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.

Valuing SEP portfolios and determining FRAND rates: How, and who should "get it done"?

While there is much uncertainty about the outlook for standard-essential patent royalty rates in court determinations, there are plenty of solid benchmarks in well-established comparable licenses (“comps”). The former rates are thin on the ground and have been made up based on some dubious and fiercely contested tenets as judges scrabble to set figures that are fair, reasonable and on-discriminatory. The latter rates have been agreed in droves through negotiation in licensing programs with dozens of licensors, hundreds of licensees and many thousands of patents. These are not meaningless asking prices with no takers —or just one or two transactions specifically conceived and executed to establish a desired marker— they are economically significant because they are underpinned by many billions of dollars of licensing trade over decades.

And, many players in the cellular industry have self-servingly colluded to cap aggregate royalties since the introduction of 3G twenty years ago. Unsurprisingly, these voices dominate because most, by far, of the interested parties, including OEMs, must become licensees to implement the standards legally. For only a few is licensing more an income generator than a cost in manufacturing.

Who is to say how much all the patents in devices are worth, how that valuation should be derived and how value should be divided among technology owners, implementers and end users? Weighing up all of this is significantly a matter of personal judgment—not of simply applying some supposedly pre-ordained formula. Vacating the District Court Judge Selna’s bench trial decision in TCL v. Ericsson on appeal, the Federal Circuit has prescribed retrial with a jury. This will recalibrate awards based on the subjective judgement of randomly selected non-experts. It will likely include consideration of bottom-up valuation methodologies reflecting consumers’ purchasing preferences, price sensitivities and the perceived value for smartphone features and performance improvements.

The math(s) is not easy or proven

Even using comps is not straightforward in many cases because most licenses are cross licenses and so the prices and monies paid typically reflect significant netting off between the notional royalty rates of the parties and also account for the respective trading flows of their manufactures. Where licensors do not have downstream manufacturing businesses, that need licensing—such as smartphone manufacturing—royalty rates can more easily be directly compared among licensees, in many cases, without adjustment. For example, Qualcomm and InterDigital do not make or sell devices, which account for most, by far, of the trading value in the cellular products (e.g. around $500 billion per year for mobile phones). Adjustments are also required in the comparison of licenses due to up-front lump sum payments, per-device caps, per device floors, total payment caps and other differences.

So how on earth could something as seemingly complex and difficult as valuing a portfolio of SEPs be left to a bunch of jurors? Judge Selna’s decision was extensive and 115 pages long. It applied two different methodologies —"top down” and “comparable license analysis” with the “unpacking” of two-way licenses—and disregarded a third—a bottom up “Ex Standard approach” designed to estimate the value of SEPs independent of any value arising from incorporation of SEPs into a standard. With his judgement vacated, Judge Selna’s analysis no longer has any legal authority; but it does reveal some of the methods and arguments that may continue to be applied in the valuation of SEPs and determination of royalties for these under FRAND terms.

The wisdom of lay folk

Perhaps the jurors will see through all the bluff and complexities, as they do in so many other trials. They can be unburdened by the weight of consensus, self-interested majorities and conventional wisdom. The Seventh Amendment constitutional right to a jury trial in civil proceedings has served the US well. It is probably one of the reasons why the nation is for centuries the most successful technological innovator in the world. If not, the US has evidently not been held back by its patent law and execution of this right.

Significantly, the New [December 2019] Policy Statement on Remedies for Standards-Essential Patents Subject to Voluntary F/RAND Commitments issued by The U.S. Patent & Trademark Office (USPTO), the National Institute of Standards and Technology (NIST), and the U.S. Department of Justice, Antitrust Division (DOJ) offers views on remedies for standards-essential patents that are subject to a RAND or FRAND licensing commitment. This overturns interpretations of the 2013 policy statement by the USPTO and DOJ: ‘the agencies have heard concerns that the 2013 policy statement has been misinterpreted to suggest that a unique set of legal rules should be applied in disputes concerning patents subject to a F/RAND commitment that are essential to standards.’ In addition to saying a lot about how injunctions should become more readily available—an important issue, but which is outside the scope of my article— the new Policy Statement advises that ‘with respect to damages, the Federal Circuit has explained, “We believe it unwise to create a new set of Georgia-Pacific-like factors for all cases involving RAND-encumbered patents.” The court further stated that “[a]lthough we recognize the desire for bright line rules and the need for district courts to start somewhere, courts must consider the facts of record when instructing the jury and should avoid rote reference to any particular damages formula.”’ (Emphasis added and citations omitted.)

