Explainer: Standard Essential Patents and National Security

By Christopher Borges

Technology standards are a critical domain of international cooperation and competition in high technology. Standards create a common language for communication about technology and innovation, allowing firms to collaborate and develop interoperable products. At the same time, for some critical and emerging technologies such as telecommunications and artificial intelligence, the selection of a given standard can greatly influence whose product will succeed in global markets.

Over the last decade, the international competition over standards has focused on standard essential patents (SEPs), which is a patent on an invention that must be used to comply with a technical standard. Companies with large SEP portfolios can generate significant revenue, giving them an edge in R&D efforts to create the next generation of products and standards. In some key fields such as telecommunications, SEPs account for billions of dollars in annual licensing revenue.

Accordingly, SEPs are an increasing focus of policymakers. The United States and European Union have recently proposed new policies regarding SEPs, while China is striving to create more SEPs and shape the global flow of SEP licensing revenue. Nations such as India, Japan, South Korea, Singapore, and the United Kingdom have all released or are considering guidelines governing SEP licensing negotiations.

The growing scope, impact, and intricacy of these developments call for greater clarity in understanding key terminology in burgeoning policy discussions. This article explains the key concepts and geopolitical context needed to understand the ongoing debate regarding standards and SEPs.

Q1: What are technology standards?

A technology standard is a set of established technical specifications, guidelines, or protocols that are widely accepted within a particular industry or field of technology. While adoption is nominally voluntary, firms are often incentivized to adopt particular standards in order to reduce development costs and gain access to larger markets. For example, a firm is more likely to use the industry standard for a power cord rather than develop its own unique cord and risk consumers passing it over because it does not fit into other devices and power outlets. At the same time, products using approved standards provide information to consumers about the safety and interoperability of a given product. Imagine how many different power adapters you would need if power outlets were not standardized.

For these reasons, technology standards are ubiquitous in modern life. International trade relies on standardized shipping containers to streamline transport, while interoperability standards like Wi-Fi, Bluetooth, and 5G allow seamless communication between different devices made by different manufacturers. By providing shared platforms for industry participants to work together to bring new technological solutions to the marketplace, commonly recognized and adopted standards reduce costs, improve quality, and promote collaboration for innovation.

Q2: What are standard essential patents?

An SEP is a patent on a technology used within an industry standard. The patent is considered “essential” because any product that conforms to that standard must use the patented technology. For instance, if a company holds a patent over a component necessary in USB ports, no computer manufacturer could create a USB port without licensing that patent from the relevant SEP owner. SEPs are vital to the standard setting process as they incentivize companies to invest in developing the foundational technologies that advance critical industries, and to contribute those technologies to global technology standards that all companies can utilize.

Q3: How are standards and SEPs determined?

Standards are typically set by standards development organizations (SDOs), also known as standards setting organizations (SSOs). SDOs are composed of market participants and driven by consensus to establish voluntary standards. This combination of elements creates a robust standards-setting process that is difficult for individual actors to manipulate. No single faction can force their vision on others, while firms cannot be forced to use a standard. Instead, firms collaborate through SDOs and ultimately adopt standards developed through a coordinated technical effort.

SDOs range from large bodies composed of national governments that cover a wide range of standards issues—for example, the International Organization for Standardization (ISO)—to private sector groups focused on specific industries—for example, the European Telecommunications Standards Institute (ETSI)—to small groups focused on specific technologies—for example, the HDMI Forum.

As an SDO works to determine a standard, patent owners can declare that their patents are essential to that standard and are therefore SEPs. However, SDOs typically do not evaluate if a patent is truly essential to the standard, a process known as an “essentiality check.” The sheer number of SEPs in modern technology—the 5G standard for cellular telecommunications encompasses over 25,000 SEPs—makes essentiality checks on all SEPs impractical. Instead, essentiality checks are usually performed by courts when either the SEP is challenged, or the SEP owner files for an injunction against an implementer.

The system for declaring SEPs, though varied across SDOs, has prompted concerns that bad actors are over-declaring SEPs to extract licensing fees from implementors. Indeed, some studies suggest that many patents disclosed as SEPs are not actually essential to the standard. However, certain scholars dispute the accuracy and reliability of these studies. Furthermore, a certain degree of over-declaration is inevitable and can occur in good faith. Some SDOs, for instance, encourage firms to declare their patents to be SEPs if they “might” be essential, while others do not possess a mechanism for withdrawing declared SEPs as the standard naturally evolves.

