Standard Essential Patents (SEPs), FRAND, and Corporate Survival Strategies

In the era of the Fourth Industrial Revolution, advanced technologies such as 5G, the Internet of Things (IoT), and Artificial Intelligence (AI) are dissolving industrial boundaries and unlocking unprecedented possibilities. Underpinning this wave of technological innovation are 'standards,' which provide the essential foundation for seamless interoperability between diverse devices and services, thereby fostering market growth. However, the technologies that are indispensable for implementing these standards – known as Standard Essential Patents (SEPs) – represent powerful assets for innovating companies, yet simultaneously pose significant hurdles that technology implementers must overcome.

SEPs transcend the realm of ordinary technology patents; they are strategic assets intrinsically linked to market dominance. Consequently, the licensing terms surrounding SEPs, particularly the interpretation and application of the FRAND (Fair, Reasonable, and Non-Discriminatory) principle, have escalated into matters of critical importance, often determining the very survival of global corporations. High-stakes litigation involving astronomical sums, exemplified by clashes like Apple vs. Qualcomm and Samsung vs. Ericsson, starkly illustrates this significance.

1. Understanding Standard Essential Patents (SEP) and the FRAND Principle

• Definition and Specific Nature of SEPs: An SEP refers to a patent that is technically essential – meaning unavoidable – for implementing a specific industry standard (e.g., LTE, Wi-Fi, HEVC codec) in a product or service. While its legal status is identical to that of a regular patent, its incorporation into a standard effectively grants it significant market power. This unique position subjects the enforcement of SEP rights to certain constraints. Standard Development Organizations (SDOs) typically require participating companies to disclose relevant patent information during the standard-setting process, forming the basis for subsequent SEP declarations.
• Background and Meaning of the FRAND Commitment: If SEP holders were permitted to weaponize their patents to block access to standardized technologies or demand excessive royalties, the fundamental benefits of standardization – such as enhanced interoperability and market expansion – would be nullified, ultimately stifling technological innovation. To prevent this detrimental outcome, most SDOs require SEP holders, whose patents are incorporated into a standard, to make a commitment (the FRAND commitment) to license these SEPs on Fair, Reasonable, and Non-Discriminatory terms to any willing licensee. Although typically framed as a voluntary pledge by the SEP holder, this commitment often carries legal enforceability once made.
• The Goal of FRAND: Balancing Interests and Fostering Innovation: The FRAND principle fundamentally seeks to strike a delicate balance between two potentially conflicting objectives. First, it aims to ensure that SEP holders receive fair and adequate compensation for their substantial investments in research and development, thereby providing continued incentives for innovation. Second, it aims to guarantee that technology implementers can access essential standard technologies at predictable and reasonable costs, enabling them to develop diverse products and services and promoting robust market competition. The core challenge in all legal discussions and disputes surrounding FRAND lies in finding this precise equilibrium.

2. The Realities of FRAND Licensing

Despite the existence of the FRAND commitment, actual licensing negotiations are frequently fraught with difficulties. This largely stems from the inherent ambiguity and lack of universally accepted, concrete criteria defining what precisely constitutes "Fair, Reasonable, and Non-Discriminatory" terms.

