Absurd (F)RAND licensing-rate determinations for SEPs

I have submitted many articles to IP Finance over the last couple of years as a "guest" contributor. I would like to thank Jeremy Phillips for inviting me to do so, and posting my articles for me with all the editing and production work entailed. This is my first IP Finance posting as a "resident" contributor.

Absurd (F)RAND licensing-rate determinations for SEPs

Judge James L. Robart's findings in the case between Microsoft and Motorola, which issued in April 2013, represent the first U.S. judicial attempt to determine reasonable and non-discriminatory licensing fees. Most recently, Judge James F. Holderman has also had a go in his royalty rate opinion in the Innovatio case. The judges’ rate setting applies only to standard-essential patent technologies in H.264 video and 802.11 WiFi. In my opinion, the rates set in both cases are defectively based and unreasonably low.



Rate-setting in SEP licensing

The judges’ decisions are both based on the faulty dictum that patentees are entitled only to a small proportion of standard-essential patent value. Valuation methods selected unsurprisingly reflect that predisposition. The judgements significantly rely on the defective notion that SEP-owners’ rewards should only reflect “intrinsic value” of technologies, and that they should be deprived a proportion of the value that comes through standardisation including “network effects.” Core technology developers deserve to share in the economic benefits of standardisation because of the significant costs and risks in developing, proposing and integrating their technologies. That has been the basis for investment and market success so far.

Patent pools and chipset profits used by Judges Robart and Holderman respectively provide biased and misleading benchmarks for (F)RAND royalties. The judges identify some major limitations in using patent pools while seeming oblivious to other pitfalls. Judge Robart ill-advisedly uses pools because participants are mainly implementers who tend to be most interested in keeping their royalty costs low. Those with the most valuable patents tend to steer clear. Judge Holderman latches onto an alternative approach, based on silicon chip component manufacturer profits, that is also deeply flawed, while taking comfort from choosing a reasonable royalty rate that falls within the range established for the same standard by Judge Robart. Licensing rates on ICT products commonly apply across the entire product because value is delivered and enjoyed on that basis. They have little to do with and should not be limited to profits on chips.

My full analysis is a rather lengthier 24 pages. Those with the interest and stomach for it can find it in full here as a PDF document.

Theories of harm with SEP licensing do not stack up

In this guest posting authored by regular IP Finance contributor Keith Mallinson (WiseHarbor), Keith debunks economic theories of effects and harm due to alleged royalty stacking with numerous patents essential to cellular standards. He does this by assessing the development of these technologies, products and services, market entry, competition and prices over the last six years or so. Keith shows that the sector is thriving and fast-growing. Evidence reveals that aggregate patent royalties paid are nothing like as high as is commonly alleged and are not detrimental. By comparing technologies and their performance over several years, identifying increasing product choice and new market entrants, and tracking key metrics with reducing price indices, decreasing Herfindahl-Hirschman market concentration indices and stellar market growth figures, Keith shows that the dire predictions of academics including Mark A. Lemley and Carl Shapiro in their 2006 and 2013 papers are incorrect, unfounded and based on inapplicable theories.

Exponential global growth in cellular data with mobile broadband

Source: Ericsson Mobility Report, November 2012

Cellular prices flat or falling versus the rising CPI

Source: U.S. BLS indices

Herfindahl-Hirschman Index tracking declining manufacturer market share concentration

Sources: WiseHarbor analysis on figures from Gartner,
Strategy Analytics and WiseHarbor using company disclosures

Keith observes that these inapplicable theories and assertions are also troublingly being adopted by judges and government agencies in their smartphone patent war rulings, despite the weight of so much evidence to the contrary.

For ease of reading, Keith's contribution (which is rather longer than usual) can be accessed here as a PDF document.

