Searching for Answers to the Standard Essential Patent Problem

“You might have thought that—after decades of legal debate and academic writing, dozens of judgments, and extensive discussions between technology companies—the questions around standard essential patent portfolios would be close to being resolved. But that is far from the case.”

Searching for Answers to the Standard Essential Patent Problem self driving - this year (likely in October), the United Kingdom’s highest court will hear arguments on questions arising in two disputes concerning standard essential patents (SEPs). The UK Supreme Court has agreed to hear appeals in Unwired Planet International Ltd and another v Huawei Technologies (UK) Co Ltd and another UKSC 2018/0214 and the joined cases Huawei Technologies Co Ltd and another v Conversant Wireless Licensing SARL UKSC 2019/0041 and ZTE Corporation and another v Conversant Wireless Licensing SARL UKSC 2019/0042. The arguments are likely to focus on one question: can a national court impose a global license in SEP cases?

The closely watched appeal will be the culmination of years of litigation between the parties. In the Unwired Planet case, Mr. Justice Birss of the High Court heard five trials on the validity and infringement/essentiality of Unwired Planet’s patents. In April 2017, he then gave a mammoth judgment determining what a fair, reasonable and non-discriminatory (FRAND) license would be, and setting royalty rates. Critically, he found that only a worldwide license would be FRAND in the circumstances of this case. The England and Wales Court of Appeal upheld this conclusion, in a judgment in October 2018. The Supreme Court will likely sit in a five-judge panel in a hearing that will last about two days and will be live streamed on its website (the date and panel details have not been confirmed yet). It will hand down judgment later this year or early in 2020. (Ironically, patent specialist Lord Kitchin is a member of the Supreme Court but will not be sitting in this case as it is his own judgment that is under appeal.)

SEPs Under Scrutiny

You might have thought that—after decades of legal debate and academic writing, dozens of judgments addressing questions such as what constitutes a FRAND license and what are reasonable royalties, and extensive discussions between technology companies—the questions around standard essential patent portfolios would be close to being resolved. But that is far from the case. The outcome of the UK Supreme Court hearing, for instance, will have an impact on negotiations between owners of SEP portfolios and implementers worldwide, at a time when standards are set to become critical to many more industries.

There are other issues under discussion too, including the scope of antitrust enforcement, the role of patent pools, and the rollout of 5G networks. The latter in particular raises crucial questions for SEP licensing, as manufacturers of all sorts of connected devices—automobiles, home appliances, security systems and more—will become implementers.

Many of these issues will be addressed at IPWatchdog’s Patent Masters Symposium, Standard Essential Patents: Striking a Balance Between Competition and Innovation being held in Arlington, VA next month. One of the speakers at the Symposium will be former USPTO Director David  Kappos, who is now with Cravath. Kappos said: “We have some clarity in some places, but there are still a lot of unanswered questions. Most of the clarity has come in Europe and Japan and concerns the responsibilities of both licensors and licensees in SEP licensing. I wish there were more clarity in the U.S.” One of the key areas of uncertainty, he says, is the one being addressed by the UK Supreme Court: will licensees be compelled to take a global license?


The Future is 5G

As 5G, which offers higher speeds and lower latency, is rolled out worldwide, debates about SEPs, FRAND, and royalties are intensifying, including in industries that have been immune to such questions until now. Take automotive for example: as first partial and ultimately full automation is rolled out, communication between vehicles, users, and other objects in the environment will become critical for safety and successful navigation. Already in the EU it is mandatory for new cars to be installed with a system called eCall, which automatically dials the emergency services when the vehicle is involved in an accident (Regulation (EU) 2015/758).

There is now a boom in patenting relating to autonomous vehicles. A report, “Patents and self-driving vehicles”, published by the European Patent Office in cooperation with eucar in November 2018, found that 4,000 European patent applications relating to self-driving vehicles were filed in 2017, compared to just 922 in 2011. The growth rate for such technologies is 20 times greater than for patent applications in general. WIPO statistics back up the EPO report. According to the 2019 PCT Yearly Review, digital communication was the technology field with the most Patent Cooperation Treaty (PCT) applications published in 2018 (20,271) while applications for “basic communication processes” increased by 29.5%, those for “control” by 21.2%, and those for “transport” by 11.3%.

