Essentiality Checks for Standard Essential Patents

There is widespread concern about the lack of transparency regarding standard essential patents (SEPs). This paper examines the proposal to introduce essentiality checks, a certification scheme for declared SEPs. We develop a framework that allows us to evaluate how essentiality checks would impact licensing, litigation, and incentives to innovate. In our model, an upstream innovator invests in R&D and privately learns about the likely essentiality of its patents for a standard. The innovator then licenses the patents to a downstream implementer who can contest the essentiality of the patents in court. We show that, although essentiality checks can reduce litigation, they also raise incentives for R&D investment. Because the latter can be excessive if FRAND requirements are ineffective and spillovers are small, the overall welfare impact of essentiality checks is ambiguous. This paper was accepted by Joshua Gans, business strategy. Funding: C. Wipusanawan gratefully acknowledges funding by the Deutsche Forschungsgemeinschaft (DFG, German Research Foundation) – project number 443732464.