The Internet of Things Meets SEP Licensing

Challenges and Opportunities Ahead

As the Internet of Things (IoT)👉 “Connected devices exchanging data via internet for smart functionality” continues to expand rapidly across industries, it is poised to collide with the complex world of standard-essential patent👉 A legal right granting exclusive control over an invention for a limited time. (SEP) licensing👉 Permission to use a right or asset granted by its owner.. This intersection presents both significant challenges and opportunities for innovators, implementers, and policymakers alike. A comprehensive report by the European Commission’s SEP Expert Group examines the evolving landscape of SEP licensing in IoT ecosystems and proposes potential reforms to address emerging issues.

The IoT Revolution and Standards

The IoT refers to networks of connected and communicating ICT devices or “things” across various application domains or “verticals” – from industrial applications like smart manufacturing to consumer applications like connected health devices. For these IoT networks to function, many technical standards must be developed and implemented to ensure interoperability👉 The ability to exchange and use information seamlessly across boundaries. between diverse objects and software.

Key types of standards needed for the IoT include:

The Internet of Things (IoT) relies on a complex ecosystem of interconnected devices and systems, necessitating a wide array of technical standards to ensure interoperability and functionality. To enable the seamless operation of IoT networks across various applications and verticals, several key types of standards are essential:

Connectivity standards to connect IoT devices (e.g. cellular, WiFi, Bluetooth)

Connectivity standards are essential for enabling IoT devices to communicate with each other and with networks. These standards include cellular technologies like 4G and 5G, short-range wireless protocols like WiFi and Bluetooth, and low-power wide-area network (LPWAN) technologies designed specifically for IoT applications.

Standards for quality and security of IoT communications

Standards ensuring the quality and security of IoT communications are crucial for reliable and safe data exchange between devices. These standards cover aspects like encryption, authentication, and quality of service to protect data integrity and prevent unauthorized access.

Standards enabling cooperation between IoT devices and cloud services

Standards facilitating cooperation between IoT devices and cloud services define protocols for data exchange and interoperability. These standards allow devices from different manufacturers to communicate seamlessly with cloud platforms, enabling advanced analytics and remote management capabilities.

Standards for the internal functioning of IoT devices

Standards governing the internal functioning of IoT devices ensure consistent performance and compatibility across different products. These standards define requirements for various components and functions within IoT devices, such as power management, sensor interfaces, and data processing.

Cybersecurity standards to protect IoT device operations

Cybersecurity standards for IoT devices are critical for safeguarding against vulnerabilities and attacks that could compromise device operations. These standards establish best practices for secure device design, firmware updates, and protection against common cyber threats, helping to ensure the integrity and safety of IoT ecosystems.

Multiple standards development organizations (SDOs) like ETSI, CEN/CENELEC, and 3GPP are working to address these standardization needs for IoT. The standards landscape is complex, with different technologies applying to specific verticals or more broadly across domains.

The SEP Licensing Landscape

Standard-essential patents (SEPs) protect technologies that are essential to implementing technical standards. SEP holders typically commit to license these patents on fair, reasonable, and non-discriminatory (FRAND) terms.

Key trends in the SEP landscape include:

• The cumulative number of declared SEPs continues to increase, though growth rates are slowing: The total stock of declared SEPs has been steadily rising over time, with new declarations outpacing expirations. However, the growth rate of declared SEPs has started to decrease noticeably since 2013, as more patents near expiration. This slowing growth trend is likely to continue in the coming years, though the overall number of active declared SEPs is still increasing.
• Estimates of true SEP counts vary widely, with essentiality rates likely below 50%: There is significant uncertainty around the number of truly essential patents among declared SEPs, with estimates varying widely. Most studies suggest the share of actually essential patents among declared SEPs is well below 50%, with realistic average estimates in the 25-40% range. This implies that many declared SEPs are likely not essential in practice, though determining true essentiality rates remains challenging.
• SEP transfers have not significantly changed the number of licensors so far: While about 18% of declared SEPs have changed ownership through transfers, this has not dramatically altered the landscape of potential SEP licensors. Some transfers have consolidated portfolios, while others have split them up, but overall, there is no clear evidence that SEP transfers have substantially fragmented ownership or increased the number of licensors. The effects of SEP transfers on the licensing landscape thus appear limited so far.
• Participation in key standards like 3GPP has steadily increased: Participation in major standards development organizations like 3GPP has shown consistent growth over time. The number of contributions to 3GPP standards has increased almost continuously, with a recent uptick. While the number of contributing firms was long stable around 100, recent years have seen more new contributors joining the process, indicating expanding participation.
• SEP royalty payments have grown but remain a small fraction of product values: Available data suggests that SEP licensing revenues roughly doubled between 2009 and 2016, outpacing growth in general IP licensing. However, estimates indicate that aggregate SEP royalties still represent a relatively small share of the price of products implementing the standards. While individual implementers may pay higher rates in some cases, on average SEP royalties appear to be a modest fraction of product values.

