Fool’s errand with fallacies in administrative essentiality checking

This is my second article on some topics discussed by my panel on “transparency” and in other sessions at the Patents in Telecoms and the Internet of Things conference in London recently. My first article, also published here, was on how value and royalty costs in standards and SEPs are passed along the supply chain to consumers.

The European Commission’s proposed essentiality checking and patent counting at the EUIPO is troubling. While parties are entitled to present whatever methods and studies they wish to imply Standard Essential Patent (SEP) portfolio strength in licensing negotiations or to the courts in litigation, the proposed registry with mandatory essentiality checking on random samples of patents will give a false sense of security on the applicability, accuracy and reliability of such checks, measures and any royalty charges derived from them. Essentiality determinations and patent counts provide a poor and unproven gauge of patent portfolio strength. Methods fail a key integrity test for any evaluation or measurement system because results are not reproducible. Despite the EUIPO being ordained the official authority on determining patent essentiality, its checking will be as contestable technically as for private evaluators and their studies that already check essentiality, count patents and invariably disagree with each other. Nevertheless, even though determinations are non-binding they will have significant sway with the courts.

A European Parliament press release issued following a January 2024 Legal Affairs Committee vote to adopt “New rules to promote standard-setting innovation in new technologies” states that “in 5G almost 85% of the standard essential patents are in fact non-essential. The new essentiality test will stop the occurrence of over-declaration”.

Some studies do indeed indicate essentiality rates of only 15% (i.e. 100%-85% = 15%) or even less in some cases—which might well be correct—but there is no evidence to support the latter contention that checking will improve the declaration behaviour of patent owners. There is no shame or sanction for over-declaration. Bias in essentiality checking—that is most severe at such low essentiality rates—means that the effects of over-declaration can only be somewhat moderated by checking. Over-declaration can never be anywhere near eliminated. The bias incentivises over-declaration despite checking. Rather than stopping over-declaration, institutionalized checking by the EUIPO will likely motivate patent owners to game the system by declaring even more patents of dubious essentiality.

Essentiality is subjective and only one among various factors affecting patent strength

Patent strength is a function of validity, infringement and technical contribution, as well as essentiality to the standards. While some parts of standards go unimplemented, are rarely used, become obsolete or are peripheral to where standards provide most innovative value, other parts are fundamental to very significant improvements with new technologies such as 5G. For example, various radio access network technology improvements have increased network speeds and capacities one hundred thousand-fold (e.g. from 10 kbps to 1 Gbps) since the introduction of 2G data in the mid-1990s.

Some characteristics can be objectively, reliably and reproducibly checked, others cannot. Patent essentiality and validity are matters of judgment where different assessors will often disagree about what are ostensibly yes-no decisions. As stated by the judges’ decisions in Unwired Planet v Huawei and TCL v Ericsson, respectively:

“Based on my assessment of both experts, I am sure the disagreement represents cases in which reasonable people can differ.” (Paragraph 335.)

“Given the somewhat subjective nature of these determinations, ‘disagreements’ is probably a more accurate label than ‘error.’" (Footnote 16.)

By way of analogy: on the one hand, selections of beauty pageant and international song contest winners are also subjective tasks that can be swayed by judges’ predilections and do not have reproducible results with different assessors; on the other hand, and in marked contrast to all the above, checks such as the UK’s annual car roadworthiness MOT test is highly objective and reproducible. Two different test centres would reliably come up with the same pass-fail result for the same car after verifying that brakes work, turn indicators flash, and measuring that tyre tread depth is sufficient, among other checks.

Determining true essentiality is made more difficult by the fact that patent counters have very different objectives to those agreed by consensus in Standard Setting Organizations. ETSI merely wants to ensure standards such as 5G are not blocked by demanding patent owners declare whether they believe a patent might be or might become essential. ETSI never checks essentiality and does not want to do so. Essentiality declarations such as those in ETSI’s IPR database were never intended to be used for royalty rate determinations in Fair, Reasonable and Non-Discriminatory (FRAND) licensing, as sought by the Commission with the EUIPO’s registry and additional steps of essentiality checking and patent counting.

