BREAKING: Mr Justice Marcus Smith has made his Optis v. Apple FRAND determination: only $5M per year for global standard-essential patent license covering all Apple products, even hypothetical Apple Car

BREAKING: Apple has effectively prevailed over the Optis Wireless patent licensing firm in the High Court of Justice (formerly known as the England & Wales High Court, still commonly abbreviated as EWHC). Optis will receive only approximately US$5 million per year from Apple, and we're talking about a worldwide standard-essential (SEP) portfolio license covering all Apple products implementing cellular connectivity, even "a hypothetical Apple car, retailing at a hypothetical US$100,000 and using the Standard for Cellular Connectivity."

Let's face it: London is not the city of milk and honey for SEPholders. After the Unwired Planet v. Huawei decisions by the High Court, Court of Appeal, and UK Supreme Court, some thought the United Kingdom would become one of the world's most attractive SEP enforcement destinations. In March, Mr Justice Mellor--also almost one year after the related trial--handed down his InterDigital v. Lenovo decision, which overwhelmingly favored the interests of the defendant. One could have a debate over whether InterDigital or Optis is now likely more disappointed, but neither of them can be pleased with the amounts.

The decision already came down on May 10, but it has not been published yet. I've been able to obtain some basic information and snippets from a source I must protect. I had no idea that the judgment had already been entered when I wrote on May 27 that it could be further delayed by Mr Justice Marcus Smith's new merger case (Microsoft v. Competition & Markets Authority, over the $68.7B acquisition of Activision Blizzard King). He not only hears patent cases but is also the President of the Competition Appeal Tribunal of the United Kingdom. I live-tweeted about the initial case management conference last week and subsequently blogged about that case. I'll also comment on next Monday's second case management conference, and I'll be speaking about the application of competition law to SEPs at a London conference on Tuesday that is keynoted by Mr Justice Smith and organized by Concurrences together with King's College London. I look forward to meeting some of my readers there. I very rarely attend in-person events.

Getting back to Optis v. Apple:

It's possible that Optis will appeal the decision. If it standards, Apple gets a global lifetime license (including backroyalties) to that patent portfolio for roughly $60M (including interest). Optis wanted a lot more--in fact, so much more that Apple even threatened with leaving the UK market should the UK part of the dispute result in an obligation to take a worldwide license at a rate Apple would have deemed excessive. Apple withdrew the threat, but it shows that they were afraid of a worst-case scenario far in excess of what the High Court has now decided.

Some of Apple's arguments for bringing down the royalty rate were rejected, and that includes Apple's favorite SEP devaluation argument, which is that the smallest saleable patent-practicing unit (SSPPU) should serve as the royalty base. Mr Justice Smith authored an entire section "to explain why the SSPPU approach is, in [his] judgement, indefensible." Wow. "[I]ndefensible."

Interestingly, Mr Justice Smith even agreed with Apple that the baseband chipset "does contain the relevant technology." And Optis did not really dispute that the market value of that one is approximately $25. Then Mr Justice Smith notes that--at that price--"[t]he product is, however, unlicensed." And he rejected the idea that if a baseband chipset maker generates a profit of maybe $5 on the $25 component, it "should pay for the licence out of the US$5 profit, and that this therefore constituted the absolute limit that ought to be paid by anyone."

Mr Justice Smith did not mince words as he criticized Apple's SSPPU argument:

"Indeed, it is quite absurd to presuppose that the manufacturer of a baseband chipset would forego any part of their profit unless absolutely compelled to do so. It is much more likely that baseband chipset manufacturers would increase the price of their product to reflect the added value to purchasers of that product of having a licence to the SEPs comprising the stack. Absent extremely clear market evidence, the assumption that the baseband chipset manufacturer would absorb the costs of the licence and not pass them on is almost certainly both unsafe and wrong. Certainly, it cannot be assumed."

Mr Justice Smith made adjustments to Optis's share of the 4G SEP stack, and (presumably because not all of Optis's infringement assertions succeeded) based that patent owner's share of the total royalty stack on an even lower percentage (we're talking about less than 1%) than its ownership share. He did not find Apple to have been an unwilling licensee who would no longer be entitled to a FRAND license.

One key overlap between Mr Justice Smith's approach in Optis v. Apple and Mr Justice Mellor's in InterDigital v. Lenovo is that the patent holder's proposed comparable license agreements were rejected because the respective licensees were smaller players:

"[G]iven the nature of Optis’ counterparties to the Optis Comparables – generally small players in the market, with low or at least not massive sales volumes – there is a question whether these licences properly reflect a FRAND rate for a counterparty like Apple."

By contrast, all of the comparable license agreements that Apple asked the court to rely on where agreements between Apple and other parties:

"The Apple Comparables are all licences where the common factor is Apple. Apple sought and obtained licences to different portfolios with different counterparties. This means there is no direct comparable with the portfolio in issue before me (which is a factor pointing away from the usefulness of the Apple Comparables), but some insight is gained into the value of the Stack as a whole, and the value attributed (at least so far as a company the size of Apple is concerned) to different portfolios held by different counterparties. The size and commercial “clout” of the licensee may be (I do not say is) a relevant factor in terms of royalties in any event."

The decision spans almost 300 pages, and I have yet to obtain and digest the document in its entirety. I did, however, want to share some of the most important and interesting aspects of the ruling now--not least also with a view to the Tuesday conference (The Innovation Economics Conerence for Antitrust Lawyers), where Mr Justice Smith may also say something about the valuation of FRAND-pledged SEPs.

As I mentioned in a recent post, several FOSS Patents blog posts were discussed at the Optis v. Apple FRAND trial last year.

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IEEE rejoins mainstream of standard-setting world as it undoes key elements of 2015 patent policy that encouraged hold-out by unwilling licensees: major defeat for Apple and its allies

Rationality and pragmatism have prevailed, and unity--within the universe of standard-setting organizations--has been restored. The IEEE Standards Association Board of Governors (IEEE SA BOG) just announced an update to its patent policy, which will formally enter into force on New Year's Day.

These are the key take-aways:

• The highly controversial elements the IEEE added to that patent policy in 2015 and which favored hold-out by unwilling licensees among implementers of WiFi (IEEE 802.11) and other IEEE standards have effectively been stricken (or, at a minimum, thoroughly diluted to the extent they no longer mean anything). Those issues include access to injunctive relief, the royalty base (proponents of the Smallest Salable Patent-Practicing Unit (SSPPU) often pointed to the IEEE policy), and what type of behavior ina licensing negotiation constitutes (un)willingness.

• Simply put, the IEEE's patent policy is now much more like ETSI's: right holders are not restricted (in terms of the royalties or remedies they demand) beyond the applicable case law.

• Ten years ago, I reported on an IEEE amicus brief that said standardization bodies should take "no direct role in patent enforcement." With today's amendments to the 2015 policy--which essentially repeal the 2015 amendments--IEEE is back to where it was before.

• IEEE's announcement also resolves a conflict that had arisen because of some major patent holders ( including, but not necessarily limited to, Ericsson, GE, Huawei (notably, a large-scale WiFi implementer as well), InterDigital, LG, Nokia, Orange, Panasonic, and Qualcomm (in alphabetical order)) participating in the standard-setting process under the old policy, declining to provide letters of assurance (LOAs) under the 2015 policy: in case of doubt, the least restrictive (on patent holders) policy now applies.

• That LOA divergence even jeopardized the ANSI certification of newly developed IEEE standards as I mentioned in the post I just linked to. The revised policy brings IEEE back into the ANSI fold as far as I can see. That's obviously up to ANSI to decide--I'm just voicing my own opinion.

