Measuring value and royalty costs in standards and SEPs passed along the value chain to consumers

An economist in the audience asked my panel on “transparency” at the Patents in Telecoms and the Internet of Things conference in London recently about achieving this by demanding detailed company financial disclosures. This is my first of two articles on topics in my wheelhouse that were addressed at this superlative biennial event. 

Rough judgments

Companies are generally unwilling to reveal such accounting figures that would help show how royalty costs are passed on and where profits are generated. Furthermore, some major value transfers are non-monetary and would not show up in these measures. Nevertheless, it is possible to surmise where most economic value is generated, captured or passed through, and where royalty costs are passed on in supply chains to customers.

Aggregate royalties paid of around five percent of handset revenues are very modest in comparison to total value in standards and the consumer welfare derived by several billion people using devices such as smartphones for many useful purposes.

Most of the value created in technology standards such as 4G and 5G is passed through to consumers. How much and where the rest of it is harvested across the supply chain and in the broader ecosystem is more complex and subtle.

Royalties paid and passed on can have a significant bearing on the financial performance of individual companies where competitors are paying and absorbing different amounts.

My analysis here includes some unashamedly qualitative assessments, as well as my usual quantitative support. But first, some definitions and background.

Economic pie sharing

Economists describe value created, for example, from technology innovation, as a total “surplus” that’s divided between producers and consumers. Producer surplus is obtained where the price received is higher than the minimum at which the producer is willing to sell. Consumer surplus is where the price paid is lower than the maximum the consumer is willing to pay. However, in the real world, it’s more complicated than this binary split with various different players in the ecosystem benefiting from standards such as 4G and 5G including standard-essential patents (SEPs).

Those who derive value from standards including SEPs, and share the total surplus include patent licensors, device OEMs, device ODMs (i.e. contract manufacturers), network equipment OEMs,  MNOs and MVNOs (i.e. physical and virtual mobile network operators), Big Tech Internet platforms and software publishers as well as end-users. Suppliers that generate no more than their cost of capital might be regarded as not capturing surplus, but superior returns and deficient returns can be generated in various ways. Reasons that possibly explain weak or strong profitability include (in)efficiency and other business activities. For example, Apple is by far the most profitable smartphone OEM and has accounted for between 70 percent and 80 percent of total handset profits over many years because it has a lot going for it. It is a more specific empirical question to what extent its superior returns result from it paying less than economic value or harvesting surplus in other ways in use of the cellular standards including SEPs.

Upstream creation, downstream consumption

Communications standards such as 4G and 5G are enormously valuable overall. This is resoundingly indicated by more than five billion mobile phone users (i.e. unique subscribers) and with rapid uptake of new standards. In addition to using mobile devices for calling and text messaging, with the vast majority of devices now being smartphones these are the primary or only means of accessing the Internet for most of these people. For a large and increasing proportion of them, these devices are also the dominant means of receiving news, sharing photos, paying for purchases, navigating and even watching video.

Some of the surplus created by standard-technology developers is retained or used to subsidize product business in network equipment or devices; but most of it flows to consumers within a few years of new technologies becoming commercially available. In between, a few major OEMs are likely retaining significant surplus. However; most OEMs and ODMs that are paying their dues in patent licensing fees are probably not keeping much of the surplus at all. Various Over-The-Top (OTT) players are taking significant value indirectly—in competition with MNOs and in information exchange barter trading with consumers, as explained below.

Fruits of competition and dominance

Vigorous competition bringing innovation and rapidly-declining quality-adjusted prices has delivered exceptional growth in new higher-performance services and network traffic growth. By the mid-2000s, unsubsidized new mobile phones could be purchased in most nations for under $50 and for as little as $20 in developing nations. By 2010, around half the world’s population had a mobile phone. Now, for example, there are plenty of 4G Android smartphone models on sale in India in the price range of RS5,000 to RS10,000 ($55 to $110) that include at least 4GB of RAM, front and rear cameras and 6 inch or larger displays that can stream video and deliver location-based services. Consumer surplus is clearly high in use of these, despite the relatively low willingness or ability to pay much higher prices in nations with modest income-per-capita such as India.