Challenges for SEP Licensing in IoT

The report identifies several key challenges that may arise as SEP licensing expands into diverse IoT verticals:

• Increased complexity due to multiple verticals, business models, and applicable standards
  The IoT landscape is characterized by a multitude of verticals spanning industrial and consumer applications, each with its own set of business models and relevant standards. This complexity is further amplified by the variety of connectivity standards that may be used within a single vertical, ranging from short-range technologies like Bluetooth to cellular standards like 5G. The interplay between different verticals, business models, and applicable standards creates a highly intricate environment for SEP licensing in the IoT context.
• Higher transaction costs from more SEPs, SEP holders, and potential licensees
  As IoT technologies evolve and expand, there is likely to be an increase in the number of declared SEPs, SEP holders, and potential licensees across various verticals. This proliferation of stakeholders may lead to higher transaction costs associated with identifying relevant SEPs, negotiating licenses, and managing licensing relationships. The increased complexity could make it more challenging and time-consuming for both SEP holders and implementers to navigate the licensing landscape effectively.
• Reduced transparency in the SEP landscape
  The growing number of declared SEPs and the diversity of IoT applications may contribute to reduced transparency in the SEP landscape. It may become increasingly difficult for implementers to determine which SEPs are truly essential for a given standard or application, especially considering the varying essentiality rates among declared SEPs. This lack of clarity could create uncertainty for both SEP holders and implementers, potentially complicating licensing negotiations and increasing the risk👉 The probability of adverse outcomes due to uncertainty in future events. of disputes.
• Difficulties in determining appropriate licensing levels in IoT value chains
  Identifying the appropriate level for licensing SEPs within IoT value chains presents significant challenges. The complexity of IoT ecosystems, with multiple layers of components and services, makes it difficult to determine where in the value chain👉 A series of activities that create and deliver value in a product for end-users. licensing should occur. This issue is particularly pronounced when considering end-products that incorporate multiple standardized technologies, each potentially subject to SEP licensing.
• Challenges in valuing SEP portfolios across different IoT applications
  Valuing SEP portfolios for diverse IoT applications introduces new complexities in determining fair and reasonable royalties. The value that a standardized technology adds to different IoT products or services may vary significantly across verticals, making it challenging to establish consistent and equitable licensing terms. This variability in value could lead to disputes over appropriate royalty rates and bases for different IoT applications.
• Complications from new IoT business models like platforms and data-driven businesses
  The emergence of platform-based and data-driven business models in the IoT space introduces novel challenges for SEP licensing. These models, which may generate value through network effects or data analytics rather than traditional product sales, complicate the determination of appropriate royalty bases and rates. Licensing approaches that have worked for conventional product-based businesses may not be directly applicable to these new IoT business models, necessitating innovative licensing solutions.

The expert group notes disagreement over the extent and impact of issues like patent hold-up, hold-out, and royalty stacking in SEP licensing. Some members view the current FRAND framework as largely successful, while others see growing problems that require reform.

Potential Reforms and Proposals

The Internet of Things (IoT) is creating new challenges for licensing standard essential patents (SEPs). This expert group has analyzed key issues and proposed potential improvements to the SEP licensing framework for IoT.

Improving Transparency:

Incentivize more specific SEP declarations by SDOs

SDOs could be encouraged to require more detailed, patent-specific declarations rather than blanket disclosures. This could provide implementers with better information about which patents may be essential to standards.

Encourage independent essentiality checks of declared SEPs

Having independent bodies like patent offices assess the essentiality of declared SEPs could increase certainty. This could help both SEP holders and implementers by confirming which patents are truly essential.

Improve information on SEP validity through data sharing and challenge procedures

Sharing technical information between SDOs and patent offices could improve patent quality. Fast, low-cost procedures to challenge SEP validity could also be introduced before going to court.

Investigate using AI/ML to support efficient essentiality and validity assessments

AI and machine learning tools could potentially be used to make essentiality and validity checks more efficient and cost-effective. This could allow for more comprehensive assessments of large SEP portfolios.

Licensing in the Value Chain:

Establish principles like single-level licensing and uniform FRAND royalties

Licensing at a single level in the value chain and using uniform FRAND royalties regardless of licensing level could reduce complexity. This could help address disputes over the appropriate level for licensing SEPs.

Enable vertical coordination on licensing issues

Some degree of vertical coordination between different levels of the value chain may be needed to implement licensing principles. This could help align incentives and reduce conflicts between different parts of the value chain.

Mitigate impacts through have-made rights, differentiated royalties, etc.

If licensing occurs at the end-product level, have-made rights could protect component suppliers. If licensing occurs at the component level, differentiated royalties could account for different product values.

Determining FRAND Terms:

Provide guidance on meaning of non-discrimination in FRAND

The European Commission could provide clearer guidance on how to interpret the non-discrimination requirement of FRAND. This could help reduce disputes over whether licensing terms are discriminatory.

