Huawei makes a surprising announcement, or, the changing role of patents in the global economy

Last week, The Economist published a report of an interview it held with Mr Ren Zhengfei, CEO of Chinese telecoms giant Huawei. The report contained a surprising announcement: Huawei is apparently willing to sell its 5G technology to a Western buyer. "For a one time fee", says the report, "a transaction would give the buyer perpetual access to Huawei's existing 5G patents, licenses, code, technical blueprints and production know-how". 

In a companion piece, The Economist calls the offer "a peace offering that deserves consideration". Indeed, Huawei's strong position in the 5G area [the report cites a statistic that puts Huawei's 5G patent position second only to Samsung's, see below] is the subject of considerable controversy, which in America culminated in a total ban for U.S. companies to do business with Huawei. In The Netherlands, hundreds of people took part in a demonstration against the implementation of 5G last week, fuelled in part by fears over the opportunities for espionage it allegedly offers the Chinese government.

The sale of the 5G patent portfolio – apparently accompanied by an extensive transfer of know-how – would leave the buyer "free to use it outside China and develop the technology as it sees fit". In the US, "the buyer would face no competition from Huawei" because the company does not operate there, while "in other countries the two would go head to head".

That's a very interesting twist in the global strife over 5G dominance that is worthy of some closer analysis from a patent law perspective.

Huawei is a major holder of 5G patents (Source: The Economist)

The centrality of exclusivity in patent law

Every student of IP learns that patents exist to stimulate innovation [though an academic minority still advocates a rights-based conception of patent rights, an argument lucidly set out by professor Mossoff here]. There are various theories on how patents are supposed to achieve this goal: for instance, the idea that patents induce disclosure of knowledge that would otherwise remain secret, or that patent exclusivity is needed to recoup investments in innovation, or that it creates incentives for competitors to 'invent around' the patentee's exclusive domain.

All these theories share reliance on the idea that patent exclusivity – a patentee's virtually unfettered right to decide who uses their invention and under which conditions – is what drives the market's capacity to innovate. A large part of this Kat's research is aimed at understanding to what extent this assumption has stood the test of time.

Research suggests that industry reliance on patent protection is lessening. A classic 2008 study found "substantial differences between the health related sectors … in which patents are more commonly used and considered important, and the software and Internet fields, in which patents are reported to be less useful". The results are confirmed over time, also for Europe, where, at least in the UK, purportedly "[a] surprisingly small number of innovative firms use the patent system". Indeed, tech companies have long stated that they do better when there are fewer patents to deal with [see e.g. here for an analysis by the Financial Times], and also in Europe we see an increase in advocacy against perceived abuses or overprotection of the patent system [e.g. here].

But there are also industries that continue to rely strongly on patent protection and the pharmaceutical industry is a prime example, as discussed in the FT article. Traditionally, they were joined by innovator companies in the telecoms industry, whose business it is to design and implement mobile infrastructure.

For instance, four telecoms giants [Ericsson, Nokia, Philips & Qualcomm] jointly wrote a letter to the U.S. Secretary of Commerce last March urging him to embrace antitrust policy that would interfere minimally with enforcement of SEP's. The letter stresses that these innovators rely on the right to exclude, offered by their patents, in a balanced FRAND-system to recoup their investments and re-invest their profits into in further R&D to create the next generation of standards. Indeed, the undersigned companies are familiar players in European patent litigation and their enforcement efforts have dominated large parts of the European debate concerning FRAND.

It is therefore surprising that their competitor Huawei, which reportedly invested around USD 10 billion a year on research and development related to 5G base stations, has now decided to sell off its patent portfolio. True, Huawei is also a major manufacturer of mobile phones, whereas some of the other major patent holders in the telecoms industry are not [though they rarely restrict themselves to mere licensing of technology: Ericsson, for instance, is also a major provider of telecom hardware]. But just as in other cases, there are major investments behind Huawei's 5G patents, which makes it interesting that it is apparently choosing a radically different course for their exploitation. 

Modern times put before us difficult decisions (Meme credit: Hackernoon)

Modern times & novel patent strategies

None of this is to say that licensing patents is the only way for non-manufacturing entities to monetize their investments in R&D. It is well known that the sale of patents is (also) an important stream of revenue for innovator companies, as is shown by the recent sale by Nokia of part of its patent portfolio to Xiaomi, which was not the first time the Finnish giant sold off IP to competitors or new entrants. Rather, the offer by Huawei underlines the dynamism of the modern economy and the changing role that patents play therein.

Indeed, the uses to which patents are put in this environment are manifold. They are held defensively as leverage for cross-license deals in case of assertion by competitors, or to attain freedom to operate in an uncertain niche in the market, or to secure investment by funds, or to try and coerce small companies into paying license fees. As always, the business leads the way and the brains in the patent department figure out ways to utilize the patent system to optimize the chosen strategy.

The question, then, is how these changes in markets should influence patent doctrine. A similar debate is taking place in competition law, where the ascent of data is driving novel business models that traditional competition doctrine seems ill-equipped to deal with. A forthcoming paper by professor Wu, for instance, looks at the "blind spot" these doctrines have for platforms that generate income through user's attention, not their money [here]. Scholars like Wu argue that this requires reorientation of some of competition law's fundamental assumptions. The question is not merely academic: the European Commission, too, is working on how to retain the efficacy of competition law in the digital era [as becomes clear from a very elaborate study it published earlier this year].

What about patent law? It seems obvious that it, too, must get with the times and adapt to new ways in which patents are employed. But if it is difficult enough for competition law to keep up with protecting current markets, the challenge for patent lawyers, scholars and judges is even greater. Patents, after all, primarily serve to safeguard future markets, and what they will look like no-one can predict. Calls for reform of the patent system, then, are at once vital to its sustained credibility and risky business. Add to that the general tendency of legal systems to lag behind market developments, which to this Kat seems a feature rather than a bug, and patent lawyers have their work cut out for them. Interesting times indeed.