IoT and IP royalties: Does off-the-shelf mean off the hook?

Internet of things (IoT) technology is playing an important role in the fourth industrial revolution. IoT provides the connective tissue that allows machines and software to interact, making factories smarter and enabling remote monitoring and control of complex systems. For businesses, understanding the intellectual property (IP) rules that underpin IoT technology is crucial, especially where they relate to ‘standard’ technologies. Unfair practices around licencing certain patents in standards can lead to exorbitant licencing fees or even court rulings to halt production or sale of products simply because an innovator uses a standard.

Manufacturers across the UK develop new IoT-enabled products and add IoT functionality to their existing products all the time. In doing so, they often use commercially available off-the-shelf (COTS) IoT solutions that use standardised tech. Why do these innovators need to worry about IoT standards abuses?

For example, consider a company that makes industrial heaters and wants to alert its customers on their smartphones when the heater is running outside of certain times. The company may even want to enable customers to turn the heater off remotely. To do that, the manufacturer can purchase ready-to-use timers, temperature sensors, and wireless connectivity modules. By integrating these technologies into the heater, the manufacturer creates a new IoT device that improves sustainability and safety. By ‘purchasing COTS IoT solutions, the company avoids the cost and complexity of developing the sensor and wireless connectivity module in-house.

It may seem reasonable to assume that there would be no issues relating to intellectual property when you add an unchanged, off-the-shelf solution to an existing product—especially when buying it from a trusted retailer. However, this is not necessarily the case. Let’s dive into some of these issues.

Standard-Essential Patents

A standard-essential patent (SEP) is a patent declared necessary for a standard technology such as 3G, 4G, or Wi-Fi to work (read more about the importance of SEPs). SEPs are important because companies can face SEP infringement claims simply because they use the standardised technology (for example, 4G technology needed to connect their IoT innovation to the internet). Put simply, licencing SEPs is an essential part of developing IoT connected products.  

Even when innovators integrate off-the-shelf components in good faith, they are increasingly vulnerable to attacks from SEP holders’ claims of SEP infringement simply because their components rely on standardised solutions. These claims potentially include demands for immoderate royalties from SEP holders who may even seek injunctions against production from a court.

When setting up the standard, the owners of these SEPs voluntarily commit to making their patents available on fair, reasonable, and non-discriminatory (FRAND) terms. However, they don’t always keep that commitment. For example, some SEP holders unfortunately prefer to target innovators at the end of the value chain where they try to calculate the royalty based on the whole product—instead of just the part that uses their patent. Let’s return to the heater example. The value of an individual IoT temperature sensor is much lower than the overall value of the heater because the IoT component only does one thing, whereas the value of the heater is based on a range of factors, such as brand, how good it is at heating, and its energy efficiency. If some SEP holders get their way, manufacturers would be paying royalties over the final product’s value and uses (real or hypothetical - e.g. a heater used for a garden office versus a factory), instead of just the IoT part where the SEP is located. This is unfair because much of that claimed value (of, for example, our heater) is completely unrelated to the SEP.

And let’s not forget, the heater company doesn’t have a choice—if they want to connect their heater to the internet, they have to use the technical standard and licence the corresponding SEPs. This puts SEP holders in a gatekeeping position, giving rise to significant competition concerns, and is exactly why SEP holders should commit to abide by the FRAND terms.

We are already seeing this type of abuse of innovators in the telecom and automotive supply chains. Without changes in legislation, we will see SEP abuses spread across the wider manufacturing and IoT communities too, including any businesses using off-the-shelf IoT solutions in their products.

What is the solution?

In the short term, manufacturers that use off-the-shelf IoT solutions should discuss and agree with their supplier where the SEP licencing liability sits in the supply chain and ensure that they understand their liabilities related to the use of standards and SEPs. Companies do not want to find themselves with a giant, unexpected royalty bill, or face spiralling legal costs to fight it.

In the long term, a definitive solution to this problem would be a clarification by legislators that a SEP holder cannot discriminate and must offer FRAND licenses to all willing licensees, regardless of where they sit in a value chain. This would enable licenses to be taken at the most appropriate point in that supply chain. After all, this is the essence of the ‘non-discriminatory’ part of FRAND terms. Companies using off-the-shelf solutions should be able to do so with confidence.