[GuestPost] Opinion: Skirting FRAND requirements under the guise of promoting innovation and efficiency (Part I)

Merpel wonders where we are headed on 
the FRAND licensing level debate, and 
who is in the driver's seat? 

In courtrooms across the globe, arguments continue to rage as to the extent of an SEP owner's FRAND undertaking.  In exchange for getting their technology incorporated into a standard (meaning that, if essential to the standard, that technology has to be used by users of the standard), SEP owners have to give an undertaking - known as a FRAND undertaking.  This undertaking obliges SEP owners to be prepared to licence their patents on Fair, Reasonable and Non-Discriminatory (FRAND) terms. Otherwise, unlike normal patents where competitors do not have to use the technology, SEP owners are in a position which could allow them to extract extremely high and possibly anti-competitive royalties from their competitors or stop them from participating in the standard and market completely (which were vices the European Commission wished to be addressed with the ETSI IPR Policy).  Thus, the FRAND undertaking is a safeguard that seeks to balance users' interests with SEP owners' interests in protecting their IP. But the courtroom debates in the US, Germany, UK and China have raised numerous unanswered questions about what this means.  How wide or narrow is this FRAND undertaking?  To whom is the FRAND undertaking owed? What does FRAND even mean?  The second question was subject to the CJEU referral in the Nokia v Daimler (see previous posts here), but which has so far remained unanswered in Europe.  In the first of a two-parter opinion piece, two US patent and anti-trust litigators in the form of Mark Selwyn, Tim Syrett and Alix Pisani of WilmerHale (who have acted in some of these cases) discuss their view of what is going on and where the answer might, and should lie.  

Over to Mark, Tim and Alex:

"Part 1: SEP Owners’ Current Arguments Are Inconsistent with History

The question of where in the supply chain a standard-essential patent (SEP) owner that has committed to license on fair, reasonable, and non-discriminatory (FRAND) terms must license is of global significance. The Fifth Circuit will soon address an antitrust complaint alleging a conspiracy to deny FRAND licenses to component suppliers in favor of licensing car companies.1   The European Court of Justice had also been set to address questions referred to it by a German court in litigation between Nokia and Daimler about Nokia’s argument that it has discretion to determine the point in the supply chain at which it licenses its SEPs until that case recently settled.2

As these cases demonstrate, notwithstanding that a commitment to license on FRAND terms and conditions requires “non-discrimination,” some SEP owners argue that they are not required to license component suppliers so long as they license suppliers of end products. In support of this position, these SEP holders principally contend that (1) the FRAND commitment has historically not been understood to require such licensing and (2) requiring licensing of component suppliers would be inefficient and jeopardize investments in standard setting. Neither of these positions withstands scrutiny.

In the Federal Trade Commission’s litigation against Qualcomm, Judge Koh addressed the first argument on a summary judgment motion, concluding that Qualcomm’s FRAND commitments under the Telecommunications Industry Association (TIA) and Alliance for Telecommunications Industry Solutions (ATIS) Intellectual Property Rights (IPR) policies require Qualcomm to license its SEPs to modem chip suppliers. Although the Ninth Circuit reversed Judge Koh’s 2019 judgment and vacated her 2018 summary judgment determination as moot, the Ninth Circuit explicitly did not reach the merits of Judge Koh’s determination that Qualcomm’s FRAND commitments obligate it to license to rival chip suppliers.3

This two-part series addresses this ongoing dispute about who must be licensed to FRAND-committed SEPs, and shows that the arguments advanced by some SEP holders that licensing component suppliers will reduce incentives for investments in standard setting and is inefficient for licensing are fundamentally flawed. First, as discussed in Part 1, SEP holders that now advocate against licensing component suppliers made the decision to invest in standard setting when they understood FRAND commitments to require licensing everyone and developed their large SEP portfolios with such an understanding in mind. Second, as will be discussed in Part 2, litigation of SEPs demonstrates that involving component suppliers—the parties that best understand the technology at issue—in licensing negotiations promotes efficiency, and assertions of SEPs against phone suppliers regularly require the involvement of baseband chip suppliers to provide evidence about how the accused functionality operates. Part 2 will also discuss the financial motives of SEP holders—specifically, that licensing at the device level is far more lucrative because it provides outsized royalties. In contrast, licensing at the component level—or the smallest salable unit—ensures that SEP holders are compensated for the value of their invention instead of the other features of complex, multi-component products.

Overall, it is not efficiency and innovation that drives SEP holders’ arguments, but rather that licensing to original equipment manufacturers (OEMs)—entities that manufacture devices such as mobile telephones—is much more lucrative than licensing at the chip level.

