US DOJ Antitrust Division Releases Review Letter Concerning University Patent Pool

The United States Department of Justice, Antitrust Division, (DOJ) has recently released a statement concerning the potential anticompetitive impact of a patent pool involving universities concerning patents involving “autonomous vehicles, the “Internet of Things,” and “Big Data.”  The DOJ finds that the pool is “unlikely to harm competition.”  The Press Release states:

The Justice  Department’s Antitrust Division announced today that it has completed its review of a proposed joint patent licensing pool known as the University Technology Licensing Program (UTLP).  UTLP is a proposal by participating universities to offer licenses to their physical science patents relating to specified emerging technologies.

As part of its review, the division interviewed potential participants and considered its prior guidance on patent pools.  The department has concluded that, on balance, and based on the representations in UTLP’s letter request, the proposed joint patent licensing program is unlikely to harm competition. 

“University research is a key driver of innovation,” said Acting Principal Deputy Assistant Attorney General Michael Murray for the Antitrust Division.  “In the physical science area, however, some university research may never be commercialized due to the costs associated with negotiating multiple licenses and combining the complementary university patents that may be necessary for cutting-edge implementations.  To the extent that UTLP makes it easier for universities to commercialize inventions that may be currently unlicensed and under-utilized, industry participants, university researchers, and ultimately the public can benefit.” 

Currently 15 participating universities intend to cooperate in licensing certain complementary patents through UTLP, which will be organized into curated portfolios relating to specific technology applications for autonomous vehicles, the “Internet of Things,” and “Big Data.”  The overarching goal of UTLP is to centralize the administrative costs associated with commercializing university research and help participating universities to overcome the budget, institutional relationship, and other constraints that make licensing in these areas particularly challenging for them. 

UTLP has incorporated a number of safeguards into its program to help protect competition, including admitting only non-substitutable patents, with a “safety valve” if a patent to accomplish a particular task is inadvertently included in a portfolio with another, substitutable patent.  The program also will allow potential sublicensees to choose an individual patent, a group of patents, or UTLP’s entire portfolio, thereby mitigating the risk that a licensee will be required to license more technology than it needs.  The department’s letter notes that UTLP is a mechanism that is intended to address licensing inefficiencies and institutional challenges unique to universities in the physical science context, and makes no assessment about whether this mechanism if set up in another context would have similar procompetitive benefits.

Under the Department of Justice’s business review procedure, an organization may submit a proposed action to the Antitrust Division and receive a statement as to whether the Antitrust Division currently intends to challenge the action under the antitrust laws based on the information provided.  The department’s conclusions in this business review apply only to UTLP.  They are not applicable to any other agreements or initiatives relating to patent licensing by universities or other entities.  The department reserves the right to challenge the proposed action under the antitrust laws if the actual operation of the proposed conduct proves to be anticompetitive in purpose or effect.

Copies of the business review request and the department’s response are available on the Antitrust Division’s website at https://www.justice.gov/atr/business-review-letters-and-request-letters, as well as in a file maintained by the Antitrust Documents Group of the Antitrust Division. 

The DOJ Business Review Letter is available, here.  The universities' request letter for review is available, here.  

Regulatory Changes Coming to the Bayh-Dole Act Regs?: Free Webinar

UIDP is holding a free webinar at 9:00 am Pacific Standard Time on January 14, 2021.  The webinar is titled, “Implementation of the NIST ROI Green Paper Findings.”  The description states:

Based on input from thousands of organizations in the research community, the National Institute of Standards and Technology (NIST) has recommended legislative changes to dramatically increase the ROI from the billions in government investment in research and development. This webinar will showcase the pending changes and provide information on the new opportunities and streamlined processes for universities and businesses that interact with federal labs or receive federal funding. The implications of the changes for research organizations both in the U.S. and abroad are significant.

Background: In April 2019, the National Institute of Standards and Technology (NIST) announced the release of a final green paper from its Return on Investment (ROI) Initiative for Unleashing American Innovation. This national goal aims to dramatically increase returns from the more than $150 billion per year of U.S. federal government investment in research and development. The NIST ROI Green Paper provided a summary of private and public stakeholder inputs received from hundreds of experts and organizations representing thousands of companies, universities, federal laboratories and other institutions. The document identified 15 findings by NIST to help inform decision-making and implementing actions by the relevant departments and agencies that could further enhance the U.S. innovation engine at the public-private interface. A number of the findings noted that implementation would require revisions to the Stevenson-Wydler Technology Innovation Act of 1980 or the implementing regulations to the Bayh-Dole Act. In response, NIST has vetted through informal and formal interagency processes and delivered both a legislative proposal containing 10 findings for modernizing the Stevenson-Wydler Act, and a Notice of Proposed Rulemaking for updates to the Bayh-Dole Act regulations.