Only the courts can definitively determine which patents are truly essential, which are not invalid and valuate portfolios. Cases in litigation illustrate how uncertain everything is and how expert opinions differ. The challenges in assessing essentiality were extensively discussed at the conference. Issues include interpretation of patent claims and that the scope of these can be entwined with validity. Prosecution history can be pertinent in making determinations. As patents are amended to cover the standard they can include what has been contributed to the standard by others. With many patents being found invalid by the courts, validity should not be ignored on the path to determining value, as it is in the Commission’s proposed checking. Validity can be the most significant factor affecting SEP value.

In FRAND litigation, highly experienced top minds including judges, experts and those representing the parties spend many months at multi-million dollar costs evaluating and deliberating—with various disagreements on essentiality and validity of litigated patents prior to judgment—even though typically only a few patents are examined.

If all that work including analysis of claim charts and patent prosecution histories is actually required to do a proper job on only a few patents, how can we trust the accuracy of the EUIPO’s experts examining orders of magnitude more patents and whose determinations ignore the crucial issue of validity? While the courts tend only to have the resources to do the required assessments on no more than a handful of patents in each case, there are many tens of thousands of patents and patent families declared essential to standards such as 5G. It is unsurprising that the UK courts have tended to reject patent counting as a means of determining FRAND royalties, except in some cases as a cross-check for determinations primarily based on comparable licensing agreements.

Unscalable checking

One proposed way dealing with the insurmountable task of checking all a standard’s declared patents is to check only random samples of them. The hope is that it would be possible to check a manageably small number of them very thoroughly and accurately. Consensus is that accuracy can best be achieved with the preparation and use of claim charts.

However, there are several problems with this approach, as illustrated in my empirical research in 2021 and 2022:

• Even when claim charts are used to assist in determining essentiality, different assessors still disagree widely in their determinations with agreement on only around 83% of them. That’s not as good as it might seem when one considers that different assessors can be expected to agree on precisely 50% of them if one assessor was making determinations randomly based on the flip of a coin. If two assessors disagree in their determinations, at least one of them must be wrong. However, if two different assessors are in agreement, that does not mean the determination is correct.
  
  
• Inaccurate determinations cause a substantial upward systematic bias in essentiality rates derived after checking. My empirical research shows that the proportion of false positive essentiality determinations will greatly outnumber false negatives at essentiality rates of 15% or less.
  
  
• Sample sizes need to be large (e.g. >1,000) if true essentiality rates are at 15% or below and if, for example, accuracy within ± 15% at the 95% confidence level is required. Sampling error as a proportion of true essentiality rate increases at lower and lower levels of true essentiality.
  
  
• Sampled patents cannot be appealed and reassessed without destroying the integrity of the sample. For example, if one in ten patents is sampled the determination has a 10x effect implied in the entire population count. With inevitable selection bias in appealed patents, “corrected” determinations will have a distorted and magnified effect implied in the overall population.
  
  
• However, it would be to deny justice not to allow some kind of appeals procedure on determinations made by a public authority. This issue could weigh heavily in FRAND dispute litigation.
  
  
• It’s very costly. Ericsson testified in TCL v Ericsson that it took 50 man-hours per patent to prepare claim charts.

What the Commission is seeking to concoct at the EUIPO will produce yet more patent counting studies, somewhat like what PA Consulting has been producing regularly for years and that several other firms have published from time to time. PA’s studies are widely used because others use and seemingly take heed of their results—not because they are proven to be accurate and reliable, because it is impossible to prove that. Here’s what Justice Smith had to say in the Optis v. Apple judgment:

“So, as with validity – but for different reasons – making a judgement about levels of essentiality in the stack is unreliable and unsafe.

My conclusion is that – accepting entirely that PA Consulting seeks to do a careful job – for the purposes of a judicial determination of what is fact, the PA Consulting/Optis approach to determining Stack size (or the figure for the denominator) is not to be relied upon.