With the above developments, we are likely to see rather higher awards for SEPs than, for example, the paltry figure of somewhat less than one US cent per LTE SEP resulting from Judge Selna’s overturned decision.[1]

Juries tend to award rather larger damages figures. In Qualcomm v. Apple, San Diego, March 2019, the figure of $1.41 per iPhone was awarded for infringement of three non-SEPs (i.e. 47 cents per US patent. A Los Angeles jury just awarded the California Institute of Technology (Caltech) $838 million from Apple and $270 million from Broadcom—totalling approximately $1.1 billion—for infringement of four patents used in the implementation of the WiFi standard (IEEE 802.11). Per device, this is equivalent to $1.40 (35 cents per patent) for Apple and 26 cents (6.5 cents per patent) for Broadcom.

Three different portfolio valuation and FRAND determination methods where presented by the parties for Ericsson’s 2G, 3G and 4G SEPs in TCL v. Ericsson.

“Reasonable, maximum aggregate royalties” with “proportionality”

I have already criticized at length Judge Selna’s top-down approach and so I provide no more than a summary of that here. When I wrote my critique of Judge Selna’s subsequently vacated Decision, I focused almost entirely on his top-down analysis; but indicated I might return to assess the other methods of FRAND rate determination and his analysis of them.

Top-down is fundamentally flawed for two reasons, and thirdly, Judge Selna’s corresponding determinations were biased and erroneous in his application of the methodology.

Firstly, the selected aggregate royalty rate caps—of 6 to 10 percent for 4G LTE and 5 percent for 3G— do not reflect the value of the underlying technologies. The figures are quite arbitrary and were only advocated by those who wanted to limit royalties to those levels. Why should the value of IP versus hardware in a smartphone be limited to such small percentages of its purchase price when the corresponding percentages for IP in music CDs, video DVDs, software CD ROMs or patented pharmaceuticals are more like 80 percent?

Judge Selna justified use of this approach on the basis that Ericsson and others had in 2008 encouraged the industry to allocate royalties based on a maximum aggregate rate and proportionality among licensors based on relative patent strength among portfolios. However, there were several in the industry that never subscribed to such an approach and were, instead, for good reasons, vociferously opposed to it.  For example, in December 2008, Qualcomm publicly stated it was against such a formulaic approach because it ‘would arbitrarily limit the value of standards essential patents, discourage innovation, encourage the filing of marginal patents, complicate and delay the standardization process, and be impossible to implement in practice.’ There is no reason to bind these dissenters to such an approach. It should be possible for them and others to derive significantly higher royalties, if enough value is there.

Secondly, apportionments among patent holders are inaccurate. For example, patent-portfolio stand-essentiality determinations are cursory, inconsistent and patent counting methods typically assume all patents are of equal value, which is antithetical to valuation principles in patent law. Counting technical contributions to standard-setting organizations also has the shortcoming of rewarding quantity instead of quality.

Thirdly, Judge Selna erroneously whittled the rates down for Ericsson in several ways:

I.                     Regarding company and aggregate single-mode rates as multimode rates,

II.                   Using inaccurate, unreliable and likely biased patent assessments in apportionment of the aggregate rate to Ericsson with:

a.       inflated patent counts in the denominator,

b.       deflated patent counts in the numerator,

III.                  Regarding announced rates, including aggregate rates, as US rates rather than global rates,

IV.                 Discounting indicated rates based on patent expirations, even though indicated rates were based on certain expectations for these expirations,

V.                  Disregarding the value of standard-essential improvements and Ericsson’s share of these.

While the cap is purportedly to protect implementers from the “worst case” scenario with a “royalty stack;” in fact, nobody pays anywhere the maximum figure. On average, as I have shown and as others have confirmed, here and here, the aggregate royalty paid on mobile phones including smartphones is no more than around 5 percent including all generations of cellular SEPs, non-cellular SEPs and non-SEPs.  That is net of cross-licensing, but even those with nothing to cross license are not paying much more. For example, TCL managed to hold out payment to Ericsson for 7 years before trial. There was no evidence presented in that case that TCL was paying anywhere near or above an aggregate of 10 percent, nor that it would be doing so with payment to Ericsson at the rates set in Judge Selna’s Decision.  I have never seen evidence that anyone has paid an aggregate figure reaching or even approaching 10 percent for LTE licensing.

