IoT – Welcome to the patent wars?

While the discussion around IoT focusses on all the new applications and business opportunities, it is in large parts still based on established patented technology. Especially wireless communication functions are based on standardised technologies like UMTS, LTE or Wi-Fi, which were defined by large players in the communications industry years ago and has been in the center of worldwide patent disputes ever since.

Standardisation is organized by the industry under the umbrella of standard setting organisations such as IEEE or ETSI to ensure an open and transparent standard setting process, in which everybody can participate. The resulting technology, however, is nevertheless protected by thousands of patents, which are held by the contributors to the standards and have to be licensed before the technology can be implemented in new products. Licensing to implementers is not handled by the standard setting organisations themselves, which generally avoid to get involved in the economic aspects of licensing (with the notable exception of a highly controversial initiative by IEEE). The standard setting organisations merely require a general undertaking by their members that any patents, which are necessary to use a standard (standard essential patents or “SEPs”), will be licensed to implementers under fair, reasonable and non-discriminatory terms (“FRAND” terms). This leaves it to the implementers of the standard to negotiate licenses to the standard essential patents with the various patentees individually. As expectations on the applicable royalty rates typically vary significantly, the parties regularly end up in litigation around the world in which standard essential patents are enforced.

Even though the holders of standard essential patents have to grant licenses under FRAND terms, they have not waived their patent rights and did not grant a license to everbody when contributing the patents into the standard. Under the applicable rules of the standard setting organisations and the rules of European competition law (Art. 102 TFEU) as interpreted by the European Court of Justice in its landmark decision Huawei v. ZTE the owners of standard essential patents merely have to offer a FRAND license before they start litigation for an injunction. If the offer for a FRAND license was made and the implementer refused to accept it, patentees are free to enforce their standard essential patents in court with all available remedies such as injunctions preventing the future use of the technology or a claim for the recall and destruction of all products, which implement the technology.

Even though the decision Huawei v. ZTE has generally improved the position of implementers in litigation, the injunction is certainly not off the table, especially in German courts. Therefore implementers should be careful not to dismiss a license offer by a patentee too lightly and without making a reasoned counter offer within in a short time period. Otherwise the courts may well issue an injunction as highlighted for example in a series of cases involving patents essential to UMTS and held by a company called Saint Lawrence Communication. This litigation resulted in injunctions against as Deutsche Telekom and Vodafone in the regional courts of Mannheim (case 2 O 106/14) and Dusseldorf (case 4a O 73/14). In recent cases brought by Sisvel in Dusseldorf against Haier (case I-15 U 65/15) and against ZTE (case 4a O 154/15) and by Philips in Mannheim against Archos (case 7 O 209/15) and others, injunctions were denied because the patent owners had not complied with FRAND requirements before starting actions for injunctive relieve. However, injunctions remain available as soon as patent owners submit proper FRAND license offers before starting litigation and implementers of the technology fail to react to these offers in a reasonable and constructive way.

Since there is no workaround for a truly standard essential patent, except purchasing licenses or using already licensed components, the consequences of an injunction can be very hard. This is especially true in industries such as the automotive industry or in industry automation, where development cycles are comparatively long and the replacement of components requires substantial testing due to high reliability and safety requirements.

Before this background implementers should be careful when selecting components for communication functions in IoT applications and check the patent and licensing situation before committing to a specific technical solution. Given the large number of patents and patent owners in the field of communication technology, communication devices with all the required licenses are currently not available in the market. Companies who want to enter the IoT should therefore get acquainted with the basics of patent and licensing issues in the telecoms industry and prepare to react swiftly as soon as they are approached by third parties with requests for entering into a patent license.