SEP Holders’ Evolving Stance on Component-Based Licensing

Despite SEP holders’ current arguments, the history and practice of component-level licensing demonstrate that a FRAND commitment encompasses licensing component suppliers. As Judge Koh found, “Qualcomm’s own practices also contradict its current positions that the IPR policies permit Qualcomm to discriminate against component suppliers[.]”4  In fact, Judge Koh observed that “Qualcomm had received licenses ‘to manufacture and sell components,’” “Qualcomm received ‘exhaustive licenses’ from ‘[o]ver 120 companies,’” and “Qualcomm has emphasized in prior litigation that a SEP holder may not discriminate in licensing its SEPs.”5

In 2007, Qualcomm told the U.S. Supreme Court in an amicus brief that “licensing its intellectual property to entities that produce (non-Qualcomm) chips” was one of its “primary sources of revenue” and that “Qualcomm has provided chipmakers nontransferable, worldwide, nonexclusive, restricted licenses to its portfolio of technically necessary patents.”6  And when confronted with the claims made to the European Commission by Nokia, Ericsson, and others that Qualcomm had improperly refused to license its SEPs to chipset competitors, it responded that the “accusation that Qualcomm has not lived up to its commitments to standard-setting organizations to license its essential patents on fair and reasonable terms is belied by the more than 130 licenses that Qualcomm has granted to a broad range of companies, among them five of the six reported claimants.”7  Further, a Qualcomm executive stated in 2007 that “anybody who wants to ship chips into CDMA-based, whether it is 3G or UMTS or CDMA, they have to have a license” from Qualcomm.8   Indeed, as the Korea Fair Trade Commission observed, to this day, Qualcomm—itself a baseband chipset supplier—insists on being granted a license to the SEPs of its customers that sell cellular phones.9

But Qualcomm is not the only SEP holder to have changed its stance on component-level licensing. As noted, in 2005, Nokia and Ericsson joined with other suppliers of baseband chipsets, including Broadcom and Texas Instruments, to file complaints with the European Commission about Qualcomm’s refusal to license essential patents to potential chipset competitors on FRAND terms. 10  And in 2006, Nokia argued to the European Commission that Qualcomm’s termination of a license with Texas Instruments “would breach Qualcomm’s duty to license on FRAND terms, after having induced SSOs to base the CDMA and UMTS/WCDMA standards on Qualcomm’s technology.”11 Nokia even noted that Qualcomm’s actions “induced third parties to invest in the implementation of that standard in good faith reliance upon Qualcomm’s commitments.”12

Today, however, these same SEP holders argue for the refusal to license essential patents to component suppliers. For example, Nokia has argued that “[r]equiring component-level licensing contravenes industry norms, leads to the ATIS and TIA IPR Policies being inconsistent with the ETSI IPR Policy, and could have unintended consequences for other SEP holders and the industry at large.”13  Ericsson has contended that “[i]n the mobile telecom industry, the business practice has always been and continues to be to license the final product (i.e. in most cases the mobile phone)” and that component-based licensing “is not a fair approximation of value of these standardised technologies, as the component costs does not account for investment in making the standard.”14

SEP Holders’ Argument That Licensing at the End User Level is Necessary to Promote Innovation Does Not Withstand Examination

Contrary to SEP holders’ current arguments, component-based licensing will not destroy incentives to invest in standard setting. The same SEP holders making this argument now invested in standards even when they acknowledged their FRAND commitments required licensing at the chipset level. In fact, Nokia, Qualcomm, and Ericsson made investments and built their SEP portfolios with full knowledge that a FRAND commitment includes licensing competing chipset suppliers.

For example, in a 2006 earnings call, Nokia recited that it had “built its IPR portfolio over the last 15 years, investing over EUR25 billion in R&D and now we own close to 11,000 patent families . . . [and that] 20% of Nokia’s patent portfolio is standards-related and is in broad use by our competitors, which means that the number of Nokia IPR used by third parties is higher than the industry average.”15   And in a 2008 press release announcing a patent license agreement with Huawei and its affiliates for standards essential patents, Nokia stated that it “has built one of the strongest and broadest IPR portfolios in the wireless industry and since the early 1990’s has invested close to EUR 35 billion in research and development.”16

Similarly, in a 2006 earnings call, Qualcomm recited that “[w]e expect the combination of pro forma R&D and SG&A expense for fiscal 2006 to increase approximately 26% to 29% year-over-year, driven by growth in R&D as we continue to invest in the evolution of CDMA2000 and WCDMA multimedia functionality, single chip low-cost solutions, and longer term technology enhancements including OFDMA.”17  And in a 2007 earnings call, Qualcomm recited that “[t]his business is funded on R&D and innovations that we have transferred to are [sic] approximately 140 licensees.”18  In fact, Qualcomm boasted about its OFDMA chip licensees and noted that it “expect[s] the combination of pro forma R&D and SG&A expense for fiscal 2007 to increase approximately 30% to 31% year over year.”19

For its part, Ericsson, in 2006 highlighted its “technology leadership” with its “18,000 R&D engineers and $3.5 billion in investments in R&D every year.”20  And in a 2007 earnings call it recited that “our prime drive is to make sure that we have a very competitive IPR portfolio, so that when we do have the cross licensing agreement that we are obliged to have when we entered into this fair agreement and every standard is to sit on a better pie than anybody else with more essentials.”21

As history makes clear, there are incentives to invest in standard-setting that go beyond generating licensing revenue from end-product licensing. Those include operating profitable businesses selling cellular components and network equipment infrastructure that depend on the availability of standards for widescale adoption. Indeed, in many standard-setting organizations, participants agree to license their patents on a royalty-free basis, such as for the Bluetooth standard. In such cases, participants recognize that the benefit to selling products that support a standard outweigh the potential gains from licensing revenue.

