The Real FRAND Scam Part 2

Previously we addressed some of the key omissions in Unified Patents’ article “FRAND SCAM.”  This post discusses the article’s failure to address the heavy criticism of the royalty calculations in the TCL decision forms the basis for the key arguments in the article.  For a long time industry analysts have criticized the TCL decision on a number of grounds (see, for example, this thoughtful article by Richard Vary at Bird & Bird):

  • The TCL decision applied a top-down approach to calculating the value of Ericsson’s patent portfolio, based on biased and inconsistent assumptions. This resulted in an incorrect reduction to the value of Ericsson’s patent portfolio, with further skewed inferences further exacerbating that effect. Other courts, recognizing that the method was flawed for those very reasons, opted for a more balanced route. Although the Unwired Planet court in the UK was presented with substantially the same top-down approach as in TCL, the UK court recognized that the approach was inherently biased, and significantly adjusted it before using it as a cross-check. For example, the UK court appreciated that all patents do not have equal value, refused to apply an incorrect reading of Ericsson’s past statements on aggregate royalties, and declined to derive shares of that aggregate royalty by using different levels of scrutiny for the things being compared. While the plaintiff’s share was highly scrutinized, the rest of the industry’s share was based on a 20-minute-per-patent review that the UK court simply could not accept as credible. Indeed, a later study has found the results of the 20-minute-per-patent review to be comparable to random guesswork.
  • The TCL decision relied too much on the top-down approach as opposed to relying more heavily on comparable licenses, due to an unsubstantiated concern over “royalty stacking.” As several authors have already demonstrated, royalty stacking levels as reported by Unified Patents in its advertisement do not exist and are contradicted, as economic theory suggests, by the level of competition and price decrease that we have experienced in the mobile industry for decades.
  • The TCL decision refused to consider comparable licenses with a royalty structure that best reflected TCL’s closest competitors, ZTE and Coolpad. Instead, the court relied on agreements between Ericsson and significantly different companies like Apple and Samsung as a basis for which to determine the TCL rate—apples to oranges comparison by most observers. In contrast, the UK court decision did include ZTE and Coolpad in its comparison and found that Apple was not a good comparable for lower-end manufacturers. Just looking at the numbers, the differences between Apple and TCL are stark. In 2017, Apple’s ASP was $686; TCL’s ASP was a mere $48. Apple sold 215.8 million devices; TCL sold 32.9 million. Apple’s brand value has been estimated to be in excess of $300B; TCL’s brand value is practically zero. Presumably, significant adjustments would be needed to compare companies that top the list of most valuable technology companies year after year with a more regional player with a brand better known in its home country. The UK court recognized the fruitlessness of comparing Apple to lower-end vendors without proper adjustments.
  • In the TCL decision, the court took an unorthodox approach to setting licensing rates by electing to apply the percentage royalty rate it determined from other licenses based off of their retail prices to only the wholesale price of TCL’s handsets. This mistake alone can skew percentage results significantly, as retail and wholesale prices differ dramatically. The UK court did not make this mistake in its calculations.
  • Another reason why the Apple license is inapposite to the TCL/Ericsson dispute is that Apple’s dispute with Ericsson was resolved after six months of litigation, but TCL refused to take a license for over four years. Moreover, Apple settled with Ericsson, TCL required a court to impose a royalty.

In the next and final post, we will address some of the article’s misrepresentations about the TCL decision and discuss a strange comment where Unified Patents seem to praise China’s anti-trust authorities.