• At the same time, IEEE has--again, just in my opinion--avoided running into problems with the International Organization for Standardization (ISO) (see this LinkedIn article by NY-based attorney David Cohen).

• In my ">May 2022 post on the IEEE situation I mentioned that Apple and some of its allies were lobbying hard to prevent from happening what has now been formally announced. Let's hope that Apple recognizes this defeat and doesn't resort to ever more astroturfing, which is simply annoying in the SEP context and adds insult to injury with respect to App Store issues.

• I applaud IEEE for drawing the necessary conclusions from the fact that no other major standard-setting body (I don't even know about a minor one, but I can't claim to know them all) ever followed suit and modeled its own patent policy after the 2015 IEEE policy.

• There is a parallel here between what IEEE has decided to do and what the Biden Administration did a few months ago, i.e., that the DOJ, USPTO, and NIST decided neither to adopt a new SEP policy statement nor to reinstate the Obama-era one. No more outlier positions. Just neutrality--and deference to the courts of law.

• This is a major success not only for SEP holders interested in fair compensation and reasonably strong enforcement, but also for former Antitrust Assistant Attorney General Makan Delrahim, who put pressure on IEEE. He's now in private practice (Latham & Watkins, a firm that oddly counts Apple among its most important clients, if it isn't even Latham's most important client), but his approach to the old IEEE policy has been vindicated today. I didn't always agree with him to put it mildly, but he does deserve credit. I previously mentioned a significant, equally SEP-related, post-term achievement of his last year (the Fifth Circuit's dismissal of HTC's appeal against Ericsson).

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Biden Administration publishes draft policy statement on standard-essential patents that strikes reasonable balance between patentees' and implementers' interests and bears resemblance to Huawei v. ZTE

Yesterday three U.S. government agencies--the Antitrust Division (ATR) of the United States Department of Justice (DOJ), the United States Patent & Trademark Office (USPTO), and the National Institute of Standards and Technology (NIST)--invited stakeholders to submit comments by early January on a new draft policy statement on standard-essential patents (SEPs).

I applaud the Biden Administration for taking--at least this stage--a very centrist position. Rather than go from one extreme (the Trump Administration's take on SEPs) to another, the three agencies have put forward a statement that reflects a good-faith effort to strike a very reasonable balance. The draft statement warns against the risks to innovation and standards from both the overleveraging of SEPs by their owners and what others simply call hold-out tactics by unwiling licensees. As a litigation watcher, I'm well aware of the existence of either problem.

My favorite part is in footnote 8, which says that "[p]roviding additional information with the licensing offer . . . may be particularly helpful to small entities that do not have the expertise or resources to fully address SEP issues and may lack access to information from which to draw assurance that proposed terms are F/RAND."

The step-by-step negotiation process proposed by the draft statement bears a strong resemblance to EU case law. It's pretty much how the European Court of Justice intended Huawei v. ZTE to be applied, though the post-Sisvel v. Haier I & II reality in Germany looks rather different (and even the relatively FRANDly Dusseldorf Regional Court is not going to challenge Sisvel v. Haier).

In practice, however, SEP injunctions are harder to obtain in the U.S. than in Europe due to eBay v. MercExchange, a decision the draft policy statement obviously mentions.

The draft policy statement is just that--a draft--and even the final vesion is not going to be anything more than persuasive authority in litigation. And how persuasive it will be remains to be seen, as it's obviously difficult for judges to attach much importance to policy positions that depend on which party is in power. At the beginning of this year I was pretty certain that Democrats would stay in power for several terms now, but with what has gone wrong in certain respects (with America now facing a second epidemic: crime), it's possible that Republicans will take back the White House next time. The judiciary will take note of what the executive branch has to say, but has to focus on its own case law. Even the U.S. International Trade Commission (ITC), which is a government agency, is unlikely to modify its stance on the availability of limited exclusion orders (U.S. import bans) over SEPs.

Even if Congress enacted legislation on SEPs (which is not on the horizon at this stage), it wouldn't practically change much for net implementers who do business in jurisdictions such as the UK and Germany. They'd be forced into global portfolio licenses under the threat of sales bans. The effect would then only be indirect, with net implementers possibly hoping that policy makers in Europe might be influenced by the Biden Administration--which I just don't expect to happen.

The draft statement does not touch on the question of whether an implementer who declines to take a global portfolio license should be enjoined the way it is done in the UK and Germany--nor does it say anything about the recent proliferation of antisuit (and anti-antisuit, anti-anti-antisuit, and anti-anti-anti-antisuit injunctions) in that context. Antisuit injunctions are available under U.S. law. But if foreign courts bar an implementer from seeking a U. S. antisuit injunctions by means of a (often even pre-emptive) anti-antisuit injunction, there is little that U.S. courts can do for implementers asking them for help.

While the Trump Administration's policy statement stressed that antitrust law is not above patent law, and effectively suggest that SEP issues should be dealt with under patent and contract rather than competition law, the Biden Administration's draft policy statement makes a few references to antitrust law in footnotes. For example, the statement says patents should be treated like any other property, and that "[c]onditions on licensing may also raise antitrust concerns."

There is nothing in the draft statement on the question of the proper royalty base or on suppliers' access to component-level exhaustive SEP licenses.

Different stakeholders and their lobbying fronts are going to make all sorts of demands now. From my perspective, there's no reason either side could claim that the sky is falling. Neither is anything in that draft statement ourageously unfavorable to one camp nor is the statement going to make huge impact (for the reasons I explained above). But whatever the three government agencies put forward after the current round of feedback could be more controversial.

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Slide decks from Brussels conference on Component-Level SEP Licensing (November 12, 2019)

During and after the Brussels conference on Component-Level SEP Licensing that I organized on Tuesday, I've received various requests for the panelists' slide decks. Fortunately, all the speakers who used slides have provided them to me by now and authorized their publication.

I'll also do a follow-up in the form of a summary (with some soundbites).

Now, let me provide links to the slide decks in the chronological order of the presentations:

• Dave Djavaherian, PacTechLaw: Access to FRAND Licenses Under the Contract Laws

• Professor Joachim Henkel, Technical University of Munich: Patent royalties in the IoT industry: an economics perspective

• Eric Stasik, Avvika: Component-Level Licensing -- Licensing practitioner's perspective on fallout from FTC v. Qualcomm ruling

• Evelina Kurgonaite, Fair Standards Alliance: Could Judge Koh's reasoning be adopted under Art. 102 TFUE?

• Professor Rafal Sikorski, Adam Mickiewicz University and SMM Legal: Antitrust complaints over SEP licensing

• I filled in for Kent Baker (who couldn't travel that week) to provide a quick outline of the Continental v. Avanci et al. case in the Northern District of California

• Bram Nijhof, Taylor Wessing: Abstract on the evolution of national case law on SEP injunctions since Huawei v. ZTE

• Maurits Dolmans, Cleary Gottlieb Steen & Hamilton: The proportionality requirement under the EU enforcement directive (with certain references to the German injunction reform debate)

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Component-Level SEP Licensing: final conference program as PDF

If you plan to attend next week's Component-Level SEP Licensing conference in Brussels, you may find it useful to download the final conference program (this post continues below the PDF document):

FOSS Patents 19-11-12 Confe... by Florian Mueller on Scribd

The conference is already overbooked, but for a few more days I'll still accept registrations via EventBrite as there are always some no-shows and the hotel can provide--to use a cloud computing-style term--some (limited) burst capacity if needed.