I accept that were a reliable qualitative assessment to be possible, that might well be preferable. But an unreliable qualitative assessment – especially where even the magnitude of the error is unknown – is not (in my judgement) an acceptable metric to use when seeking to answer the FRAND Question.

I cannot use the PA Consulting data as a metric in answering the FRAND Question.”

Patent counting is simplistic

Even checking both essentiality and validity is woefully insufficient in determining patent value. It’s widely recognized that different patents vary in value enormously—by orders of magnitude from virtually worthless to some real gems. The significance of a patent’s technical contribution to a standard and value in implementation can vary from being seldom used or of marginal worth to being fundamental functionality that might enable major cost savings or increases in customer utility or revenues to be generated. Convenience aside, there is, therefore, no basis for assuming that portfolio value is in proportion to any kind of patent count (i.e. of declared, found essential or found not invalid patents). On the contrary, some patent owners likely have a much larger proportion or number of gems than others. However, even approximately how much more is an unanswered empirical question.

Ministry of Patent Counting and Red Tape

The Commission’s proposals for registering, checking and counting patents, among other demands in the proposed legislation, is also in conflict with the stated objectives of European leaders.

French and German leaders Emmanuel Macron and Olaf Scholz recently co-wrote an op-ed in the Financial Times setting out some laudable objectives:

“With an ambitious industrial policy, we can enable the development and rollout of key technologies of tomorrow, such as AI, quantum technologies, space, 5G/6G, biotechnologies, net zero technologies, mobility and chemicals.

We call for strengthening the EU’s technological capabilities by promoting cutting-edge research and innovation and necessary infrastructures.

We call for an ambitious bureaucracy reduction agenda to deliver on simpler and faster administrative procedures and cutting bureaucratic burdens for businesses of all sizes. We welcome the European Commission’s initiative to reduce reporting obligations for our companies by 25 per cent.” (hyperlink added)

The Commission’s proposed demands for patent registration at the EUIPO, together with preparation and submission of additional information such as patent claim charts will substantially increase administrative burdens for European companies such as Ericsson and Nokia that remain dependent on SEP licensing income. These new burdens will cause friction, delays and diminution in the well established, highly effective and self-sustaining innovation loop in which licensing fees are used to fund further R&D, leading to the creation of yet more valuable new technologies.

Better to have scarce and costly technical experts innovating and prosecuting their own patents, or designing and testing new products, rather than tying up hundreds of them generating additional information for checkers and in doing the checking—at patent owners and at the EUIPO, respectively.

Transparency about what?

There was consensus at the conference that greater transparency could help with FRAND licensing for SEPs. However, rather than burdening licensees with voluminous disclosures on patent claims and with delays while conciliators deliberate about aggregate royalties and technical experts check patents for essentiality, it would be better to have licensors and licensees disclose more about actual licensing. This should include terms in licensing agreements and information on licensed trade including volumes and prices. If parties are unwilling to make such information public, then it could be disclosed to a confidential repository with limited access, information anonymised and other safeguards. Let’s find out more about what’s happening already and rely on that, rather than trying to make things up with top-down rate setting.

In Q&A under the Chatham House Rule, I asked another panel whether a modicum of accuracy and reliability can be achieved in essentiality checking to determine patent portfolio strength. Bad news — no. Good news — it’s probably not necessary because most licences get agreed, regardless.

While I believe it would be best for the Commission to abandon is proposed checking and rate setting, if it does proceed it should consider recommendations about how to do that competently and with recognition of limitations, as explained in my publications cited with hyperlinks in this article.


Keith Mallinson, founder of WiseHarbor, has more than 25 years of experience in the telecommunications industry as a research analyst, consultant and testifying expert witness.

How to derive and apply aggregate royalty rates for SEP FRAND determinations

Among numerous legal, economic and commercial concerns about the European Commission’s proposed legislation for Standard Essential Patent (SEP) licensing, its plans for aggregate rate setting and mandatory Fair, Reasonable and Non-Discriminatory (FRAND) rate determinations in various technology standards raises all kinds of issues and alarms.