The speaker is Courtney Silverthorn, the Acting Director of the Technology Partnerships Office at the National Institutes of Standards.  The moderator is Jay Schrankler, the Associate Vice President and Head of Polsky Center for Entrepreneurship & Innovation, University of Chicago.  Registration information is available, here. 

Delta and United Securitization Deals

Fitch Ratings has a nice discussion of the securitization deal concerning Delta Airlines and its mileage program around September 2020.  Here is a description of the deal:

The transaction is backed by payments to be made to SMIP under a license agreement signed with Delta for the use of the SkyMiles Intellectual Property (IP) assets and backed by co-brand agreements with third parties for the purchase of SkyMiles. SMIP, as owner and licensor of the IP, licenses the IP to SMIF which then sublicenses the IP to Delta. Through the license agreements, SMIP grants a worldwide license to Delta and its subsidiaries to use the IP to operate the loyalty program, SkyMiles. The licensees then pay a monthly license fee equivalent to all the cash collections generated by sale of miles to Delta as governed through an Intercompany Agreement. Additionally, the third-party agreements will be assigned to SMIP and payment for the purchase of SkyMiles from third parties will be remitted directly to a collection account held at JP Morgan Chase Bank, N.A. in the name of SMIP. These agreements include the co-brand agreement and membership reward agreement with American Express, the largest third-party partner.

The senior secured financing will be guaranteed, on a joint and several basis by certain subsidiaries under Delta. Additionally, the issuers grant additional security to the lenders/bondholders, including a first priority perfected security interest in the cash flows from the SkyMiles program, a pledge of all rights under contracts/agreements related to the SkyMiles program, a pledge of the transaction accounts (including the collection, payment and reserve accounts) and a pledge over the equity interests in certain subsidiaries of Delta.

There’s also a very interesting discussion of Covid-19 and the creditworthiness of Delta Airlines.  Notably, United entered into a similar agreement earlier in the year.  Details concerning that deal are available, here. 

Trademark Royalty Securitization Deal with Vanderbilt University

In 2019, Global Capital gave Goldman Sachs an award for most innovative securitization deal.  The deal concerned the securitization of royalty payments from a license between Vanderbilt University and Vanderbilt University Medical School.  The deal apparently provided Vanderbilt University funding raising its endowment by 30%.  More details are available, here, in an article by Max Adams.  In 2018, Vanderbilt University had an endowment around US $4.6 billion. 

Copyright Parts of Covid-19 Relief Bill

Well, I guess because they could: The Hollywood Reporter has some of the details concerning 10 years in prison for illegally streaming and small claims copyright administrative bodies parts of the Covid-19 relief bill.  And, the immediate deduction for TV and movie production expenses gets extended.  Never let a crisis escape without taking advantage of it. 

Robust Funding for Regenerative Medicine in 2020

The Alliance for Regenerative Medicine has released data on financing for regenerative medicine and it is at a record pace for 2020.  In the first three quarters of 2020, worldwide financing has reached almost $16 billion and exceeded the top prior year of 2018 already ($13.5 billion).  The report includes a breakdown based on amounts for types of regenerative medicine as well as private, public and partnership funding. The report is a short two pages or so and available, here. 

Coming to Grips with an IP Business Model

 

By Roya Ghafele, OxFirst

Email: info@oxfirst.com

 Executive Summary

To come to grips with a business model for IP is a dire necessity for any firm seeking to compete on the edge. The many business opportunities afforded by IP extend beyond its ability to protect and enable a firm’s performance. IP can in and by itself constitute a business opportunity. Particularly firms operating in forward looking technology spaces cannot ignore the business dimension of IP. The need to thoroughly establish a business model for IP is given by the sheer growth opportunities enabled in many technology sectors.

 

What is a business model?

At its simplest form, a business model consists of generating value for somebody else. In return one receives some sort of compensation that allows to keep oneself going. How much one adds value to someone else’s undertaking and how much one can request in return for this service or product offering, differentiates a strong business model from a weak one.

This understanding of a business model is commensurate with the findings put forward in the academic literature, which argue that the main elements of the business model are the creation of value and the implementation of strategy to capture revenue from the established value. As such, the business model can be seen as a mediating structure between a host of different input factors and various economic outputs. The success of the business model relies on its adequate appraisal of the market environment.

The internal dynamics of a business model rely on two key elements: value creation and value appropriation. The business model establishes the organizational, procedural and operational means by which a firm creates and appropriates value in its target market.

Value creation involves all of the resources and processes deployed towards the achievement of a given strategy. In that respect intellectual property can be a key internal resource a company can rely on. Value appropriation again describes the revenue logic of the firm’s operations. Also here, IP can play an important role.

While these insights are generally established in the field of management, they have so far found insufficient application in the area of intellectual property law. This is somewhat astonishing as business model innovations have been at the core of the very technological revolutions that intellectual property is supposed to protect.

