Two Lies and the Truth About the 2021 Draft SEP Licensing Policy

Standardized technology is everywhere – from mobile phones to smart appliances to automobiles. Industries based on standardized technology are thriving on nearly all measures of competition, including extensive innovation resulting in new products and features, lowered prices even with upgraded products, and many manufacturers vying for consumers attention and dollars. In short, businesses and consumers are benefiting from standardization.

One reason these industries are flourishing is because the ecosystem surrounding these industries are generally well balanced. Companies that participate in standards development organizations, or SDOs, and engage in research and development to develop the technology on which these standards are based are able to secure patent rights to protect their investments. These companies can then license these patents, known as standard essential patents or SEPs, and recoup some of their investments via licensing fees. In this respect, SEPs are no different than other patents. 

However, to facilitate a widespread adoption of the standard and ensure that numerous manufacturers are able to offer products or services that are based on the technology standard, SDOs often require a FRAND commitment from companies who submit technology for incorporation into a standard. A FRAND obligation requires an SEP owner to license their patented technology to any and all comers on fair, reasonable, and non-discriminatory bases. This is different from non-SEPs, where a patent owner can charge whatever license fees he wishes or even decline to license the patent altogether.

This system that rewards the SEP owner while still ensuring manufacturers have adequate access to the technology creates a balanced ecosystem that has been working well and performing as we would hope. Despite this, the U.S. government is poised to step in and dramatically upset this balance. In December 2021, the US Patent and Trademark Office (PTO), the National Institute of Standards and Technology (NIST), and the US Department of Justice, Antitrust Division (DOJ) published the Draft Policy Statement on Licensing Negotiations and Remedies for Standards-Essential Patents Subject to Voluntary F/RAND Commitments. Numerous comments were submitted about the policy; many can be summed up as “two lies and the truth.” 

Lie #1: The draft policy is essential because there are serious problems with the standardized technology ecosystems.

Nope. The standardization ecosystem is functioning well with healthy amounts of both innovation and competition. The draft policy refers to “opportunistic behavior” by SEP owners, but provides no evidence of this behavior and no analysis that the draft policy is needed. Moreover, significant empirical studies have shown that the problem of “opportunistic behavior” by SEP owners does not exist – exactly what we would expect given how well standards-intensive industries are performing without the imposition of the draft policy. As one submitted comment noted, the draft policy is a “solution in search of a problem.” Because there is no real problem to address, any changes the draft policy imposes are more likely to upset the delicate balance that currently exists in favor of the implementers of standardized technologies. 

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Lie #2: The draft policy does not prohibit SEP owners from obtaining injunctive relief.

Technically true, but, in practice, nope. The practical result of the draft policy is that injunctions will be unavailable for infringement of SEPs. Specifically, the draft policy indicates that injunctions are justified where an implementer is “unwilling” to enter a FRAND license. However, the draft policy continues by defining an “unwilling” licensee as one who “refuses to pay what has been determined by a court or other neutral decision maker” to be a FRAND rate. Unless an infringer is acting in contempt of the court, injunctive relief is unavailable. 

Under the policy, although an SEP owner must offer a FRAND license, manufacturers are under no obligation to accept. And, even if they refuse to negotiate, they aren’t considered unwilling licensees until they’re in contempt. Without the ability to obtain an injunction, there is an incentive to infringe the patent since the only risk of litigation is paying the licensing fee they would have paid to begin with. This upsets the balance and encourages implementers to engage in predatory infringement, rather than take licenses.

Truth: The draft policy will have significant negative impacts on both innovation and national security.

Because the draft policy effectively prohibits SEP owners from being able to enjoin infringing manufacturers and otherwise shifts what had been a balanced ecosystem to favor this group, it is likely that innovators will be less inclined to participate in standards development. Devaluing IP protections in the U.S. disincentivizes innovation.

At the same time that US companies may be moving away from SDOs due to the draft policy, China is intentionally creating a greater presence for its companies and country in these organizations. Many aspects of national security rely on standardized technology; ceding leadership in SDOs to China means that much of our national security will be in China’s hands. 

Imposing a policy that disincentivizes innovation by making SDO participation unattractive for US companies and that has the potential to allow China to decide the future of the technology at the heart of our national security, all based on the lie that there are problems that need to be fixed is a game that the US can ill afford to play.

Kristen Osenga is the Austin E. Owen Research Scholar & Professor of Law at the University of Richmond School of Law.