Why it is patently wrong to underestimate SEPs’ importance in emerging markets

Standard-essential patents (SEPs) play a crucial role in the modern intellectual property (IP) landscape. They cover technologies necessary for complying with industry standards, enabling global interoperability for devices and systems such as Wi-Fi, Bluetooth, and 5G networks.

However, SEPs also bring complexities – especially in emerging markets and for smaller companies navigating their way through IP challenges. In this interview with Managing IP, Steven Pepe, a partner and chair of the intellectual property litigation practice at Ropes & Gray, shares his insights on the opportunities and hurdles that SEPs present in these markets for smaller enterprises.

Hear Steven Pepe, Matthew Shapiro, and Frances Zhang of Ropes & Gray discuss licensing negotiation groups with Managing IP's senior reporter, Rani Mehta

SEPs underpin the very fabric of modern technological communication, according to Pepe. “Without industry standards and the resulting SEPs, technology development would come to a screeching halt,” he says. “We depend on standards every day, [in] cellular, video, Wi-Fi, Bluetooth, USB.”

Standards ensure interoperability between devices and systems, meaning an Apple device can connect with a Samsung device, or a Windows computer can communicate with a Mac. While standards are critical in product development, SEPs can even enhance companies’ motivation to engage in R&D. “SEPs promote innovation by ensuring protection for contributions and developments,” Pepe adds.

However, with SEPs comes the fair, reasonable, and non-discriminatory (FRAND) obligation, a commitment by SEP holders to license their patents on fair terms. Pepe notes that FRAND terms are designed to “protect innovators and implementers alike, encouraging both the creation of, and access to and adoption of, new technologies, and ultimately that is good for the consumers and the public at large”.

The impact of SEPs on innovation, especially for smaller businesses such as tech start-ups, is a point of debate, and Pepe believes there are two schools of thought.

The first view posits that SEPs can be a barrier for smaller companies, which often operate on limited budgets. “They need to focus on product development, innovation, creating a market for their products, and getting to market as soon as possible,” Pepe says. “In a typical start-up or a company working in an emerging market, they're operating on razor-thin budgets. If they need to engage in SEP licensing discussions, that takes away precious time, money, and resources that these start-ups don't have.”

“And there's a perceived degree of unequal bargaining power. If I'm a small tech start-up or in an emerging market or developing company and I have to negotiate or litigate with a powerhouse company that is well established and has a large portfolio and deep pockets, there may be unequal bargaining power and leverage.”

However, SEPs can also serve as a facilitator of innovation, especially given that they offer smaller companies access to advanced technologies they may not have the resources to develop internally. This access could accelerate product development and improve market readiness. “If they didn't have access to these technologies, they would need to develop them in-house, which requires time and money and resources,” Pepe says. “Once you have access to standardised technology, that could accelerate the technological development process.

“And the FRAND obligation is supposed to provide access to SEPs on fair terms. So having access to SEPs on fair, reasonable, and non-discriminatory terms may reduce the time that is needed for companies to innovate and develop technologies in these emerging spaces. You could also have collaboration between start-ups and SEP holders that can result in quicker and better innovation.”

“So there's really two schools of thought and it depends a lot on the behaviour of the licensor in those situations and whether it is really, truly offering fair terms for their SEPs.”

The possibility of SEP holders misusing their licensing power can also result in monopolistic behaviours. “The FRAND obligation, in theory, should prevent monopolistic behaviour,” Pepe says. “But there are SEP holders that demand rates that are not FRAND, they're supra-FRAND, and that can make access to technologies prohibitive and difficult and costly. And when you limit access to SEPs, it can stifle innovation, whether you're a tech start-up in an emerging market or an established market.”

Monopolistic practices also negatively affect consumers, Pepe cautions, as they can lead to higher prices and slower technology development. “Ultimately, what we're trying to do is develop technologies that will be beneficial not just for the licensors and the licensees but the public and the consumer,” he says. “We want them to have access to these great technologies that allow for interoperability that makes things more efficient and cheaper. And if you have monopolistic behaviours and monopolistic agreements, that could drive up prices and slow down the development process.”

One way that companies operating in emerging markets can counterbalance SEP challenges is by strengthening their IP portfolios. By developing their own patents, such companies can negotiate cross-licences or use their IP as leverage in licensing negotiations. “You need to make an investment in your own IP,” Pepe says. “When you have your own patents, when you have your own SEPs, these can be used in licence negotiations for a cross-licence or as an offset when negotiating with an SEP holder. When you enter into that negotiation with nothing to offer, you have no negotiating power.

“I've had small clients that are going into SEP negotiations and they're floating their own non-SEPs as part of the consideration and the negotiation. That helps to level the playing field and provides lots of leverage. That means that tech start-ups need to have the money, time, and the resources to be able to build up their own patent portfolios.

“But these companies also need to identify developments and innovations that are patentable within the work that they're doing. And that's a big problem I see with tech start-up companies. They're so focused on technology development, getting to market, making it better and more efficient, that they don't take a step back and say, ‘Well, do we have something that's patentable here that we can patent and use as an asset?’ And a lot of times they just don't have the resources to do that.”

