In October I was honored to be part of the John Marshall Law School IP Executive seminar program run by the inestimable Daryl Lim, and to be part of an all-day, three-person panel on Standard Essential Patents (SEPs). My co-panelists were Graham Bell of Cubicibuc Ltd. and Randall Rader, former Chief Judge of the US Court of Appeals for the Federal Circuit.
We spent the day providing short talks followed by vigorous panel discussion on a series of topics designed to illustrate the need for, origins and benefits of, and the challenges facing players in the SEP ecosystem. Additionally, we reviewed standard-setting organizations (SSOs) and their IP policies, the “Patent Wars” (which mostly concern SEPs), F/RAND royalties, and injunctions. We closed the day prognosticating about the future of standardization and SEP licensing.
The day started out with Graham providing an historical overview of how technical standards developed and why they are ubiquitous. We then discussed how SEPs are an inevitable consequence of standardization and catalogued the various challenges, first in identifying whether a patent is in fact an SEP, then in setting up an antitrust and legally compliant SEP-patenting program.
Before we started our discussion of F/RAND — and how the simple-to-articulate, but extremely hard-to-define, principle spawned hundreds of lawsuits and thousands of learned articles and papers — I kicked off a short discussion of whether there is in fact a royalty rate crisis in the SEP ecosystem.
I argued that there wasn’t, but based on a 2016 speech by Commissioner Margrethe Vestager (European Commissioner for Competition since 2014) where she seemed to accept that 30% of the cost of a smartphone was attributable to SEP royalties, I could see why some might think that there was a crisis. This point transitioned to a discussion about how many well-known talking heads and experts in the SEP ecosystem have deep corporate connections on various sides of the key issues. We all concluded that while it is always worth reading what these experts have to say, it is important to take their arguments and try to evaluate them objectively.
One of the more lively discussions was around whether the nature of SEP licensing trends towards global litigation. In my remarks I reviewed the typical economics of standard-essential patents given the average costs associated with prosecuting and maintaining a typically sized SEP family (not inclusive of underlying research and SSO policy compliance costs). When those costs are combined with the average cost of a standard patent litigation, then compared to the average likelihood of success and the average damages amount (for non-SEPs; for SEPs the costs are higher, and the success and damages rates lower), I argued that an SEP owner stood less than a 1/6 chance of doubling their money — worse than rolling half a pair of dice.
As a result, I argued that SEP licensors generally engage in risk mitigation by trying to license larger portfolios. They reason that at least one SEP in the portfolio will have a much better-than-average ROI should negotiations fail and lead to litigation. Because courts have historically avoided global portfolio determination, and it is challenging to assert more than a handful of patents in any one case, failed negotiations lead to set piece litigation where the patents in suit act as proxies for the value of the entire portfolio. This in turn leads to potential licensees trying to limit the impact of a license to only those patents in litigation, which in turn leads to multiple litigations around the world, which in turn leads to regulatory investigations and anti-suit requests.
Appropriately, after a vigorous discussion of my thesis that SEP licensing leads to litigation, we transitioned to discussing actual case law.
Judge Rader provided an excellent overview of key recent US, EU, UK, and Chinese cases and regulatory actions touching FRAND and SEP licensing. The case overview was followed by a fascinating conversation about whether it is best to conceive of SEP licensing as a global phenomenon. Judge Rader then provided another excellent summary of the various remedies available for SEPs, including FRAND royalties, and when injunctions might be allowed. Some of the concepts we explored included the original meanings and current uses of various royalty-calculation concepts, including: “entire market value” vs. “smallest salable patent practicing unit,” “top-down” vs. “bottom-up,” “strict proportionality” vs. “proportionality plus,” and the pros and cons of various damage models and their application to FRAND rate setting.
After the Judge reviewed the case law and legal concepts, we discussed how these concepts played out in the recent Unwired Planet and TCL decisions. (Our program occurred before the recent appeal decision in Unwired Planet in the UK.) We went through some of the mechanics behind the calculations and how the concepts have been used in actual licensing discussions. Graham showed the audience a really fascinating tool (and spreadsheet) he developed for his clients that provides FRAND royalty projections based on various agreed-upon assumptions that have been used by the courts.
After we had reviewed the state of the case law on SEP licensing, I led a discussion about some data points that might make a reasonable observer ponder whether SEPs were worth pursuing anymore.
The penultimate part of the program addressed the seemingly very high rate of invalidation or nullification of SEPs. We reviewed a number of reasons why, for example, in Germany the nullification rate for software and Telecom patents (many of which are SEPs) is over 88%.
Closing out the day we discussed IoT patents, automotive patents, licensing for all, and other emerging trends impacting SEPs. We then speculated about the different ways that SEP licensing will change in the future.
David L. Cohen, Esq.
David L. Cohen, P.C. – Kidon IP
123 West 93rd Street
New York, NY 10025