• The Duty to Negotiate in Good Faith and Its Challenges: Both SEP holders and potential implementers (technology users) are generally expected under the principle of good faith (bona fides) to make genuine efforts to reach an agreement on FRAND licensing terms. However, significant disagreements frequently arise over crucial specifics, including: royalty calculation methodologies (e.g., determining the appropriate royalty base – entire product price vs. specific component price; the use and validity of comparable license analyses; top-down vs. bottom-up calculation approaches), the geographical scope of the license (global vs. country-specific), and the terms of any potential cross-licenses.
• Litigation as a Means of Enforcement and Defense: When negotiations reach an impasse, disputes often escalate into legal battles.
  • SEP Holders: Frequently initiate patent infringement lawsuits. Seeking injunctive relief (sales bans) is a common tactic aimed at significantly increasing negotiating leverage, as injunctions can exert immense, potentially business-crippling pressure on implementers.
  • Technology Implementers: Typically counter by arguing that the royalty rates demanded by the SEP holder violate FRAND principles. They may file lawsuits seeking a court determination of appropriate FRAND royalty rates (e.g., through declaratory judgment actions) or mount defenses based on patent invalidity or non-infringement.
• The 'Hold-up' vs. 'Hold-out' Dilemma:
  • Hold-up: Refers to the situation where an SEP holder, having gained substantial market power after its technology was adopted into a standard, potentially abuses this position by demanding excessive royalties or imposing unfair licensing conditions. This behavior can inflate costs for technology implementers, deter market entry by competitors, and ultimately harm overall competition.
  • Hold-out: Conversely, describes the conduct of a technology implementer who intentionally delays or evades good-faith licensing negotiations and refuses to pay fair royalties for the use of SEPs. This strategy obstructs the SEP holder's legitimate right to receive remuneration for their innovation, potentially hindering their return on investment and weakening long-term incentives for technological advancement. Courts and regulatory bodies worldwide are increasingly striving to balance these twin risks, often imposing a reciprocal duty of good faith negotiation on both parties and scrutinizing their negotiation conduct as a key factor in legal determinations.
• Efficiency Through Patent Pools: In technology sectors characterized by a dense web of numerous, complexly intertwined SEPs (such as video codecs and mobile communications standards), 'patent pools' offer an effective mechanism for streamlining licensing. In a patent pool, multiple SEP holders aggregate their relevant patents, allowing them to offer a joint license. This enables technology implementers to resolve licensing issues for multiple patents through a single, consolidated agreement, significantly saving transaction costs and time. Prominent examples include Avanci, MPEG LA, and Access Advance.

3. SEP Policy and Case Law Trends in Major Jurisdictions

SEP and FRAND disputes are inherently international, yet courts and regulatory authorities in different countries often exhibit distinct approaches and priorities. This patchwork of legal landscapes creates significant uncertainty for companies operating globally.

