Curing contagion and harm from previous changes in IP policy and law for SEP licensing

Following IEEE’s purported “clarification” and “update” of its Patent Policy in 2015, with a non-objecting Business Review Letter from the U.S. Department of Justice at that time, the Department has now “supplement[ed], update[d] and amend[ed]” its 2015 BRL with a new BRL.

The Department complains in its new BRL that its 2015 BRL was “frequently and incorrectly” cited as “an endorsement of the IEEE Policy.” The new BRL emphatically and with mettle renounces Standard Setting Organization patent policy changes that were proposed by the former head of the Department’s Antitrust Division, Assistant Attorney General, Renate Hesse, together with those that were detailed in IEEE’s 2015 Patent Policy.

This Patent Policy change was damaging to IP owners and their incentives to contribute to the standard setting and development process. Misinterpretation of the BRL, including by foreign authorities, has resulted in harmful policy developments and legal overreach in Standard-Essential Patent disputes.

As also requested by the Department most recently, it is about time IEEE re-reconsidered its Patent Policy given adverse developments at this SSO and with changes in US law and policy with respect to SEPs since 2015.

A low watermark for developers and contributors of SEPs

The former AAG, publicly beckoned SSOs to weaken patent owners’ rights with her disregard for considerations of patent “hold out.” In a 2012 speech entitled Six “Small” Proposals for SSOs Before Lunch she suggested that SSOs include terms in patent policies that make injunctions harder to obtain, restrict cross-licensing and “explore setting guidelines for what constitutes a F/RAND rate.” She also encouraged SSOs to overcome any concerns they might have about antitrust actions against their revised patent policies by “seek[ing] ex ante review through [the Department’s] business review procedures.” This was presumably to reassure any SSOs that might adopt her proposals would not find adverse antitrust actions being formulated against them subsequently.

A couple of years later, IEEE-SA (responsible for the 802.11 WiFi standard among many others) changed its Patent Policy in 2015, touting it as “clarification” and an ”update,” but it actually set out various wholly new terms that are restrictive and harmful to patent owners. In the face of significant resistance by IEEE members who were technology contributors, and via a highly controversial and secretive process, the new patent policy significantly restricted flexibility in the Reasonable and Non-Discriminatory commitment with the following conditions:

• SEP holders must waive their rights to seek any injunctions until they have successfully-litigated claims against unlicensed implementers to conclusion in a court of appeals;
• Reciprocal cross-licensing cannot be required, except for patents reading on the same standard;
• Royalty charges “should” be calculated based on the “smallest saleable” implementation of any portion of the standard and comport with a reasonable aggregate royalty burden of the relevant standard; and
• Only licenses for which SEP holders have relinquished the right to seek, enforce, or even threaten, an injunction can qualify as “comparable licenses” for determining RAND royalties.

The Patent Policy “update” also obliged patent holders to be bound by the IEEE RAND commitment to license their patent to any “Compliant Implementation,” meaning that a patent holder making such a commitment cannot opt to license its patents for using the IEEE standards at only certain levels of production (e.g. entire end product device, as opposed to chip or module).

The cause’s harmful effects

Following my in-depth empirical analysis on the effects of this patent policy change, published in September 2017—which showed that the standardization process was being jeopardized given the widespread unwillingness of technology developers to pledge their patents to the new Patent Policy—in a review of IP policy developments in December 2017 I also wrote:

“[Assistant Attorney General Makan Delrahim], the new head of the US DoJ antitrust division is reinforcing a trend that shifts the balance between IP rights and antitrust restrictions.[1] But significant harm has already also been done internationally with contagion from prospective or actual policy positions that were previously more hostile or equivocal on IP owners’ rights. For example, some Asian antitrust agencies have welcomed, for reasons of industrial or protectionist policy, previous attempts in the ‘West’ to weaken rights of SEP owners. Actions have included seeking to reduce royalty returns, imposing chip-based licensing and reducing the availability of injunctions. Getting the Asian authorities also to reverse their positions in IP policy, for example, on antitrust enforcement, is a daunting task.”

I, among various others, unwittingly, incorrectly, yet unsurprisingly misinterpreted the extent of what the Department had stated in its 2015 BRL. This BRL purported a patent “hold up” problem that the "Update" to IEEE’s Patent Policy “may further help to mitigate.” And it was a cunning sleight of hand by the former AAG to propose more in her aforementioned speech than could be legally defended as “endorsed” by the Department’s BRL.

