Friday, 19 May 2017

Adjusting the Balance in SEP Evaluations and Licensing

A European Commission DG Growth initiative described in its Roadmap on Standard Essential Patents for a European digitalised economy aims to increase information on SEPs so implementers can get a better idea about which of these they might be infringing. Additional disclosures on how patent claims might read on the standards could be beneficial. Requirements should reflect the dynamics and uncertainties in standards development and patent prosecution and must not be onerous to patent owners. These are issues for standards development organisations to consider.

A report DG Growth commissioned in support of its initiative entitled Transparency, Predictability, and Efficiency of SSO-based Standardization and SEP Licensing (the CRA report) proposes that SDOs or the European Patent Office could also help meet this objective by being appointinted the central assessor that would screen patent disclosures to determine and count which patents are truly essential. This would be undesirable intervention with various adverse consequences. As I wrote here for IP Finance in detail very recently, third-party determinations on large portfolios are inherently subjective, inconsistent and unreliable.

The creation of this EC-ordained “patent counting” database would also lend it to being used as an interventionist means of valuing SEP portfolios. In conjunction with the unwarranted imposition of maximum cumulative rates (i.e. royalty caps), this could facilitate the ill-conceived price regulation alluded to by the Competition Commissioner.

The CRA report also embraces defective patent hold-up and royalty stacking theories. General theories on hold-up and “Cournot complements” are misrepresented and do not apply to patents. There is a lack of supporting evidence on alleged patent hold-up, royalty stacking and much of it to the contrary including that for opposing effects from patent hold-out (i.e. patent trespass). 

SDO IPR policies are commonly misrepresented with the bogus notion that patent owners should be deprived a share of value from use of patents in standards. Neither the economics nor the law is settled here. Sharing in the “gains from trade” incentivises risky investments.

Private ordering has worked very well in 2G, 3G, 4G and it will continue to work well in IoT including 5G. Prospects are no more uncertain now than they were when these previous-generation standards were introduced and helped transform the communications markets. Decades of fruitful progress indicates it is not “too soon to tell” how things are playing out. By all measures these markets are extraordinarily competitive and successful, with large research and development investments, extensive resulting innovation, massive growth in subscribers and data consumption, reducing quality-adjusted prices, and dramatic shifts in market shares with new market entry, market exits, low and decreasing concentration in supply. I have been showing this with facts and figures here, here and here for many years, and as others have confirmed.

The CRA report is right to reject a mandatory switch to chip-based royalty rates and licensing, and to recognise the legitimacy of charging different royalties depending on “field-of-use” (e.g. an IoT lightbulb versus an augmented reality headset or a self-driving car). This well-established principle aligns costs with functionality used and value generated.

IoT is expected to be worth up to the teens of trillions of dollars to the global economy by 2025. That is 500 times more than the cost of licensing the communications technologies that are already providing the growth fulcrum for IoT developments. Undercutting royalties will diminish gains that could otherwise be obtained widely by leveraging reinvestments in intellectual property.

With it being much more difficult to obtain injunctions than it used to be, as the CRA report and Justice Birss in Unwired Planet v. Huawei also observes, the scales have already been tipped significantly in favour of implementers versus technology developers in terms of bargaining power. The balance here needs to be redressed here not swayed further. Royalties are flat or declining while opportunities and demands to invest in R&D for the good of all in IoT and 5G are increasing.

DG Growth should not interfere with SDO governance or try to pick winners among these or their IPR policies. Rather than speculating about how much aggregate licensing costs could be, costs should be measured by asking licensees what they are actually paying in cash royalties. Compare that with the value the resulting technologies deliver in the market.

Private ordering is preferable to public ordering and intervention is unnecessary. SDOs, patent pools, other licensing platforms and bilateral licensing under FRAND conditions can continue to serve the industry well and to the benefit of consumers.

However, if EC decides to intervene there should be impact assessments before intervening and empirical analysis of effects thereafter. DG Growth should also measure the results previous rulings— including those affecting the availability of injunctions— have already had on royalty rates and how long it takes to complete licensing agreements.

