Federal Circuit dismisses SSPPU "rule"

Readers of this blog will know that I've frequently questioned the idea that there's a "rule" mandating that royalty or damages for infringing multi-component products be calculated using a "Smallest Salable Patent-Practicing Unit" (SSPPU) as a value-base. The idea of this "rule" has attracted quite some powerful followers and in February 2015 it was even codified into the new IEEE patent policy (!).

Well, on December 3, 2015, in an appeal decision in the CSIRO vs. Cisco case, the US Federal Circuit made it crystal clear that no such "rule" exists.

The decision includes other interesting opinions too, but I'll limit this post to royalty-base aspects. 

This statement from the decision sums things up quite nicely:

"The rule Cisco advances — which would require all damages models to begin with the smallest salable patent-practicing unit — is untenable. It conflicts with our prior approvals of a methodology that values the asserted patent based on comparable licenses. ...Such a model begins with rates from comparable licenses and then “account[s]for differences in the technologies and economic circumstances of the contracting parties.” Finjan, 626 F.3d at 1211. Where the licenses employed are sufficiently comparable, this method is typically reliable because the parties are constrained by the market’s actual valuation of the patent."

In other words, an SSPPU royalty-base "rule" would e.g. conflict with the use of comparable licenses as evidence of damages value. Given the importance placed on comparable license evidence in US law, an SSPPU royalty-base "rule" can therefore not exist.

Besides the square dismissal of the imaginary SSPPU "rule", the Federal Circuit also noted that:

"The choice of royalty base — which is often the focus of the apportionment analysis—is irrelevant to the district court’s analysis. The particular rates relied on by the district court were contemplated as cents per end unit sold by Cisco, but they could equally have represented cents per wireless chip without affecting the damages calculation.",

and:

"Because the parties’ discussions centered on a license rate for the ’069 patent, this starting point for
the district court’s analysis already built in apportionment. Put differently, the parties negotiated over the value of the asserted patent, “and no more."".

It's good to also see this point being made. People - oddly - seem to forget that payments for legitimate use of others' IPR are not made in "percent", but in real money, i.e. Dollars, Euros, Yuan etc. So what's ultimately relevant is the value - in real money - that a patent portfolio brings to the end-product. In this sense, a too strong focus on a specific model parameter such as a royalty-base is arguably irrational.

Hopefully, this Federal Circuit decision can bring any ongoing debate about SEP FRAND license value in line with actual law. 

IEEE after the patent policy update

A number of technology-contributing IEEE members have now refused to be bound by the IEEE's new patent policy adopted in February 2015. The question is, what does that mean for the IEEE as a Standards Setting Organization (SSO)?

In my experience, the strength of the international competitive-collaborative style of telecommunications standardization - largely pioneered by ETSI - lies in the fact that individual technical contributions compete purely on technical merit. This means that the type of competence needed for the effort can be highly specialized; basically some of the very best research engineers in the field, from all over the world, get together to create these complex standards. This ensures cutting-edge, future proof, global standards.

This in turn is possible when the SSO's patent policy has been generally agreed by all members on a high level, and patent policy issues can therefore effectively be "removed" from the daily standardization work itself. Those specialist engineers can focus all their efforts on inventing new clever solutions and arguing about the technical pros and cons of each other's proposals. And importantly, they can spend zero time thinking about patent policy.

But in the IEEE today we have a fragmented situation where a subset of its members have publicly stated that they will not adhere to the IEEE's new patent policy. Here some readers may of course wonder why those members aren't then simply "thrown out" of the IEEE's SSO work? But actually, in order to make the work of an SSO - not only the IEEE - as inclusive as possible, contributors are allowed to declare on a case by case basis which patent policy their patented contribution would be licensed under, which in fact does not have to be the policy adopted by the SSO. It's just that the norm has typically been that all members have agreed with the SSO's policy. But in the IEEE we now have an anomaly. The existence of these "disagreeing members" creates some distinct challenges to the IEEE's standardization effort going forward, at least within 802.11 ("WiFi") standardization.

