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".

Follow-up on cellular FRAND royalty levels

Recently, a Fierce Wireless article by Keith Mallinson discussed the issue of cellular SEP FRAND royalty rates and in my opinion made some very good points on the cumulative level, based on a practical rather than theoretical argumentation.

In the article, there's an estimation of cumulative royalty rates, where the actual combined licensing revenues of the world's major cellular SEP licensors are basically divided by the actual number of phones sold. Based on such a calculation, it was estimated that "a total aggregate SEP royalty across all handsets worldwide is most likely to be no more than a mid-single-digit percentage". That estimation is probably quite accurate, and I find the "reality-check" approach very refreshing. Not least considering the amount of dubious theoretical argumentation one can find on this subject. 

But since I myself mentioned the figure of "around 10%" in an earlier post on cellular FRAND royalty levels, I felt that a clarification might be needed to remove any potential confusion. Mr Mallinson's calculation method gives a high-level view; a global average estimation of the cumulative royalty rate. On the other hand, my post focused on the  question: "What cumulative SEP FRAND royalty does an OEM without own basic R&D or SEP holdings have to pay?". These are two different things. Let me explain.

Essentially, there are three categories of mobile phones sold on this planet:

1) Phones sold by OEMs with own basic wireless R&D and SEP portfolios.

Many (other) asserting SEP portfolio holders are themselves implementers, and thus need a "grantback" license to these OEMs' SEP portfolios. Therefore, this subset of phones is subject to lower SEP royalty rates due to "royalty netting". As I described in my post and is also clear from Mr Mallinson's article, this is not discriminatory, due to fair value transfer. The cumulative royalty for this category of phones is somewhere in the 0-10% interval.

2) Phones sold by OEMs without own basic wireless R&D and SEP portfolios.

Instead of doing heavy investments in cellular wireless R&D, these OEMs have chosen to focus their business efforts on e.g. design, brand management, localization, feature development, marketing or logistics. The basic cellular technology is procured through the SEP FRAND licensing regime. This is the category of phones I addressed in my post, and in my experience, its cumulative royalty is around 10%.

3) Phones sold by OEMs that are "unwilling licensees".

Due to factors such as patent hold-out and the emergence of major localized OEMs in jurisdictions with less effective IPR enforcement regimes, a number of phones sold globally today are unlicensed. That is, they constitute infringing devices and no royalty at all is payed for them.

So a new OEM has two legitimate choices: a) get into basic wireless R&D to contribute to the standards and in the longer term pay somewhere between 0% and 10% or b) let others do all that and pay around 10%. As is worth repeating, there are no free lunches.

Considering that the phones in the three categories are subject to cumulative royalties of something like 0-10%, 10% and 0% respectively, it's perfectly possible that the global average might end up somewhere around 5% as indicated by Mr. Mallinson's calculation. Having said that though, it's important - for new OEMs but also for courts and agencies - to appreciate that the global average is not necessarily a relevant reference per se for a given OEM. 

Finally, it's of course quite alarming that a subset - and probably a sizable minority - of phones sold globally are currently not covered by SEP portfolio FRAND licenses and corresponding royalty payments. Or to put it more bluntly, are sold by OEMs who "willfully infringe" other's SEP portfolios. Partly a result of the "patent hold-out" challenges discussed in a previous post, this is a grossly under-reported problem that I hope to return to in another post.

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.