Standard-Essential Patents

Standards play a key role in many industries, including those critical for future growth. Intellectual property (IP) owners vie to have their technologies incorporated into standards, so as to collect royalty revenues (if their patents dominate some of the functionalities embodied in the standard) or just to develop a competitive edge through their familiarity with the technology. However, it is hard to know in advance whether patents are complements or substitutes, i.e., how essential they are. Thus a major policy issue in standard setting is that patents that seem relatively unimportant may, by being included into the standard, become standard-essential patents (SEPs). In an attempt to curb the monopoly power that the standard creates, most standard-setting organizations (SSOs) require the owners of patents covered by the standard to grant licenses on fair, reasonable and non-discriminatory (FRAND) terms. Needless to say, such loose price commitments can lead to intense litigation activity. This paper constitutes a first pass at a formal analysis of standard-essential patents. It builds a framework in which essentiality and regulation functions can be analyzed, provides a precise identification of the inefficiencies attached to the lack of price commitment, and suggests a policy reform that restores the ex-ante competition called for in the literature and the policy debate. Key concepts include:

• Standards transform inessential patents into standard-essential ones.
• Price discussions within the standard setting process run the risk of expropriation of IP holders, as even balanced SSOs will "blackmail" IP owners to accept low prices in exchange for their functionalities' being selected into the standard.
• The ability to engage in forum shopping enables IP owners to shun SSOs that force them to charge competitive prices. This suggests imposing mandatory structured price commitments on SSOs.