USPTO Finds No One Country or Firm "Winning" 5G Tech Race

The United States Patent and Trademark Office has released a report titled, “Patenting Activity Among 5G Developers.”  Notably, the USPTO Report states:

In recent years, many studies have attempted to identify a single global leader in 5G technologies. Because it is difficult to directly determine which company owns the most patent-protected technologies used in 5G networks, existing studies have examined company activity in 5G standardization work and patents and patent applications declared potentially essential to 5G standards.

This report provides a broader perspective by examining more than one data set and by recognizing the variances in significance that patents have to a sophisticated technical standard, such as 5G.

Specifically, the report examines which companies have fled for more patents at the USPTO in four technologies that have seen the most patenting activity among declared patent flings: Management of Local Wireless Resources, Multiple Use of Transmission Path, Radio Transmission Systems, and Information Error Detection or Error Correction in Transmission Systems. This approach narrows the focus to patent flings on technologies central to 5G innovation. In addition to measuring patenting activity in these four technologies, the report also examines certain patent fling attributes associated with greater value. By analyzing the question of the 5G patenting activity from a variety of perspectives, the USPTO has generated a rich set of results that are arguably more informative of 5G competitiveness than prior studies.

The USPTO’s examination shows that six 5G companies consistently competed in patenting activity: Ericsson, Huawei, LG, Nokia, Qualcomm, and Samsung. According to the data generated for the report, no single firm dominates 5G innovation at present.

In summary, the results suggest that there remains ongoing competition among these six 5G companies in patenting activity notwithstanding media claims that a single firm may lead. Given the complexity of the results, caution is recommended when reviewing media claims of 5G dominance.

The Report also notes some key takeaways:

• Unique among studies on 5G patenting activity, this report examines both (1) overall global 5G patenting trends, and (2) patent flings and value indicators in the four most patented 5G-related technologies. • Based on the report’s analysis of patenting activity, the six most active 5G companies are Ericsson, Huawei, LG, Nokia, Qualcomm, and Samsung. • The findings of the report call into question claims that any single firm or country is “winning.”

The report is available, here. 

Unreasonably-low royalties in top-down FRAND-rate determinations for TCL v. Ericsson

While Ericsson is a leading contributor to mobile communications standards, a US District Court in California has significantly undervalued Ericsson’s standard-essential patents (SEPs) by relying heavily on flawed “top-down” valuation analysis that prorates royalties by company for 2G, 3G and 4G based on SEP counting. This analysis applies a series of inaccurate assumptions which whittle down royalty rates from an understated notional maximum in a succession of unreliable steps. The resulting rates derived are a lot lower than those found in a European court’s FRAND determination for the same company in the same year (2017) and for the same 2G, 3G, and 4G patent portfolios. The differences between these US and European determinations are irreconcilable.

The perils of top-down methodology

Two nations divided

In late 2017, Honourable James V. Selna, Judge of the District Court of the Central District of California, handed down a court-ordered fair, reasonable and non-discriminatory (FRAND) license in TCL v. Ericsson.[1] His Court’s Decision used a top-down analysis, together with a comparable license analysis as a cross-check, to determine various FRAND rates. This approach might, at first glance, be perceived as similar to the FRAND determination in the UK's Unwired Planet decision.[2] However, in that case Honourable Justice Birss centered on Ericsson’s comparable licenses and used top-down analysis only as a cross-check. This difference, among others, led to significantly different results.

In TCL v. Ericsson, the Court’s tasks were to determine:

• Whether Ericsson met its FRAND obligation,
• Whether Ericsson's final offers before litigation, Offer A and Offer B, satisfy FRAND, 
• What terms are material to a FRAND license, and then supply the FRAND terms.

The Court was presented with two principal schemes for determining the proper royalty rates. TCL advocated a "top-down" approach which begins with an aggregate royalty for all patents encompassed in a standard, then determines a firm's portion of that aggregate. Ericsson used its existing licenses with similarly situated licensees (i.e. comparable licenses) to determine the appropriate rates. Ericsson also offered an "ex ante," or ex-Standard, approach which seeks to measure in absolute terms the value which Ericsson's patents add to a product by asking consumers how much they value certain product capabilities such as improved battery life.