The PDF will render correctly on most devices. However, when viewed on Scribd (such as in this post), a special character in the name of one speaker may result in a "blot."

Also, I've already received some useful feedback from readers to yesterday's "Call for input: do you know of any cases in the PC industry in which SEP holders refused to license component makers or based their royalties on the end product?"

So far it looks like there are a couple of wireless companies that also try to impose device-level royalties on personal computers, but they just can't do that when WiFi cards are sold separately and later incorporated into PCs, and some tried the same with respect to MP3 (as implemented by the Microsoft Windows operating system). I'll follow up with more detail on that one later this month.

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Call for input: do you know of any cases in the PC industry in which SEP holders refused to license component makers or based their royalties on the end product?

What you find in the headline is not meant to be a rhetorical question. While I'm personally unaware of any case in the personal computer industry (with just one exception that I'll state in a moment) in which a standard-essential patent (SEP) holder insisted on the end product (desktop computer or laptop) being the royalty base and/or refused to grant an exhaustive license to component makers, I can't rule out that there have been such cases in that huge and decades-old industry. That's why I'm asking for your help. Input from readers has previously been very helpful, such as in connection with privateering (patent transfers from to non-producing entities).

My focus is on mobile devices, and I've looked at PC-related patent litigation only when countersuits targeting personal computers were brought in retaliation for mobile patent suits. In one such case, an absurd letter by Motorola Mobility to Microsoft entered the public record: Motorola wanted 2.25% per unit from Microsoft and explicitly stated that "the royalty is calculated based on the price of the end product (e.g., each Xbox 360 product, each PC/laptop, each smartphone, etc.) and not on component software (e.g., Xbox 360 system software, Windows 7 software, Windows Phone 7 software, etc.)." To put this into perspective, on most PCs that royalty rate would have been roughly at a level with Microsoft's entire income from selling a Windows OEM license. Motorola made that outlandish demand in a letter, but limited its royalty demand to 2.25% of the selling price of Windows in Judge James L. Robart's now-famous FRAND case as well as in a similar proceeding (that led nowhere before the parties withdrew all pending claims) before the Mannheim Regional Court. Motorola even denied the undeniable later on--apparently they realized they had been a bit too crazy, fortunately just temporarily.

Video codec patents are one example of a category of SEPs for which patentees could theoretically have insisted that the royalty base should be the end product. Graphics and memory standards are another example.

What about WiFi? All I know is that I've bought WiFi cards for several desktop PCs in a row, just because it's always a nice fallback when there's an issue with a landline or a router. I can just get a connection via a smartphone with tethering--and in many places, other options exist. Obviously, when I bought those cards for roughly $40-50 each, there was no way any WiFi patent holder could have collected a royalty based on the total cost of the related PC. I paid my $40-50 for that component regardless of whether I plugged it into a $500 or a $5,000 computer. Apparently, the companies that made the WiFi cards I bought were fully--and exhaustively--licensed. It's the same situation when you buy an additional or larger memory chip or a new graphics adapter and just install such components yourself.

Today's smartphones are handheld PCs. If there really is no example (other than a letter Motorola distanced itself from) of SEP holders having treated the PC industry the way they're now trying to treat the mobile device and automotive industries, then that would expose the likes of Qualcomm, Nokia, and Ericsson as total outliers in the wider technology industry.

In case you do know of any cases, please fill out the contact form. I protect my sources unless you request--in writing--to be named. What I'm primarily looking for is verifiable information, such as publicly accessible court filings. If you have unverifiable information that you nevertheless consider highly pertinent, please let me know, too--but I may then have to follow up with you to get a better idea.

Thanks in advance for your help! I will publish the results of this call for input on this blog, in a future post.

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Cert petition, amicus brief criticize Federal Circuit for vitiating damages apportionment requirement: Time Warner Cable v. Sprint

The United States Courts of Appeals for the Federal Circuit has always been viewed as being more sympathetic to patent holders than to alleged infringers--but not in every single aspect of patent law. For an example, some critics of former Chief Judge Randall Rader, who disparaged the PTAB as patent "death squads," acknowledged that his rulings on patent infringement damages provided some important clarifications beneficial to defendants.

Two documents that have recently been filed with the Supreme Court of the United States argue that various Federal Circuit rulings in recent years have gutted the apportionment requirement for patent damages claims:

• On August 15, Time Warner Cable (which doesn't exist anymore in its original form, but a Charter Communications subsidiary is now continuing the litigation in question) filed a petition for writ of certiorari (request for Supreme Court review) in its patent infringement dispute with Sprint. A district court--affirmed by the Federal Circuit--found that Time Warner infringed a Sprint patent on connections between VoIP and pre-VoIP-era telecommunications networks, and awarded $140 million in damages, based on a reasonable-royalties theory that Time Warner argues failed to apportion between infringing and non-infringing features. Time Warner's petition raises two distinct issues: the one relating to apportionment and one about the written-description requirement.

• Last week, Intel filed an amicus curiae brief in support of the first part (apportionment) of the cert petition.

Both the petition and the amicus brief place particular emphasis on a 135-year-old Supreme Court ruling: In Garretson v. Clark (1884), the top U.S. court stated that "the [prevailing] patentee [seeking damages] must in every case give evidence tending to separate or apportion the defendant's profits and the patentee's damages between the patented feature and the unpatented feature." And the highest court in the land added that "such evidence must be reliable and tangible, and not conjectural or speculative." In that case, the patent-in-suit read on an improved mop head, but not the cleaning device as a whole.

Interestingly, it was also in the late 19th century when it became law that a prevailing design patent holder was entitled to an unapportioned disgorgement of infringer's profits. A typical example of a design patent-infringing product at the time was a carpet. In the Apple-Samsung dispute, there was a strong policy argument that today's highly multifunctional products had to be analyzed and treated differently from 19th-century products. But in the Garretson utility patent case, apportionment already came into play even though it was a no-tech (not even a low-tech) product by today's standards. Undoubtedly, what was already warranted in the Garretson mop-head case is hugely more relevant in the smartphone era.

There's some indication that the Supreme Court may have felt last year that the question of apportionment at least potentially warranted another look: on April 4, 2018, the Supreme Court invited the Solicitor General to express the views of the federal government on the cert petition in EVE-USA, Inc. v. Mentor Graphics Corp.--but before the DOJ responded to this CVSG, the petition was withdrawn as a result of a settlement.

Yesterday, Sprint responded to Time Warner's petition and Intel's amicus brief.

With a view to any unfinished business left over from EVE-USA, Sprint argues that it was a lost-profits case, while the case pending now is about a reasonable royalty (as a damages theory). That's a weak point because the issue was and is apportionment.

Like pretty much any party opposing a cert petition, Sprint also claims that it's all about a factual determination rather than a need for important legal clarification. While I don't agree with Sprint as far as the apportionment question is concerned, they may have a point here with respect to the scope of the patent-in-suit in light of the written description. But that one is only a lower-priority second part of Time Warner's petition, and there is no support whatsoever from any amicus curiae for that part. I would have thought that more parties than one (Intel) would throw their weight behind the apportionment question, but one theory I have is that some of the organizations that typically care about such issues have business relationships with Sprint and/or work closely with Sprint on other policy issues.

