Unlocking innovation – are standard-essential patents the key?

4 mins read

By Stephen Tulip, UK Membership & Engagement Manager, ACT | The App Association

The last few years have not been easy for businesses in the United Kingdom. COVID-19 restrictions and the UK’s departure from the European Union forced many companies to dedicate their resources to adjusting to new rules. They had to focus on surviving in the here and now, rather than on the future.

Despite these setbacks, many technology areas are ripe for growth, including green technology, med-tech, advanced manufacturing, and artificial intelligence (AI). With this in mind, the UK government recently launched its Innovation Strategy. This strategy aims to unlock the innovative potential of UK businesses through extra funding (£22bn), closing skills gaps, and investing in research and development.

The implementation of new practical structures will support the strategy’s ambitions, including a new science and technology council, finance and innovation hubs, and intellectual property education programmes. However, the strategy is missing one aspect: how standard-essential patent (SEP) abuse holds back the true potential of the industrial internet of things innovation in the UK.

Standards, patents, and the FRAND commitment

To grow through innovation, companies must invest in advanced manufacturing techniques and further development of their products. Many are looking towards the internet of things (IoT) to support new capabilities and to provide new revenue streams. To make products that connect to the internet, companies rely on standardised technologies such as 4G, 5G, and Wi-Fi.

In a standard setting process, stakeholders come together to collectively decide on the innovations that become a standard technology. Some businesses that participate in this process contribute their patented technologies to the industry standard. If their patented technology is adopted and is truly essential, users typically cannot avoid the corresponding patents. To make up for this imbalance, standards organisations require the owners of such standard-essential patents (SEPs) to license their SEPs on fair, reasonable, and non-discriminatory (FRAND) terms to businesses that want to use this technology.

The FRAND commitment benefits both licensors and licensees as well as others who rely on standardised technologies. On the one hand, the FRAND commitment ensures the ability for companies that developed the standardised technologies to profit from their patented inventions. On the other hand, it’s intended to provide a guaranteed mechanism by which companies can use patented technologies to support their own innovative products.

But because SEPs can be declared “essential” to a standard by the SEP’s owner, patent owners hold more power than the licensee in licensing negotiations. If SEP licensing negotiations later fail and the case goes to court, UK courts often rule that the sale should be halted (injunction) to avoid infringement of the patent. Production of products that use this patent effectively comes to a stand-still. This especially complicates things because standards can consist of thousands of SEPs. So, if one single SEP holder fails to honour its FRAND commitment to license its patent to a license-seeking manufacturer, it essentially means the manufacturer is blocked from using the whole standardised technology. This manufacturer would be unable to compete with others who do use that technology (e.g., 4G or Wi-Fi). Some SEP owners use this threat to demand exorbitant royalties that are neither “fair” nor “reasonable,” and sometimes even refuse to provide a license at all to those who need to leverage the standard – despite their voluntary FRAND commitment.

Not so FRANDly licensing terms

While the FRAND commitment should resolve SEP licensing power imbalances (and it often does), there is an increasing trend where SEP licensors are choosing to discard their FRAND promises, simply to attain licensing revenues that exceed the value of their patented invention. Additionally, SEP holders are often larger, well-funded companies, some of which only exist to profit from SEP licensing. They are well equipped to enforce their patents, while licensees often do not have the resources and capital to defend themselves, especially if they’re SMEs.

It is particularly important for UK SMEs to understand how SEP licensing affects them because new decisions in several court cases have already created some concerning precedents. For example, in the case Unwired Planet vs Huawei, the UK’s Supreme Court decided that companies can be forced to agree to global SEP licenses or risk UK-production being halted – even if that company only needs a license in the UK.

This ruling, in particular, has created significant disadvantages for UK businesses that depend, or will depend, on SEP licensing. Increasing abuse by SEP licensors limits UK companies’ ability to use the technologies they need to develop new advanced manufacturing techniques or new IoT devices. Even more concerning – unless you are a company with the resources to go to court – there isn’t much you, as an independent innovator, can do about it. But that is about to change.

Later this year the UK Intellectual Property Office will launch a consultation on the SEP licensing framework. For the first time, SMEs will have the chance to directly share their views on this issue. This consultation is a crucial step because it provides an opportunity to unblock a major barrier to innovation.

Unlocking innovation

The UK government has signalled its desire for the economy to grow through innovation and is taking practical steps to achieve this goal with its recently released Innovation Strategy. However, current SEP licensing practices that disadvantage SMEs limit this ambition. SEP licensing abuses make it difficult for businesses to license patents that are essential for improving their manufacturing processes and connecting their products to the internet.

New policy directives or legislation that help SMEs utilise standards fairly and tackle the issues created by the Unwired Planet vs Huawei ruling are a crucial step in removing a major roadblock to all kinds of innovation in the IoT space. Such actions are a practical step the UK government could take that would benefit companies across the country, and reinforce the UK’s position as a home for innovation.