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.

US Antitrust Chief Delrahim Announces Withdrawal from DOJ/USPTO Policy Statement on Remedies for SEPs subject to FRAND

On December 7, the chief of the Antitrust Division at the U.S. Department of Justice (DOJ), Makan Delrahim, announced that the DOJ will be withdrawing from the 2013 USPTO and DOJ joint statement, “Policy Statement on Remedies for Standards-Essential Patents Subject to Voluntary F/RAND Commitments.”  The announcement was part of his speech, titled “Telegraph Road: Incentivizing Innovation at the Intersection of Antitrust and Patent law.”  His speech provides, in part:

. . . In the more recent past, we have seen somewhat of a shift toward the view that patents might confer too much power, particularly if those patents are essential to a technical interoperability standard.  The fundamental right of the patent holder to exclude competitors has been questioned in this context.

In particular, I have criticized the argument that it ought to be a violation of antitrust law for a holder of a standard-essential patent, or SEP, to exclude competitors from using the technology, including by seeking an injunction against the sale of infringing goods—I think that argument is wrong as a matter of antitrust law and bad as a matter of innovation policy. 

. . . When it comes to the test for obtaining injunctive relief against infringement, patent law already strikes a careful balance that optimizes the incentive to innovate, for the benefit of the public.  The test was articulated by the Supreme Court in eBay v. MercExchange.  

. . . A court applying the eBay test is thus allowed to consider effects in the market, including (as Justice Kennedy noted in concurrence) how significant the patented invention is to the use of the product, and whether the patent holder can be properly rewarded for that contribution without the ability to exclude competitors. 

When this test is used to maintain appropriate incentives to innovate, it thus facilitates the goals of antitrust law and patent law alike. 

I fear that we at the Antitrust Division gave some observers the opposite impression, however, with the confusion created by the joint statement issued by the Department of Justice and the U.S. Patent & Trademark Office in early 2013, entitled “Policy Statement on Remedies for Standards-Essential Patents Subject to Voluntary F/RAND Commitments.” 

That Policy Statement purported to offer the agencies’ perspectives on the propriety of a federal court issuing an injunction, or the International Trade Commission’s issuing an exclusion order, “when a patent holder seeking such a remedy asserts standards-essential patents that are encumbered by a RAND or FRAND licensing commitment.”  In particular, the statement discusses what is in the “public interest” because the eBay test and the Tariff Act governing the ITC name the public interest as a relevant factor.

As I have said before, this joint statement should not be read as a limitation on the careful balance that patent law strikes to optimize the incentive to innovate.  There is no special set of rules for exclusion when patents are part of standards.  A FRAND commitment does not and should not create a compulsory licensing scheme.  

In those cases, as in all cases, the question is what result will optimize the incentives to innovate for the benefit of the public.  Since injunctions against infringement frequently do serve the public interest in maintaining a patent system that incentivizes and rewards successful inventors through the process of dynamic competition, enforcement agencies without clear direction otherwise from Congress should not place a thumb on the scale against an injunction in the case of FRAND-encumbered patents. 

Despite my clarification of the Antitrust Division’s position on the propriety of these types of injunctions, the potential for confusion remains high because the joint statement from 2013 indicates that an injunction or exclusion order “may harm competition and consumers,” seeming somehow to suggest an antitrust inquiry that is distinct from the goal of optimizing the incentives for innovation—namely, dynamic competition.  

This potential for confusion has lead me to a conclusion that I would like to announce here today, in the interest of clarity and predictability of the laws, and among the patent law community with whom we share the goal of incentivizing innovation: The Antitrust Division is hereby withdrawing its assent to the 2013 joint “Policy Statement on Remedies for Standards-Essential Patents Subject to Voluntary F/RAND Commitments.”

The 2013 statement has not accurately conveyed our position about when and how patent holders should be able to exclude competitors from practicing their technologies.  We will be engaging with the U.S.P.T.O. to draft a new joint statement that better provides clarity and predictability with respect to the balance of interests at stake when an SEP-holder seeks an injunctive order.

Any discussion regarding injunctive relief should include the recognition that in addition to patent holders being able to engage in patent “hold up,” patent implementers are also able to engage in “hold out” once the innovators have already sunk their investment into developing a valuable technology.  Additionally, a balanced discussion should recognize that some standard-setting organizations may make it too easy for patent implementers to bargain collectively and achieve sub-optimal concessions from patent holders that undermine the incentive to innovate.  That is the topic I want to turn to next.

Although standard-setting organizations can undoubtedly offer enormous benefits to consumers, there are antitrust risks associated with any activity that involves competitors making joint decisions.  When there is evidence that participants in a standard-setting organization have engaged in collusion, which is the “supreme evil” of antitrust law, according to the Supreme Court in Trinko, the Division will be inclined to investigate. 

For instance, there is a potential antitrust problem where a group of product manufacturers within a standard-setting organization come together to dictate licensing terms to a patent holder as a condition for inclusion in a standard because it may be a collective exertion of monopsony power over the patent holder.  . . . 

The Antitrust Division will therefore investigate and bring enforcement actions to end practices that eliminate the independent centers of decision-making and thereby harm competitive processes, including price competition and innovation competition.  Often a single maverick firm may be willing to take a chance on a new and innovative technology or business model that the rest of its competitors would rather see killed off in its incipiency.  Antitrust law recognizes the consumer benefit of those entrepreneurial and innovative tendencies and their vulnerability to collusion.

