This article is the second of a three-part series titled “An Innovator’s Guide to Standard Essential Patents” in which we elaborate on how Standard Essential Patents are created. In the first article we explored the fundamental concept and nature of Standard Essential Patents or SEPs and in the third article we will analyze the worth of SEPs in shaping modern-day innovations and product implementations.

An Innovator’s Guide to Standard Essential Patents – Part II: How are standard-essential patents created?

 

In theory, anyone can simply “declare” that a patent is essential to practicing a standard. In reality, declaring a standard-essential patent (SEP) can be a time-consuming and costly process. For most companies that are developing technologies related to a given technical standard, opting to become a member of standard-setting organization (SSO) is the best path for creating SEPs. While annual membership fees can be tens of thousands of dollars, the benefits of membership can far outweigh the costs.

The purpose of an SSO is to develop agreed-upon guidelines for the implementation of a given technology, such as enabling interoperability between systems and devices. Companies that are members of an SSO cooperate, explore, and choose the “best” way to implement the technology, even though member companies may otherwise be direct competitors. For example, the European Telecommunications Standards Institute (ETSI) is one of the largest telecommunications SSOs, comprising roughly 900 members from 65 countries. Annual membership is € 6,000 – € 155,000, depending on the member’s gross revenue from the sale of telecommunications products and services. In exchange for membership fees, members obtain access to the most up-to-date information concerning the standards, and they can contribute technical specifications to influence the direction of the standards development. This gives members a valuable head-start when developing products and patent portfolios as compared to non-members.

However, each member must declare to the SSO all of its intellectual property rights (IPR)—patents and patent applications—that the member determines might be essential to practicing the standard. Each member must further commit to license such IPR under fair, reasonable, and non-discriminatory (FRAND) terms and conditions to any member or non-member (FRAND licensing is the topic of a future article in this series).

When developing or licensing SEPs, there is an issue of scale. Consider ETSI for context. If each of its 900 members declare a few essential patents per year, the total number of SEPs would be quite large. However, some members are far more active than others, declaring hundreds of SEPs. In fact, for the 5G New Radio standard, the top ten ETSI members have declared almost 90% of the 5G SEPs so far. As of late 2020, there were nearly 26,000 declared 5G SEP families, comprising 94,000 standard-essential patents and patent applications. This means a company that is developing some 5G-connected device must obtain licenses to use each of the thousands of SEPs from hundreds of SEP owners!

 

Declared 5G Standard-essential Patents (SEPs)

Source: IP Watch Dog

 

There are at least two reasons why companies over-declare SEPs. First, SSO members are required to declare IPR that “might be essential.” As a standard develops and technical specifications are adopted, modified, or abandoned, inventions relating to those modified or abandoned specifications may no longer read on the standard. Second, portfolios with more SEPs generally command higher royalty rates when licensed. Either way, the issue of “non-essential SEPs” is an important issue to tackle for both SEP owners and SEP licensees. Indeed, court cases and research studies have shown that around 25-75% of all declared 3G, 4G, and 5G SEPs are likely not essential. Unfortunately, determining essentiality can cost thousands of dollars for just one SEP and millions of dollars for an entire portfolio.

There are several things that SEP creators can do to streamline the creation (and licensing) of SEPs. An obvious first step is to become an active member of the relevant SSO. The SEP creator should create claim charts in parallel with patent-drafting and prosecution, and should update the claim charts as the standard evolves and when patent claims are amended. This allows the SEP creator to more readily demonstrate essentiality, which can accelerate license negotiations and ultimately yield a higher royalty rate.

In summary, companies developing inventions related to a technical standard have opportunities to create and monetize standard-essential patents. With the right guidance, company leaders can determine the viability of creating a SEP-licensing revenue stream. The next part in this series will explore how to value a SEP portfolio.

 

Image Credits: Photo by Alexander Suhorucov on Pexels

This article is for informational purposes, is not intended to constitute legal advice, and may be considered advertising under applicable state laws. The opinions expressed in this article are those of the author only and are not necessarily shared by Dilworth IP, its other attorneys, agents, or staff, or its clients.