LTE Patents Licensing Royalty Issues with Connected Cars Licensing Journal January 2016

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As the connected car market glows, LTE is becoming the main connectivity technology not only for the V2X (vehicle-to-vehicle, vehicle-to-person, vehicle-to- roadside unit) communications but also for providing value added services (e.g., infotainment).For example, the 2015 Audi A3 LTE connectivity service includes navigation with Google Earth and Street View, weather and event information. Thus, one may expect that the increasing use of LTE can make the automotive sector a new patent dispute battleground

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LTE Patents Licensing Royalty Issues with Connected Cars Licensing Journal January 2016

  1. 1. JANUARY 2016 DEVOTED TO LEADERS IN THE INTELLECTUAL PROPERTY AND ENTERTAINMENT COMMUNITY THE Edited by Gregory J. Battersby and Charles W. Grimes LicensingJournal V O L U M E 3 6 N U M B E R 1
  2. 2. JANUARY 2016 T h e L i c e n s i n g J o u r n a l 1 LTE Patents Licensing Royalty Issues with Connected Cars Alex G. Lee As the connected car market grows, long term evolution telecommunications technology (LTE) is becoming the main connectivity technology not only for the vehicle-to-vehicle, vehicle-to-person, vehicle- to-roadside unit (collectively, V2X) communications, but also for providing value added services (e.g., infotainment). For example, the 2015 Audi A3 LTE connectivity service1 includes navigation with Google Earth and Street View, weather, and event informa- tion. Thus, one may expect that the increasing use of LTE can make the automotive sector a new patent dispute battleground.2 The main issue with the LTE patent dispute will be the reasonable royalty of LTE standard essen- tial patents (SEPs) that can be used for damage evaluation regarding infringing LTE products. SEPs encompass intellectual property rights (IPRs) for the standardized technologies. Usually, all the essential aspects of standardized technologies are particular- ized in standard specifications.3 Thus, SEPs can be defined as patents that include one or more claims that are infringed by the implementation of cer- tain standard specifications. Consequently, any LTE standard–compatible products (e.g., LTE connectiv- ity chipsets) may infringe SEPs. Alex G. Lee is a principal IP Strategist with TechIPm LLC, an IP strategy consulting firm based in Boston, MA. He is an emerging technology (Electronics, Computer, IT, Telecom, IoT) patent expert with extensive experience in technology R&D and management, business development, strategy consulting, and intellectual property man- agement in the United States and South Korea. He has consulted with Fortune 500 companies, patent monetization firms, law firms, investment firms, and research institutions regarding the strategy for patents acquisition, investment, pros- ecution, development, litigation, monetization, and commercialization. The author would like to thank Professor Christopher Gibson at Suffolk University Law School and Professor Michael L. Rustad, Ms. Hee-Eun Kim, Mr. Larry M. Goldstein, and Professor Stephen Y. Chow for their valuable comments. Standard Setting and Its Affect on Patent Royalty Rates Standards often are developed and set-up through the standardization process by the standard setting organizations (SSOs).4 If the adopted standards are covered by some patents owned by the members that proposed the adopted standards, the mem- bers become the patentees of SEPs. The patentee of SEPs may have market power in the relevant technology market because the industry may be locked in to using the standard, and the value of SEPs becomes significantly enhanced. Thus, the patentee can demand and obtain unreasonably high royalty payments and artificially increase the value of the patent due to the very high cost of switching to alternative technology, which the implementer would have to pay.5 Thus, the patent hold up occurs when a patentee of SEPs demands unreasonably higher license fees after the standard is widely adopted than could have been obtained before the standard was implemented. To avoid the patent holdup problem, a majority of the SSOs require that the members participating in the standardization process agree ex ante to license their SEPs under fair, reasonable, and nondiscrimi- natory (FRAND)6 terms ex post to any implementers of the standard. The members’ agreements to license their SEPs under FRAND terms usually are called FRAND commitments. In general, FRAND commit- ments are interpreted as enforceable contractual obligations between a member and an SSO.7 An implementer of the standard is a third-party benefi- ciary of FRAND commitments and therefore entitled to a license of SEPs.8 Two important questions about the FRAND com- mitments are FRAND royalty base and rate. One may use a royalty base equal to the entire market value of an infringing product if “the patented feature is the basis for consumer demand” for the entire product.9 If the patented feature is not the basis for consumer demand for the entire product, the royalty base only should reflect the contribu- tion of the patented feature to consumer demand.10 Thus, if a product consists of many components, the