Take the example of cloud computing. Cloud computing allows for an infinite amount of data storage and processing capacity on demand. As such, it constitutes a major value proposition for businesses. Yet, the intellectual property that reads on such services remains more or less entangled with a traditional IP paradigm. IP is often used to protect the goods and services offered. If the IP actually meets up to this requirement remains more often than not unknown. This is explained by the fact that patent validity can only be tested through court proceedings. If the IP is not upheld, then in such a scenario the IP has not lived up to its expectations.

Applying a Business Model to IP

The existing body of IP management suggests that the role IP can assume in a corporate context can extend beyond this single value proposition. Patents can be used to block other market participants from entering the market, but they can also serve to enhance the firm’s reputation. Patent attorney often emphasise on the strategic function of patents to assure a firm the freedom to operate. 

Other than the important signalling function that IP can offer, it can also be an instrument of revenue generation. Often, this is achieved through the licensing and sales of IP.

Source: OxFirst research

From the lens of the business model, the way IP can be instrumentalized can be categorized into three broad areas.

           1)  Competition management

       2) Marketing Function of IP

       3) Generating Income from IP

While in the first two approaches the IP serves primarily to protect and enable a business model based on the delivery of products or services, it is the third approach that allows to most closely associate the IP itself with a business model.

If IP is being used for keeping competitors at bay or for enhancing a firm’s perception, then the IP is not directly used to drive business. Rather, it assumes a support function. It is only when the IP becomes subject of the business activity in itself, that one can speak of an IP business model.

In these instances the business model centres around the IP itself and allows to establish a corporate function for intellectual property that can be detached from the trading activities of the company per se. Trading on the grounds of intellectual property assets can have several advantages. For one, it is much less costly and complicated to ship intangible assets around the planet. For two, the trade in the underlying rights to a technology can enable a firm to enter into joint ventures, collaborative exchange or other forms of open exchange, while foregoing the many hassles associated with a full fletched merger or acquisition.

Why one cannot ignore the IP business dimension

Developing strategic relations on the grounds of IP can be much easier to achieve than on the basis of tangible items. This is explained by the nature of IP rights. With the further differentiation of business models, I tend to believe that companies will be forced to consider more thoroughly what type of business goals they would like to achieve through their IP. This requires a more systematic investigation into the business proposition of a firm’s IP. At present, there is too much intellectual property gathering dust. In the current crisis, firms simply can’t afford to continue doing so.

Right-pricing cellular patent licensing in 4G and 5G connected vehicles

Bountiful connectivity apps in vehicles

While litigation is bogging down the licensing of cellular standard essential patents (SEPs) in vehicles with disputes about where in the production supply chain licensing may or must occur—from chip, to module, to telematic control unit (TCU), to entire vehicle—this is also delaying payment of Fair, Reasonable and Non-Discriminatory (FRAND) royalty charges in these cases and causing confusion about licensing value. This is a pity because clarity is in everyone’s urgent interest.

Well-established mobile phone licensing benchmarks conservatively imply a total value of at least around $30 per vehicle for patents essential to the 2G, 3G and 4G standards.

Great expectations for IoT hinge on cellular technology

There is strong consensus and enthusiasm in government, business and among commentators about the Internet of Things, with its multi-trillion dollar market potential. While financial and other benefits will be reaped by many vendors and users in various different industries, as well as by consumers, several generations of patented technologies developed largely by companies within the telecommunications industry over many years—up to and including newly introduced 5G—are enabling this major opportunity.

Despite cellular technologies being developed by and hitherto implemented largely among a relatively limited group of telecommunications industry OEMs producing cellular products—most significantly mobile phones as well as mobile network equipment—the variety and numbers of prospective technology implementers in IoT are far greater. While SEP licensing is well established for mobile phones and base stations—with thousands of agreements since the 1990s worth many billions of dollars every year—the industry is still in the throes of establishing the basis and pricing for use of these technologies in various different IoT applications including cars, domestic appliances, industrial robots and remote meters.

This article conservatively estimates total FRAND charges for licensing all cellular SEPs in vehicles, based on value derived therefrom and reflecting some recent court judgements on FRAND charges in other devices including smartphones. 

How to charge?

Since the early days of the 2G mobile phone industry, SEP owners most often licensed their cellular patents at royalty rates calculated as a percentage of phones’ average wholesale (i.e. unsubsidized) selling prices. One reason for this is that OEMs anticipated the subsequent downward trend in mobile phone prices, which fell dramatically following the introduction of digital cellular with 2G in the early 1990s. OEMs did not want to be locked into fixed dollar-per-unit (“DPU”) royalty charges that would increase in percentage terms as manufacturing costs were rapidly declining.

