An interesting and powerful device known as the standard-essential patent (SEP) is in the spotlight. SEPs can bring wonderful inventions to people all over the world. They also can bring trouble. Big businesses are using them to wage war. Small businesses may be hit by them. The U.S. government is taking a closer look at what they mean to innovation and how they impact consumers. SEPs are the most intriguing element of the standards domain.

What Is A SEP?

A SEP is no ordinary patent. It has special properties that can cause it to have even more widespread ramifications than a typical patent. Of course, a typical patent grants rights and privileges to its owner, who isn’t necessarily the inventor. An entity can acquire a patent in several ways, such as through an acquisition or an outright purchase.

The owner can use it to prevent others from making, using, and selling the patented invention without permission. A patent owner can decide to keep the patent to itself, or it can choose to license the invention to any or all, at any price it desires. Thus, a patent can bring a distinct advantage, both monetarily and through market control.

A patent becomes even more interesting when it enters the standards arena. If a patent owner contributes the invention to become part of a technical standard, then everyone who implements the standard—and the goal of every good standard is to be widely implemented—will infringe upon the patent! Unless the patent’s owner permits everyone to use the patent when they implement the standard, that is.

Because a patented invention that is part of a standard will have to be used by anyone who creates a product compliant to the standard, the patent is called a standard-essential patent. In most cases, the SEP’s owner is allowed to charge a licensing fee to everyone, as long as it’s not unreasonable.

The Value Of A SEP

There’s no doubt that standards and patents have served and continue to serve humanity well. From the patent owner protecting its intellectual property to the companies that come together to create a standard that grows the market, as well as to the consumer who has greater choice and value in innovative products, standards and patents are key in a knowledge-based economy. And SEPs can provide the foundation.

For an implementer of a standard, access to a patented invention at a reasonable cost can be quite valuable. Being allowed to make, use, and sell a unique and significant invention, without incurring the high cost of inventing it, can expedite a vendor’s entry into a marketplace. Startups and large competitors alike can be anxious to be allowed to implement a prized patented invention. A SEP can be a catalyst to a vibrant, growing market.

The holder of a SEP may have a powerful tool at its disposal as well. If the patented invention is really good and there’s a demand in the marketplace for products that use the invention, the holder might realize a solid revenue stream through licensing for years. (Again, the cost of a license must not be unreasonable.) Having numerous vendors implement the SEP and pay a fee to the owner can be an extra benefit to the owner over keeping the patent out of the standard.

Indirectly, even the consumer can get value from a SEP that is contributed to a standard. Standards bring product quality, interoperability, and reliability. They also facilitate consumer choice. The availability of multiple high-quality, innovative products to choose from makes buyers happier. Everybody can benefit when SEPs are intertwined with standards.

What Is FRAND?

The base requirement for SEPs to be constructive is licensing under FRAND conditions. Without FRAND, SEPs can cause costly conflicts. FRAND is the acronym for fair, reasonable, and non-discriminatory. It’s also known as RAND—reasonable and non-discriminatory. According to the principles of FRAND licensing, the patent owner must allow anyone to take a license, the license terms must not be illegal or anti-competitive, and the cost of the license must not be too high.

When a patent owner licenses a SEP with FRAND terms, it can be a win-win. The owner makes money from the patent as well as the invention itself, if the owner is also selling products that use the invention. Competing vendors pay a small price for access to a big invention. The market can grow more rapidly when a standard is combined with a patent.

The SEP Controversy

With all the goodness of SEPs comes a lot of controversy. SEPs have created so much contention that even the United States government is scrutinizing them. Several aspects to SEPs can make them hazardous and complicated to the patent owner, standard implementers, innovators, and consumers.

A patent owner should be very careful when participating in standards-development activities that are associated with the patented technology. It is nothing short of cheating to contribute patented technology to a standard and later file a lawsuit for patent infringement on everyone who has implemented the standard. This bad practice can result in the loss of patent rights for the owner, as happened in the famous case in 1996 of Dell and the VESA VL-bus standard. Very recently—demonstrating a good practice—as Google acquired Motorola Mobility, it negotiated with the U.S. Federal Trade Commission (FTC) and agreed to honor Motorola’s (F)RAND obligations.

When a SEP owner agrees to license it under FRAND terms, who determines what exactly is fair and reasonable? The owner may think it’s fair to charge a royalty of a few pennies per part. But if a product contains hundreds of the part, the product developer may see the cost as exorbitant. The owner may believe it’s reasonable to obtain non-SEP patent licenses from others in exchange for its own, but other patent holders may see this as an attempt to steal their intellectual property.

What happens if a SEP owner offers a FRAND license to everyone, but a vendor chooses not to take a license? Should that vendor be allowed to implement the publicly available standard anyway? Or should injunctions be imposed on the vendor? Some people fear that SEPs could stifle innovation if a SEP owner cannot assert its rights.