• United States (US):
  • Contract Law Approach: US courts often tend to view the FRAND commitment primarily through the lens of contract law, treating it as an agreement between the SDO and the SEP holder. Implementers are frequently recognized as 'third-party beneficiaries' entitled to the benefits of this contractual commitment. (The court's direct calculation of a reasonable royalty rate in Microsoft v. Motorola serves as a notable example of this approach).
  • Limited Antitrust Application: The prevailing judicial trend is not to automatically equate a FRAND breach with an antitrust violation. The influential appellate decision in FTC v. Qualcomm (9th Circuit, 2020) explicitly held that an SEP holder's failure to fulfill FRAND obligations, by itself, does not necessarily constitute an antitrust violation, suggesting that appropriate remedies typically lie within the domains of patent law or contract law. The court notably distinguished between potentially unlawful 'anticompetitive' conduct and merely 'hypercompetitive' business practices, viewing the latter as not inherently illegal.
  • Fluctuating Policy Stance on Injunctions: The US executive branch's policy regarding the availability of injunctive relief for SEPs has undergone several shifts: the Obama administration (2013) issued guidance suggesting limited availability; the Trump administration (2019) withdrew this guidance, emphasizing patent holder rights; the Biden administration (2021/2022) subsequently withdrew the 2019 statement, favoring a case-by-case analysis. The current stance appears to lean towards allowing courts to determine the appropriateness of injunctive relief based on the specific facts of each case, rather than adhering to a rigid overarching policy.
• European Union (EU):
  • Competition Law Focus: The EU primarily addresses SEP enforcement through the framework of competition law, specifically examining whether an SEP holder's actions constitute an abuse of a dominant market position under Article 102 of the Treaty on the Functioning of the European Union (TFEU). The landmark ruling by the Court of Justice of the European Union (CJEU) in Huawei v. ZTE (2015, Case C-170/13) provides the core legal framework.
  • The Huawei v. ZTE Framework: This pivotal judgment outlines specific procedural steps that an SEP holder should generally follow before seeking an injunction against an alleged infringer. These steps involve: ① Notifying the alleged infringer of the infringement in writing; ② If the implementer expresses a willingness to take a license, the SEP holder must make a specific, written FRAND offer; ③ The implementer must respond to the offer promptly and in good faith (if rejecting, providing reasons or making a concrete FRAND counter-offer); ④ Seeking an injunction without adhering to such a process may be deemed an abuse of dominant position. This framework serves as a crucial benchmark for national court decisions concerning SEP injunctions within EU member states.
  • Recent Legislative Attempt and Withdrawal: In 2023, the European Commission proposed a comprehensive SEP Regulation. Key elements included establishing an SEP registration database, introducing mandatory essentiality checks, and creating a process for determining aggregate royalties, potentially administered by the EU Intellectual Property Office (EUIPO). However, facing sharp disagreements between SEP holders and implementers, as well as among member states regarding its scope and impact, the proposed regulation was formally withdrawn in February 2025. This withdrawal suggests that, for the foreseeable future, the primary means of regulating SEP/FRAND issues in the EU will continue to be the post-hoc application of competition law principles, guided by the Huawei v. ZTE precedent.
• China:
  • Active Judicial Intervention and Assertion of Global Jurisdiction: Chinese courts have demonstrated a pattern of active intervention in SEP disputes, often perceived as being aligned with protecting and promoting domestic industries. Courts have directly determined specific (often low) royalty rates in key cases, such as Huawei v. InterDigital (Shenzhen Intermediate People's Court, 2013, setting a 0.019% rate) and Huawei v. Conversant (Nanjing Intermediate People's Court, 2019). More significantly, in recent high-profile cases like OPPO v. Sharp (2021) and OPPO v. Nokia (Supreme People's Court decision influencing lower courts, 2022), Chinese courts have boldly asserted their jurisdiction to determine global FRAND licensing terms, signaling a clear ambition to expand their international judicial influence in this critical area.
  • Strategic Use of Anti-Suit Injunctions (ASIs): Chinese courts have become notably proactive in issuing Anti-Suit Injunctions (ASIs). These orders aim to prevent parties involved in FRAND litigation within China from initiating or continuing related legal proceedings in foreign jurisdictions. Examples include ASIs issued in Ericsson v. Samsung and Xiaomi v. InterDigital. This practice frequently triggers complex jurisdictional conflicts, often leading to foreign courts issuing counter-injunctions (known as anti-ASIs or anti-anti-suit injunctions). The authority of Chinese courts to issue ASIs in SEP cases was formally recognized through a judicial interpretation by the Supreme People's Court in 2020.
  • Strong Intervention by Competition Authorities: China's competition regulator, formerly the National Development and Reform Commission (NDRC), demonstrated its willingness to intervene decisively in the SEP space. In 2015, it imposed a then-record fine of approximately $975 million on Qualcomm for abusing its dominant market position related to SEPs and mandated significant changes to Qualcomm's licensing practices within China. This landmark enforcement action considerably strengthened the negotiating position of major Chinese smartphone manufacturers like Huawei and Xiaomi in their dealings with Qualcomm.
• South Korea:
  • Strong Regulation via Competition Law: The Korea Fair Trade Commission (KFTC) adopts a highly active stance in regulating the SEP landscape, aggressively sanctioning unfair business practices and abuses of dominant market positions by SEP holders as violations of the Monopoly Regulation and Fair Trade Act (MRFTA).
  • Significance of the Qualcomm Cases: The KFTC has imposed two landmark sanctions against Qualcomm, both largely upheld by the judiciary: ① In 2009, targeting discriminatory licensing practices related to CDMA technology, unfair rebate schemes, and tying arrangements, resulting in a fine of approximately ₩270 billion (upheld by the Supreme Court in 2019). ② In 2016, addressing Qualcomm's refusal to license SEPs to competing modem chip manufacturers and its imposition of unfair contractual terms on mobile phone manufacturers, leading to a record fine of approximately ₩1.03 trillion (substantially upheld by the Supreme Court in 2023). These pivotal decisions clearly established the precedent that breaches of FRAND commitments can constitute actionable abuses under South Korean competition law.
  • Judicial Support and Corporate Roles: South Korean courts primarily function to review the legality of KFTC decisions in this area, generally providing backing for the agency's stringent enforcement approach. Concurrently, major South Korean corporations like Samsung and LG are significant global players in SEP disputes, acting sometimes as assertive SEP holders deploying offensive strategies, and at other times as implementers defensively seeking to bolster their negotiating leverage. The KFTC also engages in efforts to foster fair negotiation environments, for instance, by issuing non-binding 'Guidelines on Negotiation of Standard Essential Patent Licenses' in 2021.