The issue that Time Warner Cable and Intel complain about in their filings is that the Federal Circuit has in recent years deemed the apportionment requirement to be satisfied by other means than an apportionment in a strict sense. In a strict sense, apportionment would really mean to tell the jury what the commercial value of the non-infringing parts and features of a product is versus the deemed-infringing one(s)--and to then determine what percentage of that commercial value would constitute a reasonable royalty or lost profits. However, the Federal Circuit's disturbingly permissive approach has recently been to content itself with such alternative approaches as simply seeking a "low" royalty rate on an entire product--and there would be other examples that contrast with various Federal Circuit decisions earlier this decade or even before, all of which showed that the appeals court took the judiciary's gatekeeper role in the damages theories context very seriously.

Damages determinations are put before juries, and jurors easily get misled by damages theories based on the entire commercial value of a complex multifunctional product. Even the distinction between a mop head and the rest of a cleaning device can make a significant difference. The difference between a patent infringed by a $5, $10 or $20 chip versus the value of an entire smartphone is far more substantial. But this gets even worse when someone may assert a patent on a cup holder in a car, or on one feature of numerous computer programs shipped with a car.

Again and again and again, Sprint's opposition brief points to the fact that their trial evidence included, among other things, allegedly-comparable license agreements that should be deemed strong evidence of the market value of the patented invention--evidence that already involves an apportionment because the parties who negotiated the relevant agreements will have taken the need for apportionment into account.

Comparable license agreements bear considerable weight with judges and juries. With a view to their relevance to apportionment, Sprint's opposition brief implicitly suggests two things:

1. Under what Sprint considers the correct standard, such license agreements should in and of themselves be deemed to satisfy the apportionment requirement. In other words, Sprint would like to use such top-down evidence to eliminate the need for a more conventional bottom-up apportionment where one attaches a part of the entire commercial value of a product to the infringing feature(s) and the remainder to the non-infringing ones.

2. Sprint seems concerned that the apportionment standard suggested by the petitioner would make license agreements relating to entire products (and not just to particular components) inadmissible as evidence.

I disagree with #1, and believe #2 overshoots.

License agreements can't serve as a substitute for an apportionment analysis presented to the jury. The Garretson language doesn't appear to allow that kind of end-run around the apportionment requirement.

But that doesn't mean such license agreements would be inherently inadmissible under the standard proposed by Time Warner. If a jury is presented with apportionment evidence in the case before it, and if the jury is furthermore informed of how to analyze a third-party license agreement against this apportionment background, then it may still work. Let me give an example: a patent reads on a particular type of chip, and that kind of chip is commonly found in WiFi routers as well as smartphones. The patent holder negotiated a royalty of 0.5% of the end price of a WiFi router, and presents that agreement as evidence in a dispute with a smartphone maker. What clearly wouldn't make sense is to argue that a WiFi router manufacturer's decision to pay a 0.5% royalty means the same royalty rate should apply to smartphones. But the royalty can be normalized by calculating what royalty rate was actually paid with respect to the relevant component. If the relevant component in the accused smartphone is also properly identified, then the router license agreement may have a probative value that outweighs the risk of jury confusion.

It's too early to go into much detail on the merits. Right now, it's about certworthiness. The petition and Intel's amicus brief make a plausible case that the Federal Circuit has recently rubberstamped damages theories that don't appear to satisfy the apportionment requirement that one can reasonably read into the statute (35 U.S.C. § 284), the Garretson decision, and various post-Garretson decisions. Only the Supreme Court can get the Federal Circuit back on the right track by clarifying that Garretson, after 135 years, is still good law and even far more critical--in economic terms--than anyone could have imagined back in the 19th century.

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Broadbased IoT industry support for CWA2 set of standard-essential patent (SEP) licensing guidelines and best practices

At times, courts are asked to clarify what FRAND (fair, reasonable and non-discriminatory) means for standard-essential patent (SEP) licensing terms. The two most fruitful U.S. cases in this regard have been Microsoft v. Motorola (Judge James L. Robart, Western District of Washington) and FTC v. Qualcomm (Judge Lucy H. Koh, Northern District of California). In the EU, Huawei v. ZTE proved reasonably helpful, though definitely not at a level with the aforementioned U.S. cases.

But besides litigation, policy initiatives as well as efforts by standardization bodies can and do provide orientation. In the U.S., the IEEE has become a particularly important discussion forum, and the arguably most important European guideline-development effort, a workshop under the umbrella of European standard-setting organizations CEN and CENELEC with support from Germany's DIN, has just concluded with the publication of a 51-page "CEN Workshop Agreement" on the "Core Principles and Approaches for Licensing of Standard-Essential Patents" after more than a year of discussions. The official dcoument number is "CWA 95000." The shorter name is "CWA2." Why the number 2? Because there's another set of recommendations by another group of companies, and it advocates pretty much the opposite approach, but it has considerably less support from industry than CWA2.

This is an important time for the publication of such proposed guidelines for different reasons. The industry is transitioning to 5G, and in an Internet of Things world, ever more--and an ever greater diversity of--devices will implement wireless industry standards. Also, a new EU Commission will be appointed this year, and the incoming Commission will have to address SEP licensing principles in different fields of policy-making as well as in competition enforcement.

The Fair Standards Alliance issued a press release on CWA2 this morning. The FSA partnered with ACT | The App Association. ACT already pointed to CWA2 yesterday evening in an amicus brief supporting the FTC against Qualcomm's motion for an enforcement stay. FSA and ACT teamed up with the leading German standard-development body, Deutsches Institut für Normung (DIN), and DIN served as the secretariat for this workshop.

All in all, 56 organizations have already expressed their support for the document, even including some who were not involved in the process but agree with the conclusions. Europe's largest automotive association, ACEA, and IP2Innovate, an industry group whose membership significantly overlaps with that of the FSA and which promotes reasonable patent enforcement policies (unlike the FSA, without focusing on SEPs), also agree with the CWA2 guide. Here are some of the household names among the companies listed in the CWA2 document: Apple, BMW, Cisco, Deutsche Telekom, Renault, Honda, Juniper, Volkswagen, Daimler, Ford, Hitachi, HP, Lenovo, and Toyota. If your company or other organization would also like to throw its weight behind the CWA2 guide, please get in touch with the FSA.

The supporters of CWA2 own and generate many patents, and some of them have actively enforced their intellectual property rights. In other words, they're the opposite of "infringers." But they do understand both sides of the licensing equation, and that's why the recommendations made in the CWA2 document appear reasonably balanced. They don't seek to devalue SEPs, or to enable "holdout" (the act of refusing for an extended period of time to take a license). At the same time, the CWA2 guide promotes principles that greatly reduce the risk of patent holdup (the following summary is consistent with my terminology on this blog, not always identical to the terms used in the CWA2 document):

1. access to injunctions only as a last resort

2. availability of licenses to all comers including chipset makers

3. FRAND valuation based on technical contribution at time of standard-setting, without capturing post-standardization increases in value or collecting percentages of components beyond the smallest salable patent-practicing unit (SSPPU)

4. separate availability of SEP license on FRAND terms without tying this to a license to non-SEPs

5. no overbroad NDAs that would complicate an implementer's evaluation of assertions of essentiality or infringement in the negotiation process

6. no circumvention of FRAND licensing obligations through tranfers ("privateering"); if SEPs are transferred, implementers shouldn't be worse off

Obviously, some patent holders with a particularly strong interest in aggressive monetization don't want any of the above. That's why there's also "CWA1" as I mentioned before. The FSA and ACT expressed their disagreement with the CWA1 approach in an open letter earlier this year. While that letter apparently didn't have the desired effect of creating more balance, it shouldn't be too hard for policy makers (such as the incoming EU Commission) to figure out which of the two sets of recommendations is conducive (CWA2), and which one is detrimental (CWA1), to innovation and competition. That's easy to tell based not only content but also by simply looking at the backers:

• CWA2 already has 56 backers, including some of the most significant technology companies in the worldand especially in Europe, versus the 17 organizations behind CWA1.

