On the draft IEEE patent policy

IPR policies of telecoms Standardization Setting Organizations (SSOs) mainly define how patents that become part of the standard should be treated, typically through the principle of a (F)RAND ((Fair), Reasonable And Non-Discriminatory) licensing commitment. These policies have been in place for many years, decades even, but are quite naturally subject to reviews from time to time. In spite of such reviews and occasional calls for more regulatory content though, the policies are more often than not left largely unchanged.

This likely demonstrates that the original policies continue to serve the market rather well. Quite some wide-ranging thought and foresightedness have gone into them in order to carefully accommodate the diverse and complex interests of users and innovators of advanced communication technologies in the marketplace. And ultimately, to make the standards commercially successful in the long-term.

However, a radical IPR policy change is now underway within the Institute of Electrical and Electronics Engineers (IEEE), an SSO responsible for numerous standards including "WiFi", or IEEE 802.11 as it's formally known. Since last year, a proposal for an update of the patent policy of the IEEE Standards Board Bylaws is being worked on by the IEEE-SA (IEEE Standards Association), a body within the IEEE responsible for standards. Compared to previous IPR policies of telecoms SSOs, this proposal is very detailed and far-reaching. At least to me it also gives the impression of being aimed at significantly changing how wireless SEP licensing will work in the future. Let's take a detailed look.

To begin with, the policy states that the determination of a "reasonable rate" for a SEP "should" consider (emphasis added):

a) "the value that the functionality of the claimed invention or inventive feature within the Essential Patent Claim contributes to the value of the relevant functionality of the smallest saleable Compliant Implementation that practices the Essential Patent Claim" (emphasis added),

b) "the value that the Essential Patent Claim contributes to the smallest saleable Compliant Implementation that practices that claim, in light of the value contributed by all Essential Patent Claims for the same IEEE Standard practiced in that Compliant Implementation" (emphasis added)

[and]

c) "existing licenses covering use of the Essential Patent Claim, where such licenses were not obtained under the explicit or implicit threat of a Prohibitive Order, and where the circumstances and resulting licenses are otherwise sufficiently comparable to the circumstances of the contemplated license" (emphasis added).

Requirements a) and b) appear to mandate how the apportionment of the invention's value should be done. The phrase "smallest saleable compliant implementation" must reasonably mean a component or sub-assembly within the end-product, and in my mind the so-called "chip-set" might well be a likely candidate for this. The invention's value to such a component only is all that shall be considered. As I touched upon in my previous post on cellular FRAND royalty levels, this is actually not in line with how damages for patent infringement are, or should be, judged by courts. Indeed, as the US Federal Circuit recently clarified in the D-Link case, it's the value of the patented invention to the end-product that is the yardstick. In clarifying the "Entire Market Value Rule", it stated that according to the “substantive legal rule”, the “ultimate reasonable royalty award” – that is, the result of e.g. multiplying a royalty rate with a royalty base – ”must be based on the incremental value that the patented invention adds to the end product” (emphasis added). Thus, mandating SEP value apportionment to consider only a component within the end-product is not the law.

Requirement c) is even more remarkable. This is because ever since the patent system was created, all licenses - including (F)RAND SEP licenses - have by definition been obtained "under the explicit or implicit threat of a prohibitive order". I say "by definition" because this is quite simply the basic legal right of a patent holder, a right to exclude. And as I elaborated in an earlier post, (F)RAND doesn't change this per se. So in other words, c) simply says that none of the WiFi licenses in existence at the time of adoption of this new IPR policy may be used as a reference for any new WiFi licenses. This "purging" of the historical record of WiFi licenses seems intended to "cement" the component value apportionment mandated by a) and b). Presumably because the royalty considerations of those preexisting licenses may have been based on the value that the SEP portfolio brings to the end-product rather than to a component within. 

Interestingly, in the above-mentioned D-Link case, the defendant argued for disqualification of existing license evidence on those very grounds, but the Federal Circuit rejected this: "In short, where expert testimony explains to the jury the need to discount reliance on a given license to account only for the value attributed to the licensed technology, as it did here, the mere fact that licenses predicated on the value of a multi-component product are referenced in that analysis—and the district court exercises its discretion not to exclude such evidence—is not reversible error."  In fact, licenses "predicated on the value of a multi-component product" are perfectly normal in practical wireless SEP licensing. And incidentally, they're also in harmony with the law.

