Sharp - not weak or late enforcement is required against recalcitrant SEP implementers

Public comments on SEPs and FRAND licensing sought for the US Department of Justice’s Draft Policy Statement and the UK Intellectual Property Office’s Call for Views.

It is vital that the fundamental sanction in patent law—of the temporary right to exclude—along with other remedies, including enhanced damages, are readily available against infringers when Fair, Reasonable and Non-Discriminatory (F/RAND) licensing has been offered, but is rejected, evaded or unreasonably delayed.

Technical standards confer enormous value to implementers and consumers. For example, cellular standard-essential technologies enable annual revenues exceeding a trillion dollars in operator services, several hundred billion dollars in smartphone sales and hundreds of billions more in over-the-top applications and services on those devices. Undermining the fundamental patent rights of organizations that commit large R&D resources to develop those technologies and contribute them to the standards would unfairly short-change those innovators and jeopardize ongoing investments in 5G and the Internet of Things (IoT). In addition to facilitating revenue growth and cost savings in those downstream markets, standard-essential technologies, for example, help save the planet by enabling us to fly and drive less—thus reducing our carbon footprints—and reduce deaths on the road with autonomous driving capabilities.

Innovative standard-essential technology developments result from high-value professional employment: for example, in US organizations including InterDigital, Nokia Bell Labs and Qualcomm. In contrast, most handset implementer jobs, such as those in manufacturing, are offshore.

Technology transfer from independent developers to implementers of cellular and other standards is flourishing and extensive. Intellectual Property Rights (IPR) policies—most notably including ETSI’s IPR Policy as applied to FRAND licensing of cellular Standard-Essential (SEPs)—have facilitated exceptional innovation, industry growth and vigorous competition including numerous new market entries with low barriers to entry in mobile phones (e.g. Apple in 2007, Xiaomi, Oppo and Vivo since 2011) and some notable major market participant exits (e.g. Nokia in 2013 and LG in 2021).

Aggregate royalty payments are small percentages of product costs and have declined while many implementers seek to significantly diminish, greatly delay or entirely avoid paying these altogether. This undermines competition and deprives the innovative companies—that develop the new technologies for all to share through their contributions to openly-available standards—from obtaining an adequate, fair, and timely return on their substantial R&D investments.

Increasing yet illegitimate attempts to weaken patent rights encourage free riding and unfairly advantage unscrupulously opportunistic implementers. Harm is mainly suffered in advanced nations, such as the US and in Europe, where most standard-essential technology developments occur and recompense for these patented contributions have been available, while implementers have largely taken unfair advantage elsewhere.

Patent piracy (i.e., theft) provides offenders with an unfair cost advantage over those implementers who comply by paying their dues in FRAND royalties. This disparity impairs a compliant implementer’s competitive position and has far more impact on the sales and profits it can make than any other input cost (e.g., manufacturing labor) that is paid uniformly by all implementers. It also deprives patent owners of fair and timely compensation from those free riders.

In absence of reasonable resort to injunctions and enhanced damages, it is also implementers wielding considerable market power from downstream product sales such as of smartphones that can misuse their negotiating strength, with delay tactics and brinkmanship to force down royalty charges paid on licensing renewals to below the FRAND rates they have already used to lower payments paid to various other licensors.

 
More consultations

While copious evidence shows the success in technology transfer from developers to implementers in cellular standards, there is ongoing conflict between some SEP owners and implementers in FRAND licensing. This is in markets where cellular standards already prevail, and in markets being developed based on new cellular-based technologies (e.g., IoT in smart cities, agriculture, manufacturing, healthcare and in the metaverse). Despite various consultations and the publication of policy documents over many years, authorities in the US, European Union, UK and elsewhere have repeatedly asked for comments and views on the same issues as policies are adjusted.

The Department of Justice (DoJ), Patent & Trademark Office (USPTO) and the National Institute of Standards and Technology (NIST) in the US seek public input on various questions with publication of the DoJ’s ‘Draft Policy Statement on Licensing Negotiations and Remedies for Standard-Essential Patents Subject to Voluntary F/RAND Licensing Commitments’ (“DoJ Draft Revised Statement”). It states that this seeks to promote good-faith licensing negotiations and addresses the scope of remedies available to patent owners that have agreed to license their essential technologies on F/RAND terms. However, it threatens to weaken fundamental patent rights emphasized in the DoJ’s 2019 statement on the very same issue.

