Telecoms battles come to the courtroom
James Nurton delves into the world of telecoms standards and patents and provides a guide to the disputes and players in pending litigation
Court 18 is an oak-panelled room tucked away at the back of the Royal Courts of Justice in London. It has wooden vaulting, leather-bound legal volumes, narrow wooden benches and grey-suited lawyers. Just below the old wooden clock that regulates the court's work, a poster shows a silhouette of a mobile phone with a red line through it and proclaims: "The use of mobile telephones is forbidden in courtrooms ... Please switch all mobile phones OFF before entering the courtroom."
Despite its unfriendliness towards mobile devices, court 18 is the venue for the latest round of multi-million dollar battles over the complex technology that enables the mobile communications gadgets (such as telephones, PDAs and Blackberry handsets) that we all use every day to talk to each other, take photos, surf the net, send email, view maps and perform countless other tasks. On October 15, at the start of a three-week trial between Nokia and InterDigital (one of three cases between these parties in the UK), the Victorian courtroom was filled with lawyers with laptop computers, piles of colour-coded lever arch files and textbooks with titles such as WCDMA for UMTS and Digital Signal Processing.
This is the world of telecoms patent litigation – a world of breathtaking technologies, detailed rules on standards and seemingly interminable acronyms (a short glossary is published below). A world that is taking IP rules and debates into new territory, and shaping the future of the way we communicate with each other.
Six thousand kilometres from court 18, in Washington DC, another court is playing a key role in shaping this new world: the International Trade Commission (ITC). The ITC has heard a series of disputes over telecoms patents in the past two years, with more scheduled – many of them the same parties involved in litigation in Europe: Nokia, InterDigital and Qualcomm, for example. Unlike federal district courts, the ITC takes action directly against offending products being imported into the US (in rem in the jargon). Also unlike federal courts it deals only in exclusion orders (effectively injunctions) and not damages. Win a patent infringement case at the ITC, and you can block the infringer's products from entering the US – a powerful weapon, especially since the Supreme Court's eBay ruling last year, which made injunctions harder to come by in federal courts.
The DONE thing
What is going on with all this litigation? The arguments being heard in court 18 between the bewigged barristers and the judge, Mr Justice Pumfrey, provide some pointers. Although this is a patent trial, they are not debating validity or infringement, or the kind of issues you would normally expect to hear in an IP case. Instead, this trial is all about DONE – declarations of non-essentiality.
DONE are the new weapons that licensees are using to challenge patents when licensing negotiations fail. To understand why DONE are important, we need to travel from legal London to high-tech Sophia Antipolis near the French Riviera, sometimes known as Europe's Silicon Valley. Sophia Antipolis is home to the European Telecommunications Standards Institute (ETSI), the body that was set up in 1988 to standardize telecoms technology in Europe and beyond.
2nd generation wireless communication technology, using digital rather than analogue radio signals. Various standards exist, but the main one is GSM. 2.5G refers to 2G enhanced with data transfer.
3rd generation wireless communication technology, introduced from 2003 and now available in much of the world – although less than 10% of all mobile phone users have it at the moment. 3G is better for users – as it can support more features – and better for networks – as it can use the spectrum more efficiently. The standard was set by the International Telecommunications Union and called IMT-2000. The 3GPP's UMTS system complies with that standard. However, due to the variety of features supported (cameras, video and music players, web browsers, email clients) and the many patent owners, royalty stacking is a problem for 3G manufacturers. This leads to patent disputes.
Enhanced data rates for GSM evolution. Not-quite-3G data transmission technology used to enhance GSM networks, notably in North America. Used by Apple's iPhone.
European Telecommunication Standards Institute, based in Sophia Antipolis, France. ETSI managed the standardization of GSM mobile telephony system and is an important player in the 3G Partnership Project, which is developing a global 3rd generation mobile telephony system. Its rigorous IPR policy requires members to disclose patents they consider essential and agree to license them on FRAND terms. But agreements are made directly between licensors and licensees and ETSI does not have a capacity to resolve disputes. Nokia and InterDigital are disputing whether their respective patents declared to ETSI are essential.
Frequency division duplex; a wireless transmission technology used in UMTS/WCDMA system. The InterDigital patents that Nokia is challenging cover this technology.
Fair, reasonable and non-discriminatory: the terms on which licensors agree to license patents that are essential to standards – akin to a compulsory licensing system. While most companies recognize the usefulness of FRAND licensing, there is much scope for dispute over what (1) fair, (2) reasonable and (3) non-discriminatory mean.
