As connected technologies become part of our everyday life and work, a promising generation of new European small businesses are leading the way in internet of things ingenuity. Across the markets they compete in, their innovative products depend on standards to interoperate with each other and the rest of the world. But the process for licensing standardised technologies has been plagued by widespread abuses that too often remain hidden. Tragically, Europe’s most innovative startups and SMEs have been the prime victims of these abuses.
Once patents become essential to using a standard, anyone who needs to use that standard must license them to leverage the standard, placing the holder of those patents in a gatekeeping position. Recognising the risks to competition, standards bodies have those who voluntarily contribute their patents to standards to provide access to the same on fair, reasonable, and non-discriminatory (FRAND) terms. The FRAND commitment is intended to ensure that any reasonable party can use the standard via needed standard-essential patent (SEP) licenses while providing a fair return for the SEP holders. Yet, numerous SEP holders have exploited ambiguities within the meaning of FRAND to exclude willing and reasonable parties from even getting a license and to obtain excessive royalty rates, most harming small-business standards users.
SEP licensing abuse is rampant
The negotiations between SEP holders and SEP licensees happen in private. When it comes to small companies, the disputes rarely make it to the courts because the cost of litigation is simply prohibitive for SMEs. Facilitated by this dynamic and an overuse of non-disclosure agreements, abusive and anticompetitive SEP licensing tactics have remained hidden for far too long. And the supra-FRAND terms attained by SEP holders in dealings with SMEs are then used to justify further supra-FRAND demands from further licensees.
Only on rare occasions do these damaging tactics come to light. Recently, in a landmark judgement, a UK court called out InterDigital as an ‘unwilling licensor’ for demanding unfair terms and an excessive royalty rate, noting that InterDigital had forced smaller companies to accept excessive license fees in order to establish a history of higher royalty rates to be used a baseline for further negotiations with others.
Anticompetitive SEP licensors prey on SMEs that can’t afford to absorb the abuses, resulting in their acceptance of supra-FRAND terms or cancelling plans to develop some of their most innovative products using standardised technologies. SMEs must be able to license the SEPs to which they need access so that they can leverage standardised technologies, and that they have certainty they will be able to do so.
The FRAND commitment is a valuable and necessary enabler of competition in technology-based fields, intended to balance the interests of SEP owners with those of standard implementers. However, the lack of definition on what is fair, reasonable, and non-discriminatory has been allowing SEP holders to abuse its construct.
Europe’s leadership is in the balance
Using standardised technologies is only becoming more and more crucial to growth and job creation across IoT. According to McKinsey, IoT is expected to generate €12.5 billion to the world economy by 2030. In this context, the standardisation of technologies like 5G and Bluetooth today, and future 6G protocols, is crucial to enabling IoT developers to deliver new innovative and interoperable solutions to the market.
The EU has many opportunities to provide leadership and certainty (and to set the example for the rest of the world). For example, SMEs dealing with SEP licensing would be glad to see the Commission confirming that SEP injunctions should be extremely rare and only used as a last resort due to the voluntary FRAND commitment the SEP holder made to provide a license to any willing licensee. For SMEs particularly, the threat of a SEP injunction is existential when most have one or just a few product lines and cannot distribute risk like larger companies can
SMEs are an essential part of the European economy, making up approximately 23.1 million enterprise businesses in the European Union in 2022. These businesses drive the EU’s economic growth.
Two steps forward, one step back
The European Commission has long recognised that persistent SEP holder abuses are a drain on competition and innovation and has committed to develop a new framework to ensure fairness and efficiency for the EU in SEP licensing. The Commission’s new proposal presents a rare opportunity to systemically increase transparency in the current patent system and remove of some barriers to innovation for SMEs. As the release date for the Commission’s proposal approached, after a lengthy consultation process, a draft of the proposed regulation was leaked, causing a flurry of lobbying from those who are feverishly clinging to the status quo. Despite the Commission knowing that today’s system is harming innovation and the European economy, the Commission has since walked back on key provisions and removed some of the most effective solutions proposed in the original text.
The European Parliament has a crucial role in helping SMEs thrive
Since opportunities for profound reform are sparing, it’s important for European policymakers to enact a comprehensive set of measures that address the current problems. The current SEPs package has been developed using an extensive consultation process involving all stakeholders, but there is still a long road ahead. The European Parliament has the opportunity — and the responsibility — to step up where the Commission has not leveraged these opportunities and ensure that SMEs have the opportunity to use standardised technologies on FRAND terms.