Buying and selling smart devices: SEP licences and competition law

Standards Essential Patents (SEPs) are patents that must be infringed when someone makes, buys or sells a connected or ‘smart’ device. A recent decision in the UK courts has brought competition law issues to the fore when companies and their advisers are looking at SEP licensing, especially for SMEs and smaller licensees. On 14 February 2024, Mr Justice Smith delivered his judgment in Optis Cellular vs Apple relating to the consequential matters arising from his main judgment handed down in May 2023.

The judgment

The judgment addressed a number of issues relating to confidentiality and transparency, but the Judge also raised a concern as to whether the confidentiality arrangements agreed between SEP owners and/or implementers concerning the terms of SEP licences constituted an infringement of the provisions of Chapter 1 of the UK’s Competition Act 1988 (the “Act”). Much like Article 101 of the Treaty on the Functioning of the European Union and Section 1 of The Sherman Anti-Trust Act, Chapter 1 of the Act prohibits acts which restrict or distort competition. Any agreement or decision which is prohibited under Chapter 1 of the Act is void.

Mr Justice Smith said he had concerns that concerted endeavours by significant market participants in keeping SEP licensing rates secret constituted a potential violation of Chapter 1 of the Act “given the fact that rates in the market are generally supposed to be Fair, Reasonable and Non-Discriminatory (FRAND). Non-discriminatory, as it seems to me, implies a degree of transparency.”

Mr Justice Smith, also Chair of the Competition Appeal Tribunal in the UK, further set out his concerns regarding competition law breaches, saying that whilst the disclosure of lump-sum rates may be “anti-competitive” in a non-technical sense, “where a group of Implementers and/or SEP Owners collectively arrange – using court processes as necessary – to keep market rates (which is what FRAND rates are or ought to be) secret, in order to leverage their own negotiating position, an infringement of the Chapter 1 prohibition may arise. A great deal will turn on whether the parties are acting truly independently or whether there is some sort of arrangement or understanding regarding confidentiality…”.

The impact on SMEs and smaller licensees

What is particularly concerning for SMEs and smaller licensees is that confidentiality agreements, and supra-FRAND SEP licensing rates, are being forced upon them, putting them at a competitive disadvantage. Many SEP holders are desperate to keep their ‘true’ FRAND licensing rates secret and hidden from SMEs and smaller licensees, thereby discriminating against them. Mr Justice Smith said that when parties are negotiating licences on FRAND terms, they should be able to “question – by reference to other rates agreed with other parties – whether the rates they are being offered are, indeed, ‘non-discriminatory’, as well as ‘fair’ and ‘reasonable’”.

SEP licences and NDAs

The confidentiality provisions that Mr Justice Smith identified were part of SEP licensing agreements, but they are not the only confidentiality agreements involved in SEP licensing. While a certain amount of confidentiality is necessary in negotiations for licence agreements – SEP holders frequently require licensees to disclose competitively sensitive input cost information and sales data – the same cannot be said for much of the information covered by the NDAs used in licence negotiations (including by patent pools).

SEP holders often require potential licensees to sign NDAs as a precondition to sharing their represented “FRAND” terms and to entering into licence negotiations. These NDAs are often extremely broad and restrict sharing any information related to the SEP holders patent portfolio, including infringement and essentiality claim charts, not even with suppliers (whose components may infringe the patents) or customers (who may already be licensed).

Potential licensees, especially those buying or selling products with ready-made components providing the connectivity functionality, often lack the technical understanding to evaluate this information. This means smaller companies can be isolated from their suppliers who could seek direct licences from the SEP holders and/or help them with technical analysis and developing a reasonable FRAND counter-offer. Similarly, there is significant secrecy around patent pools; some patent pools do not disclose the number of essential patents in the pool, as well as the results of essentiality checks, the apportionment of royalties between SEP owners and pool administrators, and pool rebate or discount programmes. Mr Justice Smith’s statements raise the question as to whether these NDAs, and/or the refusal to share the ‘true’ licensing rate for a SEP portfolio and other information, may infringe Chapter 1 of the Act.

In June 2023, the UK Competition and Markets Authority (“CMA”) strengthened its enforcement work against illegal cartels and is now offering a reward of up to £250,000 to people who report unlawful cartel activity they have witnessed, whilst protecting their anonymity. In the UK, businesses found to have been involved in illegal cartels can be fined up to 10% of their annual turnover, individuals directly involved can face up to five years in prison, and company directors can be disqualified from holding director positions for up to 15 years. The reward is separate from the CMA’s leniency programme where a business that has participated in a cartel may escape sanctions if they come forward with information about the cartel, provided certain conditions are met.

Given the concerns highlighted by the UK courts, all parties involved in SEP licensing should give careful consideration to whether or not the confidentiality obligations imposed by SEP holders, the refusal to share information, and the practice of withholding the ‘true’ or ‘real’ rates with all implementers, infringe Chapter 1 of the Act (and/or Article 101 TFEU).

If your business makes, buys or sells smart devices and you have concerns about how patents may impact your business, please contact Robert Pocknell.