Patent privateering - a comment on the FOSS Patents campaign

In my previous post, I questioned the stance taken by FOSS Patents blogger Florian Mueller on what he calls "patent privateering". It seems like a veritable FOSS Patents campaign has been launched against this phenomenon, with crowd-sourced name-and-shaming and all. 

I feel that this campaign is - at best - unhelpful, since its basis is rather lacking in analysis and it carries an unwarranted presumption of sinister causes on behalf of SEP holders. 
In short, FOSS Patents goes after an effect rather than a cause.

More questioning of the campaign has recently come from Richard Lloyd of IPR newspaper Intellectual Asset Management (IAM): "the notion behind the FOSS Patents initiative - that privateering is bad and should be stamped out – is just plain wrong".

However, in a more recent FOSS Patents post, Mr. Mueller does ask the relevant question "...why companies with such vast resources and enormous sophistication (in-house and externally, in legal and in technical respects) need help from little guys with a controversial business model to do license deals with the very same licensees with which they've already done deals before and do deals with all the time."

But the question was rhetorically put, i.e. still presuming sinister motives. It shouldn't be rhetorical though. It's an excellent question. At least if you really want to try to understand the problem. My answer, as I indicated last year and more recently last week, is that patent holdout is an important driving factor behind SEP sales. So to the extent we need a campaign, patent holdout should be the target. To cite IAM's Richard Lloyd again: "In short, it doesn’t look like the privateer who is being unreasonable and abusive, it is the companies who will not sit down and talk turkey. Maybe this is what we really want to be shining a light on. Anyone want to help IAM put together a list?"

In what looks like an attempt to isolate a particular group of "good guys" from "evil-doers", Mr. Mueller goes on to ask the question "...why a number of major right holders generally don't sell patents to PAEs. For example, I'm not aware of Qualcomm doing this... Or IBM. ... Or even Microsoft".

Again rhetorical, and again it needn't be. This one is particularly easy to explain. To begin with, in a cellular SEP context we can forget about IBM and Microsoft since neither is a significant SEP holder. So let's look at Qualcomm. It's the only significant SEP holder that sells chipsets and not end-user products. And not just any old chipsets, but the most popular ones on the market. So for Qualcomm, SEP-licensing is more straightforward than for other SEP-holders since there's already an established and keen business interest on the part of its potential licensees. Indeed, Qualcomm hardly ever initiates SEP infringement lawsuits, and yet it has the industry's highest SEP license royalty revenue. Clearly, Qualcomm has so far been subject to far less patent holdout than other significant SEP-holders, and therefore hasn't felt the need to engage in SEP selling for "patent privateering".

So, while perhaps contrary to Mr. Mueller's intention, his Qualcomm example is the perfect corollary to my own conclusion: SEP selling is largely a rational response to patent holdout. 

Patent privateering - cause and effect

In a recent FOSS Patents blog post, there was a discussion on "patent privateering" in relation to SEPs. The definition used in the post was "the act of large companies feeding trolls with patents in order to maximize their patent monetization income and/or drive up their competitors' total cost of defense". Whether this definition is appropriate or not could be debated, but the blog post is nevertheless interesting as one reaction to what seems to be a relatively new form of behaviour in the industry.

However, there's a key statement in the post: "Many privateering deals involve SEPs and are part of a scheme to circumvent FRAND licensing obligations", that is worth quite some scrutiny.

Regarding FRAND licensing obligations, my experience is that:

1) A growing number of SDOs and competition jurisprudence ensure that FRAND licensing obligations transfer with the SEPs to the new owners. Therefore, SEP-holders typically contractually bind the buyer to abide by FRAND terms for the purchased SEPs. Sellers may also impose royalty caps versus third parties on the buyer. 

2) The post inherently assumes that when an SEP holder sells off SEPs, the seller's FRAND rate is unchanged. It doesn't explore whether there may be legitimate reasons for maintaining the same rate or whether sellers reduce their FRAND rates by a "corresponding" amount after sale. Sellers can contractually agree with the buyer to do so, as well as permit buyers to disclose that information to potential licensees. Then the transfer won't affect the cumulative FRAND rate for OEMs.

