How thousands of IoT companies are misled by component suppliers over patent licences   

Contractual clauses that imply businesses are free from legal risk should not be taken at face value 

By Sven Torringer and David Muus 

“[SUPPLIER] respects the importance of intellectual property rights (“IPR”) and respective laws and regulations. As such, [SUPPLIER] has actively engaged with known essential IPR owners and successfully secured licensing to legally use their technologies in [SUPPLIER MODULE].” 

This clause appears in agreements between certain IoT component suppliers and their customers. These agreements, known as indemnifications (or indemnities), are supposed to provide assurance that everything regarding patent licences has been taken care of by the suppliers.  

Sisvel has seen this exact language in agreements from three different module makers. All of them are among the world’s largest suppliers of the components (modules) that enable IoT devices to be connected, thereby making them “smart”.  

Unfortunately, though, we believe a false impression is being created. As a leading IoT patent pool administrator, we know that these companies have not “actively engaged” with the relevant essential IPR owners. Of course, this also means the necessary licences have not been secured either. 

To make matters worse, in some cases we suspect customers have been asked to pay a premium for these indemnities, even though they may not be worth the paper they are written on.  

Module suppliers, smoke and mirrors 

Through its Cellular IoT licensing programme, Sisvel can offer licences to IP held by 34 companies and institutions that cover over 50% of the patents essential to the LTE-M and NB-IoT connectivity standards. These patent holders should, therefore, be among those “known essential IPR owners” the suppliers give the impression they have engaged with and secured licences from.  

In reality, though, they are avoiding active engagement with us, despite the single licence the Sisvel Cellular IoT pool offers being the easiest and most logical way to obtain access to all 34 patent portfolios. Our attempts to open discussions with the module suppliers concerned have so far been met with nothing but silence. 

Unfortunately, non-engagement seems to be a deliberate strategy. What’s more, the terms and condition of the indemnities also discourage IoT manufacturers themselves from taking the licences they lack but need.   

We know this because the same documents that include the licensing coverage claims also suggest that indemnity ‘protection’ might be lost if the customer engages with the owners of the patented inventions on its own initiative to get the necessary clearances.   

… the OEM shall take no action to compromise the infringement claim without express written approval of [SUPPLIER] 

While this may look like a reasonable request – after all the supplier has said it will take care of the costs of any infringement claim – in practice this clause puts the manufacturer (OEM) in a difficult position. They may have realised the supplier failed to take any of the licences that should have been obtained; they may be in trouble and need to talk to the licensors to get the coverage they need; but doing so creates a concern they will lose the only protection they have. What’s more, when they ask the supplier if they can talk to us, they may get no reply, and they’ll have no idea what to do. This puts them between a rock and a hard place.  

Why would module makers who have secured the licences they claim they have worry about their customers speaking to the patent holders concerned? Perhaps this is a question they should be asked before any contract containing such a provision is signed.  

In fact, taking any statements module suppliers make about patent coverage at face value, without first checking their authenticity, is fraught with peril. After all, it’s not them who run the risk of infringement claims and lawsuits, it’s their customers: if you are a manufacturer that would be you, in other words. Licensing in cellular technology commonly takes place at the end-product, not the component, level. 

That said, not all suppliers are the same. While some seem to provide indemnifications and guarantees that are questionable at best, others have chosen to behave far more responsibly. Either they are much more serious and diligent with the level of indemnity they promise or they take proactive steps to make licences readily available to their customers. One such is Nordic Semiconductor, which has taken positive action to facilitate easy access to licences for its customers. We encourage others to follow this route.   

Keep your module suppliers honest 

If you want to hold your supplier accountable for the licensed status of the products they are selling you, there is a simple step you can take to see whether they are willing to stand by their claims. 

First, you should know the difference between an indemnification and a guarantee. 

An indemnification is a promise to compensate certain damages that may result from a particular event, such as a patent infringement claim.  

A guarantee is a promise that covers an obligation, for example that the supplier has taken the required licences to known patents. 

While a guarantee should remove the possibility of nasty surprises up front, the very best an indemnification can do is clean up the mess afterwards. And that’s the best-case scenario. Indemnity clauses can be full of limitations and other clever legal loopholes that will severely limit the protection they are supposed to provide (we will address this topic in a follow-up article). 

Guarantees, then, are the best option. You can be specific in your requests for them, or even before that in your bidding process when procuring components.  

For example, if you are looking to implement LTE-M technology, you may simply ask in writing for a guarantee that the supplier has already obtained a licence to all relevant patents that are owned by the participants in the Sisvel Cellular IoT patent pool; or, even simpler, that a licence to the Sisvel C-IoT patent pool has been acquired.  

If the supplier answers yes, you can contact us to verify whether this is true. If the answer is no, ask the supplier to state the royalty costs that are outstanding. You can verify what is still due for LTE-M or NB-IoT under the Sisvel C-IoT licence by using the Sisvel website.  

With this information you should be able to make a proper comparison between different suppliers based on the actual situation, rather than having to rely on promises they may or may not meet. 

Eliminate risk the easy way  

As previously explained, Sisvel Cellular IoT offers a single licence to thousands of standards essential IoT patents, owned by 34 major innovators in a single transaction. Transparent royalty rates start at just $0.08 per device.  

The programme was specifically designed to maximise business certainty and minimise transaction costs for IoT companies that may be new to the patent licensing world. We are very happy to talk to you directly - and by joining Sisvel Cellular IoT, you do not need to rely on your supplier’s indemnities or guarantees.  

Every business that uses technology invented by others is responsible for ensuring it has the necessary licences. If your strategy is built around supplier indemnifications, it may well be on shaky ground. At the very least, make sure that you understand the limitations of your agreements and that your business is not relying on false promises.  

Sven Torringer is programme manager of Sisvel Cellular IoT 

David Muus is head of licensing programmes at Sisvel 

The content of this Article is for general information only and does not constitute professional or legal advice. You must not rely on the information in the Article as an alternative to seeking advice from an appropriately qualified professional. If you have any specific questions about any such matter, you should consult an appropriately qualified professional.