The concept of Standard Essential Patents (SEP) is emerging in India and gradually gaining popularity with Philips gaining victory in the suit filed by them. Philips being a SEP holder initiated SEP litigation in India.
The SEP is the set of "standards" or "industry standards" or "technology standards" that needs to be met so that a product or process functions in a specific manner. They specify the requirements that has to be met by the manufacturer of the given product/s. Industries like for example mobile phones, tabs etc have to use technologies that are governed under SEP. Similarly in the industries of telecom their are two technologies covered under SEPs Code Division Multiple Access(CDMA) and Global System for Mobile Communication(CDMA).
If for making a product compliant with an industry standards, a manufacturer needs to use patented technology and it is impossible to manufacture that particular product without infringing the said patented technology, then that patented technology is called Standard Essential Patents. Like in the case of smartphones etc, it is not possible to create a standard compliant product without using technologies like CDMA OR GSM. In other words, the patents that are essential for compliance with industry standards and that have been adopted by a Standard Setting Organisation(SSO) are SEPs.
The owner of the SEP has superior bargaining power that can be misused by them during licensing to other entities in order to earn unreasonable revenues. On the other hand, any SSO may avoid adopting a standard if the owner of SEP is reluctant in licensing the patent in advance. This may be again a detrimental factor since the level of adoption by the SSO is the determining factor of the SEPs value.
The only solution to this is the creation of F/RAND or FRAND– Fair, Reasonable, And Non-Discriminatory terms. These terms are made as requirement by SSOs in order to ensure Fair, Reasonable, And Non-Discriminatory licensing of patents by SSO members to other members and sometimes non-members as well. The FRAND terms ensure a balance between use of the standard by all the manufacturers in the industry and the fair benefits reaped by the SEP owner.
Under Patents, FRAND and Compulsory Licensing are two different forms of licensing. FRAND is widely used in industry like telecommunications, mobile phone and softwares whereas compulsory licenses have been used by different Governments where the need of use of inventions, mostly pharmaceuticals, are required for general public which is of prime importance. Compulsory license is the result of Government mechanism and it's supreme right to provide public welfare. On the other hand FRAND is the result of free market forces working within industries and SSO in order to determine whether a patent can be determined as a SEP. Royalty rates are set by negotiations and market forces in FRAND and royalties are set by Government in case of Compulsory Licensing. The former is more inconsistent than the later.
Both ultimately create value for the patented product which is different from the value of the product in the market. The entity which ultimately consumes the product pays lesser for it due to both these licensing mechanisms.