Some Worst Case Scenarios as the Trade War with China Escalates

As the trade war and tension with China escalates, I am thinking about some worst case scenarios—particularly in the academic context concerning intellectual property/valuable information.  At least one commentator has made the allegation that the Trump Administration may attempt to restrict students from China.  This will greatly hurt some universities who are deriving a substantial amount of revenue from Chinese university students—and will benefit universities in other countries without such a restrictive policy such as Canada.   It is not too much of a jump to think the Trump Administration may also attempt to restrict Chinese professors and researchers from visiting academic institutions or being hired by academic institutions.  There have been quite a few interesting allegations raised concerning Confucius Institutes at U.S. universities.  I am wondering whether the United States and other countries will attempt to restrict the travel and employment in China of their academics who are citizens of their respective countries.  For example, let’s say a top researcher who is a U.S. citizen at Stanford University is offered a position at a major university in China or another country.  Could the U.S. government attempt to restrict the academic from moving (or even giving academic presentations)?  Does that happen already?  Certainly, we do have U.S. export control laws that would restrict certain technologies from being disclosed to a national of another country even in this country.  Perhaps a distinction will be made based on whether the research is funded by the government.  What about publication?  Will the Trump Administration also attempt to restrict academics from publishing certain research--there are some rules concerning national security and publication of patents?  Ultimately, does it matter if we do not have adequate cybersecurity protections?  

The Importance of an Accurate Assessment of Patent Valuation and Potential Market

A recent article in the Saint Louis Post Dispatch by Christopher Yasiejeko describes a patent-related dispute between two academic institutions.  Two major research universities, University of Wisconsin (through its technology licensing arm, Wisconsin Alumni Research Foundation (WARF)) and University of Washington, Saint Louis (WUSTL) are engaged in litigation concerning royalty payments over a jointly invented patented invention that was licensed to Abbott Laboratories.  The inventors included a researcher from Wisconsin and one from WUSTL. 

One of the issues with university developed technology is who will cover the patent prosecution costs.  Here, WARF apparently agreed to cover the costs for a higher royalty rate.  The dispute concerns apparent representations made by WARF concerning the value of the patent—allegedly representations were made that the value was not very high by WARF.  WUSTL appears to assert that WARF made representations to others that the patent was actually quite valuable and eventually important to the pharmaceutical, Zemplar, which according to the article “generated $409 million in sales in 2011.”  This appears to be a case where fraud in the inducement in entering the contract is relevant.  However, it seems strange that WUSTL was unable to arrive at their own valuation or understand the potential market for the invention—perhaps they did not have the resources at the time invested in technology transfer.  WARF was likely well financed at that time and certainly experienced.

[Hat Tip to Technology Transfer Central]

Recording Industry Association of America Reports Revenues are Up in 2017

The Recording Industry Association of America (RIAA) reports that revenues are up for a second year in a row.  The RIAA states that:

In 2017 revenues from recorded music in the United States increased 16.5% at estimated retail value to $8.7 billion, continuing the growth from the previous year. At wholesale, revenues grew 12.6% to $5.9 billion. Similar to 2016, these increases came primarily from growth in paid music subscriptions to services like Spotify, Amazon, Tidal, Apple Music, Pandora and others, which grew by more than 50%. This is the first time since 1999 that U.S. music revenues grew materially for two years in a row. At $8.7 billion, the industry has taken a decade to return to the same overall revenue level as 2008, and is still 40% below peak levels as the growth from streaming has been offset by continued declines in revenues from both physical and digital unit based sales. 

Notably, “[s]treaming music platforms accounted for almost 2/3rd of total U.S. music industry revenues in 2017, and contributed nearly all of the growth.”  Interestingly, digital download revenues slipped 25%.  Also, “[s]hipments of physical products decreased just 4% to $1.5 billion in 2017, a lower rate of decline than in recent years.”  This is good news for the industry; although we are talking about returning to 2008 revenue levels. An earlier WIPO report noted that positive revenue growth in prior years was attributable to two causes: streaming (new business models) and an expansion into new markets (mostly developing countries).  

Where is 5G communications technology IP coming from?

As I explained in IP Finance last week, following President Trump's blocking of Broadcom’s hostile bid to acquire Qualcomm, by remaining independent the cellular technology leader will be able to maintain its long-term commitment to high levels of R&D investment (at 23 percent of sales recently), most significantly including that in 5G communications standard-essential IP.

Use Cases for 5G International Mobile Telecommunications

5G is strategically important to the entire mobile ecosystem and to many nations for economic as well as for national security reasons.  The 5G standard will support many complementary technologies and market developments. Total estimated value is $12.3 trillion in 2035.