General Packet Radio Service, a mobile data service that turns voice-only phones into gadgets that can send and receive messages and email and access the world wide web (albeit slowly compared to other technologies). Available for GSM systems, GPRS is what turns 2G into 2.5G. GPRS was standardized by ETSI, and then 3GPP.
Global system for mobile communications, formerly Groupe Spécial Mobile. 2G technology that is still used in the majority of mobile phones worldwide. Built on standards established by ETSI, and based on Time Division Multiple Access (TDMA) multiplexing, which is to be distinguished from W-CDMA.
Universal mobile telecommunications system. Also known as 3GSM, it succeeds GSM as a mobile telephony standard – at least in Europe. It uses W-CDMA and is standardized by the 3GPP.
Wireless code division multiple access, an efficient and flexible means of using the radio spectrum to carry more traffic. Used in 3G systems, such as UMTS. Having previously backed a competing system, Qualcomm is now a major player in W-CDMA.
ETSI's standards-setting process is complex, and involves participation from many players in the industry. A crucial part of it is the handling of IP rights, about which the Institute provides an extensive policy and guidelines. The aim is to ensure that any patents that are essential, or potentially essential, to the technical standard are declared, and their inclusion in the standard is voted on when it is adopted. The policy ensures that everyone knows which patents apply to standards – and also which patents are not part of the standard and are retained by their owners for competitive advantage (so-called implementation patents). Essential patents must be licensed on FRAND terms (see box). However, it is down to individual manufacturers to negotiate royalty rates or cross-licences bilaterally with the patent owners. If they fail to agree terms, then the manufacturer is either shut out of the particular technology or is technically infringing.
While ETSI has been widely commended for its success in establishing technical interoperability through standards (which is why our phones work), it has not – and indeed, has not attempted to – resolve IP disputes. It is an organization of engineers, not lawyers. When licensing negotiations break down, therefore, parties have headed to the courts.
The first case between Nokia and InterDigital in the UK came in 2004 when Nokia sought invalidation of three UK patents owned by InterDigital for 2G and 2.5G telephony. Under pressure from Pumfrey, InterDigital asserted that it considered two of these patents to be essential to the relevant standard. In response, Nokia claimed that it did not infringe on the grounds that the patents were not essential. Although admitting he was "in two minds as to whether this is a possible approach to a patent action", Pumfrey decided that the court should "resolve the commercial issue in the terms that it is understood by the parties". The Court of Appeal agreed, and DONE were born.
That case was settled as part of a worldwide agreement between the parties over 2G technology, so the judge was never called on to decide whether the patents were indeed essential. But, when a similar dispute arose over 31 InterDigital patents for 3G technologies, Nokia went straight for a DONE. After preliminary legal wrangling during 2006, Pumfrey (endorsed by the Court of Appeal) said the action could proceed. The case that began last month will therefore decide whether or not the three-and-a-half patents remaining in the litigation (there is no longer a dispute over the essentiality of the remaining patents) are indeed essential to the 3G standard. In response to Nokia's suit, InterDigital has filed a similar action challenging some 35 patents that are owned by Nokia and the joint venture Nokia-Siemens Networks. If this is not resolved, and all the patents remain in play, a trial lasting up to six months will take place next year.
By hearing arguments over DONE, Pumfrey has extended the Patents Court's jurisdiction, according to Chris Thornham, an associate with SJ Berwin: "It's outside your normal statutory basis. The only place in Europe where you can get a court to opine on this is the UK." Reinhardt Schuster of German firm Bardehle Pagenberg agrees that German courts would be less likely to approach cases "on such an abstract basis". But he adds that they have been willing to address issues such as what is a reasonable licence: "I know of one case in Dusseldorf involving an ETSI standard where the court said no reasonable licence was offered, as other patentees might approach the defendant." There have also been cases over telecoms standards in the Netherlands. But, because of the more extensive procedures for discovery and evidential analysis, and thanks to the common law system that gives more leeway to judges, the London court has become, says Thornham, "the unofficial dispute resolution centre for ETSI".
What's more, if any of the patents at stake are held to be non-essential, that will have ramifications beyond the immediate parties involved, as other licensees will surely feel emboldened to renegotiate. Some fear that such a declaration would open the floodgates to litigation; whether that happens or not, Nokia has put (considerable) money where its mouth is, and set an example for others to follow. In a different area, MP3, DONE arguments have already been pursued in a dispute between Philips and SanDisk.
The Nokia-InterDigital disputes over DONE are fascinating from a legal perspective. But telecoms industry sources say that another dispute in London, between Nokia and Qualcomm, could prove more significant for the industry. While InterDigital has a few significant patents for W-CDMA (a network used for 3G phones), Qualcomm has much more fundamental IP and has consequently been seeking substantial royalties from manufacturers. The case, which may address issues including validity, infringement and royalty rates, starts at the Patents Court at the end of this month.
