FOSS patents and the royalty base

In a recent FOSS patents post, blogger Florian Mueller continues to advocate that the SEP license royalty base for cellular mobile devices should be changed from the end-product to the "smallest saleable unit", i.e. the chipset. In the post, quite some disappointment is expressed regarding Judge Robart's "failure" to mandate a chipset royalty base in Microsoft vs. Motorola. 

As I mentioned in a previous post, the royalty base is a parameter in a specific royalty calculation model. What matters in the end is the absolute payable royalty, and that it considers the value that the patent portfolio in question brings to the end-product. I believe that judges adjudicating patent cases are generally well aware of this.

But there's a statement in the FOSS patents post that specifically caught my attention: "Apple's position is that the difference between the price of an iPhone and that of a cheap "feature" phone (colloquially also called "dumbphone") is unrelated to wireless communications standards. I support Apple on that one"

I'm not sure I'd support that statement. The difference in price between a "dumbphone" and a "smartphone" most certainly appears to be related to wireless communication standards. 

Imagine a "smartphone" that only includes 2G wireless communication standards. Such a "smartphone" would hardly command a high price on the market, if indeed it could be sold at all. But simply add 3G/4G to it and suddenly it becomes a very attractive product. Clearly, the 3G/4G wireless communications standards bring tremendous value to a "smartphone" device. 

But while we're at it, why not compare Apples to Apples?

I'll simply quote myself from an earlier post: 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. 

Surely that's a more interesting price difference.

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.