Cap and prorate

My critique focuses on the use of top-down analysis adopted by the court in the TCL v. Ericsson case, with reference to some metrics used in the UK Unwired Planet decision. One reason for doing so is that both courts were presented almost identical evidence, but each judge chose a different approach, leading to the US District Court granting rates for the Ericsson portfolio that are less than half the rates determined by the UK High Court. I have been critical of top-down methodologies as the key element to determine FRAND royalties in various articles for more than a decade.[3] This critique is the latest in this series. It also follows my work as a testifying expert witness on behalf of Ericsson in the US case.

Top-down apportionments are almost invariably based on the notions of a fixed royalty rate aggregate or cap and royalty-rate proportionality based on patent counts rather than patent value. Unlike in patent cases, where courts definitively determine validity, infringement and essentiality patent-by-patent; no such determinations were made by the Court on Ericsson’s patents, or on the larger universe of all patents declared by their owners to be possibly essential to the cellular standards.

Therefore, any ostensible exactitude in the top-down figures derived is spurious. The Court notes that “The search for precision and absolute certainty is a doomed undertaking.” (Decision, page14). I agree: no methodology can provide that in FRAND-rate setting. For example, it is impractical in terms of time or money to conduct —on hundreds or thousands of patents in SEP portfolios—the kind of patent-by-patent analysis typically carried out on no more than a handful of patents in patent infringement and validity litigation.

Significant failings in the Court's top-down FRAND-rate determinations include starting with aggregate royalty rate figures that were too low and then whittling these down with a succession of largely erroneous adjustments:

• It mistakenly regarded announcements and other disclosures of companies' individual royalty rates and of expected aggregate royalties as multi-mode rates including two or more standards rather than as single-mode rates.
• These aggregate rates were then prorated with much greater scrutiny and adjustments to the count of Ericsson's SEPs in the numerator and than for the "relevant universe" of all SEPs in the denominator of the apportionment calculations:
• Only a subset of Ericsson's patents with claim charts were included in the numerator, whereas patents were counted in the denominator without any requirement for creation or submission of claim carts,
• Whereas all Ericsson's SEPs counted —whether or not patent essentiality was contested by TCL's experts—were evaluated by the parties for at least 50 hours per patent family, the average time spent evaluating entire patent families counted in the relevant universe was a cursory 45 minutes,
• Modest adjustments for SEP over-declaration in the relevant universe were based on highly unreliable "error rate" calculations,
• Substantial and unwarranted geographic adjustments were made to Ericsson's SEPs and royalty rates,
• Inapplicable adjustments were made for expiration of Ericsson's patents while disregarding significant value in new SEPs (e.g. for LTE Advanced).

Comps and other valuation methods

Comparable licenses, with the prices in these firmly established by several years of commerce and billions of dollars in licensing payments already made, can provide the most accurate and reliable basis to establish FRAND licensing rates. The inaccuracies there are in interpreting and adjusting figures and terms so that comparisons can be made among licenses on an apples-to-apples basis. Comparable licenses are widely accepted pricing benchmarks in patent cases around the globe, including those involving SEPs. There is also much to comment upon with respect to the (lack of) rigor and accuracy in the Court’s analysis and findings based on Ericsson’s existing licenses: for example, how cross-licenses were “unpacked” to derive “one-way” licensing rates. Nevertheless, I am leaving this and the Court’s rejection of Ericsson’s ex-standard valuation method for others to analyze in detail right now, or for me to do so elsewhere in due course.

Following my review of the courts’ decisions in both abovementioned cases, I continue to conclude that top-down valuation methodologies are subject to various shortcomings including inaccuracy (i.e. true error rates in determinations are unknown), unreliability (i.e. results are not reproducible consistently) and susceptibility to significant bias (because determinations are so subjective and devoid of an audit trail on how determinations are made). Centering on a top-down methodology that is largely based on only cursory standard-essentiality determinations by TCL's experts in this case, as the primary means of apportioning FRAND rates is untrustworthy.

The above is a summary of my critique of the Court's top-down analysis which is available in full, here, and also in the SSRN eLibrary.

