Internet of things (IoT) innovators across the European Union (EU) have long advocated for the need for EU-wide legislation concerning standard-essential patents (SEPs)—the patents that enable the use of standard technologies like Wi-Fi, 4G, and 5G. Recently, the European Commission launched a public consultation to assess the existing issues around SEP licensing, clarify current rules, and examine possible solutions. Stakeholders, like IoT innovators, academics and experts, trade organisations, associations, and private citizens can comment until 9 May 2022 through a questionnaire on the Commission website. In parallel, the European Commission is consulting on its revised Horizontal Guidelines which address cooperation agreements between companies, standardisation agreements, and other competition rules.
Other regulators around the world are also starting legislative processes and investigations into SEPs and licensing issues—from the United Kingdom to Japan and from the United States to Singapore. As all these policy development processes are underway, we want to refresh our readers’ memories and cover what SEPs are, how these patents affect our members, and what can be done to improve the SEP licensing process.
What are standard-essential patents?
A standard-essential patent (SEP) is a patent that a patent holder volunteers to be part of a standardised technology (e.g. 4G, 5G, Bluetooth, or Wi-Fi). If another company wants to use the standard, they must license the patents related to that standard (unless the SEP holder agrees to waive that requirement). In declaring their patent as ‘essential’, patent holders gain access to a larger market for their patent because anyone looking to implement the standard must license their patent. In exchange for trading their patent’s exclusivity for a higher volume of uptake, the patent holders voluntarily commit to license the SEP on fair, reasonable, and non-discriminatory (FRAND) terms. Find more tech terms you need to know to understand SEPs, in this blog post.
Why is a healthy and robust SEP framework important for our members?
Many of our members create IoT products and services that enhance every aspect of our daily lives. They typically build or integrate hardware products that incorporate standardised technologies, and to do so, they need to acquire a licence to use the patented elements of that standard. An example would be a company that makes irons and wants to integrate an IoT component to their product to alert their customers on their smartphones when the iron is not shut off after use. They will need to use standardised technology, for example, Wi-Fi, to connect their iron to the consumers’ smartphone.
However, a single standardised technology may include hundreds, or even thousands, of patented parts. This means it’s usually complicated, time-intensive, and often costly to understand and resolve SEP licensing issues. Since standardised technologies are almost universally relied upon to communicate with other products and infrastructure, IoT manufacturers have practically no other option than to license SEPs to enable their devices can connect to the internet and/or other devices.
SEP abuse exists in many forms, but essentially it boils down to a SEP holder breaking their promise to make SEPs available on fair, reasonable, and non-discriminatory (FRAND) terms. Because of the power imbalance that exists between SEP holders and potential licensees, SEP holders can (and increasingly do) exploit FRAND terms. Such behaviour exposes potential licensees to abuses, like unfairly high royalty fees or even being locked out from using the standard via injunctions. A large, unexpected bill from SEP holders claiming infringement or, worse, a court-issued injunction halting sales or the entire production process, can mean the end of an otherwise viable company. In an efficient, balanced, and fair licensing system, the iron company from our example can focus on making a functional iron that, above all, removes creases from your clothes—but also successfully warns you if you left it on unintentionally—rather than fighting unreasonable legal battles over patents for using a standard. If a patent is infringed, courts are an appropriate place to settle these disputes, but a simple and straight-forward request for licensing an SEP should be just that: simple and straight-forward.
In its survey, the European Commission correctly indicates that small and medium-sized enterprises (SMEs) are particularly dependent on standard technologies. Unlike large companies, SMEs often do not have the financial resources nor the time or expertise to sustain years of litigation in court. This combination of dependency and lack of legal resources makes them particularly vulnerable to SEP abuse.
What can be done to improve the SEP licensing process?
Describing its reasoning for the initiative, the European Commission notes it ‘seeks to create a fair and balanced licensing framework’. Such a framework has been a work in progress in the EU. In November 2017, the European Commission issued a Communication on licensing practices for SEPs. The Communication intended to provide a balanced, smooth, and predictable framework for SEPs that would contribute to the development of IoT and harness Europe’s lead role (read more here and here). Since then, various court rulings have set further precedent on the interpretation of what FRAND means. In this context, European legislators have been investigating the need to establish a comprehensive framework that applies to everyone, aiming to help companies, lawyers, judges, and others to interpret FRAND terms.
We believe that transparency will be a key component of such a framework. In situations where SEP holders insist on overly restrictive non-disclosure agreements (NDAs), it can be impossible for potential licensees to properly evaluate the alleged basis and support for the SEP holder’s licensing demands. Further, overly broad and unnecessary secrecy requirements by SEP holders defeat the entire purpose of the FRAND construct (creating a fair and transparent ecosystem for SEP licensing). Transparency about non-commercially sensitive aspects of agreements is, therefore, key. However, transparency is just one piece of the puzzle in achieving a balanced and pro-innovation SEP licensing ecosystem. Enhanced transparency would, for example, not address the fact that some SEP holders refuse to offer a license to innovators that request them. This behaviour conflicts with the ‘non-discriminatory’ part of FRAND. Issues like these, too, deserve the Commission’s attention in its new policy development process.
Having a solid legislative framework that clarifies legal concepts like FRAND, enables small business innovators to license valid, and essential SEPs with the certainty that they can actually use the standard. Much like any other business decision, information is key—especially before signing a contract or any other agreement. Licensing agreements should not be any different. We are thus urging the European Commission to construct a framework that allows innovators to make informed decisions about licensing the SEPs. Doing this allows innovators to invest the time and money they would otherwise spend on legal fees in making new, better, or market-changing products instead, benefitting both manufacturers and consumers.