While royalties for 2G/3G/4G cellular connectivity in a mobile phone have usually continued to be charged as a percentage of the end-product selling price, the value established there—when stated as an equivalent DPU figure—is a key consideration. As average mobile phone prices increased with the widespread adoption of 3G smartphones from the late 2000s and 4G smartphones several years later, SEP licensors have, in many cases, at the behest of OEMs, “capped” percentage-based royalties to maximum DPU figures to ensure royalties paid do not exceed the value of additional features deemed less dependent on cellular connectivity. 

Similarly, DPU pricing is also applicable for other cellular-enabled “devices” including, for example, PCs and connected vehicles. There are also bountiful ways in which connectivity is exploited in these with various applications. However, a vehicle OEM, for example, would quite reasonably refuse to pay royalties for cellular SEPs that are calculated as a percentage of a vehicle’s cost or value in alloy wheels or leather seats. 

I have argued for many years against the proffered valuation methodology of basing royalties on a percentage of the sales price of a component or “smallest-saleable patent practicing unit (SSPPU)” and this approach has been soundly rejected by US and European courts.  The US Ninth Circuit Court of Appeals has ruled in Federal Trade Commission v. Qualcomm that “the district court’s analysis [relying on an SSPPU approach]is still fundamentally flawed. No court has held that the SSPPU concept is a per se rule for “reasonable royalty” calculations . . . .” Similarly, in Germany in Nokia v Daimler, the Mannheim court stated that the “royalty provided in [Daimler’s] counter-offer is not reasonable, as the reference value used in the top-down approach in the form of the average purchase price of [TCUs] is unsuitable. This reference value prevents [Nokia] from participating adequately . . . in use of the technology in the saleable end product.” (Unofficial translation.)

I am not commenting here on how aggregate royalties can or should be apportioned among SEP owners. Elsewhere, I have commented on the inaccuracies and other shortcoming in apportioning royalties based on the counts of declared-essential or judged-essential patents. 

Where to license?

While I and many others have also long argued it is also rather simpler and more efficient to license at the entire device level—as has always been the case in mobile phones—the Court of Appeals additionally ruled in the above that it is the patent licensor’s prerogative to license where it wishes. 

As discussed below, the value of cellular functionality to a connected vehicle is at least around $30 per unit, regardless of where licensing occurs in the production supply chain, and irrespective of the different formulae that could be used to calculate that figure with licensing at different stages in that supply chain. 

Valuation benchmarks

While there has never been consensus in the telecommunications industry that aggregate royalties for SEPs should be capped—with significant dissent by various licensors including Qualcomm—maximum aggregate figures proposed by some leading companies that declare many patents essential to cellular standards—when correctly interpreted and applied—provide at least some conservative valuation benchmarks. Court determinations of FRAND royalty rates for individual licensors—also as percentages of unsubsidized wholesale handset prices—in a few different cases have been based upon or cross-checked using such aggregate figures:

• 6% to 10% for LTE by Judge Selna in TCL v. Ericsson, which was subsequently overturned on appeal;
• 8.8% for LTE (i.e. 4G) by Justice Birss in Unwired Planet v. Huawei;
• 5% for 3G and 6% to 8% for 4G by the Shenzhen Intermediate Court in Huawei v. Samsung.

However, adjustments to the above are warranted because some source figures have been misinterpreted and incorrectly applied or alternative figures could have been reasonably selected as aggregate royalties in determining FRAND rates for the parties’ portfolios. 

Prior to Judge Selna’s judgement being entirely vacated on appeal, I showed he had muddled single-mode and multi-mode licensing rates in pages 5 to 7 of my critique of his “top-down” SEP royalty rate valuation analysis. As LTE was being first standardized in 2008, patent owner announcements from April that year proposed individual and aggregate single-mode LTE royalty rates. This was for like-for-like comparisons with claims of ”less onerous” licensing for rival 4G technology WiMAX at “much lower” rates and with patent pooling at a “predictable cost”. Only a couple of companies also mentioned their proposed multi-mode rates. It is only since then that Apple’s iPhones and Android-based smartphones have been multi-mode devices needing licensing of more than one generation of technology. The first of these smartphones, including even 3G, was not introduced until the second half of 2008. The aggregate rates Judge Selna used in deriving an aggregate FRAND rate of 6% to 8% (his judgement also cites a figure “not higher than 10%”), reflected only the value in LTE and not that in 2G and 3G. The correct figure for LTE handsets (i.e. multimode devices) with his methodology should, therefore, have been 11% to 15%, including an additional 5% for 3G, and conceivably more for the inclusion of 2G. 

Justice Birss also uses the “total royalty burden” in his FRAND rate determinations. He indicates, for a 4G multimode handset, “the aggregate implied by either party’s case (Huawei’s 13.3% and Unwired Planet’s 10.4%).” The average of these two figures is 11.9%. 