Meanwhile, the prices of high-end smartphones have increased. For example, many consumers happily pay more than $1,000 for various iPhone and Android models. Apple thus appears to be deriving significant producer surplus. While much of that arises from its strong brand, favored designs and manufacturing cost control, it also seems likely that a significant proportion of that is from standards-based technologies, after its payment of SEP royalties. It’s notable from recent FRAND decisions in the UK (i.e. in Interdigital v. Lenovo and Optis v. Apple) that large OEMs—such as Apple, Samsung, Xiaomi and Huawei—paying royalties in large lump sums up-front spend relatively low amounts per unit, and as percentages of unit selling prices, in comparison to many smaller OEMs paying running royalties. The larger OEMs are evidently receiving deep discounts of up to 80% for volume and prepayment.

In comparison to Apple and Samsung, most handset OEMs are in a rather more commoditized (i.e. less product-differentiated) and price-competitive market segment. Marginal costs also tend to be passed on to customers in the latter, but with little scope to increase prices much above costs no matter what goodies become available (to all) in the standards. The contract manufacturer ODMs also operate on thin margins. While owing their existence to the new technologies that fuel handset market growth and replacement, most manufacturers do not appear to be making exceptional profits in doing so.

Even some major OEMs have failed financially in the face of competition, regardless of ever-improving and increasingly valuable standards. It’s notable that despite Nokia being the handset market leader commanding the vast majority of the sector’s profits in the 2000s, and with peak financial performance around 2008, the firm’s floundering smartphone business at the beginnings of the 4G era was divested to Microsoft in 2014 and then subsequently closed with declining sales a couple of years later. With LG’s market share falling from 9% to 2% during the 2010s, it stopped selling smartphones in 2021.

All being things equal, one would expect costs including royalties to be fully passed on by suppliers in their prices. One would also expect that prices could be elevated little more—despite standard-technologies creating more total surplus than is paid for them in royalties—due to fierce downstream price competition among OEMs. Given the many competing suppliers at the commodity end of the market, one way a supplier might retain substantial supplier surplus would be if that company was avoiding royalty payments (e.g. through hold-out) while its competitors were incurring those costs and passing them on to customers. Alternatively, if that supplier was the only one, or if few are, paying such royalties, it might be unable to fully pass-on such costs to its customers without diminishing its sales volumes and market share.

Quid pro quos

MNOs and MVNOs do not pay directly to use the standards or SEP technologies that have kept them competitive in generating their service revenues. Instead, MNOs pay for new standards-based technologies in their network equipment purchases that are licensed with payment of patent fees by the manufacturers. MNOs and MVNOs commonly subsidize consumer purchases of new handsets that also employ these manufacturer-licensed technologies.

The fortunes of MNOs worldwide vary significantly: however, with a few exceptions such as US market leaders AT&T, Verizon and T-Mobile in recent years, profitability is generally modest or meagre. For example, Vodafone and 3 in the UK are hoping their proposed merger will improve lacklustre financial performance in competition with two other MNOs.

While some MNOs may have been able to capture some of the economic surplus in 4G and 5G, it seems that the MNOs and MVNOs overall are not major hoarders of surplus. Instead, consumers benefit, for example, by getting more and more data for around the same expenditure as for much less data previously. While global MNO revenues have been rather flat over many recent years, MNOs are supplying exponential network traffic growth of 1,000x over fifteen years since 2010. Fierce competition among operators is causing all the cost-per-gigabyte reductions and increased value MNOs receive from technological improvements to be passed through downstream to consumers with an unrewardingly constant unitary elasticity in the market demand curve.

In contrast, Big Tech Internet platforms are making money hand over fist in comparison to most MNOs, even though surging mobile data now accounts for almost 60% of all Internet traffic. Google (Android, Google Play Store, YouTube), Meta (Facebook, Instagram, WhatsApp) and Apple (iOS and App Store) are indirectly appropriating some of the surplus generated by standards and SEPs. For example, as WhatsApp is free for end-users, it cannibalizes the higher profits mobile operators could otherwise make on picture messaging, international calls and roaming calls. Even though consumers pay for mobile data so they can use this app, MNOs’ supplier surplus is diminished by these substitution effects. And, there’s is no free lunch for consumers: the Faustian bargain in using WhatsApp is in allowing Meta to access personal phone contact information. Consumer surplus is thus diminished and Meta’s supplier surplus is increased by this payment made in-kind.

Big Tech is also taking significant slices of the surplus from OEMs. For example, when you browser search or ask Siri for an Internet search on your iPhone it uses Google’s search engine. Payments by Google to Apple, to be the default search engine on iPhones, reportedly accounts for 14 to 21 per cent of Apple’s profits.  Payments were expected to be between $18 billion and $20 billion annually by 2021. That’s not all economic surplus from the value of communications standards and SEPs, but a significant proportion of it surely is given that Google, like Meta, also harvests value from consumers’ personal information including use—such as location—of mobile devices.

