Much of the public is aware that a number of controversies swirl around the treatment of patents. However, due to the high-powered litigation surrounding these disputes between large companies with household recognition (and the sometimes staggering damage awards that grab headlines), some may perceive this as simply another front in the wars between these mega corporations fought by armies of attorneys that do not relate to or impact small- and medium-sized companies.
In reality, the legal and policy decisions made around patents deeply impact countless small- and medium-sized businesses, particularly those that need to implement patents in order to integrate standardized technology into a product (these patents are known as “standard essential patents,” or SEPs). Technical standards (such as IEEE-802.11, also known as Wi-Fi), in fact, are developed through an open and consensus-based process in order to ensure interoperability among all industry participants – presuming that an implementer can use the standard which naturally incorporates patents. In the well-known instance of Wi-Fi, such a standard may incorporate hundreds of patents. That is why those contributing patents into a standard are required to make a commitment to negotiate this licensing fee on Fair, Reasonable and Non-Discriminatory (FRAND) terms. So, who is negatively impacted when a SEP licensor disregards their FRAND obligations?
While the “big company” patent disputes have been heavily reported in the media, too often we have not been hearing about the muting impact that abuse of FRAND commitments generally has on the small entrepreneur and innovation. The impact of these abuses – which affect the survival of small companies that do not have the resources for years of litigation and are simply unable to fight lengthy court battles when SEP FRAND obligations go off the rails — should not be underestimated.
The labyrinth of smartphone standards from Bluetooth to Wi-Fi to image sensors to GPS, radio frequencies and many more all require developers that use these standardized protocols as a baseline for innovation to pay significant patent licenses on SEPs that have a FRAND obligation attached to them. Because licensors of SEPs naturally hold overly-dominant bargaining power in these licensing negotiations, this is precisely why FRAND obligations are required of them.
While a Fortune 500 company can afford to throw endless resources into litigating disputes that arise through leveraging the standards that underlie these operating systems, small innovators simply do not, and are easily locked out by anti-FRAND behavior. So when these SEP licensors willfully depart from their FRAND obligations, the damages are multiplied in the context of small businesses and innovators.
Two renown economists and former officials at the U.S. Department of Justice concluded that a reasonable standard implementer would be willing to settle for more than three times the royalty level that the court deemed reasonable in a dispute between Microsoft and Motorola just to avoid a mere 1.2% chance of losing in court. These figures are much higher for small business who lack the resources to litigate.
A patent system where those who were bequeathed a license to make money – because one or more of their SEPs were accepted into a widely-used technical standard in return for a FRAND commitment – resort to back-alley extortion tactics usually seen in a Scorsese film (for example, unreasonably filing for injunctions in District court during a licensing negotiation) is not a facilitator of entrepreneurial growth and innovation. That is why we believe so strongly that the FRAND issues we have seen both in the U.S. and abroad on nearly every continent are not exclusive to multinational technology behemoths, but raise significant issues for countless small- and medium-sized businesses.
It is just as important – some may say maybe more – to young engineering students at Stanford or the Indian Institute of Technology. It is time that their voices are represented in this international debate.