Fair shares for all

While the value created in an invention can be enormous, this is shared among various participants in the value chain. Ultimately, virtually all the benefits tend to flow downstream to end users. In the interim, some of the value is rightly captured in profits by technology developers, OEMs and service providers.

Judge Selna threw out the “Ex Standard” valuation methodology of Ericsson’s expert David Kennedy because, in Selna’s opinion, the values it derived were too high:

‘Ericsson's 4G Essential Patents confer $6.15 to $7.14 of value on a 4G handset. The Court finds that Kennedy's result are highly suggestive of royalty stacking; i.e, valuing individual components of a standard in manner that accedes the aggregate value of the standard.’

He also wrote: ‘it is simply not logical that two features could have a value in excess of Ericsson's entire portfolio.’

These statements confuse the concept of value to the user with the technology-licensing price to an OEM that is fair and reasonable or that would be negotiated commercially under market conditions. The above figures represent maxima — not figures demanded, let alone expected or likely to be anywhere near realised by licensors.

Consumer surplus is defined as the difference between the consumers’ willingness to pay for a good and the amount that they actually pay. On average, producers capture only small percentages of the total welfare gains from innovation, with consumers capturing the remaining surplus. Licensing rates determine how the licensors and licensees split the producers’ share of those total welfare gains.

The FRAND rate licensing price reflects two factors:
Value to consumer ($) x share of value to be accrued by licensor (%) = royalty to licensor ($).

Bottom-up valuation methods, including Ericsson’s Ex Standard approach derive an upper limit to what features are worth. What licensors may yield from them in licensing fees is a question of rent splitting and how the economic surplus is shared among licensors, their licensees and downstream parties including mobile operators, over-the-top service providers (e.g. Google, Facebook and Netflix) and end users.

Economics and market dynamics tend to determine outcomes including how economic surpluses are shared. For example, while research has shown that the value a consumer derives from Google search may be tens of thousands of dollars per year per user, Google is happily making huge profits while generating, only, hundreds of dollars per person. Hypothetical choice experiments can derive consumer values, even for services such as Google that have zero pricing for consumers. Internet platforms—such as Google— are under intense scrutiny by competition authorities due to their dominance and how they might be abusing that rather than for their high profits per se. In litigation, such as in TCL v. Ericsson, jurors must decide how much of the large economic surpluses generated by SEP technologies are awarded in licensing fees. 

Get (un)packing

While comparable licenses are potentially the very best valuation benchmarks because they reflect billions of dollars of trade with many licensing agreements over many years, not all of these can be employed directly before significant adjustments. Lump sum payments, differences between sales forecasts (most applicable because the assumption is that licenses should have been completed before trading) and actual sales (20:20 hindsight), and assumed “net present value” discount rates can all have significant effects on derivation of simple, one-way licensing rates from complex two-way licensing agreements including multiple terms and conditions.

I also explained the complexities and difficulties of “unpacking” comparable licenses to derive the effective one-way licensing rates in another article I published last year. One of the issues I discussed there is that licensing rates tend not always to be proportional to the number of patents— as assumed by both parties’ experts in TCL v. Ericsson—in unpacking Ericsson’s cross licenses to derive simple “one-way” licensing rates. Among many examples of that phenomenon, is IBM’s historic licensing approach, with pronounced non-linearity in licensing fees for more than five patents:

Number of Licensed Patents Covering the Product	Percentage of the Selling Price
1	1%
2	2%
3	3%
4	4%
5 or more	5%

        

Bottoms up

In a presentation I gave on the topic of top down and bottom up valuation methodologies at the Patents in Telecoms and the Internet of Things conference at Tokyo University in November 2019, I reused some analysis I have been presenting since 2015 showing how cellular functionality is priced by Apple at a much higher mark-up than other costs. Apart from the absence of cellular capabilities, the iPhone Touch 5^th Generation had very similar specifications to the iPhone 5c. However, the latter was sold for $450, which was more than twice the price of the former, despite costing only around $32 more in manufacturing.

