ITU discusses on Standard Essential Patents

The ITU (International Telecommunication Union) has for the first time organized a public event to discuss the tensions on the interplay of IPR and standards. The ITU is a UN agency which is among other standard projects responsible for the H.264 video coding standard (MPEG4). The ITU invited all interested parties, mostly from the ICT industry (Apple, Motorola Mobility, Qualcomm, Microsoft, Google, Nokia, Ericsson, etc.) but also from international organizations (EPO, USPTO, WIPO, EC, DOJ or FTC) and academia (Knut Blind, Tim Pohlmann, Rudi Bekkers and Robert Barr) to discuss recent disputes on SEPs (standard essential patents) and F/RAND licensing. In light of recent litigation on SEPs (Apple vs. Samsung, Motorola vs. Microsoft and Motorola vs. Apple) the main topic of the conference was to discuss if the F/RAND licensing of SEPs is a broken system.

Injunctive relief and SEPs:

One major topic dealt with the question if SEP holders should be allowed to impose injunctions if possible licensors are not willing to pay a reasonable license. The notion of antitrust authorities (DOJ or the DG competition) is very clear: A F/RAND commitment should be a constrain to injunctive relief. Someone who commits to license under F/RAND and then refuses to licenses just requests higher fees. Injunctions would thus be a vehicle to increase royalties. SSOs which select patented technologies as an industry wide standards give the right holder a certain market power. In the view of antitrust authorities the market for a SEP license is a market of its own. Thus, SEP holders would have a monopoly market power. F/RAND is a mechanism to constrain market power. While F/RAND may constrain injunctive release the question is how to constrain? The antitrust authorities further stated that circumstances where injunctions are possible should be narrow and only be an option to licensees that are not willing to pay at all. Also, even the possibility to impose an injunction could increase royalties even in the absence of a court decision. These fees would then also be subject to an anticompetitive price.

While these statements seem to leave little room for interpretation the situation is often more complex. First of all firms that declare their essential patents to SSOs (Standard Setting Organizations) in most cases do not commit to license under F/RAND but only state that they are prepared to grant a license or that they will enter license negotiations in good faith to offer FRAND terms (e.g. as to the ETSI IPR policy). While in the US most courts would not allow injunctions for SEPs, the situation in Europe is very different (see the injunctive relief decision of a Munich court in the case of Motorola vs. Apple). It seems that there is no legal certainty and courts may decide on a case by case basis which may even result in different decisions between countries. Some of the participating firms requested more precise IPR policies of SSOs to answer the question: To what extent can we say there is willingness to enter negotiations? It must be more than a statement it must be a FRAND offer! However the fear is that some companies would not participate in standard setting when the enforcement of SEPs is limited upfront.

The discussion showed that firms face a complex system of different SSOs and different policies. There seemed to be a need for a basic level of common understanding since it is often difficult to interpret what SSOs’ IPR policies actually mean.

Current situation and future development of F/RAND:

The second part of the discussion dealt with the F/RAND system in general. Most of the participants actually agreed that the F/RAND system is not a broken system and works very well even though F/RAND may not be a very specific contract. There are many examples of successful license agreements under the name of F/RAND and many examples of successful standard setting in light of high patenting (GSM, UMTS, WiFi, etc.). However, there are many recent challenges due to drastic changes of the business environment. While standard setting in the early 90ies was done by a couple of big players that all had similar incentives and business models, the market has changed in recent years. New market participants who license SEPs may not earn money from selling devices to payments from phone calls, but make returns from patent license, advertisement or constructive applications. It is thus increasingly difficult to determine a reasonable license and to determine if fees should be measured to a unit, a component or a whole product. Many firms however demand for a common understanding of F/RAND. The opinion of the ITU is to not intervene in bilateral license negotiation but that a clarification could be a significant contribution of ITU. The ITU wants to take a lead to promote effective RAND and to provide a neutral platform to facilitate discussion on F/RAND where all members have equal rights.

Reasons for an increase of SEP litigation:

Litigation is very costly for all involved parties and will only be pursued if the technology or product in question has a certain value. One reason of increasing SEP litigation thus is the increasing importance of ICT standards. ICT products increasingly rely on technology standards (e.g. the UMTS, LTE standard or the Wifi standard to allow faster internet connections) to ensure interoperability. Thus technology components often indispensably work together and as a result may even lead to an interrelation of SEP and non-SEP.

In recent years standards setting has evolved from a mere coordination on common specifications to the joint development of complex technology platforms. Firms promote their best and most innovative solution to be accepted as an industry wide standard and SSOs select best quality technologies (patents). Competition thus also takes place at the standard setting level. Increasing competition may result in more litigation.

Another reason is the increase of essential patents and the increase of multiple rights holders in general. However, in most cases the increase of essential patents is due to an increased in the number of standards that are subject to essential patents, not to an increase of patents per standard. This means there is an increasing demand for technology standards in the market.

A further reason is that SEPs are increasingly transferred due to trades of patents, patent portfolios (Nortel auction) or whole companies (Motorola Mobility). Recent examples are: Ericsson sold SEPs to Research in Motion, Nokia sold SEPs to MOSAID, Sisvel and Vringo, IPcom acquired Robert Bosch SEPs, Highpoint acquired SEPs originating from AT&T, and HTC acquired SEPs from both Google and Hewlett Packard. Acacia acquired SEPs from Adaptix, Intel acquired SEPs(?) from InterDigital, and Apple acquired SEPs from Novell. Intellectual Ventures teamed with NVIDIA to acquire SEPs from IPWireless.

The change of patent ownership changes cross licensing agreements. Firms may find themselves in the position to suddenly pay more for the same patents compared what they have been paying before. Cases of disagreement may lead to litigation (Motorola vs. Microsoft).

Furthermore the ICT industry is subject to short product life cycles where market players and market shares have changed in a quick manner in the last ten years. Standard setting however is a long term process. In many cases incumbent firms hold the largest number of SEPs, while their market share decreases (e.g. Nokia, Microsoft, etc.). Litigation may thus be subject to a clash of long terms versus short term investments.

The main question however remains: Is patent litigation a sign for increasing competition or a sign for future problems?

The workshop triggered some very interesting and important discussions, however failed to really formulate the problems that may be at play. It has however to be mentioned that many of the participating firms are currently in litigation and are thus not able to state their opinion in public. There are many disputes, discussion and workshops to come to find the answers of many of the discussed questions.

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About timpohlmann

Tim Pohlmann is a post-doctoral researcher in economics at Mines ParisTech and Berlin Institute of Technology. He specializes in the economic analysis of markets for technology. He earned his doctoral degree with the highest distinctions in August 2012 from the Berlin Institute of Technology with a dissertation on patenting and coordination in ICT standardization. Tim’s research covers the empirical analysis of the trade of patents, patent trolls, standardization consortia and patent pools. He has presented his work at a large number of international conferences. Tim has been actively involved in preparing studies for the European Commission and the German Federal Government on the role of patents in technological standardization and business models in Open Source Software. Doctoral Thesis SSRN author page
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