Although there are certain best practices for guarding the process of standard setting against such abuses, we are concerned that some standard-setting organizations may not even attempt to adopt these safeguards.  

. . . Calling your meetings a standard-setting organization, or even in fact publishing some standards necessary for interoperability, is not a free pass for coordination designed to reduce common competitive threats or forestalling innovative developments in the industry that put a legacy business model at risk.

… Patent policies affect the incentives for innovation.  If an SSO’s policy is too restrictive for one side or the other, it also risks deterring participation in procompetitive standard setting. 

Just as competition in the marketplace results in better outcomes for the consumers of goods and services, competition among standard-setting organizations to adopt better patent policies can result in better outcomes for the consumers of standard-setting activities (that is, for the participants themselves). 

It is for this reason that we will take a dim view of any coordinated effort by competitors to stifle competition among standard-setting organizations, including competition to offer the patent policy that brings the most participants to the table.  For instance, competitors would come under scrutiny if they orchestrated a group boycott of an SSO with a patent policy that is unfavorable to their commercial interests. 

Trump Administration Releases Annual IP Report to Congress

The White House U.S. Intellectual Property Enforcement Coordinator has released its Annual Intellectual Property Report (Report) to Congress (around 170 pages!).  The Report outlines the Trump Administration’s approach to intellectual property policy and provides information concerning the activity of the various agencies in the U.S. government with duties related to intellectual property.  The bulk of the Report includes appendices which are descriptions of the work of each agency concerning intellectual property over the last year or so. 

The general thrust of the Trump Administration’s approach to intellectual property is stated by a President Trump quote:

“We will safeguard the copyrights, patents, trademarks, trade secrets, and other intellectual property that is so vital to our security and to our prosperity. We will uphold our values, we will defend our workers, and we will protect the innovations, creations, and inventions that power our magnificent country.” 

The Report outlines the Administration’s four-part strategic approach, which includes: 

• engagement with our trading partners; • effective use of all our legal authorities, including our trade tools; • expanded law enforcement action and cooperation, and • engagement and partnership with the private sector and other stakeholders.

Under the first strategic approach, the Report outlines various initiatives and activities across different agencies to engage and educate trading partners, including the USPTO’s Global Intellectual Property Academy.  Under the second strategic approach, the Report notes that the Trump Administration will strengthen the Committee on Foreign Investment in the United States as well as utilize the WTO Dispute Settlement process.  On the third strategic approach, the Report notes:

 At the end of FY 2017, the FBI had 228 pending IPR investigations. The largest number of investigations deal with the theft of trade secrets (79), copyright infringement (79),31 and trademark infringement (64).32 During FY 2017, the FBI initiated 44 new investigations, made 31 arrests, got 23 convictions, and had seizures totaling $750,205, forfeitures totaling $86,949, restitution totaling $53,396,003, and FIRE (Frozen, Indicted, Restrained, Encumbered) totaling $750,000. 

In FY 2017, the number of CBP and HSI IPR seizures increased more than eight percent, to 34,143 (from 31,560 in FY 2016). The total estimated Manufacturer’s Suggested Retail Price (MSRP) of the seized goods, had they been genuine, was $1,206,382,219.

In FY 2017, ICE-HSI initiated 713 intellectual property investigations and had 457 arrests, 288 indictments, and 240 convictions.

In FY 2017, the IPR Center vetted 27,856 investigative leads; of these 16,030 were referred to law enforcement partners. Additionally, the IPR center de-conflicted 4,750 investigative targets for partner agencies and industry. While performing these de-conflictions, the IPR Center identified 321 situations where two or more entities were investigating the same target. Finally, the IPR Center referred 959 leads to private industry for follow-up.  . . .

U.S. law enforcement and Federal agencies participated in Operation Pangea X, which was conducted from August 19, 2017 to September 19, 2017, with the participation of 123 countries, and culminated with a week of action, where participating countries and agencies conducted and/or reported the results of their respective operations. U.S. and Mexican authorities typically participate in Pangea independent of each other. However, in FY 2017, ICE-HSI, CBP, and Mexico collaborated during the U.S. operational phase of this operation. On September 25, 2017, INTERPOL issued a press release highlighting the results of Operation Pangea X, which resulted in 3,584 websites taken off-line, 400 arrests worldwide, and the seizure of 470,000 packages with an estimated value of $51 million in potentially dangerous medicine.

The IPR Center’s Operation Apothecary addresses, analyzes, and attacks potential vulnerabilities in the entry process that might allow for the Internet-facilitated smuggling of commercial quantities of counterfeit, unapproved, and/or adulterated drugs through international mail facilities, express courier hubs, and land borders. During FY 2017, Operation Apothecary resulted in 59 new cases, 38 arrests, 37 indictments, and 41 convictions, as well as 567 seizure incidents of counterfeit items.

On standard setting, the Report notes:

Standards Setting: Many of America’s economic competitors engage strategically in standards setting organizations (SSOs), often to the detriment of American innovators. As the Administration and American industry engage with SSOs, it will be important to ensure that SSOs are being used fairly to promote the adoption of new technologies, rather than impeding the ability for American innovators to continue creating and inventing.  And as SSOs promote the adoption of new technologies, such technologies should be available to industry under fair, reasonable and non-discriminatory terms.