Q4: How are SEPs licensed?

Given that conforming to an industry standard requires use of an SEP, SEP owners are in a strong market position. In theory, they could charge exorbitant licensing fees knowing that there is a high cost to not using the standard (known as the “hold-up” problem).

Thus, to ensure that SEPs are broadly available for licensing, SEP owners routinely commit to SDOs to offer licenses on fair, reasonable, and non-discriminatory (FRAND) terms. However, while some SDOs provide guidance on FRAND licensing rates, these rates are not set by the SDO and there is no formal legal definition of FRAND. Instead, SEP owners and SEP licensees negotiate licensing rates, with litigation as an option should negotiations break down.

Historically, courts have determined FRAND rates for only the SEPs issued in their own nations, as a court’s jurisdiction typically ends at its country’s borders. However, the parties to FRAND disputes are often multinational corporations with worldwide operations, and many SEP licensing agreements are global in scope. Thus, in the last decade, some courts have set FRAND rates for all SEPs worldwide related to the dispute between the parties. This global approach was utilized by the UK High Court in one instance in 2017, but more recently has been employed by courts in China, which issued their first global FRAND rate in the 2023 case Nokia vs. Oppo. U.S. courts have issued global FRAND rates in the past as well, but only when the disputing parties have requested that they do so.

Q5: How do SEPs relate to national security?

As technology standards are foundational to many critical technologies, influence over global standards-setting processes may grant nations notable geopolitical advantages. Nations can guide standards development in directions which favor their domestic industries, thereby bestowing them with a technical edge.

Further, as technology becomes increasingly ubiquitous in everyday life, standards development carries considerable political considerations. In telecommunications, for instance, the same standards which ensure all mobile devices are interoperable can dictate requirements around data retention, encryption, and location tracking, among other privacy considerations. Thus, influence over telecommunications standards may allow nations to advance their own human rights and security agendas. As standards-reliant technologies, such as digital connectivity, increase in importance, so do standards.

Accordingly, SEPs are also important for national security. Should a company successfully create an SEP, the revenue generated from licenses allows them to recoup their investment and generate profit that they can invest in creating next-generation technologies and standards. In other words, the R&D required to develop the technology used in standards draws on revenue generated from SEP licensing. If companies did not receive sufficient licensing revenue from their SEPs, they would be less able to invest in developing new technologies used in standards, causing their home nations to lose influence over the global standards setting process.

Q6: What is the current landscape of SEP ownership?

While there is no comprehensive data on SEP ownership by country and the global flow of licensing fees, it is generally accepted that Western countries are net recipients of SEP licensing fees, while countries in Asia, including China, are net payors of SEP licensing fees. This division exists because currently the United States and Europe are R&D powerhouses for many of the technologies protected by SEPs, while Asian countries are manufacturing powerhouses for the technologies that incorporate SEPs, such as smartphones, computers, and increasingly automobiles.

The global SEP landscape is slowly shifting, however, and there are clear exceptions emerging to this rule. Some companies in Asia such as China’s Huawei and South Korea’s Samsung own thousands of SEPs and are major players in the standards and SEP ecosystem. Indeed, China claims it has filed the most 5G SEPs of any country. In the words of the China Intellectual Property Administration, “China has evolved from a nobody (1G) to follower (2G) to quick learner (3G) to peer (4G) and to today’s position of a frontrunner (5G).” Not all SEPs contribute equally to a standard, so analysis focusing solely on SEP numbers does not provide a complete picture of a firm or nation’s contribution to a given standard. Even so, the trajectory of China’s ambitions and capabilities is clear.

As the home of many of the most innovative companies in the world, the United States and Europe have long led the way in creating SEPs and setting international standards. They have benefitted commercially and in terms of national security from this leadership.

Today, however, this leadership and its benefits are under threat. China is prioritizing the development and licensing of SEPs while seeking to exert more influence in the global standards-setting process. Without a clear understanding of the role of standards and SEPs in international competition and national security, the United States and Europe risk undermining their leadership position in the research, development, and commercialization of new technologies that run the world.

Christopher Borges is a program manager and associate fellow with the Geoeconomics Center at the Center for Strategic and International Studies in Washington, D.C.

This piece was originally published on July 10th with the Renewing American Innovation Project at the Center for Strategic and International Studies in Washington, D.C.

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