To me, a), b) and c) seem to be specifically designed to usher in a brand new era of very low royalty rates for WiFi. Clause c) makes all old licenses irrelevant as references. And clauses a) and b), while not necessitating it, certainly encourage a significant lowering of the absolute royalty rate by mandating consideration of the SEP's value to (at most) the chip-set only, thus creating a low-product-value bias with regards to the absolute royalty. I'm not sure how much support there will be for such a change, but it's not in line with what the US Federal Circuit has said about the law.  

However, there's more of interest in the proposed new IEEE patent policy, relating to prohibitive orders:

"An accepted ...[RAND licensing commitment] ... precludes seeking, or seeking to enforce, a prohibitive order except as provided in this policy." (emphasis added),

where "as provided in this policy" means:

"The submitter of ... [a RAND licensing commitment]... agrees that it shall neither seek nor seek to enforce a prohibitive order ...unless the implementer fails to participate in, or to comply with the outcome of an adjudication, including an affirming first-level appellate review, if sought by any party within applicable deadlines..." (emphasis added).

At first glance, this actually looks a bit similar to the process used e.g. in the US Federal Trade Commission's Consent Order in the Google/Motorola case. As a potential "softer" means to combat the very destructive"patent-holdout" behaviour, I myself saw that as a quite interesting path. However, when looking more in detail at the wording, it doesn't look like that's the purpose here. The phrase "an adjudication, including an affirming first-level appellate review" gives the distinct impression that an affirming first-level appellate review is actually a requirement. This makes it quite a different story from the quoted US FTC process. Unless I misunderstood the phrase, the whole thing looks like an attempt to in practice ban prohibitive orders altogether in SEP portfolio cases. Of course, also this is something that the Federal Circuit has clearly declared an error, as I mentioned in my earlier post on portfolio licensing and patent hold-out.

So overall I'd say that the patent policy changes proposed by IEEE-SA represent large steps in wrong, unmotivated and even unsupportable directions. What appears to be a ban on prohibitive orders is not in line with US Federal Circuit precedent and would only worsen the patent hold-out problem and put artificial downwards pressure on royalty rates. The mandating of value apportionment based on only a component and the explicit disqualification of old license agreements as references also don't align themselves with Federal Circuit precedent. When stripped down to its bare essentials, the proposal looks rather like a path-clearing for a drastic cut of the absolute SEP royalty level for WiFi.

But isn't that good? Well if it had been shown that there was a clear problem with royalties being too high, affecting the market in negative ways, then the IPR policy could definitely be in need of a review and as a consequence possibly even an update. But evidence of concrete problems to that effect yet remain to be demonstrated. We can again look at the D-Link case, a case that was specifically about SEP licensing for the IEEE standard 802.11 ("WiFi") and which involved several prominent implementers of that standard. The Federal Circuit confirmed that no evidence of royalty stacking or patent hold-up - two phenomena sometimes claimed to create 'too high' SEP royalties - was presented and that they should never be presumed to exist just because they are theoretical possibilities: "The district court need not instruct the jury on hold-up or stacking unless the accused infringer presents actual evidence of hold-up or stacking. Certainly something more than a general argument that these phenomena are possibilities is necessary. Indeed,“a court should not instruct on a proposition of law about which there is no competent evidence.""

There are others who have questioned the purpose of this new proposed policy. For example, the IEEE USA board (!) recently sent a letter to the IEEE board, straightforwardly asking for an explanation of exactly what's wrong with the existing patent policy and what concrete problems the new policy proposed by IEEE-SA is supposed to solve.

The SSO IPR policies set the delicate basis for achieving a long-term balance between incentive for innovation and incentive for implementation. This balance is for the common good of technological innovation, a healthy marketplace for implementers, and ultimately consumer choice. However, it seems to me that in the new draft patent policy for IEEE, shorter-term business interests of implementers may have been allowed to take on rather more weight than they should have. To my knowledge, no obvious market need has been demonstrated for any of the changes proposed. Nor is there any legal mandate for them and in fact, some changes even tend to run contrary with US Federal Circuit opinion.

To the extent that there's an actual need for an update of its patent policy, hopefully the IEEE will eventually come up with a more balanced proposal than the present one.

Clarifications from the Federal Circuit

On December 4, a much anticipated opinion was delivered by the US Court of Appeals for the Federal Circuit ("Federal Circuit") in the Ericsson vs. D-Link et. al. case, concerning a WiFi (IEEE 802.11) SEP portfolio license. I'm pleased to note that the Federal Circuit in several aspects aligned itself with what I've myself been expressing in recent posts under this blog.