According to Strategy Analytics, the global wholesale average selling prices for LTE handsets (i.e. overwhelmingly multi-mode including 2G, 3G and 4G standards) were $270 in both 2018 and 2019. That equates to $29.70 to $40.50 per handset at multi-mode royalty rates of 11% and 15%, respectively.

While cellular SEP licensing revenues for Ericsson, InterDigital, Nokia and Qualcomm alone amount to many billions of dollars per year, that is overwhelmingly from mobile phone licensing with revenues understating value in cross licensing among these and other companies. For example, as Ericsson and Nokia used to have large handset device operations and still have major cellular network equipment businesses, licensing fees paid in cash among those and many other cellular industry companies significantly reflect netting off rather higher nominal charges. Major implementers—including Apple, Huawei, LG and Samsung with substantial market shares of device sales in recent years—tend to generate little or nothing in cash royalties for SEP licensing while they seek to minimize license fee outpayments through cross licensing. 

Licensing fees paid also understate value because many OEMs have remained unlicensed due to free-riding with patent “hold-out” and because some OEMs do not have licensing programs but own patents for defensive purposes. 

SEP value in vehicles versus smartphones

The value of SEP technology to vehicles is provided in various ways and applications to manufacturers, consumers and vehicle fleet operators. In some respects, this value exceeds the value that the same technology confers on a smartphones. As well as enabling in-vehicle information and entertainment systems, cellular technology:

• Connects all of a car’s occupants concurrently, while smartphones tend to be used by only one person;
• Enables remote vehicle diagnostics for maintenance, asset management tracking and route management in trucks; 
• Improves vehicle safety with C-V2X, for example, with collision avoidance alerts introduced in 4G: thus saving lives by reducing the numbers of millions dying and many more suffering from serious accidents on the roads worldwide each year; and
• Can continuously connect various third parties, including the vehicle OEM, insurance providers and fleet management service providers.

The value derived from the one-off licensing charges is also elevated in connected vehicles because these have longer working lives than smartphones.  Cars, for example, typically have 14-year lifespans before scrappage, versus seven years for mobile phones, while users in developed countries replace their phones about every 18 months.

The DPU value of cellular SEPs in vehicles is, therefore, at least comparable to that in smartphones.

Even more than a big smartphone on wheels

While there will continue to be a large proportion of costs and value in vehicles that has nothing to do with cellular capabilities, the proportion of that in information and communications technologies—significantly including cellular connectivity—is large and growing rapidly. As defined by industry analyst Markets and Markets, the global connected car market is expected to be worth $54 billion in 2020 and is projected to reach $166 billion by 2025—a compound annual growth rate of 25%. With sales of around 70 million light vehicles per year, that amounts to $600 per vehicle in 2020 rising to $2,400 per vehicle in 2025. It believes the connected truck market is also worth tens of billions of dollars per year. In addition, Markets and Markets circumscribes a separate global in-vehicle infotainment market which it projects to grow from $24.3 billion in 2019 to $54.8 billion by 2027—a compound annual growth rate of 10.7%.  Research shows that car manufacturers charge consumers from several hundred dollars to many thousands of dollars for connected car application “packages.”

In consideration of all the above and the “maximum aggregate rates” relied upon by the judges, as discussed above, an aggregate SEP value of $30 to $40 per smartphones is also reasonably applicable per connected vehicle for multimode 2G/3G/4G licensing. While DPU royalties are explicitly not derived as a percentage of a vehicle’s cost or price, it is notably that the above figures correspond to less than 0.1 % of average selling prices for cars—at $37,800 in the US and $27,400 globally— two orders of magnitude higher than for LTE smartphones at $270 over the last couple of years. 

The future in 5G

As indicated above, the connected car market is expected to quadruple in size over the next five years, with additional growth in adjacent markets that are also dependent on cellular connectivity. As well as buoying average prices and stimulating new vehicle sales volumes, connected vehicle capabilities in cars and trucks—with Markets and Markets’ market definition, or with my broader market definition—will inevitably provide among the best opportunities for vehicle OEMs to differentiate their products and bolster profit margins. For example, capabilities including C-V2X are being enhanced in 5G over what is possible in 4G, with improvements such as enhanced positioning to enable increasingly autonomous and even self-driving vehicles. While market definitions include the cost or price of tech hardware and software, utility and value to consumers will grow as autonomous capabilities—provided by C-V2X, sensors and AI—save lives while relieving occupants from driving and enabling them to work, relax or sleep. 

While cost and value to manufacturers and consumers in connected vehicles is almost entirely still in 2G, 3G and 4G today, this will increasingly be in 5G with it expecting to dominate the flow of gross additional cellular connections (a leading indicator) and account for 31 percent of all established connections worldwide by 2025. That justifies significant additional royalties for 5G in vehicles, as some cellular SEP owners are already obtaining through the licensing of 5G smartphones and other devices.