The new BRL clarifies and underlines the Department’s position by stating that “[b]ased on our analysis in 2015, we indicated there was no intention at that time to challenge the proposed policy—nothing more. Any representation by IEEE—or other stakeholders, government enforcers, or commentators—that the Department has endorsed the Policy is wrong, causes confusion, and must stop.” (all BRL citations omitted here and elsewhere.) So, while I argued from the outset against such a Patent Policy change—given the adverse effects it would have on patent holders, the standard development process and how it would contaminate policy making and licensing enforcement abroad—with my perceptions prejudiced by separate public statements from the former AAG and from analysis in the 2015 BRL, I also incorrectly inferred at least an implicit “endorsement” of the Patent Policy change by the Department in its issuance of the 2015 BRL:

‘Curing and reversing the contagion

The detrimental effect of the patent policy change and supporting BRL is possibly even more severe outside of IEEE standards in some jurisdictions. The 2015 IEEE patent policy change, endorsed by a BRL from the previous DoJ antitrust head, is dangerously serving as a template for antitrust enforcers worldwide – not only with respect to IEEE standards, but also for other standards such as 3GPP’s mobile communications standards. This is like pushing at an open door in nations where antitrust enforcement is being used as an instrument of industrial or protectionist policy to support manufacturing-oriented companies who would like to pay less for the IP they are reliant upon that is developed in other nations, significantly including the US and Europe.

Contributing technology to standardisation efforts and making a FRAND commitment is voluntary. If antitrust agencies construe IEEE’s patent policy as only a “clarification,” and therefore impose it on holders of SEPs to various [SSO’s] standards the effects could be severe. They might bind patent holders to new conditions that they were never willing and never agreed to accept— for IEEE standards and for other standards. The latter would include standards such as 3GPP’s where some technology developers’ business models, development of standards and their success are much more dependent on payment of royalties than with IEEE standards. 3GPP standards account for much more in total royalties than IEEE standards. Delrahim rightly states that “[w]e should not transform commitments to license on FRAND terms into a compulsory licensing scheme.”

Antitrust agencies including NDRC (China), KFTC (Korea) and TFTC (Taiwan), as well as many other organisations and individuals have been swayed by or receptive to policy positions of US and European government agencies that were against or ambivalent about upholding patent rights in interoperability technology standards including those of many [SSOs] including IEEE, 3GPP (including regional partners such as ETSI).’

The new BRL also notes that:

“the misinterpretation of the 2015 Letter appears to extend around the world and may have influenced foreign enforcement activity. Over the last several years, some foreign competition authorities have misapplied the 2015 Letter in support of enforcement actions against essential patent holders that have no basis under U.S law, raising the prospect that the business review process could be subject to intentional manipulation abroad. For instance, in 2017 a major economy’s competition agency claimed the Department expressed support for IEEE’s injunctive relief provisions in connection with a liability decision penalizing an essential patent owner. And, more recently, a policy report authored for another jurisdiction incorrectly characterized the 2015 Letter and other Department letters as “soft precedent” to guide SSOs in designing IPR policies. 

IEEE’s advocacy may have informed the broad misinterpretation of the 2015 Letter and led to mistaken reliance on it as guidance for foreign enforcement activity. The potential negative impact to global enforcement policy from such a misunderstanding is extensive, commensurate with the wide proliferation of antitrust agencies around the world and the scope of remedies sometimes sought by jurisdictions.”

However, I also noted in 2017 that IEEE remained alone in unfairly manipulating its patent policy to the detriment of patent owners, with other [SSOs] resisting such harmful change:

‘Except for IEEE, [SSOs] have reaffirmed longstanding IP policies that uphold the rights of patent owners. For example, major European [SSOs] CEN and CENELEC state that [SSOs] should not provide guidance on, or impose compliance with, FRAND pricing, valuation, and rate-setting methodologies, and they “firmly believe that pricing should be determined by patent holders and implementers outside of SSOs in the context of bilateral negotiations.”’

Backspin

Recent developments in policy and law indicate that the undermining of fundamental patent rights and fixed, formulaic prescriptions for determining royalties outside and inside of court are out of favour. 

In its attempts to limit damage and effect reversal in the direction of policy change, the new BRL states that “[t]he Department urges IEEE to ensure that neither it nor its members characterize the 2015 Letter as an endorsement of IEEE’s Policy.” And it indicates “the Department’s concern about mischaracterization of the Letter is also animated in large part by recent changes to US law and policy that render aspects of the 2015 Letter inaccurate.” Therefore, “[t]he Policy limits the basket of rights available to an essential patent owner such that it may undercut current US law and policy.”