Firstly, on the issue of "royalty stacking", the Federal Circuit rejected jury instructions on royalty stacking because the defendants failed to present evidence that there was a royalty stacking problem: “A jury, moreover, need not be instructed regarding royalty stacking unless there is actual evidence of stacking. The mere fact that thousands of patents are declared to be essential to a standard does not mean that a standard-compliant company will necessarily have to pay a royalty to each SEP holder. In this case, D-Link’s expert "never even attempted to determine the actual amount of royalties Defendants are currently paying for 802.11 patents."” This is what I opined in my earlier post on royalty stacking, i.e. damaging royalty stacking shouldn't be assumed to exist per se, but instead clear evidence to that effect needs to be presented in each case. Once again we need to remember that royalty stacking occurs per definition in wireless SEP portfolio licensing. That doesn't mean that it's automatically harmful to the market nor to any given OEM.

Secondly, on "Patent hold-up", again no evidence of such was presented: “Absent evidence that Ericsson used its SEPs to demand higher royalties from standard-compliant companies, we see no error in the district court’s refusal to instruct the jury on patent hold-up or to adjust the instructions expressly to take patent hold-up into account.” As I wrote in my post on portfolio licensing and patent hold-out, evidence of "patent hold-up" is hard to find in reality. But the key point from the Federal Circuit again being that clear evidence must be presented in each case, it should not simply be presumed to exist just because it's a theoretical possibility.

Thirdly, on the topic of "Royalty base", which I touched upon in my post on cellular FRAND royalty levels, the Federal Circuit made another good clarification. On apportionment and the "Entire Market Value Rule", it stated that according to the “substantive legal rule”, the “ultimate reasonable royalty award” – that is, the result of e.g. multiplying a royalty rate with a royalty base – ”must be based on the incremental value that the patented invention adds to the end product”. The Federal Circuit confirmed that to determine a (F)RAND royalty in the wireless industry, you are definitely not mandated to use the smallest salable component such as a chipset as a royalty base. There's nothing wrong with using the entire end-user product as royalty base, as long as reasonable apportionment of value of the patented invention to the end-user product is done.

The Federal Circuit's practical approach to SEP licensing and damages is encouraging. Hopefully other courts and agencies, including those in other jurisdictions, will follow suit and move away from theoretical calculations towards a focus on real world practices and evidence.

Cellular FRAND royalty levels

What's a fair and reasonable royalty for a cellular Standards Essential Patent (SEP) portfolio license, and how is it determined? This sounds like a simple enough question, but actually it's not. In this post I'll share some of my experiences and thoughts in relation to this much debated subject.

To tackle this subject, I believe one should start by assessing values. Let's first look at the value of the cellular standard to a mobile phone. To say that the cellular standard itself is absolutely crucial for a mobile phone is hardly controversial. In fact, the cellular capability defines the phone as a commercial product: an iPhone wouldn't be an iPhone without cellular capability. Apple is able to sell its iPhone at a price of several hundred US$ more (!) than the price of its iPod, a very similar product but without cellular capability. This price difference demonstrates the tremendous value of adding standardized cellular technology to an otherwise similar device.

So yes, the cellular standard is definitely fundamental to a mobile phone. But what about a cellular SEP portfolio, what's the value of that? Before looking at a given SEP portfolio though, let's start by considering the cumulative. What's the license value of all SEP portfolios taken together. After all, that's the ultimate concern of the Original Equipment Manufacturer (OEM) selling the product. How is this "total mass" of cellular SEP portfolios related to the standard?

To address those questions, let's first assume that we'd like to create a brand new cellular 5G standard as a successor to 4G, but - for whatever reason - we want it to be completely void of SEPs. What could that correspond to in practice? Well, since patents live for up to 20 years, only standardized technical solutions older than 20 years would be completely "safe" to include. So we might actually end up selecting the first (1990) version of GSM (2G) as our 5G standard. This certainly feels like a very bad idea indeed. But why exactly? Because a 2G standard can't possibly fulfil the technical requirements placed on a 5G standard. The example might seem a bit extreme, but I want to illustrate an important point. The value of a standard strongly relates to new pieces of technology added to it. This is because a new cellular standard is subject to more harsh technical requirements - with respect to supported data rates, delay, capacity, flexibility, new services, efficient data compression and so on -  than previous standards. Having own experience from standardization, I know that these new requirements are there to make the new standard as future-proof as possible. While many consumers may accept to change phones quite often, mobile network operators make tremendous investments in infrastructure and will hardly be amused about having to replace it after only a couple of years because it's gone obsolete. In order to fulfil these tougher requirements of a new standard, brand new technological innovations are very often required, and these are also typically patented. So, while all cellular SEP portfolios together may not be strictly equivalent to the standard itself, they represent the value of the standard since they include the technologies that allow the standard to fulfil its specific requirements.