And, what about the SEP licensors who also develop the standards in the first place? Some of them are probably obtaining some producer surplus and using it to support their complementary product businesses in communications processor chips, network equipment and devices. Nevertheless, with aggregate royalties paid only around five percent of handset revenues, a much lower percentage when also including MNO and mobile OTT revenues and declining over the last decade, the remaining surplus passed through downstream in a vibrant and innovative ecosystem where almost everyone now is a major consumer is much, much more.

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.

U.S. Government Accountability Office Report on Impact of 2020 Trademark Modernization Act and Fraud

Pursuant to the 2020 Trademark Modernization Act (TMA), the U.S. Government Accountability Office (GAO) released a report examining fraud at the U.S.Trademark Office.  The GAO made recommendations to the Trademark Office to reduce the number of fraudulent trademark registrations.  The GAO reviewed the impact of changes made by the TMA and stated:

Based on our analysis of USPTO data for the period December 21, 2021, through June 27, 2023, we found that the USPTO Director and trademark attorneys representing their clients used the TMA’s new expungement and reexamination procedures to remove 2,615 falsely or inaccurately claimed goods and services from trademark registrations. Specifically: • Reexamination proceedings accounted for 1,955 of the removals compared to 660 removals resulting from expungement proceedings (see fig. 4). • Director-initiated proceedings accounted for 592 of the removals and third-party petitions accounted for 2,023 of the removals.

The GAO recommendations provide:

Recommendation 1: The Commissioner for Trademarks should plan and conduct regular fraud risk assessments of the trademark register to determine a fraud risk profile that aligns with leading practices in the Fraud Risk Framework. Specifically, this process should include (1) identifying inherent fraud risks to the trademark register, (2) assessing the likelihood and impact of inherent fraud risks, (3) determining fraud risk tolerance, (4) examining the suitability of existing fraud controls, and (5) documenting the fraud risk profile. Recommendation 2: The Commissioner for Trademarks should identify and implement improvements to current data systems to strengthen trademark data analytics for stronger fraud risk management.

The report also discusses other methods the U.S. Trademark Office uses to detect fraud such as post registration audits. 

Japanese Universities Having Trouble with Tech Transfer

Nikkei Asia has published an article by Kenjiru Suzuki titled, "Japan's Universities Fail to Make the Most of Intellectual Property: Due to Lack of Support, Patents Only Make 2% Compared to U.S. Schools."  The title provides a nice summary of the article's findings.  Research has pointed to differences between countries and their innovation systems as to why a specific country may not experience the relative success of U.S. universities in technology transfer.  For example, there may be differences in university culture, laws concerning taking a company public, corporate formation laws, laws concerning mergers and acquisitions, tax law, amount of available funding, expected licensing terms, skilled workforce, specific IP and data rights laws, networks of support and engagement, university researcher buy-in, and availability of capital (among other things).  I confess I am surprised that Japan has not realized more success in this area.  

US Department of Treasury Sanctions Commercial Spyware Entities

The U.S. Department of Treasury has sanctioned individuals and entities responsible for commercial spyware.  The Press Release states:

WASHINGTON — Today, the Department of the Treasury’s Office of Foreign Assets Control (OFAC) designated two individuals and five entities associated with the Intellexa Consortium for their role in developing, operating, and distributing commercial spyware technology used to target Americans, including U.S. government officials, journalists, and policy experts. The proliferation of commercial spyware poses distinct and growing security risks to the United States and has been misused by foreign actors to enable human rights abuses and the targeting of dissidents around the world for repression and reprisal. 

“Today’s actions represent a tangible step forward in discouraging the misuse of commercial surveillance tools, which increasingly present a security risk to the United States and our citizens,” said Under Secretary of the Treasury for Terrorism and Financial Intelligence Brian E. Nelson. “The United States remains focused on establishing clear guardrails for the responsible development and use of these technologies while also ensuring the protection of human rights and civil liberties of individuals around the world.”  . . .

PREDATOR SPYWARE SOLD TO CUSTOMERS AROUND THE GLOBE

Since its founding in 2019, the Intellexa Consortium has acted as a marketing label for a variety of offensive cyber companies that offer commercial spyware and surveillance tools to enable targeted and mass surveillance campaigns. These tools are packaged as a suite of tools under the brand-name “Predator” spyware, which can infiltrate a range of electronic devices through zero-click attacks that require no user interaction for the spyware to infect the device. Once a device is infected by the Predator spyware, the spyware can be leveraged for a variety of information stealing and surveillance capabilities—this includes the unauthorized extraction of data, geolocation tracking, and access to a variety of applications and personal information on the compromised device. 