The Department highlights in its new BRL:

• “serious harm to innovation that could arise from limiting injunctive relief.” This is because “injunctive relief is a critical enforcement mechanism and bargaining tool—subject to traditional principles of equity —that may allow a patent holder (including an essential patent holder) to obtain the appropriate value for its invention when a licensee is unwilling to negotiate reasonable terms.”
• “key risk in relying solely on the smallest saleable unit method, to the exclusion of others, is that real-world licenses often set royalties based on end-product revenue. Parties should not be discouraged from relying on these licenses—particularly since this sort of market-based evidence is often “the most effective method of estimating [an] asserted patent’s value.”

The heart of the matter

A major policy contention over many years is the extent to which efficient FRAND licensing can be disrupted, unfairly distorted or prevented by patent “hold up” by patent owners seeking excessive royalties or by patent “hold out" by implementers seeking sub-FRAND royalties, or to delay payment or avoid it altogether. According to the new BRL, ‘The 2015 Letter focused on the risk of so-called “hold up” by patent-holders without considering the possibility of “hold out” by patent implementers or the Policy’s effect on patent holders’ innovation incentives.’ It also states that ‘The 2015 Letter has proven incorrect, however, in anticipating that “hold-up” would be a competitive problem. Rather, concerns over hold-up as a real-world competition problem have largely dissipated.’ The Department notes that “studies and analyses conducted in the intervening years about hold out have confirmed that these are serious concerns, as well.” In my analysis and opinion, while purported concerns about patent “hold up” have never been factually substantiated, patent “hold out” is a pervasive problem. Accordingly, ‘The Department since has recognized that “[c]ondemning [hold up], in isolation, as an antitrust violation, while ignoring equal incentives of implementers to ‘hold out,’ risks creating ‘false positive’ errors of over-enforcement that would discourage valuable innovation.”’

The Department now urges SSOs “to promote balanced representation in decisional bodies so that diverse interests are represented and [SSO] decisions do not shift bargaining leverage in favor of one set of economic interests, including the interests of either implementers or patent holders.”

Making amends

The new BRL seeks to limit the damage caused at home and abroad by remarks made by the previous AAG, by what was described in the 2015 BRL and by what was incorrectly inferred to be Department policy at that time. While absence of evidence in support of patent “hold up” theory would have made it indefensible for the Department to “endorse” IEEE’s 2015 patent policy with advocacy in the 2015 BRL, non-objection to that patent policy in that BRL and these other statements have had adverse effects at home and abroad. While the new BRL will help arrest and reverse harmful change beyond IEEE in the US and elsewhere, I will watch with interest to what effect this and other recent developments in law and policy might have on patent policy at IEEE.

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[1] The new trend was already being set by other actions including: (i) dissenting statements of US FTC Commissioner Maureen Ohlhausen in the matters of (a) Robert Bosch, (b) Motorola Mobility and Google and (c) Qualcomm; (ii) the CJEU’s judgement in Huawei v ZTE establishing obligations applying to both sides of an SEP-licensing agreement. The European court also stated that the FRAND commitment “cannot negate the substance of the rights guaranteed to the proprietors by Art. 17(2) of the European Charter of Fundamental Rights.”

Development of innovative new standards jeopardised by IEEE patent policy

I recently wrote a paper for 4iP Council about the effect of the Institute of Electrical and Electronics Engineers' (IEEE) 2015 patent patent policy change on submissions of Letters of Assurance (LOAs) indicating whether patents are pledged to the new policy. In this, I have reviewed some third-party analysis on adoption of the new patent policy and LOAs. And, I have also included my own analysis of LOA data available from IEEE. The summary of my paper is reproduced below with some updated figures from one third-party analyst and with the addition of an IEEE logo:

Development of innovative new standards jeopardised by IEEE patent policy

In March 2015, IEEE significantly amended its patent policy in what was couched as an “update” but that seeks to significantly revise commitments from parties holding patent claims essential to IEEE standards to license those rights on reasonable and non-discriminatory (RAND) terms. Changes disallow patent holders from receiving any value attributable to the standards, require licensing at the smallest saleable patent practicing unit level, and deny these rights holders entitlement to seek an injunction against an unlicensed implementer until appellate review is exhausted.  IEEE’s stated objective was to protect implementers from patent holdup, which was alleged without any substantiation.[1]  IEEE is promoting, by reducing technology licensing costs, the short-term interests of certain implementers while undermining standard-essential patent values and the ability of SEP owners to receive adequate compensation, they are entitled to, from licensing their SEPs.