DG Growth’s analysis should be as open and transparent as possible, for scrutiny by all.

The above is a summary to my full article, here. This supplements my response to the DG Growth consultation on this topic in 2015.

Friday, 12 May 2017

Do not Count on Accuracy in Third-Party Patent-Essentiality Determinations

The Roadmap onStandard Essential Patents for a European Digitalised Economy from the European Commission’s DG Internal Market, Industry, Entrepreneurship and SMEs (DG Growth) sets out how it believes increasing transparency on standard-essential patents and its other objectives with SEPs and FRAND licensing might be achieved. 

A study report commissioned by DG Growth in support of this initiative on Transparency, Predictability and Efficiency of SSO-based Standardization and SEP Licensing (the CRA report) proposes, among various other recommendations, that declared patents and patent applications should be centrally assessed by standard-setting organizations or by the European Patent Office to determine whether they are actually essential to standards including those developed by ETSI for 3G, 4G and 5G.

A path to price regulation

This intervention is unwarranted and results would be unreliable. It would introduce various inaccuracies with significant subjectivity, biases and would be very costly in any attempt to do such a massive job thoroughly. Parties should be entitled to use, internally and in bilateral or multilateral agreement and in litigation with others, whatever patent-evaluation techniques they wish. That is entirely different to a particular “patent-counting” methodology and assessor being imposed.

DG Growth also headlined in its Roadmap that it would like to make SEP values and FRAND royalties clearer to prospective implementers. If it prescribes the creation of a centralized SEP assessment database, as described above, this inevitably will also lead to it being used to determine a patent owner’s share of SEPs and FRAND royalties. This is problematic due to the inaccuracies described and it would also troublingly lead to the setting of prices on a company-by-company basis, which is not and should not be the role of the European Commission or instruments it controls.

Justice Birss concludes in Unwired Planet vs. Huawei that “in assessing a FRAND rate counting patents is inevitable”. The parties in the case did indeed use that among other valuation methods, but their respective patent counts differed very widely – for example, by a factor of five for the total number of LTE SEPs. However, the judicial process enables the court to figure out where the biases and inaccuracies lie in case-specific circumstances and make sense of differences in opinion.

Intervention with centralised essentiality assessments would be a blunt instrument that would be subject to political and other adverse influences. The regime would lack the flexibility to adapt that exists in the marketplace among companies acting independently and that occurs among parties in litigation with due process in the courts.

An impossible Holy Grail

The implicit assumption that objective and accurate determinations of portfolio essentiality, patent strength and value can be made with extensive assessments of numerous patents, or with in-depth evaluations of relatively small samples of these, is deeply flawed. Evaluating standard-essentiality is a fact-intensive, complex and highly subjective task, as is assessing patent validity and patent value. Only a court of law can make definitive determinations on these issues.

The opinions of others tend to differ widely, as illustrated when comparing the results of third party “patent counting” studies in which assessors evaluate companies’ shares of SEPs. I first analysed this using linear regression and measuring correlation between the results of two studies in an article I published in 2011. It showed the results of the two studies from around then were totally unrelated.
Disagreement on LTE Essential Patent Determinations:
 Regression shows extremely weak correlation between two studies’ results (R2=0.0008)
Expanding my analysis to include many more publicly available studies since then also reveals very wide disparities. For instance, LG’s share of LTE patents judged essential by various assessors range from 2.9 percent to 23 percent a factor of eight.  Huawei’s share of judged-essential LTE patents range from 0.6 percent to 10 percent a factor of seventeen. Nokia’s share of judged-essential LTE patents range from 2.3 percent to 54 percent a factor of 23.

