

We encourage all relevant decision makers within the client’s organisation to be present for an interactive session that could be delivered in a workshop setting.

The key benefits of this will be:

  • Building a clear view of targeted products and the associated standards
  • Developing a common understanding of the context of SEPs and FRAND licensing
  • Building the capability within client team to negotiate and discuss issues of SEPs and FRAND on an equal level with potential licensors
  • Building a view of the potential licensing demands that might be made by the various patent holders.
  • Begin to explore preferences in building a FRAND theory.

In building a counter offer for FRAND demands client’s must make decisions on approaches which are consistent with other values and may in the future be used against client’s in other licensing activities. It is important that organisations understand the implications of the terms and selections made – hence we encourage exploring the implications in a FRAND model (http://www.cubicibuc.com/frand-model) .

Having a common understanding within the team is an important knowledge building stage, and this process will allow organisation to build issues around SEPs and FRAND licensing into its strategic processes and thinking for future technologies, and future products.

IPR: Some useful definitions

See our other pages on IP Topics including: