The growth of the Internet of things (IoT) ecosystem has been a technological revolution and is expected to generate €12.5 billion for the global economy by 2030. In an effort to meet increasing customer demand for IoT products, a record number of businesses across industries and sectors are increasing their IoT capabilities to advance efficiency and deliver better outcomes for their customers. Mike Sax, Founder and Chairperson of The App Association, explains what SMEs need to know about the IoT and standards.
SMEs entering the IoT space must understand the intellectual property (IP) rules that underpin IoT technology, especially where they relate to technology standards. There are real-world consequences to small businesses that fail to successfully navigate standards and the licensing of standard-essential patents (SEPs), including discriminatory fees or court-ordered market exclusions for the production or sale of products, both of which can impose major setbacks to an SME’s plans for growth.
Why standards matter
Technology standards are agreed-upon building blocks for specific technologies that provide seamless connectivity and interoperability to products across various markets. For example, Wi-Fi is the technology standard that allows your smartphone to connect to any Wi-Fi network worldwide (if you have the password). This is because the Wi-Fi standard is always the same wherever it is implemented. Good examples of other standards relevant to IoT include 4G, 5G and Bluetooth.
Standardisation enables companies to buy off-the-shelf products in order to implement standards, giving them an innovation head start by ensuring their product can interact with other IoT devices and networks. The standardisation process empowers innovators, including SMEs, to efficiently build innovative connected technologies without reinventing a new connectivity system. This process is also good for consumers because the resulting product will be able to communicate with other technologies that use the same technology standard (e.g. Wi-Fi).
Standard-Essential Patents (SEPs)
A technology standard relies on the contribution of several innovations (e.g. hardware, chips, ports and code), many of which are patented. The patented technologies contributed to a technology standard are called SEPs, which are declared necessary to access the technology standard. The fair licensing of SEPs is important because companies that are building exciting innovations may be disrupted by SEP infringement claims simply because they use the standardised technology (for example, 4G technology needed to connect their IoT innovation to the Internet). You can’t use a standard like 5G without licensing the necessary SEPs. Therefore, SEP licensing is an essential part of developing IoT-connected products.
When setting up the standard, the owners of SEPs voluntarily commit to making their patents available on fair, reasonable and non-discriminatory (FRAND) terms. However, SEP holders don’t always keep that commitment. For example, some SEP holders refuse to license to innovators unless they are at the end of the value chain, where the SEP holder can seek more royalties based on the value of the end product, instead of just the part that uses their patented technology. Let’s take cars as an example. The value of an individual IoT sensor is much lower than the overall value of a car because the IoT component only does one thing, whereas the value of the car is based on a range of factors, such as brand, design, safety and efficiency. If some SEP holders get their way, manufacturers would be paying royalties over the final product’s value instead of just the IoT part where the SEP is located. This is unfair because much of that claimed value (of, for example, the car) is completely unrelated to the SEP.
And let’s not forget, the car company doesn’t have a choice – if they want to connect their vehicle to the Internet, they must use the technical standard and license the corresponding SEPs. This puts SEP holders in a gatekeeping position, giving rise to significant competition concerns and is exactly why SEP holders should commit to abide by the FRAND terms.
This type of SEP abuse has historically been seen in the telecom industry but has spread over time to emerging and critical spaces, such as automotive and healthcare markets. Without changes in legislation, we will continue to see SEP licensing abuses spread to SMEs in the broader IoT communities, including any businesses using off-the-shelf IoT solutions in their products.
Even when innovators integrate off-the-shelf components in good faith, they are increasingly vulnerable to attacks from SEP holders’ claims of SEP infringement simply because their components rely on standardised solutions. These claims potentially include demands for excessive royalties from SEP holders by way of threat to seek injunctions against the innovator’s product. SMEs are often targets for excessive royalties because they are vulnerable and cannot afford to endure costly infringement suits even if they succeed. For example, a recent judgement in the UK on a case between InterDigital and Lenovo found that InterDigital, the SEP holder, was routinely charging higher rates to SMEs to inflate the value of the SEP.
Will the situation for SMEs change?
Creating standards can be an expensive and time-consuming business, and it’s appropriate for companies that create and own SEPs to be able to profit from them. However, the ability to make a profit should not be at the expense of SMEs seeking to enter the IoT market with innovative new products. SMEs should not face unnecessary barriers to market because they lack the expertise and resources to fight complex IP legal battles. The standards ecosystem needs to work for everyone, not just the large international companies that own the rights to SEPs.
Fortunately, governments around the world are considering action to change the SEP licensing landscape for the benefit of smaller innovators. The UK Intellectual Property Office is currently examining the SEP ecosystem, while the European Union has gone further, proposing legislation. The courts will continue to review SEP cases, and based on recent rulings, we may see a shift in the current status quo that provides SMEs a fairer SEP licensing process (InterDigital v. Lenovo 2023).
Next steps
In the short-term, businesses that use off-the-shelf IoT solutions should discuss and agree with their supplier where the SEP licensing liability sits in the supply chain and ensure that they understand their liabilities related to the use of standards and SEPs. Companies want to avoid facing a giant, unexpected royalty bill or spiralling legal costs to fight it.
In the long-term, a definitive solution to this problem would be legislators clarifying that a SEP holder cannot discriminate and must offer FRAND licenses to all willing licensees, regardless of where they sit in a supply chain. This would enable licences to be taken at the most appropriate point in that supply chain. After all, this is the essence of the ‘non-discriminatory’ part of FRAND terms. Companies using technology standards to innovate new IoT products should be able to do so without fear of inflated bills or legal headaches.
It can be hard for SMEs to follow and engage with SEP licensing due to its complex and ever-changing nature. That’s why membership bodies like ACT | The App Association are working to ensure that the SME voice is heard in these critical discussions. SMEs exploring IoT are strongly advised to speak with their relevant trade bodies about standards and standard-essential patents while the window of political influence is open.
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