Following publication of the proposed legislation and impact assessment on April 27, the Commission has been seeking online feedback submissions by August 10, 2023.

In a previous posting here and in my initial feedback submission the Commission 14th June, I have argued against the Commission’s apparent intention to abandon the established approach of using comparable licensing agreements directly as benchmarks in FRAND rate determinations, and instead apportion rates among SEP owners based on their respective shares of total SEPs using the top-down approach.[1] For example, I was critical about use of patent counting methods. My new feedback submission to the Commission focuses on aggregate royalty rate setting.

Any aggregate royalty rates set must be precisely defined, derived and applied. Aggregate rate setting for standards, as proposed by the Commission, will enable proposed rates to be depicted and manipulated in ways which are anticompetitive, unfair and will under-value patented standard-essential technologies. According to the proposed legislation, “‘aggregate royalty’ means the maximum amount of royalty for all patents essential to a standard.”[2] The Commission also indicates “uncertainty about the SEP royalty burden” and that “Stakeholders consider that the FRAND licensing concept could benefit greatly from some clarification, notably with regard to the determination of an aggregate royalty burden.”[3]

Aggregate royalty rates proposed to or set by the EUIPO could be in quantification of the total payment burden to be paid or of the rate to be used in determining individual FRAND royalty rates with the top-down approach.[4] The latter should be a higher figure than the former to allow for SEPs that remain unlicensed and for which there is no payment.

Either of these aggregate royalty rate percentages might be derived somehow from among various different formulations of aggregate rates reported. However, these reported rates vary enormously, for example, global rates from more than 35% to less than 5% of a smartphone’s selling price. The maximum aggregate rate burden implementers will have to pay and the correct Aggregate Royalty Rate for Apportionment (ARRFA) in a top-down approach FRAND determination will fall well within those two extremes.

An alternative approach in aggregate rate setting is to estimate value in standards with use of techniques including hedonic pricing or conjoint consumer preference analysis, and then apportion value somehow between SEP licensors and implementers.

If aggregate rates are to be set at all—as they are for patent pools in their rate cards, but in the opinion of many is unnecessary and dysfunctional in bilateral licensing[5]—such rates must be derived in the applicable context. Collective action—such as in patent pools—where some major licensors are typically also major licensees will tend to set rates that are lower than would be agreed bilaterally. Another crucial difference is that patent pool aggregate rates are the rates licensees actually pay.

In FRAND determinations for bilateral licensing there is always a shortfall between the ARRFA and what is actually paid because the SEPs in any given standard are never fully licensed. The aggregate rates from which bilateral licensing rates are derived are never fully paid due to notional royalty allocations to patents that remain unlicensed. Any aggregate royalty setting must recognize this difference if such rates are to be used to determine FRAND rates using the top-down approach.

To mitigate shortcomings in rate setting, some guiding principles must be established on what the “SEP royalty burden” and ARRFA should include and exclude, as well as how and by whom such rates should be derived and applied. The interests of both SEP owners and implementers must be safeguarded while reflecting industry realities with the many factors that shape varied financial and other terms in established licenses. Application of economic theory must have full and proper regard for what royalty figures reported in the industry represent and how licensing actually gets done.

My full submission to the Commission can also be downloaded from WiseHarbor.

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[1] Feedback on draft EU legislation by Keith Mallinson, WiseHarbor; June 14, 2023

[2] Article 2 (10).

[3] Proposed regulation (page 8) and Impact Assessment (2.3.2)

[4] “A SEP holder or an implementer may request the competence centre for a non-binding expert opinion on a global aggregate royalty.” Article 18

[5] Various court decisions including Unwired Planet v. Huawei and  InterDigital v. Lenovo have avoided or explicitly rejected aggregate rate setting, while others including Optis v Apple, also in the UK, have also primarily used comparable licensing benchmarks in their FRAND determinations.