Qualcomm has apparently not been shy in asserting its patent portfolio. That has also now landed it with a competition investigation by the European Commission, prompted by complaints from rivals and other manufacturers that Qualcomm's royalty demands (quoted as 5%, regardless of the type of phone or the cost) are too high. The investigation is being fast-tracked but is still expected to take at least a year. Although the Commission may exonerate Qualcomm of any wrongdoing, the implications of any finding that there has been unfair competition are profound. Just ask Microsoft.
The commercial context
The likelihood is that more than 1 billion new phones will be sold this year, according to Gartner, with an increasing number of them 3G. The mobile phone market is enormous and competition is growing, including from new entrants such as Apple. Add to that the fact that, as William Cook of Simmons & Simmons points out, "phones are not just phones" and convergence of different features means more patent royalties have to be paid. And then consider that consumers and network providers (many of whom are still suffering from overpaying for 3G spectrum licences) are putting pressure on manufacturers to cut prices.
These trends will have a big impact on patent licensing. 3G is really a bundle of technologies, each of them subject to standards and incorporating patented inventions, and each of them has to be paid for. Manufacturers have largely been coy about the royalties they pay, but an indication was given in a statement by Nokia in April this year where it said the aggregate royalties it paid on W-CDMA handsets was less than 3%. This figure includes payments on Qualcomm's early patents, but not its newer patents, royalties for which are disputed. Three percent may not sound much, but that's only for one technology – and given that the company reported that it sold €24.8 billion-worth of phones in 2006, it equates to royalty payments of more than €700 million. This world is certainly a far cry from the telecoms industry a generation ago, where most suppliers were postal, telegraph and telephone (PTT) government agencies, whose attitude was, as Bill Moodie of Herbert Smith says: "We don't need patents because we've got a monopoly."
The other big difference between 2G standards such as GSM and 3G standards such as W-CDMA is that the patent balance of power is different. While established players such as Alcatel-Lucent, Ericsson, Motorola and Nokia remain important, Asian companies such as NTT DoCoMo, LG, Samsung and Panasonic are much more prominent in 3G, as are new entities such as Broadcom, Qualcomm and InterDigital. Not all of these companies are manufacturers, which means that they are seeking royalty payments rather than cross-licences. Finally, there are simply a lot more patents now that most of the industry has woken up to the need for protection.
The result is that manufacturers face paying a significant royalty. One industry source told Managing IP that a single 3G handset could include thousands of patented technologies, with hundreds in the radio interface alone. With more patents and new players, licensing negotiations have become more complex and tougher and in such circumstances it is not surprising that some players maintain the suspicion that licensors are over-declaring, claiming patents are essential when they are not or simply being greedy.
Another reason for the rush to litigation is the impact of the ITC. By trying cases in as little as 12 to 14 months (less than almost all district courts), providing what is perceived to be a lower threshold for infringement, a more extensive discovery and more liberal evidence rules, with four specialized administrative law judges – and no juries – and giving a patent owner the ability to block devices coming into the US from the rest of the world, the ITC has gained a more influential role and made defendants sit up and take notice. It does not award damages, but often patent owners will file parallel suits in federal courts – which typically stay proceedings – and, in any case, a finding of infringement at the ITC can be used to negotiate licensing terms. Charles Schill of Steptoe & Johnson says the ITC is therefore becoming increasingly attractive, especially for fast-evolving products: "Parties have more confidence about getting a decision in the timeframe of the lifecycle of these products."
The ITC has been used with striking effect by Broadcom, which acquired a portfolio of patents for chips used in mobile devices and sued Qualcomm for infringement. In a bad summer for Qualcomm, the ITC in June found the company had infringed and barred the future import of infringing chipsets, including those used by networks such as Verizon, AT&T and T-Mobile. This decision came just a month after a jury found it had infringed three other Broadcom patents. In another commercial blow to the company, its customer Verizon Wireless said after the decision that it had agreed a "strategic alliance" under which the telecoms provider will pay Broadcom a $6 royalty per handset, PDA or data card sold – up to $40 million a quarter. Qualcomm has appealed the ITC decision – although it also claims it has a workaround that should keep Americans talking in the meantime.
The future is here
Users of mobile phones will be well aware of the rapid advances in the industry, and the fact that handsets that were the envy of everyone in September are virtually obsolete by Christmas. Even as multi-million dollar battles rage over 3G patents and standards, there is talk of 4G being developed and standardized. Can the law keep up with the technology? For once, it seems that the courts are indeed being flexible and creative and treating disputes in a commercial way. The outcome of the cases being heard now may therefore help to address some of the problems that bedevil this industry, as well as others that depend on standards. And the answers may come sooner than you think: back in court 18, Mr Justice Pumfrey has recently been appointed to the Court of Appeal. Since he is expected to complete his case load before he takes on his new role, this should mean that his judgment in the first Nokia v InterDigital DONE case will be published within the next couple of months.
