The importance of SEPs
We are on the cusp of a transformational era where a range of internet of things (IoT) devices could connect vehicles, buildings, appliances, wearables and more. IoT devices will likely incorporate existing and future standards (e.g., GSM, 3G, 5G) to facilitate interoperability, and these standards are based on patented technologies. A patent that protects technology essential to a standard is called a SEP.
Businesses in the IoT ecosystem should be cognizant that the determination of fair, reasonable and nondiscriminatory (FRAND) terms for the licensing of SEPs has led to several high-profile disputes in the telecommunications sector — FRAND wars 1.0. With the incorporation of SEPs into the IoT ecosystem, the confusion will likely spread outside the telecommunications sector, leading to FRAND wars 2.0.
A significant impediment to determining FRAND terms for the licensing of SEPs is the lack of adequate information about the validity, essentiality and enforceability of SEP standards. The SEPs are self-declared by developers as essential to the implementation of a standard and are not subject to review at the time of setting a standard. For example, more than 23,500 patents have been declared as essential to standards such as GSM and 3G.
The lack of information could result in IoT standard implementers becoming exposed to excessive royalty demands based on a weak portfolio of patents or nonessential patents. In addition, businesses may find themselves embroiled in injunction proceedings in multiple jurisdictions, which threaten the launch or sale of IoT devices.
The IoT ecosystem makes it harder than ever to see around corners and plan ahead. But in this age of digital disruption, standing still is not an option. With various moving pieces in the IoT chess board and connectivity standards, such as 5G, yet to be settled, defining appropriate standards will be a major challenge.
The decision on which standards to adopt to ensure access to nontraditional technology and intellectual property should involve several alternatives to allocating capital. This includes mergers and acquisitions, joint ventures, alliances and industrial mash-ups, when complementary capabilities exist at another company. Decisions to buy, share or build new technologies and services must be made now to unlock value and to meet the challenges of an unclear licensing regime.
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EY legal contacts
Manu Mohan – EU Competition Lawyer
Kiran S. Desai – EY Global EU Competition Law Leader
Stefan Krueger – EY Head of Digital Law