The licensing of Standard Essential Patents (SEPs) has often been associated with tactics deemed as unfair price discrimination. SEPs are fundamental to products adhering to specific technical standards, including cellular and Wi-Fi, integrated into everything from laptops and smartphones to medical devices and autonomous vehicles.
In their quest to monetize SEPs aggressively, numerous companies are said to practise price discrimination by demanding royalties based on the value of the licensee’s end-product or service. In his detailed examination, David Katz outlines how this system results in licensees paying different fees for the same technology, dependent on factors extrinsic to the standardized technology itself, such as profit margin and market target.
Katz draws the comparison to a scenario where mechanics might price their services based on the income a vehicle generates for its owner, illustrating the inherent bias in such a pricing system. The technician who holds a SEP doesn’t contribute to the licensee’s potential market success or the sector in which it’s implemented. Hence, it becomes unfair if the royalty price gets influenced by these factors.
Most leading standards organizations mandate participants to adhere to agreements of Fair, Reasonable, and Non-Discriminatory (FRAND) terms. The FRAND commitment is designed to circumvent such practices by limiting SEP holders to royalties aligning with the incremental value provided by the patented technology. Market opportunism otherwise enables SEP holders to demand higher fees based on usage, which runs counter to the FRAND commitment.
Indeed, violating the FRAND commitment threatens the delicate balance of innovation incentives, deters newcomers from investing in new applications of technology and potentially slows down the pace of innovation. Success and innovation penalties imposed through discriminatory licensing further stymie companies from entering more profitable markets due to the inflated SEP costs.
The best way to ensure FRAND compliance, according to Katz, is to establish a royalty based on the cost of the component allowing the standardized feature. This approach sees a uniform charge for a service within a consistent system, where the charge doesn’t fluctuate based on the client’s profitability from their end product.
Governments worldwide, including the European Commission, the UK Intellectual Property Office, China’s State Administration for Market Regulation, and India’s Telecom Regulatory Authority, are taking proactive steps to assess and reform SEP licensing policies and regulations. It’s indeed a critical juncture to address and rectify discriminatory practices and uphold the commitment to fair and non-discriminatory licensing, not just as a legal requirement but as a responsible step toward fostering a more balanced and innovative technological sector.