The Intellexa Consortium, which has a global customer base, has enabled the proliferation of commercial spyware and surveillance technologies around the world, including to authoritarian regimes. Furthermore, the Predator spyware has been deployed by foreign actors in an effort to covertly surveil U.S. government officials, journalists, and policy experts. In the event of a successful Predator infection, the spyware’s operators can access and retrieve sensitive information including contacts, call logs, and messaging information, microphone recordings, and media from the device.    

PRESIDENTIAL DIRECTIVE TO PROMOTE ROBUST COMMERCIAL SPYWARE STANDARDS TO PROTECT NATIONAL SECURITY AND UNIVERSAL HUMAN RIGHTS 

As described in E.O. 14093 and the White House Fact Sheet, commercial spyware has proliferated in recent years with few controls and a high risk of abuse.  A growing number of foreign governments around the world, moreover, have deployed this technology to facilitate repression and enable human rights abuses, including to intimidate political opponents and curb dissent, limit freedom of expression, and monitor and target activists and journalists. Misuse of these powerful surveillance tools has not been limited to authoritarian regimes. Democracies also have confronted revelations that actors within their systems have misused commercial spyware to target their citizens without proper legal authorization, safeguards, and oversight. 

This Presidential Directive has identified that the United States has a fundamental national security and foreign policy interest in countering and preventing the proliferation of commercial spyware that has been or risks being misused, in light of the core interests of the United States in protecting U.S. government personnel and U.S. citizens around the world; upholding and advancing democracy; promoting respect for human rights; and defending activists, dissidents, and journalists against threats to their freedom and dignity. 

To advance these interests and promote responsible use of commercial spyware, the United States has established robust protections and procedures to ensure that any U.S. government use of commercial spyware helps safeguard its information systems and intelligence and law enforcement activities against significant counterintelligence or security risks; aligns with its core interests in promoting democracy and democratic values around the world; and ensures that the U.S. government does not contribute, directly or indirectly, to the proliferation of commercial spyware that has been misused by foreign governments or facilitate such misuse.

KEY ENABLERS OF THE INTELLEXA CONSORTIUM

Tal Jonathan Dilian (Dilian) is the founder of the Intellexa Consortium, and is the architect behind its spyware tools. The consortium is a complex international web of decentralized companies controlled either fully or partially by Dilian, including through Sara Aleksandra Fayssal Hamou.   

Sara Aleksandra Fayssal Hamou (Hamou), is a corporate off-shoring specialist who has provided managerial services to the Intellexa Consortium, including renting office space in Greece on behalf of Intellexa S.A. Hamou holds a leadership role at Intellexa S.A., Intellexa Limited, and Thalestris Limited.  

Intellexa S.A. is a Greece-based software development company within the Intellexa Consortium and has exported its surveillance tools to authoritarian regimes. Intellexa S.A. was added to the Department of Commerce Entity List on July 18, 2023, for trafficking in cyber exploits used to gain access to information systems, threatening the privacy and security of individuals and organizations worldwide. 

Intellexa Limited is an Ireland-based company within the Intellexa Consortium and acts as a technology reseller and holds assets on behalf of the consortium. Intellexa Limited was added to the Department of Commerce Entity List on July 18, 2023, for trafficking in cyber exploits used to gain access to information systems, threatening the privacy and security of individuals and organizations worldwide. 

Cytrox AD is a North Macedonia-based company within the Intellexa Consortium and acts as a developer of the consortium’s Predator spyware. Cytrox AD was added to the Department of Commerce Entity List on July 18, 2023, for trafficking in cyber exploits used to gain access to information systems, threatening the privacy and security of individuals and organizations worldwide. 

Cytrox Holdings Zartkoruen Mukodo Reszvenytarsasag (Cytrox Holdings ZRT) is a Hungary-based entity within the Intellexa Consortium. Cytrox Holdings ZRT previously developed the Predator spyware for the group before production moved to Cytrox AD in North Macedonia. Cytrox Holdings ZRT was added to the Department of Commerce Entity List on July 18, 2023, for trafficking in cyber exploits used to gain access to information systems, threatening the privacy and security of individuals and organizations worldwide. 