5G is a new standard that significantly embodies cumulative technology developments from previous cellular standards including 3G UMTS and 4G LTE. Many more innovative new technologies will also be added to 5G over the next decade or so. 

Transformation and growth with 5G

Mobile communications has improved in leaps and bounds since the introduction of analog phones in the early 1980s. After cellular was only significantly used for voice calling for a couple of decades, network traffic from voice was surpassed by data communications in 2009 with demand for the latter at least doubling every 18 months ever since. This is no mean feat. It resulted from major investments in technology R&D as well as in network facilities and new devices.

Exponential growth in mobile data

With the first commercial 5G deployments from around 2019, the new standard promises to be transformative and facilitate further growth with:

• Enhanced mobile broadband—even more of the above, with higher speeds and increased capacity to support that and additional users
• Ultra-reliable and low-latency communications for applications such as self-driving cars
• Massive Machine Type Communication in the Internet of Things (IoT) to connect tens of billions of sensors and other devices worldwide

While market opportunities are wide ranging and will include numerous technologies, they are most significantly underpinned by the mobile communications technologies developed and contributed to the 5G standard, including IP protected by standard-essential patents.

Building on the shoulders of giants

5G is substantially based upon previous cellular technologies. For example, whereas previous advances from 1G to 2G, from 2G to 3G and from 3G to 4G where largely defined by a totally new “air interface”, both 4G LTE and 5G “New Radio” are predominantly based on OFDMA wireless technology. 5G is also capitalizing on many other technologies that were already introduced in previous standards. Examples include QAM modulation, MIMO space division multiplexing and multi-carrier aggregation technologies. This short paper of mine explains in greater depth how seminal and foundational technologies are initially contributed to the standards and are then also very valuably reused in later standards. As standardization progresses, many more companies get involved in the process, including some who supplement these foundational technologies with additional contributions of varied worth.

As declarations begin to be made—of patents that owners believe are essential to the 5G standard—it will soon become apparent that a clear majority of these will have already have been declared essential to previous standards including various 3G standards and 4G LTE. Technology-IP leaders in 3G and 4G will therefore also tend be the leaders in 5G.

It is still very early for 5G SEP declarations because declarations are usually made several months after the setting of standards. The first standardization of 5G was not until December 2017 in 3GPP Release 15.[1]

Following this initial 5G standard release, there is substantial additional and ongoing development work including trials, debugging, development of commercial products and the introduction many new technical features and performance improvements.

Leading cellular technology innovators, among others, will continue to make new contributions to the standards in 5G, including additional technologies that are being introduced in later releases of the 5G standard, as also illustrated in this Qualcomm blog posting.

Quality trumps quantity in SEPs

The value of standard-essential technologies is largely a function of patent quality—particularly including seminal and foundational contributions—rather than of the raw numbers of patents filed, issued or declared essential to the standards. Nevertheless, significant attention is paid to these metrics, and on the numbers of technical contributions to standard setting organizations because these figures are easy to count and promote in the media, in licensing negotiations and in court litigation.

However, SEP declarations and the number of technical contributions companies make to the standard-setting process can easily be inflated by those who seek to “game the system.” Declarations of patents that owners believe might be essential or might become essential to the standards are not policed or verified by SSOs. Their IPR databases were set up to identify patents and their owners, not for the purposes of apportioning SEP value or FRAND royalty rates. As I have indicated previously in IP Finance, patent counting is inaccurate and unreliable even when third parties make essentiality checks.

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[1] 3GPP is the stand setting organization responsible for all the major mobile communications standards including 2G GSM, 3G UMTS, 4G LTE and 5G.

Trump Administration Moves Against Iranian Institute for Theft of University Information

US Department of Treasury and US Department of Justice charge Iranians and Iranian research institute with theft of intellectual property from universities throughout the world.  The press release from the US Department of Treasury names the Iranians.  Specifically, the press release states:

Today’s action designates one Iranian entity and 10 Iranian nationals pursuant to E.O. 13694, as amended, which targets malicious cyber activities, including those related to the significant misappropriation of funds or economic resources, trade secrets, personal identifiers, or financial information for private financial gain.

The Mabna Institute is an Iran-based company that engaged in the theft of personal identifiers and economic resources for private financial gain. The organization was founded in or about 2013 to assist Iranian universities and scientific and research organizations in obtaining access to non-Iranian scientific resources. The Mabna Institute also contracted with Iranian governmental and private entities to conduct hacking activities on its behalf.  

