One year ago, the European Parliament advanced the European Commission’s proposed Standard Essential Patents Regulation to address the opaque and costly standard-essential patent (SEP) licensing system that makes it increasingly difficult for small and medium-sized enterprises (SMEs), like our members,to innovate. The proposal aimed to simplify the licensing process, ensuring that Europe remained competitive in the global tech race.

One year later, a handful of big companies have pressured the Commission to announce its intention to withdraw the regulation. This leaves SMEs facing the same unfair and unpredictable SEP licensing system. The European Commission and Parliament have already recognised these challenges, but recognition alone is not enough. Europe’s ability to remain competitive depends on a SEP licensing landscape that works for SMEs, not just large SEP holders. EU institutions must act to support SMEs, European competitiveness, and the future of innovation.

SME IoT manufacturers, SEPs, and FRAND licensing

The Internet of Things (IoT) sector is growing rapidly, transforming industries such as healthcare, logistics, and manufacturing. Smart devices, including energy-efficient thermostats, advanced medical wearables, and precision agriculture tools are empowering people and driving progress across industries. SMEs are at the heart of this innovation, driving the IoT revolution, bringing agility, niche expertise, and deep community ties that are crucial to advancing the Europe’s Digital Decade. Yet, despite their critical role, SMEs continue to face the same licensing barriers that hold them back. One year after the European Parliament advanced much-needed reforms, SEP licensing remains just as opaque and unpredictable, leaving SMEs trapped in a legal web that stifles innovation instead of a simplified, supportive system.

SEPs are patents that cover technologies incorporated into industry-wide technical standards, such as 4G, 5G, Wi-Fi, and Bluetooth. Connectivity standards are fundamental for developing IoT products, allowing devices from different manufacturers to interoperate. Standardisation is fiercely competitive; once a technology becomes part of an industry standard, it is globally licensed, effectively locking in entire markets.

To prevent anti-competitive behaviour, SEP holders make a voluntary commitment to license their patents on fair, reasonable, and non-discriminatory (FRAND) terms. While these commitments are legally binding, some opportunistic SEP holders have taken advantage of loopholes, increasingly disregarding their voluntary FRAND commitments and engaging in abusive SEP licensing tactics. As a result, the SEP licensing landscape remains incredibly difficult for SMEs to navigate.

The cost of inaction is high for SMEs

Standardisation is meant to encourage widespread adoption by innovators of all sizes, yet SMEs are often excluded due to the resources required to face SEP licensing complexities. When SMEs struggle to navigate SEP licensing, Europe’s digital economy suffers, leading to slower innovation, and weakened global competitiveness. Below is a breakdown of the barriers SMEs face just to bring connected products to market. These obstacles are not theoretical, it is the true impact of inaction for SMEs and small technology innovators.

Step 1: Choosing the connectivity standards

For SMEs developing IoT products, deciding which connectivity standards to implement is both a technical choice based on functionality and a business decision based on what modules are both available to purchase and provide the right standards capability.  To stay competitive, they often integrate multiple standards, from video coding (e.g., HVEC) to cellular (3G, 4G, 5G) and Wi-Fi (Wi-Fi 5, 6, and 7). Often, SMEs end up sticking with older, inferior standards, not because they want to, but because the evolving SEP licensing landscape is costly to navigate and riddled with uncertainties.

This is a major problem for Europe’s competitiveness. The rollout of 5G and next-gen Wi-Fi unlocks faster speeds, lower latency, and greater energy efficiency, but these benefits must be available to all. If Europe wants SMEs to innovate and compete globally, policymakers must ensure they can adopt cutting-edge standards without being trapped in an ever-growing web of licensing barriers.

Step 2: Off-the-shelf, but not off the hook

Many SMEs attempt to simplify licensing complexities by purchasing pre-certified connectivity modules, only to discover they often come with a costly catch. SEP licenses are often not included in these off-the-shelf products, leaving SMEs unexpectedly liable. This happens because opportunistic SEP holders deliberately withhold licenses from manufacturers higher up the value chain, instead targeting end-product manufacturers to extract higher royalties. This pricing manipulation is deeply unfair, as the true value of an IoT product comes from its software, design, and unique functionalities – not just its standardised connectivity components.