One-stop-shopping is best in IoT

While bilateral licensing is possible in IoT including connected vehicles—as it is in mobile phones—the reduced transaction costs and other benefits inherent in platform-based licensing or patent pooling is highly attractive to both licensors and licensees in IoT, as I wrote in my previous article here very recently. While all the major cellular SEP owners have preferred to license bilaterally to the relatively small number of handset OEMs, most prefer now to license these SEPs into the numerous different vertical sectors in IoT through a platform or pool. For example, while there are differences in analysis and opinion about exactly what proportion of cellular SEPs Avanci represents, there is broad agreement that it, with its 39 licensors, has most of them. Avanci licenses all its 3G and 4G SEPs for $15 per connected vehicle—the price of a car wash—regardless of how many TCUs, modules or modem chips the vehicle contains.

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A similar article to this was originally published in RCR Wireless.

Keith Mallinson is a leading industry analyst, commercial consultant and testifying expert witness. Solving business problems in wireless and mobile communications, he founded consulting firm WiseHarbor in 2007.

One-stop-shopping with segmented offerings is most appealing for SEP licensing in IoT including 5G

In various industries including pharmaceuticals, where a product is typically protected by only a few patents, if intellectual property is licensed at all, licensing tends to be atomized: company-by company for individual patents or small portfolios, and nation-by-nation rather than globally in many cases.

In marked contrast, patent pooling is increasingly attractive for licensing cellular technologies with emerging IoT including 5G because it can provide greater transparency, predictability, and various efficiencies such as lower transaction costs at scale in standard-essential patent (SEP) licensing with multiple dimensions and complexities including:

• Scores of patent jurisdictions, but with a handful of these most significant by far;¹
• Hundreds of patent owners, while most SEPs are owned by a very small proportion of these;²
• Thousands of implementers, with the vast majority of these in IoT outside of the cellular industry vertical;³ and
• Hundreds of thousands of patents declared essential to the cellular standards, while large proportions of these are not actually essential.⁴

No more than a dozen or so patent owners have significantly or profitably operated their own licensing programs to monetize SEPs in cellular,⁵ and even fewer have in other technologies such as video codecs where patent pooling has predominated for many years.⁶

While the number of jurisdictions and patent owners has not increased substantially for cellular SEPs in recent years, the number of prospective implementers is increasing enormously, as is the number of SEPs. Patent pooling enables those new implementers to be most effectively licensed by all SEP owners.

One size does not fit all implementers

Whereas cellular technologies were once all implemented by a relatively small number of OEMs and in only a few different types of device, including cellphones and PCs, in IoT there are a very wide and expanding array of applications from sensors and humble products such as meters to very complex and costly apparatus such as self-driving cars, surgical instruments and industrial equipment. Market verticals are also numerous including manufacturing, mining, agriculture, smart grids, smart cities and smart homes. Licensing across all this diversity requires wide distribution and range in licensing packages, segmented to suit different implementations, including various licensing price points reflecting the significantly different values derived from the SEPs by implementers and their customers in some applications versus others. 

Benefits for all licensors

The inherently larger scale in patent pooling than in bilateral licensing makes this all more cost effective for both licensors and licensees in IoT.

Some major cellular SEP owners— including Ericsson, InterDigital, Nokia and Qualcomm—significantly monetize their patents by licensing cellular device OEMs directly. Others who are also major device implementers—including Huawei, LG and Samsung—significantly reduce or eliminate their device licensing costs through cross-licensing, also directly, with other cellular device OEMs. Many more cellular SEP owners have too few SEPs to profitably support their own cash-royalty generating licensing programs. Instead, while some license their video-codec SEPs through patent pooling, others’ cellular SEPs have largely remained dormant, for “defensive” purposes.

For decades now, cellular patent pools—including those for 3G, administered by Via Licensing and SISVEL subsidiary 3G Licensing SA, and for 4G, administered by SISVEL and Via Licensing—all failed to make any significant impact versus bilateral licensing, and, as I predicted in 2010, had no prospect of doing so.

However, the outlook for patent pooling in cellular technologies improved dramatically when Avanci entered the market in 2016 with its 2G/3G/4G licensing platform focused exclusively on IoT, with licensing and charges based on end-devices and the SEP value conferred to them. While none of the major cellular SEP owners—including all the companies named above—joined any pools that were seeking to license all types of device including mobile phones, all four of those significant SEP monetizers named above agreed to pool their cellular SEPs for IoT licensing through Avanci along with 35 other licensors. While various assessors disagreed about the relative positions of individual SEP owners, they broadly agreed that those four companies collectively accounted for most SEPs.

Patent pooling enables those companies with existing programs also to reach a far larger range of licensees than previously with their own licensing programs, and, for SEP owners without licensing programs, it enables them to be able to monetize their patents at all. The smaller licensors particularly benefit from various economies of scale and cost efficiencies, including distribution (i.e. in licensing “sales” and marketing), in operations and administration because they have lower licensing revenue potential. For example, assessing patent essentiality and relative value among SEP owners is expensive and can be contentious. Costly litigation is more likely required to ensure payment of royalties outside of pooling arrangements.