Prior to the new policy's acceptance in Feb 2015, disagreeing members had submitted - and the IEEE had accepted - certain so-called Letters of Assurance (LoA) endorsing the old IEEE policy for certain 802.11 standards. LoAs are documents describing under which conditions the submitter agrees to license its potential SEPs for a specified standard, i.e. essentially whether the existing IEEE patent policy is agreeable to the submitter or if another policy will be used instead. Now, with the assumption that accepted adherence to a given IEEE patent policy cannot be changed retroactively, SEPs relating to the IEEE standard(s) specified in those pre-Feb-2015 LoAs will therefore be subject to two different patent policies - the old and new IEEE patent policy - depending on who owns the SEP in question.

Some of those standards are already finalized, and in those cases the impact will largely be limited to the licensing and dispute resolution spheres. However, some standards are still being worked on, meaning that there can be an impact within the SSO work itself. There could be an increased risk of proposals not being selected purely on technical merit, but potentially also based on whether the submitter supports the new or old IEEE patent policy. Thankfully, standardization/research engineers' natural behaviour is to focus on technical merit, but one still can't rule out that their management could convince them to behave differently. 

Furthermore, regarding potential SEPs for IEEE standards not specified in those pre-Feb-2015 LoAs, new LoAs would have to be submitted. But a disagreeing member submitting a new LoA would - by definition - tick the box stating its disagreement with the (new) IEEE policy. So at least if the disagreeing member's proposed solution would technically outsmart all other proposals, there's a potential issue to resolve. Assuming that technical merit continues to be the yardstick, that proposal should be selected for inclusion into the IEEE standard in question. But in this case the IEEE would instead have to examine the LoA and decide whether it would be acceptable or not. This would generally have to be done on a case-by-case basis. And if the LoA would not be acceptable to the IEEE's members, the technical proposal itself can't be accepted. Or in other words, the admittedly best technical solution would have to be actively de-selected from the standard (!). 

There has been some speculation as to whether Qualcomm - one of the disagreeing members - could benefit from its recent acquisition of Cambridge Silicone Radio (CSR) in the sense that CSR had made a "broader than usual" pre-Feb-2015 blanket LoA covering all IEEE 802.11 (WiFi) standards. Qualcomm could then allegedly utilize the CSR LoA to license also its future SEPs according to the old IEEE policy at least for all future versions of WiFi. If so, it would at least save Qualcomm from having to make those new "potentially difficult" LoAs for IEEE 802.11. While that could reduce the probability of its proposals being rejected due to origin, the risk will still be there given that Qualcomm, after all, doesn't adhere to the new IEEE policy. 

Clearly, scenarios as described above threaten to remove the "pure technical bliss" of the classic international competitive-collaborative standardization effort within the IEEE. There may now have to be more patent engineers and patent attorneys involved in the SSO work processes. The efficiency of the IEEE as an SSO will likely suffer, and alarmingly, the IEEE's future standards run the risk of not containing the best technology out there. Even worse, the best technology may have been made available to the IEEE, who then actively rejected it. If such fears materialize, some companies might very well leave the IEEE and instead support - or perhaps even create - other competing standards through other means.

The new IEEE patent policy's apparent disconnect with the law is problematic. Only last week in its CSIRO vs Cisco appeal decision, the US Federal Circuit squarely rejected one of the key principles of the new policy, namely the mandatory chipset royalty base. In the same breath, the Federal Circuit re-emphasized the importance of evidence in the form of comparable licenses, also in stark contrast to the new policy. We also know that the new policy's rule on injunctive relief in practice also differs from Federal Circuit opinion. 

The IEEE, and ultimately the general public, would surely benefit the most if the IEEE stays strong and relevant, capable of efficiently creating top-notch standards going forward. So perhaps it's time for a pragmatic and open discussion among IEEE members with the aim to consolidate the different viewpoints in the light of the law. Another update of the policy may very well be needed to put the IEEE's standardization work back on track again.