As I predicted in the IP Finance blog prior to the adoption of this controversial new patent policy,[2] and as indicated by others including senior government officials,[3]  the purported “clarification” is significantly jeopardising the IEEE Standards Association as a venue for development of open technology standards that include significant patented intellectual property. Large proportions of contributors to IEEE standards are now unwilling to provide “positive” Letters of Assurance (“LOAs”) under IEEE’s new patent policy.

In this paper, I have reviewed available data on LOAs and some third-party analysis of this. My conclusions are striking: almost three quarters (i.e. 73 percent) of LOAs for the IEEE flagship 802.11 WiFi standard, accepted by IEEE and posted on its website in the 18-month period to June 2017, are “negative” LOAs, indicating the submitter’s legitimate ex ante refusal to pledge RAND licensing under the new patent policy. Nearly half (i.e. 47 percent) of all accepted LOAs posted on the IEEE website over the same period are negative LOAs. More than one third (i.e. 42 percent) of companies portrayed as leaders with LOAs to IEEE standards are unwilling to pledge their SEPs under the new patent policy or have not provided LOAs when asked to do so.

The new patent policy has created a perverse situation among patent owners and implementers.  In the absence of positive LOAs, implementers are left uncertain about which patent policy applies, if any, and about future ability to implement the standard. Therefore, implementers may be unclear whether many SEPs are subject to new licensing terms, the old licensing terms or are not subject to RAND licensing terms under any patent policy at all. This is unacceptable. Proponents of the new patent policy are also lamenting this lack of clarity, while trying to use this as a pretext to breach binding contractual agreements between IEEE and patent owners in previously-accepted LOAs.[4]

Chart 1: More than one third (10/24=42%) of companies IPlytics portrays as leaders with LOAs to IEEE standards are unwilling to pledge their SEPs under the new patent policy or have not provided LOAs when asked to do so

Source: IPlytics empirical study report on patenting and standardisation activities at IEEE[5] (black and green); WiseHarbor added Chart titles in bold black, identifiers and annotations in other colours.

Orange is the successor to France Telecom.
“Not applicable:” Positive blanket LOA accepted prior to March 2015 under previous patent policy.

Approvals for “standard-amendments” 802.11ah and 802.11ah deferred with policy impasse

There is deadlock between the two sides of this argument – largely, patent owners who seek adequate compensation from licensing their SEPs versus some implementers[6] who would like to minimise their costs. Despite attempts by advocates of the new patent policy text to portray IEEE standardization work as continuing to proceed well, to the contrary, this is an illusion with unreconciled differences regarding applicable patent policy and LOAs. Previous attempts to significantly undermine rights of patent owners in other standard development organizations (SDOs) have failed: for example; with an intellectual property rights (IPR) policy change at ETSI in the 1990s that was abandoned before taking effect.

Unwillingness of SEP holders to pledge to the new patent policy are delaying standardization approval decisions. IEEE seeks to approve standards for which all known SEPs are pledged under the new patent policy with accepted IEEE LOA forms. But it is failing in this objective with an unprecedented high number of negative LOAs submitted and because LOAs requested from others are not forthcoming and should therefore be regarded as “missing.” Negative LOAs that have been accepted by IEEE are, for example, with standard-amendments 802.11ai and 802.11ah. However, numerous other prospective negative LOAs have been rejected by IEEE because patent owners have sought to indicate – and IEEE has refused to allow – willingness to license on a basis other than the new patent policy, such as on the basis of the previous IEEE patent policy. With numerous known SEPs for which there are no licensing commitments, the above amendments to the 802.11 standard have only been “conditionally approve[d]” by the IEEE-SA’s Standards Board.[7] 

Conditional approvals are merely deferral tactics because there can be no reasonable expectation that the LOA conditions preventing full approval with the new patent policy will ever be met. Patent holders who have submitted negative LOAs are not going to change their minds and replace them with positive LOAs in the prevailing circumstances. Similarly, it seems very unlikely that those who acknowledge receipt of a request for an LOA but refuse to submit a positive LOA are likely to change their minds about doing so and submit a positive LOA.  Deferring full approval until these two amendments are rolled up into the next version of the entire standard (i.e. 802.11/D10) amounts to “kicking the can down the road.” [8]

This impasse has occurred because many contributors to IEEE standards are, independently of each other, unwilling to pledge assurances under the new patent policy, which was established without consensus[9] among a closed group of interested parties. The new patent policy text is purported to be a “clarification” of existing patent policy and not a new patent policy — begging the question why many of the new positive LOAs submitted merely restate previous LOAs already-submitted pursuant to the previous patent policy needed to be submitted at all. It is, instead, increasingly creating ambiguities and concerns that courts might interpret new conditions as mandatory. Many patent owners are unwilling to agree to the new patent policy because being bound by it could undermine their licensing businesses — including pre-existing agreements.

