Basics of SEP in light of the recent German court’s decision

I have earlier researched, discussed and talked about Standard Essential Patents (SEP), however, I have never penned down my thoughts on this topic until now! ­– This is a basic post and is addressed to students and freshers in the field of  IP.

What is Standardisation?
Have you ever thought why competitors, despite being in competition with each other, manufacture products like, all plugs, sockets, charging points, 3G/4G network, etc. in a technically standard shape, size and dimension? Why doesn’t every company has its own technical specification of products manufactured by them? Imagine if a Havells plug goes off at your home and you go to an electrical shop to buy a new plug, however, the shop sells only Bajaj electrical products, which do not match with the specifications of Havells’. How difficult it would become for users to buy products strictly complying with the technical specifications of each company. Today, we can freely share our mobile chargers ­– for devices manufactured by Nokia, Vivo, Samsung and Lenovo to name a few – but we loudly express our feelings of dismay when an iPhone’s charger lacks interoperability with other handsets. What would have happened if it had been the case with every other thing we owned? There would be HAVOC! Or we would have become Aatmnirbhar (English term – self-sufficient) by now.

Why do we need standardisation?
To avoid the non-uniformity in the products, the Standard Setting Organisations (SSOs) set standards by identifying the best technologies that can enable interoperability. The participants in a standard-setting process (standardisation) are the technical experts, stakeholders, tech companies, patent holders, competitors etc. who come together to discuss and set a particular standard. For example, 3G and 4G technologies are technical standards set in the telecom sector by SSOs such as European Telecommunications Standards Institute (ETSI); MP3, CDs, USB, etc. All the participating members, the manufacturers or the competitors would manufacture their products with the set standards. The reason for inclusion of such standards in devices is that it not only ensures interoperability and seamless performance, but it also drives consumer demand in accessing the latest technologies that are tried and tested. Once a standard is set, and there may exist a patent (or a patent application) claiming those technical standards, that patent would be declared as SEP or Standard Essential Patent by the SSO upon adoption into the standard. This adoption presupposes the patentee’s duty to disclose any patent or application that may be essential. Now the other manufacturers who wish to manufacture the products that are standard-compliant are required to obtain a license from the SEP holder to avoid violation of patent rights.

Are you thinking what advantage does a competitor gain by declaring his patent as SEP?  A technical standard gives a lot of market return advantages to the adopters as it opens interoperability and intra-industry application of the technology. Just like an ICT standard technology is usable in mechanical field, transportation, etc. and a product developed, in compliance with a technical standard, has a huge scope for market return.

How the process of standardisation could be abused?
Now think how exploitative an SEP holder could be, when all the competitors are implementers of those standards and require an SEP license. In other words, the SEP holder could demand unjustifiable royalty rates from the competitors for use of his SEP, and the competitors would have no choice but to pay the demanded royalty to stay in the market. This particular situation is called patent hold-up. Thus, the SEP licensing needs to be checked.

To keep a check on any exorbitant practices by SEP holders, the International Standard Organisations (ISO) or SSOs prepare IPR policies, which require the members to offer licenses to the users of SEP on  Fair, Reasonable and Non-Discriminatory (FRAND) terms. Thus, SEP holders are committed to licensing on FRAND terms. That said, the SEP holders and the adopters or implementers interpret the FRAND terms differently, and it becomes a dispute when the adopters use the technology without a license or deny obtaining a license ­– This situation is called as patent hold-out­.

To avoid the conflicting issues of patent hold-up and patent hold-out, it is required that the SEP holders should offer the license on FRAND terms and adopters shall obtain the license.