• While CWA2's supporters have a rather reasonable track record in patent enforcement, almost a third of CWA1's backers have been on the receiving end of antitrust complaints or antitrust lawsuits: Qualcomm (around the globe), Dolby (see this blog post by a Korean IP law firm), Ericsson (in China), Nokia, and InterDigital, which I sometimes refer to as "InterDigitroll" (they were investigated in China and sued in the U.S.).

Thanks to CWA2, there now is a comprehensive proposal for a FRAND licensing framework on the table that has the support of many large players from the automotive and information and communications technology industries. That document will be referenced on many occasions going forward, in Europe and beyond.

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Upcoming conferences (U.S., EU) on chipset-level patent licensing and the royalty base in automotive and other high-tech products in light of FTC v. Qualcomm

While I routinely talk to professional investors about key IP and antitrust developments (such as on a highly successful conference call hosted by Susquehanna International Group last week), I haven't spoken at, much less organized, conferences in a long time. But Judge Lucy H. Koh's FTC v. Qualcomm antitrust ruling in the Northern District of California is--while this kind of clear-cut guidance was overdue in my view--a watershed moment for patent licensing practices and damages theories. By virtue of having followed FRAND licensing issues since 2010 and FTC v. Qualcomm from the get-go (including that I attended the entire January trial) it's fair to say that I'm uniquely positioned to discuss the impact, implications and ramifications of the decision as well as related matters, such as certain antitrust complaints Daimler and its suppliers lodged with the European Commission and a Continental complaint against the Avanci patent pool company in the Northern District of California.

Judge Koh's ruling is now being appealed. The notice of appeal was filed on Friday, and a motion to stay enforcement is pending as well. But even if Qualcomm obtained some kind of enforcement stay, there will be important developments in various jurisdictions, and Judge Koh, arguably the world's leading technology judge by now, has the potential for thought leadership not only in other U.S. federal districts and circuits, but even overseas.

Component-level patent licensing is a hot topic particularly (though not exclusively) for the automotive industry, which sees itself increasingly exposed to demand letters and lawsuits.

At a one-day conference in Northern California (for U.S. and Asian attendees) and another one in the Munich area (for a European audience), I am going to discuss the following aspects and implications of the chipset-level licensing and royalty-base parts of Judge Koh's opus magnum:

1. The FTC v. Qualcomm ruling, the underlying testimony, and the parties' arguments

2. Outlook: next procedural steps; prospects of affirmance, reversal, certiorari, or settlement

3. Comparison to other U.S. case law (Microsoft v. Motorola, GPNE Corp v. Apple, HTC v. Ericsson); Entire Market Value Rule and smallest salable patent-practicing unit (SSPPU); influence of FTC v. Qualcomm on other U.S. decisions

4. Patent exhaustion and its attempted circumvention (covenants not to sue, covenants to exhaust remedies)

5. Chipset licensing and standard-setting organizations' FRAND licensing guidelines

6. Automotive antitrust complaints (Continental v. Avanci, DG COMP complaints by Daimler, Bury et al.)

7. Potential for adoption of Judge Koh's reasoning in Europe under Art. 102 TFEU

8. Is legislative action warranted/desirable or can case law solve the problem?

9. Panel discussion (ideally, a neutral moderator and two speakers from each side of the debate)

It's no secret that I've taken pretty clear positions on the issues. However, that never prevents me from accurately summarizing what the other side claims and argues, as my Wall Street clients and listeners know.

I thought about possibly partnering with law firms on this, but frankly, I can't think of a firm that wouldn't also represent at least some clients seeking to maximize their patent licensing revenues, so I felt it would be better for me to stay independent. However, I would entertain sponsorships, provided they can be properly disclosed and don't constitute a conflict of interests affecting what I will say at the conferences, much less what I write on this blog (not an issue if an organization's views on component-level patent licensing are consistent with mine).

At this point there are no definitive conference dates, but I do plan to turn this around rather quickly. I'll be very receptive to what you have to say, and it would really help to know how many of you are interested in attending at a market-level attendance fee (and in which of the two locations). So please drop me an email at fosspatents@gmail.com if these conferences are potentially relevant to your work. Thanks in advance!

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Common sense against Qualcomm: Apple stresses smartphone functionality also works without modem chip--over WiFi--but Qualcomm wants royalties on entire device

I'm typing this while Fish & Richardson's Ruffin Cordell is still delivering Apple's opening statement in the Apple v. Qualcomm antitrust trial here in San Diego (Southern District of California). There are two key points made in the first half of the statement that are going to make things hard for Qualcomm to persuade the jury of its own story:

• Mr. Cordell made a point that is very obvious: why would Qualcomm impose gag clauses with multi-billion dollar penalties attached on its customers if it had nothing to hide? The fact that Qualcomm insisted on contract terms that would make it economically irresponsible under most circumstances for companies to ask competition enforcement agencies for help indeed speaks volumes. It's about covering up misdeeds.

  It will be hard for Qualcomm to explain this away. It's not just that companies entering into business agreements with other companies want some peace of mind. They don't want to sign a contract one day and be sued the next day. But government agencies in charge of antitrust enforcement don't just cause one company a lot of grief because another company asks them for it. They perform their own analysis, generally starting with a first plausibility check, followed by what some call "preliminary investigations" if there's enough smoke to suspect fire, and things get real only if those agencies reach independent conclusions. As for independence there certainly is no such agency in the world that would be in Apple's pocket because the United States is just too large an economy and too well-respected a democracy for one company to control the government and in other countries Apple is just a foreign entity.

  So if Qualcomm had had a clear conscience, it would never have had to worry about a customer like Apple potentially complaining to independent government agencies because the agencies would just decline to investigate, or they would take a short look and stop wasting their time. Only someone who really has something to hide and, as a result, something to fear would do that. That Qualcomm had something to hide and therefore something (antitrust charges) to fear is evidenced by the battlemap chart I showed you in yesterday's post on the start of this trial (jury selection). In the aggregate, Qualcomm has been fined to the tune of many billions of dollars by regulators on multiple continents, which I once called the "Antitrust Grand Slam."

• The next context in which common sense complicates things for Qualcomm is the question of the royalty base. Qualcomm's royalty is based on the entire device. There is a cap now ($400), but it's dozens of times higher than the market value of a modem chips. So Qualcomm collects royalties--as Qualcomm told the IRS--on the whole enchilada because it's "humongously more lucrative." But this means they charge for parts of the product they don't actually make any technical contribution to.

  The key term is "royalty base": What is the 100% basis against which whatever reasonable royalty percentage should be applied? Is the 100% a $1,000 phone? A hypothetical $400 phone? Or should it be a baseband processor (also called modem chip, or modem processor, or baseband chip)--which Qualcomm itself sells at $20 per unit and others sell at $10 or less?

  If Apple wins the royalty-base part, it's within striking distance of convincing the jury of Qualcomm's terms being unreasonable. They have other ways, such as (what came up later in the opening argument) a comparison between what Qualcomm collects per unit vs. other companies like Ericsson that may hold even more standard-essential patents. But what I think may have the greatest persuasive impact here is the following point Mr. Cordell made:

  A smartphone is a mobile computer, with conventional telephone functionality representing just a limited part of it. But most of that smartphone functionality--such as playing computer games, listening to music, watching or recording videos--works over WiFi, too! And if something works over WiFi (in fact, many of those apps work better over WiFi than over cellular networks, which are slower and less stable in general), then there's no plausible basis on which a cellular SEP holder can collect a royalty on the commercial value of the related computing functionality.