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[1] http://images.law.com/contrib/content/uploads/documents/1/TCL-v.-Ericsson.Decision-part-1.pdf

[2] Huawei v Unwired Planet, [2017] EWHC 711 (Pat), 5.April 2017 https://www.judiciary.gov.uk/wp-content/uploads/2017/04/unwired-planet-v-huawei-20170405.pdf

[3] http://www.wiseharbor.com/wp-content/uploads/2018/01/Ezine-article-on-royalty-caps-April-2008.pdf, http://www.rcrwireless.com/article/20111116/opinion/analyst-angle-no-consensus-on-which-patents-are-essential-to-lte/, http://www.ip.finance/2013/11/absurd-frand-licensing-rate.html (Click through to full article, page 21) and http://www.ip.finance/2017/05/do-not-count-on-accuracy-in-third-party.html

Patents and Share Prices - Ericsson

Apple and Ericsson have been engaged in a number of patent infringement suits over the past few years. Finally, on Monday Ericsson announced that it had reached a settlement with Apple under which Apple would be granted to all of Ericsson's standard-essential patents, as well as to certain other patent rights (which are not named). We've often reported on these patents on this blog and my fellow contributor Keith Mallinson has studied them extensively and their effect on competition.

The Apple settlement will apparently boost Ericsson's revenue from licensing of intellectual property rights in 2015 to SEK 13-14 b (around USD 1.5 billion) compared to 2014's revenue of SEK 9.9 bn reported here. It's not surprising that Ericsson's share price jumped yesterday from Friday's closing price of USD 9.12 to USD 9.62 at 09.50 Eastern time after announcement and closed today (Tuesday) at USD 9.56. Apple's price did not change much during the same period.

It's clear that licensing revenue is becoming a significant contributor to Ericsson's bottom line. In 2014 operating income was reported to be SEK 11.1 Bn, which included a payment from Samsung for an IPR licence of SEK 2.1 Bn.  The amount paid by Apple remains confidential and will include an ongoing royalty (as does the Samsung agreement) and so there will be further contributions to Ericsson's bottom line over the next few years.

The European Commission, among other organisations, have been concerned that the smartphone patent wars damage competition, as reported in the Financial Times. The Apple/Ericsson agreement show how patent can work - Ericsson receive additional revenue for their work on the development of telecommunication standards and Apple pay for access to this technology.

Nortel sells its patents to Ericsson

I am indebted to Joff Wild who reported on his IAM blog the recent developments on the Nortel asset sale. A few weeks back we discussed the bid by Nokia Siemens Networks on our post and significantly noted that the LTE patent rights were not included in the bid for USD 650 Million. Swedish company Ericsson pipped them with a massive USD 1.13 billion offer which included apparently the patent rights.

This apparently has upset Canadian company RIM and a number of politicians in Canada would like to see the bid overturned on grounds of national security. The Dow Jones Newswire reports, however, that the Canadian industry minister has yet to make a decision.

Our post quoted JPMorganChase who apparently had valued the patent rights at USD 2.9 billion - although a more realistic value might be USD 950 million. If we look at the USD 480 million difference in Ericsson and NSN bids and do a net present value analysis it does look as if those LTE patents would be worth around USD 950 million over their lifetime.

Ericsson have, of course, got their own portfolio of LTE patents. So they probably don't need any more to "swap" with other players. A cynic might suggest that the main reason for purchase would be to ensure that the IP rights remain in safe hands and don't get snapped up by a "troll" who wishes to extract cash from the telecommunications companies.

More on Licensing in the Mobile Telecommunications Space

Eric Stasik of Avvika in Stockholm was kind enough to follow up my recent blog entry of licensing rates in the mobile telecommunications sector with the following additional comments:


On the matter of telecom royalty rates, even more interesting than the announcement by Nortel is the recent revelation by Qualcomm:

"Qualcomm COO, Len Lauer revealed on the occasion of a Merrill Lynch Global Technology Conference on June 03 that the company normally charges 4%-5 % as royalty for 3G shipments. The COO further revealed that the company had put royalty rate at 3.25 % when it was asked by European standards group to submit a rate for LTE."

(http://www.telecomtiger.com/Corporate_fullstory.aspx?storyid=6478&flag=1&passfrom=topstory&section=S162)

The European standards group referred to is NGMN presently under the auspices of ITU.

In addition to Nortel's 1% we have Ericsson (http://www.ericsson.com/technology/licensing_programs/index.shtml) who earlier announced an LTE royalty rate of 1,5%.

If you take 3,25% + 1% +1,5% you're already at 5,75%.

Now add to this Nokia + Motorola + InterDigital + another score (or more) of essential patent holders and you arrive at a number much larger than the "single digit royalty" which Ericsson and Nokia are talking about with regard to LTE. I would be surprised - indeed stunnned - if any ex ante exercise on 4G/LTE produced a number less than 20-25%. A "single digit royalty" is simply not credible.