Solving patent licensing in an IoT world

Richard Vary, Bird & Bird LLP

More things are becoming connected. Wireless telecommunication is, gradually, becoming incorporated into all areas of our lives. 

Richard Vary

In the 2G era of wireless telecommunications (1990s and early 2000s) we saw huge collaborative advances in technology, with each contributor building on the work of others. But there was comparatively little patent litigation. Each technology developer wanted its competitors to pay when they used its technology. But each technology developer also needed to use its competitors’ technology to build its own devices. So both sides had an incentive to reach agreement, and each had something to trade. 

From 2006 to 2012, 3G cellular networks started to make wireless data as fast as a desktop internet connection.  Three industries converged. One industry was the traditional mobile phone industry. The other two were the computer and consumer electronics industries. These industries made products that worked better when they could use the wireless connectivity of the mobile phone: cameras, media players and personal digital assistants. These became a single device: the smartphone. 

The new entrants could launch their products knowing that they could later obtain the licences, on fair, reasonable and non-discriminatory (FRAND) terms. But they did not have as many patents to cross-license, and this meant that deals had an ever larger cash element. That made agreement harder to reach. 

When deals could not be reached, some patent owners brought infringement proceedings. Some implementers complained to regulatory bodies that the patent owners were not offering their standards-essential patents (SEPs) at a rate that was fair, and brought claims in competition law. These were the Smartphone Wars. 

With the development of 5G we are seeing another convergence. In essence, 5G makes it easier to include wireless telecommunication technologies into a range of products: cars, smart meters, domestic appliances and aircraft engines – the Internet of Things (IoT). It isn’t just one or two new companies that are entering the wireless arena – it is hundreds. Some are large, some are very small, some are start-ups and some are companies with over a century of tradition. All come from very different industry backgrounds. 

Some fear that the cycle that led to the Smartphone Wars will repeat. With greater divergence among the technology developers and technology implementers, we will see more disputes. The stage is set for Smartphone Wars II. That, at least, is the theory.

However, one great change in patent litigation since the Smartphone Wars has been the rise of portfolio determination. For companies that wish to give or receive a patent licence, the real question is, “How much?” 

The first attempts at portfolio rate determination were in 2007/2008, when Nokia and Bosch asked the Mannheim court to determine whether their respective offers for a licence to the Bosch patent portfolio was FRAND. The Mannheim court declined to do so. 

The change occurred with the Huawei v ZTE case in Europe, and the Google consent order from the FTC. These established that if a patent owner was willing to go through independent third-party portfolio determination, but the infringer was not, the infringer was at risk of injunction. Now, there was an incentive to both sides in having a third party set the rate. 

Nokia arbitrated with Samsung and later LG. Huawei arbitrated rates with Ericsson and with Interdigital. These first four arbitrations showed that it was possible to set a rate even where there were huge disputes about the extent of validity and infringement. 

Courts have also shown that they are prepared to set rates. In Microsoft v Motorola Judge Robart set a rate for Motorola’s portfolio of 802.11 (wifi) and video coding (H.264) patents. In Innovatio IP Ventures Judge Holderman set a rate for Innovatio’s portfolio of 23 wifi (802.11) patents. The English Court, in its Unwired Planet decision, set the rate that Huawei must pay for a licence to Unwired Planet’s patent portfolio, and the Central District of Los Angeles set the rate that TCL must pay for a licence to Ericsson’s portfolio in its the recent TCL v Ericsson case.

The advantage of portfolio determination when compared to the patent-by-patent, country-by-country litigation that we have seen in the past is that (a) it is cheaper; (b) it is quicker; and (c) there are no industry-disrupting injunctions or taxpayer-funded interventions by regulators. 

What's the advantage of arbitration over litigation?

In portfolio determination proceedings, the main difference between arbitration and litigation is that litigation can be forced by one side on the other, while arbitration requires both to agree to enter the process. If parties can agree, then the advantages of arbitration are as follows.

Neither party wants their licence agreement terms to become public if their competitors’ are private. Some courts have mechanisms to protect confidentiality. However, courts have a duty to make public as much of the hearing and decision as possible. As a result, even with those measures in place there have been leaks of confidential information from court proceedings. Bloggers have tweeted royalty rates from hearings (Apple v Samsung, Netherlands). Courts have inadvertently released information in judgments (TCL, Huawei v Samsung). Even with redacted judgments, it is often possible by cross-referencing with other information sources to reverse-engineer the redactions. Arbitration institutes are under no obligation to publish awards, so leaks are rarer.

There is a perception that some courts award lower royalty rates. Others are seen as more pro-patentee. Consequently, parties are rushing to the court that they think will favour them. Of course arbitrators can also be affected by bias, but the selection process, in which each appoints one arbitrator and the institute picks a chair gives less opportunity for one side to pick a panel that is entirely favourable. 