A Few Among Many Wide Variations in Shares of Judged-Essential LTE Patents Among Patent-Counting Studies

Lowest Estimate
Highest Estimate
Disparity
Huawei
2.9%
23%
8x
LG
0.6%
17%
17x
Nokia
2.3%
54%
23x

Portfolio-wide assessments are necessarily shallow due to the large number of patents and work required per patent. They are therefore inherently imprecise. There is no precision or certainty in determinations absent the impossibility of in-depth patent-by-patent court determinations for entire portfolios of thousands of patent families.

Invalid extrapolations

Conducting in-depth assessments on relatively small samples of patents does not fix this shortcoming. The proportion of SEPs in portfolios cannot be projected from random samples of patents with the precision of predicting the results of coin tossing. Patent selections (e.g. those applicable to devices rather than networks, or which patents in a patent family) and essentiality determinations are with significant personal judgement, bias and uncertainty. Consensus is that patent values are highly skewed. Many patents are worth little or worthless because they would likely be found invalid or not infringed by a court. As shown in Commonwealth Scientific and Industrial Research Organisation v. Cisco, with one patent licensing at around one dollar per unit in comparison to very little for most WiFi patents, some patents are worth hundreds of times more than the average SEP in a standard. This is all probabilistic.

In other words, determining overall essentiality across thousands of patent families and among many patent owners with standards such as 4G LTE is so subjective and potentially unreliable that any assessor’s count of the number of SEPs owned by a given company is questionable. The corresponding patent strength or patent value that might be subsequently derived, in absolute terms or in relation to other patent owners, is even more contestable.

Conflicting demands, bureaucratic competence and impartiality

Authorities should only make assessments and publish figures that are reliable and can be measured reproducibly such as “weights and measures” and in official statistics such as demographic figures and the national accountswhich SEP counts are not. Patent attributes should be assessed as they currently are in the marketplace as the market and its participants see fit, with owners’ disclosures and various third-party assessors of SEPs.  Parties should also be able to consider other factors and make different assessments based on, for example, their own technical analysis of declared patents. Market forces can determine and change which standard-essential technology factors and assessments suit the market best, while bureaucracies struggle to get it right and can be very resistant to needed change. Where disputes arise, the courts can make determinations with due consideration of industry practices.

Implementers of SEP-based technologies have the legitimate concern that it can be difficult to determine exactly which patents they are infringing, from whom they must seek licenses and how much in FRAND royalties they should pay. In response, ETSI’s IPR policy requires that patent owners provide information on patents and patent applications that they believe might be essential or might become essential to standards such as 3G WCDMA and 4G LTE. ETSI does not police or audit what is submitted to its IPR database. Disclosure requirements might reasonably be increased to include more information on how patent claims map to the standards, but judging this for essentiality or commercial value is not a job for a standards development organisation or the patent office. Antitrust restrictions preclude SDOs from getting involved in valuing patents and setting licensing terms including FRAND royalty charges.

Disclosure tactics
Patent disclosures to SDOs including ETSI were purposely intended to be conservatively-large, including patents which might be or could become essential to standards, but the goalposts are being moved. ETSI’s IPR policy helps ensure that the maximum number of patents will be identified and will be available for licensing under FRAND terms. However, it also tends to result in significant over-disclosure so that patent owners can avoid penalties, such as compulsory, royalty-free licensing if they do not disclose a patent that ends up becoming essential as the patent is prosecuted and as the standard changes in its development. With so much attention on SEP counts and use of these as a proxy for portfolio patent strength and value, some companies seek to maximize the number of patents they declare to justify a relatively high royalty.

Inaccuracies, biases in determinations and company disclosure tactics, as above, are why it would be unwise for SEP determinations, SEP counts and any other counts that are used to determine patent and portfolio values to be imposed on the market.

The wisdom of King Solomon’s (data) Mines

Any EC-prescribed centralized SEP assessment database tool would inevitably result in parties becoming, at least somewhat, obliged or pressured to use it to “split the baby” in determining patent owners’ shares of SEPs and FRAND royalties in licensing. Established and emerging practices would be eroded or marginalized including:

·       Use of comparable license benchmarks from hundreds of executed licenses and billions of dollars in royalty payments over many years,

·       In-depth bilateral discussions on patent claims and how they map to the standards, and

·       The counting of approved contributions to the standards.
 
