IP: Licensing standard essential patents in a changing legal environment

SEP licensors and prospective licensees have little choice but to negotiate in an uncertain environment, but due diligence can help

Standard Essential Patents (SEPs) are patents that cover adopted standards in a particular industry. The standards themselves may be de facto (i.e., adopted by a particular industry without any deliberative process or other agreement or coordination, de jure (i.e., imposed by statute or regulation), or adopted by consensus of industry participants acting as voluntary members of a standard setting organization (SSO). In recent years, SEPs have become featured players in high profile and high stakes litigation, particularly in the telecommunications industry.  .

Generally, licensing SEPs is much different from traditional patent licensing. Licensors of SEPs are ordinarily required to offer non-exclusive licenses to all those wishing to obtain a license on fair, reasonable and non-discriminatory (FRAND) terms. Recent case law makes it clear, however, that the precise meaning of the FRAND obligation imposed on SEP licensors is far from settled (such as Microsoft Corp. v. Motorola, Inc.,; In re Innovatio IP Ventures, LLC Patent Litig.; Microsoft Corp. v. Motorola, Inc.; Apple, Inc. v. Motorola Mobility, Inc.; and In re Certain Wireless Devices With 3G Capabilities And Components Thereof). As a result, both licensees and licensors of SEPs are obliged to navigate a dynamic landscape of legal rights and duties that inevitably have material impacts on the terms and conditions of SEP licenses.

Until recently, it was widely assumed that the bottom-line issue at stake in a FRAND-compliant SEP negotiation was the offered royalty rate, but with courts increasingly willing to explore all aspects of the offered terms and subsequent negotiation, licensors would be wise to carefully assess all material terms of contemplated licenses before making an offer to a prospective licensee. That assessment should consider not just the royalty rate and market position of the licensee, but also such licensing terms as territorial scope, most-favored-nations provisions, incorporation of improvement patents and cross-licensing.

For both the licensee and the licensor of SEP patents, the best way to avoid missteps in the negotiation process is due diligence. Like a merger, acquisition or similar corporate transaction, the parties to a SEP licensing transaction need to know as much as they can about not just the SEPs being licensed, but also other patents that cover the same or similar standards, but which are not implicated by the transaction. Knowing the valuation of the SEPs involved and the other SEPs, as well as the other terms that may affect the value of the SEPs offered for licensing, can be critical to ensuring a FRAND-compliant licensing program and successful FRAND negotiation.

And like any complex corporate transaction, where obtaining an expert to provide an opinion regarding valuation can be a valuable tool to ensure that a company’s board of directors will not be second-guessed by its shareholders, expert advice regarding the value of a SEP portfolio and proposed license terms can be an excellent tool for ensuring that courts will not second-guess a licensor’s decision to offer particular licensing terms for its SEPs, or a licensee’s decision to reject a particular offer to non-exclusively license those SEPs. Given the state of the law today, a determination of whether a transaction is FRAND compliant does not lend itself to an objective analysis, so having a third party expert’s guidance on the matter can help to ensure that a licensee or licensor’s own conclusions are not the product of unrealistic expectations driven by its own biases.

Conclusion

Given the dynamic state of jurisprudence governing SEP licensing and FRAND compliance, SEP licensors and prospective licensees have little choice but to negotiate in an uncertain environment, confronting the strategic and compliance implications of SEPs with no objective measure of whether or not particular conduct is FRAND compliant. Doing thorough due diligence, being consistent in negotiating principles, and treating similarly placed parties in similar ways are all sound means of minimizing the risk that a licensor’s offer will be found to be inconsistent with that party’s FRAND obligations, while likewise minimizing the risk that a prospective licensee’s election to refuse an offered license because it is not FRAND compliant is not misplaced.

Contributing Author

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Jeffrey C. Johnson

Jeffrey C. Johnson is a partner in Pryor Cashman’s Intellectual Property Group. He is experienced in the transactional aspects of technology and intellectual property exploitation...

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