Unfair Price Bias in Standard Essential Patents Needs to Stop

Companies that license standard essential patents, or SEPs, often engage in unfair price discrimination tactics.

SEPs are essential to products that adhere to certain technical standards such as cellular and Wi-Fi. Some products can include hundreds of standards, and some standards can involve thousands of patents.

While these standards had been used in a narrow range of devices—such as laptops, tablets, and smartphones—the internet means these standards are now used in a wide range of products, including crop-sensors, medical devices, autonomous vehicles, and industrial machinery.

Many companies seeking to aggressively monetize their SEPs engage in a form of price discrimination by demanding royalties based on the value of the licensee’s end-product or service.

This practice means two licensees may pay different fees for the same technology simply because one licensee’s product may yield a higher profit margin, cater to a more lucrative market, have more expensive components, or include many additional features beyond the standardized technology.

The technology claimed by a SEP is static; it doesn’t fluctuate with the licensee’s potential market success or the sector in which it’s implemented. The patents practiced in a 5G chipset cover the same technology regardless if the end product is a budget smartphone or a high-end autonomous vehicle.

What SEP monetizers do is no different than if mechanics started pricing their services based on how much income a vehicle generates for its owner. A ride-share driver would pay more for a brake job on the same car than a retiree who only drives to the grocery store and back. Intuitively, we understand this is unfair discrimination because the price is detached from the work.

Most leading standards organizations require participants to make contractual commitments to license their SEPs on terms that are fair, reasonable, and non-discriminatory—or FRAND.

The FRAND commitment limits SEP holders to royalties commensurate with the incremental value provided by the patented technology, because once an industry adopts the standard, product manufacturers become locked in. They can’t walk away when faced with unreasonable demands.

Demanding higher fees based on use case doesn’t reflect additional value provided by the SEP holder, but rather an opportunistic strategy of price discrimination that’s inconsistent with the FRAND commitment.

Impeding Innovation

Violating FRAND commitments jeopardizes the delicate balance of innovation incentives. It risks entrenching market incumbents while deterring newcomers from investing in new applications of technology, wary that their success could unjustly inflate costs.

Discriminatory licensing is a “success penalty” that can deter firms from entering more profitable, expensive markets due to SEP costs. The knock-on effect is a potential slowdown in the pace of innovation, as companies may shy away from groundbreaking developments that would necessitate SEP usage, preferring safer, less costly ventures.

SEP monetizers that charge royalties based on use case are penalizing success and innovation in the implementers’ fields. SEP holders should indeed be fairly compensated for their innovations.

This compensation has been broadly recognized to be the value of the patented technology itself before it was included in the standard, not on how much money a user can make from an innovative application of the entire standard.

Governments all over the world are evaluating and reforming SEP licensing policies and regulations, with the European Commission’s proposed regulation aimed at reforming SEP licensing the most prominent. But the Department of Commerce, UK Intellectual Property Office, China’s State Administration for Market Regulation, and the Telecom Regulatory Authority of India are also engaged in reviewing how SEPs operate.

As regulators worldwide reevaluate SEP licensing, it’s a prime moment to confront and correct today’s discriminatory practices. Empowering the commitment to fair and non-discriminatory licensing isn’t just a legal requirement—it’s a practical step toward a more balanced and innovative technological sector.

The simplest way to prevent unfair discriminatory licensing is to use the cost of the component that enables the standardized feature as the base for establishing a royalty.

This approach is like having a consistent charge for a brake pad replacement, regardless of how the vehicle owner profits from their car. It’s equitable, fair, and it should be recognized as the best way to ensure FRAND outcomes.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

David Katz is a senior associate in the antitrust group at WilmerHale in Washington, D.C.

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