But who starts the SEP licensing negotiation?
The negotiation on SEP licensing can be best explained with the help of the landmark case laws on SEP decided by the European Court of Justice (ECJ) and German courts.
In 2009, Huawei made a commitment to grant SEP licenses on FRAND terms for the LTE mobile standard set by the European Telecommunications Standards Institute (ETSI). The dispute arose when Huawei and ZTE couldn’t reach a settlement for SEP licensing and ZTE continued using Huawei’s SEP. However, previously, the German courts while deciding the SEP licensing disputes took the patentee friendly approach (Orange Book case), wherein the potential licensee/implementer had to show its willingness to accept the FRAND offer. Whereas, the European Commission took the implementer-friendly approach (Samsung-Motorola case), whereby if the potential licensee has shown its willingness to negotiate the FRAND offer and even then, if the SEP holder files a case of patent infringement, it will be considered as abuse of dominant position under Article 102 of TFEU. Accordingly, the Advocate General emphasised in the Huawei case, the need to find a ‘middle-path’ between the excessive protection of both the SEP holder and implementer, as given by the above-discussed cases. The CJEU’s judgement brought a series of guidelines for SEP licensing negotiations between both the parties to avoid the risk of patent infringement on the implementer’s part and abuse of dominant position by filing an interim injunction application on the SEP holder’s part. The stepwise guidelines provided are as follows:

• “Step 1: The SEP holder must give in writing a warning to the implementer of the infringement along with the details of relevant SEP;
• Step 2: The implementer must express a willingness to conclude a licensing agreement on FRAND terms.
• Step 3: The SEP holder must provide a specific, written offer for a licence on FRAND terms.  The offer must specify the amount of royalty and how it is calculated.
• Step 4: The implementer must “diligently” respond to that offer, in accordance with recognised commercial practices and in good faith. No delaying tactics must be resorted to at all. Alternatively, the implementer should make a counter offer to FRAND terms in writing to the SEP holder.
• Step 5: If the implementer is using the teachings of the SEP before a licensing agreement has been concluded, the implementer must provide appropriate security with respect to its past and future use of the SEP.”[1]

Recently, the German Federal Court for the first time applied the aforesaid decision of ECJ in the case of Sisvel v. Haier on May 5, 2020. The aforesaid stepwise negotiation was interpreted as follows:

• Step 1: The SEP holder must give warning to the implementer in writing of the infringement along with the details of relevant SEP ­– Detailed technical or legal explanation from the SEP holder is not required; mere notification along with a claim chart would be enough to meet the requirement.
• Step 2: The implementer must express a willingness to conclude a licensing agreement on FRAND terms ­– Clear and unconditional willingness is required by the implementer
• Step 3: The SEP holder must provide a specific, written offer for a licence on FRAND terms.  The offer must specify the amount of the royalty and how it is calculated – Offer to be provided only after receiving an adequate declaration of willingness in step 2
• Step 4: The implementer must “diligently” respond to that offer, in accordance with recognised commercial practices and in good faith. Alternatively, the implementer should make a counter offer to FRAND terms in writing to the SEP holder – SEP holder’s offer on FRAND terms could be different for different licensees, but differences should be justified as being non-discriminatory.

In contrast to the development of SEP litigation in Germany and EU, SEP litigation in India is still in nascent stages even after the first case was filed in 2003. Since then, a handful of cases have been argued before the Delhi High Court, out of which the most famous case was the patent infringement dispute of Philips vs Rajesh Bansal & Ors. decided in 2018, as it was the first post-trial decision on SEPs in India. The Delhi High Court’s decision in Philips’ case was based on patent infringement and less was discussed about the essentiality of the patents, however, it did touch on the FRAND licensing negotiation, which was determined by the parties. Nevertheless, the Indian courts have not witnessed any core SEP litigation involving both the patent and competition law issues and particularly like stepwise SEP licensing negotiations before the German courts. Except the cases filed against the Indian handset manufacturers by Ericsson, wherein the Delhi high court clarified that the competition law question should be decided by CCI. Hence, with the expected growth in the manufacturing facilities and trade in India, we can await some interesting decisions on SEP cases in the near future.

On a lighter note, I was recently involved in a mock patent licensing activity, which was undoubtedly interesting but full of jitters. Let me know your experiences of licensing negotiations (or any other IP negotiations) in the comment section below. #Happy_Patenting
Thanks to my roommate Yashwant for sharing his SEP expertise with me.

[1] https://www.nortonrosefulbright.com/en/knowledge/publications/8f90efbd/the-eu-court-of-justice-