Balancing FRAND Commitments and Corporate Interests: Innovative SMEs Square Up Against Industry-leading Standard Essential Patent (SEP) Portfolios

This past summer, several of our members had the opportunity to attend the Canadian Telecom Summit hosted in Toronto featuring a wide-range of discussions ranging from expansions in telecommunication protocols to the implications of privacy and data security in the technology sphere.

Among other topics was the discussion surrounding the emergence of Internet of Things (IoT) devices and the subsequent need for collaboration between telecommunication providers and technology firms in order to sustain the rapidly evolving “smart” market. From a consumer perspective, many rightfully expressed concerns over the privacy of user data and residual effects of recent regulations such as the General Data Protection Regulation (GDPR) on just how certain data can be collected and used.

However, the same small-to-medium sized enterprises (SME) that reside on the cutting edge of innovation in the emerging internet of things (IoT) and that are tasked with implementing these new data privacy regulations continue to face old challenges. This is especially true in the context of Standard-essential patents (SEPs), where global technology giants have enough capital leverage and industry dominance to undermine any player attempting to access the telecommunication market.

Briefly, a patent that protects technology essential to a standard is called a standard-essential patent (SEP). In fact, it is virtually impossible to manufacture standard-compliant products such as smartphones without using technologies covered by at least one, if not several, SEPs. For example, more than 23,500 patents have been declared essential to network protocols such as GSM and the “3G”or UMTS standards developed by the European Telecommunications Standards Institute (ETSI). This means that each time an inventor seeks to implement a standard, say, allow their phones to communicate over 3G networks, they would inherently have to use an SEP in order to guarantee this functionality. When these patents are held by large multinational corporations, inquiries into anti-competitive measures are raised as this may give companies owning SEPs significant market power. For example, in a phenomenon known as the “smartphone patent wars”, holders of standard-essential patents sought to ban competitors’ products from the market on grounds of SEPs infringement, resulting in what was later dubbed a patent “hold up”. For large corporations, issuing these injunctions reaps no significant consequences, whereas small businesses simply cannot sustain the cost and time associated with SEP litigation, not to mention the potential loss in investment. In these circumstances, the seeking of injunctions can significantly alter licensing negotiations and lead to unfair licensing terms which ultimately creates a negative impact by limiting consumer choice and raising existing prices. Therefore, the task becomes a balancing act between the interests of the corporations seeking to protect and license their SEP technologies and the motivations behind the innovation community who seek to access these technologies.

In order to combat resource-draining SEP litigation, competition bureaus around the world have introduced certain terms of compliance. In Europe, the European Commission declared that in the standardisation context, where the SEPs holders have committed to licence their SEPs and to do so on fair, reasonable, non- discriminatory (FRAND) terms, it is anti-competitive to attempt to exclude competitors from the market by seeking injunctions (on grounds of SEP infringement) so long as the licensee is willing to take a licence on FRAND terms. With respect to IoT innovators, the Commission went one step further and recognized the significant contributions of SMEs to innovative IoT solutions as well as the critical role of standards in “empowering SMEs to compete with industry giants”.

Ultimately, most policy makers and legislators would agree that one of the main goals of this type of competition regulation particularly in the intellectual property field is to protect against business models that engage in licencing extortion, otherwise known as “patent trolls”. Just this month, a Californian jury awarded WiLAN, a Canadian-based intellectual property licencing company, $145 million in damages following a patent infringement case against Apple. However, among other allegations made by Apple, the company claimed that WiLAN’s business model “revolved around threatening to initiate litigation against technology companies to extract licensing fees”, a strategy they claim has been used by the defendant on over 275 companies.

Likewise, commitments to a fair and accessible marketplace become even more important in light of recent cross licensing agreements among large corporations. This month, Ericsson and LG Electronics renewed a global patent license agreement on FRAND terms including a cross license that covers patents relating to both companies’ 2G, 3G, and 4G standard-essential patents. Ericsson and LG Electronics are two of the leading contributors to the GSM (2G), UMTS (3G), and LTE (4G) cellular communication standards and both companies are making significant investments in the development of the NR (5G) standard reported on earlier. Although to some this may seem like nothing more than a monopolistic endeavour, some nations have made it clear that the merits behind such industry-leading patent portfolios deserve their respective remuneration.

In Canada, for example, the Competition Bureau has expressed caution with tipping the SEP licensing scales in favour of SMEs. The Bureau recognizes that a firm’s commitment to license on fair, reasonable and non-discriminatory (“FRAND”) terms does not inherently mean that it is committing to license on a royalty-free basis. That is, as much as the Bureau seeks to protect newcomers, it also acknowledges that corporations may often make large investments in research and development and accordingly, ought to be permitted to collect appropriate royalties in order to recover the value of their investment. This is not to say that Canada’s commitment to recognizing the value of innovation through SMEs have been overlooked; in fact, the National Research Council of Canada (NRC) is now able to invest in SME innovation projects for up to C$10 million or a maximum 50% of the project’s value.

Nonetheless, the fact remains that an alignment of efforts to balance the playing field between the wide range of innovators and corporate technology providers both in Europe and in Canada, is necessary to support international mandates of a balanced SEP licensing ecosystem that is safeguarded by a meaningful FRAND commitment.

 

Andrei Mesesan is an IPilogue Editor and a JD Candidate at Osgoode Hall Law School.

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