4. The Intersection and Tension: Patent Rights vs. Competition Law

The SEP domain inherently exists at a point of friction where the exclusive nature granted by patent law clashes with the openness required for standardized technologies to flourish under competition law principles. This creates an unavoidable tension between these two bodies of law.

• Deepening Hold-up vs. Hold-out Debate: While historical concerns often centered on the potential for 'hold-up' abuses by powerful SEP holders, there is now a growing and serious recognition of the 'hold-out' problem perpetuated by some implementers. The concern is that if innovators are systematically denied fair compensation for their contributions to standards, the long-term incentives for engaging in the costly R&D necessary for technological progress could be significantly undermined.
• Jurisdictional Efforts to Find Balance: Courts and regulatory agencies worldwide are actively grappling with the challenge of striking an appropriate balance between mitigating both hold-up and hold-out risks. Different jurisdictions exhibit varying preferences: the EU emphasizes procedural fairness established through the Huawei v. ZTE framework; the US leans towards contractual remedies and exercises caution in applying antitrust law; while China and South Korea demonstrate a greater propensity for robust competition law enforcement against perceived abuses.
• Legal Nature of the FRAND Commitment: The precise legal characterization of the FRAND commitment remains a subject of ongoing debate – is it primarily a contractual obligation, a duty arising under the general principle of good faith, or an area predominantly governed by competition law rules? The UK Supreme Court's influential decision in Unwired Planet v. Huawei (2020), while affirming a court's power to determine global FRAND license terms, crucially also upheld the patent holder's right to obtain an injunction if the implementer ultimately refuses to accept those court-determined FRAND terms. This ruling reflects a balancing act that respects the rights of patent holders alongside the obligations imposed by FRAND.
• Increased Complexity for Global Corporations: For multinational corporations operating across diverse legal systems with varying policy priorities, the complexities are immense. Developing a coherent and effective global strategy for SEP licensing negotiations and potential disputes is imperative, requiring a comprehensive assessment of legal risks and potential outcomes in each relevant jurisdiction.

5. The Expanding Scope of SEPs and Future Prospects in the New Technology Era

The strategic importance of SEPs is rapidly expanding beyond its traditional stronghold in mobile communications (like 5G) and extending into virtually all future industrial domains, including the Internet of Things (IoT), Artificial Intelligence (AI), autonomous vehicles, and smart factories.

