Israel:
Supply Chain Licensing For Automotive/IoT Startups
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Israel boasts a strong start-up ecosystem, including in the
field of vehicular communications, smart mobility and sensors. Such
technologies often require the use of patented wireless
communication standards, such as Wi-Fi or 4G/5G cellular standards.
Recent legal developments in the United States and the European
Union threaten to impose the costs of licensing these standards on
such start-up companies, rather than on larger Tier 1 or OEM
manufacturers farther down the supply chain. Background and
Analysis
Wireless communication standards such as Wi-Fi and 5G are
patented technologies. As these communication technologies are
standardized, startups incorporating these technologies in their
products cannot avoid patent infringement.
Nonetheless, startups should be confident that wireless
communication technologies are available for incorporation in their
products. Patent holders often commit to license this technology
under “fair, reasonable and nondiscriminatory” (FRAND)
terms specifically in order to encourage third parties to adopt
their patented technology.
However, though FRAND licenses may be available, payment of a
FRAND royalty is a non-negligible expense, especially for a
start-up company. In addition, startups rarely have the leverage or
market information to negotiate better FRAND terms.
Startups have in the past found relief in the customary
commercial practices of the wireless communication industry, which
typically saw the FRAND license fee as being paid downstream by the
original equipment manufacturer. Startups negotiating their place
in the supply chain have been able to argue that they should bear
neither the costs of the FRAND license nor the potential liability
from the infringement of wireless communication patents.
Recent cases in the United States and the European Union
challenge these customary practices. For example, a federal
district court in California has held that the contractual FRAND
commitment required Qualcomm to license its patents to any
interested party in the supply chain. The Tier 1 automotive
supplier Continental has sued patent holders to obtain a FRAND
license, even though Continental does not occupy the ultimate spot
in the supply chain. In other words, automotive and IoT startups
can no longer be confident that the burden of negotiating and
paying FRAND license fees will fall on larger and more
sophisticated parties downstream in the supply chain. These
developments will require startups to change their negotiating
strategies when contracting in the supply chain.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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