Refusals to license standard essential patents harm innovative industries and competition

Brussels, December 2, 2020 – Refusal of standard essential patent (SEP) holders to grant licences to component manufacturers not only harms competition, but is also a cause of multiple challenges to entire value chains, creating legal uncertainty, impeding business compliance with patent law and undermining well-established business practices. Whereas licensing component manufacturers would reduce transaction costs and prevent many legal proceedings so that companies driving the future of the Internet of Things (IoT) could focus resources on developing innovative products instead.

Some SEP holders refuse licences to companies operating in upstream levels of a value chain, in violation of applicable law and despite their voluntary commitments to license such patents to all third parties on fair, reasonable and non-discriminatory (FRAND) terms.

In this illustrative paper, the Fair Standards Alliance highlights some of the harms resulting from SEP holders’ refusal to license semiconductor companies that manufacture cellular chips, as well as module manufacturers that develop and sell components incorporating those chips.

Companies that create devices supporting current and next-generation cellular and IoT applications have been critical to the innovative development of the connected economy. Component manufacturers that make modules with connectivity features is a notable example.

To enable communication over 4G/5G networks, component manufacturers’ products comply with radio connectivity standards, such as the NB-IoT and LTE-M. Component developers practicing cellular technology standards – chip and module manufacturers – actively participate in the standard setting process.

SEPs relevant to 4G/5G communication standards are addressed to communication techniques and protocols. Such SEPs generally do not claim the actual use of end products. Rather, they claim discrete functions enabled by particular components incorporated in end products, such as chips. For example, the ability to cook food in an oven with high temperatures has nothing to do with connectivity to the Internet and are completely unrelated to standardised communication technologies.

SEP owners – if they had created a novel downstream end use invention – would be permitted by patent laws to seek a patent on an entire end device rather than on the standardised connectivity technology. But if the SEP holder has foregone such an opportunity to obtain a patent covering downstream innovations, it should not be treated as if it had obtained such a patent.

Importantly, the communication technology remains the same whether it is used in an oven, a lawnmower, or a pair of hiking boots. An IoT chip that goes into a smart oven is either the same or substantially the same as the IoT chip that is used in a smart meter. So the standardised functionality is the same, and it is the downstream company that decides how to innovatively use that functionality in its products.

Some SEP holders seek to justify selective licensing practices claiming that end devices exercise more of the patents related to a given standard than a component. But connectivity SEPs are generally use-agnostic – they describe the communication protocols, but do not specify the content of those communications (i.e., “turn oven off” vs. “tell car to slow down”).

Refusals to license component manufacturers hurt innovation and does not benefit anyone:

• Component manufacturers are unable to supply their cellular connectivity products free of third-party rights and consequently cannot indemnify their customers;
• Their customers cannot obtain components that include third-party IP rights, and may be inclined to choose competing technologies or component manufacturers that are able – either for technical or economic reasons – to offer indemnification; and
• SEP holders do not get royalties for thousands of products reading on the standard.

To read the full position paper please follow this link.