Adjusted LOA counts have reduced dramatically since introduction of new patent policy

The counts of submitted LOAs have been misleadingly presented to suggest that the new patent policy is having no overall adverse effect on licensing commitments. The numbers of accepted LOAs since the patent policy change have been inflated by a large proportion of “duplicate” LOAs (resubmissions of LOAs for standards for which there are already existing LOAs) that are not required by IEEE bylaws. Instead, after some well-justified adjustments to LOA counts for these and for negative LOAs and “missing” LOAs (in cases where IEEE sought from a disclosed essential patent holder, but did not receive, an accepted LOA), figures indicate that LOAs are dramatically and statistically significantly lower since the patent policy change. This indicates major adverse effects.

Chart 2: Rejection of IEEE’s new patent policy is indicated by dramatic fall in positive LOAs[10]

Continuing activity in technical working groups, for now, is no assurance this will persist

Technical working group activity is continuing while participating companies wait to see if conflicts will be resolved so that new standards, as well as improvements and amendments to existing standards, will be approved. However, any suggestions that the continuing rate of Project Authorization Requests (PARs) — to commit IEEE-SA resources to new standard-development work — indicate that all is well in IEEE standardisation are phoney. Many IEEE projects do not include many, or even any, patented technologies: so, these might be unaffected by difficulties with the new patent policy. The standards that provide significant innovative value beyond compatibility are rich in patented technologies. LOAs identify these patents, their ownership, and the basis upon which they can be licensed. For those standardisation projects that include significant patented technologies, it is what is occurring with LOAs, rather that PARs, that spells trouble.

It could be several years before it is evident how much IEEE standardisation has been harmed. For example, clarity (to implementers, in particular) could be rapidly restored by allowing patent owners optionally to indicate their willingness to license based on the old patent policy. Meanwhile, IEEE standardisation work including supporting R&D and product implementation will suffer as participants consider switching to other SDOs. By then it could be too late to fix things.

The whole story

My entire paper can be accessed from 4iP Council's web site, here. Since its publication this month, Ron Katznelson has updated his analysis to 20th September 2017, here, as also reflected in my summary for IP Finance, above.

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[1] IEEE-SA request for business review letter, November 7, 2014; http://www.gtwassociates.com/answers/DOJ%20PDF/IEEEBRL2015/PatentHoldUpasRationaleIEEE_Bus_Review_Document_02_11072014.pdf

[2] Keith Mallinson: IEEE will jeopardise its attractiveness as venue for standards development if proposed new IP policies are adopted, February 6, 2015; http://www.ip.finance/2015/02/ieee-will-jeopardise-its-attractiveness.html

[3] See e.g. Former Rep. Terry Lee, Don’t turn off Wi-FI (January 8, 2015), available at http://thehill.com/blogs/congress-blog/technology/228817-dont-turn-off-wi-fi; Adam Mossoff, Reality Check: Weakening Wireless Technology Patents Hurts Everyone (RCR Wireless News, January 28, 2015) available at http://www.rcrwireless.com/20150128/opinion/reality-check-weakening-wireless-technology-patents-hurts-everyone-tag10; Leah Nylen and Lewis Crofts, EU Warns of Impact of IEEE’s Patent Policy Change (MLex, January 27, 2015); U.S. Senator Christopher Coons letter to U.S. Department of Justice (14 January 2015) available at http://www.advancingengineering.org/christopher-coons.    

[4] See March 2017 slides by Gil Ohana on behalf of Cisco at http://grouper.ieee.org/groups/pp-dialog/email/pdf6eBTMFaO8V.pdf,  http://grouper.ieee.org/groups/pp-dialog/email/msg00437.html and comments in response at http://grouper.ieee.org/groups/pp-dialog/email/msg00418.html.

[5]https://asoft20107.accrisoft.com/atfrand/clientuploads/news/IPlytics_2017_Patenting%20and%20standardization%20activities%20at%20IEEE.pdf

[6] This paper’s author recognises that a large proportion of implementers are also patent owners.

[7] http://standards.ieee.org/about/sasb/1216sasbmin.pdf#page=22

[8] “Put off confronting a difficult issue or making an important decision, typically on a continuing basis.” Oxford Living Dictionaries.