So how about the license value of all cellular SEP portfolios in terms of actual money? And who decides it for that matter? Here I'd first like to point out that the consequences of "wrong" pricing can be tremendous. If too high, then consumer demand will suffer. If too low, then incentives for standards innovation will suffer. But in fact, we can all see mobile device sales and usage expanding strongly and new state-of-the-art standards continuing to be created. So clearly, the market must have somehow managed to settle at a balanced pricing. But at what level? In my experience from working with cellular SEP licensing for quite some time, I can see an established cumulative royalty cost for all cellular standards up to 4G somewhere around 10% of the OEM selling price of a mobile phone. Note that this is not my opinion of what it "should" be. This is the reality that I see.

I'd like to make two important comments in relation to this 10% figure:

1) High-end phones often have advanced screens, cameras etc. that may be argued to be unrelated to the cellular standard. According to such argument, the percentage-principle leads to an unfairly high royalty for these products. But in reality, those attributes actually increase the usage of the cellular standard. In fact, the 3G and 4G standards were even specifically developed with the performance of such devices in mind. So the value of at least 3G and subsequent standards - and hence of all SEP portfolios relevant to those - is higher for high-end phones. Nevertheless, high-end phones are still often subject to "royalty caps" in order to address the perceived concern. Conversely, at the other end of the spectrum, the percentage-principle may cause very-low-end phones to devalue SEP portfolios. In such cases "royalty floors" may be used as well.

2) Most major SEP-holders are practicing entities, i.e. they sell standards-compliant products themselves. When such an SEP-holder offers a license to its SEP portfolio to an OEM, it typically also needs a license to the OEM's SEP portfolio. This is known as a "grant-back" license. In these cases, there will be a "royalty-netting" effect. One party pays a net royalty to the other based on their respective SEP portfolio strengths and net product sales. Therefore, SEP-holding OEMs ultimately pay a lower net cumulative royalty rate than non-SEP-holding OEMs. Importantly, this is not a violation of the Non-Discriminatory ("ND") part of FRAND since the value of a license is transferred back in place of some royalties. An OEM either makes large investments in basic R&D - resulting in innovations and patents - or pays full license fees. After all, there are no free lunches. 

Some OEMs new to the market have recently started to argue that the cumulative royalty should instead be no more than a fraction of the cost of a "baseband chip". This is a component inside the mobile phone that includes cellular connectivity functions. Such a change would actually make the cumulative royalty about an order of magnitude lower than what it is today. This argument doesn't make sense to me because it doesn't go to the value of using the cellular connectivity, but rather to the cost of a component necessary for that connectivity. Patent damages, i.e. the royalties determined by a court, are based on the value for the use made of the invention (e.g. in the US according to 35 USC 284).

As a parallel, one could look at a movie DVD. The entire component and manufacturing cost is probably no more than US$0.50. Yet nobody would seriously argue that the IPR value for the product as a whole, including the movie script, production, direction, screenplay, music, acting and so on, should be a fraction of that amount. It's the value of the IPR to the end product that's important. Arguing for a 90% de-valuation of cellular SEPs when there's been an established and well-working SEP valuation regime in place for decades seems irrational to me and would certainly disrupt the market balance, and for sure not in favour of innovation.

Having discussed the cumulative royalty at some length, I can now return to the original question: What's a fair and reasonable royalty for a given cellular SEP portfolio license, and how is it determined? Or in other words, how much should a given SEP-holder obtain within the cumulative budget and how is that fraction actually decided?

Most market participants agree that there has to be some form of proportionality at play here, in keeping with general principles of fairness and reasonableness. SEP-holders with "stronger" portfolios are entitled to larger royalty fractions. But using what metric? Counting SEPs? Valuing the SEP portfolios in terms of "innovation value"? This is not an easy question. Still, the actors in the market - the SEP-holders and established OEMs - over time "get to know" the overall value of each other's portfolios. They do this through license negotiations as well as by gaining knowledge of each others' R&D, standardization activities and patenting quality. The main challenge arises for someone who's inexperienced with this market.

