Absurd (F)RAND licensing-rate determinations for SEPs

I have submitted many articles to IP Finance over the last couple of years as a "guest" contributor. I would like to thank Jeremy Phillips for inviting me to do so, and posting my articles for me with all the editing and production work entailed. This is my first IP Finance posting as a "resident" contributor.

Absurd (F)RAND licensing-rate determinations for SEPs

Judge James L. Robart's findings in the case between Microsoft and Motorola, which issued in April 2013, represent the first U.S. judicial attempt to determine reasonable and non-discriminatory licensing fees. Most recently, Judge James F. Holderman has also had a go in his royalty rate opinion in the Innovatio case. The judges’ rate setting applies only to standard-essential patent technologies in H.264 video and 802.11 WiFi. In my opinion, the rates set in both cases are defectively based and unreasonably low.



Rate-setting in SEP licensing

The judges’ decisions are both based on the faulty dictum that patentees are entitled only to a small proportion of standard-essential patent value. Valuation methods selected unsurprisingly reflect that predisposition. The judgements significantly rely on the defective notion that SEP-owners’ rewards should only reflect “intrinsic value” of technologies, and that they should be deprived a proportion of the value that comes through standardisation including “network effects.” Core technology developers deserve to share in the economic benefits of standardisation because of the significant costs and risks in developing, proposing and integrating their technologies. That has been the basis for investment and market success so far.

Patent pools and chipset profits used by Judges Robart and Holderman respectively provide biased and misleading benchmarks for (F)RAND royalties. The judges identify some major limitations in using patent pools while seeming oblivious to other pitfalls. Judge Robart ill-advisedly uses pools because participants are mainly implementers who tend to be most interested in keeping their royalty costs low. Those with the most valuable patents tend to steer clear. Judge Holderman latches onto an alternative approach, based on silicon chip component manufacturer profits, that is also deeply flawed, while taking comfort from choosing a reasonable royalty rate that falls within the range established for the same standard by Judge Robart. Licensing rates on ICT products commonly apply across the entire product because value is delivered and enjoyed on that basis. They have little to do with and should not be limited to profits on chips.

My full analysis is a rather lengthier 24 pages. Those with the interest and stomach for it can find it in full here as a PDF document.

Incentives to Collaborate: WIPO Article and the US DOJ/USPTO Guidance Letter

In the December 2012 WIPO Magazine there is an excellent brief article concerning patent pools and standards titled, “Collaboration in Intellectual Property: An Overview,” by distinguished Harvard Business School Professor Josh Lerner and doctoral student Eric Lin.  The article describes the increase in patent pools in the last 15 to 20 years after a period of regulatory distrust of such collaborations since the 1940s.  The article notes that many questions remain for research relating to collaborations and makes suggestions for future research, but also states that some lessons can be learned from the existing literature, such as “requiring patent pools to engage in independent licensing.”  The article also argues that regulatory agencies should “actively encourage socially beneficial collaborations” instead of focusing on the potential anticompetitive consequences of such collaborations.  Specifically, the authors note that France, Germany and the United Kingdom provide benefits to participants in certain collaborations.  Moreover, the authors caution that US regulators may be too zealous in prohibiting discussions of price by standard setting organizations and this may waste time.  The authors suggest a “temporary safe-harbor status to firms that wish to explore the feasibility of collaborating.” 

The United States appears to be taking some steps towards ensuring that the International Trade Commission does not act in a way that creates a disincentive to participate in or create collaborations.  In a January 8, Joint Statement by the United States Department of Justice, Antitrust Division (DOJ) and the United States Patent and Trademark Office, Office of the General Counsel (USPTO), the DOJ and USPTO provide guidance to the International Trade Commission concerning whether exclusion orders should issue in all cases if standards essential patents offered on F/RAND terms are infringed.  The DOJ and USPTO clearly explain the benefits of patents as well as the benefits of voluntary licensing such as F/RAND licensing, and ultimately caution that exclusion orders in particular cases could result in providing disincentives to participate in F/RAND licensing.  The Intellectual Property Watch provides a description of the report here and a copy of the report is available here.   A good first step? 

New CDMA2000 patent pool launched

This week Sisvel launched a new joint patent licensing program, offering a licence to essential CDMA2000 patents (patents for hybrid 2.5G/3G technology of mobile telecommunications standards that use CDMA, code division multiple access, a multiple access scheme for digital radio enabling the sending of data between mobile phones and cell sites) on “fair, reasonable, and non-discriminatory terms”. The patents included in the program are owned by big players such as France Telecom, Nippon Telegraph and Telephone Corporation, and Siemens.

Sisvel, the Italian consumer electronics group, started in 1982 and today is one of the leading companies in managing IP and maximizing the value of patent rights. Sisvel will act on behalf of the patent owners as licensing administrator for the program, which is designed to make essential CDMA2000 patents more easily accessible and ensure that users can “benefit from the flexibility and practicality of the license terms available”. The royalty rate for all included functions under any license is “only US$ 0.05 per patent family per unit, up to a cap of US$ 0.50 per unit for products that include the 1x-RTT air interface but have no EV-DO functionality, and a cap of US$ 1.00 per unit for products that include the EV-DO air interface”.

More information is available here and some CDMA2000 market statistics can be found on the CDMA Development Group website here.

Licensing Framework for LTE Announced

My recent embrace of podcast listening has yielded its first blogging fruits. A brief item on a Technology podcast of the Wall Street Journal reported this week that a licensing framework has been reached regarding the emerging mobile network technology known as Long Term Evolution (LTE). A quick search on the internet produced a cornucopia of items covering this development.

In short, the parties to the agreement undertake to keep royalty rates on their respective patents low enough to spur development of the technology. With respect to handset and laptop sales, they have agreed to keep patent royalties under 10%.

LTE is being described as the next-big advance in mobile technology, enabling cell phones to provide users with such nifty services as high quality TV (though the eyeglasses needed to view these programs by old geezers like myself are not part of the technology) and seamless video calling. By reaching agreement on the licensing framework, the hope is that the time to deployment of the LTE technology will be reduced to two years or so.

The international array of companies involved in the agreement reportedly are Nokia, Ericsson, Alcatel-Lucent, NEC, NextWave Wireless, Nokia Siemens Networks and Sony Ericsson. According to Reuters, Mobile carrier Verizon Wireless (no. 2 in the US) had previously announced its intention to build on the platform, while China Mobile (the world's biggest) has expressed an intention to test LTE. As well, Alcatel-Lucent and NEC have entered into a joint venture for development and marketing of the technology. Tantalizingly, Qualcomm, while not being a party to this agreement, has reportedly promised chips for the LTE technology, which competes with Qualcomm's own Ultra Mobile Broadband Technology.

Who else is missing? Well, for starters, Nortel is absent from the list. A company spokesman for Nortel, Mohammed Nakhooda, is reported to have stated that "[e]veryone would agree that Nortel is a major contributor to the LTE standards" and that it "is front and centre for all discussions [regarding LTE systems]." In other words, look for Nortel to announce its own royalty rate scheme.

A posting by Vijay Nagarajan puts the Nortel position in a broader light against the backdrop of past licensing agreements in this area. He notes that something similar was attempted in 2002 regarding WCDMA, where agreement was reached to cap royalty rates, only to witness that holdouts with a strong IP position in the technology went ahead and set their own (presumably double-digit) royalty rates, reaping the benefits on their corporate bottom line.

I personally love devoting one MBA class to arrangements of this kind, given the complex mix of cooperation, competition, standardization and hold-out. Only time will tell if the LTE royalty arrangement reached this week heralds anything more than feeding my pedagogical curiosity.