SEP and FRAND become toxic acronyms in patent litigation
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Too much standardized technology is being held up on shipping docks and in courtrooms, according to the International Telecommunication Union. The ITU recently gathered tech heavyweights together to address the surge in litigation involving standards-essential patents (SEPs), and fair, reasonable and non-discriminatory (FRAND) terms placed upon SEPs to ensure rapid adoption of industry standards like 3G or H.264 video codec format. Royalties and injunctive relief dominated the ITU’s agenda. Once taken for granted, SEPs enjoy a higher profile today as both legal pawns and strategic assets.
Apple, Google, Motorola Mobility (MMI), RIM, Microsoft, Ericsson and Nokia attended the ITU roundtable hoping to find a better balance between user requirements, market needs, and the rights of patent holders as SEPs grow more litigious. “We are seeing an unwelcome trend in today’s marketplace to use standards-essential patents to block markets,” said Hamadoun Touré, ITU secretary-general.
FRAND-related cases have reached a tipping point across the globe. The EU is exploring whether Samsung has used 3G intellectual property to "distort competition in European mobile device markets.” Meanwhile, two U.S. federal district courts are pursuing Apple and Microsoft claims against Motorola, both arguing contracts entered into with standard setting organizations (SSO) were violated. As part of the bigger patent reform debate, SEPs pose unique challenges as the ITU, IEEE, and other SSOs more often develop technical standards anticipating technology, yet don’t enforce patents. “Patents are meant to encourage innovation, not stifle it,” said Toure’.
Each technology standard represents a huge collection of patents pooled together and bound by an agreement to license based on FRAND, or RAND, terms. These terms allow tech companies to not only adhere to standards, but also be charged a reasonable rate to license from specific patent holders. Because licensee and licensor are often rivals, FRAND terms maintain a level playing field and push technologies to the end user without a conflict of interest. In other words, a patent holder can’t pick and choose licensees, or artificially inflate rates to distort the marketplace. In short, the system guards against a “patent holdup,” the result of patent owners demanding extraordinary fees after committing IP to a standard.
Although technologies do get standardized, current issues revolve around a lack of standard license pricing. As of late, nobody with stake in the game can determine what fair, reasonable and non-discriminatory pricing is. Pricing structure is a problem, too.
For example, Motorola charges a 2.25 percent royalty to Apple and Microsoft. Sounds fair and reasonable. But instead, Motorola wants 2.25 percent on the “net selling price of the relevant end product,” even if the SEP is imbedded in one software or hardware component of a finished unit. Foss Patents pointed out this mathematical absurdity when considering the escalation of standard technology in higher ticket items. “If a BMW car implements H.264 or UMTS, they will want 2.25 percent of the price of the car.” Now that’s not fair, reasonable, and if you consider Motorola is owned by Google, sounds pretty discriminatory toward Apple and Microsoft--maybe even malicious.
In theory, SEPs and applicable FRAND terms don’t blossom from a swap meet full of voodoo math, bad faith and cowboy operators. When SSOs convene to map out a new technology standard, they invite all industry members and participation is voluntary. Appreciating the market implications of including a member’s intellectual property in the resulting standard, the governing SSO sets bylaws for disclosure and licensing. Participating members must agree to accept terms and conditions included in the SSO’s bylaws.
Disclose IP rights critical to the implementation of a proposed standard, and commit to license essential IP based on FRAND terms. If everybody plays by the rules, then you have an equitable standard to play and profit from.
What if a member goes rogue and won’t pay a FRAND license fee, yet decides to implement the standard anyway? That’s when patent infringement comes into play, the SEP owner may feel entitled to injunctive relief, and the SSO’s plan goes awry. Injunctive relief in a RAND context has proven a polarizing topic among big tech players, including those attending the ITU roundtable.
Proponents claim injunctive relief is not a provision within a SSO contract. And if SSO bylaws are too restrictive, then innovators may choose not to participate in future standards. The opposing view states FRAND commitments should not be subject to injunctive relief because sunk investment in standard design and production prohibits moving to an alternative technology.
Dissecting Apple’s recent blockbuster victory over Samsung, we can see how patents carrying FRAND obligations now get spun into legal weapons that further fuel today’s patent wars. Based on royalty rates between 2 percent and 2.75 percent, Samsung estimated Apple owed them up to $399 million for the alleged violation of patents covering the UMTS 3G standard, including two SEPs. Apple argued Samsung’s royalty demands were unreasonable.
Patent 7,447,516--a "method and apparatus for data transmission in a mobile telecommunication system supporting enhanced uplink service"--was pivotal in Samsung’s counterclaims against Apple. Apple witnesses testified patent ‘516 was essential, the royalty rates were out of line, and Samsung failed to comply with the correct standards process.
Filed in 2005 and issued in 2008, Samsung’s ‘516 aims to prioritize the most important broadcast from a cell phone along the 3G network. In effect, reprioritizing, or scaling back other channels to utilize a phone’s inherent power more efficiently. Samsung’s invention identified non-restransmittable functions and gave them more power, actually redistributing power for retransmittable functions by putting them on hold.
Before ‘516, cell phone functions competed for transmission power, and voice transmissions were dropped when power requirements exceeded specifications. So Samsung claimed Apple phones dropped fewer calls because of ‘516. And the accompanying technology was fundamental. Rather, more fundamental than, say, touchscreen IP central to Apple’s infringement case against Samsung. Samsung also highlighted ‘516’s ability to transmit static images and video. According to Samsung, Apple was not paying for critical technology users deemed attractive in their iPhones.
In defense, Apple witnesses pointed out Samsung’s royalty demand--compounded by other SEP contributors charging a similar amount--would overwhelm the cost structure of both iPhones and iPads.
Apple also argued Samsung rigged 3G by contributing ‘516 tech to the standard, but waiting much later to disclose IP rights, a violation of standards rules. Although Samsung’s counterclaims including ‘516 were eventually dismissed, SEPs continue to be an unintended patsy in mobile patent litigation.
Some experts argue SEPs aren’t particularly innovative based on their own merit. And a SEP’s true market value to the inventor hides in the collective force of the standard itself. With zero, or minimal commercial value, holding products hostage due to an injunction seems counterproductive to the adoption of a standard. And any premiums paid on top of reasonable royalties distort a hyper-competitive mobile market competing on design, marketing, and supply chain management. Add those premiums to production costs and the consumer is the ultimate victim.
Nothing substantive came of the ITU roundtable. But when taking a look at the audience--the monster brands in attendance--we can see how “little” SEPs have become big business when FRAND terms are exploited. But if the ITU has anything to do with it, expect fewer “holdups” in the future.
Going forward, FRAND terms and price structure become more consistent and fluid throughout the industry, almost standardized. Patent owners seek a reasonable level of pricing and maintain the spirit of technology standardization. Both makers and users benefit from more stable, forecasted pricing. Viable products are not withheld from selected markets. SSOs and contributors team and collaborate based on proven bylaws and contract terms.
Eliminates entitlement to injunctive relief in extreme cases of IP users failing to comply with legitimate FRAND terms. If only damages apply, standard adopters may take their chances in court rather than pay a licensing fee. Stringent bylaws may reduce, not enhance, future participation in standards creation. Adding new contract provisions without a patent owner's consent would conflict with freedom of contract.