Who needs a license to standard essential patents?

Having recently discussed some specific court cases and hot topics, I thought it might be time for a more generic post on licensing concepts and principles. Specifically, I'd like to talk about what I call the "licensing point" for patents in general and Standard Essential Patents (SEP) in particular. Simply put, I'll try to answer the question; "Who needs an SEP license"?

By "licensing point" I mean "the entity among several entities in a product value-chain that obtains a patent license for making or selling products". We know that in the case of mobile phones, the Original Equipment Manufacturer (OEM) - the entity that puts a ready-to-use end-product on the market with a brand name belonging or licensed to it - is the SEP licensing point. In this post I'll discuss why this so, and also whether it's likely to stay that way going forward. 

Generally speaking, the licensing point is ultimately selectable by the patent holder, and could be virtually any entity in the value chain whose product encompasses the inventions covered by the licensed patents. It could be the end-product OEM, a component manufacturer or an entity in-between those. It could even be a point downstream from the OEM, like a whole-seller or a high-street- or Internet retailer. The royalty parameters just need to be properly adjusted in every case to reflect the ultimate license value to the end-product. For sure there can be practical complications in implementing some of these licensing points, but they should be perfectly permissible per se.

But that's more of a theoretical observation, now let's look at specifics. As stated, the OEM happens to be the cellular SEP licensing point. But why is that exactly? As it turns out, there are several reasons. 

We can start with a simple historical reason. Up until the end of the 1990's, the only OEMs that existed on the mobile device market were all vertical OEMs. So in fact there was only one possible licensing point.

So that was easy. But as we know today, this market structure changed a lot since then, so an interesting question is why the licensing point did not change with it. 

Indeed, the mobile device industry went through a structural change during the first decade of this century. From consisting of only a handful of vertical OEMs, it became more diverse, including a value-chain of specialized entities. This change was initially led by Qualcomm on the chipset level and further downstream by Taiwanese "notebook ODMs". 

  

However, in spite of increased specialization, some vertical or near-vertical OEMs still remained and new ones even emerged. Today there are pure mobile device vertical OEMs (Samsung, LG), pure infrastructure vertical OEMs (Alcatel-Lucent, Ericsson, Nokia) and combined mobile device and infrastructure vertical OEMs (Huawei), all doing pretty well in the marketplace. These companies have substantial in-house knowledge and control of the chain from components or chip-sets all the way down to the manufactured finalized product. So to maintain that position there's a need for these OEMs to invest rather heavily in R&D and standardization, which in turn will also generate SEP portfolios.

Now, for all such SEP-holding OEMs, an interesting question arises; would it be appropriate for the mobile device SEP licensing point to move upstream from the OEM level to e.g. the chipset manufacturer level?

While such a move might seem plausible at first glance, it could lead to complications. To understand this, let's first look at a hypothetical example scenario, but using real-world entities for ease of explanation. Take a SEP-holding mobile device OEM like Samsung. Assume that Samsung would license its SEP portfolio at a point upstream from the OEM level, let's say to chipset maker Mediatek.
Now as long as another SEP-holding OEM, for example Huawei, located downstream from Mediatek would not assert its SEP portfolio against Samsung, this would be just fine. But if it would - and it likely would because Huawei would have a FRAND commitment as an SEP holder - then Samsung might have reasons for concern. In the example scenario, while Samsung needs an SEP license from Huawei, things are not as obvious regarding Huawei's need of an SEP license from Samsung. In many jurisdictions, Samsung's license to Mediatek can be seen as inherently providing certain rights to Huawei under Samsung's patents, for products that include Mediatek's chipsets. So in effect, Samsung's license to Mediatek could limit its own defenses against an SEP portfolio assertion by Huawei against Samsung's products.