An interesting twist these days is that patents, and especially SEPs because their impact can spread so broadly, can bring in a healthy revenue stream for companies that purchase patents for the sole purpose of suing potential infringers. These companies are known as patent assertion entities (PAEs), non-practicing entities (NPEs), or, less kindly, patent trolls. A SEP in the hands of a troll can be a potentially explosive device, giving standards a bad name and harming businesses.

A fundamental risk of a SEP is that the patent might not be essential after all. The SEP owner can claim it is essential, and others may claim it is not. Fear and threats may stall or halt the standardization process. Or, the process can continue until the standard is widely adopted when it becomes clear that the patent was indeed essential to implementing the standard and an epic clash begins.

Disputes over SEPs are settled in courts of law, one case at a time. This can be very costly to an entire industry, not to mention a burden on the judicial system. Because FRAND is an indeterminate concept at present, every case can be different and yield a different remedy, often after years of debate and appeals.

SEP Horror Stories

Standards in general bring goodness. Many of them work so well, they’re taken for granted. They promote the next level of innovation, giving advantages to companies and entire industries. But when there are problems, there can be serious ramifications, and SEPs become even more interesting. Many horror stories involving SEPs can be found with a simple search for “standard-essential patents.”

Currently one of the most prominent is within the colossal battle between Apple and Samsung. After a complaint by Samsung that Apple had infringed on a Samsung-owned SEP, the U.S. International Trade Commission placed a ban on importing Apple’s iPhones (before the 4S) and cellular iPads (before the third-generation iPad 4G) into the U.S. Immediately, Apple protested and soon the ban was overturned by the White House (the first time in 26 years that a President overturned a ruling by the ITC). Now there are cries of U.S. protectionism and threats of mobile phone shortages for consumers.

A less prominent story revolves around a SEP associated with IEEE 802.11, affectionately known as Wi-Fi. On the other side of the world in Australia, the Commonwealth Scientific and Industrial Research Organization (CSIRO) asserted that it owned a SEP connected with Wi-Fi. In 2012, CSIRO demanded payment from six large companies who coughed up a total of $229 million to stay out of court and risk having to pay more. In 2009, CSIRO did the same thing to 14 other companies and raked in $200 million.

One of the scariest stories is that of Innovatio IP Ventures LLC. Innovatio owns about 30 patents associated with Wi-Fi. It sent demand letters to 8000 to 12,000 businesses that provide Wi-Fi services, such as coffee shops and hotels. Innovatio claimed these businesses infringed on its SEPs and asked for around $2500 from each business to avoid a lawsuit. Because the amount of money was relatively small, the businesses might have paid up instead of incurring the costs of litigation. Cisco filed a suit against Innovatio, claiming this practice was akin to extortion. Cisco lost the case. The story isn’t over yet, and the larger fear is that Innovatio could do the same to every household that uses Wi-Fi.

What Should Be Done?

When licensed under FRAND terms and without controversy, SEPs can be a boon to the industry and consumers. With their ability to distribute innovations widely and promote competition, SEPs in and of themselves are beneficial to society. But when things go wrong, SEPs can be at the heart of big, ugly, expensive conflicts.

Some claim that these conflicts are few and far between. They are corner cases that are dealt with properly by the court system. Nothing needs to be done about controversial SEPs as the industry is healthy, innovation is continuing, and consumers have more choice now than ever.

Others claim that the problems with SEPs are escalating and are affecting companies, innovators, and society. They state that too many SEPs turn out to be non-essential after wasting time and resources. They are asking for governmental intervention and policies that provide remedies or prevent injunctions. There is also growing concern over patent trolls with SEPs. As the U.S. Department of Justice continues its investigation into SEPs, new legislation could be put in place to temper the increasing strife. (See the Senate subcommittee hearing, “Standard Essential Patent Disputes and Antitrust Law,” at http://1.usa.gov/145mdva.)

Another possibility is to improve the quality of patents, and SEPs in particular, from the outset. This could help ensure that SEPs are valid and lawsuits that are filed are more appropriate. Standards-developing organizations could work more closely with patent offices toward this goal.

Standards-developing organizations have patent policies that usually include SEPs and FRAND requirements. These policies could be enhanced to refine the definition of FRAND and state the consequences of SEP misuse.

There may be additional creative solutions to the problems caused by SEP abuse. All interested parties are invited to contribute. In the meantime, SEPs will continue simultaneously to benefit and frustrate the world.

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Karen Bartleson is the senior director of community marketing at Synopsys Inc. She has 30 years of experience in semiconductors, joining Synopsys in 1995 as standards manager. Her responsibilities include initiatives that increase customer satisfaction through interoperability, standards support, university relationships, and social media engagements. She also held the position of director of quality at Synopsys for three years. She was elected president of the IEEE Standards Association for the 2013-2014 term. She holds a BSEE from California Polytechnic University, San Luis Obispo, Calif. She was the recipient of the Marie R. Pistilli Women in Design Automation Achievement Award in 2003. Her first book, The Ten Commandments for Effective Standards, was published in May 2010.