Thalestris Limited is an Ireland-based entity within the Intellexa Consortium that holds distribution rights to the Predator spyware and acts as a financial holding company for the Consortium.   

Dilian, Hamou, Intellexa S.A., Intellexa Limited, Cytrox AD, Cytrox Holdings ZRT, and Thalestris Limited are being designated pursuant to Executive Order (E.O.) 13694, as amended by E.O. 13757, for being responsible for or complicit in, or having engaged in, directly or indirectly, cyber-enabled activities originating from, or directed by persons located, in whole or in substantial part, outside the United States that are reasonably likely to result in, or have materially contributed to, a significant threat to the national security, foreign policy, or economic health or financial stability of the United States and that have the purpose or effect of causing a significant misappropriation of funds or economic resources, trade secrets, personal identifiers, or financial information for commercial or competitive advantage or private financial gain.

SANCTIONS IMPLICATIONS

As a result of today’s action, all property and interests in property of the designated persons described above that are in the United States or in the possession or control of U.S. persons are blocked and must be reported to OFAC. In addition, any entities that are owned, directly or indirectly, individually or in the aggregate, 50 percent or more by one or more blocked persons are also blocked. Unless authorized by a general or specific license issued by OFAC, or exempt, OFAC’s regulations generally prohibit all transactions by U.S. persons or within (or transiting) the United States that involve any property or interests in property of designated or otherwise blocked persons. 

In addition, financial institutions and other persons that engage in certain transactions or activities with the sanctioned entities and individuals may expose themselves to sanctions or be subject to an enforcement action. Prohibitions include the making of any contribution or provision of funds, goods, or services by, to, or for the benefit of any designated person, or the receipt of any contribution or provision of funds, goods, or services from any such person. 

The power and integrity of OFAC sanctions derive not only from OFAC’s ability to designate and add persons to the Specially Designated Nationals (SDN) List, but also from its willingness to remove persons from the SDN List consistent with the law. The ultimate goal of sanctions is not to punish, but to bring about a positive change in behavior. For information concerning the process for seeking removal from an OFAC list, including the SDN List, please refer to OFAC’s Frequently Asked Question 897 here. For detailed information on the process to submit a request for removal from an OFAC sanctions list, please click here.

Click here for more information on the individuals and entities designated today.

US DOJ Announces Indictment of Former Google Employee and PRC National for AI Trade Secret Theft

US Department of Justice announced the indictment of former Google employee for stealing AI related trade secrets.  The press release states:

A federal grand jury indicted Linwei Ding, aka Leon Ding, charging him with four counts of theft of trade secrets in connection with an alleged plan to steal from Google LLC (Google) proprietary information related to artificial intelligence (AI) technology. . . .

According to the indictment, returned on March 5 and unsealed earlier today, Ding, 38, a national of the People’s Republic of China and resident of Newark, California, transferred sensitive Google trade secrets and other confidential information from Google’s network to his personal account while secretly affiliating himself with PRC-based companies in the AI industry. Ding was arrested earlier this morning in Newark.

“The Justice Department will not tolerate the theft of artificial intelligence and other advanced technologies that could put our national security at risk,” said Attorney General Garland. “In this case, we allege the defendant stole artificial intelligence-related trade secrets from Google while secretly working for two companies based in China. We will fiercely protect sensitive technologies developed in America from falling into the hands of those who should not have them.”  

. . . “In the one year since its inception, the Disruptive Technology Strike Force has been relentless in protecting advanced U.S. technologies, like artificial intelligence, from malign actors,” said Assistant Secretary Matthew S. Axelrod of the Commerce Department’s Office for Export Enforcement. “Let today’s announcement serve as further warning – those who would steal sensitive U.S. technology risk finding themselves on the wrong end of a criminal indictment.”

According to court documents, the technology Ding allegedly stole involves the building blocks of Google’s advanced supercomputing data centers, which are designed to support machine learning workloads used to train and host large AI models. According to the indictment, large AI models are AI applications capable of understanding nuanced language and generating intelligent responses to prompts, tasks, or queries. The indictment describes how Google developed both proprietary hardware and software to facilitate the machine learning process powered by its supercomputing data centers. With respect to hardware, Google uses advanced computer chips with the extraordinary processing power required to facilitate machine learning and run AI applications. With respect to software, Google deploys several layers of software, referred to in the indictment as the “software platform,” to orchestrate machine learning workloads efficiently. For example, one component of the software platform is the Cluster Management System (CMS), which functions as the “brain” of Google’s supercomputing data centers. The CMS organizes, prioritizes, and assigns tasks to the hardware infrastructure, allowing the advanced chips to function efficiently when executing machine learning workloads or hosting AI applications.