  Mr. Cordell announced that Apple would get back to this point throughout the trial. I can see why. They won't have to talk about this every trial day, but when testimony--people confirming that everything works over WiFi (in fact, I quite often make WiFi calls where people call me on a cellular number or I call them)--shows to the jury that the very largest part of the value of an iPhone is not dependent on Qualcomm's modem chip technology, Qualcomm is going to have a problem persuading the jury of the opposite.

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EU guidelines on standard-essential patents favor product-centric businesses large and small

Given that I'm working hard on my personal "Flexit," I'm the exact opposite of your average "EU über alles" kind of claquEUr. But when the EU does something right, I'll acknowledge it. The "Communication from the [EU] Commission to the [EU] Institutions on Setting out the EU approach to Standard[-]Essential Patents" (published the week before last) is by far the best I've seen from the European Commission, or any EU institution, in ages.

Just like the Fair Standards Alliance, I welcome this (now quoting the FSA) "forward-looking guidance to European industry" on SEP licensing because the European Commission declined to endorse "use-based" licensing fees, which is what the likes of Nokia and Ericsson (and their non-European allies, particularly Qualcomm) wanted. "Use-based" licensing is just a euphemism for gutting the "ND" (non-discrimination) part of "FRAND" by allowing patent holders to charge royalties on components of multifunctional products they have nothing to do with. Industry issues often enter the public sphere only through litigation, and the dispute between Apple and Qualcomm serves as a useful showcase: Apple credibly alleges that Qualcomm effectively seeks incremental royalties on iPhones with more memory, better/bigger screens, better cameras, fingerprint sensors, and so forth. That kind of insanity is what "use-based licensing" comes down to. I wonder when the likes of Qualcomm will demand royalties on the interior of the official Apple Stores, arguing that no one would walk into those stores in the first place if it weren't for wireless connectivity...

Obviously, Apple was among the parties who provided input to the European Commission that was materially consistent with what the Fair Standards Alliance proposed. We can talk about the proper royalty base (or damages base, to be precise) again in the build-up to next year's fourth Apple v. Samsung trial, but let's stay focused on SEPs right here and now.

The royalty-base issue became the most hotly-contested one during the EU consultations on which last month's official communication was based. But the question of injunctive relief is no less important. At the end of the day, a SEP holder can extract excessive SEP license fees either way: by going directly for overcompensation (in the form of license fees and/or damages awards) or by getting leverage through injunctive relief (sales bans, import bans, seizures by customs authorities; USITC-style remedies are indeed available and sometimes granted in the EU as well) and then imposing non-FRAND settlement terms. Arguably, injunctive relief is even more problematic since it can also be used to shut competitors out of markets. The EU guidelines on SEPs do make reference to the Huawei v. ZTE ruling by the Court of Justice of the EU, and it becomes clear (not just between the lines) that the Commission, generally speaking, disfavors SEP injunctions. What made stakeholders focus more on the royalty base is simply that the rejection of "use-based licensing" has yet to be enshrined in case law while there's plenty of case law around the globe that has practically made it impossible to obtain SEP injunctions except under extremely rare circumstances. The Qualcomm showcase is also telling: while Qualcomm has flooded Apple with patent infringement suits this year, it's not even trying to seek SEP injunctions (including SEP-based import bans): all of its injunction requests are based on non-SEPs according to Qualcomm's own representations.

The EU stresses that its guidelines are a set of policy recommendations, not an interpretation of the law. But the part on injunctive relief is a statement of the law for the most part. I hope that some of the ongoing disputes and competition enforcement actions will over the next few years result in so much clarification that even the royalty-base question will have to be considered a largely settled ("settled" in terms of "adjudicated") issue.

The Commission guidelines start off with transparency. I agree with that part. It's an interesting suggestion that patent offices could help determine and, after a standard is finalized and a patent finally issued (or narrowed through reexaminations or litigation), revisit the question of whether a given patent, as finally issued, is actually essential to a standard, as finally adopted. Apart from the standard-specific parts the EU positions on transparency relating to SEPs should also apply to non-SEPs. At least I can't see any reason why they shouldn't. But it would have been off-topic for the Commission to make a more comprehensive recommendation on patent ownership transparency.

In subsection 2.2, the EU SEP guidelines refer to the principle of non-discrimination (again, the "ND" in "FRAND"). That part of the guidelines could have been sharper, clearer, and more elaborate. But the Commission's competition enforcement arm still has the opportunity to make a positive impact with respect to some SEP holders' refusal to extend licenses to rival chipset makers.

I disagree with the Commission's rosy portrayal of alternative dispute resolution (ADR) mechanisms and of the (so far non-existent) Unified Patent Court. I always consider it a lost opportunity when a SEP licensing issue gets resolved through an opaque process that doesn't contribute to the evolution of case law (on the proper royalty base, for instance).

The part on open source and SEPs (Section 4) is factually accurate. What I think should always be made clear in this context is that open-source companies such as Red Hat do pay patent royalties all the time while claiming in policy discussions that open source, particularly software licensed under the GPL free software license, and patent royalties are inherently incompatible.

All in all, the EU SEP guidelines are a victory for businesses of all sizes whose focus is on making and selling products (as opposed to the monetization of patent portfolios). While Europe's companies are and will remain insignificant in the largest market segments and most lucrative fields of technology (apart from SAP, and even that one may be acquired by a U.S. tech company sooner or later), the jury is still out on its automotive industry (I'm skeptical, but others aren't), and the EU Commission refers to Internet-of-Things (IoT) startups. In IoT, there are and will be many niche opportunities, and that's exactly where the EU (as an economy) does have some opportunities (while it's never going to be competitive in search engines, operating systems etc.). I agree with the Commission that small IoT companies need a healthy and reasonable SEP-licensing environment. Helping those companies, and Europe's automotive industry, makes a lot more sense than wacko calls for a cordinated EU response to the success of companies like Apple, Google, and Facebook.

More than anything, I'm glad the European Commission didn't bow to lobbying pressure from increasingly patent-focused has-beens like Ericsson and Nokia. Those companies aren't Europe's future. And some of the key beneficiaries of supra-FRAND royalties would be non-EU companies such as Qualcomm at any rate.

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FRAND flurry: two new initiatives promote fair licensing of standard-essential patents, Qualcomm in trouble

FRAND-pledged standard-essential patents (SEPs) were a major topic (actually, the #1 topic) on this blog a few years ago. Then my focus shifted, but my positions on this issue did not. I'm following with great interest Apple's efforts not to bow to Ericsson's notoriously-aggressive SEP royalty demands and pleased to see that two new industry initatives relating to FRAND were launched this week:

1. ACT | The App Association has announced a new web resource for innovators, policy-makers, and academics. It's called All Things FRAND and supported by significant players including Cisco, Intel, and Microsoft. ACT is headquartered in the U.S. but also quite active abroad.

2. The new FairStandards Alliance is based in Brussels, the de facto EU capital. Its website says: "We are friends of FRAND"

   The FairStandards Alliance is off to a pretty good start with this position paper and support from an interesting mix of IT (Cisco, Dell, HP, Intel, Juniper), mobile/IoT (Fairphone, India's Micromax, Lenovo, Sierra Wireless, Telit) and--this is particularly interesting but not surprising to me given that cars are increasingly "smartphones on wheels"--automotive companies (BMW, Volkswagen).