Even more remarkable from an economic perspective was the fact that sales volumes for iPhones in 2014 were more than 12 times greater volume terms and 46 times greater in revenue terms than for all iPods.  Apple is free to price at any level it wishes and so its prices are only an indirect indicator of consumers’ perceptions of value. Relative sales performance is an outcome of its pricing. According to basic economic principles, if two products are close substitutes a much lower price for one would tend to result in much greater demand for versus the other product.  The much higher demand for the cellular devices— despite the much higher price— underlines the premium value in cellular and that no iPods are close substitutes for iPhones.

Out on the range

FRAND rates are not as range bound or unique, as many might imagine they should be. It all depends on the circumstances, other licensing terms and market developments over the years. On appeal, Justice Birss’ Decision in Unwired Planet v. Huawei was largely upheld and partially annulled. The higher court ruled several different sets of rates and terms could all be FRAND and that there did not have to be only a single FRAND rate, as Birss had ruled.[2]

I have been arguing here since 2013 that the FRAND rate range should be quite wide because, for example, patent pool participants legitimately tend to agree on relatively low rates in the interests of their downstream-oriented members versus legitimately agreed bilateral FRAND rates. I have not yet come across anyone arguing that royalty-free patent pools or “platforms”, such as that for the Bluetooth and USB standards, have rates that are non FRAND.  Common sense suggests that royalty free is not an isolated incidence of what is FRAND where other licensing arrangements set a significant non-zero FRAND rate. The range of rates that are FRAND must at least span between these figures, subject to other licensing terms and conditions.

In my abovementioned Tokyo presentation, I also showed that FRAND rates for video codecs have varied enormously over time and between competing patent pools. It is remarkable that the maximum licensing cost (set in dollars rather than as a percentage of the product selling price) for the MPEG 2 standard technology pool was 10 times higher than the 20 cents maximum for its higher-performing successor MPEG 4 (AVC/H.264)—even over the years in which use of the two standards was substantially overlapping. Many commercial factors were at play, including the fact that the latter standard was adopted in much higher volumes by being software based rather than hardware based and being used mostly in smartphones rather than in the domestic CE products including TVs, set top boxes and DVDs into which MPEG 2 was primary introduced.  

Have we had enough of experts?

As a testifying expert witness, I would be one of the last to propose getting rid of them: but none of them, nor their sponsors or acolytes, nor those who are swayed by them have a monopoly on wisdom or are infallible. Following those with prevailing views is a safe bet for those in the firing line of scrutiny with tricky and contentious decisions to make. But that does not make those views right. Bias towards consensus or the majority is not justice. As the New Policy Statement identifies, courts have misguidedly tended to follow a unique set of rules in dealing with FRAND disputes. 

On account of it finally being Brexit Day, today, it is most fitting to paraphrase British Member of Parliament and outspoken Brexiteer Michael Gove—who maintains he was misrepresented when it was reported he had said ‘people have had enough of experts’ in the highly contentious debate about the merits and costs of Brexit. Rather than do away with experts, one should always look for the dissenting voice. When there appears to be a settled consensus, look at the people who are challenging it. If their arguments are well constructed, then pay close attention; if you think it is just bogus nonsense then reject it— but test alternative propositions. The notion that things should be taken simply on trust because of someone’s position is an invitation to intellectual conformity and what we need is a vigorous, debating, dissenting culture.

While all but a relatively small proportion of SEP portfolio licenses are negotiated to completion between or among parties, it is time for some fresh thinking and judgement on where value lies and how it should be shared when there is dispute. I am looking forward to seeing what jurors will come up with.

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[1] A figure of 0.5 cents per SEP can be calculated by dividing Judge Selna’s 0.45% LTE royalty rate award by the figure of 125 patents declared essential and claim charted by Ericsson and then multiplying that figure by the approximate average selling price of $140 per LTE handset manufactured and sold by TCL in the relevant period from 2013 to 2015. The calculated figure increases to 0.9 cents if, as TCL’s Expert Dr Kakaes opined, only 70 of Ericsson’s patents are deemed standard-essential to LTE.

[2] As noted by Herbert Smith Freehills ‘One of the few points on which the Court of Appeal disagreed with Birss J was on the question of whether there can only ever be a single set of FRAND terms as between a potential licensor and licensee, as the judge had found at first instance.  The Court of Appeal were of the view that it was ‘unreal’ to think that two parties will necessarily arrive at precisely the same set of terms as two other parties (all of them acting fairly and reasonably and faced with the same set of circumstances).  Rather, the Court of Appeal held that a number of sets of terms may all be fair and reasonable in a given set of circumstances, finding that this approach was supported by the economic evidence.’ 