According to the indictment, Google hired Ding as a software engineer in 2019. Ding’s responsibilities included developing the software deployed in Google’s supercomputing data centers. In connection with his employment, Ding was granted access to Goggle’s confidential information related to the hardware infrastructure, the software platform, and the AI models and applications they supported. The indictment alleges that on May 21, 2022, Ding began secretly uploading trade secrets that were stored in Google’s network by copying the information into a personal Google Cloud account. According to the indictment, Ding continued periodic uploads until May 2, 2023, by which time Ding allegedly uploaded more than 500 unique files containing confidential information.

In addition, the indictment alleges that Ding secretly affiliated himself with two PRC-based technology companies. According to the indictment, on or about June 13, 2022, Ding received several emails from the CEO of an early-stage technology company based in the PRC indicating Ding had been offered the position of Chief Technology Officer for the company. Ding allegedly traveled to the PRC on Oct. 29, 2022, and remained there until March 25, 2023, during which time he participated in investor meetings to raise capital for the new company. The indictment alleges potential investors were told Ding was the new company’s Chief Technology Officer and that Ding owned 20% of the company’s stock.

According to the indictment, unbeknownst to Google, by no later than May 30, 2023, Ding had founded his own technology company in the AI and machine learning industry and was acting as the company’s CEO. Ding’s company touted the development of a software platform designed to accelerate machine learning workloads, including training large AI models. As alleged in the indictment, Ding applied to a PRC-based startup incubation program and traveled to Beijing, to present his company at an investor conference on Nov. 24, 2023. As set forth in the indictment, a document related to Ding’s startup company stated, “we have experience with Google's ten-thousand-card computational power platform; we just need to replicate and upgrade it - and then further develop a computational power platform suited to China's national conditions.” 

The indictment alleges Ding’s conduct violated his employment agreement as well as a separate code of conduct that Ding signed when he became a Google employee. Further, the indictment describes measures that Ding allegedly took to conceal his theft of the trade secrets. For example, he allegedly copied data from Google source files into the Apple Notes application on his Google-issued MacBook laptop. By then converting the Apple Notes into PDF files and uploading them from the Google network into as separate account, Ding allegedly evaded detection by Google’s data loss prevention systems. Likewise, the indictment describes how in December 2023 Ding allegedly permitted another Google employee to use his Google-issued access badge to scan into the entrance of a Google building – making it appear he was working from his U.S. Google office when, in fact, he was in the PRC.

Ding is charged with four counts of theft of trade secrets. If convicted, Ding faces a maximum penalty of 10 years in prison and up to a $250,000 fine for each count. A federal district court judge will determine any sentence after considering the U.S. Sentencing Guidelines and other statutory factors.

The FBI and Commerce Department are investigating the case.

The U.S. Attorney’s Office for the Northern District of California and Justice Department National Security Division’s Counterintelligence and Export Control Section are prosecuting the case.

Today’s action was coordinated through the Justice and Commerce Departments’ Disruptive Technology Strike Force. The Disruptive Technology Strike Force is an interagency law enforcement strike force co-led by the Departments of Justice and Commerce designed to target illicit actors, protect supply chains, and prevent critical technology from being acquired by authoritarian regimes and hostile nation-states.

An indictment is merely an allegation. All defendants are presumed innocent until proven guilty beyond a reasonable doubt in a court of law.

US PTO Releases Guidelines on AI Assisted Inventions

The United States Patent Office has issued Guidelines on AI Assisted Inventions.  The press release concerning the guidelines provides:

To incentivize, protect, and encourage investment in innovations made possible through the use of artificial intelligence (AI), and to provide the clarity to the public and United States Patent and Trademark Office (USPTO) employees on the patentability of AI-assisted inventions, the USPTO has published guidance in the Federal Register. This guidance delivers on the USPTO’s obligations under the Executive Order on the Safe, Secure, and Trustworthy Development and Use of Artificial Intelligence.

“The patent system was developed to incentivize and protect human ingenuity and the investments needed to translate that ingenuity into marketable products and solutions,” said Kathi Vidal, Under Secretary of Commerce for Intellectual Property and Director of the USPTO. “The patent system also incentivizes the sharing of ideas and solutions so that others may build on them. The guidance strikes a balance between awarding patent protection to promote human ingenuity and investment for AI-assisted inventions while not unnecessarily locking up innovation for future developments. The guidance does that by embracing the use of AI in innovation and focusing on the human contribution.”