Removing roadblocks to efficient licensing

Pooling is logical, efficient, beneficial to SEP owners and implementers, and widely favored in some instances (i.e. for video codecs generally and for cellular in IoT). A recent business review letter (BRL) on the matter of Avanci’s proposed new 5G licensing platform for IoT, from the U.S. Department of Justice’s Antitrust Division, notes that the Department had ‘long recognized that patent pools can “provide procompetitive benefits by integrating complementary technologies, reducing transaction costs, clearing blocking positions, and avoiding costly infringement litigation.”’

Nevertheless, there remain impediments to SEP licensing in general that threaten to prevent patent owners reaping their just rewards and that impair potential advantages in patent pooling. While the following contentions are not all fully resolved to final appeal in all major jurisdictions, obstructions to well-established licensing and valuation methods are being removed and some trends that are hostile to SEP owners are reversing:

• End-device licensing. While SEP technologies are significantly implemented in baseband modem chips, patented cellular capabilities reach extensively beyond these components into modules and across entire devices. By licensing at the end-device level, all patents can be included in a single agreement. Nevertheless, there is significant dispute between many licensors who insist on licensing end-devices and some implementers who want to license at the chip or module level. Challenges to well-established and extensive end-product licensing practices have been made under antitrust laws, as well as in contract and patent laws. In FTC v. Qualcomm, the US Ninth Circuit Court of Appeals has recently rejected all antitrust-based claims including exclusive dealing: “Qualcomm is under no antitrust duty to license rival chip suppliers.” The aforementioned BRL also recognizes considerable efficiencies in licensing vehicles and notes that the Department of Justice’s Antitrust Guidelines state that field-of-use restrictions, such as licensing at the end-product level, can be procompetitive.⁷
• End-device-based royalty rate determination. Relatedly to the above, there has also been significant litigation to undermine the well-established and predominant method of basing royalty charges on the value in end products, and, instead, determine royalties based on the, so-called, smallest-saleable patent practicing unit. However, the Ninth Circuit Court of Appeals has also ruled in FTC v. Qualcomm that that there is no obligation for patent owners to calculate royalties on that alternative basis, even if a chip can be deemed to be the SSPPU in any implementation. ‘No court has held that the SSPPU concept is a per se rule for “reasonable royalty” calculations; instead, the concept is used as a tool in jury cases to minimize potential jury confusion when the jury is weighing complex expert testimony about patent damages.’ No jury was ever involved in FTC v. Qualcomm litigation, nor is one ever involved in determining royalties in normal business operations outside of court. The German Mannheim court in Nokia v Daimler has found that Nokia’s [end-product-based] automotive licensing offer was fair, but that neither Daimler nor its supplier Continental “were seriously willing or prepared to conclude a license agreement with the applicant on [fair and reasonable] terms.” The Department of Justice also notes in its BRL of Avanci’s proposed 5G IoT licensing program that there are a variety of ways to value the patented technology and stated that it believes parties should be given flexibility to license in a manner that best rewards and encourages innovation.⁸
  The value delivered by these cellular SEP technologies substantially exceeds chip implementer design and fabrication costs in many cases. Licensing at the chip level, and calculating royalties on this basis would tend to drive royalties down to values in the most basic implementations (e.g. a “connected” lightbulb) and undervalue patents in high value end-devices (e.g. connected cars with cellular V2X capabilities). The result would be economically inefficient and dysfunctional with reduced incentives for SEP owners to contribute their technologies to the standards. Chip-based licensing would result in more uniform charging which could be too costly for low-value applications or under-compensate for inclusion of SEPs in high-value applications.
• Global licensing. While numerous technology products, including those containing cellular SEPs, are global with manufacturing and sales including many nations, and with thousands of global patent licenses agreed and underpinned by many billions of dollars of royalty payments made over many years, some implementers have held out from taking such licenses by arguing that national courts do not have extra-territorial jurisdiction. However, The UK Supreme Court’s recent appeal judgment in Unwired Planet v Huawei and Conversant v Huawei and ZTE rules that the English Court has power to grant an injunction in respect of UK national patents unless the implementer enters a global license of a multinational patent portfolio, and to determine the terms of that license. The UKSC recognizes that national courts determine validity and infringement of national patents but the ETSI IPR policy—as is applicable to cellular SEP licensing— empowers a national court to determine FRAND rates and terms. There was no UK lower-court determination of validity or infringement for foreign patents. Implementers remain free to challenge patents at the national level and seek a reduction in royalties should that be successful for significant technologies. Worldwide licensing is the norm, is supported by the ETSI IPR FRAND agreement, and is not precluded by national courts. There is no international forum for appeal, and so it is only national courts that can deal with disputes about worldwide licensing.