The Mabna Institute conducted massive, coordinated cyber intrusions into computer systems belonging to at least approximately 144 United States-based universities, in addition to at least 176 universities located in 21 foreign countries:  Australia, Canada, China, Denmark, Finland, Germany, Ireland, Israel, Italy, Japan, Malaysia, the Netherlands, Norway, Poland, Singapore, South Korea, Spain, Sweden, Switzerland, Turkey, and the United Kingdom.  The exfiltrated data and stolen login credentials acquired through these malicious cyber-enabled activities were used for the benefit of Iran’s Islamic Revolutionary Guard Corps (IRGC), and were also sold within Iran through at least two websites. The stolen login credentials belonging to university professors were used to directly access online university library systems.  

Today, OFAC is also designating nine Iran-based individuals who were leaders, contractors, associates, hackers for hire, and affiliates of the Mabna Institute for engaging in malicious cyber-enabled activities related to the significant misappropriation of economic resources or personal identifiers for private financial gain.

According to a Reuters article, this type of action was relatively rare under the Obama Administration. 

Better late than never to do the right thing for SEP owners

Winston Churchill once said you can always count on Americans to do the right thing — after they have tried everything else.

At last, American authorities are also beginning to do the right thing for owners of standard-essential patents. Under the previous administration of President Barack Obama, America’s agencies did the wrong thing by seriously undermining standard-essential patents in various ways. For example, this existentially threatened the independence of Qualcomm, which relies substantially on its patent-licensing business to fund long-term R&D including that in upcoming 5G mobile communications. Thankfully, President Donald Trump’s administration has recognised the important need to support, not undermine, the nation’s technology innovators, and uphold their patent rights, as enshrined in the US Constitution.

President Trump’s blocking of Broadcom’s attempted hostile acquisition of Qualcomm brought allegations of protectionism and some discontent among shareholders; but no such intervention would ever have been called for if Qualcomm’s licensing business model had not been so wantonly attacked at home and abroad by antitrust actions including large fines and by royalty payments being withheld by Apple. This all took significant toll on the firm’s stock price. US agencies and major companies from various nations were widely complicit in the onslaught. In the absence of all that skulduggery, Qualcomm’s stock price would never have been within Broadcom’s acquisition reach.

Countermeasures required

The presidential intervention prompted the writing of several business newspaper leaders on matters of industrial policy, national security and merger control in the IP-rich technology sector, including 5G communications. While the order was made ostensibly for reasons of national security, protectionism is pejoratively alleged. Either way, the legitimate concern was that the prospective change of ownership and control would curtail Qualcomm’s long-term R&D investments – from high levels of 20-25 percent of sales over many years – jeopardizing its technology leadership and strong position versus China including its national champion Huawei.

Even before President Trump's order, the US Treasury's Committee on Foreign Investment in the United States (CFIUS) had already expressed concerns about the transaction in a letter addressed to Broadcom and Qualcomm lawyers.

The Financial Times recognizes ‘Qualcomm is no ordinary company. In an era when mobile technology is ingrained in every kind of economic activity, it develops key intellectual property underlying wireless communication. All mobile networks are built on standards developed with Qualcomm’s leadership. In a sense, Qualcomm’s technology touches all the data on all mobile devices, everywhere. Most people may not know it, but the company is as ubiquitous as the air.’

However, Chinese competitors benefit from strong industrial policies, private or state ownership and government subsidies which enable them to be more patient and less risk averse about obtaining returns on R&D investments. As noted in IP Finance, with recent figures from the EPO, Huawei (China) is now the top patent applicant in Europe. Also with focus on mobile communications technologies, Qualcomm and Ericsson are in fifth and tenth positions respectively. Patent counts are only part of the story where patent quality is most important, but these numbers at least provide an indication of the desire and intent of the Chinese to surpass their western competitors in IP ownership.

The Economist identifies the ascendancy of China. ‘“DESIGNED by Apple in California. Assembled in China”. For the past decade the words embossed on the back of iPhones have served as shorthand for the technological bargain between the world’s two biggest economies: America supplies the brains and China the brawn.

Not any more. China’s world-class tech giants, Alibaba and Tencent, have market values of around $500bn, rivalling Facebook’s. China has the largest online-payments market. Its equipment is being exported across the world. It has the fastest supercomputer. It is building the world’s most lavish quantum-computing research centre. Its forthcoming satellite-navigation system will compete with America’s GPS by 2020.’

The above follows the Economist’s headline a couple of weeks earlier ‘What the West got wrong: It bet that China would head towards democracy and a market economy. The gamble has failed.’