The UK Government’s Intellectual Property Office (IPO) has also launched a “Call for Views” to better understand whether the current SEP framework encourages innovation and effectively promotes competition in markets, or whether there are any barriers to innovation and competition. The IPO states that this will establish whether government intervention is required and to understand what intervention could look like.

Evidence-based analysis

Alleged opportunistic behaviors described in the DoJ Draft Revised Statement—that are commonly referred to as patent holdup and holdout—are examined in-depth in my full report on this topic. In this, I consider key issues including industrial and IPR policy, market power, and why sanctions such as injunctions and enhanced damages must be available for licensing to be widely and timely completed under FRAND terms and royalty rates.

This article was first published in RCR Wireless on 24th January 2022.

New report commissioned by UKIPO on IP valuation market: Observations by the authors

In September 2017, the UK Intellectual Property Office (IPO) published a 148-page independent report, entitled “Hidden Value: A Study of the UK IP Valuation Market” that it had commissioned, and which was authored by Mr. Martin Brassell, Chief Executive, Inngot Limited and Dr. Jackie Maguire, Managing Director, Firm Advantage Limited. Mr. Brassell and Dr. Maguire have kindly provided IP Finance with a number of key observations based on the report. Interested IP Finance readers are invited to consult the report in its entirety (see below).

“Our study has provided an opportunity to investigate some important issues in the area of IP valuation. Why don’t more companies havean awareness of what their intangible assets are worth? What drives them to find out? What methods can they use to understand their asset value, and who helps them? Lastly, what can be done to encourage more firms to take IP value seriously?

We were unsurprised to discover that few, if any, managing directors wake up in a cold sweat at night worrying about how much their IP is worth. As previous research has indicated, many companies do not think of intangibles as being assets at all in the conventional sense. Even if they decide to capitalise the cost of developing or acquiring intangibles, their accounts sometimes appear to suggest that these assets are declining in value as they are being written down, even if their business contribution is in fact growing.

We found that the drivers for IP valuation are very specific and heavily transaction-oriented. We identified 22 distinct reasons for valuing IP, which fell into three categories. The largest number of drivers, accounting for the majority of IP valuation activity, relate to specific needs, such as transfer pricing, post-purchase accounting, preparation for M&A activity, estimating damages in litigation or (occasionally) insolvency. There is some IP valuation activity that is done as a positive response to specific opportunities, such as licensing, collaboration or raising investment. Finally, there is a small but growing number of occasions where there are new applications for IP that require value to be better understood – and this is where a specific opportunity for improved awareness appears to lie.

From the drivers that can be measured, it is unlikely that more than a few thousand IP valuations are currently being conducted annually. The valuation providers fall into two broad categories – large accounting firms and specialist ‘boutiques’ – with a very wide variation in costs, depending upon the complexity, purpose and origin of the valuations. Cost does not emerge as a barrier, as there is a range of services being provided addressing a range of needs. However, valuation providers confirmed a high degree of reliance on introductions or referrals from other professionals, which suggests that people only tend to value their IP when someone they respect tells them it is necessary to do so.

All of this points to an insufficient appreciation of the benefits of being able to measure IP value and thereby manage it better. More educational outreach, better access to information and meaningful testimonials could all help to address this situation over time; but the obvious question that remains is, if the benefits were more compelling, would not more businesses choose to value their IP? Realistically, in the busy world of the SMEs that form the overwhelming majority of UK firms, some pretty compelling incentives will be needed to make business leaders sit up and take notice when they have so many other competing priorities.

From the research that we conducted, it seems that these incentives might come from one of two directions. The first is strategic reporting in its various forms. It has long been apparent that financial statements miss out an important source of value creation in companies (for the reasons noted above); more attention is now being paid to filling these information gaps with insights on how a company is innovating and the assets it is producing as a consequence. Also, the most recent Financial Reporting Standard applicable in the UK and Republic of Ireland (FRS 102) within generally accepted accounting principles (UK GAAP) is beginning to have some impact on accounting awareness of intangibles.

