Here is my third and last post on the Global Standards Leadership Conference that I attended. You can find my other two posts here: Global Standards Leadership Conference - Part 1 (sepessentials.com) and Global Standards Leadership Conference - Part 2 (sepessentials.com).
This post focuses on the “New Frontiers of SEP Licensing” panel. The panelists were John Han from Qualcomm, John Kolakowski from Nokia, Ran Xu from Xiaomi, Ryan Cunningham from Sheppard Mullin and Mike Crowley from HP, Inc. Tim Pohlmann of IPLytics was the moderator. As in my first post, for purposes of comprehensibility, I have summarized and grouped the discussion according to the themes that emerged, rather than in the exact order in which the statements were made and for shorthand, I’ll refer to the participants by their affiliation rather than by their name.[1]
Introductions
Most of the panelists started by explaining what they, or their companies, do.
Xiaomi explained that they have been in the handset market for 14 years and is now the third largest handset maker behind Apple and Samsung. Xiaomi also makes smart home devices. Xiaomi’s devices implement cellular, WiFi, Bluetooth and other standards. Xiaomi is also a SEP holder and licensor.[2]
Qualcomm introduced itself as being the “most successful” cellular licensing entity in the world with the world’s “best mobility technology.”
Ryan Cunningham explained that he often represents smaller implementers, often in the IoT space, in SEP related matters.
The HP person said that he used to be at Blackberry so he knows the handset market as well as laptops and the other types of devices made by HP [mostly printers].
Why do companies file lawsuits in random places: Forum shopping and SEP litigation.
There was a quite interesting discussion about forum shopping in SEP-related litigation. There are a number of established and emerging forums that SEP holders and SEP implementers rush to file in as I have discussed in a series of posts.[3] These include the United States, the U.K., Germany, China and India as well as a recent uptick in such filings in Brazil.
HP used India and Brazil as an example. HP pointed out that neither India nor Brazil are large international markets, but the amount of SEP patent litigation against multi-nationals is going up in both of these jurisdictions. Both of these forums are perceived to be favorable jurisdictions for licensors, so licensors select them even when they bear little connection to the overall dispute and overall sales.
Cunningham explained that in his experience, SEP holders always file in “injunction friendly” locations, regardless of the connection of that forum to the overall dispute. They do so in order to obtain higher than FRAND rates. He said that, in his experience, once a SEP licensor files in an injunction friendly court, the SEP licensor asks the court to set a global FRAND rate. On the other hand, when an implementer files in a non-injunction friendly location and asks the court to set a global FRAND license, in his experience, the SEP holder always argues that the court has no jurisdiction. He concludes that SEP licensors forum shop in order to obtain higher than FRAND rates through the threat (or actuality) of an injunction.
Nokia (a major SEP licensor) admitted that SEP holders file lawsuits where there is “robust enforcement” which he also equated to jurisdictions in which SEP holders were likely to obtain injunctions. Nokia “welcomes and embraces” these jurisdictions and expects these jurisdictions will see more cases filed by SEP holders. “Connectivity is global after all” and so SEP holders have options in their choice of forum.
Whereas Nokia praised injunction friendly jurisdictions, Nokia took a different view on China. Nokia stated that China does not fairly adjudicate SEP issues. Nokia believes that China undervalues SEP patents, or at least foreign owned SEP patents, particularly in cases against Chinese implementers.
Xiaomi (a Chinese implementer) pointed out that there are now a lot of courts that say they can adjudicate a global SEP license. Litigation used to be a last resort, but this is changing as parties try to race to the courthouse to get their license dispute adjudicated in a friendly to their side forum. The different forums and their different takes on the meaning of FRAND, and on injunctions, have created a lot of confusion and uncertainty. It also creates unfairness. Xiaomi cares how much it pays to license SEPs for a particular standard, but it also cares how much its competitors pay. “Fairness is important.” A reasonable point given that fairness is part of the FRAND obligation.
My takeaway from this discussion (and from seeing new jurisdictions emerge over the past few years that are willing to make global FRAND determinations) is that we are in an arms race right now when it comes to forums and forum selection. Xiaomi hit the nail directly on the head by reminding us that this type of forum selection can lead to unfair, discriminatory and thus non-FRAND outcomes. Without actually saying it, Nokia echoed this sentiment with its pointed comments about the unfairness (in its opinion) of outcomes in China.
