SEP owners in the driving seat
There have been many important milestones in the development of 5G, the next generation of cellular technology tipped to revolutionise new areas of the economy and bring them into the hyper-connected, digital age.
The first 5G-enabled smartphones are already on the market, albeit with limited 5G network coverage. There is also fierce debate over who should provide the infrastructure that underpins it all, with the UK following the US’s lead in shutting out market leader Huawei.
Less likely to generate headlines are the mechanisms by which the patents essential to 5G will be licensed. But the manner in which 5G is made available through the underlying IP will be key to the rollout of the technology.
The announcement late last month from patent pool operator Avanci that it has received antitrust clearance from the US Department of Justice (DoJ) for its 5G licensing programme is significant for a number of reasons. The DoJ’s business review letter (BRL) gives a green light, from an antitrust perspective, to the licensing model favoured by Avanci and standard-essential patent (SEP) owners.
It also marks one step closer to the launch of the first 5G licensing pool. Whether that will be Avanci’s is not clear. But the licensing infrastructure is being put in place to make 5G available to a new generation of implementers.
But on what terms? The BRL gives specific clearance to a licensing model under which the royalty is calculated based on the end product. This is the model favoured by SEP owners as it affords them the greatest return on investment.
From the point of view of SEP owners, their patented technology is central to the appeal of these high-value consumer products, and they feel they should be compensated accordingly.
A spokesperson for Nokia, a world leader in telecommunications SEPs, told WIPR: “We congratulate Avanci on the clearance by DoJ of their business model as a licensing platform and welcome the views by DoJ highlighting the benefits of ‘end-product-level’ licensing for standard-essential patents.”
Implementers, meanwhile, tend to take a different view. But judging by recent events, it’s SEP owners who seem to be getting their way.
The end-product-level licensing model has been attracting attention from some competition authorities and has been at the heart of litigation between patent owners and implementers.
According to German carmaker Daimler, Nokia’s policy of licensing to end-product manufacturers is in violation of SEP owners’ FRAND commitments. Specifically, Daimler has argued in German court that Nokia’s refusal to license its SEPs directly to Daimler’s suppliers is in violation of FRAND rules.
The Federal Cartel Office, Germany’s competition regulator, has also taken an interest. The Cartel Office took the unusual step of asking a first-instance court, in this case the Mannheim Regional Court, to refer the issue of end-product-level licensing to the Court of Justice of the European Union.
But the Mannheim court ruled in favour of Nokia, and declined to refer the case to the EU’s top court. A spokesperson for Daimler told WIPR at the time that “we would welcome an EU judicial clarification, as it would answer the questions on the licensing obligation of SEPs”.
The case could also foreshadow potential conflicts down the line involving 5G. The patents at issue were part of an Avanci patent pool. Alongside the BRL, the Mannheim court’s decision hands the momentum to SEP owners as both sides grapple to shape the licensing infrastructure for the next generation of cellular technology.
“The DoJ approved our approach, which grants licences to complete vehicles,” says Luke McLeroy, senior vice president at Avanci.
“We believe that simplicity for all parties is best served by licensing at a single point in the value chain, which may be the final product depending on the industry context,” McLeroy continues.
And while we may hear more from the Federal Cartel Office on the issue, the DoJ appears satisfied that the model presents no antitrust concerns for SEP owners in the US.
McLeroy says: “We would also note that in its BRL for the Avanci 5G automotive program, the DoJ commented that the efficiencies of licensing at the vehicle level are considerable and noted that its antitrust guidelines make clear that field-of-use restrictions (such as licensing at the end product level) can be procompetitive.”
But the argument goes far beyond the automotive industry; it’s relevant to all sectors where 5G licences will be needed for the next generation of consumer products.
Francisco Mingorance is chief executive of IP Europe, a business coalition representing some of the world’s biggest telecoms SEP owners, including Nokia, Ericsson, InterDigital, and Orange.
“Components inside an IoT device are very cheap,” Mingorance says. In IP Europe’s view, to calculate royalties based on these component parts would undervalue the scale of investment undertaken by SEP owners.
“The BRL creates the predictability needed for technology implementers to pay FRAND licensing fees for the use of the cellular technology licensed by Avanci, and the incentives for Western cellular technology developers to continue investing billions of Euro every year to development key 5G/6G technologies needed by the market,” Mingorance continues.
Of course, the BRL doesn’t settle the debate around end-user licensing. It just says that Avanci’s favoured approach isn’t illegal. But the DoJ’s conclusions mark another hurdle cleared for 5G SEP owners.
Qualcomm
The DoJ clearly set out its position on end-product-level licensing in the BRL. But in recent years, it’s been in conflict with another federal agency, the US Federal Trade Commission (FTC).
This month, the US Court of Appeals for the Ninth Circuit adopted the approach favoured by the DoJ and reversed a major antitrust defeat for Qualcomm.
The FTC had been pursuing Qualcomm for allegedly abusive business practices—including its practice of licensing exclusively to end-product manufacturers of smartphones and smart cars.
The commission was initially successful, with US District Judge Lucy Koh ruling against Qualcomm last May. But earlier this month, Koh’s landmark ruling was reversed on appeal.
In case the BRL wasn’t enough of a boon for SEP owners, they now have a major decision from the Ninth Circuit to give them extra legal footing.
“It could have a significant impact in the US regarding implementers’ defences against SEP owners,” says Brian Kacedon, partner at Finnegan, of the Ninth Circuit’s ruling.
Kacedon continues: “The big question is—can SEP owners dictate at what level in the supply chain they can license? Qualcomm says it can do it at the lowest level, that’s where the most money is.”
Notably, the Ninth Circuit didn’t take a position on whether this practice violates FRAND obligations required by standard-setting organisations. But like the DoJ, it makes it clear that it’s not illegal under antitrust law.
“That may or may not be a breach of your FRAND obligations, but there’s not an antitrust remedy for it,” Kacedon says.
And whether it is a breach of FRAND obligations will surely be the subject of many more disputes in future.
According to Chris Gaspar, partner at Milbank, “Qualcomm and a challenger would each have good arguments—it’s a closer case than you might think”.
On the face of it, SEP owners’ FRAND commitment to make a licence available to all interested parties on fair terms would seem to include chip manufacturers as well as smartphone makers.
But as Gaspar says, Qualcomm could argue that “chip manufacturers actually are getting access because their customers are getting access—they aren’t effectively being denied anything”.
It should be remembered that the Ninth Circuit’s decision can still be challenged. Carmakers including Honda and Ford, as well as chipmaker Intel, have asked the FTC to seek an en banc rehearing.
Gaspar thinks this is “very likely” to be the FTC’s next move. Kacedon cautions, however, that after a protracted legal battle, and an inter-agency conflict with the DoJ, this largely depends on whether the FTC has any “political appetite” left to keep fighting.
Whether the commission does or not, it’s unlikely that implementers will give up any time soon. The question of how SEPs are licensed, to who, and on what terms, will remain as thorny an issue as ever in the 5G era.
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