The team is joined by Guest Kats Rosie Burbidge, Stephen Jones, Mathilde Pavis, and Eibhlin Vardy, and by InternKats Verónica Rodríguez Arguijo, Hayleigh Bosher, Tian Lu and Cecilia Sbrolli.

Thursday, 9 November 2017

Who is going to win the big EU Commission SEP licensing battle - "use-based" or "licence to all"?

The SEP licensing debate in Europe gives
watching tennis a run for its money...
Tomorrow is a big day for standard essential patents. The language of the hotly anticipated and contested European Commission Communication on SEP licensing is set to be agreed by European Commission directorates-general.   The final version of the Communication is understood to be made public before December 2017.   Readers may recall that the Commission held a short-lived consultation on the roadmap for SEPs back in May of this year (see here) that seemingly elicited only 8 responses including from Apple, the Global Antitrust Institute at George Mason University and ACT | The App Association (see more below).

Over the past several months, positions of some companies and organizations have become increasingly entrenched with a battle forming between "use-based licensing" and "licence to all".  Two organizations - ACT and IP Europe - on opposite sides of the debate have been battling it out via blogs and press releases.  IP Europe's corporate membership includes Ericsson, Nokia, InterDigital and Qualcomm - the latter two, although not a "members" of IP Europe, are part of the Global Innovation Taskforce.  ACT draws support from companies like Apple, Intel, eBay and Facebook.

"Use-based" licensing is an approach which calculates the value of the licence based on how the technology that uses the SEP is used (as opposed to being limited to the value of the SEP alone). The Fair Standards Alliance - which counts Dell, HP, Cisco, Intel and Apple as its members - has commented that:
"... use-based licensing could harm the European economy at a critical time for development and proliferation of IoT and 5G technologies. Under use-base licensing, SEP holders would be able to charge different rates depending on the use of the technology, even though the technology is the same. Downstream innovators would therefore be required to pay a portion of the values they themselves create to upstream SEP holders. As the FSA states, use-based licensing would risk that an SEP holder can “seek compensation for value that it did not create, for technologies that it did not invent, and for innovations for which it cannot rightfully claim credit.” Such practices will “hinder – rather than enable – the take-up of these digital technologies.”
"Licence to all" is an approach where a chipset manufacturer can seek a licence from the SEP owner for whatever downstream use that may arise - whether it is envisaged at the time the licence is sought or not (especially important with IoT).   IP Europe has, however, declared that a "licence to all" model will have:
"calamitous implications for innovation in 5G and Internet of Things (IoT) connectivity technology. ‘License to all’ would essentially stall licensing negotiations and drive high-tech jobs from Europe – such as those developing new technologies for standardisation. This is a stark contrast with the stated goals of the European Commission: to “promote the roll out of 5G and IoT, the licensing and enforcement of patents essential to ICT standards need both to be balanced, predictable and to facilitate access to the technology while preserving its fair value”. 
Several press releases continue in this vein - herehere and here.

Brian Scarpelli, Senior Policy Counsel at ACT stated to the IPKat that the evolution of the positions of two of IP Europe's corporate supporters - Ericsson and Nokia - has changed over time was the nature of their business has become more reliant on licence fees.  He states that:
"In 2005, Ericsson and Nokia filed complaints to the European Commission’s antitrust authorities about Qualcomm – accusing it of using its patents to squeeze excessive royalties and licencing deals from them. In 2009 Ericsson was involved in a similar antitrust case against Qualcomm in the Republic of Korea. Ericsson’s arguments [1] then, particularly with regard to use-based pricing of SEPs,  were remarkably similar to the principles the App Association has always championed as follows: 
  • Use-based SEP pricing distorts the market by allowing SEP holders to demand higher royalties from licensees based on others’ contributions to open standards as well as the ingenuity of downstream innovators, neither of which the SEP holder is responsible for.
  • The uncertainty use-based SEP pricing would introduce in existing and future industries that rely on open standards would be damaging to the entire open standards system and to competition across market sectors.
  • Use-based pricing is therefore inconsistent with the FRAND licensing commitment that all SEP holders make when they volunteer their patents into technical standards ."
Scarpelli continued stating that:
"Use-based pricing gives the SEP holders unchecked power to demand exorbitant licensing fees across the value chain based on their own interpretation of how innovative and successful the downstream inventions are... It would be bad for tech innovators relying on open standards that promote interoperability and competition today as well as in future IoT products and services. And bad for European consumers who would face the prospect of higher prices and reduced choice." "
In the IP Europe corner, it is contended that a "licence to all" system would be equally disastrous in that such a model would be "inefficient":
"The knock-on effects of a ‘License to All’ policy would mean delays and reduced access to the latest connectivity standards for European consumers, and could raise a number of high-stakes legal challenges. "
Francisco Mingorance of IP Europe continued stating that:
“Under massive pressure from the Silicon Valley giants, the ‘license to all, or to any’ concept is actually a ‘license to kill’ innovation in Europe. If adopted, it will remove incentives for innovators to openly share cutting-edge technologies with the marketplace. Open standards will be replaced over time by proprietary connectivity technologies that are controlled by Silicon Valley giants at the expense of European consumers, competitiveness and job creation, with technology and jobs going to Asia and elsewhere.”
The battle has also filtered into the ranks of the European Telecommunications Standards Institute (ETSI).  The life-long Honorary Director General of ETSI, Karl Heinz Rosenbrock, stated in an article entitled "Why the ETSI IPR Policy Requires Licensing to All" that:
"“ETSI adopted the clear and unambiguous policy of requiring that FRAND licences be offered to all interested comers/potential licensees who provide products or services designed to be compatible with the chosen standard, irrespective of their position in the industry or a chain of distribution. 
For these reasons, I am of the opinion that the obligation to license under the ETSI IPR Policy, once a FRAND undertaking is given, is not limited to end products like handsets but includes also components like chipsets and others when a component manufacturer seeks a license. ”
In rebuttal, Dr Betram Huber who participated in the drafting of the ETSI IPR Policy published his own article in September 2017 stating that the IPR Policy:
"does not compel and SEP owner to grant a licence to every company that requests one, without consideration of where the licence-seeking company operates in the chain of production or of whether that licence would be duplicative of licences granted to others".  
And then, written last week, Rosenbrock published a lengthy reply stating that:
"...I am very worried about the risk that “end‐use royalties” could be misused to pervert the “license to all” principle that I defended in my First Article. This would frustrate the carefully developed protections offered by the ETSI IPR Policy, in which I personally invested a great deal of effort. Moreover, I do not see why a SEP owner should be allowed to extract value from the downstream innovation of others as well as from their own invention. That strikes me as a tax on additions and value added downstream.  
To put it at as simply as possible: why should an SEP owner earn more because a mobile handset is gold‐plated? Royalty calculation methodologies should not be used to evade the fundamental obligation under a FRAND promise to license to all interested parties. "
But IP Europe say under the model proposed by ACT, app developers would be exposed to
"new financial demands, adding to the mandatory 30% tax on their sales revenue currently demanded by the monopoly owners of App platforms."
Opponents to use-based pricing are of course at pains to emphasize that they do not object to patents having value or SEP owners recovering their R&D through FRAND licenses.  Instead, explained, Scarpelli, their position is that they want to ensure that the SEP owners' FRAND commitments "translates into a balanced SEP licensing ecosystem that ensures standards are a building block for innovation, not a roadblock."