There are of course solutions to this problem. Fundamentally, courts overreach when they make determinations about issues outside the borders of their jurisdiction. If the U.K. courts only made decisions about U.K. patents and U.K. sales, and China only made decisions about Chinese patents and Chinese sales and India only made decisions about Indian patents and sales then there might still be differences in how FRAND rates are determined in different locations. But those differences would be equally applicable to all patents and all sales in those jurisdictions. It only becomes unfair and potentially a non-FRAND outcome when some decisions about U.K. patents and sales are made by the U.K. and others by China or by India, and some decisions about Chinese patents and Chinese sales are made by China but others are made by the U.K. or India or Brazil. The easy solution to stop this forum selection arms race and bring fairness and non-discriminatory outcomes back to the process is to limit judicial decision making (absent party consent) to patents issued, and sales that occur, in the decision-making jurisdiction.
IoT Related Issues
SEPs and their application to IoT seems to be the topic of the year and this panel was no different. The panelists talked extensively about IoT and how SEP licensing should be different, or the same, for IoT devices as compared to, for example, handsets or cars.
Qualcomm discussed its own cellular licensing regime as an example of how it does this. For handsets, Qualcomm charges 3.25% of the net selling price but it then it will include a cap on the royalty. So, for example, Qualcomm does not actually charge $32 to license its SEP portfolio to the seller of a $1000 phone. Qualcomm charges more like $3-4 per phone because of the cap. But Qualcomm charges less to license its SEP portfolio for smart meters. Qualcomm charges $0.35 or so for smart meters for the same portfolio. Qualcomm said this price differentiation is not price discrimination because Qualcomm is applying industry practice and looking at the benefits and use cases.
Qualcomm also said that the market for IoT devices is massive and hard to individually address through a licensing program. However, most of the IoT device makers buy modules to implement connectivity standards. There are only about 5 module makers in the world. Qualcomm would be willing to address the IoT market by licensing through the module makers as long as the dollars charged contemplates the use case of the module.[4]
There was some mention of the Nordic Semiconductor deal in this regard I believe by Nokia (it is, after all, Nokia’s deal).[5]
Aside: For those that do not know anything about the deal, Nokia and Nordic Semiconductor have adopted a “pioneering new approach to licensing the use of cellular IoT Standard Essential Patents.” From what I understand, this entails Nordic doing Nokia’s licensing for Nokia with Nordic’s customers. According to the announcement, as part of Nordic’s sale of IoT hardware, Nordic will now offer its customers the “opportunity” to acquire licenses to Nokia’s SEP portfolio. I am not sure I would want to be one of Nordic’s customers offered that “opportunity.” Anyway, back to the panel.
Xiaomi brought up a similar point to what Juniper had discussed during the earlier technology panel.[6] Many devices in the IoT space such as smart meters need connectivity, but they do not need most of the technology that is in the cellular standard. A smart meter might send only a few bits per second for a few hours a month. Most IoT devices have very low data rates and do not need a lot of connectivity bells and whistles [ok he did not say bells and whistles – that is my interpretation of what he said]. When implementers are not using the full scope of technology in a standard, the license valuations should be adjusted to account for that limited scope.
Someone else (I think HP) chimed in with an example. Water pipes often have phone home reporting mechanisms but, like other IoT devices, they have very limited connectivity needs. They could be using 3G or even 2G if it still existed today. They do not need, and do not use, the full scope of functionality that is in the 4G standard (let alone the bloatware that is the 5G standard). “We are lying if we say 4G is a standard.” There are “like 20 versions” of 4G. Not all implementations of 4G are the same – different cellular chips have different functionalities and different kinds of products that use those cellular chips use different aspects of the incorporated functionality. For IoT, the real problem is that if they are approached for a SEP portfolio license, they usually know very little about the standard and what parts of the standard their products are using. That makes it extremely difficult to evaluate portfolio offers.
I thought these were really good points. For the reasons stated in some of my previous posts, the idea of “use cases" is a licensor made up concept that is not how things work in the real world. But, that post was premised on the licensor version of what is a “use case." Most SEP licensors apply that term to mean the following: SEP licensors are entitled to look at how much money the device maker makes from its end user device (the “use case”), claim that all of that money is enabled by cellular (or other standardized) technology and then demand a license based on the overall device price (rather than a percentage based on the chip price, the module price or anything close to the actual implementing component).