  3. 3. 2 T h e L i c e n s i n g J o u r n a l JANUARY 2016 royalty base can be the market value of the relevant component to consumer demand created by the patented feature.11 Caselaw Regarding FRAND Licensing Rates In LaserDynamics, Inc. v. Quanta Computer, Inc.,12 the court ruled that the royalty base can be the small- est saleable component that embodies the patented feature. By this reasoning, the FRAND royalty base may be the smallest saleable component that embod- ies the relevant SEPs. After the FRAND royalty base was determined, a royalty rate for a specific SEP can be calculated by taking account of the economic contribution of the specific SEP to the smallest sale- able component that is used in determination of the FRAND royalty base. In Microsoft Co., v. Motorola, Inc.,13 the court affirmed the lower court ruling in determining the FRAND royalty. The district court provided basic guidelines for assessing FRAND royalty. The district court devised the guidelines based on the Georgia- Pacific analysis of the reasonable royalty14 modified to take into account the SSOs’ primary goals for requir- ing FRAND commitments. The court provided five primary goals for adopting FRAND commitments: 1. Promotion of widespread adoption of SSOs’ standards; 2. Avoidance of patent hold-up; 3. Avoidance of royalty stacking; 4. Creation of valuable standards; and 5. Exclusion of hold-up value in the reasonable royalty. The court, then, modified the Georgia-Pacific factors to account for the five primary goals for requiring FRAND commitments. The key modification to the Georgia-Pacific factors leads to the reasoning that a royalty in a patent pool for the specific SEPs at issue or comparable licensing transactions as a candi- date for the royalty established through negotiation under FRAND commitments. Thus, the royalty rate in the recently formed LTE patent pool may provide expected FRAND licensing revenue. Another court’s guidelines for assessing FRAND royalty for SEPs can be found in In re INNOVATIO IP VENTURES, LLC.15 The court calculated FRAND roy- alty (cap) of WiFi SEPs using the average profit mar- gin of the WiFi chips that cover all the implemented features of the WiFi standard in the infringing prod- ucts. Then, the court calculated FRAND royalty by multiplying the average profit margin to the contribu- tion of patentee’s SEPs to the profit and pro rata share of patentee’s SEPs to the total number of WiFi SEPs providing similar contribution to the profit. Thus, LTE FRAND royalty can be evaluated as (average profit margin to the contribution of patentee’s SEPs) ϫ (net profit of relating products) ϫ (pro rata share of patentee’s SEPs to the total number of LTE SEPs pro- viding similar contribution to the profit).16 In response to the courts’ determination of FRAND Royalty, major SEPs owners such as Qualcomm, Nokia, and Ericsson expressed their serious concerns about the courts’ rulings to diminish the value of SEPs. Qualcomm insisted that there is nothing wrong with the licensing practice of using the price of the entire end product as the appropriate royalty base, because licensing at the end user device level has been an industry custom in the telecommunications sector.17 By the telecommunications industry custom, Qualcomm explained that patentees of SEPs usually did not enforce licensing obligations to component manufactures. Therefore, FRAND royalty base can- not be the smallest saleable component that embod- ies the relevant SEPs. The Private Sector Speaks Up Additionally, Qualcomm reasoned that the contri- bution of the patented feature to consumer demand should not be limited to components of devices because extended consumers’ benefits are coming from the services provided by the network connecting devices.18 Therefore, the smallest saleable component that embodies the relevant SEPs actually is the device itself in the telecommunications sector. Furthermore, developing standard technology in mobile telecom- munications is a high-risk business. Thus, without strong patent protection and return for Research & Development, there will be no encouragement for further investment in telecommunications stan- dards. Consequently, artificially diminished royalties on mobile telecommunications standard–compatible products will impede innovation, and thus, harm to the industry and consumers ultimately.19 On the other hand, Cisco, HP, Microsoft, and sev- eral other IT companies argued that the use of the entire market value as a royalty base should not be used unless all of the profit of the infringing product is attributed to the features of SEPs.20 Thus, the value of SEPs should be determined by apportion to the contribution actually made by the patented features to the accused product. They also insisted that paten- tees bear the burden of proof for the value of SEPs.