[9] To mask it, in the fall of 2014, the IEEE-SA removed the most-prominent indication of its previously long-standing principles of consensus, due process and openness from its website.  See comparative website snapshots http://web.archive.org/web/20140723051820/http://standards.ieee.org/about/strategy.html versus new page:  http://standards.ieee.org/about/strategy.html.

[10] Standard Essential Patents – the empirical record since adoption. Symposium on Antitrust, Standard Essential Patents, and the Fallacy of the Anticommons Tragedy, Berkeley, CA. October 29, 2016. [Updated March, 2017 in my full report and, again, to September 2017 in this summary for IP Finance] Ron D. Katznelson, Ph.D.* http://bit.ly/IEEE-LOAs

Fair returns on R&D from SEP licensing with smartphone success and upcoming 5G

Patent licensing remains a flashpoint for mobile telecom as it moves towards a future of 5G and the Internet of Things (IoT)

Cellular technology pioneers are being marginalized with diminished financial returns on their research and development investments while leaders in devices and “over-the-top” services are flourishing. Calls to weaken the basis of licensing standard-essential technologies are misplaced. There are no indications of profiteering or harm caused by licensors. All evidence is to the contrary.

Innovations in standards including technologies based on standard-essential patents can be exploited in product and service implementations by anyone. Undermining the value of SEPs will choke off vital R&D investments along the path to “5G” and cause other harmful disruptions to the mobile ecosystem, including reduced contributions to or withdrawals from standard setting.

The innovation game

As I noted here a couple of months ago in a cellular industry trade publication I also write for, innovation in cellular and other supporting technologies as well as in applications will be able to sustain the rate of smartphone improvements. New technologies can also advance the “internet of things,” automotive and other capabilities. And the financial rewards could be substantial. A European Commission study has identified a potential annual benefit to its member states of 113 billion euro ($124 billion) annually as early as 2025, from deploying 5G, with trickle-down benefits from 5G investment totaling as much as 141 billion euro.

However, technology developments and infrastructure demand large investments globally. According to a study report on the “mobile revolution,” by the Boston Consulting Group in 2015, “to reap the economic benefit of [5G] networks and beyond, mobile players will need to invest approximately $4 trillion in R&D and capital expenditures by 2020.” BCG estimates mobile players invested an aggregate of $1.8 trillion in capex and R&D from 2009 through 2013, and are expected to invest approximately $4 trillion between 2014 and 2020. While the bulk of this is capex by mobile operators, BCG also estimates R&D technologies continue to accelerate, reaching almost $100 billion annually, and growing at a rate of 9% year-over-year since 2009.

R&D investments by their very nature can be very risky: consequently, these rely on the possibility that adequate revenues might be earned to compensate for these risks and the long time it takes to generate these revenues. With short device lifecycles, returns on product R&D are relatively quick and can be reasonably certain for market leaders with new models annually in popular lines such as iPhone and Galaxy, notwithstanding the occasional disaster like the incendiary Galaxy Note 7. Returns are significantly slower and less certain in network equipment product developments, for example, with big bets on once-per-decade generational changes including GSM, WCDMA/HSPA, LTE and upcoming 5G.

In the case of the fundamental technologies that contribute to these standards, lead times before any revenues can be generated are even longer and risks are much greater. For example, less than 17% of contributions to Third Generation Partnership Project standards have been approved for inclusion in the standards. Many contributions are based on and preceded by many years of R&D by individual companies before a technology is presented to any standard-setting organization working group. Nevertheless, for those technologies that are adopted the entire ecosystem including chip, device and network equipment manufacturers, as well as network operators and OTT service providers benefit from improved capabilities. In cellular, these have included thousand-fold increases in data rates over little more than a decade, much reduced latencies, higher network availability, high-definition voice, plunging costs per gigabyte for operators and users, and so on.

Ecosystem disruptions

However, there is significant and increasing divergence between those who have largely borne the costs of developing the standard-essential technologies and those who benefit most financially from exploiting them. Whereas most of the developers of the standard-essential technology employed by all implementers used to be vertically integrated with mobile phone manufacturing, those companies including Qualcomm (2000), Alcatel (2005), Siemens (2005), Motorola (2012), Ericsson (2011) and Nokia (2014) have sold off their handset businesses. The sellers, including those that have merged, have continued with sales of network equipment or chips and patent licensing. Handset brand names Motorola and Alcatel have lived on under licensing arrangements with Lenovo and TCL, respectively.

Handset OEM market shares have therefore changed dramatically.And many new entrants have appeared.Meanwhile, the mobile devices market has expanded enormously along with demand growth for data services. These are the largest money makers in the mobile ecosystem, while use of OTT services including Facebook, YouTube and Netflix has surged on mobile devices, and as mobile advertising revenues have grown to nearly half of total internet advertising revenues.