Scaremongering about SEPs

A post by Stefano Barazza on the IPKat weblog on 11 March caught the attention of Keith Mallinson (WiseHarbor), a regular contributor to IP Finance and a man who has taken a particular interest in the impact of standards and FRAND licensing on the ability of businesses in the telecom sector to compete with one another and in the extent to which voluntarily arrangements between competing businesses facilitate or chill investment.  This is what Keith writes:

Scaremongering about SEPs 

A recent article in the CPI Antitrust Chronicle entitled “Standard Setting Organizations Can Help Solve the Standard Essential Patents Licensing Problem”, that was reviewed by The IPKat, asserts that  

“specific circumstances affecting some industries like the information and communication technology (“ICT”) sector may limit the effectiveness of intellectual property rights” to “stimulate innovation, and to benefit consumers”. The authors (Kai-Uwe Kühn, Chief Economist, DG Competition, European Commission; Fiona Scott Morton, former Chief Economist, Antitrust Division, US Department of Justice (2011-12); Howard Shelanski, Director, Bureau of Economics, Federal Trade Commission) provide no evidence for such harm and mention only one example with “UMTS, or 3G.”

Widespread success and benefits in SEPs

Facts and figures show there is no such problem. On the contrary, the IPR licensing system is thriving with widespread benefits beyond patentees, in 3G and many other technologies. Standard-Setting Organizations can make adjustments to their rules and procedures where and when necessary; patent and contract disputes can continue to be dealt with by the courts.

Many and various different cats get the cream with SEPs

In marked contrast, my analysis in the 16 articles I have published in IP Finance over the last couple of years has shown how very well (Fair) Reasonable and Non-Discriminatory Licensing is working for patented technologies used in ICT standards.  Major successes include cellular communications with GSM, WCDMA (UMTS) and LTE, and video encoding and compression with AVC/H.264 among many other flourishing standards. 

Despite the fact that all the above technologies are subject to thousands of Standard-Essential Patents, any of which can–according to detractors–block or “hold-up” standards entirely, these cellular and video standards are used by most of the world’s population every day. Sales of products implementing them, including mobile phones and other consumer electronic devices exceed two billion units per year worldwide. 

These standards-based technologies are as innovative as one could possibly expect or want. Furthermore, developments are highly collaborative. Hundreds of companies have declared in the ETSI IPR Database that 124,000 of their patents are possibly essential to these 3GPPcellular standards. Improvements continue apace to 2020 and beyond. Patent pool licensing for AVC/H.264 includes most of the standard’s patents with 30 licensors, 2,600 patents and 1,200 licensees at a royalty rate of no more than 20 cents per device. HD video is being enhanced in the H.265 standard with higher definition and increased compression for reduced communication bandwidthdemands.

Consumers have more and more product choice with plunging prices, additional device features and increasing processing power literally in their hands. The first cell phones and color TVs cost thousands of dollars. Mobile phones sold without subsidy or service contract commitments were available for as little as $20 by the mid 2000s.  Similarly, smartphones that can stream TV shows among many other capabilities are also now available for less than $100.   Such low-cost devices will soon have the performance of handsets that cost several hundred dollars today.

Standards make technology more widely available because SSOs demand open disclosures, help make various technologies compatible and require members to offer patent licenses through (F)RAND declarations.  But what about the alleged harm to technology implementers such as device manufacturers from Patent Assertion Entities, or patent trolls as they are also disparagingly called?   These have mostly asserted non-SEPs and they have not fared particularly well when they have litigated, including SEPs. Furthermore, the courts are very reluctant or unwilling to issue injunctions when patent disputes are clearly about the price for licensing SEPs.

The CPI Antitrust Chronicle article represents personal views–not official agency positions–by these antitrust economists. In fact, some statements may contradict case law or agency policy. If and when the purported issues and problems appear, they can be and are effectively handled –without, for example, the proposed interventions on seeking injunctions and setting cash prices –in the normal course of business by SSOs and their participants, or through the courts when there are patent or contract disputes.  

SSOs are not monopolists or monopsonists and nobody is forced to join any SSOs. These voluntary organizations compete with each other on many fronts including rules of participation for members.  It is therefore fair and reasonable to let members decide among themselves what obligations, restrictions and other rules they want. In the absence of proven harm, there is no reason to fix a system that isn’t broken.