Royalty pricing dichotomy in 5G SEP patent pool for Open RAN Radio Units

MPEG LA and Unified Patents have just launched their Alium patent pool program that seeks to license 4G LTE and 5G standard-essential patents (SEPs) for a minimum charge of $10 per Open RAN Radio Unit (RU). Previously, attention to licensing and royalty charges for cellular SEPs has been overwhelmingly on devices, including mobile phones and recently in IoT. Alium’s stated objectives are to “help accelerate 5G” by providing suppliers of these functional units in network equipment with SEP licensing and to establish Fair, Reasonable and Non-Discriminatory (FRAND) royalty rates for them. It has not yet been disclosed which or how many owners of patents declared essential to the above standards have agreed to join the pool, if any, or are likely to do so.

Diversifying RAN equipment supply

Cellular technologies are highly standardized in the most open and collaborative way, so that any piece of network equipment will work with any device conforming to the same technical specifications from standard-setting organization 3GPP.

However, lack of standardized interfaces supporting interoperability among different functional parts the Radio Access Network (RAN)—as defined by the Open RAN Alliance as RU, Distributed Unit (DU) and Centralized Unit (CU)—has made it difficult or impossible to mix and match cellular network equipment software and hardware from different vendors. Consequently, operators have had to procure all those functional units from the same vendor for any given geographic part of their networks. The O-RAN Alliance that develops the standardized interfaces, has adopted reference designs for outdoor macrocells and indoor small cells (e.g., low PHY layer functionality per 7-2x split).

Open RAN promises to increase choice, competition among vendors and drive down costs in network equipment supply by enabling operators to integrate functional unit products from different suppliers. This approach is already being pursued by new operators including Rakuten in Japan and Dish in the US. Incumbent operators are also major advocates for Open RAN—including the O-RAN Alliance’s founding members AT&T, China Mobile, Deutsche Telekom, NTT DoCoMo and Orange who enjoy questionable governance privileges over others in the alliance. Some of these are making select Open RAN deployments, typically where integration and performance requirements are modest.

Licensing new entrants and establishing FRAND rates

For Open RAN to develop and succeed—as many desire and expect—in addition to technical issues, various commercial issues also need to be resolved. These include patent licensing for the vast trove of standard-essential technologies employed in 4G LTE and 5G network equipment. Given that cellular devices are the most significantly SEP-licensed of any product category, it seems likely that the emerging ecosystem in Open RAN might also become significant in SEP licensing.

Widespread cellular SEP licensing of mobile phones for cash royalty payments took off with the introduction of CDMA-based technologies including CDMAOne in the 1990s, and with CDMA2000 and WCDMA from around the millennium. Leading SEP owners; Ericsson, Nokia and Qualcomm, license these patents, but have ceased producing handsets. Since the introduction of 4G LTE, many different SEP owners’ disclosures have revealed “rate card” licensing charges for their cellular SEPs in handsets and other devices. The leading cellular SEP licensors generate around $9 billion annually.

Previously, in 2G with GSM, an oligopoly of vertically-integrated companies including Alcatel, Ericsson, Motorola, Nokia and Siemens owned most of the SEPs and also produced the standard-compliant devices. The SEPs were either cross-licensed or never asserted among those companies, and so royalty rates were unclear and net payments, if any, were invisible publicly.

The licensing of cellular RAN equipment—where there are also only a small number of vertically-integrated OEMs including Ericsson, Nokia, Huawei—is still rather like the above, as it used to be in 2G for handsets.

Open RAN’s open interfaces are enabling new entrants and new routes to market in cellular network equipment software and hardware supply. However, network function units—including RUs in particular—also implement numerous 3GPP technologies, many of which are SEP based and some of which are different to those in User Equipment (UE). Unlike the vertically-integrated oligopoly of OEMs who already have ingrained access to the SEP technologies required, many of these newcomers will need to license numerous SEPs and will have nothing much to cross-license.

Critical mass for pooling

While neither the operators nor the new-entrant Open RAN technology suppliers are likely to be enthusiastic about making royalty payments to many SEP owners, Alium claims it “provides a one -stop shop to license essential patents and help establish a FRAND rate.”