Take as an example a willing licensee OEM new to the market and without standardization involvement or SEPs. It needs to allocate around 10% of its product price to cellular SEP license royalties, but how does it determine the fractions? Are there ways to find at least estimates of the distribution of those 10%? Well there are indeed some commonly discussed methods, which I'll briefly explain here:

1) ETSI IPR database declarations
Due to its apparent simplicity, it's very tempting to look at various patent holders' SEP declarations on ETSI's IPR database and to estimate royalty fractions based on them. However, such results are actually totally unreliable, since neither the declarer nor ETSI has any obligation to verify essentiality. The original purpose of the database was to ensure that there would be no hidden surprises in terms of unknown patents turning up at a later stage as SEPs. For this reason, patents "believed" to be essential could be declared, even though they might turn out not to be. As a result, significant over-declaration regularly takes place. This leads to gross over-estimates of the total SEP holdings and distorts the distribution of SEPs. So at best, this kind of study may be used to get a picture of potential SEP-holders rather than estimates of actual SEP holders' relative fractions.

2) Third party evaluations
Some instead turn to SEP evaluations performed by third parties. Unfortunately many such evaluations tend to be based on "keyword searches" in patent databases, which make them about as useful as horoscopes. More serious evaluation attempts actually try to look at the patent claims in some detail and compare them to the standard. Although those evaluations could in principle give indications of actual SEP-holder fractions, they also tend to suffer from reliability restrictions. Besides the obvious concern of bias, their accuracy is also limited due to time and cost constraints in combination with the large mass of potential SEPs to go through.

3) Accepted standards contributions
A newer method, originally explored by Ericsson, is not to look at patents at all (!), but instead at "accepted standards contributions" to the 3GPP standardization process. That essentially refers to technical solution proposals accepted into the standard. It's assumed that this metric has a strong correlation with SEP-ownership over time and that significant standards contributors all have similar "patenting rates" and "patenting quality". Since these assumptions are actually quite reasonable and the contribution data is all publicly available, this method is potentially accurate. Interestingly, it also aligns itself with incentivizing technical contributions to the standard. However, with this method becoming more widely used, its accuracy may suffer in the longer term since some standards-participants can be tempted to make numerous proposals on relatively trivial technical solutions solely to increase their "accepted contribution rate".

In practice though, these kinds of estimations are mainly used only as tools to roughly gauge the SEP portfolio landscape. Our new OEM will obtain the most accurate information about the SEP-holders' portfolios and FRAND royalty requests simply by conducting licensing negotiations with different SEP-holders in parallel. In this way the OEM can scrutinize the different SEP portfolios down to whatever detail it sees fit. This may be done through examining and discussing so-called claim-charts detailing the patents' relation to the standard in question. If needed, OEMs sometimes even employ external experts for such evaluations. Over time, these negotiations typically do result in a fair and reasonable royalty partitioning.

In this context I'd also like to point out that OEMs don't always fully appreciate the restrictions that the non-discriminatory ("ND") part of FRAND places on the SEP-holder. Many SEP holders have a multitude of already signed SEP portfolio license agreements in place and simply can't discriminate against existing licensees in favour of a new OEM. It's also inappropriate for a new OEM to compare itself with unwilling licensees - i.e. those essentially not wanting to pay anything - in terms of how much royalty it should pay. Doing so further exacerbates the "patent hold-out" problem discussed in my previous post.

In this post I've tried to describe the realities surrounding cellular SEP royalty levels for mobile phones, based on my own SEP licensing experience. Under the FRAND regime, I believe that the market has managed to strike a balance between innovation value and consumer value and established a cumulative royalty rate at around 10% of the mobile phone OEM selling price for all cellular standards up to 4G. I'm aware that some still believe that cumulative royalty rates are too high, that there's too much litigation going on and that radical changes to the system are urgently needed. I'll end this post by addressing these issues one by one.

Are cumulative royalty rates "too high"? I can't really tell for sure, but at least I don't see any obvious support for that notion. As I mentioned in an earlier post, consumer choice and new future-proof cellular standards hardly seem to be lacking. Also, among the top-10 global mobile phone OEMs of today, virtually none of them had sold a single mobile phone only a decade ago, and some of them didn't even exist a that time. So at least entry barriers are low. Margins may be getting lower for some OEMs, but that can be an effect of fierce global competition thanks to those low entry barriers (!) and perhaps partly even the result of patent hold-outs, i.e.some other OEMs paying  - ironically - too low (i.e. zero) cumulative royalties.

Is there "too much litigation"? Well, with some high-profile litigation cases going on in recent times, one might think that most cellular SEP portfolio license negotiations end up in court. But actually, this is a classic example of an availability error - "if you see it, it must be common". The truth is that most such negotiations are successfully concluded in good faith, far from the limelight, and only a small fraction end up in court. Actually, the most visible litigation case, Apple-Samsung, is fundamentally not about SEPs at all but rather about Apple's attempts to protect its proprietary smartphone user interface functions.