Create confidential repository of SEP license agreements

A confidential database of existing SEP licenses could be created for use by courts and arbitrators. This could provide better data for assessing whether terms are non-discriminatory while maintaining confidentiality.

Develop methodology to assess compliance with non-discrimination obligations

A standardized methodology for evaluating whether licensing terms comply with non-discrimination requirements could be developed. This could provide more certainty and consistency in FRAND determinations.

Facilitating Negotiations and Disputes:

Require more proactive license-seeking by implementers

Implementers could be required to proactively seek licenses before commercializing standard-compliant products. This could help address concerns about implementers delaying or avoiding taking necessary licenses.

Impose sanctions for delaying tactics in negotiations

Penalties could be imposed on parties that engage in bad faith delaying tactics during licensing negotiations. This could create incentives for both sides to negotiate efficiently and in good faith.

Establish independent expert bodies to assist in royalty determinations

Independent expert committees could be created to provide non-binding opinions on appropriate royalty rates. Courts could consider using these expert determinations to inform their decisions in SEP disputes.

Promoting Patent Pools:

Encourage pool formation during standards development

SDOs could foster the creation of patent pools earlier, during the standard development process. This could allow pools to be operational more quickly after standards are approved.

Enable on-demand collective licensing agencies

Public collective licensing agencies could be established to grant licenses upon request for standards with multiple SEP holders. This could provide an option for efficient licensing before patent pools are formed.

Promote “pools of pools” for IoT products using many standards

SEP holders could be encouraged to form larger pools covering multiple related standards used in IoT products. This could reduce transaction costs for products that implement many different standards.

The expert group emphasizes that no single proposal will solve all issues, but a combination of reforms could offer improvements. They recommend the European Commission carefully assess impacts before pursuing any policy changes.

Key Debates and Open Questions

The report highlights several ongoing debates and open questions around SEP licensing for IoT:

Whether FRAND terms should be uniform across IoT verticals or allowed to differ

Some members believe FRAND terms should be uniform across IoT verticals to ensure consistency and fairness. Others argue that FRAND terms should be allowed to differ between verticals to account for the varying value that standardized technologies provide in different applications. This is a contentious issue without clear consensus among experts.

How to determine FRAND royalties for new IoT business models like platforms

Determining FRAND royalties for new IoT business models like platforms presents novel challenges, as traditional product-based royalty structures may not be applicable. Some experts suggest basing royalties on metrics like number of users or revenue generated by the platform. However, there is still significant uncertainty around the best approaches for valuing SEP licenses for these new business models.

The appropriate level of licensing in IoT value chains

The appropriate level of licensing in IoT value chains is a highly debated topic without clear resolution. Some argue for licensing at the component level to reduce transaction costs, while others prefer end-device licensing to capture the full value of the patented technology. Ultimately, the appropriate level may depend on the specific vertical and value chain structure.

The extent and impact of issues like hold-up, hold-out and royalty stacking

There is significant disagreement among experts about the extent and impact of issues like hold-up, hold-out and royalty stacking in SEP licensing. Some believe these are serious problems that hamper innovation👉 Practical application of new ideas to create value. and increase costs, while others argue their effects are overstated. More empirical research is likely needed to definitively assess the real-world impacts of these issues.

How to balance incentives for SEP holders and implementers

Balancing incentives for SEP holders and implementers require carefully weighing competing interests. SEP holders need sufficient compensation to incentivize continued R&D investment, while implementers require reasonable access to standardized technologies. Finding the right balance is challenging and may require case-by-case analysis based on the specific circumstances.

The role of patent assertion entities in IoT licensing

The role of patent assertion entities (PAEs) in IoT licensing is controversial. Some argue PAEs serve a valuable role in helping inventors monetize patents and increase efficiency. Others contend PAEs engage in abusive litigation that increases costs without providing value. The impact of PAEs on IoT licensing remains to be seen as the ecosystem develops.

Whether aggregate royalty burdens should be determined upfront

Some experts propose determining aggregate royalty burdens upfront to increase certainty for implementers. However, others argue this is impractical given the complexity of IoT ecosystems and difficulty predicting future developments. Whether and how to establish aggregate royalties remains an open question without clear consensus.

Conclusion

As the IoT continues its rapid expansion, bringing connectivity to diverse industries and applications, it will inevitably intersect with the complex world of SEP licensing. This collision presents both significant challenges in extending FRAND principles to new domains as well as opportunities to evolve licensing frameworks for the digital age.

Policymakers and industry stakeholders will need to carefully navigate issues of transparency, FRAND determinations, dispute resolution, and licensing models to create a balanced system. This system must continue to reward innovation and SEP contributions while also enabling broad implementation of standardized technologies across IoT verticals.

The proposals put forth by the European Commission’s expert group offer a starting point for debate and potential reforms. However, given the diversity of stakeholder views and the rapidly evolving technological landscape, ongoing dialogue and flexible, adaptable approaches will likely be needed. As the IoT and SEP licensing worlds converge, finding the right balance to foster both innovation and implementation remains a critical challenge for the years ahead.