Extending SEP licensing reach for IoT through patent pooling

The ways in which cellular SEPs are licensed are expanding as these technologies are increasingly being implemented in many more devices than mobile handsets, tablets and PCs. While bilateral licensing is not going away any time soon, and will always remain an option due to antitrust concerns that would arise if one or even several patent pools were the only means of licensing, patent pooling or similar platform-based licensing is increasingly attractive in IoT including 5G. This is because the numbers of implementers and applications is increasing dramatically outside the cellular industry vertical, and because the value that IoT can provide significantly varies from case to case, accordingly. Patent pools have the scale to be able to offer one-stop-shopping to implementers with most or all of the SEPs they need to license, and with royalty charges that are proportionate to the value they derive from the sophisticated cellular technologies they use, such as upcoming ultra-reliable and low-latency communications in 5G.

While bilateral licensing is most likely to continue to predominate among the technology developers and implementers within the cellular industry, the Avanci licensing platform —initially focusing on connected vehicles and smart meters with charges (e.g. up to $15 per vehicle for 3G & 4G) based on value in those devices and applications—is beating a new path in cellular technology licensing. This is attractive in IoT, including 5G, in a way that has already proven successful for all devices in video codec standard technology licensing.

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Endnotes

¹While it is not cost effective or necessary to patent in all jurisdictions, effective IP protection for products manufactured or sold in several or many nations also requires patenting in multiple jurisdictions including US, China, Europe and Japan.

²Net of duplicates, I estimated 265 different companies had declared patents as essential to 3GPP standards in the ETSI IPR database by May 2019. While patent counting is not an accurate or reliable of method of comparing SEPs among different patent owners, as illustrated by wide disparities in various studies’ patent essentiality assessment results, these studies far less controversially all show that most SEPs are owned by fewer than 10 companies.

³While, according to Strategy Analytics, 37 OEMs accounted for 83% of cellular handset shipments in 2018, the GSM Suppliers Association had identified, already by August 2020 (less than 18 months from 5G’s inception), 93 vendors who had announced 401 available or forthcoming 5G devices including 18 different “form factors” among these. While GSA’s figures include various end-devices, they also include intermediate products including modules and vehicle onboard units which are increasingly being incorporated in plethora of additional end-devices (e.g. cars) by many different OEMs serving their respective vertical markets. For example, licensing platform Avanci, with 39 licensors, has licensed 14 vehicle manufacturers. There are also many OEMs in other verticals, including healthcare, industrial automation and asset tracking. For example, 36,000 Bluetooth Special Interest Group members including manufacturers and others in numerous vertical sectors all cross-licence their SEPs for the Bluetooth standard under a royalty-free pooling arrangement.

⁴While 332,511 patents had been declared essential to 3GPP standards in the ETSI IPR database by September 2020, studies claim that many of these are not actually essential.

⁵A total of 56 companies, including patent pools and patent-assertion entities, were identified as prospectively generating cellular SEP royalties, with 5 “Leaders” and 16 other public companies accounting for more than 90% of these, in A New Dataset on Mobile Phone Patent License Royalties, by Haber, Galetovic and Zaretzki, 2H 2017.

⁶The vast majority of video codec SEPs are licensed to thousands of licensees through only a few patent pools including those administered by MPEG LA, HEVC Advance and Velos Media.

⁷The BRL states at page 18: ‘Here, the efficiencies from the proposed field of use appear to be considerable and are likely to outweigh the potential competitive harm caused by limiting the scope of the Standard [Patent Licensing Agreement] to connected vehicles. The Antitrust Guidelines for the Licensing of Intellectual Property make clear that field-of-use restrictions can be procompetitive because they allow the licensor “to exploit [its patents]as efficiently and effectively as possible” and that they may “increase the licensor’s incentive to license.”’ (Citations omitted.)

⁸The BRL states at page 20: ‘There are “a variety of ways” parties might value patented technology, including setting royalties based on end-product revenue. The essential cellular SEPs licensed here are subject to FRAND commitments. Avanci represents that its current rates for the 4G Platform are FRAND and reflect input from both licensors and licensees, and that Avanci intends its 5G rates also to be FRAND. There is no single correct way to calculate a reasonable royalty in the FRAND context. Each standards-essential patent holder will have to decide whether the Avanci Platform comports with its own FRAND commitments. Standards implementors can enforce the commitments in contract proceedings if there are disputes. The Department believes parties should be given flexibility to license in a manner, consistent with these commitments, that best rewards and encourages innovation.’ (Citations omitted.)

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This article was originally published in RCR Wireless.

Keith Mallinson is a leading industry analyst, commercial consultant and testifying expert witness. Solving business problems in wireless and mobile communications, he founded consulting firm WiseHarbor in 2007.