But the most troubling aspect of the FOSS post is that it carries a presumption of sinister motives being present; "part of a scheme to circumvent...obligations". No attempt is made to explore what might be legitimate motives for selling SEPs.

My experience from real-world licensing is overwhelmingly that companies do have legitimate motives for their business decisions, so to simply and sweepingly assume the opposite strikes me as a rather extreme position to take.

In fact, as I've already mentioned in an earlier post, there is indeed a major legitimate cause of SEP selling. It's called patent hold-out.

Several of today's phone OEMs with large product sales are relatively new to the business and as regards to SEP licensing tend to behave differently from their equivalents in the past. Instead of trying to negotiate necessary SEP-portfolio licenses in good faith, there's a tendency to proclaim virtually any license offer as being "non-FRAND". Then simply wait for the patent holder to try to obtain FRAND value on its global SEP-portfolio through expensive and inefficient patent-by-patent, country-by-country litigation - a process that may never lead to FRAND value recoupment. This behaviour is known as "patent hold-out" and is becoming widely recognized by courts and agencies worldwide as being a major problem. For a discussion on the mechanism, reasons and effects of patent hold-out, I refer interested readers to my earlier post on the subject.

As a result of all this, several holders of significant global SEP-portfolios have in recent times increasingly become unable to obtain FRAND value from their portfolios in traditional ways, i.e. through bi-lateral patent licensing. These SEP-portfolio owners don't have the corporate culture or relevant experience to extensively enforce their patents through courts and so have turned to NPEs, who are much more experienced with patent litigation, in order to recoup value from their patents.

If we really want to mitigate "privateering" going forward, we should voice our support for appropriate changes to mitigate its actual causes. We should find ways to facilitate fair and efficient adjudication of FRAND license terms of global SEP-portfolios, and adopt clear rules that allow injunctive relief against those who refuse such an adjudication. And of course, regulators, courts and agencies should continue to acknowledge, highlight and enforce against the growing patent hold-out problem.

With such measures effectively implemented, I'm convinced that SEP transfers seen as "privateering" will decrease and SEP licensing efficiency will increase.

IPR & Make in India

Under new prime minister Modi, India has launched the ambitious "Make in India" campaign, with the clear aim to attract global companies to locate their manufacturing resources in India. The timing of the campaign seems excellent, coinciding with global companies looking around for alternative manufacturing hubs to China. It could be just what India needs.

Although India hasn't really kept up with China's level of technology investment for some time, the overall IPR legal framework in India is comprehensive and there's a strictly independent judiciary that Indians are rightly proud of. In recent years, a rapidly growing number of patent cases in various fields have been handled by Indian courts, continually further developing their specific competence on patents - arguably the most complex form of IPR - in the process. In fact, today India even serves to demonstrate that major international patent enforcement is no longer restricted to the US and Europe. India was recently selected by Ericsson for the filing of cellular SEP infringement lawsuits against some alleged infringers, including the Chinese OEM Xiaomi and the Indian OEM Intex.

In relation to the Make in India campaign, the Indian Cellular Association (ICA), a grouping including many Indian mobile phone OEMs, recently submitted a report to the Indian government, apparently pertaining to IPR issues related to the campaign. Although the report is currently not public, statements from it have been quoted in a recent article in the Indian newspaper Economic Times. Sadly, those statements are at best confusing, and at worst misleading.

According to the article, ICA in its report seems to highlight the above-mentioned case of Ericsson enforcing its cellular SEP portfolio against alleged infringement in India, and then makes generalized, negative and far-reaching conclusions about India's future as a manufacturing hub based on that. 

What seems to be a key message is:

"There can never be any manufacturing set up in India since the global giants have cartelized and self declared their patents and they would be charging these incredibly high rates only from the Indians and not from the international companies."

To begin with, this statement presumes a clear link between manufacturing and patents. But with respect to cellular SEP licensing, the licensing point is at the OEM level, which is downstream from the manufacturing point. This makes the manufacturing territory virtually irrelevant. As far as cellular SEP licensing is concerned, for the typical Indian OEM selling products largely in India, it doesn't matter if the products are manufactured in India or not. So actually, the supposedly "showcase example" of SEP licensing highlighted in the report has nothing to do with Make in India in the first place.
There may well be other technology areas, for example pharmaceuticals, where IPR may be more coupled to manufacturing, but highlighting cellular SEP licensing in a manufacturing context is simply not relevant.