Both these initiatives are interested in various FRAND-related issues. The FairStandards alliance is particularly clear in its support of a proper royalty base. That question (on which Apple has been vocal in court and in standard-setting organizations) also appears to be key to findings of South Korea's Fair Trade Commission in an investigation of Qualcomm's licensing practices, including its device-based pricing strategy. I agree with analysts who view this as spelling trouble for Qualcomm. South Korea's FTC may very well get support, in political terms, from the two new FRAND initatives launched this week.

In the past, Qualcomm got away pretty much unscathed, at least in the EU. Even its Chinese settlements appears not to have caused similar worries in the investment community. South Korean antitrust enforcers are apparently taking the lead now with respect to this particular SEP holder, and I applaud them for their courage and steadfastness.

It would be great if Apple (which has always been on the good side of FRAND) and Google (which appears to be on the good side by now) could also lend support to one or more initatives of this kind. Google and Cisco have often agreed on patent policy matters. Why not on this one?

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How much leverage will Ericsson gain over Apple with its European patent infringement actions?

On Friday, Ericsson announced the filing of " suits in Germany, the United Kingdom and the Netherlands against Apple's products" because negotiations in a global patent license have not resulted in a deal in more than two years but Apple "continues to sell products, for which its licenses have expired, on a global scale." Four months ago Ericsson had already sued Apple in the Eastern District of Texas, followed by an ITC complaint (request for U.S. import ban).

The gist of Ericsson's Friday press release is that Apple is allegedly an unwilling licensee. That term does not appear in the statement, but it's what Ericsson wants to say. Motorola and Samsung said it before. The willingness of an implementer of an industry standard to reach a license agreement on FRAND terms is a key consideration for antitrust regulators and courts. Even the defendant-friendliest FRAND ruling ever, which Judge Posner handed down in an Apple-Motorola case and the FRAND-related part of which was affirmed by the Federal Circuit (though then-Chief Judge Rader dissented), did not rule out access to injunctive relief over standard-essential patents (SEPs) on a "no matter what (the defendant will or will not do)" basis. The bar for SEP injunctions has been raised in recent years, also in Europe, but implementers of standards still have to proceed with caution because their own conduct, not only that of the patent holder, will be taken into consideration.

In any event, Ericsson says it is also asserting non-SEPs against Apple in Europe. Those are unencumbered, so Ericsson is free to seek and enforce injunctive relief.

Compared to the size of Ericsson's patent portfolio, very few assertions have ever come to judgment. The most optimistic (for Ericsson) perspective would be that this is because defendants realized this was a strong portfolio and backed down. It's also a valid perspective, however, to say that Ericsson's portfolio is largely untested in court. With so much money being at stake between Apple and Ericsson, it's now more likely that at least some decisions will come down.

In light of the entire industry's low "hit rate" with smartphone-related patent infringement actions, it's unlikely that Ericsson's European lawsuits will scare Apple to death:

• Non-SEPs have usually been worked around. There was only one dispute in which I saw an indication that a company may have agreed to pay because workarounds weren't going to be immediately available (at least not without major cost implications), and that was HTC in its dispute with Nokia, but Nokia had lost so many cases by the time of the settlement that it may have offered HTC a relatively good deal just to get a result rather than lose dozens of additional cases.

• Of the three European jurisdictions in which Ericsson has sued Apple, only Germany makes access to injunctive relief generally available over non-SEPs. In the UK and the Netherlands, the question of whether monetary compensation is sufficient always comes up.

• While Germany is very patent holder-friendly on the remedies side and infringement actions tend to be adjudicated rather quickly, its courts are increasingly inclined to stay smartphone patent cases because those patents are normally invalidated in their entirety or narrowed beyond recognition when they come to judgment in the Federal Patent Court. If the patent holder then loses the first validity ruling, the infringement case won't be resumed (if at all) until the Federal Court of Justice has spoken.

• In the UK, infringement and validity are adjudged in the same proceeding, and the invalidation rate there is extremely high (rightly so).

• Ericsson's press release states that Apple let an offer to set a FRAND rate by arbitration expire. So what? Arbitration is an option if both parties agree. If one of them (typically the implementer) doesn't want to go down that avenue, any rate-setting decision will have to be made by a court of law, in a public proceeding (public at least to some extent, while arbitration is 100% private).

Ericsson will have to perform better than other smartphone patent litigants to even reach the point at which Apple will seek a FRAND rate determination by one or more European courts, and for the reasons I just explained, this could also take quite some time. If and when it happens, Apple will likely emphasize the royalty base issue in Europe as well (it already does so in the U.S.). That one has the potential to go all the way up to the Court of Justice of the European Union (CJEU).

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Ericsson may demand 1.5% of Apple's sales from LTE-compatible iPhones and iPads for its patents

This is a follow-up to yesterday's post on the dispute between Apple and Ericsson over standard-essential patent royalties. I published Ericsson's complaint first because, though it was filed two days later, it appeared on a publicly-accessible court docket sooner. I also want to show you Apple's complaint now and say a few things about it (below the document):

15-01-12 Apple Complaint Against Ericsson by Florian Mueller

Apple's complaint was filed by Wilmer Hale, one of the firms representing Apple against Samsung. Wilmer Hale originally focused on Apple's defense against Samsung but also became involved with offensive matters, especially in the Federal Circuit (access to injunctive relief). Mark Selwyn has been a very key player on Apple's external legal team in the Samsung cases, in the U.S. as well as abroad (there was at least one Mannheim case in which he officially attended the trial). Joseph Mueller (not a relative of mine) is a co-author of a study according to which smartphone patent royalties may exceed $120 per device and undermine industry profitability. There's no reason to assume he's responsible for Apple's damages claim in the second California Samsung case (over five patents) that I criticized so harshly last year, or the design patent and trade dress damages in the first case.

It's the fate of lawyers and their firms that they stand on different sides of debates from time to time, and in this case it's not even inconsistent per se because Apple's position is that standard-essential patents have little value while non-SEPs should be deemed very valuable. While it's intellectually consistent, I disagree with the unbelievable discrepancy between Apple and WilmerHale's positions on SEP vs. non-SEP royalties. It's like they want non-SEPs on small features to be hundreds, if not thousands, of times more valuable than SEPs without which those devices wouldn't work at all. For example, in the first Samsung case Apple sought $2.5 billion (mostly over design patents) from Samsung while arguing that half a cent per Samsung SEP was a FRAND royalty. To WilmerHale's credit, the aforementioned study raises concerns over patent royalties that are not limited to SEPs.

Apple's complaint cites a former director of patents and licensing at Ericsson who publicly stated in 2010 that Ericsson expected to seek LTE royalties of 1.5% of the end product price. The filing also says the following:

"In its public statements, Ericsson has never retreated from the position that it is entitled to an approximate 25 percent share of a total LTE 'royalty stack' based on a percentage of the end prices of entire LTE devices--such as full smartphone or full tablet computers. And Ericsson has never accepted that LTE licensing should begin with a component-focused royalty base, to which a reasonable rate is applied."

Apple's complaint then picks seven LTE patents Ericsson asserted in other litigation and asks the court to hold those patents non-essential to LTE (in which case Apple wouldn't need to license them merely because it claims its products are LTE-compatible) or, should the court disagree on non-essentiality, to determine a FRAND rate for each of them. This patent-by-patent approach is unacceptable to Ericsson, which is why it asked the court in Texas to determine a portfolio rate.