In theory a UK court could perform a FRAND valuation in 18 months or so. A US court would take rather longer. But both Unwired Planet and TCL v Ericsson have so far taken more than three years, and there are appeals still to come. Arbitration can be quicker. It might be 14 months to a hearing and less than two years to a final decision.

Approaches to determining a frand royalty rate

Comparable licences
Most commonly the tribunal will look to other comparable licences. These may be licences granted by the SEP owner himself, or licences granted by other SEP owners. Typically, in discovery, each party will obtain access to the others’ comparable agreements: the SEP owner and the prospective licensee’s out-licences and in-licences.
The most easily comparable licences will be one-way licences. But more commonly, the parties have entered cross-licences. Licences may specify rates in ad valorem or per unit rate terms and they may be paid via running royalties or lump sums. The patent portfolio in the comparable licence will be different in size and value to the licensor’s portfolio in the arbitration because portfolios change over time. Each of these factors needs to be controlled for in the analysis. 

Top-down approaches
As an alternative to using comparable licences, a party may seek to show that a rate is FRAND by demonstrating that the SEP owner holds a certain share of all the SEPs in the industry, and that it is entitled to a share of the total aggregate royalty rate in the industry. 

Determining portfolio strength at relevant dates
In each of the different methodologies described above, a necessary input to the calculation is the strength of each relevant patent portfolio. Since there is no direct measure of portfolio value, economists model value by looking at proxies. The simplest of the commonly used proxies is a count of unique SEP families in the portfolio in question.
However, even this requires a number of technically challenging steps, such as: determining the body of declared SEPs; removing dead patents; assigning patents to the correct owner; and assigning patents to each standard generation. It is not possible to tell from the ETSI database alone what size portfolio each person holds (or held at the relevant point of time). This is because the ETSI database does not include all the patents in each declared family, and does not contain the necessary bibliographic patent information to perform calculations on expiry dates or ownership. Bird & Bird has created a patent portfolio analysis tool that is able to take all of these factors into account and generate accurate family counts for any company in the industry at any date of interest.
Recognising that not all SEP families are of equal value, economists often use more sophisticated proxies for value. One of these is forward citations, which require a measure of the number of citations received by each patent family in the portfolio. In order to be accurate, this kind of measure requires sophisticated “normalisation” techniques: adjusting for the age of a patent or the country in which it was filed.
Another is the comparison of the number of change requests have been submitted by a party, or how many were accepted. 

Taking account of “true essentiality”
Not all patent families declared essential to a standards-setting organisation such as ETSI are truly essential.
One of the fears of implementers in entering a portfolio rate arbitration is that they believe they will not have an opportunity to challenge the patent owner’s portfolio. This is not correct: the implementer can (and usually does) make technical arguments about the portfolio. The difficulty is that, if the tribunal is seeking to determine the share of truly essential/valid patents held by the patent owner, then the same level of scrutiny must be applied to the patents of the patent owner as to the industry as a whole. The source of data that we used in two arbitrations was a database created by PA Consulting. This provides a neutral assessment of the essentiality of every patent family declared to the CDMA2000, UMTS and LTE standards.
The PA survey is undoubtedly less rigorous than the scrutiny that a patent would face in court. But the important point here is that the same level of scrutiny is applied to all patents in the exercise. 

Suggested structure of a portfolio determination arbitration offer

Arbitrations can become expensive. One way to keep costs under control is to restrict the time available for the arbitration. The following is a suggested structure:

  • Hearing: Five to seven days. One day for opening, two days each for evidence. One optional day for tribunal questions, one optional day for closings. 
  • Three arbitrators (chair not the same nationality as either party). 
  • All lawyers, arbitrators and witnesses are to work in a common language. Interpretation and translation is expensive.
  • The parties should specify in the arbitration agreement that the hearing is to be held within one year or 18 months of the filing of the request for arbitration. Keeping the time short limits the amount of evidence and argument. Unlike judges, arbitrators must abide by agreed time limits.
  • A maximum of three rounds of evidence and submissions. The last must be strictly reply evidence.
  • A seat of arbitration, ideally Europe or Asia. US arbitrations can be more expensive because there is a tradition of adopting a more thorough approach compared to continental Europe or Asia. The UK, Singapore and Hong Kong offer a compromise of sufficient discovery and evidence without the high cost. 
  • Rules: ICC with IBA rules of evidence (which have no depositions, and targeted discovery), WIPO, or LCIA if in London

A large proportion of the cost in arbitrations and litigations to date has been expended on technical analysis: challenges to individual patents in the portfolio at issue and responses to these. Although they generate a lot of paper, these have not greatly affected the outcome. However, few implementers would agree to arbitrate on terms that they are not allowed to challenge individual patents in the portfolio, and few SEP owners would dare to leave such challenges unanswered. Except in high-value arbitrations, parties should be encouraged to keep evidence in this area “light”, or agree to use existing neutral third-party portfolio analyses, such as the PA Consulting report, as a proxy for portfolio strength. 

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