Scarpelli noted that the Commission has "a great opportunity to provide clarity on permissible SEP licensing behavior...[and to] cement Europe's role as a leader by IoT".  Mingorance went further stating that if "licence to all" was endorsed:
“[m]ore than a lost opportunity to set out a clear European vision that promotes open standards, such a move is unthinkable. No communication would be a far better alternative.”
There is little surprise as to what is informing the positions of either side.  The question is which position will find favor with the European Commission , especially those in the powerful DG Competition, which has traditionally been pretty "cold" towards those who reside on the other side of the Atlantic.   Or, perhaps, with such polar views on the appropriate way forward  Mingorance's suggestion of "no communication" may not be such a bad idea, at least for now....

What do readers think the EU Commission should do?



[1] Scarpelli stated that "in a summary document of the complainants’ arguments, lawyers for Ericsson argued that ‘discrimination in licensing of essential technology based on use of owner’s implementing products (chipsets) would frustrate the realization of procompetitive benefits from the standard.’   The document continued: ‘Users of standards should be able to continue to obtain the benefits of competition (i.e., cost- and demand-based prices) and …. not get “held up” by after-the-fact attempts to extract higher profits on the basis of the increased market power obtained from standardization.’"

2 comments:

Anonymous said...

What the Silicon Valley big dogs are not saying out loud is that "use based licensing" combined with "license to all" would completely destroy any IoT business model planning on using low priced sensors if the current SEP royalty burden (in absolute dollar amounts) in smartphones would be applied to IoT devices/sensors. This is because the price of a single IoT device/sensor would become uneconomic.

So what they are really saying is that going forward the license fees for all connected devices should be pegged to the cheapest most simple device (or even one component thereof). Nice plan to get a huge discount on already agreed smartphone licenses..

So instead of taking a look at what is a reasonable royalty burden in each product segment (home appliances, cars, sensors etc), we should trash the years of hard work of the smartphone market participants to negotiate and establish a reasonable royalty burden for smartphones?

Anonymous said...

The commenter above mischaracterizes the debate and has demonstrated a lack of knowledge of the topic.

Use-based licensing is the practice of valuing the royalty base of a Standard Essential Patent based on the wholesale price of the end product. This means in effect that the chipset inside a $300 smartphone costs more than a $200 smartphone with chipset x.
Moreover, It is a practice that encourages abusive behavior in the marketplace, especially from vertically integrated companies such was demonstrated in jurisdictions such as Taiwan and South Korea.

In addition, the conditions for the licensing of standard essential patents no longer pertain exclusively to the smartphone industry due to the fact that everyday consumer items such as fridges, cars, watches, healthcare devices, televisions, cameras, robot, drones, and a plethora of other devices are now connected to the 'internet of things'. SEPs now apply to all of these devices also.

Next time you go to the supermarket just consider if you would buy that kilogram of potatoes based on a nominal fee for the potatoes followed by a royalty for how you use those potatoes.

Subscribe to the IPKat's posts by email here

Just pop your email address into the box and click 'Subscribe':