  4. 4. JANUARY 2016 T h e L i c e n s i n g J o u r n a l 3 A method to resolve disagreement about FRAND royalty base may be a hybrid approach to royalty base that was suggested by the 3G licensing plat- form.21 The 3G licensing platform, which is the licensing organization for 3G mobile SEPs, adopted reference market value of the entire product as a royalty base, if the product consists of several func- tional blocks. For example, if the product performs 3G mobile communication and other functions that give values to the users of the product, the royalty base only takes into account the value proportional to the 3G mobile communication function embed- ded in the entire product. Thus, if a mobile phone of price T includes a component of price A for mobile communication function and other components of price B for other independent functions and multiple components of price C for common functions sup- porting both mobile communication function and other independent functions, FRAND royalty base for mobile communication is A in the smallest sale- able component approach and T in the entire market approach. In the hybrid approach to FRAND royalty, however, FRAND royalty base for mobile communica- tion is A ϩ C ϫ [A/(A ϩ B)] taking into account the net contribution of the multiple components for common functions to mobile communication. Consequently, FRAND royalty base is a compromise value between the two extremes such that it is the entire product value including only the smallest saleable function contributed by the patented feature of a SEP. 1. https://www.youtube.com/watch?v=Bx9LYdKw5sQ. 2. For potential patent litigation risk regarding LTE, please see my article, Lee, “Increasing Monetization Activities Exploiting LTE Patents,” at http://techipm-innovationfrontline.blogspot.com/2015/04/increasing- monetization-activities.html. 3. To facilitate interoperability among the industry players, participants in the development of standards establish specifications for the essential components of the standardized technology. The standard specifications, however, do not define all the technical aspects for commercial products implementation. 4. In this article, SSO will be used interchangeably with the traditional term SDO (Standard Developing Organization). During the standardiza- tion process, participating members propose their preferred standard applications to the technical committees of SSOs. Board members of the technical committees then review the proposed standard applica- tions and submit the adopted applications to the technical committees to decide whether to accept the adopted applications through a voting among the participating members. 5. See, e.g., Mark A Lemley and Carl Shapiro, “Patent Holdup and Royalty Stacking,” 85 Tex. L. Rev, 1991, 2007 (2007). 6. In this article, FRAND will be used interchangeably with RAND (reason- able, and nondiscriminatory). In FRAND, fair means underlying licens- ing terms are not un-fair. Reasonable means that the licensing royalty rates should not be excessively higher than the value of benefits that can be acquired by the license. Non-discriminatory means licensors treat all licensees in a similar manner in licensing agreements. 7. Mark A. Lemley, “Intellectual Property Rights and Standard-Setting Organizations, 90 Cal. L. Rev. 1889, 1909-1918 (2002). 8. Here, the beneficiary includes both members and nonmembers of the SSO. See, e.g., id. at 1915. 9. Marine Polymer Techs., Inc. v. HemCon, Inc., 672 F.3d 1350, 1360 (Fed. Cir. 2012) (en banc). 10. Uniloc USA, Inc. v. Microsoft Corp., 632 F.3d 1292, 1318-1319 (Fed. Cir. 2011). (When a standard is incorporated into only one component of a multi-component product, royalties based on the value of the entire product tend to compensate SEP holders for numerous technologies and features beyond those covered by their patents, thereby overcompensat- ing them and leading to royalty stacking (the overall cumulative royalty costs for a given standard in excess of the total product cost)). 