On the other hand, if what we mean by a “use case” is that a product is using less than all of the SEPs in a standard because it is does not use all of the functionality contained in that standard, then of course the overall royalty amount should be less. If there are 350,000 patents in the standard but a device is only using 1/100 of them because of the limited functionality enabled by that particular device, then that device should have an overall lower royalty than a device which uses the full scope of functionality claimed in the standard. In this example, such a device would only need a license to at most 3,500 patents (and probably less than that because, by many estimates, only something like 20% or less of declared patents are actually essentially) as opposed to all 350,000 declared patents in that space. Licensing 3,500 of the patents in the space should, of course, cost less than licensing all 350,000 of them. This is a particularly relevant issue right now in the cellular space because the 5G standard has become so full of features and functionality that few, if any, device makers are using (e.g., full of “bloatware”).
The Difficulties of Downstream Licensing
HP chimed in to explain that even with their own products (and keep in mind that HP is a large, sophisticated entity), it is difficult to understand how many valid SEPs are in a given portfolio that are actually implemented in a particular product. The declaration process is broken and so it is hard even to know how many essential patents there really are or what each declared SEP relates to in the standard. From the business perspective, licensing is a bill of materials cost. But, the lack of transparency on the overall royalty burden makes this a nearly impossible task to do.
Xiaomi said that they have been sued by two non-practicing entities just last month. They already have many 4G and 5G licenses but there are always more entities seeking royalties from them. “We do not know who else will approach us and how much we will need to pay overall. This is a big issue for implementers.”
When Qualcomm is licensing its portfolio, Qualcomm wants to talk about the technical details and the quality of its portfolio first. To that end, Qualcomm "always" provides representative claim charts, sometimes hundreds of them, to potential licensees and often engages in months of technical discussions. But, for some reason, potential licensees always want to talk first about valuations and how much a license is going to cost.
Cunningham pointed out that this type of licensor driven technical discussion can be quite difficult for many companies. Many companies have no inhouse lawyers, or very limited capacity, and it is a very expensive process to do a technical review. Many of these companies know very little about the standard or about how their products use the standard – they are just purchasers of modules. It would make more sense to address this issue with the module makers who are much closer to the technology and understand it much better. But most SEP licensors refuse to license at the module level or make their demands so high that it is unaffordable at the module level.
Qualcomm claimed that they have to license downstream because “tier 1s” do not build the price of licensing into the price of their product. This statement was made in reference to licensing in the automotive space: in that space, tier 1s are the component suppliers so I assume here he was referring to the module makers.
I will just note that this is a nonsensical argument. First, the price received by the module makers is the real-world value that the market has set for a device that implements the standard. Accordingly, the price of a module already has built in the value the market perceives to be appropriate for the totality of the standard (plus all the other technology that goes into making a working chip and a working module). It just does not take into consideration "use cases" because that is not how the real-world of product sales works.
Second, until they were approached by SEP licensors several years ago, the car companies also did not build the price of such SEP licensing into their products. By Qualcomm’s argument, SEP licensors should approach only companies that have already built that price into their products which would mean that SEP licensors should not have approached the car companies either. When we dig deeper into what Qualcomm was actually saying it can be translated as follows:
Module makers do not make enough money to support the excessive royalties we are seeking which we are basing on the value of the end product through our “use case” arguments. That is why we have to license downstream even though it would be much more fair, reasonable and non-discriminatory (not to mention much easier, less time-consuming, more efficient and would result in significantly lower overall transaction costs to both us and the device makers) to license the 5 or so module makers, rather than the thousands, or hundreds of thousands, of downstream module users. But then we would have to accept a royalty amount that is reasonable based on the price of a module (or a chip) which we are not willing to do (unless we can get the chip or module makers to do our licensing for us using a "use case" based pricing model, e.g. the Nordic Semi deal).
Aggregate Royalties and Avanci
Xiaomi pointed out that cellular SEP licensing is mature, but there is still not any consensus around it. No one really knows what is the aggregate, overall royalty amount and no one can agree on what it should be. For example, the major licensors disagree on how much should be charged for 5G as compared to the 4G rates.
One of the panelists (my notes do not reflect which one) pointed out that when the original LTE standard was adopted, there were alternative standards that could have been used. The adoption of 4G was not guaranteed. In order to get support for the adoption of 4G, a number of entities made public statements about what the overall aggregate royalty should be. Now that 4G has been adopted and we are essentially locked into using it, those entities have walked away from their statements about aggregate royalty. If they had been honest at the time about what they would later seek, people might have adopted one of these alternative standards (or developed a different version of the standard).