Patent counting usefully complements these other SEP evaluation methods in licensing negotiations, but this technique should not be the bureaucratic means of setting prices on a company-by-company basis that would emerge from stipulating patent counting and emphasizing it over other valuation methods. Centrally imposed assessments would likely become increasing dysfunctional and corrupting as the system, its administrators and its operators are gamed or courted for political and commercial gain. Government agencies would do better to keep clear and let licensing parties and third parties in face of market forces decide for themselves which facts, figures and studies they would like to use in licensing deliberations and in litigation.

My entire article, here, supports my conclusions by showing methodically how very inconsistent determinations of LTE essentiality and patent strength are among all the different third-party evaluators. It shows that such methods are particularly unreliable in valuing patent portfolios.



Wednesday, 10 May 2017

Relecura Releases Internet of Things Patent Landscape Report


Relecura, the data analytics firm, has released its interesting and thorough Internet of Things – Technology Landscape and IP Commercialization Trends Report.  The report includes a helpful slide on the technology stack in IOT to understand the layers of relevant technologies necessary and another slide on hot application growth areas.  The report also includes a breakdown of key players in the space and strategy.  The patent landscape portion of the report includes the following “high level findings”:

The top patent holders are from diverse sectors like consumer electronics (Samsung, LG, Sony); telecom (Huawei, Ericsson, Korea Electronics Telecom, ZTE), and software (IBM, Microsoft).

• Qualcomm is the leading filer in multiple jurisdictions as well as PCT filings. This suggests an intention to license its technologies worldwide.

• The network layer has the highest number of patent filings and accounts for 62% of all the IoT patents. • Samsung is a key patent holder in most layers of the IoT technology stack and its patents address multiple application areas.

• IoT patent transactions per year have shown an increase after 2011.
• Patent filings related to the upper layers of the IoT stack were relatively less till 2011, but have increased significantly starting in 2012.

Helpfully, the report contains a wealth of other information including top patent holders and assignees with a breakdown by industry.  It also includes the top cited patents and the high quality patents and patent holders by Relecura’s metrics.  The report also covers patent transactions.  The report is available, here. 

Tuesday, 9 May 2017

Legislation Introduced in Maryland to Restrict University Licensing: The Future?


The Electronic Frontier Foundation (EFF) has started a program called Reclaim Invention.  The premise of the program is to ensure that universities, particularly public universities, are not licensing patents to so-called patent trolls.  There are basically two prongs to the effort: 1) mobilizing people involved with universities to pressure universities to sign a patent pledge—essentially volunteering to engage in certain conduct concerning university inventions and licensing; 2) pushing state legislatures to adopt legislation restricting universities licensing practices.  The EFF’s proposed legislation includes the following two thrusts:

First, it requires university technology transfer offices to adopt a policy committing them to manage patent assets in the public interest. University policy should include:

  • researching the past practices of potential patent buyers or licensees;
  • prioritizing technology transfer that develops inventions and scales their potential user base;
  • endeavoring to nurture startups that will create new jobs, products, and services;
  • fostering agreements and relationships that include the sharing of know-how and practical experience to maximize the value of the assignment or license of the corresponding patents.

The second part of the legislation voids any agreement to license or transfer a patent to a patent assertion entity. [emphasis added]

The EFF’s program is based on research by Professor Robin Feldman concerning Intellectual Ventures relationship with universities. 

Notably, legislation taking the EFF approach has been introduced in the state of Maryland.  So far, the status line on the Maryland legislature webpage states: "In the House -- Unfavorable Report from Appropriations -- Withdrawn." Notably, the synopsis of the bill states that it conditions student financial assistance and research funding from the state on adopting the policy.  It will be interesting to see if the legislation (or some modified form of it) passes.  For a critique of the EFF’s approach, please see this article in Forbes by noted property rights scholar Richard Epstein. 