11. This situation is especially prevalent in the ICT industry. 12. LaserDynamics, Inc. v. Quanta Computer, Inc., 694 F.3d 51, 68 (Fed. Cir. 2012). 13. Microsoft Co., v. Motorola, Inc., No. 2:10-cv-01823-JLR (W.D. WA 2013), Dkt. No. 681 at 25-41. 14. Georgia-Pacific Corp. v. U.S. Plywood Corp., 318 F. Supp. 1116, 1120 (S.D.N.Y. 1970). (Fifteen factors for determining a reasonable royalty are as follows. (1) Royalties patentee receives for licensing the patent in suit; (2) Rates licensee pays for use of other comparable to the pat- ent in suit; (3) Nature and scope of license in terms of exclusivity and territory/customer restrictions; (4) Licensor’s established policy and marketing program to maintain patent monopoly by not licensing oth- ers to use the invention; (5) Commercial relationship between licensor and licensee, such as whether they are competitors or inventor and promoter; (6) Effect of selling the patented specialty in promoting sales of other products of the licensee; the existing value of the inven- tion to the licensor as a generator of sales of his non-patented items; and the extent of such derivative or convoyed sales; (7) Duration of patent and term of license; (8) Established profitability of the products made under the patent, its commercial success and its cur- rent popularity; (9) Utility and advantages of patent property over old modes and devices; (10) The nature of the patented invention, the character of the commercial embodiment of it as owned and produced by the licensor, and the benefit of those who have used the invention; (11) The extent to which the infringer has made use of the invention and the value of such use; (12) The portion of profit or selling price customarily allowed for the use of the invention; (13) The portion of realizable profit attributable to the invention as distinguished from non-patented elements, significant features/ improvements added by the infringer, the manufacturing process or business risks; (14) Opinion testimony of qualified experts; and (15) Outcome from hypothetical arm’s length negotiation at the time of infringement began). 15. In re Innovatio IP Ventures, LLC, No. 1:11-cv-09308 (N.D. Ill. 2013), Dkt. No. 975. 16. For example evaluation of LTE royalty for a specific SEPs owner, please see my article, Lee, “How much will Apple need to pay to Ericsson for a reasonable licensing royalty of LTE patents?,” available at http://techipm- innovationfrontline.blogspot.com/2015/03/how-much-will-apple-need-to- pay-to.html. 17. Comments of Qualcomm, FTC Standards Workshop, Project No. P11- 1204, June 13, 2011 at http:// ftc.gov/os/comments/motorolagoogle/ 563708-00022-85574.pdf. 18. According to, “Smartphones Are Eating the World,” MIT Technology Review, March 15, 2013 available at http://www.technologyreview.com/ photoessay/511791/smartphones-are-eating-the-world/, mobile operators’ service market was $1.2 trillion and mobile phone (including smart- phone) market was $269 billion globally in 2012. In fact, mobile network operators commonly subsidize mobile phone prices, and thus, consum- ers actually do not pay the full cost of the phones. Hence, even to base licensing royalties on the cost to the consumers of the phone is incorrect, because the phone prices are maintained at an artificially low level by the network operators. 19. Qualcomm also expressed its concern about reverse hold up such that an infringer refuses to negotiate in good faith for a FRAND license. 20. Cisco et al.’s amicus briefs with the Federal Circuit: Apple, Inc. v. Motorola, Inc., No. 12-8540 (Fed. Cir. 2013), Dkt. No. 93. 21. Larry Goldstein and Brian Kearsey, Technology Patent Licensing 154 (Aspatore Books 2004).
  5. 5. Copyright © 2016 CCH Incorporated. All Rights Reserved. Reprinted from The Licensing Journal, January 2016, Volume 36, Number 1, pages 7–9, with permission from Wolters Kluwer, New York, NY, 1-800-638-8437, www.wklawbusiness.com

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