Judges Lourie and Newman of the Federal Circuit Critique Alice/Mayo and Myriad

The U.S. Court of Appeals for the Federal Circuit, in AatrixSoftware, Inc. v. Green Shades Software, Inc., recently denied a rehearing en banc concerning two cases that may make it more difficult to dismiss a claim challenged for lack of patent eligible subject matter under the Alice/Mayo test because of factual issues.  This leaves intact the ability of counsel to raise factual issues which may avoid early resolution of a patent infringement action on patent eligible subject matter grounds.  Notably, Judges Lourie and Newman, both of whom have graduate degrees in technical fields and are very experienced members of the Federal Circuit, requested in a concurring opinion that the U.S. Congress revisit patent eligible subject matter, particularly in light of the Alice/Mayo test and the U.S. Supreme Court “abstract idea gloss.”  Judge Lourie states:

The case before us involves the abstract idea exception to the statute.  Abstract ideas indeed should not be subject to patent.  They are products of the mind, mental steps, not capable of being controlled by others, regardless what a statute or patent claim might say.  Gottschalk v. Benson, 409 U.S. 63, 67 (1972) (“[M]ental processes, and abstract intellectual concepts are not patentable, as they are the basic tools of scientific and technological work.”).  No one should be inhibited from thinking by a patent.  See Letter from Thomas Jefferson to Isaac McPherson (Aug. 13, 1813) (“[I]f nature has made any one thing less susceptible, than all others, of exclusive property, it is the action of the thinking power called an Idea.”).  Thus, many brilliant and unconventional ideas must be beyond patenting simply because they are “only” ideas, which cannot be monopolized.  Moreover such a patent would be unenforceable.  Who knows what people are thinking?  

But why should there be a step two in an abstract idea analysis at all?  If a method is entirely abstract, is it no less abstract because it contains an inventive step?  And, if a claim recites “something more,” an “inventive” physical or technological step, it is not an abstract idea, and can be examined under established patentability provisions such as §§ 102 and 103.  Step two’s prohibition on identifying the something more from “computer functions [that] are ‘well-understood, routine, conventional activit[ies]’ previously known to the industry,” Alice Corp. Pty. Ltd. v. CLS Bank Int’l, 134 S. Ct. 2347, 2359 (2014) (alteration in original) (quoting Mayo, 566 U.S. at 73), is essentially a §§ 102 and 103 inquiry.  Section 101 does not need a two-step analysis to determine whether an idea is abstract.   I therefore believe that § 101 requires further authoritative treatment.  Thinking further concerning § 101, but beyond these cases, steps that utilize natural processes, as all mechanical, chemical, and biological steps do, should be patent-eligible, provided they meet the other tests of the statute, including novelty, nonobviousness, and written description.  A claim to a natural process itself should not be patentable, not least because it lacks novelty, but also because natural processes should be available to all.  But claims to using such processes should not be barred at the threshold of a patentability analysis by being considered natural laws, as a method that utilizes a natural law is not itself a natural law.

Judge Lourie also criticized the U.S. Supreme Court’s decision in Myriad Genetics:

[F]inding, isolating, and purifying such products are genuine acts of inventiveness, which should be incentivized and rewarded by patents.  We are all aware of the need for new antibiotics because bacteria have become resistant to our existing products.  Nature, including soil and plants, is a fertile possible source of new antibiotics, but there will be much scientific work to be done to find or discover, isolate, and purify any such products before they can be useful to us.  Industry should not be deprived of the incentive to develop such products that a patent creates.  But, while they are part of the same patent-eligibility problems we face, these specific issues are not in the cases before us.   Accordingly, I concur in the decision of the court not to rehear this § 101 case en banc.  Even if it was decided wrongly, which I doubt, it would not work us out of the current § 101 dilemma.  In fact, it digs the hole deeper by further complicating the § 101 analysis.  Resolution of patent-eligibility issues requires higher intervention, hopefully with ideas reflective of the best thinking that can be brought to bear on the subject.

There are numerous proposals for changing patent eligible subject matter before the U.S. Congress, for example, see the AIPLA proposal, here.