The guidance, which goes into effect February 13, makes clear that AI-assisted inventions are not categorically unpatentable. The guidance provides instructions to examiners and stakeholders on how to determine whether the human contribution to an innovation is significant enough to qualify for a patent when AI also contributed. It builds on the existing inventorship framework by providing instructions to examiners and applicants on determining the correct inventor(s) to be named in a patent or patent application for inventions created by humans with the assistance of one or more AI systems. It states that patent protection may be sought for inventions in which a human provided a significant contribution to the invention.

Additionally, in order to further assist our examiners and applicants in their understanding of this guidance, examples of hypothetical situations of how the guidance would apply are available on our AI-related resources webpage.

To learn more about what the guidance is and is not, and to get your questions answered and provide feedback, we invite you to attend our upcoming public webinar on March 5 from 1-2 p.m. ET. We also invite you to read the Director’s Blog on AI and inventorship guidance: Incentivizing human ingenuity and investment in AI-assisted inventions.

The full text of the inventorship guidance for AI-assisted inventions and the corresponding examples are available on our AI-related resources webpage. The USPTO will accept public comments on the inventorship guidance and the examples until May 13, 2024. Please see the Federal Register Notice for instructions on submitting comments.

The Guidelines provide a nonexhaustive list of principles to use when analyzing ai-assisted inventorship:

1. A natural person's use of an AI system in creating an AI-assisted invention does not negate the person's contributions as an inventor.^[53] The natural person can be listed as the inventor or joint inventor if the natural person contributes significantly to the AI-assisted invention.

2. Merely recognizing a problem or having a general goal or research plan to pursue does not rise to the level of conception.^[54] A natural person who only presents a problem to an AI system may not be a proper inventor or joint inventor of an invention identified from the output of the AI system. However, a significant contribution could be shown by the way the person constructs the prompt in view of a specific problem to elicit a particular solution from the AI system.

3. Reducing an invention to practice alone is not a significant contribution that rises to the level of inventorship.^[55] Therefore, a natural person who merely recognizes and appreciates the output of an AI system as an invention, particularly when the properties and utility of the output are apparent to those of ordinary skill, is not necessarily an inventor.^[56] However, a person who takes the output of an AI system and makes a significant contribution to the output to create an invention may be a proper inventor. Alternatively, in certain situations, a person who conducts a successful experiment using the AI system's output could demonstrate that the person provided a significant contribution to the invention even if that person is unable to establish conception until the invention has been reduced to practice.^[57]

4. A natural person who develops an essential building block from which the claimed invention is derived may be considered to have provided a significant contribution to the conception of the claimed invention even though the person was not present for or a participant in each activity that led to the conception of the claimed invention.^[58] In some situations, the natural person(s) who designs, builds, or trains an AI system in view of a specific problem to elicit a particular solution could be an inventor, where the designing, building, or training of the AI system is a significant contribution to the invention created with the AI system.

5. Maintaining “intellectual domination” over an AI system does not, on its own, make a person an inventor of any inventions created through the use of the AI system.^[59] Therefore, a person simply owning or overseeing an AI system that is used in the creation of an invention, without providing a significant contribution to the conception of the invention, does not make that person an inventor.

Additionally, the guidelines, related to the duty of candor and reasonable inquiry, state:

For example, patent practitioners who are preparing and prosecuting an application should inquire about the proper inventorship.^[74] Given the ubiquitous nature of AI, this inventorship inquiry could include questions about whether and how AI is being used in the invention creation process. In making inventorship determinations, it is appropriate to assess whether the contributions made by natural persons rise to the level of inventorship as discussed in section IV above.

National Academy of Inventors 2023 World-Wide University U.S. Utility Patent Rankings

The National Academy of Inventors has released its 2023 university rankings for U.S. granted utility patents.  The top 10 include: “1) The Regents of the University of California -- 546; 2) Massachusetts Institute of Technology – 365; 3) The University of Texas System –235; 4) King Fahd University of Petroleum and Minerals –216; 5) Stanford University –199; 6) Purdue University – 198; 7) Harvard University – 186; 8) Zhejiang University –185; 9) Arizona State University –170; 10) California Institute of Technology –156.  Zhejiang University (2022, 16) passed Tsinghua University (2022, 5) as the highest ranked university based in China for 2023.  The list of the top 100 is available, here: 2023-Top-100-Worldwide.pdf (academyofinventors.org).