Some pending legal actions and deals relating to 2G and 3G
Key to the actions
1. On October 1, the European Commission, the EU competition authority, initiated proceedings against Qualcomm, and said it would conduct the case as a matter of priority. The action follows separate complaints filed by six companies – Broadcom, Ericsson, NEC, Nokia, Panasonic and TI – in 2005. They alleged that Qualcomm's demands of a 5% royalty for its WCDMA patents, and its attempts to exclude competitors, breach EU competition law as well as its commitments to standards-setting bodies.
2. In June, the ITC upheld a ruling that Qualcomm had infringed a Broadcom patent for a data processing terminal used in a communications network, and barred the import into the US of new phones incorporating the infringing chips. Qualcomm has appealed the decision to the Federal Circuit, though that court decided in February not to stay the order while the appeal is pending.
3. Litigation between Broadcom and Qualcomm is active in the federal courts, In May, a Californian jury awarded Broadcom nearly $20 million in damages after finding that Qualcomm had infringed three patents. This award was doubled by the judge in August, after the jury found the infringement was wilful. A hearing on an injunction is pending. Broadcom has also filed competition actions against Qualcomm in US state courts.
4. The dispute over royalties owed by Nokia to InterDigital for its 2G and 2.5G patents under an agreement signed in 1999 was finally settled in April 2006, following an ICC arbitration and various court battles in Europe and the US. Nokia agreed to pay $253 million to InterDigital. The UK arm of the litigation (N v I UK I) was the first case to raise the possibility of a declaration of non-essentiality, but the issue was not fully tried before the settlement.
5. Based on the precedent established in N v I UK I, Nokia sought to have 31 of InterDigital's 3G patents declared non-essential. By the time hearings in the case, N v I UK II, started on October 15, three-and-a-half patents remained in dispute. This case is due to last three weeks and a decision is expected within the next three months. In a tit-for-tat action, InterDigital has sought similar declarations regarding 35 patents owned by Nokia and the joint venture Nokia Siemens Networks. This case, N v I UK III, is set to be heard next year and if it proceeds for all 35 patents could last up to six months.
6. In a complaint filed at the ITC in August, InterDigital sought a bar on imports of Nokia phones which, it claims, infringe two of its US patents. Nokia's N75 handset was specifically targeted. A trial is likely in the middle of next year. The company also filed an infringement suit in federal court in Delaware.
7. After nearly 10 years of litigation, in March 2003 Ericsson and Sony Ericsson agreed a settlement with InterDigital, whereby the manufacturers would take a royalty to InterDigital's 2G patents. Payments included a one-off fee of $34 million for the period to December 2002 and an annual fee from Ericsson of $6 million from 2003 to 2006. The per-product royalty that Sony Ericsson would pay on handsets was never publicly disclosed, although details of the agreement were sought under discovery in the litigation between Nokia and InterDigital.
8. In July this year, Ericsson and Samsung settled their disputes over 2G and 3G technologies. Terms were not disclosed, but the deal included cross-licensing of patents and royalty payments. The agreement ended litigation in the US, UK, Germany and the Netherlands that had been filed since a previous agreement expired in 2005.
9. Nokia and Qualcomm have filed complaints against each other at the ITC. On October 20, a judge issued an initial determination terminating a complaint filed by Nokia against Qualcomm in August, as there is arbitration pending between the parties regarding a 2001 licence agreement. The decision regarding a June 2006 complaint filed by Qualcomm against Nokia is expected early next year. Qualcomm has also sued Nokia in Germany, France, Italy, China, the US and the UK (where the trial is due to begin at the end of this month). Nokia has sued Qualcomm in at least Germany, the Netherlands and Delaware. The case in Germany was dismissed on October 22, and the Dutch decision was awaited when Managing IP went to press.
10. InterDigital field a suit a the ITC in March alleging that Samsung's handsets and components infringe three of its 3G patents. The complaint specified four Samsung handsets that are alleged to contain infringing components, and a trial is expected early next year. A similar complaint was filed in Delaware.
11. On October 11, BlackBerry maker Research in Motion extended its worldwide licence agreement with InterDigital to cover 3G products. The agreement will last to the end of 2012. Terms were not disclosed.
12. In January 2006, InterDigital and LG agreed a five-year patent licence agreement reportedly worth $285 million to the US company.