Component-level licensing

Component-level licensing refers to the question of the level of the value chain at which the holder of a essential patent for a standard must grant its licences: to the supplier of the chip or module implementing the standard, or to the manufacturer of the end product, car, phone or connected device, that incorporates it. The stakes are considerable, because the royalty base, and therefore its amount, differs according to the level chosen. Component-level licensing has pitted patent holders against user industries for several years.

The positions

First, holders argue that the FRAND undertaking leaves them the choice of licensing level, provided the whole chain has access to the standard, summed up by the formula access for all. They prefer to license the manufacturer of the end product, whose price reflects the use value of connectivity. Next, component suppliers and some manufacturers argue that the undertaking requires licensing anyone who asks, a formula summed up as licence for all, and that the royalty must be calculated on the component, the smallest unit implementing the standard. Finally, intermediate positions distinguish according to standards and sectors.

The state of the law

The question has not been settled by the Court of Justice of the European Union. A German court referred it in 2020 in the dispute between an automotive supplier and a holder of telecommunications patents, but the referral was withdrawn after settlement. National courts therefore assess case by case, relying on the intellectual property policy of the standardisation body, on competition law and on sector practices. The European technology transfer block exemption regulation and the Commission’s guidelines provide elements of analysis, which can be consulted on the website of the European Commission. The debate joins that on the base of the FRAND rate.

Key points

In practice, component-level licensing is a major issue for the automotive industry, the internet of things and manufacturing, where end product manufacturers are not traditional telecommunications players. Supply agreements must provide for the allocation of the standard-essential patent risk between supplier and customer, through warranties and cooperation clauses. The firm advises on these issues, as presented on the page FRAND and standard essential patents counsel.