The much more fundamental controversy here is not whether a FRAND determination should be made on a patent-by-patent basis but the question of the royalty base (see also the second sentence of the paragraph quoted above).

Ericsson basically takes the position that everything you run on an iPhone or iPad depends on wireless connectivity, so they should get a percentage of the device price. Apple's position has been for a long time that the price of a baseband chip is the proper royalty base against which some percentage should be applied, arguing that a "jalopy" and an expensive sports car also pay the same highway toll.

Obviously, access to injunctive relief has become much more difficult for SEP holders as a result of certain judicial decisions and regulatory interventions and settlements in recent years, at least in the U.S. and in Europe. But there were two key FRAND-related battles that the "net implementers" (my term for companies that are implementers of standards to a far greater extent than they seek to exploit SEPs of their own) haven't been able to win. The first one is about whether the exceptional cases in which injunctive relief is available should depend exclusively on the patent holder's behavior (since that's the party that made a FRAND pledge in the first place) or on both parties' conduct. The likes of Google (Motorola) succeeded in convincing judges and regulatory authorities that FRAND is a two-way street and an absolutely unwilling licensee may be enjoined from further infringement, as opposed to one that makes a good-faith, serious effort to obtain a license. There's no reason to believe that courts and regulators will change their stance on this one anytime soon. But the second question is the one Apple has now put front and center in its California case against Ericsson, and it's one on which the jury is still out though Apple does face a significant (or maybe even steep) challenge. The royalty base.

Even Judge Robart held in the Microsoft v. Motorola FRAND contract case that a royalty based on the price of a complete product as opposed to that of the smallest saleable unit (which Microsoft proposed in that case and which Apple is arguing now in the Ericsson case) may still be FRAND, as long as the percentage is low enough. However, in a different case (in Chicago), Judge Holderman agreed with a group of defendants against Innovatio's WiFi claims that the chipset price as the proper royalty base.

It won't be easy for Apple to get a bright-line rule that a FRAND commitment is violated merely by using a different royalty base. In procedural terms, I think Apple would have to take the Ericsson case all the way up to the Supreme Court--and while there are reasons to assume that Apple will drop this case as soon as it can reach a reasonable deal with Ericsson, the question is strategically important enough to Cupertino that it may pursue this as a matter of principle.

While I'm not aware of any ruling in which a U.S. or European court categorically ruled out injunctive relief over SEPs even against unwilling licensees, it looks like the law on the royalty base isn't settled yet, so this could be an increasingly interesting case over the next few years. The days are long gone when this was mostly a "FRAND Patents" blog, but I plan to look at this dispute from time to time.

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Patent royalties may exceed $120 per smartphone, undermine industry profitability: working paper

A working paper by an Intel in-house counsel and two WilmerHale lawyers, The Smartphone Royalty Stack: Surveying Royalty Demands for the Components Within Modern Smartphones, has just been published (direct link to PDF). Intel Vice President and Associate General Counsel Ann Armstrong and WilmerHale's Joseph Mueller and Timothy Syrett have made an invaluable contribution to the debate over reasonable royalties and incentives for innovation in this field.

This first-rate paper finally answers the billion-dollar question everyone with an interest in smartphone patents has been asking for some time: the total licensing cost per device. The authors have thoroughly researched the licensing environment and highlight various key facts that should give policymakers, regulators and courts pause. They note that royalty stacking, "in which the cumulative demands of patent holders across the relevant technology or the device threaten to make it economically unviable to offer the product, [...] is not merely a theoretical concern" (as, by the way, the likes of Qualcomm allege). Based on publicly-available data, these competent authors "estimate potential patent royalties in excess of $120 on a hypothetical $400 smartphone--which is almost equal to the cost of [the] device's components" (estimated to be $120 to $150 in total based on figures published by Nomura Securities in reliance on Gartner data). They conclude that "those costs may be undermining industry profitability--and, in turn, diminishing incentives to invest and compete". I also believe that smartphone-related patent licensing costs, relating to standard-essential as well as non-standard-essential patents, must come down. Policymakers, antitrust enforcers and judges -- Judge Posner certainly did his best in this regard -- will hopefully bring those fees down in the years ahead.

The paper does properly distinguish between royalty demands and actual royalty payments. Patent holders frequently have to lower their demands during the course of negotiation. Cross-licenses and "patent exhaustion arising from licensed sales by component suppliers" can also make a major difference, but the terms on which companies actually agree are usually kept confidential. Royalty demands sometimes surface in litigation.

The authors based their study entirely on public documents. They (especially the WilmerHale lawyers, who, among other things, defend Apple against Samsung's counterclaims) have obviously seen some confidential license agreements, but couldn't make use of any of that information for their working paper. They also don't speak for any particular company or firm. Apple just demanded a "reasonable royalty" of $40 per device from Samsung at the recent California trial, for five software patents. Now a paper authored in part by lawyers representing Apple against Samsung (with a defensive focus, but still) says that $120 per device for everyone's patents, -- hardware and software patents, standard-essential and non-standard-essential patents -- may be "diminishing incentives to invest and compete". This shows independent thinking and writing. I would not be surprised to see Samsung's lawyers quote certain key findings of this study in their U.S. litigations with Apple. The paper appears slightly Apple-friendly to me in the context of the design patents-related part of Apple v. Samsung, but within reason (I agree in principle with what it says about that). The study also notes that UI patents can typically be worked around, and "[a] truly distinctive and innovative user interface--as distinct from a copied or derivative design--may result in minimal or no royalty exposure".

One key characteristic of the study is that it analyzes licensing costs on a component-by-component (including software components) basis: cellular baseband chip, random access memory (different kinds), flash memory (different kinds), WiFi, Bluetooth, GPS, NFC, battery, power management, audio (different subcategories such as MP3), camera/video (non-standards-based as well as standards-based formats like JPEG and H.264), applications processor, operating system, other pre-installed software, SMS, MMS, email, W3C (royalty-free standards), UPnP (royalty-free), digital media sharing, USB, user interface, outer design (also an area in which the study notes that infringement can be easily avoided).

The study has a much broader focus than my own litigation monitoring in recent years. Its findings appear plausible to me, except that I believe the "operating system" part of the royalty stack is underestimated. No operating system patent holder ever told me what their demands or actual deal terms were, but a couple of years ago I downloaded a litigation-related document that was publicly accessible for less than a day on the ITC document system that mentioned a major operating system patent holder's royalty demands. Against that background I think the study published today is very conservative (to say the least) with respect to operating system patent licensing costs -- but this, if anything, reinforces the overall message.

This is not a policy paper per se, but it does raise and stress policy concerns, particularly about non-practicing entities (NPEs), colloquially often referred to as "patent trolls", and the growing problem of "privateering" (patent transfers from major operating companies to NPEs in order to hide behind others that will assert patents aggressively against the original patent holder's competitors). Certain patent holders' demands, tactics and positions are discussed as examples of factors that exacerbate the royalty-stacking problem. Those patent holders include Ericsson and, to a far greater extent, Nokia, a company that has sold patents to a number of NPEs in recent years and is itself increasinly turning into a patent assertion entity.

This paper is recommended reading for everyone with an interest in smartphone IP issues from a legal and/or economic point of view. It's particularly recommended reading for all those who could, through their actions and decisions, address at least parts of the problem this paper describes. I believe it will be quoted a lot in court documents and academic writings in the years ahead.

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