Complexities of patent licensing in the Internet of Things

With the coming revolution of the Internet of Things (IoT) we are seeing thousands of innovative developers coming up with great ideas as to how they can use the IoT and wireless components to develop new products and industries and improve existing ones. We can’t yet imagine all of the new exciting products that will be developed in the coming years, but we are already seeing innovative IoT products such as smart meters, smart lights, smart heating and connected devices in our homes; and we are beginning to see what the future holds for autonomous driving, smart factories (aka Industry 4.0) and smart cities.

Standards such as 3G, 4G, 5G, Zigbee and Wi-Fi are administered by standards-setting organisations and, in accordance with the IPR policies of most organisations, licences for standards essential patents (SEPs) should be made available on a fair, reasonable and non-discriminatory (FRAND) basis.

One of the challenges that developers and device manufacturers face is ensuring they get the appropriate warranties and indemnities from their suppliers when they are buying wireless components. On the face of it, and as is the case in most industries, it should be common practice to ask the supplier or distributor of a wireless component for a warranty that the intellectual property rights have been paid for and to seek an indemnity against patent claims relating to the wireless component.

However, many companies licensing their SEPs relating to wireless standards have developed practices which create uncertainty in the normal supply chain. The uncertainty is created partly because several patent owners refuse to license their SEPs to the manufacturers of the wireless components. This means that component suppliers cannot give the usual warranties and indemnities to their customers (such as distributors) that the products are free from infringement claims, and in turn, distributors and others further up the supply chain can’t give the usual warranties and indemnities to the developers and manufacturers of the end devices.

Many SEP holders are seeking licence fees from SMEs and others that are developing the end-product hardware, and are seeking to take a share of the end selling price of the device. In effect, they are seeking to take a share of the innovations of the developers of the end products. It is a bit like a company selling bricks saying that that the price of the brick (if used in a small house) is £1, but the price of exactly the same brick (if used in a palace) is £5.

In any event, the net result of these claims is that the device manufacturer will be left dealing with multiple claims from SEP holders which relate to technology that it is not familiar with and, in many cases, for which it is not able to obtain the appropriate warranties and indemnities from its suppliers. Because claims can go back six years, the historic claims could be significant and could build up, with the SME not even knowing that the problem is accumulating in the background..

On top of that, and with so many of the SEP holders seeking multiple licence fees, the cumulative licensing fees can be exorbitant. Any company buying components or products compliant with standards should check very carefully the terms and conditions of purchase and try and obtain warranties and indemnities that cover SEPs, and that the appropriate IP indemnification provisions are passed through the entire supply chain from the original component supplier. If it is not able to obtain the necessary warranties and indemnities, it should consider what the potential costs and liabilities might be.

As part of an attempt to simplify the patent licensing process in the IoT for all industry participants, a workshop was organised last year within the framework of the European Standards Organizations CEN and CENELEC, with the support of the Deutsches Institut für Normung (DIN).

A draft document has recently been published setting out some core principles and approaches to the licensing of SEPs in products and devices that will lie at the heart of the IoT. While companies always remain free to conduct their negotiations as they determine on a case-by-case basis, the draft document provides some core principles and approaches that seek to foster a FRAND outcome, and some of those can be summarised as follows:

1. Licence availability: A FRAND licence should be made available to any company that wants one to implement the relevant standard; refusing to license some implementers, such as wireless component suppliers, is the antithesis of the FRAND promise.
2. FRAND methodologies: SEPs should be valued based on their own technical merits and scope, not based on downstream values or uses (i.e. not based on the end value of the device or product that has been developed by the SME). In many cases this will involve focusing on the smallest component that directly or indirectly infringes the SEP, not the end product incorporating additional technologies. As noted by the European Commission, SEP valuations “should not include any element resulting from the decision to include the technology in the standard.” Moreover, “[i]n defining a FRAND value, parties need to take account of a reasonable aggregate rate for the standard.”
3. NDAs and fairness: Neither party to a FRAND negotiation should seek to force the other party into overbroad secrecy arrangements. Some information, such as patent lists, claim charts identifying relevant products, FRAND licensing terms, aspects of prior licensing history and the like, are important to the evaluation of potential FRAND terms, and public availability of those materials can support the public interest in consistent and fair application of FRAND. A patent holder should not seek to exploit its information advantage regarding the patents or prior licences to interfere with the potential licensee’s ability to effectively negotiate.
4. Injunctions: A FRAND SEP holder must not threaten, seek or enforce an injunction (or similar de facto exclusion processes like Customs seizures or raids at trade shows) except in exceptional circumstances. Parties should seek to negotiate FRAND terms without any unfair “hold up” leverage associated with injunctions or other de facto market exclusion processes.

If the parties to the negotiations adopt these principles and approaches, it is to be hoped that negotiations will lead to licensing with a fair and reasonable and non-discriminatory outcome.

For companies and lawyers that may be interested in more detail, a copy of the document is here and it has been put forward for public consultation, so anyone who is interested can provide comments by 28 March 2019. A final version of the guide will be published by CEN-CENELEC once the consultation and review process is completed.