Update – recent developments and legal issues regarding the Internet of Things, by Ignacio González Royo.

The Internet of things (“IoT”) is the concept of placing sensors, electronics and software on physical devices, vehicles, buildings, and other items and providing them with network connectivity, so that they can collect and exchange data. With the IoT, we can create smart grids, smart homes, smart transportation or smart cities, and improve efficiency (e.g. save energy), accuracy (e.g. more precise measuring) and generate economic benefit (such as new applications, services, etc.). Some experts estimate that the IoT will consist of almost 50 billion objects by 2020.
The IoT poses significant legal risks for the impact it may have on society at large. One of these fields is the data protection and privacy field. In its Opinion 8/2014 on the Recent Developments on the Internet of Things (see here), the Article 29 Data Protection Working Party made it very clear that organizations operating in the IoT arena must place privacy and data protection at the forefront of IoT product development. The opinion further stipulates that IoT organizations also must ensure that their IoT devices respect the principles of privacy by design and are equipped with the privacy friendly defaults expected by EU citizens. This opinion identifies the main data protection risks that lie within the IoT ecosystem before providing guidance on how the EU legal framework should be applied in this context. It further provides a comprehensive set of practical recommendations addressed to the different stakeholders concerned (device manufacturers, application developers, social platforms, further data recipients, data platforms and standardization bodies) to help them implement privacy and data protection procedures/protocols in their products and services.
However, other legal challenges arise in the Intellectual Property field, and more specifically, in Standard Essential Patent licensing under Fair Reasonable and Non Discriminatory (FRAND) conditions and royalty collection practices. This is relevant because most IoT devices, in order to collect and transfer data and get network connectivity, will have to use standard technologies (e.g. Wifi, 4G (LTE), 5G, etc.). These technologies are protected by Standard Essential Patents (SEPs) and belong to third parties which most likely require royalty payments. Standard technologies rely on hundreds of patented technologies to function effectively, so, for IoT stakeholders, royalty payment can really become an issue. This has led to some litigation in various countries, mostly on the basis of abuse of dominance (see, for example, the Huawei v. ZTE case here), as well as actions from antitrust authorities (for instance, see the Motorola case here).
The European Commission published in December 2016 a study developed by IP lytics (see here) with empirical analysis of the SEP landscape.  As summarized by IP lytics here, the study’s main findings are:
  • Trends at SSOs and patent holders: Over 70% of worldwide SEPs are declared at ETSI  (European Telecommunication Standards Institute), underlining the importance of the European market. However, for key technologies in Europe, companies in Asia and the USA hold more SEPs and younger patent portfolios than European companies. European firms Nokia, Ericsson and Siemens file a large amount of SEPs, but American and Asian companies such as Qualcomm, InterDigital, Samsung, Huawei, Google and LG also file heavily in Europe.
  • Licensing: 68% of SEPs are subject to FRAND (fair, reasonable and non-discriminatory) terms, 65% are subject to reciprocity rules and only 9% of SEPs are pooled.
  • Value: SEPs have higher value and larger family size than other patents (28 vs. 16 for the control group).
  • Timing declaration: 71% of all declared SEPs are granted after the final standard release with important differences amongst SSOs (e.g. 73% at ETSI, 20% at ISO  and IEC).
  • Essentiality checks: The evidence collected suggests a strong case for more transparency. To be reliable, essentiality checks should be implemented after patent examination and first standard release. It can provide transparency and legal certainty to market players at reasonable cost, if implemented for future SEPs and only one patent within the family. Patent offices have the technical competencies, access to documents, industry recognition which allow them to perform these checks at reasonable cost.
  • Implications: This report shows the importance of SEPs in protecting and allowing the diffusion of key technologies in Europe. It provides unique empirical evidence on a number of key issues related to SEPs.
Top sellers of SEPs include Motorola, Nokia, Ericsson, InterDigital and Panasonic, whereas the most active buyers include Qualcomm, Intel and Apple.  
The lesson learned from this study is that, if you are an IoT stakeholder, you may face the issue of royalty payment for use of SEPs; and expert advice seems to be critical in this situation because, unfortunately, there is still little legal guidance on royalty calculation in Europe or in the US.
The EC is determined to improve the existing IPR framework in order to ensure easy and fair access to SEPs. This is described in the 2016 Communication, ICT Standardisation Priorities for the Digital Single Market.
The European Commission published another study in December 2016, titled “Transparency, Predictability and Efficiency of SSO-based Standardization and SEP Licensing” (see here) which analyzed a number of issues relating to the standardization process and SEP licensing. The report presents the costs and benefits of practical solutions to facilitate an efficient standardisation process and SEP licensing and concrete recommendations are offered on different issues such as FRAND terms, over-declaration, essentiality checks, conflict resolution process and increasing transparency. The authors consider a number of specific policy options which might solve some of those problems and, perhaps, the study’s most controversial proposal is the creation of a ceiling on the aggregate royalty for a given standard.
2017 and 2018 will see whether this proposal will be implemented and, if so, by whom and how. In the meantime, the UK’s High Court is hearing a case (Unwired Planet v Huawei), which should be handed down in early 2017 and is likely to provide useful guidance.
United States
On 6 December 2016, the US Supreme Court (in the context of the well known Apple-Samsung litigation) had the opportunity to provide clarity on a controversial issue regarding royalty calculation: for infringements involving multi-component products, should damages be calculated based on the value of the whole end product sold to consumers, or on the basis of only a particular component of that product? Unfortunately, the Supreme Court rejected to comment on this issue referring this question to the Federal Circuit. We will, therefore, have to wait and see what the Federal Circuit decides on remand.
Nevertheless, litigation in the US in this field continues to occur. Apple Inc. sued Qualcomm Inc. last week, accusing it of monopolizing the market for chips for wireless devices and withholding $1 billion in retaliation for cooperating with South Korean antitrust authorities (see here). Likewise, the US Federal Trade Commission has also brought a new complaint (see here)  against Qualcomm's patent licensing practices before the Northern District Court of California. The FTC complaint accuses Qualcomm of excluding competitors and harming competition by these actions:
  • Qualcomm withholds its baseband processors unless a customer accepts a license to standard-essential patents on terms preferred by Qualcomm, including elevated royalties that the customer must pay when using competitors’ processors (“no license-no chips”).
  • Qualcomm has consistently refused to license its cellular standard essential patents to its competitors, in violation of Qualcomm’s FRAND commitments.
  • Qualcomm entered into exclusive dealing arrangements with Apple Inc., a particularly important cell phone manufacturer.
In the absence of clear and harmonized guidance, IoT stakeholders should follow the above cases closely as their outcome is likely to impact the worthwhileness of new businesses in the IoT arena.

Ignacio González RoyoSenior associate at Meitar Liquornik Geva Leshem Tal's Technology and Intellectual Property Group. Currently based in Tel Aviv, Israel.   Prior to joining Meitar, he was a senior associate at J&A Garrigues S.L.P, in the Intellectual Property Department and the Telecom & Media and Sports & Entertainment industries. Degree in Law from Universidad Complutense de Madrid. Degree in Architecture from Universidad Politécnica de Madrid. Postgraduate studies in business law and business intelligence and security. Member of FIDE's Academic Council.


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