https://telecom.economictimes.indiatimes.com/tele-talk/a-fact-based-critique-revisiting-the-price-of-innovation/1357 Mar 15, 2016 Past week, I read an article on standard-essential patents (SEPs) by Divya Rajput, and how their licensing on Fair, Reasonable, and Non-Discriminatory (“FRAND”) terms helps several industries to operate and serve customers. Ms. Rajput makes several interesting points, but these points are not grounded in reality and reflect logical inconsistencies. There was a time when indentured servitude was considered to be a good thing. Thank God we are not living in those days. Today, it is a criminal offense. Same is true for licensing of SEPs. What was an excellent business practice in the 90s, is not a viable business strategy today. Out of the original five (Motorola, Ericsson, Nokia, Alcatel-Lucent, and Nortel), none remains in providing and manufacturing mobile phones. Rather, all are involved in patent licensing in some form or the other. The cross-licensing rates in those days cannot be used as a bench mark today. There is no quarrel with the proposition that spending on Research and Development is a sine qua non for innovation. However, that does not mean that the public should pay for research that is unproductive. The high technology industry is a perfect example of applying Pareto strategies. Investment (including in R&D) is made in multiple avenues and products. 4 out of 5 have failed, and continue to fail. Only 1 succeeds. Does this mean that the high technology industry extracts supra-normal profits from the one that is successful to compensate for those that failed? The answer is no. Reasonable profits multiplied by volumes is the hall mark of the operation of the high tech industry. To quote the Directorate General - European Commission: “The so-called smartphone patent wars should not occur at the expense of consumers. …...”“….[M]oreover, it is in the public interest that potentially invalid and non-infringed patents can be challenged in court and that companies, and ultimately consumers, are not obliged to pay for patents that are not infringed.” The issue of remuneration for the SEPs is not new. However, in India, it definitely is not the case that FRAND assured SEPs ensuring the growth of the mobile industry. Like the case globally, FRAND / SEPs are a very recent phenomenon. Even advanced patent law jurisdictions saw SEP related cases as recently in 2012-13, i.e. around the same time they came up in India. It is more of a case of torpedo action: surfacing for the claiming royalties when Indian parties become large enough to warrant the attention of patent holders. Similarly, the author is mistaken on technologies becoming SEPs on pure merits. It is done by a vote, and like the reader knows that a vote is not necessarily going to bring in the best technology. What happens in such meetings is that a lot of engineers from different companies get together to decide on a series of issues. Quite a few bring in their proposed solutions to address the problem. A vote is then taken on the various solutions, and what passes muster is the one that has the maximum votes, and passes on to become part of the standard. It is also the case that patent applications have been filed the day or week before the solution is tabled publicly. SSOs and SDOs merely facilitate the meeting. The actual decision is taken by the engineers present and voting. Each committee has a different composition, and there are thousands of such committees. Big SEP owners send several engineers to most of these meetings, and which is why they claim a significant number of SEPs. Note that SSOs themselves do not vet the claim of essentiality – it is a self-declaration/claim. There are several studies of repute – all showing that over-declaration is rife, and most if not all SEP owners over-declare their patents as being essential at least 7-8 times! Hence it is not a case where there is hold-out. It is a case where an extortionary demand is made for licensing of SEPs. Any view about over-declaring is countered by treating the prospective licensee as holding out on the patent holder. Well if the demand is extortionary and not in proportion to the rights, a prospective licensee has all rights to call a spade, well, a spade. US Courts have countered the issue of patent holdup by asking for evidence on the same. Till date, no such evidence has been presented by any SEP owner. Calling a prospective licensee as unwilling is a very simple tactic adopted by the right holder to counter a claim of invalidity, non-essentiality, etc. But consider this, from the European Commission paper on SEPs: “Potential licensees of SEPs should remain free to challenge the validity, essentiality or infringement of SEPs. It is in the public interest that potentially invalid patents can be challenged in court and that companies, and ultimately consumers, are not obliged to pay for patents that are not infringed.” Injunctions against prospective licensees who question the basis of the extortionary claim, is something alien to Indian jurisprudence, and that given enough time, the Indian judiciary will see through the smokescreen created by the right holders to demand unjust and extortionary royalties. The right holder has himself agreed for a FRAND royalty, i.e. it agrees that money is the ultimate remedy, if someone questions the demand, does not mean that it should be sent out of business by way of an injunction. If there is any issue of amount, it can and should be decided after trial. In my view, in the current Ericsson matters, under the current scheme of things, parties are financing litigation against themselves. SSPPU based pricing: There are several reports that reflect the nature of royalty stacking for this industry. For example, a Wilmer-Hale study provides that put together the royalty burden on a smartphone, if it is on end device, is more than $150, i.e. for a device who bill of material is around $150, the royalty is another $150!! Is it reasonable? I don’t know the answer. But in my view, the question here is who will pay this if the norm is to pay royalty on an end product, rather than where a patent is implicated? Of course, the consumer. The second issue is the questionable facts brought in: There are SSOs like IEEE who have clearly stated in their IPR policy (February, 2015) that royalty imposed is on component basis. In fact, the US Department of Justice, Anti-Trust Division had a good look at the IEEE policy change and found it to be proper, under scrutiny. As regards judicial pronouncements, I am doubtful that there is even one judicial pronouncement that allows for royalty on end product basis. The test in multiple jurisdictions, including United States, Europe, Japan, etc. has been proportionality – i.e. claim of royalty can only be there on what one has invented, not beyond. By charging a royalty on an end product, not only is contribution by other IP owners misappropriated, but there is a royalty for non-technical aspects such as taxes, duties, freight, insurance, marketing costs, packaging, etc. Is this reasonable? As an example, SEPs have got no relationship with the screen, or a memory, or a camera module. These components are the three most expensive parts of a device, and a usually royalty paid from the vendor who supplies them. Taking the logic further, a low cost screen is different from a high cost screen, low memory / high memory, some megapixel vs. high megapixel, etc. What is the additional contribution by SEPs in the low cost screen vs. the high cost screen such that it is entitled to a higher royalty? Validity of a portfolio: This is something that is questionable, and is up for appeal at the Delhi High Court (Intex matter). Just because there are other licenses does not mean that the entire patent portfolio is valid, essential and used. We don’t know what those other licenses terms were. And there are several licenses where chipset based licensing has been gone into by the same licensors. For example, Bluetooth SIG, patent license with semiconductor companies are clear examples to the practice of licensing on a chipset basis. In the Intex matter, in my view, the judge may be limiting the view only to the interim stage, with complete facts being ascertained after trial. Conclusion: What is long term for an ant, is short term for an elephant. As a nation, we should decide how do we want our policy to encourage innovation, as well as have a well-functioning competitive market place where consumer interest trumps firm interest. We are going towards 5G, where cars, roads, entire cities would be connected. Whether we pay royalty for a 20 cent chip or the car or places in which that 20 cent chip goes is up to us. Either way, it is an issue that we must decide for posterity. DISCLAIMER: The views expressed are solely of the author and ETTelecom.com does not necessarily subscribe to it. ETTelecom.com shall not be responsible for any damage caused to any person/organisation directly or indirectly.