The recent Lenovo v. InterDigital case is the latest high-profile standard-essential patent (SEP) licensing dispute heard by the UK courts. This case highlights how small and medium-sized enterprises (SMEs) are being disproportionately abused in SEP licensing negotiations. Initially, the UK High Court (the lower court) found that SMEs are often forced into discriminatory licenses due to resource constraints and the threat of expensive litigation. However, the case was appealed, leading to a new decision by the UK Court of Appeals (the appeals court) that significantly changed the landscape once again, resulting in a major impact on small businesses seeking to create innovative Internet of Things (IoT) products using SEPs.

The basics of SEP licensing

As we have outlined before, innovators who want to use technology standards in their products must take a license and pay a royalty fee for SEPs that cover the standard. This is important for companies making connected devices because technology standards like 4G and Wi-Fi are what enable them to share data wirelessly with other devices and to leverage the internet. SEP licenses are often voluntarily committed under fair, reasonable, and non-discriminatory (FRAND) terms to check the possibility of SEP holder abuse of their dominant position. However, FRAND terms are often undefined, leading some opportunistic SEP holders to abuse their market position and demand excessive royalties, forcing small businesses into unfair agreements under the threat of injunction. This is an impossible situation for a small business to be in.

So, what have the latest developments in Lenovo v. InterDigital taught us so far?

Lesson 1: Deep pockets required for fair rates

Lenovo (the licensee) argued that InterDigital’s (the SEP holder) licensing fee was too high and not compatible with the FRAND commitment. Although InterDigital received a slight increase in their royalty percentage, the appeals court deemed the fair rate to be much lower than what InterDigital claimed. The lower court also found that the rate offered to Lenovo was significantly lower than the rates offered to multiple SMEs, which were not considered FRAND.

This reinforces that excessive supra-FRAND royalty demands are a significant problem for small businesses. An SME that (1) has little to no experience with SEP licensing and (2) has already allocated time and financial investment into their products is likely to accept a non-FRAND SEP license, especially when lacking enough information to make a fully informed decision while facing threats of litigation. This makes SMEs prime targets for abusive SEP licensing tactics.

 Lesson 2: Small businesses must take the lead

 Lenovo v. InterDigital states that licensees must approach the SEP holder to initiate license negotiations. This requirement is far more practical for large, well-funded companies, but it can be challenging for SMEs who often have little-to-no exposure to standards and SEP licensing. Expecting small companies to continuously conduct SEP licensing mapping exercises, validity and essentiality checks, and outreach is unrealistic and undercuts the value of using standards. We are discouraged that the appeals court ignored the fact that small businesses received non-FRAND licenses from the same SEP holder. This was done in an effort to create a precedent for licensing terms with larger licensees with deeper pockets.

Lesson 3: No statute of limitations

 According to the latest decision, the statute of limitations does not apply to SEP disputes, meaning that a SEP holder can bring suits forward at any time. This creates uncertainty and potential financial liabilities for small companies and startups as they grow and raise capital.

 Lesson 4: Small businesses need to start saving

The appeals court upheld a previous ruling that companies should proactively hold a dedicated pot of money in case of future SEP licensing disputes. While this may be more practical for large companies with deep pockets, it’s unrealistic for small companies operating with minimal resources. What’s more, small business investors would balk at the idea of stockpiling an undetermined amount of cash against future litigation. This scenario is far from ideal for SMEs that rely on investment to grow. With the risk of SEP litigation rising, investors are more likely to avoid small businesses without extensive financial resources. This ruling eerily suggests that the UK courts anticipate their significant involvement in SEP disputes, highlighting the need for the UK government to implement preventative regulation.

 Lesson 5: The need for regulation

The latest developments in Lenovo v. InterDigital are a stark indication that future SEP disputes in the UK will be unbalanced and distorted for SMEs unless the system is improved. The current UK SEP licensing landscape is creating rules that severely disadvantage small businesses, discourage innovation, and ultimately will deflate the use case for leveraging standards writ large.

SMEs must be protected from frivolous injunctions and not backed into a corner where they are forced to choose between inflated SEP licensing fees or an eyewatering legal bill. The new UK government can fix this easily, affordably, and quickly. First, the Intellectual Property Office (IPO) should follow through with its promised technical consultation on regulatory solutions to SEP licensing, to improve the situation for the UK’s vibrant tech SME community. With this foundation, Parliament should swiftly act to protect SME innovation across standardised markets.

Call to ACTion

The UK’s current lack of a balanced SEP licensing policy and its continued development of precedent under this system is clearly a significant barrier to innovation and competition. We call on the UK government to protect UK SMEs by implementing strong regulation around SEP licensing that is responsive to well-demonstrated abuses and harms in the system today, and that would ensure a balanced landscape with mechanisms to make basic SEP information public, increase cost transparency, check the essentiality of a SEP, and support amicable FRAND negotiations.

If you would like to join our UK SEP-related efforts, please reach out to Brad Simonich or Stephen Tulip.