SEPs spar with innovation in an evolving IoT ecosystem

“IoT as an ecosystem play” is a familiar catchphrase in the emerging Internet of Things space which has much merit. IoT deployments are typically assembled from components offered by specialist providers that must be integrated in order that devices and data ‘talk to one another’. This conversation may achieved in a number of ways – through custom built solutions designed for interoperability, through software-based integration aimed at enabling the exchange of data between systems – IT and OT, for example – through pre-configured vertical solutions or through adherence to standards in the creation of IoT products. But though communication across systems and devices is vital to viable IoT implementations, integration issues continue to dog greater market acceptance of IoT: in Canada, for example, a recent survey of 402 businesses conducted by InsightaaS/Techaisle Research found that approximately thirty-five percent of respondents identified challenges with interoperability, integration (with third-party solutions) and the lack of networking and security standards as primary obstacles to IoT adoption.

At the hardware layer, building to standard is increasingly viewed as the key to effective communication across devices, which in turn serves as the foundation for data collection/analysis and the ultimate creation of IoT business solution value. So much so, that multiple dedicated consortia, including the Industrial Internet Consortium, Open Interconnect Consortium, AllSeen Alliance (Linux led), Thread (Google sponsored) and The Wireless IoT Forum, which have appeared alongside traditional standards bodies such as the IEEE, the ITU or the European ETSI, have materialized with the goal of encouraging broad acceptance of working IoT protocols. In fact, a quick count of IoT standards at the physical, data link, networking and application layers quickly outstrips 40, with different industry players supporting different, and often competing protocols. In addition to this confusion of standards entities and efforts, though, a manufacturer’s adherence to standards presents challenges from another perspective – out of the need to address patent rights and licensing requirements associated with creation and use of the standards themselves.

Richard Johnson, patent agent, intellectual property group, Borden Ladner Gervais
Richard Johnson, patent agent, intellectual property group, Borden Ladner Gervais

According to Richard Johnson, lawyer and patent agent in Borden Ladner Gervais (BLG)’s intellectual property group, there has been “a lot of innovation in support of the next generation Internet of Things.” As example of cutting edge advance in underlying IoT technologies, he cited the work that is being done by a Stanford professor on the development of low power transceivers where the aim is to make radios so small, efficient and cheap they can be deployed on banknotes. However, when design and manufacture of products according to certain standards is the goal, this of necessity involves the use of technology that is already known, and license of the ‘standard essential patents’ (SEPs) that the standard is actually based on. “When talking about SEPs, by definition, you’re going to be talking about some technology that is already known. You already have a body like the IEEE or the ITU or the European ETSI, a body of industry players that has evaluated many options and agreed that this is how we are going to implement this particular protocol – for example, Bluetooth, WiFi, HDMI or MPEG,” he noted. And typically, the companies that were involved in setting standards are the same ones that own the patents that cover those standards.

How do SEPs work?

While patents generally allow the patent owner to prevent others from using their invention (to protect IP), part of the standard setting process has contributors to the standard issue a commitment (prior to the standard being set) stating that they agree to license the patents they own which are essential to making the standard work to anyone who wants them according to “fair, reasonable and non-discriminatory” (frand) terms. Frand terms, however, have been subject to much debate and dispute in court, and if the royalties demanded by the holders of one or more SEPS are too high, implementation is not possible and the standard becomes impractical. At the same time, Johnson explained, requiring agreement to frand terms as a condition of contribution to the standards body is also not practical:

“That would simplify things, but they [standards bodies] do not specify what is reasonable, and what the actual licensing terms are. The reason for that is antitrust and competition concerns. You can imagine what scrutiny you would be under if Microsoft, Google, Apple, Nokia, Samsung, Quaalcomm – basically the entire industry – got together to set prices. They would be facing litigation, if not some competition or antitrust liability, so they are very careful not to talk about financial terms because they would be punished if they did that.”

To make matters worse, when a standard is introduced, the patent claims for being “essential” may remain undetermined. It can take patent offices several years to determine the scope of the claims on a particular patent, “so you could have a standards contributor that has agreed to license its patents on certain terms, but the individual patents haven’t even been issued yet,” Johnson added.