Interestingly, the EPO report reveals that many of the biggest applicants in this area are not transport companies but ICT companies. The number one filer at the EPO in this sector in the period 2011-2017 was Samsung Group (624 applications) followed by Intel Corp. (590) and Qualcomm Inc. (361). The rest of the top 10 comprised four ICT companies (LG Group, Nokia Corp., L M Ericsson A.B., and Microsoft Corp.) and three auto companies (Robert Bosch GmbH, Toyota Motor Corp. and Continental AG.).

The EPO report does not shed light on how many of these patents are declared as being essential to 5G or other standards. However, research by IPlytics GmbH found that the number of 5G-declared SEP families for a vehicular application soared from 0 in 2015 to 429 in 2017 and 994 in 2018. The list of top holders of such patents comprises Qualcomm Inc., Ericsson Inc., Samsung, Huawei, and Nokia; there are no car manufacturers or auto suppliers among the top 15 companies.

Speaking the Same Language

Standardization is essential if the potential of autonomous vehicles is to be realized, said Max Olofsson of Avanci, a licensing platform: “It’s crucial for the automotive industry, as cars will talk to each other, to other objects and to people. Standardization is about using the same language. Safety regulations may also require standardization.” But there are many obstacles to overcome, including the auto industry’s established model of suppliers taking a license and providing components with warranties, and debates about what a reasonable royalty is in a connected car. In short, owners of SEPs want to ensure they are being fully rewarded for the value of their innovation while manufacturers are seeking to protect their profit margins and avoid paying excessive royalties.

Avanci’s solution has been to sign up patent licensors (about 30 so far, including most 4G patent owners). It has now agreed licenses with auto manufacturers BMW, Audi, Porsche, and Volkswagen at a royalty rate of $15 per vehicle. This covers all licensed patents for technologies up to and including 4G, but not yet 5G. “We are trying to find a benchmark number for 5G. It might be a bit more than before. Some companies are very engaged now, and we hope they will join soon. We are trying to bridge the differences,” said Olofsson.

Inevitably, however, there is also litigation. Nokia, for example, has sued Daimler and Continental in Germany for infringement of SEPs and has succeeded in blocking an antisuit injunction filed by the defendants in the U.S District Court for the Northern District of California (see “Nokia persuades Munich court to issue anti-antisuit injunction against Daimler supplier Continental, pre-empting decision by Judge Koh” on the FOSS Patents blog). Other tech companies such as Broadcom have also brought cases against auto manufacturers, some of which relate to non-SEPs. In a survey published last year, 86% of respondents said they expected to see either a little more or lots more litigation over IP rights in the automotive sector.

Not Just Vehicles

The auto industry may be the most high-profile industry that is confronting SEP issues, but it is by no means the only one. Kappos identified “connected appliances, security systems, heating/lighting systems and mobility devices such as wheelchairs” as areas where communication and interoperability will be critical, while David L. Cohen of Kidon IP, another speaker at next month’s Symposium, said that telecoms will become at least marginally relevant to everything, whether it’s automobiles, connected homes or logistics: “Whether the telecom SEP licensing and litigation ecosystem will become central or marginal to the connected future is a function of what will be the value drivers in that future—wireless connectivity or something else—and no one really knows the answer yet.”

Statistics and Solutions

Finding solutions to SEP licensing is critical to ensure both that the possibilities of new technologies are realized, and that innovators are properly rewarded. Cohen believes part of the solution may be a “machine-language approach to validity and infringement,” though he conceded that may be a “pipe dream.” He also argues that the kind of litigation we’ve seen so far may not necessarily provide a good guide to the future: “Historically, before portfolio licensing litigations such as Unwired Planet, due to litigation rules and constraints only a few patents in a portfolio could be litigated, so these tended to be seen as a proxy for the whole portfolio, which means the royalty demands for those litigation patents were probably artificially high.”

Cohen said addressing validity problems is key: “I have seen statistics claiming that SEPs represent some 12% of all issued patents in the U.S.; that indicates to me that too many SEPs are being filed, compared to what would seem to be justified. Moreover, when you look at the quality of the SEPs coming out, the historic validity rates in litigation—especially in Europe—seem awful. The question is: why are SEPs so vulnerable to invalidity attacks?”