National security makes national champions

If a trade war is emerging in the technology sector, under the pretext of protecting national security it not the US that fired the first salvo.

Due to Chinese national security including the Great Firewall of China with censorship restrictions, the Internet’s over-the-top services markets have been balkanised in China. Chinese leaders Alibaba (e-commerce), Tencent (social networking), Baidu (79% of Chinese search) and others have preempted or displaced the global leaders such as Facebook and Google.

Competition for Qualcomm—in mobile communications chips and technology licensing— is in the most open of global of marketplaces where technology development and standardization is mainly undertaken by a few and then offered freely, but not gratis, for implementation and use by all comers. China has explicit industrial strategy for innovation and manufacture in this and other industrial sectors: it uses various measures including antitrust enforcement in support of that and to the advantage of Chinese companies. For example, it allegedly forces foreign companies to surrender their IP to obtain Chinese market access. According the Wall Street Journal, a White House official said that the harm to the US from this is $48 billion. In order to settle an antitrust dispute with the NDRC, Qualcomm paid a $975 million fine and reduced its patent-licensing charges in China.

The Trump administration is now threatening tariffs on $60 billion of imports and tighter restrictions on acquisitions and technology transfers. One objective is to stem the purported intellectual property theft.

The US and other western nations have lacked coherent industrial policy for the technology sector, while antitrust policy and enforcement has also been inconsistent and has undermined IP. It was high time to start doing something that would underpin America’s technology and IP leadership, rather that erode it as had occurred for SEPs under the previous administration with President Obama.

How to make America great again in SEPs

The need is to uphold patent rights everywhere rather than for national trade protectionism which will provoke harmful tit-for-tat retaliation.

As I have shown elsewhere, US tech titans including Alphabet, Apple, Facebook and Netflix have done very well for themselves, including strong revenue growth over the last few years, based on low-cost communications platforms providing exponential growth in data consumption. However, revenues for network operators, network equipment providers and patent licensors have been flat.

Notwithstanding the above, under the previous presidential administration, and against the interests of patent-rights holders:

• The FTC issued a complaint against Qualcomm’s chip sales and licensing practices in the final hours of the Obama administration despite significant dissent.
• President Obama vetoed an ITC exclusion order against some old iPhone models, in litigation between Samsung and Apple, ostensibly for reasons of public interest.
• The Department of Justice blessed, with a business review letter, patent-policy changes at IEEE in 2015 that put concerted pressure on all SEP holders to change the way patents are licensed and that make injunctions more difficult to obtain.

Thankfully, there are signs the tide is turning against some anti-patent manoeuvres under the Trump administration with Assistant Attorney General Makan Delrahim at the Department of Justice Antitrust Division and with new guidelines on SEP licensing from the European Commission.

Patent licensing charges are allegedly harmful because these supposedly must be passed on to end consumers in higher device prices. However, the only American handset OEM is Apple. It prices its products at high levels the market will bear, resulting in stellar profit margins, rather than pricing based on its costs. While Apple stopped royalty payments to Qualcomm in the first quarter of 2017, according to Strategy Analytics, average iPhone prices rose 6.3 percent from $645 in 2016 to $686 in 2017.

IAM blogger, Richard Lloyd wrote: ‘If Trump really wants to protect Qualcomm’s long-term prospects perhaps he should get on the phone to Apple.’ The President should also ensure the FTC’s action against Qualcomm is withdrawn. That might similarly discourage other agencies around the world from diminishing the rights of SEP owners wherever they reside.  

White House Releases Memorandum on Actions against China

President Trump has released his directions to the United States Trade Representative concerning China.  In the Presidential Memorandum on the Actions by the United States related to the 301 Investigation, the President states:

First, China uses foreign ownership restrictions, including joint venture requirements, equity limitations, and other investment restrictions, to require or pressure technology transfer from U.S. companies to Chinese entities.  China also uses administrative review and licensing procedures to require or pressure technology transfer, which, inter alia, undermines the value of U.S. investments and technology and weakens the global competitiveness of U.S. firms.

Second, China imposes substantial restrictions on, and intervenes in, U.S. firms’ investments and activities, including through restrictions on technology licensing terms.  These restrictions deprive U.S. technology owners of the ability to bargain and set market-based terms for technology transfer.  As a result, U.S. companies seeking to license technologies must do so on terms that unfairly favor Chinese recipients.

Third, China directs and facilitates the systematic investment in, and acquisition of, U.S. companies and assets by Chinese companies to obtain cutting-edge technologies and intellectual property and to generate large-scale technology transfer in industries deemed important by Chinese government industrial plans.