Part 2 will explain how SEP holders’ second argument against licensing component suppliers—that licensing at the end user level is necessary to promote efficiency—also fails to withstand examination. Instead, SEP holders’ true motives are financial gains through royalties that expand beyond their invention (the smallest salable unit)."

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1.   Continental Automotive Sys, Inc. v. Avanci, L.L.C., et al., 20-11032.

2.  Tiffany Hu, Daimler, Nokia Ink Deal To End Fight Over Mobile Tech, Law360 (June 1, 2021),  https://www.law360.com/articles/1389749/daimler-nokia-ink-deal-to-end-fight-over-mobile-tech.  

3.  Fed. Trade Comm’n v. Qualcomm Inc., No. 19-16122, 2020 WL 4591476, at *6 (9th Cir. Aug. 11, 2020).

4.  Fed. Trade Comm'n v. Qualcomm Inc., No. 17-CV-00220-LHK, 2018 WL 5848999, at *12 (N.D. Cal. Nov. 6, 2018), vacated, 969 F.3d 974 (9th Cir. 2020).

5.  Id. at *13.

6. Brief of Qualcomm Incorporated as Amicus Curiae in Support of Respondent at 6-7, Quanta Computer, Inc. v. LG Elecs., Inc., 553 U.S. 617 (2008) (No. 06-937).

7.  Qualcomm, Qualcomm Responds to Reports of Complaints filed by Competitors with the European Commission (Oct. 28, 2005), available at https://www.qualcomm.com/news/releases/2005/10/28/qualcomm-responds-reports-complaints-filed-competitors-european-commission.

8. Qualcomm Inc. Presentation at Jefferies Technology Conference (Oct. 2, 2007).

9.  Decision and Order ¶ 251, In re Alleged Abuse of Market Dominance of Qualcomm Inc., Decision No. 2017-0-25 (Jan. 20, 2017), available at http://www.theamericanconsumer.org/wp-content/uploads/2017/03/2017-01-20_KFTC-Decision_2017-0-25.pdf (“it has been confirmed that the Respondents have been licensed from 297 SEP holders including handset manufacturers around the world for the SEPs necessary for the manufacture and/or sale, etc. of their modem chipsets as of May 2015”).

10. WebWire, Leading mobile wireless technology companies call on European Commission to investigate Qualcomm’s anti-competitive conduct (Oct. 28, 2005),  https://www.webwire.com/ViewPressRel.asp?aId=5089; Financial Times, Qualcomm rivals take case to EU (Oct. 28, 2005), https://www.ft.com/content/abf20f38-47ba-11da-a949-00000e2511c8.

 11.  FTC v. Qualcomm, 5:17-cv-00220-LHK, ECF 893-2 at p. 135.

 12.  FTC v. Qualcomm, 5:17-cv-00220-LHK, ECF 893-2 at p. 135.

13.  Brief Amicus Curiae Nokia Technologies Oy In Support of Neither Party, Fed. Trade Comm’n v. Qualcomm Inc., No. 19-16122 (Fed. Cir. Aug. 30, 2019).

14.  Ericsson, Patents and Standards: A modern framework for standardisation involving intellectual property rights (Feb. 15, 2015). 

15.  Nokia Corporation Q3 2006 Earnings Call Transcript at 7 (July 19, 2006).

16. Nokia Corporation Form 6-K dated Oct. 1, 2008, available at https://www.sec.gov/Archives/edgar/data/924613/000110465908061334/a08-24740_16k.htm. 

17.   Qualcomm Inc. Q2 2006 Earnings Call Transcript at 10 (Apr. 19, 2006). 

18.  Qualcomm Inc. Q3 2007 Earnings Call Transcript at 4-5 (July 25, 2007) (highlighting “CDMA-based chipsets and strong handset shipments delivered record revenue and earnings per share in the third fiscal quarter” and its “continued [] leadership position in wireless semiconductor process technology by powering the world’s first 3G handsets based on 65 nanometer chips”).  

19.   Id. at 7, 10 (“We continue to expand our broad licensing program as we announced over five new licensees this quarter.  This includes another OFDMA chip license and today we have over five OFDMA licensees.  Our licensing model continues to provide the innovation that fueled worldwide mobile wireless broadband growth.”). 

 20.  Ericsson Strategy and Technology Summit in Tokyo – Final (Nov. 14, 2006).  

 21.  LM Ericsson Q2 2007 Earnings Call Transcript at 18 (July 20, 2007).  

Note:  WilmerHale has represented certain parties mentioned in this two-part series, including representing them in certain of the cases mentioned.