Discovering or Setting Aggregate Royalties and FRAND Rates for SEP Portfolios?

The European Parliament (EP) is due to vote on the European Commission’s proposed legislation for Fair, Reasonable and Non-Discriminatory (FRAND) licensing of Standard-Essential Patents (SEPs) on 27th or 28th February 2024. Stated objectives include increasing transparency and predictability while reducing transaction costs. Measures include (1) the setting up of a mandatory register for SEPs with essentiality checks of selected and representative random samples of SEPs, (2) a process for determining a non-binding aggregate royalty rate, and (3) a mandatory pre-litigation conciliation procedure for FRAND royalty determination, combined with (4) voluntary guidance on SEP licensing. A new competence centre within the European Intellectual Property Office (EUIPO) will be responsible for these tasks. 

The US and Europe are heading in different directions on how to determine FRAND licensing charges for SEPs. While the US has shunned rate-setting regulation by withdrawing guidance from government agencies including the USPTO, NIST and DoJ and is diminishing proposed law-making, the Commission's interventionist approach prescribes a valuation methodology which a Chinese court has recently used to drastically and defectively undercut established rates.

Whether the EP broadly accepts the Commission's proposed legislation as is, makes significant amendments, rejects some or all of it outright with demands for a radical rethink and do over, the need for sound institutional governance, fit-for purpose methods and quality standards in patent checking and for determining aggregate and individual royalties looms large.

My paper about much of the above has just been published by George Mason University Antonin Scalia Law School’s Journal of Law & Economics. In this, I compare US and European approaches to determining FRAND rates for SEPs when parties are in dispute. I also critically examine how aggregate royalties might be derived, together with the mechanics of “top-down approach” royalty rate setting. The paper with citation "Keith Mallinson, Discovering or Setting Aggregate Royalties and FRAND Rates for SEP Portfolios, 19 J.L. Econ. & Pol’y 1 (2024)" can be downloaded from SSRN, here.

U.S. FTC Supports March-in Rights Guidelines

The U.S. Federal Trade Commission has released a comment in support of the NIST’s guidelines concerning the exercise of march-in rights under the Bayh-Dole Act.  The Press Release states:

Today the Federal Trade Commission issued a comment in response to the National Institute of Standards and Technology’s (NIST) request for information on its Draft Interagency Guidance Framework for Considering the Exercise of March-In Rights under the Bayh-Dole Act.

Under the Bayh-Dole Act, the federal government has the right to “march in” on patents on inventions created using taxpayer funds—to require the patent holder to license the federally funded patent to other applicants. The draft interagency framework provides guidance outlining when the government should exercise its march-in rights, which have never before been utilized. The draft framework makes clear that high price is an appropriate basis for exercising march-in rights. 

In the comment, the FTC applauds NIST, which is part of the U.S. Department of Commerce, and the Interagency Working Group for Bayh-Dole, which includes the U.S. Department of Health and Human Services, for their efforts to reactivate march-in rights as an important check on companies charging Americans inflated prices for drugs developed with taxpayer-funded research. In the comment, the FTC expressed support for an expansive and flexible approach to march-in rights, including providing that agencies can march in on the basis of high prices.

The FTC’s comment draws on its experience in promoting competition and combatting anticompetitive practices in the pharmaceuticals industry. Lack of competition in pharmaceutical markets can lead to inflated pricing, rendering some lifesaving treatments out of reach for many Americans. Nearly three in 10 Americans report rationing or skipping their medications due to high costs. Contrary to industry claims that high drug prices are necessary to fund research and development (R&D), drug prices often depend more on whether the drug faces competition than the drug’s R&D costs. At the same time, pharmaceutical firms enjoy hundreds of billions of dollars of taxpayer investment in R&D. March-in rights are an essential check to ensure that taxpayer-funded inventions are affordable and accessible to the public.

The FTC’s comment further explains that although march-in rights can be a valuable tool to address potential harms in the pharmaceutical industry, broader challenges requiring government-wide solutions remain. For example, dense “patent thickets” result from pharmaceutical companies using increasingly large patent portfolios to protect a single treatment. This may weaken the utility of march-in rights to provide affordable public access to drugs  because some pharmaceuticals may be protected by patent thickets that include privately funded blocking patents in addition to government-funded patents subject to march-in rights. In its comment, the FTC  urges agencies to work collaboratively to also address such patent thickets.

The Commission voted 3-0 to approve filing of the comment.