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Essential Patents

Posted Friday, October 26, 2012 by Mike Cicero

Industry standards are highly beneficial to the advancement and availability of technology. Because new technologies are constantly being developed, many of which serve the same or substantially similar functions, the key players in an industry often form a Standards Development Organization (SDO) to agree upon common technologies to incorporate into their products. The technologies these key players choose become the industry standards.

The widespread adoption of industry standards fosters the development of products that inter-operate with each other. For example, both Apple devices and Windows devices can create, save, and share photos in the standard created by the Joint Photographic Experts Group (the “JPEG” industry standard). Without this or a similar standard Apple and PC devices might each utilize its own file format for images which in turn would make communication between devices more difficult than necessary. Standards also lower product cost by spreading development costs over an industry. For example, rather than four companies each developing four technologies for a total of sixteen technologies, each company can develop one technology and share it with its competitors. There are other benefits as well, such as lowering “switching costs” for consumers who wish to switch between competing products.

One major disadvantage to adopting industry standards comes from fact that the vast majority of technologies that become industry standards are patentable subject matter. Patents that claim technologies which are selected by a SDO to become an industry standard are “essential patents.” In other words, if an industry standard cannot be utilized without practicing a certain patent then that patent is an “essential patent.” Essential patents and non-essential patents are significantly different. Both may bestow market power onto their owners. However, non-essential patents do not inherently bestow market power because, after all, the claimed technology may very well have no customer base and be therefore valueless. Moreover, the market power that a non-essential patent does bestow is limited by the availability of alternative technologies. Conversely, essential patents do inherently bestow market power onto its owners. First, presumably the SDO wouldn’t have taken the time to decide upon and adopt a standard if it did not intend for the technology to be widely used and so the technology will have a customer base. Second, by the SDO’s adoption of the technology as an industry standard it is by definition eliminating the availability of alternative technologies. Therefore, a patent’s value is significantly, and perhaps unduly, enhanced by its adoption into an industry standard.

If the owners of the patent were under no obligation to negotiate terms of use for a patent once it became essential then each time a SDO decided upon a standard the patent owner would gain a windfall of unearned market power. Fortunately SDO’s have thought of the risk that owners of essential patents will abuse their market power and have adopted rules, policies, and procedures to enable competitors to access standard technologies. These rules, policies, and procedures, known as intellectual property rights policies (“IPR policies”), require owners of essential patents to license the patents to competitors on fair, reasonable, and non-discriminatory (“FRAND”) terms. Typically, before a technology is adopted as a standard the owners of any patents which are needed to practice that technology are required to commit (promise) to license the technology out on FRAND terms.

Recently, Apple publicly revealed that the United States Department of Justice will be investigating Samsung’s use, or misuse, of its essential patents. Apple has asserted on several occasions that Samsung has offered to license some of its declared essential patents to competitors only on unfair terms. Also, in January of this year the European Commission launched an investigation into Samsung having possibly used essential patents as a tool to stifle competition which would be in violation of antitrust laws.

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