Collecting the rents

Revenues and profits in smartphones are much larger than those generated by the leading five cellular SEP licensors that derive most of their revenues from sales of network equipment or chips. The difference is widening with a lackluster market in network equipment as LTE orders taper off. For example, Ericsson recently issued a profit warning and its interim CEO Jan Frykhammar forecast the total mobile infrastructure (RAN) market is set to fall by between 10% and 15% this year, and by between 2% and 6% in 2017.

Economic rents, which are profits exceeding the cost of capital, are increasingly accruing to leading device OEMs and OTT service providers in the mobile ecosystem. Largely from exceptional commercial success with dominance in mobile, Apple with iPhone and Alphabet with Google’s Android have become the world’s two most valuable companies. Sales of iPhones accounted for 60% of Apple’s revenues last quarter. Its service revenues in mobile are in addition. A news release reporting Apple’s fiscal fourth quarter earnings quoted its CEO, Tim Cook, as saying “we’re thrilled with … the incredible momentum of our Services business, where revenue grew 24% to set another all-time record.” Apple’s services revenues (including Apple Pay, Apple Music, iTunes and its App Store) generated $24 billion revenues in the year to September 2016. This substantially exceeds all cellular SEP licensing fees paid, as indicated in the next section, even though Apple’s user base from which it derives these revenues is only around 1 billion devices, in comparison to 7 billion cellular devices connected worldwide. With Android in 80% of smartphones, Google also profits most significantly from mobile, also including apps, search and advertising. On a conference call with investors this summer, Google CEO Sundar Pichai said “mobile is the engine that drives us.”

Paying their dues

Companies that develop SEP technologies are highly dependent on licensing revenues as well as their sales of network equipment or chips. SEP licensing brings compensation from those who implement the standard-essential technologies in their products to those who develop those technologies. The widening disparity in revenues and profits between the smartphone device market and those who significantly rely on cellular SEP licensing revenues limits the ability of the latter to invest in technology development for standardization and implementation ahead of the anticipated 5G launches from around 2020.

Cellular SEP licensing revenues at no more than around $20 billion are modest in comparison to and are being significantly outpaced by growth in other ecosystem revenues and costs. There are around $1 trillion dollars in operator service revenues. Total handset revenues have increased from $378 billion in 2013, to $439 billion in 2015, according to IDC.The five leading mobile SEP licensors that contributed around half the patents declared essential to 3GPP standards collectively generated approximately $11 billion per annum in licensing fees between 2013 and 2015. This accounts for more than half the $20 total billion (at most) paid to all licensors. Licensing fees have declined slightly as a percentage of handset revenues.

Unholy intervention

Despite the stellar financial performance of the leading device OEMs and OTT players, there is mounting pressure to change consensus-based and established SEP-licensing practices, including by government intervention, which would further undermine the ability of cellular technology vendors to make an adequate return on their standard-essential technology investments through licensing. Measures such as making injunctions more difficult to obtain, enforcing licensing or calculating royalties at the chip level, as advocated by the so-called Fair Standards Alliance and as already implemented in the Institute of Electrical and Electronics Engineers new patent policy are all undermining SEP technology developers. Some antitrust authorities, including the U.S. Department of Justice, support such changes.

R&D investments and contributions to SSOs will be significantly reduced by measures to weaken SEP licensing. For example, proprietary and 3GPP-based technologies are vying with those based on IEEE standards for short-range communications in emerging next-generation IoT and automotive vehicle-to-x applications. Technology developers will shy away from participating in standard setting or investing at all where they cannot make sufficient returns on their investments.

The system of Fair Reasonable and Non-Discriminatory licensing in standard setting has worked extremely well with phenomenal innovation, extensive new market entry and significantly improving quality adjusted prices. There is no evidence of harm to competition or consumers. In the absence of that there is no basis to undermine the position of licensors in FRAND licensing, and particularly no justification for government agency interventions to force such change.

I originally published this article, here, in cellular industry trade publication RCR Wireless on November 16, 2016.

Self-interested bias of committee members amending IEEE’s patent policy devalues SEPs

According to research published by J. Gregory Sidak of Criterion Economics, the process by which the Institute of Electrical and Electronics Engineers (IEEE) amended its patent policy was significantly biased in favour of implementers and against standard-essential patent (SEP) owners.

