Commercially available off-the-shelf solutions for internet of things (IoT) applications are ready made internet-connected sensors that offer a convenient way for businesses to make their products smarter and more efficient.
Let’s say a company makes irons, and they want to alert their customers on their smartphones when the iron is not shut off after use. They can purchase ready-to-use timers and temperature sensors, as well as a wireless connectivity module, and integrate them into the iron. The result is a new IoT device that improves customer safety. By licensing off-the-shelf components, the company avoids the cost and complexity of developing the sensor and wireless connectivity module in-house.
It would seem fair to assume that there would be no issues relating to intellectual property when you add an unchanged, off-the-shelf solution to an existing product—especially when buying from a trusted retailer. However, this is not necessarily the case.
A standard-essential patent (SEP) is a patent declared necessary for a standard technology such as 3G, 4G, or Wi-Fi to work. (Read more about the importance of SEPs.) Even when innovators integrate off-the-shelf components in good faith, they are increasingly vulnerable to attacks from SEP holders for alleged patent infringement. Such practices could result in demands for additional royalty payments.
This is because despite committing to licence their SEPs on fair, reasonable, and non-discriminatory (FRAND) terms, SEP holders can still refuse to license, preferring to target innovators at the end of the value chain where they can calculate the royalty based on value unrelated to the patented invention. Let’s look at the iron we mentioned earlier. The value of the individual component which enables the IoT functions to work is lower than the overall value of the iron. This is because the IoT component only does one thing, whereas the value of the iron includes a number of factors, such as brand, its ability to remove creases from clothes, and its design.
It would be fair to calculate the value of the SEP royalty using the value of the IoT component because this is the technology directly relating to this patent. However, SEP owners are pushing to calculate the SEP royalty on the value of the finished iron. In this case, the royalty would be higher, regardless of the fact that much of the value of the iron is completely unrelated to the SEP. This is unfair because the royalty fee is increased by including the value added by the iron manufacturer’s innovation in the royalty calculation, which has nothing to do with the SEP or the iron’s ability to connect to the internet. Furthermore, the iron company would have no choice—if they want to connect their iron to the internet, they have to use the technical standard and licence the corresponding SEPs.
For many years, such SEP abuses occurred in the telecom sector, but they have now spread to new IoT verticals, including the automotive supply chains. Without changes in legislation, we will see SEP abuses across the wider IoT community too, including any businesses using off-the-shelf IoT solutions in their products.
There is only one definitive solution to this problem: legislators can clarify that an SEP holder cannot discriminate and must offer FRAND licenses to all willing and reasonable licensees, regardless of where they reside in a value chain. After all, this is what the “non-discriminatory” parts of FRAND terms are all about. Companies using off-the-shelf solutions should be able to do so with confidence. Module makers should take the SEP licenses they need from SEP holders, which will safeguard their customers from patent infringement lawsuits.
ACT | The App Association is working with businesses and its members to educate businesses and policymakers on these issues and advocating for a change in legislation to allow small and medium-sized businesses to invest in IoT innovation in confidence. To find out more or to have your voice heard in these important discussions, reach out or sign up directly.