End-product- vs Component-level Licensing of Standard Essential Patents in the Internet of Things Context

The appropriate level of licensing Standard Essential Patents (SEPs) in the case of a multi-tiered supply chain is among the most hotly debated issues in the SEP community and at the crux of an ongoing dispute between Nokia and Daimler. The debate centres on whether the SEP holder is (or should be) under an obligation to grant a license to any implementer, including component makers, or whether the SEP holder is (or should be) free to only license at the end-product level. After examining the various arguments raised in favour of and against each licensing model, we consider there are strong policy reasons to promote component-level licensing in the context of the Internet of Things. Component-level licensing is more likely to reduce transaction costs and spur downstream innovation of implementers, while preserving the SEP holders’ incentives to innovate. At a positive level, we examine whether a SEP holder that has given a FRAND commitment to a standardization body may be under an obligation under contract law or EU competition rules to grant a license to component suppliers. We consider that, properly interpreted, ETSI’s IPR Policy obliges SEP holders to license any implementer that seeks such license, regardless of the latter’s position in a supply chain. Assuming that the SEP owner holds a dominant position per Article 102 TFEU, it is argued then a similar conclusion can be reached on the basis of EU competition law.