He finds that large SEP holders that are net patent licensors and were opposed or neutral to the proposed changes had their comments on policy drafts rejected at a substantially higher rate than companies that are predominantly implementers and net payers of licensing fees. The bias favoured patent policy revisions designed to devalue SEPs. IEEE is the standards development organisation (SDO) responsible for developing the 802.11 WiFi standard, among many others.

Sidak provides a succinct description of the patent policy amendments and finds that these limit the ability of SEP owners to generate patent licensing royalties.

“In 2015, the IEEE ratified amendments to its patent policy to mandate that a reasonable and nondiscriminatory (RAND) royalty for a standard-essential patent (SEP)—more precisely, an Essential Patent Claim for an IEEE standard—exclude any value attributable to the standard, and to deny an SEP holder the right to seek an injunction against an unlicensed implementer until appellate review is exhausted. The amendments further say that the determination of a RAND royalty “should,” without limitation, (1) be derived from the value of the smallest salable compliant implementation of an IEEE standard that practices an SEP; (2) comport with a reasonable aggregate royalty burden of the relevant standard; and (3) disregard comparable license agreements obtained under the implicit or explicit threat of an injunction. Because the revisions place strict limitations on an SEP holder’s ability to enforce its patent rights against infringers, they truncate the upper range of the distribution of bilaterally negotiated RAND royalties and thus unambiguously reduce the compensation that the SEP holder may obtain for its technological contributions to the IEEE standards. The IEEE’s patent-policy revisions became effective in March 2015.

The IEEE’s 2015 bylaw amendments are highly significant because each unambiguously reduces the compensation that an SEP holder can obtain for its technological contributions to the IEEE’s standards. Throughout the development of those bylaw amendments, sixteen companies submitted 680 comments on four drafts of the proposed amendments and two drafts of a supporting informational document that an ad hoc drafting committee of the IEEE released for public comment. The ad hoc committee responded to the suggested revisions in each comment, either accepting them and implementing them into the next draft, accepting them in principle, or rejecting them. I find a strong negative correlation between the comment submitter’s status as a firm initially opposed to the revisions (a group primarily consisting of net SEP licensors) and the ad hoc committee’s incorporation of the submitter’s proposed revision in the subsequently revised draft. The treatment of the comments by the ad hoc committee exhibits a statistically significant bias against the firms that opposed the bylaw amendments—primarily large SEP holders—and in favor of revisions designed to devalue SEPs.”

He finds disregard for important principles and safeguards that IEEE upholds in standard setting. He notes that various members complained that the process by which the IEEE amended its patent policy did not comply with the principles of openness, consensus, balance, due process, and right to appeal that are consistent with the IEEE’s standard-setting process, and that the ad hoc drafting committee responsible for the patent policy revisions did not conciliate this dissent. 

“The IEEE patent policy, contained within the IEEE Standards Board bylaws, specifies the conditions under which an SEP holder voluntarily commits to license its SEPs on RAND terms. The bylaws serve as the Standards Board’s constitution and establish the consensus-driven process of developing and promulgating technical standards, including the popular 802.11 Wi-Fi standard. Embedded in the bylaws, as well as in other IEEE governance documents, are comprehensive safeguards that discourage opportunistic, anticompetitive conduct within the IEEE.”

Also according to Sidak:

“[t]he 2015 bylaw amendments deviated from the safe­guards that the IEEE had guaranteed its members in both the foundational documents of the IEEE and its history of consensus-driven policymaking.”

Although amending an SDO’s patent policy is a different process to selecting a technology to incorporate in a standard, it defies logic or probity that an SDO espousing these principles in standard setting should abandon them in amending patent policy – something that is so fundamental to an SDO’s standing and workings.

Sidak identifies self-interest as the reason the ad hoc committee did this. “To those large implementers, it is now expedient to renege on the bargain of interpret­ing the RAND commitment in a manner that is neutral to both net licensors and net licensees.”  The bias he found in the committee’s decision making aligns with the company affiliations and employment of committee voting members and the objectives of those companies:

“the bias suggests that decision making at the IEEE was controlled by parties that seek to devalue SEPs. The process for amending the IEEE’s bylaws did not protect the interests of SEP holders that were disproportionately responsible for the technologies that the IEEE had incorporated into its standards.”

I wrote, here, prior to its adoption, that the amended IEEE patent policy was bad policy. I opined it would undermine the free and fair market for licensing of SEPs and that imposed licensing terms would make IEEE an unattractive venue for patent owners. Most recently, I have also written, here, about how interested parties are also unjustifiably and harmfully trying to foist similar changes on patent licensing practices more widely.

Sidak’s paper can be accessed via the Criterion Economics web site here.