UKIPO survey suggests SME concerns with SEP licensing landscape

SMEs represent the biggest section of business in the United Kingdom – 99.9% in the United Kingdom and 99% of all businesses in the European Union (Department for Business, Energy & Industry Strategy, Business population estimates for the UK and regions 2022: statistical release, 6 October 2022 and European Commission, SME definition) – and are crucial drivers for innovation, creating disruptive technologies. The 40 validated responses to the United Kingdom Intellectual Property Office (UKIPO)’s SEP questionnaire for SMEs to mid-caps and call for views on SEPs and innovation should therefore provide food for thought.

The responses suggest that when it comes to SEP licensing, some SMEs and smaller businesses are concerned by:  

• the threat of injunctions and litigation;
• information asymmetry and a lack of transparency; and
• limited expertise and costs constraints.

Injunction and litigation threats

Litigation – or merely the threat of it – can have a significant chilling effect on SMEs (see page 82 paragraph 6.10 of the call for views). Indeed, all respondents to the survey reported that the threat of a court-imposed injunction is a concern for them or their business when agreeing on an SEP licence (question 29). Seeking to avoid an injunction or being dragged into costly litigation can force potential licensees into a global licence that is unfair or unnecessary (page 82 paragraph 6.8 of the call for views).

Although Lenovo is not an SME, in InterDigital v Lenovo (2023, EWHC 1583 at [288]), Justice Mellor J observed that “…where the costs of litigation would be around or greater than the total sum payable under a licence, it is far more likely that the implementer has little choice but to accept what the licensor is demanding. Certainly, InterDigital’s licences seem to fit this logic”.

Information asymmetry

Responses to the SME survey demonstrate that there is a lack of transparency on the rates agreed by an SEP holder with their other licensees and on their royalty calculation methods (see question 19 of the survey). The respondents also report that they have found it nearly impossible to obtain an accurate view of all potential licensors for a given standard. The information asymmetry is so pronounced that 83% of the respondents involved in SEP licensing believed that they were offered non-FRAND terms (question 20). SMEs also noted that SEP holders’ demands varied so drastically that the valuation could not be aligned with economic value (question 19). However, SMEs cannot easily scrutinise and challenge those perceived non-FRAND terms. 

The points raised by the survey respondents have also been raised by the High Court. In InterDigital v Lenovo, Justice Mellor concluded that a major contributor enabling InterDigital’s non-FRAND approach to licensing was the lack of transparency (InterDigital at 554-555).

Mr Justice Mellor also found that the primary effect of the practice of offering volume discounts was to discriminate against small licensees. He said:

Having considered all the evidence on the issue of volume discounts I have reached the clear conclusion that the volume discounts said to have been applied to the largest InterDigital licensees (i.e. in the range of 60%-80%) do not have any economic or other justification. Instead, their primary purpose is to attempt to shore up InterDigital's chosen 'program rates'. Their primary effect is discrimination against smaller licensees. (InterDigital, 539 (Pat) at [495]).

This lack of transparency presents challenges for SMEs trying to plan in advance for SEP licensing, which in turn has an impact on their ability to manage cash flows and secure investment. This was reflected in respondents reporting that uncertainties surrounding licensing has made it difficult for them to set prices and attract investment (question 31).

Expertise and cost constraints

Analysis by Professor Joachim Henkel suggests that SMEs lack the resources needed to evaluate SEP licensing offers, which creates uncertainty with regard to cost and legal exposure, leading to the delay or abandonment of novel products (Joachim Henkel, Licensing SEPs in the IoT, 51 Research Policy 1, 2022). One company in Professor Henkel’s study argued that the cost of evaluating the merits of these offers are so high that “no SME can afford [them]”. These consequences were similarly articulated in the SME survey (questions 22 and 31).

In Optis v Apple, the court found that Optis targeted smaller companies that lacked bargaining power to “get the sort of bargain it wanted” (Optis v Apple [2023] EWHC 1095 at [398(iii)(b)(ii)]) and sought these agreements to “produce comparables that would assist Optis” in licensing disputes with larger companies (at [398(iii)(b)(iv)].).  The judge noted that “no implementer could stay in business paying Optis’ rates” (at [467(iv)]).

Continued evolution

Given the importance of SMEs and small businesses to the United Kingdom’s aspirations in sectors such as the IoT and smart energy, these concerns should be heard and taken on board.