I asked Qualcomm and Nokia what a downstream user should expect to pay as an aggregate royalty for 4G and 5G. Qualcomm and Nokia are, after all, two of the biggest cellular SEP licensors and each also implements the cellular standard into their own products. If anyone would know the aggregate royalty, it should be them but neither knew. The best they could do was point to Avanci and say that the aggregate royalty is akin to what Avanci is charging. Qualcomm and Nokia are both members of Avanci and, according to them, Avanci is licensing “90%” of the 4G/5G SEPs.[7] That means that the price Avanci is charging is close to the aggregate royalty.
Of course, this ignores the fact that most SEP licensors argue that some SEP patents are worth more than others and that not all SEPs should be valued the same. So, even if we were to assume the 90% number was correct, that would not mean we could determine the aggregate royalty amount by simply taking the Avanci number and adding 10%. The remaining licensors might argue that their SEPs are the most valuable SEPs and so are worth as much (or more) than the totality of the SEPs in the Avanci portfolio.
HP also reasonably pointed out that Avanci does not list a price for every, or even most, downstream products. Avanci has a published rate to license cars, but not most consumer products, not cell phones, not laptops. So even if HP assumed the Avanci numbers were close to the aggregate royalty amount, HP still would have no idea how Avanci or the SEP owners were applying that to HP’s products.
Transparency
Interestingly, a number of the panelists would be willing to share their existing licenses in a confidential way. Nokia said it would be willing to share its licenses with a trusted mediator who can then accurately inform potential licensees that the amount requested is comparable to its already existing licenses. HP said that they also would be willing to share their existing licenses and if the company that the license is shared with “gets a better deal” than so too should HP. Qualcomm said the burden was on the licensor’s side to share information because “we have the information for this.”
Net Net
My overall take away from this panel was that we put too much burden on downstream licensees, most of which know very little about the technology, when we expect them to be able to engage in months of technical discussions to determine whether a patent is valid and essential and used in one of their products. There would be a lot less issues related to SEP licensing in the IoT space (and other downstream spaces) if SEP licensors were required to license the 5 or so module makers (or the chipmakers) at an amount that is reasonable as compared to the price a module maker gets from selling its implementing products.
In other words, most of the problems related to SEP licensing in the IoT (and other) spaces are artificially created by SEP holders. They are a result of SEP holders' attempts to obtain supra-FRAND rates based on “use cases” and the value of end user devices, using the threat of injunctions by filings in injunction friendly jurisdictions. While that may benefit a handful of SEP licensors, it unfairly and unreasonably burdens downstream users of standardized technology and reduces their ability to innovate in their own product space. That in turn reduces the societal benefits of standardization for all of us.
[1] Unlike the first panel of the day, I do not recall anyone saying during this panel that their views did not necessarily reflect their employers' views. I might have missed that though (or they might have forgotten to say it).
[2] According to the one assessment, Xiaomi is number 17 of top 5G SEP holders. See the report that can be downloaded here: Who Is Leading the 5G Patent Race? - 5G Patent Analytics Report (lexisnexisip.com)
[3] First Pop Quiz - A Tale of Three Lawsuits (sepessentials.com), Answers to First Pop Quiz (sepessentials.com), First Pop Quiz Revisited - The EU Complaint Against China (sepessentials.com), Jurisdiction No. 6 - India (sepessentials.com) and Jurisdiction No. 6 - India - Part 2 (sepessentials.com).
[4] Use cases play a large role in SEP licensors’ valuations – it is how they justify charging more money to some implementers than to others despite the “non-discrimination” piece of FRAND. But that is not, for example, how the module maker is able to charge for its products. The module maker charges roughly the same price for the same module regardless of “use case.” So why should Qualcomm or other SEP licensors get special rights that do not exist in the real world? See The Myth of "Use Cases" - LES SVC Part 2 (sepessentials.com).
[6] See my post, Global Standards Leadership Conference - Part 1 (sepessentials.com).
[7] This does not appear to be completely accurate. Avanci’s website makes clear that it has different participating licensors for each of its downstream licensing programs. I will interpret this statement to mean that Qualcomm and Nokia believe that Avanci’s 4G/5G car licensing program (in which they both participate) has rights to license 90% or so of the SEPs in the cellular space. It is not clear where this belief came from or whether it is accurate.