Fair Standards Alliance and the licensing point

A grouping that calls itself Fair Standards Alliance (FSA) appears to want to give FRAND a "clearer meaning in order for standards to promote innovation, economic growth, competition, and consumer choice."

FSA has published a position paper outlining some principles to this effect. Several of them seem reasonable and generally in line with the law, competition authority investigation outcomes and established SEP FRAND licensing practices. Others are more dubious, such as an unhealthy emphasis on a chipset royalty base. 

However, a key message from FSA relates to the so-called "licensing point" that I've written about earlier and defined as "the entity among several entities in a product value-chain that obtains a patent license for making or selling products". FSA essentially conveys the message that:

a) an SEP license should be available at any licensing point, and

b) the same royalty should apply regardless of licensing point. 

Now, while a) and b) certainly don't sound unreasonable per se, the irony in this message from FSA should not be missed. It's well-known that there are only a few upstream entities harbouring an expressed desire to become a wireless SEP licensing point in the first place. And this wish typically comes along with the caveat that the SEP royalty must be discounted by something like 99%.

Looking past the irony though, FSA's wish to move the wireless SEP licensing point upstream is worth discussing, including some practical considerations. 

I have previously described how the issue of so-called "grant-back" tends to prevent the licensing point for at least mobile phones from moving upstream, as long as there are SEP-holding mobile phone and/or infrastructure OEMs around. I won't elaborate on that issue further here as it's a bit intricate, so interested readers may check the earlier post for details.

Furthermore, FSA's promotion of an upstream licensing point relies on an implicit assumption. Namely that the SEP-portfolio license value to the end-product is the same regardless of end-product-type. But as I also touched upon in the earlier post, that's not necessarily true. For mobile phones, the cellular SEP-portfolio FRAND license value is well-established by markets and courts. But in principle, there could exist other types of end-products for which this license value could be lower than for mobile phones. This could e.g. be due to significant aspects of the standard, along with their patented features, being less valuable to those end-products.

Take a refrigerator for example, an end-product actually mentioned in the FSA position paper. Many advanced patented innovations for cellular standards relate to ways of being able to communicate effectively in presence of challenging and dynamic radio conditions or with limited available power.  But the fridge isn't going anywhere in particular and it's connected to the power grid day and night. So for the fridge, the value of the cellular standard in itself - and hence of a license to all its associated SEP portfolios - may perhaps be considered lower than for a mobile phone.

In such a case, one could argue that it ought to be possible for SEP-holders to "promote" the standard in question towards such a product-segment by offering a discounted royalty from that of mobile phones. Provided of course that such an offer would still be considered FRAND. As long as it's a sufficiently differentiated end-product category and the same discounted offer would be provided to all providers of such end-products, this would most likely be the case. 

But if the chipset vendor would be the SEP licensing point, such a promotion might become challenging, since chipset vendors typically don't know what end-products their chipsets will end up in. While this could in principle be solved by advanced logistics management and proper contractual follow-up, it may still turn out to be difficult in practice.

On the other hand, the chipset vendor is not the only potential upstream SEP licensing point. For example, module vendors or solution providers within the vehicular or telemetry industries could also be licensing points. In such a scenario, traceability may become less of an issue since there would be stronger end-product control. 

Summarizing all of this, there's actually nothing per se that prevents the SEP licensing point from moving upstream from the end-product OEM. There are certainly practical obstacles that can be identified as I've expressed here and previously, but at the end of the day they're probably not insurmountable. 

Therefore, the biggest reason for the cellular SEP licensing point staying at the end-product OEM level may well be the refusal by upstream entities to accept the FRAND royalty levels established by markets and courts.

For mobile phones, established royalty levels consider the value brought to the end-product and end-user. Thus the royalty can ultimately be seen as a cost distribution issue between the end-product OEM and the end-user. By contrast, upstream intermediate products such as chipsets do not take into account this end-product SEP value at all, which is clearly reflected in their prices. But if - as seemingly desired by FSA - the cellular SEP licensing point is to generally move upstream, relevant FRAND royalty levels would certainly have to be made visible upstream too.