The new role of patents in energy innovation

The global energy crisis, caused by high costs and the ever-increasing risks posed by climate change, prompted the acceleration of research and development into new energy technologies. But the growing reliance on digital communication techniques – which are essential in all sorts of monitoring devices – could give rise to more nuanced patent issues than energy technology developers might be used to.

The changing energy innovation landscape

Patent applications are filed many months, or even years, before a product appears on the market, and are often seen as an early indicator of future technology trends. A 2021 report (72 pages / 1.16MB PDF) by the European Patent Office and International Energy Agency found that the number of global patent filings in low-carbon energy technologies has been increasing over the past two decades. By contrast, there has been a decline in patenting in fossil fuels since 2015.

Some of these new technologies, such as wind or solar, are already in use on an industrial scale, while others, like the ‘internet of things’ (IoT) are at an early stage of development or deployment. The IoT describes physical objects with sensors, processing and exchanging data with each other. Its use is becoming of increasing importance in the energy sector as a means of increasing efficiency and reducing cost.

Smart meters are a well-known example of how the IoT can be applied in the energy sector. Put simply, a smart meter collects data, which then flows to the IoT hub or gateway where it is collated and transferred to the customer’s smartphone or laptop, where the data is analysed. Based on the data received, the customer can take any appropriate actions to reduce or change their energy consumption. 

Data transfers of this nature involve the use of standardised communications technologies, such as cellular or Wi-Fi, and therefore involves the use of patented technologies and, in particular, the use of ‘standard essential patents’ (SEPs).

The growing use of standardised technologies

An SEP is a patent that protects technology believed to be essential to implementing a technical standard. In other words, you cannot operate a standard compliant device without necessarily using the patented invention.

Standards are developed by businesses working together under the auspices of standard-setting organisations (SSOs), such as the European Telecommunications Standards Institute (ETSI), which oversees the development of communications standards vital to many businesses. ETSI has over 900 members from all over the world who are able to participate directly in the standards-making process.

Just because a technology is standardised does not mean that it is free, but standardisation also means the SEP owner cannot demand an extortionate royalty rate. The bodies through which businesses collaborate to develop standards – such as ETSI – require SEP rights holders to make SEPs available for others to use by way of a licence on fair, reasonable and non-discriminatory (FRAND) terms.

Other SSOs have comparable policies in place, but ETSI and other SSOs consider licence terms as commercial matters to be agreed by the SEP owner and the implementer of the standardised technology. Disputes on what are FRAND terms often arise in the context of SEP licensing negotiations. Litigation can then follow if the parties are unable to agree. Disputes have arisen in many jurisdictions including the UK, Germany and France, as well as in the US and China.

The sheer number of patents that need to be licensed to use certain communication technologies may come as a shock to energy sector companies who are likely to be more familiar with a manageable number of patents that can be individually assessed in freedom to operate exercises.

Buying the necessary hardware from component suppliers who have the right licenses can deal with these issues. However, that does not address the issues of non-practicing entities (NPEs). NPEs often prefer to target well-funded new entrants to the market and, preferably, the seller of an end product or service, as opposed to the component supplier.

The Unified Patent Court

While SEP disputes are commonplace in Europe, the coming year is expected to bring about significant changes in the European patent landscape, with the introduction of the Unified Patent Court (UPC) in June 2023. The UPC will sit alongside national courts but will provide a one-stop shop for patent litigation throughout a large part of Europe, including for SEP and FRAND licensing disputes.

Rather than multiple national litigations and potentially conflicting decisions, the UPC offers one central action, leading to centralised relief, which should reduce costs. The UPC also has new procedural rules, no existing case law, and judges with a mixture of national experience. This means that there is the possibility to shape, among other things, FRAND case law and some of the unresolved issues.

One key question in FRAND disputes is whether a court, and in this case the UPC, will set a FRAND royalty rate. There is currently no guidance from European courts, with the German Federal Court of Justice stating that a royalty rate should be negotiated by the parties. The only guidance right now comes from the UK, where the Supreme Court held that the UK court has the power to grant an injunction to prevent infringement of an SEP and determine the royalty rates and terms of a global FRAND licence.

Notably, the UK – as well Spain, Poland and Croatia – is not part of the UPC. If the UPC elects to diverge from the UK jurisprudence, implementers of technology standards may have an opportunity to argue for a different approach.

Assessing future risks

Where standardised technologies are involved, the interface of IP and competition law means there is a right way and a wrong way to deal with a demand from the party holding patents essential to that technology. It is important to be live to the issues and the lessons learnt from the development of smartphones – which can involve hundreds of thousands of individual patents. As a result, since 2009, smartphone manufacturers have launched dozens of patent litigations against one another to defend and increase their market share, known collectively as the so-called ‘smartphone wars’.

Furthermore, with the spotlight clearly on the energy sector given recent global events, the new UPC system will offer businesses operating in the energy space transformational opportunities to navigate complex European patent landscapes and access new technologies to make inroads in mitigating climate change and pressures on finances as a result of the cost-of-living crisis. Energy companies are therefore advised to review patent portfolios and patent filing strategies, audit commercial agreements to understand the impact of the UPC on those agreements, evaluate third party patents and adapt European patent commercialisation, enforcement and defensive strategies accordingly.