Are changes to "the system" needed? Well no system is perfect, so improvements are always needed. For example, new ideas for improving the transparency of the various fractional ownerships of the total SEPs could be welcomed, especially by new OEMs.  But I can't see an obvious need for any radical changes, since the FRAND technology sharing regime largely works the way it's supposed to work. Policies should continue to encourage successful cellular SEP portfolio licensing through good faith FRAND negotiations, which is still the norm today as it has been for decades. It's important that the cumulative rate and SEP portfolio proportionality principles are respected by all market participants. Any policy adjustments should work within the current framework and in a balanced way continue to make sure that it's difficult for individual SEP-holders to seek too much royalty as well as for OEMs to hold out for too little royalty. 

Portfolio licensing and patent hold-out

In the early days of the patent system, there was typically one company - one invention - one patent - one product - one jurisdiction. Today however, all these aspects have become de-coupled. Virtually any product can be covered by a number of patents in different jursidictions, originating from a number of inventions and owned by multiple companies.

For wireless Standards-Essential Patents (SEP) in particular, it's not about individual patents, it's all about portfolios of patents. Any standards-compliant product - your smartphone for example - will be covered by a number of patent portfolios, owned by different companies. By portfolio I mean one or more "patent families", where one patent family in turn consists of all patents worldwide originating from one invention. So one patent family consists of one or more patents in each of one or more jurisdictions, sometimes totalling dozens of patents. And remember, a patent portfolio can consist of many patent families, perhaps tens or even hundreds of them!

Of course, this is not strange in itself. First of all, as I described in a previous post on royalty stacking, a wireless standard is normally built through a multitude of inventions. An active contrubutor to a Standards Setting Organization (SSO) will typically contribute several inventions to the standard, quite possibly in different technology areas. Secondly, the world is highly globalized today, and virtually all manufactureres/sellers of standards-compliant devices (Original Equipment Manufacturers, "OEMs") sell their products in more than one country, and in most cases in a large number of countries. So obviously, innovators have the legal right to protect their IPR from being infringed in whichever countries support such protection.

But how about the licensing aspects of patent portfolios? Well, generally speaking patent portfolio licensing is more efficient than individual patent licensing, due to e.g. significant savings in transaction costs and time. So-called "patent pools" are often cited as examples of an extreme form of patent portfolio licensing that can bring greater efficiency to the market. Wireless SEP portfolio licensing (whether pool-based or not) also carries an additional aspect of efficiency. SEP holders normally generate new SEPs over time, and so license agreements are often designed to cover new additions of SEPs without the need of amendments or further transactions. Indeed, wireless SEP licensing has allowed the wireless device market to prosper tremendously in the last two decades. But in recent years, a worrying aspect of SEP portfolio licensing has emerged. It's connected to enforcement, and seriously threatens this efficiency. It's called "patent hold-out".

Since OEMs as well as SEP portfolios are typically global, it's perfectly natural and efficient for the SEP holder and OEM to agree on Fair, Reasonable and Non-Discriminatory (FRAND) licence terms for the entire global SEP portfolio. So there's a need to assess the value of a global SEP portfolio, in order to determine FRAND terms for it. While this is generally a reasonable requirement, there are also some important observations to make with this in mind, related to courts:

1) A given court has, at most, jurisdiction over it's own geographical territory (a region or a country), and can thus by definition only process a particular local sub-set of a given global SEP portfolio for infringement litigation.

2) Even a local sub-set of a global SEP portfolio may be very large, and consist of tens or even hundreds of patents. It's not always feasible for a given court to process even such a local sub-set in its entirety within a reasonable time.

3) Even with (hypothetically) super-high-capacity courts, the cost for an SEP holder to enforce an entire global SEP portfolio through litigation patent-by-patent would be extremely high.

Demonstrating the value of a global SEP portfolio in each jurisdiction to the fullest extent possible through patent-by-patent litigation is therefore difficult to do in practice. Only subsets of subsets of global portfolios, sometimes only a handful patents, can feasibly (from a time- and cost perspective) be processed per jurisdiction.