The second direction concerns access to finance, particularly debt, which remains the primary source of business funding. At present the regulations that are designed to ensure capital adequacy do not look kindly on intangible assets, because there is no accepted risk weighting for them. However, there are signs that lenders are beginning to take steps to obtain a better understanding of these assets and their business contribution. Of course, the main concern for a lender when dealing with any asset class is ultimately related to the value that it can recover if the asset needs to be sold to repay a loan. However, if the trend continues to find new ways forward to apply intangible asset value, IP assets could become more concretely associated with money in the minds of SMEs, which would certainly increase the appetite for IP valuation."

For the full results of the research and interviews with over 250 industry players see here.

IP Finance Toolkit: a good first step?

The UK Intellectual Property Office's IP Finance Toolkit is now out. For reasons that baffle this blogger, it has not yet been placed online by the IPO, though the Office has given permission to our friends at Coller IP (who participated in this project) to host the 44 page document here.  According to its summary:

“Banking on IP? The role of intellectual property and intangible assets in facilitating business finance” report was published [in] October 2013. The report sought to examine how effectively SMEs are able to use their intellectual property assets to secure the finance they need for company growth. It highlighted barriers faced by IP rich businesses seeking debt finance.

In March 2014 the Intellectual Property Office (IPO) published “Banking on IP, An Active Response” . This summarised the IPO’s conclusions and set out the actions it intended to take to address some of the barriers highlighted in the original report.

One of those actions was the development of tools or a framework to support a better dialogue between businesses and financial services professionals. The tools will help businesses articulate the IP they have, how it is secured and how it supports the future cash flow of the business. This toolkit has been developed with that aim. It is geared to:

• Help lenders and businesses talk the same language;

• Encourage and guide businesses to document their IP assets ahead of any application for finance;

• Help businesses to develop more effective IP management and commercialisation strategies; and

• Raise awareness of the wide variety of finance options available for IP-rich businesses.

We hope you find this guidance useful and would encourage you to work through it in advance of any discussions with potential lenders. We would also encourage potential lenders to use this guidance to understand potential value that intellectual property assets may have to a business seeking debt finance

This blogger appreciates that a document as short as this one cannot hope to be a panacea for all the ailments associated with IP finance. He hopes, though, that it will help to improve the efficacy of communication between those who need IP finance and those who offer it -- even if there remains an even bigger bridge to cross when seeking to balance the deep-roote caution of lenders with the inherent optimism of would-be borrowers.

More tools: but are they right for the job?

"Businesses to get greater Intellectual Property support" is the title of today's media release from the UK government's Department for Business, Innovation and Skills. According to its text:

"The potential for businesses to succeed and grow received a big boost today with the launch of new support tools to help small firms identify, protect and grow their intellectual property (IP) assets. The Intellectual Property Office launched ‘IP for Business’ - a suite of five business tools which make sure firms can tap into up-to-date guidance to help manage their IP. It will also help firms get more relevant advice from their accountants and other business advisers.

The tools respond to the challenge of making sure businesses can generate value from ideas against a backdrop of poor understanding of IP rights and how they can exploit them. At the centre of the toolkit is IP Equip - a new, free interactive online training tool that helps businesses and their advisors to identify assets which may be protected by IP rights and think through the strategy for protecting them. ...

Roger Burt, President of the Chartered Institute of Patent Attorneys, said:

“Small businesses and their advisors, if they understand it at all, generally see IP as a low priority. To engage their interest, you have to talk to them about its business benefits, not about the intricacies of intellectual property, particularly patent law. This new material does just that. It is a valuable addition to the tools already available.”

President of the Institute of Trade Mark Attorneys Catherine Wolfe sees the new package as having a clear advantage over some of the existing materials:

“By focusing on the potential commercial value of IP assets these new tools make it clear to business people and their advisers that it pays to get expert help at an early stage. Having an effective IP strategy can be crucially important to business.”

Other products being launched today include

• IP Equip app which is available to download free from the Apple store iTunes and Android App store. This will give access to IP information on the go. 

• IP Basics which is a range of new guides for business owners, explaining how to maximise the potential of IP. 

• IP Health Check which allows business owners to assess their own business for free with a tailored report to identify and value their IP. 

• IP Master Class which is a popular accredited course which enables advisors to advance their knowledge".

While no-one can accuse the IPO of not trying, it would be good to know how effective these tools are: how far have they been test-driven and how widely applicable are they?  Readers' experiences and evaluations would be particular welcome -- especially if they influence a decision whether to seek, or to advance, investment funding.