Pepe also suggests that emerging companies should pursue indemnification agreements with suppliers, especially those providing essential components such as Wi-Fi or cellular functionality. “Small companies should try to get indemnification from suppliers, though this is often difficult,” he says, before calling on regulatory authorities in emerging markets to implement regulatory measures that promote equitable SEP licensing practices. “When we're dealing with emerging technologies, maybe there should be more regulation and oversight to make sure the playing field is level.”

Pepe is quick to assert that there is insufficient recognition among start-ups concerning the importance of SEPs in emerging markets. “I don't think they are fully aware,” he says. “I don't think they're fully educated. My experience with start-ups and with small technology companies is that they're so fixated on getting products to market as their priority, and being aware of SEPs, being aware of getting their own patents, all of that is not front and centre for them, and it really should be.”

While insufficient awareness of SEPs is a common problem, knowing what action to take is another issue. Staying “off the radar” of SEP holders can be a beneficial strategy for start-ups. “If you're an emerging company, you’re not generating a lot of revenue,” Pepe explains. “You may not be on an SEP holder’s radar. If I'm an SEP holder, I'm going after the big fish – the people with lots of past damages, lots of revenue, lots of forward-looking sales. So stay off the radar. You might not be a worthwhile target for an SEP holder.”

Additionally, he advises that start-ups thoroughly assess licensing offers, including examining licensors’ methodologies for determining rates. “The other thing I see with smaller companies is that they get the offer from the licensor and they don't try to get an understanding of the methodology that the licensor used to get to that rate,” Pepe says. “How can I assess whether the offer you're giving me is FRAND if you don't tell me how you got there? What's your methodology? What is your approach? What are your assumptions that are built into those models? That's really important, because then you could better assess and push back on that.”

Limiting licensing to essential geographic or technical needs to minimise costs is also worth consideration. “Perhaps you don't need a full 5G licence,” Pepe says. “You know you don't need the robustness or the bandwidth of 5G, so perhaps you do 4G, where you can get, presumably, a lower rate. Think about geographies. If I’m a tech start-up and I’m only in the US market or the European market, why do I want to pay for markets that I'm not in? Maybe, for the short term, you don't have money, you're just getting a US licence for five years as you expand.”

“And then, finally, as a licensee, when a licensor comes to you and says ‘I have 50 SEPs’, don't take the licensor at his word. Ask the company to confirm essentiality. Give me the claim charts. I could then see if your patents are truly essential to the standard. We all know that there's a huge over-declaration problem. And as you reduce the SEP patent count for the licensor, the rate should go down.”

“Consider patent pools, which is a great option for small companies. But, ultimately, try to avoid litigation. For tech start-ups, it’s just like sounding the death knell.”

Patent pools typically have lower rates and reduce transaction costs, making them an accessible option for smaller players.

Pepe points to Avanci, a patent pool organisation, as a successful example of SEP collaboration. “Avanci has a number of programmes; some of which have been successful, some of which have not,” he says. “Let's talk about their automotive programme. Cars are becoming much more connected. They're turning into big smartphones. Think about 15 years ago to maybe even 10 years ago, your car wasn't really connected. You could maybe use Bluetooth to connect your phone to your car and that was about it. But think about the functionality now that you have with your car – you can operate it as a hotspot, all the data that you have coming into the car… Avanci started this automotive programme. And when you look at the pure numbers, you could say that it is probably successful. The last time I checked Avanci’s website, the automotive programme had over 50 licensors and 50 licensees.

“Pools typically have lower licence rates. There's lower transaction cost. I don't have to negotiate bilaterally with all those licensors.”

Pepe also highlights the potential of licensing negotiation groups, where implementers collectively negotiate with licensors, helping to balance power dynamics. “The other interesting option that is relatively new, but it's gaining some traction, is licence negotiation groups,” he says. “There was one that was recently formed. It's called the Automotive Licensing Negotiation Group, and that's like a patent pool – a bunch of licensors getting together to license their patents. It's a way to decrease licensing costs, because now you're pooling your resources.”

The global SEP landscape has expanded significantly in recent years, which has prompted discussions on international arbitration and mediation to mitigate jurisdictional conflicts. “It used to be that with SEPs, you would litigate them in the US and possibly Germany, maybe the UK, but over the last four or five years, we've seen this evolution,” Pepe says. “SEP litigation now is absolutely global. You have US, Germany, the UPC over in Europe, Brazil, Colombia, China, India. And you see that when you have an SEP enforcement strategy, it's never limited to just the US. This results in a lot more forum shopping and races to the courthouse, with different courts in different countries issuing injunctions, and it makes it a bigger mess. That's why there's been some push towards perhaps arbitrating internationally or mediating SEP disputes, just to avoid this mess of the global fights that you're going to have.”

The SEP regulatory landscape is also changing rapidly, with countries and standard-setting bodies continually adjusting policies to balance the needs of SEP holders and implementers. “The SEP landscape is constantly evolving,” Pepe says. “You see all these countries trying to adopt new regulations and laws to try to better balance the needs of the implementers and the needs of the SEP holders, and that balance is very hard to get.”

SEPs are a cornerstone of technological progress but also a source of challenges for companies operating in emerging markets. While they facilitate interoperability and innovation, SEPs can also hinder small businesses and new technologies due to high licensing costs and monopolistic practices.

Through strategic IP investments, collaborative licensing options, and possibly heightened regulatory oversight, Pepe believes that smaller companies can better navigate the SEP challenges in emerging markets, ultimately contributing to a more balanced and accessible global technology ecosystem.