Because of this, an infringing OEM can adopt a "patent hold-out" strategy (also called "reverse patent hold-up") when confronted with an SEP portfolio licensing offer. The OEM can claim that the SEP-holder's offer - whatever it is - is non-FRAND, and then simply wait for the SEP holder to file infringment proceedings, knowing that proving the entire SEP portfolio's worth using that route can be very inefficient for the SEP-holder. So the strategy can allow a lot of time to pass, usually several years, during which virtually no royalty payments would have to be paid on a global basis. The OEM can continue and even increase its sales of infringing products, possibly even taking market share from licensed competitors (as I mentioned in a previous post on royalty stacking). Using the patent hold-out strategy, the absolutely worst thing that can happen from the OEM's viewpoint is that it will have to pay the royalties actually requested by the SEP holder in the first place, but many years later and even then possibly only sequentially per jurisdiction. It's true that in some jurisdictions, lawyers' and courts' fees may sum up to significant amounts over time, but in many cases the patent hold-out strategy is still very attractive for the infringing OEM, especially if sales revenue is large. As a result, the SEP holder may find itself effectively forced by the OEM to agree to a SEP license agreement on sub-FRAND terms.

But since wireless SEP licensing has always been about portfolio licensing, didn't patent hold-out happen in the past? Actually not. The emergence of patent hold-out is related to a tremendeus change to the mobile device marketplace in the recent decade or so. In the past, virtually all OEMs were also strong innovators, SSO contributors and SEP holders, and so there was a widespread acknowledgment of the actual value of R&D investment in standardization and hence SEP licenses. License negotiations for SEP portfolios were seen by all parties on the market as part of the normal business. Today, due to e.g. globalization and specialization, the situation is precisely the opposite - extremely few OEMs invest heavily enough in basic R&D to contribute to SSOs and become SEP-holders. Instead it has become possible for OEMs to use technology developed by others more or less off-the-shelf. This is generally a good market development, but unfortunately, it has also become an attractive proposition for many to ignore or avoid SEP licenses (and even other forms of IPR licenses) for such technologies to the greatest extent possible.  I've personally witnessed many cases of patent hold-out, and even received more or less explicit informal confessions from infringing OEMs on the clear benefits of the strategy.  It's certainly not just a theoretical concern.

The availablity and actual use of patent hold-out in the SEP portfolio licensing context constitute a devaluation of innovation. In effect this means - counter-intuitively - that it's more difficult to fairly enforce a large SEP portfolio than a small one. This is actually very serious and could be an important reason behind the trend of SEP divestments seen in recent years. Since it is difficult to realize the potential efficiency of portfolio licensing in practice due to patent hold-out, there can be a resulting tendency of portfolio break-up. Entities, including Non Practicing Entities (NPEs), procuring sub-portfolios for their own licensing programmes could thus ultimately be seen as a perfectly natural response to infringing OEMs engaging in patent hold-out against large SEP portfolios.

Some courts and agencies have finally begun to recognise and discuss patent hold-out as a serious problem. For example in its Samsung vs. Apple investigation July 5, 2013, the US International Trade Commission found that “Apple's position illustrates the potential problem of so called reverse patent holdup …..". And in relation to the Apple vs. Motorola US Court of Appeals for the Federal Circuit decision of April 25, 2014, Chief Judge Rader commented that hold out "is equally as likely and as disruptive as a hold up". Moreover, the Korean Fair Trade Commission in its decision on Feb 26, 2014 apparently also found that there had been patent hold-out in Apple vs. Samsung. These are clearly good calls, but considering the seriousness and widespread nature of patent hold-out, more courts and agencies worldwide need to become aware of it and disincentivize it as much as possible.

For sure, patent hold-out is real and is happening as we speak. But so far there's actually been more talk about something called "patent hold-up", which is the notion that an SEP holder is able to procure licenses on super-FRAND terms based on excessive power achieved by the SEP nature of the patent portfolio. However, the idea of an SEP holder as an armed robber (as in "patent hold-up") is hardly a fitting analogy if you think about it. To begin with, the FRAND regime exists precisely to combat such potential abuse of power. And at the end of the day only a state, i.e. a court or agency, can possess any "weaponry" and can decide whether to use it or not. In the context of SEP infringement where FRAND licensing commitments are in place, the court or agency will ultimately decide what form of relief would be appropriate.  From my experience of licensing in the wireless industry, patent hold-up is rather an allegation made by an infringing OEM while executing a patent hold-out strategy. This observation is in line with e.g. a recent finding by the US International Trade Commission in InterDigital vs. Nokia et. al., June 13, 2014: "While there may be a hypothetical risk of holdup, we have evidence that this is not a real threat in this case, or in this industry."