Patent pooling entirely within the cellular sector has not fared well so far. Bilateral licensing has prevailed between cellular SEP owners and handset OEMs, with few licensors and SEPs licensed through the 3G WCDMA or 4G LTE patent pools. Avanci’s pooling of cellular SEPs for licensing outside the cellular sector to automotive OEMs seems more successful with many licensors and licensees, and pooling holds promise in IoT generally.

Successful pools tend to balance the interest of licensors and licensees. For example, while MPEG LA’s AVC/H.264 video codec patent pool has around 40 licensors, many of these are also major implementers who were motivated to join the pool because they are more interested in minimizing what they are charged to license others’ SEPs than the smaller amounts they can generate in licensing their own SEPs.

In cellular, several major declared-SEP owners have well-established licensing programs and can do better for themselves by licensing bilaterally—particularly if their SEPs are regarded more valuable than the average of those in the pool. Antitrust authorities also demand that bilateral licensing is not precluded by the existence of patent pools, so that competition is preserved.

Participation and rate setting

Although Alium has already revealed its licensing charges, it unusual for a patent pool to do that before disclosing participating licensors. This makes it impossible to estimate what proportion of all applicable SEPs might be included in the pool. Alium would welcome participation from the major cellular SEP licensors, who include infrastructure OEMs; Ericsson, Huawei and Nokia. It seems that rather than expecting those to join, it will be from among numerous others—many of who have far fewer declared SEPs—that participating licensors will emerge.

Alium follows the fashion of setting rates on a dollars-per-unit (DPU) basis. This is most palatable to OEMs producing costly products such as cars, where most of the costs (e.g., for the chassis and tires,) are unrelated to cellular technology. While Alium intends only to license at the RU level, DPU royalties generate the same amount of revenue, regardless of the price of the RU—even if the charge is instead levied on a chip or another component within the RU. Alium’s charges range from $25 down to $10 per RU, depending on unit volumes sold.

The drawback for licensees with DPU royalties is that charges do not reduce when product prices decline. Mobile phone royalties were almost invariably set only as percentages until the mid-2000s because OEMs wanted it that way with the expectation that average selling prices would fall, as they did for a decade or so until then. It was with the introduction and then predominance of smartphones since then that OEMs have demanded royalty caps that turn charges into DPUs for higher-priced handsets.

According to the ABI Research source cited in Alium’s launch announcement, the implied average prices for outdoor macro and indoor micro Open RAN RUs in 2030 will be $4,427 and $194 respectively. That seems to reflect a plausible expectation that indoor small cell RUs will become ubiquitous in the enterprise—like WiFi access points—with 205.5 million shipments forecasted for that year. Corresponding royalties on a percentage basis for incremental sales will be in the wide and unexplained range of a maximum of 0.56% on macros to a minimum of 5.2% on micros. Royalty charges of $10 on RUs selling for around only a couple of hundred dollars are likely to be resisted by OEMs and operators—particularly if the pool’s share of total declared or independently assessed SEPs turns out not to be that great.

While product prices often reduce dramatically as technology gets cheaper and markets grow, FRAND licensing requirements can make it difficult to adjust the basis and level of charging, which are typically set for the life of standards and patent pool programs.

This article was originally published in RCR Wireless.

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

Bountiful connectivity apps in vehicles

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

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

Great expectations for IoT hinge on cellular technology

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

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

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

How to charge?

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

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

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

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

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

Where to license?

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

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

Valuation benchmarks

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

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

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

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

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

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

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

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

SEP value in vehicles versus smartphones

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

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

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

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

Even more than a big smartphone on wheels

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

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

The future in 5G

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

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

One-stop-shopping is best in IoT

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

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

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

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

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

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

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

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

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

One size does not fit all implementers

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

Benefits for all licensors

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

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

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

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

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

Removing roadblocks to efficient licensing

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

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

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

Extending SEP licensing reach for IoT through patent pooling

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

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

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Endnotes

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

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

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

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

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

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

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

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

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This article was originally published in RCR Wireless.

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