Fourth, China conducts and supports unauthorized intrusions into, and theft from, the computer networks of U.S. companies.  These actions provide the Chinese government with unauthorized access to intellectual property, trade secrets, or confidential business information, including technical data, negotiating positions, and sensitive and proprietary internal business communications, and they also support China’s strategic development goals, including its science and technology advancement, military modernization, and economic development.

It is hereby directed as follows:

Section 1.  Tariffs.  (a)  The Trade Representative should take all appropriate action under section 301 of the Act (19 U.S.C. 2411) to address the acts, policies, and practices of China that are unreasonable or discriminatory and that burden or restrict U.S. commerce.  The Trade Representative shall consider whether such action should include increased tariffs on goods from China.

(b)  To advance the purposes of subsection (a) of this section, the Trade Representative shall publish a proposed list of products and any intended tariff increases within 15 days of the date of this memorandum.  After a period of notice and comment in accordance with section 304(b) of the Act (19 U.S.C. 2414(b)), and after consultation with appropriate agencies and committees, the Trade Representative shall, as appropriate and consistent with law, publish a final list of products and tariff increases, if any, and implement any such tariffs.

Sec. 2.  WTO Dispute Settlement.  (a)  The Trade Representative shall, as appropriate and consistent with law, pursue dispute settlement in the World Trade Organization (WTO) to address China’s discriminatory licensing practices.  Where appropriate and consistent with law, the Trade Representative should pursue this action in cooperation with other WTO members to address China’s unfair trade practices.

(b)  Within 60 days of the date of this memorandum, the Trade Representative shall report to me his progress under subsection (a) of this section.

Sec. 3.  Investment Restrictions.  (a)  The Secretary of the Treasury (Secretary), in consultation with other senior executive branch officials the Secretary deems appropriate, shall propose executive branch action, as appropriate and consistent with law, and using any available statutory authority, to address concerns about investment in the United States directed or facilitated by China in industries or technologies deemed important to the United States.

(b)  Within 60 days of the date of this memorandum, the Secretary shall report to me his progress under subsection (a) of this section.

News agencies are reporting that tariffs will be assessed on around $50 billion of Chinese imports, here and here.  CNN reports that the U.S. companies that stand to lose in a U.S./China trade war include Intel, 3M, Boeing, Apple and others.  However, there is the question of how much those companies are losing because of intellectual property theft that may be supporting competitors based on stolen intellectual property in markets outside of China. 

The Coming Trade War with China: More Posturing by the Trump Administration

According to Fox News, the Trump Administration will soon take and propose action against intellectual property theft by China.  Notably, the Fox News article focuses on the entertainment industry and movies.  White House Director of Trade and Manufacturing, Peter Navarro, is quoted as stating: “We are going to move forward with some recommendations for the president. And I tell you what, there’s nobody who is going to oppose that in this country.”

In the article, Horizon Investments Chief Global Strategist Greg Valliere states “he expects the Trump administration to “hit them hard” with anti-China tariffs on imports that include Chinese investments and visas for students who want to study in the U.S.”  The article notes that the EU is “on board.” 

EPO Releases Annual Report on 2017 Patent Activity: Interesting Stats

The EPO has released its annual report for 2017 patenting activity.  Notably, patenting and patent filings are trending up at 3.9% and 4.4% respectively.  In the electrical engineering field, patenting is up in the audio visual space by 10.6% and semiconductors by 13.5%.  In instruments, patenting is up in optics by 15.6% and analysis of biological materials by 12.5%.  In chemistry, biotechnology is up 14.5%, but micro-structural and nanotechnology is down by 12.6%.  Interestingly, US nationals as first inventor lead patent applications in the EPO with a 26% share.  The EU member state inventors as a whole have more nationals as first inventor (47% total).  However, Germany, the leader in the EU, has a 15% share.  Japan has 13%, and China has 5%.  The top three technical fields in patent applications are 1) medical technology; 2) digital communication; and 3) computer technology.  The top ten applicant companies are: 1) Huawei (China); 2) Siemens (EU); 3) LG (Korea); 4) Samsung (Korea); 5) Qualcomm (US); 6) Royal Phillips (EU); 7) United Technologies (US); 8) Intel (US); 9) Robert Bosch (EU); and 10) Ericsson (EU).  Sixty-nine percent of the total applicants are large entities.  Twenty-four percent are SMEs/individual inventors.  Seven percent were universities/public research.  Interestingly, SMEs/individual inventors share is down from 28% in 2016.  Universities/public research is up 1 percentage point from 2016.