Frequently, lawsuits to sort out what terms are reasonable are required down the road, a practice that makes the standards process less effective – and perilous for innovators looking to build to standard. The courts have come to recognize this as an issue in standards adoption, and have elected to try and establish process that might simplify the determination of value (as opposed to the actual value of licenses themselves). Johnson cited resolution in US courts of the Microsoft and Motorola dispute over allegations Motorola had breached its frand obligations in dealings with Microsoft over IEEE 802.11 wireless networking standard and the ITU-T H.264 video coding standard. In this case, the outcome of litigation was establishment of a basic understanding around the extent of patent rights application. Does the patent apply to the end product (and its overall value), to a component of the product, or to a very small chip within a larger device? This kind of determination can have significant monetary consequences, and has led to a trend towards consideration by the IEEE and others of what Johnson called application to “the smallest, salable unit.” Similarly, though terms will continue to be determined on a case by case basis, Johnson sees movement afoot to in the courts to insist on proper process for coming to an agreement, before the patent holder jumps to litigation. Another way to improve the process is for standards entities to ask contributors to specify exactly what the patent covers, rather than accept blanket coverage.

The impact on IoT innovation

Despite some progress on the process front, lack of clarity around licensing cost and liability for abuse of patent rights can be daunting for many companies that are looking to transform traditional products to smart, connected IoT devices through adherence to IoT standards. Additionally, other patents may exist in the market which are owned by entities that are not part of any standards body and have not made any frand or other commitments to license them – Johnson described a Texas case where Samsung was sued last year over a Bluetooth implementation by a patent aggregator that was not encumbered by any commitments – which further complicates the matter, especially for smaller companies that likely do not have the expertise or budgets to navigate the patent landscape, and the many patents that are part of technical standards.

Tension between the financial interests of the contributors, the standards bodies that are looking for progress on the creation of standards and potential adopters may have impact on IoT innovation, particularly at the commercialization stages. While it’s unlikely that an inventor or startup would attract the attention of a patent holder, this kind of protection varies inversely with commercial success. As Johnson observed: “If the implementers are aware of the [patent] landscape, then licenses are something they should be taking into account, from the point of idea to commercialization. But where it becomes a real world problem as opposed to a theoretical problem is in the commercialization phase – once you start selling significant volumes or making a splash that gets noticed. At that point, you will likely be contacted by a patent owner or several saying ‘we notice that you are implementing our standard and you don’t have a license’. It’s really in the commercialization phase that this is a barrier.”

Advice for standards adopters

The complexity and cost that can be involved in standards adoption begs an important question – how can the entrepreneur negotiate the patent landscape, or decide what standards to adhere to? In Johnson’s experience, many companies are not even aware of the issues around patents – or simply try to avoid recognizing them. And in many cases, companies that are implementing standards don’t know the internal workings of the standards: “they may know how to interface with a chip and implement it; they can use a set of commands to make it do what they want, but they are not aware of the underlying packet by packet communication protocol.”

While due diligence into what licenses apply is one approach to solving this challenge, it’s not practical from a cost perspective: I could see a startup draining their whole R&D budget on doing patent searches, trying to get it absolutely right. That doesn’t make business sense. If you were to try to analyse every potential infringement, you would quickly run out of money,” Johnson noted.

At the same time, the manufacturer who plays in a standards ecosystem by purchasing components for embed in a device – and unless the company is in the business of making its own chips, it’s likely they do so, Johnson argued – must have some protection. In his view, the best way to ensure this is to examine manufacturing contracts to see what licenses are covered, to see if the contracts provide indemnities for potential infringement, and to negotiate good supply contracts with the component provider. Device makers can also look for patents that are royalty free in the public domain – open source solutions – though this may mean the solution is less cutting edge: “if you are a vendor investing millions or billions of dollars in R&D on how to miniaturize transceivers or to improve the communications protocols, you will want to protect that. And you will not want to agree to let everyone piggyback on your work for free,” he explained.

So far, Johnson has found the IoT space to be unique in the way people view issues around patents. Unlike life sciences, pharma or biotech, where patent rights are better understood, in IoT, a prevailing perception is that obligations do not apply when a component was sourced from a third party. But implied license – or the right to use a patent – is not automatically transferred through sale. “If you are selling products that have certain functionality that is covered by a patent, it is your problem,” Johnson advised. “It’s no defense to say I bought that part from someone else. Cross licensing can be tricky.” Ultimately, he believes that “the standards will evolve because they need to evolve. The IoT ecosystem will not work if there is not some kind of standardization.” In the meantime, expert opinion that combines the technical and legal knowledge needed to interpret patent claims may prove critical to the success of each member of the IoT supply chain.



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