How IoT manufacturers can use lessons from the SEP space

This is an Insight article, written by a selected partner as part of GCR's co-published content. Read more on Insight

The IoT ecosystem continues to expand, with new devices being developed and launched for sale. However, while IoT manufactures face a number of risks – especially with regard to patent eligibility in the United States – key SEP strategies could help them mitigate these. 

IoT patenting on the rise

Statista estimates that as of 2019, nearly 38,000 patent applications directed to IoT had been filed in the United States, which remains a key geography for patent protection. And the pace of patenting for IoT technologies is increasing rapidly.  According to some estimates, including research by IPlytics, over 41,000 patent applications were filed worldwide for IoT technologies in 2018 alone, rising from 4,626 applications just five years earlier. This upward trend has continued since then in the United States and internationally and in this environment patent issues are critical considerations for IoT manufacturers. Beyond the pure volume of patents to consider, IoT products depend particularly upon connectivity and communication technologies, making SEPs highly relevant for these types of devices. However, SEPs present additional economic considerations that manufacturers should keep in mind early on in the product development cycle as SEP royalties can significantly affect a product’s profitability. 

For example, an IoT device that requires cellular communication might be designed to utilise a baseband processor that supports the latest cellular standard – currently 5G – but not all devices require such a high-powered, high-speed chipset. If the amount of data being transmitted over a cellular link is low or does not require the high-speed that 5G provides then perhaps an older standard (eg, LTE) or even an IoT-focused standard (eg, LTE-M) might be a better option. 

Because these older standards have been in the market longer, they can often be licensed at lower rates, reducing the profit pressure on the manufacturer. This example is not limited to cellular technologies – often lower-cost, less capable options are also available, including for WiFi (eg, WiFi 6 versus older releases like WiFi 5 or 4).

Open-source software brings its own patent considerations

For some IoT devices, the use of open-source software can accelerate development and bring products to market faster while also increasing interoperability with other IoT devices. However, despite open-source software being intended to provide widespread access to source code that is free of restrictions that apply to many other types of creative works (eg, the GNU General Public License terms), open-source software is not immune from patents. In fact, while software patents continue to face patentability challenges following the US Supreme Court’s decision in Alice, issued and valid patents can cover aspects of open-source software (Alice Corp v CLS Bank Int’l, 573 US 208, 2014).

In such circumstances, IoT manufacturers could be exposed to patent risk if such a patent is assigned to an entity that has not distributed its own code through open source with its corresponding licence protections. And because the very nature of open-source software means that many individuals utilise the same (or very similar) code, the open-source codebase effectively becomes a de facto standard, and patents that cover that codebase become de facto SEPs. As such, it is not inconceivable that an owner of such a patent might point to an open-source codebase as evidence of infringement.

For years, commentators have recognised the economic considerations surrounding SEPs, particularly lock-in risk, hold-up and hold-out concerns and more generally, the tension between encouraging innovation and putting the best possible technology into a given standard while ensuring widespread access to that technology (so that the standard is widely deployed). 

Based on these concerns, standards-setting organisations (SSOs) have developed comprehensive policies designed to encourage patent disclosure and promote reasonable licensing practices based on FRAND principles. These polices have been further developed over more than a decade of court decisions, fleshing out obligations of both patent owners and implementers. 

However, although open-source software has its own contracts and agreements when it comes to providing licences and rights, there is no underlying SSO that oversees declarations or FRAND obligations that are designed to affect these economic concerns through contractual remedies.

How SEP lessons could provide guidance for US patent owners

With these potential issues looming for open-source software, how can lessons learned from the SEP ecosystem help guide open-source implementers that might confront problematic patent assertions? 

First, patent owners and implementers should consider how royalty-free licensing regimes in certain standards (eg, Bluetooth) have helped to encourage widespread adoption while reducing royalty burdens. Contributors to the Bluetooth standard commit to license their patents on royalty-free terms, reflecting a general view that those contributing to the technology are more likely to benefit economically should the standard be deployed widely (through increased product sales) rather than through licensing revenue.

Open source shares some of these principles, with entities distributing source code through open-source channels that recognise the benefits of access free of IP encumbrances. As such, patent owners may elect to seek a minimum royalty or not seek a royalty at all. Similarly, an implementer facing a patent challenge or licence demand might consider analogising its situation to the royalty-free SEP regime, arguing that those agreements are comparable to the open-source licensing environment. This would reflect an acceptance in the market that a minimum royalty or no royalty at all should be due.

The SEP ecosystem provides other ways to minimise the potential royalty burden for patents that read on open-source software. As an example, many standards (ie, cellular, WiFi and video) involve patent pools, where several (and potentially many) patent owners offer their patents for license through a single, one-stop pool administrator.  In this way, implementers can obtain licence rights from multiple owners through one agreement, providing economic efficiency for both patent owners and implementors. 

But not all patent owners license their patents this way. In Microsoft v Motorola, Judge Robart concluded that Motorola – which did not join the MPEG LA H 264 video pool – could charge a royalty of two to three times the pool rate, recognising that Motorola’s patents were more valuable than the average pool patent. 

In a case like this, an open-source implementer might argue that a patent covering open-source software but was not subject to the open-source licence grant should receive a relatively small royalty, given that the majority of comparable software is available on a royalty-free basis. The argument here would be that no royalty windfall would be appropriate given the overall open-source market economics.

Key takeaways

Ultimately, the significant opportunities in IoT are unlikely to be dramatically curtailed by SEP or open-source risks. However, through proactive consideration of these issues and by drawing appropriate analogies to the SEP ecosystem, IoT device manufacturers can position their products to succeed in the market and maintain profitability at the same time.

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