The allegation in the same quote that "global giants" would for some reason discriminate against Indians in particular with "incredibly high rates" is truly odd to say the least. Assuming still that the reference is cellular SEP licensing, it can have no basis in reality nor in common sense. 
Firstly, it's highly questionable what rationale a licensor would have to even attempt such discrimination. 
Secondly, there are FRAND commitments in place to prevent unfairness, unreasonableness and discrimination. Licensors' existing license databases are regularly scrutinized by courts and agencies worldwide to ultimately enforce FRAND terms, including mitigating discrimination. 

Thirdly, Indian OEMs are so far generally unlicensed under cellular SEPs, i.e. they pay zero actual royalties to SEP holders. So if anyone would be discriminated against, it's the already licensed international companies operating in India. And to add to the irony, the potential discriminators are Indian OEMs themselves, including members of ICA (!). Indeed, the High Court of Delhi in its recent infringement judgement in Ericsson vs. Intex found that Intex - an ICA member - had "acted in bad faith" and became an "unwilling licensee as per its overall conduct". It further decided on interim payments by Intex in the region of 0.8-1.3%, obviously a far cry from the alleged "incredibly high rates".

With regards to "global giants have cartelized and self-declared their patents", I'm afraid it's a bit of a challenge making any sense of the statement at all. The only feasible conclusion I can draw from it is that ICA has not fully understood the simultaneously collaborative and competitive process of cellular standards creation and the FRAND licensing regime for technology sharing. It would be unfortunate if ICA failed to understand how these processes actually enable the standards to be deployed worldwide and allow billions of dollars of R&D and network investments to be made and the entire related eco-system - which ICA partly represents - to prosper.

Another key statement in the article reads:

"This in complete contrast to regimes such as China, where 0.019 per cent royalty can be charged and USA, where the Courts have directed 0.5-2 per cent royalties to be charged on the value of smallest saleable practicing unit which is royalty on chipset value and not on the phone value"

In fact, the quoted examples of allegedly lower rates are not from particularly relevant rulings relating to cellular SEP licensing. The quoted China ruling is most likely from Huawei vs InterDigital in the Guangdong High Court of China. An early use of the Chinese Anti-Monopoly-Law (AML), it is widely seen as a purely political ruling against so-called Non-Practicing Entities (NPEs). If ICA really wanted to use China as a yardstick, a far more important measure would be the conclusion of the recent AML investigation against Qualcomm - importantly being a non-NPE and major cellular SEP licensor - where China allowed Qualcomm to charge a 3.25% royalty on the phone value. 

Regarding the reference to the US and the "royalties to be charged on ...chipset value" argument, it is well-known to be nonsensical. In the US, chipset value has been squarely dismissed as a mandatory royalty base in e.g. CSIRO vs Cisco and by the US Federal Circuit in Ericsson vs. D-Link. Also in China it has been dismissed through the AML ruling on Qualcomm where phone value was maintained as royalty base. Based on e.g. such powerful international references, the High Court of Delhi also dismissed the argument in its recent judgement in the Ericsson vs. Intex case.

To the extent that ICA should be making recommendations concerning IPR, it should obviously strive to provide relevant, true and objective facts about IPR in the mobile industry, and their relevance - if any - to "Make in India". But in its report, ICA unfortunately does not do that. Instead it provides incorrect and irrelevant information about cellular SEP FRAND licensing in particular. I'm afraid I can't see how conclusions drawn from such information can be helpful to the government of India.

ICA is now, according to the same article, part of a Fast Track Task Force set up by the Indian government to rejuvenate mobile manufacturing in the country. To be clear, ICA may well be a competent advisor on many aspects of mobile phone manufacturing. But as far as cellular SEP licensing goes, as put recently by reputed IPR newspaper Intellectual Asset Management, "Perhaps FRAND matters are best left in the hands of the judges".