• 5G and Technological Hegemony: As the core enabling infrastructure for a truly hyper-connected society, securing a strong portfolio of 5G SEPs is directly linked to both national and corporate competitiveness. The fierce competition among major players like Huawei, Qualcomm, Samsung, Nokia, and Ericsson to accumulate and license 5G SEPs reflects broader geopolitical contests for technological supremacy. Licensing demands for 5G SEPs are rapidly proliferating beyond smartphones into diverse sectors such as automotive (as seen with the Avanci patent pool for connected vehicles) and industrial equipment.
• The IoT Ecosystem and Standardization: In the burgeoning IoT environment, where billions of devices are expected to interconnect, a multitude of standards covering communication protocols (e.g., Wi-Fi, Bluetooth, Zigbee, LoRaWAN, NB-IoT), data formats, and security are essential. Correspondingly, related SEPs are widespread. Engaging in licensing negotiations for these numerous SEPs can pose a significant financial and administrative burden, particularly for the many small and medium-sized enterprises (SMEs) operating in the IoT device manufacturing space. This highlights the growing need for efficient, streamlined licensing mechanisms, such as platform licensing approaches like the Avanci IoT platform.
• The Convergence of AI and SEPs: While comprehensive standardization for AI technology itself is still in its nascent stages, AI techniques are increasingly being integrated into established standards, particularly in areas like telecommunications (e.g., for optimizing 5G/6G network performance), data compression and formats, and even hardware specifications (e.g., for AI-accelerating chips). This trend increases the likelihood that patents covering AI-related inventions will be declared essential to future standards. As AI-driven converged services, such as autonomous driving, smart cities, and advanced healthcare diagnostics, continue to develop and rely on standardized platforms, AI-related SEP and FRAND issues are poised to become significantly more critical and contentious.
• Future Challenges: As the pace of technological advancement continues to accelerate and cross-industry convergence deepens, SEP disputes are likely to become even more complex, multifaceted, and difficult to predict. Key challenges for the future include developing more effective and harmonized international dispute resolution mechanisms (potentially involving bodies like the World Intellectual Property Organization - WIPO - through arbitration and mediation), clarifying and potentially strengthening the role of SDOs in managing FRAND commitments, and fostering more transparent and efficient global licensing markets to reduce transaction costs and friction.

Proactive and Strategic SEP Management is Imperative

Standard Essential Patents and the associated FRAND framework are no longer niche concerns confined to a handful of large technology corporations. They have unequivocally emerged as core business and strategic management factors capable of determining the success or failure of enterprises across virtually all technology-based industries. Holding SEPs can be a source of substantial royalty income, but being an implementer of standardized technology can conversely expose companies to unforeseen cost burdens and significant legal risks if SEP licensing is not managed effectively.

Therefore, it is crucial for companies to:

• Monitor standardization activities relevant to their industry from the earliest stages of R&D.
• Carefully assess the potential for their own technological innovations to become SEPs.
• Strategically build and manage their patent portfolios with standardization in mind.
• Approach FRAND license negotiations (whether as a licensor or licensee) with a thorough understanding of the applicable legal frameworks, judicial precedents, and regulatory trends in all relevant jurisdictions.
• Consider diverse strategic options, such as participating in patent pools, engaging in collective negotiation efforts, or pursuing strategic litigation when necessary.

Above all, the most critical element is adopting a proactive approach to SEP management – diligently identifying potential risks and formulating comprehensive response strategies before disputes arise or licensing demands materialize.

Pine IP Firm: Your Compass in the Complex World of SEPs

Navigating the intricate and constantly evolving global landscape of SEPs and FRAND is a formidable challenge for any company to undertake alone. It demands the guidance of seasoned experts possessing a rare combination of deep understanding and practical insight spanning law, technology, economics, and international business dynamics.

Pine IP Firm leverages extensive experience and highly specialized expertise, meticulously honed through years of representing leading domestic and international corporations in complex SEP matters. We provide comprehensive, tailored legal solutions designed to address the full spectrum of SEP-related issues your business may face.

Our commitment is to ensure that your valuable technological innovations yield their rightful rewards and that your company achieves sustainable growth and success in the competitive global marketplace. Let Pine IP Firm be your most trusted strategic partner in mastering the challenges and seizing the opportunities presented by SEPs and FRAND.