How Moves to Weaken Standard-Essential Patents (SEPs) Threaten U.S. National Security

On December 6, 2021, the Department of Justice (DOJ), United States Patent and Trademark Office (USPTO), and National Institute of Standards and Technology (NIST) launched a draft policy statement that sought to revise an earlier 2019 statement by those same agencies. This statement, titled Draft Policy Statement on Licensing Negotiations and Remedies for Standards-Essential Patents Subject to F/RAND Commitments, is justified as an effort to encourage good-faith licensing negotiations and to address the scope of remedies available to patent owners that have agreed to license their essential technologies on fair, reasonable, and non-discriminatory (F/RAND) terms.

Though well-intentioned, this proposal has wide-reaching negative implications for U.S. national security and competitiveness. Hidden within opaque legal terminology, this move would weaken intellectual property (IP) protections that are key for developing and establishing U.S. global leadership in advanced technologies like artificial intelligence (AI), fifth-generation (5G) networks (and now 6G), and quantum computing. Coming on the heels of President Biden’s July 2021 executive order on Promoting Competition in the American Economy, which also sought to weaken standard-essential patents (SEPs) in the name of boosting innovation, this change would have debilitating consequences for U.S. global competitiveness at a time when competitors like China are taking actions to further develop their own system of IP protections and leadership in international standard-setting.

Q1: What are standard-essential patents?

A1: The U.S. innovation system—a network of capabilities, rules, and policies supporting research, development, and commercialization of new technologies—is a national strategic asset. Since the nation’s founding, the innovation economy has served as the basis for U.S. competitive and strategic advantage, a finding affirmed in the October 2021 White House National Strategic Overview for Research and Development Infrastructure. Underpinning this dynamic system is a robust framework of rules governing standards and IP protection. Standards set the pace for innovation, providing shared platforms for industry participants to work together to bring new technological solutions to the marketplace. Standards also promote interoperability and safety, giving consumers more and better choices.

In turn, patents and IP provide a temporary period of exclusivity for a particular solution granted in exchange for disclosing that solution. A strong patent system for inventions creates, among other things, the rents that spur risk-taking and encourage entrepreneurship. Standards, when paired with secure property rights, encourage smaller firms and individual inventors to share their new ideas and collaborate with others without the risk of theft.

An SEP is a patent that can be properly mapped onto a consensus industry standard. SEPs and their licensing are common in the mobile-wireless and telecommunications industry, a sector that is highly standardized due to the need for interoperability between mobile devices. SEPs are also increasingly important in other Internet-of-Things (IoT) systems, as well as connected cars, autonomous vehicles, artificial intelligence, and many other emerging and critical technologies.

Q2: What is the “hold-up” problem with SEPs?

A2: Both the patent holder and the patent licensee must cooperate to realize the potential of a new idea. In some cases, however, the patent owner may seek to “hold-up” and ask for large royalties after the licensee has committed to the use of a particular technological standard that is required for the use of the patent in question. To overcome this collective action problem, particularly given the complexity of standards and patents that go into advanced devices, owners of SEPs often make a commitment to offer licenses on (F/RAND) terms.

A new challenge arises in the process of negotiating or applying these so-called F/RAND terms. In a 2013 statement, the DOJ and the USPTO noted that injunctive relief, a type of restraint order, may be an appropriate remedy in certain circumstances—for example, when a potential licensee constructively refuses to engage in a negotiation to determine F/RAND terms. In 2019, following extensive interagency consultations NIST joined DOJ and USPTO in issuing a further clarification, pointing out that a patent owner’s commitment to F/RAND terms is a relevant factor in determining appropriate remedies for hold-up situations.

Q3: What change did the DOJ make in 2021 regarding the policy framework governing SEPs and what is its impact?

A3: In a departure from previous statements, and without sufficient prior consultation, the 2021 DOJ statement called into question the availability of injunctive relief for SEP owners under most circumstances. By discouraging injunctive relief and creating uncertainty, the proposed policy effectively reduced the value of SEPs, with negative consequences for innovation in the United States. The draft undermines the reliability of the IP system, which is essential for allowing U.S. companies to be able to compete on a level playing field and maintain their leadership position. In a market-based economy, the ability to monetize IP rights through successful licensing is an important mechanism that enables firms to invest in the risky research and development (R&D) required to lead in global standards.

Further, the draft risks undermining the sustainability of the open standardization system. In the cellular space, innovators have traditionally relied on licensing to get appropriate returns on their R&D investments. Without the clear ability to achieve these returns, U.S. firms will be less willing to continue contributing their technology to global cooperative standards bodies, where hundreds of companies voluntarily participate to develop common technology solutions.

Q4: How does this change benefit China?

A4: The immediate beneficiaries of the 2021 Draft Policy Statement are firms based in China. This is because the implementers (and thus licensees) of cellular technologies are largely based in China, like Huawei. Technology standards are global in nature, and thus, so are the patent portfolios associated with these technologies. As such, the usual industry-wide practice is to engage in portfolio-wide licenses that are global in scope. Devaluing U.S. patents reduces the value of global portfolio licenses and therefore reduces the price that Chinese implementers pay for American innovation. What is more, the long-term and largest beneficiaries are also firms based in China.

China has strong ambitions and a growing investment in setting and governing critical technology standards. Although U.S. companies are currently leading in several key areas, numerous reports have confirmed that China is rapidly closing the gap. Over the last several years, China has pursued economic strength through its Belt and Road Initiative to promote its standards and sell its equipment. As part of this, China’s Digital Silk Road has encouraged its authoritarian standards of surveillance, monitoring and censorship with its internet and telecommunication equipment.

Q5: What should the United States do?

A5: Market-driven U.S. firms rely on return on investment from their long-term and risky R&D by licensing their portfolio of SEPs to continue the cycle of reinvesting these revenues in future R&D. U.S. companies would be less likely to continue making costly and risky investments unless they are able to monetize their successful inventions. Strong IP rights, including those that cover SEPs, play a fundamental role in ensuring that companies are compensated and incentivized to contribute their inventions to global standards. Absent the ability to enforce SEPs effectively, only the global companies that receive significant public funding or state subsidies from their governments—such as China—will be able to compete at the levels needed to lead in global technology standards.

In an unprecedented show of solidarity over what appears to be a technical issue of DOJ policy on standards and patents, a distinguished bipartisan group of former defense, national security, patent, and standards leaders has recently come out in opposition to this proposed policy change. As the implications of this proposal come to be better understood by the broader policy community, and more policymakers make the connection that sound national security rests squarely on a robust innovation-based economy, this proposal will hopefully lose traction. Diminishing the United States’ ability to continue this leadership at such a crucial time of global competition would have unforeseen consequences and send a message to U.S. allies to follow suit—further compounding the loss and handing the competition over to China. It is important, therefore, to recognize the national security implications of such a change in SEPs now, and not after the damage has been done.

Alexander Kersten is deputy director and fellow of the Renewing American Innovation Project at the Center for Strategic and International Studies (CSIS) in Washington, D.C.

Critical Questions is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).

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Alexander Kersten
Deputy Director and Fellow, Renewing American Innovation Project