He suggests the reasons for this could include: the likelihood of litigation in jurisdictions such as Germany, where there is no discovery; the principle of maximum cumulative royalty and strict proportionality, which promotes patent quantity over quality; serial nullity suits that lead judges to be prejudiced against SEP validity; rushed and underfunded patent prosecution; and prior art (in the form of prior and draft standards, meeting minutes and draft proposals) being easily available.

Another question is what role administrative agencies should play in setting rules for both licensors and licensees. The European Commission and Japan Patent Office both provided guidance last year, which has been broadly welcomed. At the Patent Masters Symposium, Kappos will take part in a session addressing disharmony between the Department of Justice (DOJ), Federal Trade Commission (FTC), and USPTO on antitrust enforcement of licensing of SEPs in the United States in light of the withdrawal of the DOJ’s Antitrust Division’s assent to the 2013 Joint DOJ-USPTO Policy Statement on Remedies for SEPs, and the ruling in the Northern District of California in favor of the FTC in its antitrust case against Qualcomm. (Qualcomm has said it will seek to stay and appeal the decision, which has been criticized, including on IPWatchdog.) Kappos said: “It would be great to see the USPTO and DOJ come together to hold hearings and take input and then provide guidance on SEP licensing.”

Going further, some have suggested that patent offices should play a role in determining whether a patent is essential to a standard (which effectively decides whether a FRAND royalty is due). Raymond Millien, Vice President and Global Chief IP counsel for Volvo Car Corporation, and Jan Schnitzer, General Counsel and head of IP at u-blox AG, have argued that the EPO should publish essentiality determinations:

“This proposal may also have a non-obvious, positive consequence: … a shift of SSO [standard-setting organizations] participant’s patent filing practices. That is, participants may start to put significantly more effort into filing patent applications which have a high likelihood of being truly standard essential. As a consequence, the EPO may experience significantly fewer patent filings relating to standards which should have a positive (or at least neutral) effect on its resource management when taking on these additional responsibilities.”

Other commentators suggest that the standard-setting organizations themselves could play a greater role in determining essentiality, as well as other issues, such as what is reasonable behavior in negotiations, and the factors determining reasonable royalty.

Cohen said that the “reinvigoration of antitrust law” as well as “international politics and the impact of trade wars” are likely to have an impact on how SEP licensing develops.

There are other concerns about how SEP licensing is working. One is whether the SSOs themselves need to up their game. Another concerns questions that arise where SEPs involve software contributed to open source projects. “I believe it is clear that there are no express/implied licenses to patents in most open source agreements, but questions are now being raised about exhaustion, so there could be some interesting issues coming up,” said Kappos.

Fixing the Problems

September’s Symposium will address many of the issues that remain unresolved, including the role of antitrust enforcement, what is FRAND, the 5G landscape, PTAB, and litigation. It comes as SEPs are once again firmly in focus, with the UK Supreme Court and other hearings pending, the ongoing Qualcomm-FTC dispute in the U.S., and the rollout of commercial 5G services.

These developments are likely to encourage debate and interest in SEP issues. As Millien of Volvo has said, in a co-written article on “[P]layers in the automotive space will need to be even more vigilant about evolving FRAND concepts, seek judicial change, actively participate in the relevant standard setting organizations, and even seek appropriate legislative or regulatory action.” It will also be interesting to see whether auto companies will build up their own SEP portfolios, either through research or acquisition, and if so, what approach they take to licensing.

Despite the challenges, many observers are optimistic that solutions will be found. Olofsson of Avanci believes there is an opportunity for the auto industry—which is investing heavily in connected and autonomous vehicles—to lead the way: “It is important to educate people about how SEP licensing works. Car companies can set the standard for how things should be licensed, and litigation is avoided. It is just mainly a question of agreeing on the money.” Kappos added: “One positive thing is that automotive products have longer life cycles than smartphones per se, so hopefully licenses will be sorted out before huge damages exposure has built up. Another crucial difference is the importance of safety to the automotive industry.”

If solutions are not found, the implications could be severe; the risk of one player controlling the entire ecosystem is particularly concerning. Indeed, the very principle of promoting interoperability through agreed standards could be under threat.

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