To counteract a patent hold-out situation by an infringing OEM, SEP holders would naturally be inclined to seek injunctive relief (or an exclusion order) for SEP infringment. Having frequently observed patent hold-out in real life, I believe that the availability of injunctive relief is crucial when an infringing OEM refuses an SEP portfolio FRAND license and engages in patent hold-out. A real threat of injunctive relief even only in a single jurisdiction weakens the attractiveness of the one-sided patent hold-out strategy for the OEM and instead allows the parties to conduct a balanced negotiation in good faith. Hence, in such a scenario injunctive relief - remarkably - works as a pro-competitive tool and helps maintain the value of innovation.

However, some voices in the industry appear to be against any kind of injunctive relief for SEP infringement, no matter what. For example, in 2011 Apple made the statement in a published letter to ETSI that "Seeking an injunction would be a violation of the party's commitment to FRAND licensing.". And in 2012, this stance appeared to be more or less endorsed by Microsoft. But taking such a position is clearly unfounded and unreasonable, as e.g. recently observed by the US Court of Appeals for the Federal Circuit decision in the aforementioned Apple vs. Motorola case of April 25, 2014: "To the extent that the district court applied a per se rule that injunctions are unavailable for SEPs, it erred.". It went on to say that "an injunction may be justified where an infringer unilaterally refuses a FRAND royalty or unreasonably delays negotiations to the same effect."

Granted, a perfectly reasonable question is of course: who decides whether an infringer is clearly engaging in patent hold-out? In response, there have been proposals put forward that address this question. For example, the parties could first be mandated to go through some form of binding arbitration or judicial process to ultimately determine FRAND terms for the portfolio. Such a scheme was used e.g. in the US Federal Trade Commission's Consent Order in the Google/Motorola case. This kind of process intends to strike some kind of balance between efficiency and rigorousness on a portfolio basis. The general idea is that if the infringing OEM refuses to be bound by the outcome of such process (or refuses the process per se), then seeking injunctive relief would be permissible. Unfortunately though, even creative proposals of controlled injunctive relief for SEP infringement are being challenged. The discussion about injunctive relief in SEP infringement cases is complex, but in absence of other ideas to combat patent hold-out, simply banning injunctive relief altogether would be totally unreasonable and would heavily tilt the playing field in favour of infringers and away from innovators.

On a policy level, it's really about whether we want to fairly credit innovation in a world where it's difficult to value global patent portfolios perfectly. How can we maintain efficiency in SEP portfolio licensing given that valuing a significant SEP portfolio through global litigation on a patent-by-patent basis is inefficient in practice? One could of course simply accept that the nature of global SEP portfolios means that one has to go through a very long and expensive process to arrive at a fair global FRAND SEP license. However, due to significant time and cost aspects, this disincentivizes innovation, promotes portfolio breakup and reduces the overall efficiency of SEP FRAND licensing. In my opinion, these negative aspects are overwhelming and bad for society as a whole. The question is; is it justified to find some solution for more efficient and fair SEP portfolio valuation other than forcing the SEP holder into global patent-by-patent litigation? I would say that it is. Consider that SEP portfolio licensing has historically worked very well indeed, and has struck a good balance between innovators and users that has led to an explosive growth in the wireless industry. This balance should be preserved rather than disrupted. Ideas such as the one used by the US Federal Trade Commission in the abovementioned case at least represent creative steps towards such preservation.
 
To summarize, in recent years it's become increasingly challenging for SEP holders to enforce their SEP portfolios to obtain FRAND royalties from infringers. By using a "patent hold-out" strategy, SEP infringers tend to avoid SEP portfolio license fees for years with limited risk, based on the notion that the SEP holder needs to demonstrate the value of the entire SEP portfolio to the fullest extent possible through litigation. The limited risk to the infringer is due to the limited feasibility for the SEP holder to timely and cost-efficiently litigate its entire global SEP portfolio. Ultimately all of this leads to devaluation of innovation and inefficient SEP licensing, since it - remarkably - makes it more difficult to fairly enforce a large SEP portfolio than a small one. This contributes to innovation disincentivization, patent portfolio fragmentation, NPE proliferation and ultimately decreased market efficiency. Furthermore, lobbying efforts against any kind of injunctive relief or exclusion orders for SEP infringement certainly do not help the situation at all. I believe there's a strong need for courts and agencies world-wide to acknowledge the problem of patent hold-out, and to disincentivize it in order to make SEP portfolio licensing more fair and efficient. Creative policy proposals need to be encouraged in the space of SEP portfolio licensing, which can strike a reasonable balance between the market participants and society as a whole. In the absence of any other potent balancing factor against clear and present patent hold-out in cases of SEP portfolio infringement, injunctive relief and exclusion orders continue to be necessary - and in fact pro-competitive - remedies.