Step 3: Seeking SEP licenses

If SMEs choose not to use plug-in modules, they must integrate connectivity standards into their devices themselves. Theoretically, this should be straightforward; after all, the entire purpose of standardisation is to ensure that all players can adopt industry-agreed technology standards with publicly available specifications. However, the true challenge is navigating licensing negotiations.

Standards often contain hundreds or even thousands of SEPs, making the licensing landscape incredibly confusing. The SEP licensing landscape is skewed by extreme opacity in royalty pricing, as abusive SEP holders use overly restrictive NDAs to block access to comparable rates. This leaves SMEs unable to plan ahead, negotiate effectively, or secure investment, further tipping the balance in SEP holders’ favour.

As LucidCircus, an App Association member company, put it:

“You get a letter with an offer, and you have no idea if that offer is good or bad. You just have to take it, or you are risking an injunction that could put your company out of business because you just don’t have the resources to be in court for several months. The small and medium companies just don’t have the bandwidth to accommodate injunctions, especially if it happens in multiple markets.”

Without a transparent and predictable SEP licensing landscape, risk-averse European investors are even more unwilling to back a company without its IP due diligence and licensing in order. SMEs risk exclusion from funding opportunities, partnerships, and potential acquisition without SEP licenses.

Step 4: Abusive negotiation tactics

Once SMEs reach the SEP licensing stage, they often encounter exploitative practices from opportunistic SEP holders who exploit loopholes in Europe’s weak enforcement system, disregarding their voluntary FRAND commitments. Some of these abusive negotiating tactics include:

Over-declaration and abusive tying and bundling: Some SEP holders over-declare both the validity and essentiality of their patents, packaging them into bloated licensing bundles that force SMEs to pay for patents they don’t need.

Inflated fees and hidden restrictions: SMEs have been found to be routinely overcharged in SEP licensing demands. Due to the lack of transparency in SEP licensing, SMEs have no way to assess what truly constitutes a FRAND rate. This leaves them vulnerable to pressure tactics, often accepting supra-FRAND rates simply to avoid the legal and financial risks imposed by the abusive threat of injunction.

Abusive threat of injunction: Under EU competition law, SEP injunctions may constitute an abuse of dominance if the SEP holder did not take the necessary steps to negotiate a FRAND licensing rate in good faith. While these safeguards are meant to keep injunctions a last resort, some German courts have adopted an overly permissive approach, creating a loophole that some abusive SEP holders exploit. The European Commission highlighted this concern in a recent amicus intervention, warning that courts must be strict in applying the safeguarding steps to prevent abusive injunction. Injunctions can be devastating as they remove a product from the market entirely. This is particularly harsh for SMEs, which may rely on just one or a few products for revenue. Even the threat of an injunction exerts immense pressure, forcing SMEs to accept supra-FRAND rates.

Abuses by patent pools: Patent pools are meant to simplify SEP licensing by bundling multiple patents into a single agreement, but in practice, they can replicate or even worsen the same problematic behaviours as individual SEP holders. These include concerns about essentiality, validity, aggressive injunction threats, and high-pressure tactics. Negotiating genuine FRAND terms can become even more difficult, and one pool has even openly stated it does not consider itself bound by FRAND obligations.

The Commission must act now to support SME innovation

One year after the European Parliament overwhelmingly advanced the proposed EU SEP Regulation forward, SMEs remain trapped in an opaque, unpredictable system that stifles innovation instead of fostering it. The withdrawal of the proposed EU SEP Regulation would leave Europe’s most innovative businesses struggling with the same legal uncertainty, excessive costs, and market barriers that limit their ability to scale.

If the EU is serious about achieving its Digital Decade goals, it must ensure that SEP licensing supports SMEs, not just entrenched opportunistic SEP holders. A transparent and fair SEP framework is essential to unlocking SME-driven innovation, attracting investment, and securing Europe’s long-term leadership in the global tech economy.