The smart meter rollout is an example of the digital transformation of the energy sector. A digital communication network is spread over the electricity, gas, and water infrastructure. Smart meters, gateways and control devices use communication standards (such as WLAN, 5G, etc.) for system integration.

These communication standards are based on technology that is often patented. As a result, a licence market worth billions has developed for patent holders for mobile communication standards such as LTE: Large patent holders and patent exploiters have already discovered the smart grid as a source of income and have started to demand licence payments from device manufacturers and infrastructure operators.

Manufacturers and users of IoT and smart meter devices are therefore facing the challenge of defending themselves against excessive licence demands from patent holders. Right from the start of the legal tug-of-war, it is important to prevent the formation and consolidation of unfavourable licensing levels through active resistance.

Standards and a new market for patented technology

The digitalisation is transforming infrastructures of electricity, gas, and water (e.g., Internet of Things, IoT). A variety of wired and wireless communication technologies are being used for this (e.g. LTE, WLAN or M-Bus standards), some of which originate from the classic mobile communications sector and are now being rolled out to various industrial sectors.

However, the use of standards from communications technology does not eliminate the risk of this technology infringing third-party patents. On the contrary: patent holders file their patent applications during and after the standardisation process with the aim of including as much patented technology as possible as part of a standard therefore making the use of the standard dependent on the patented technical solution being used; the patent then becomes standard essential (also known as “SEP” for “standard essential patent”), meaning the standard cannot be used without using the patent. In the last decade, the number of declared SEPs has risen exponentially from 12,191 to 72,300, including many patents with effect in Germany: With regard to the 4G standard, around 57% of the SEP-declared patent families had effect in Germany in 2022; in the area of 5G, too, more than 50% of the patent families had effect in Germany.

FRAND license

Patent owners can assert a claim for injunctive relief against the users of their patented technology. In principle, a patent holder is free to choose which (and how many) participants in a commercial supply chain it acts against for patent infringement.

In the case of a smart meter, for example, the smart meter manufacturer, the radio module supplier (and sub-suppliers), the smart meter retailer and the commercial user (such as a municipal utility company) are potentially liable for patent infringement. Experience has shown that it is primarily the end device manufacturers and users who are the focus of the patent holders, because a higher licence fee can be demanded here due to the end sales price. However, it can be assumed that the patent holders will also turn to other market participants.

A patent holder’s claim for injunctive relief can cause considerable economic damage. This monopoly and exclusivity for patent proprietors are justified in cases where there is no standardisation of the patented technology and no conflict with antitrust and competition law. However, with a view to equal access to standardised technology, case law generally grants SEPs a right to a so-called compulsory licence, known as FRAND (Fair, Reasonable and Non-Discriminatory) conditions, as a defence against a claim for injunctive relief by the patent proprietor.

Whether and which licence conditions (especially which royalty) are in fact FRAND depends on the individual case. Although case law has developed basic principles and rules of conduct for both parties in this regard, this is often decided by disputes in and out of court between the patent proprietor and the implementer.

Developments at EU level

In February 2024, the European Parliament adopted a draft regulation on SEPs, on which the European Council must now decide. While this draft has been met with exceptionally clear and broad criticism, it will not ultimately shift the cornerstones of the conflict of interest outlined above.

In the meantime, patent owners are using the German legal system - which is generally considered to be more patent owner-friendly - to enforce their licence claims through lawsuits and warnings. The new Unified Patent Court (UPC) system, whose judgements (with injunctions) can be enforced in all participating states (currently 17 countries), is exacerbating the situation for implementers. SEP holders have already filed various lawsuits with this court, which was only established in 2023.

How can IoT and smart meter companies defend themselves?

In the meantime, major SEP exploiters have launched special programmes to generate licensing income in the IoT and smart meter sector. Whether the licence fees demanded by SEP holders correspond to the FRAND level owed is rarely determined by courts and usually by way of negotiation. The implementer is then faced with the decision to accept the - possibly excessive - offer of the patent holder or to negotiate lower licence fees, which may involve going to court. Judgments handed down in practice, show that the defence generally leads to lower royalty rates.