AIPPI Congress Report 1: Standard essential patents – maximizing value before enforcement

This year's AIPPI Congress is in Cancun, Mexico.  Yes, try explaining this location to your colleagues and clients.  But although the waters are crystal blue and the sand warm and soft, most attendees are spending their days in windowless conference rooms debating the latest developments in IP law and practice.  One such person is guest Kat reporter, Richard Vary (Bird & Bird) who was on hand to report on yesterday's panel session on standard essential patents (SEPs).  Over to Richard:

Yesterday's SEP session

"Gertjan Kuipers from De Brauw chaired the highlight of the AIPPI Conference for 2018: the SEP panel (at least in this author's view). He chose as the topic the slightly less often asked question of how to optimise a patent business in today's SEP licensing world. 

Peter Martinsson from Ericsson introduced Ericsson's contributions to the connected world. He reminded us of the huge advances made in the last few years. Wireless connectivity is the fastest scaling technology we have, going from zero to 8 billion devices in a few decades. It is also a technology that directly benefits society: a 10% increase in mobile broadband takeup increases a country's GDP by 2 or 3%. 5G will bring new benefits: not just a further leap in mobile broadband capacity and speeds, but new types of machine to machine connected devices. There is strong competition, with the fall of former giants and the remarkable growth of new entrants. Peter also explained Ericsson's significant share of contributions to the standards, over 50,000 to date. His unspoken message was: the system works. 

Adrian Howes of Nokia introduced the Nokia of today: a large and growing wireless networks business. Whilst Peter had focused on Ericsson's levels of standards contributions, Adrian expressed Nokia's contribution to the technology in terms of hard patent numbers: 20,000 patent families, and filing at a rate of 1300 families per year.

Adrian noted that Nokia's patent business is separate from its networks business. This creates inherent conflicts: Nokia can take neither an extreme pro patent nor a pro implementer position. He also noted that R&D in standardised technologies such as 5G is enormously expensive. It is a 10-20 year commitment, and demands an unwavering management commitment. 

Adrian thought that the considerations for building a successful patent business included: 

• Decide where to focus your R&D and portfolio development, bearing in mind that standards compete, and many fail. 

• Decide which SSO to join. Some SSOs have rules which make it too difficult to secure a return on the investment in R&D. It may make no sense to contribute R&D efforts to these. 

• Some standards are enormous efforts: 5G is an example. No one company can hope to contribute a large proportion of such a standard. Each company must decide where to focus its efforts within that project. 

• SEP owners should decide whether to focus on quality over quantity, and whether to be selective or broad in their declarations. 

Nokia's choice is to focus on new video/audio technologies as well as the usual radio technologies, to choose quality over quantity, to be careful in its SSO selection, and adopt a strong but considerate licensing strategy. 

Tadanobu Andou of NTT Docomo described NTT as the top mobile operator in Japan. It is active in standardiation activities and holds a world leading SEP portfolio. CyberCreative ranked NTT as top 7 in 4G technologies, with 7% of LTE. 

NTT Docomo aim is to deliver a high quality service to customers. To realise this it must build a state-of-the art network, offer attractive devices and come up with attractive service ideas. Its R&D and SSO participation is aimed at optimising these eservices. Its SEP portfolio is the inevitable result of that investment. 

NTT's strong SEP portfolio improves its image and influence in the industry. It boosts brand image with customers who see the strong portfolio as a sign of a technologically advanced company. It also brings the benefit of licensing revenues, 

NTTs strategy is to file patents for as many developments as it can, to do so in a timely manner before the SSO meetings, and to ensure the filings have adequate and good quality descriptions of the invention. After filing, NTT manages the portfolio carefully, cross checking to keep the portfolio relevant for the standard. As a SEP holder NTT promotes patent pool licensing as a one stop license at economical terms. But it will offer a bilateral license if asked. 

As a licensee, NTT tries to purchase licensed products. It believes that the IPR owners must be properly compensated for use of its IPR. 

Judge Robart of the US District Court of the Western District of Washington started from the principle that FRAND royalty rates need to be connected to the value of the patent. He described his experience in the Microsoft v Motorola case. When looking at the 40 or so patents in issue, he found that a very limited number had much relevance. He recalled one described by an engineer as "one of the most significant advances ever made", and yet noted that Google (the owner) didn’t use it in its own YouTube service because it was now obsolete. He advised that including low quality patents in a portfolio undermines the patent owner's position in a court. 

He advised parties seeking to maximise value to ask the question: do you really want to declare this patent as essential? Does it help you if you hold out a patent which is not essential as being so? 

If he had to pick one letter in FRAND that is the battleground, it would be F: what is a fair royalty? He thought that the proposed royalty must be fair for the contribution that the patent brings. The question "how much do we need to charge in royalties to continue to invest in R&D?" is the wrong question. 

He gave the example of a chip that had two applications. In one, it was built into a racing car which sold for $600-700k. In another, it was built into a children's toy which sold for $9.95. He rejected the assertion that it must have the same value in both. He believed that the court must look at the contribution of the patent to the standard, and the contribution of the standard to the product.

Dr Christof Augenstein asked why it the value of technology in mobile devices was increasing, the value given by courts to SEPs seems to be decreasing. Judge Robart explained that the question assumed improvements were equally spread over standards. A court must make a decision about what contribution the patents before it have made.

An audience member noted that as we move into 5G there will be many companies contributing. How does this affect strategy in creating and maintaining portfolios? Tadanobu Andou thought that with 5G we may need some collective licensing mechanism. Adrian Howes agreed that patent pools may become more prevalent. Peter Martinsson noted the Avanci pool as a step in that direction.

Gertjan asked about the consequences of late declaration (noting the Apple v Core Wireless decision in the Federal Circuit). Adrian debunked the myth that SSOs use declarations to decide on technology choice. ETSI has looked at who is checking declaration data: it is not engineers and the only people who look at this data are lawyers. This supports the view that the choice of technology is made on purely technical grounds. So it is wrong to assume that anyone is prejudiced by late declaration.

He noted that contributors cannot win. Some contributors declare early, before the scope of the patent is established in prosecution. Because patents tend to get narrowed in prosecution, they are accused of over-declaration. If instead a contributor waits to declare until he can be reasonably sure the granted patent will read onto the standard, he is said to have waived his patent. The Federal Circuit's decision is going to result in much greater over-declaration, which is exactly the opposite of what the European Commission and ETSI are seeking to achieve.

The panel was asked about the rise of China as a venue, and the decrease in companies using the US system. Judge Robart argued that this was a sign of increasing sophistication in companies' strategy, noting that Germany is also declining in importance. China and others are increasing because of the size of their markets. He has heard regularly that the US courts' refusal to compensate patent owners is causing companies to stay outside US, and believes that sometimes this is argued just in attempt to increase royalties in the US. Judges try to get rates as accurate as they can. The fact that they are low is just a reflection of the state of the law today. 

Peter was asked about the Ericsson "mother of 5G" patent. This patent has many pages and claims. Peter explained that Ericsson didn't do this just to save filing fees. It wanted to show in this application that it could put together a complete end to end 5G system and disclose a full working end to end system. This was an example of quality not quantity. 

Tadanobu Andou concluded by reminding the meeting that patent licence fees are in the end paid by end users. In setting licensing fees have to consider how much end users are ready to pay."