Friday, 5 May 2017

OxFirst free webinar on ‘Assessing Damages under the IPR Enforcement Directive’


OxFirst is presenting another free webinar, which appears to be another in the line of quality programs. The topic will be- ‘Assessing Damages under the IPR Enforcement Directive’, and it will take place on May 17th, 2017, 3:00 PM- 4:00 PM GMT | 16:00-17:00 CET. The speakers will be Dr Roya Ghafele and Rasmus Kamstrup Bogetoft. The program is described as follows:
The talk is first of its kind to draw together a range of different publicly sanctioned sources that provide instructions on how to value intellectual property. We apply these to illustrate how damages can be assessed under the IPRED. In doing so, we seek to contribute to a more educated way of how to assess damages under the IPR Enforcement Director.

In doing so, we fill an important gap: While the IPRED contains a host of principles discussing how to assess damages, there are no guidelines, commentaries or further explanations that would help the Court to understand how to translate these overarching guidelines into concrete assessments of the economic worth of the damage due. This, in our view, leaves an important shortcoming, which could lead to otherwise avoidable inconsistencies. Taking a bigger picture, the practice of IP valuation remains unclear to many practitioners.

By consequence, it finds much lesser application than it should. There is a clear need to increase market actors’ confidence and certainty in IP valuation methods as a way to assess damages in litigation, but also in licensing negotiations and other IP transactions. This will allow judges and practitioners alike to better understand the business and the value of the IP itself and even provide decision makers with the required information to decide whether to enforce or to license IP.
Dr Roya Ghafele has been the Director of OxFirst, an off-shot from Oxford University, since 2011. She has held academic positions with Oxford University, Harvard, U.C. Berkeley and the School of Law at Edinburgh University. Prior to that, she worked as an economist with WIPO and the OECD.

Rasmus Kamstrup Bogetoft is an assistant attorney with the Danish law firm Plesner. He is also external teacher in IP law at the Copenhagen Business School. He studied law and economics at Yale University and holds a LLM in law from the University of Kopenhagen.

Please use this link to register

Monday, 1 May 2017

New $1 Billion Singapore Fund for Commercialization and Expansion


In a recent article by Claire Huang, The Business Times has announced a $1 billion fund in Singapore designed to help a number of small to medium sized enterprises (SMEs) with strong intellectual property portfolios to “go global.”  The fund is a collaboration between the government of Singapore and the private equity firm Makara Capital.  The article notes:

Makara's managing director Ali Ijaz Ahmad listed five areas of focus for the fund:

  • Urban solutions including logistics and security;
  • Fintech;
  • Alternative energy;
  • Advanced tech such as artificial intelligence and cyber-security; and
  • Healthcare and bio-medicine.

The companies will be selected based on criteria such as having a defensible IP, strong managerial talent and pan-Asian growth potential. They will be able to tap into Ipos's expertise and networks and Makara's commercially-driven approach to turn their innovations into assets and revenue through Singapore.

The article is available, here. 

Friday, 28 April 2017

"Opportunistic" Google and Intertrust Launch "Patent Shield": Protection for Startups


Google and Intertrust have announced the creation of Patent Shield, which is designed to protect startups.  Essentially, the exchange is access to a patent portfolio for an equity stake in the startup.  It seems to put startups in the position of a much more resourced company with a portfolio of patents and presumably freedom to operate.  This appears to be another attempt to get ahead of something like the patent troll problem; however, it seems to be aimed at patent demands from entities that are practicing not absolute non-practicing entities because the portfolio is supposed to provide leverage against the entity asserting infringement initially.  Interestingly, this appears to be a great way for Google and Intertrust to find licensing partners for their patented technology without looking like a “bad guy” by operating through patent demand letters—let them come to us.  Very clever.  It also gives Intertrust the opportunity to offer its IP services to startups, and maybe a chance for additional investment/acquisition opportunities through notice about great new startups that have attracted the attention of established players in the market. Very, very clever. For more details, please see here.