However, if Samsung would instead continue to consistently license the last point in the chain -  in this example Huawei - then no such issue would occur. Then Samsung could procure a maximally efficient SEP portfolio cross-license with Huawei because it's 100% clear that Huawei needs a full license from Samsung, regardless of what chipsets happen to reside in its products. This so-called "grant-back" issue is one reason why the cellular SEP licensing point prevails at the OEM level also in today's more specialized world.

Now those particular companies were used only as examples, and I don't know the real licensing situations among them. But the example illustrates that at least as long as there remain SEP-holding mobile and/or infrastructure OEMs - which tend to be verticals - generally healthy and successful in the global marketplace, this will be a continuing factor that tends to keep the SEP licensing point for mobile devices at the OEM level.

But there are also other reasons for the OEM being the licensing point. Like the issue of "patent value apportionment". A license to an SEP portfolio needs to be priced based on the value the technical inventions therein bring to the end-product. In US law this has been made clear in e.g. the well-known CSIRO vs. Cisco and Ericsson vs. D-Link et. al. cases. And the easiest point to observe the value the inventions bring to the end-product is - not surprisingly - at the end-product level, i.e. the OEM level.

We can look at the illustrating example of the iPod Touch vs. the iPhone. These products are very much alike, with the difference largely being that one has cellular connectivity and the other one doesn't. The products have similar specs and both carry the "brand magic" of the OEM, Apple. Yet today's price difference between the two is around $250. 

As I mentioned in another post, the price difference not only illustrates the tremendous value of adding standardized cellular technology to an otherwise similar device. It also indicates the value of a license to the SEP portfolios covering it. Due to the way standards are created, the SEP portfolios covering a standard include those innovative technologies that won the competitive race to allow that particular standard to fulfil its specific requirements. Therefore the accumulation of SEP portfolios for a standard do in fact drive the value of the standard itself.

The market has established the accumulated SEP portfolio license value for a mobile device to be somewhere close to 10% of the OEM selling price of the end-product. This is a fraction of the value the standard itself brings to the end-product, but also more than the cost of a chipset. Clearly, when component suppliers don't account for SEP license costs, the component prices don't reflect the value of SEP portfolio licenses to the end-product at all. Another way of viewing this is that if the licensing point would hypothetically move to the chipset level, the chipset cost would have to increase many-fold. That may seem odd at first, but remember that this is accounting for the value to the end-product.

There are some recent and quite loud voices in the industry that - notably without rational or legal support - advocate that basing wireless SEP license royalties on end-product price is "non-FRAND", and that such royalties "must" be based on the chipset value. Actually, such calls are not always explicitly about moving the licensing point to the chipset level per se. Indeed, licensing point and royalty base are separate things. With the licensing point kept at the OEM level, a chipset value royalty base could still be possible in principle, by setting the royalty rate to some hundreds of percent. Ultimately, the royalty base is just a parameter in a certain calculation model, and what matters in the end is the value to the end-product. 

Another related factor driving the OEM licensing point is that the value of the standard may be different for different end-products. Since the value of licenses to the accumulation of SEP portfolios is proportional - but not equal - to the value of the standard, the license value can also vary between different end-products. For a mobile phone the value is very obviously large, but there are end-products for which the value might be considered smaller. For a vending machine or utility meter for example, the standardized cellular connectivity - and a license to all patented inventions therein - might for various reasons not necessarily be considered as tremendously valuable as for a mobile phone. Now if the licensing point would be moved to the chipset level, there'd be an issue with chipset tracability, or rather the lack of it. In fact, chipset manufacturers don't always know what type of end-product their chipsets ultimately end up in. Consequently it can be hard to determine the appropriate end-product license value at the chipset level. 

In this post, I've outlined some rational reasons for why SEP-holding OEMs conclude SEP portfolio licenses at the end-product OEM level. While it's certainly possible that this might change in the future, my guess is that some factors that make it rational to keep the licensing point at the OEM level will prevail for some time to come.