Although there remains some discussion, the recent proposal by the European Commission to implement a new framework for FRAND determination in standards signals one clear truth to the IP community: that the pro-standard-essential patent (SEP) side has comprehensively lost the debate of ideas when it comes to defending the current mobile phone licensing regime. The best it seems willing to hope for is an exemption under the premise that mobile phone licensing is well-established, but that sector has also seen the lion’s share of big-ticket disputes and it doesn’t look like the other side of the debate agrees that things are as calm as they’d like to say.
As chief communications officer for one of the main licensors for close to 10 years (2012 to 2021), I was in an interesting position to watch and attempt to influence that discussion. I’m not an expert in patent law, but I am an expert – to the extent anyone can be – on language, on argument. And I can summarise for you why the SEP side is losing, and indeed may have lost, the debate: because it has turned to needlessly complex language and nuanced arguments to try to maintain a status quo that is untenable, while the other side hammers out a simple message: it’s unfair.
Qualcomm domination
Let’s start with the second part: an untenable status quo rooted in unfairness. With their arguments, what status quo are the major licensors trying to defend? It is one where a single company, Qualcomm, manages to seize for itself more revenue than all other major licensors, combined, multiplied by two. The pro-SEP side frames the discussion as implementers v SEP holders and licensors, but the licensor side of the debate, economically, is disproportionately made up of the interests of one company: Qualcomm.
If you ask any 3GPP standards engineer, or any one of the hundreds of people who go to standards meetings, they will tell you that the major standards contributors – Nokia, Qualcomm, Ericsson and, recently through brute force, Huawei – all contribute roughly equally to the development of the standard. Those advancements are captured in portfolios that become the object of endless debate. What percentage of US patents? How large the Chinese portfolio, and of what value? How to categorise patent quality? How many jurisdictions covered in the portfolio, and to what extent do those jurisdictions provide leverage in the case of an injunction? And yet, for all these details – and don’t get me wrong, they are important in the world of IP management, but they’re still details – the crux of the matter is that they are a proxy, a means of measuring contribution to a global technical standard, which can then be rewarded through licensing.
Still, the Qualcomm Technology Licensing revenues were more than double the added licensing revenues of Nokia, Ericsson and all other major licensors, combined, in 2022. I was once told by a longtime former Qualcomm licensing executive, who still clearly felt much allegiance to the programme, that “Qualcomm charge so much because their portfolio is very valuable!” When I asked what made it so valuable, he replied: “Look how much licensing revenue it generates!” It was awkward: I was going to laugh at this obvious joke, but it was said with no hint of a chuckle.
The absurdity of this yin-yang snake-eating-its-tail logic is not lost on anyone, and because people are polite, especially in places like Brussels, no one will specifically call it out. What they will do is ask for greater “transparency” and yearn for a “balanced framework”, as indeed the European Commission’s proposal does. They will propose “expert-driven dispute resolution mechanisms”. But what they’re trying to say is that the system as it stands is unfair, that it’s based on an unfair distribution of business leverage that is divorced from standards development, and which has seen Qualcomm fined, over the past decade or so, a billion dollars each by basically every single major trade commission worldwide with the exception of its home country’s (the US), where they won on appeal.
Why do the industry’s leaders try to uphold this system and, in doing so, find some of the blame for a bad system fall on them? Because, despite the unfairness of this system-that-isn’t-a-system, it treats them pretty well. Over the last 15 years, as Ericsson’s profitability stayed stubbornly low or swung to loss despite the uptake of 4G, then 5G, licensing contributed approximately half – and sometimes all – of its net income. As Nokia looked everywhere for a life raft to survive the tsunami of the iPhone and its Android cohorts, jettisoning businesses and employees and losing a cumulative $6 billion between 2011 and 2013, licensing likely kept the company afloat. Neither of these companies was going to do anything that might upset the system. And so, locked into that pattern of behaviour, they continue to defend a side of the debate that, economically, is almost entirely about Qualcomm. In IP Europe’s latest comment on the commission plan, discussing aggregate royalties, the word ‘Qualcomm’ appears only once, as a member of the Avanci licensing pool, despite – once again – Qualcomm’s royalties being more, in fiscal year 2022, than those of Ericsson, Nokia and all other major licensors combined, and multiplied by two.
Complexity is king
Which gets us to the first issue: needlessly complex language and arguments, designed to make positive action impossible and preserve the status quo. Indeed, the pro-SEP side of the debate has worked mightily to have the entire discussion lost in a myriad of details. Is it contract law v competition law? What about patents that read onto options in the standard? Is a FRAND offer necessarily global, or can it be regional? Is a top-down analysis valid? Or should it be comparable licences (an obvious effort to perpetuate a status quo), or age-normalised citations? Indeed, which licences are comparable? Is a Nokia patent worth as much as a Qualcomm one? A Cisco one? What about one bought by a licensing company and asserted? Theoretically, if that patent – or portfolio – were that good, the original owner, an active licensor, would have kept it for itself, no? Ah, but now we’re into the muddy waters of patent valuation, and what indeed is a standards-essential patent (beyond simply a patent, of whatever value, that was declared by its filing entity as possibly standards-essential, pending a ruling by a court … which can be appealed, and anyway, that’s just one court, in one country, and there are many other such courts, and many other patents …).
The previous paragraph reads like an agenda from any IP conference over the past decade. If you’re a patent attorney or licensing executive, and more specifically one working on behalf of licensing companies, all of the above questions are matters of specific and significant importance. But if you’re not a patent attorney or licensing executive – say, you’re a regulator, a member of an elected political body, a member of its staff, or in my very direct experience, a reporter – these arguments are the zenith of irrelevancy. Even Mr Justice Marcus Smith, in his May 10 ruling in Optis v Apple (a disappointing one for SEP holders, to be sure), characterised a topic that has spilled gallons of ink in the IP space – the discussion about holdout v holdup – as “wasting valuable time and money” and “entirely irrelevant”.
Elsewhere, I read the position paper by IP Europe, the SEP licensors’ lobbying group, responding to the European Commission proposal. If the SEP side lost the debate through needless complexity, the IP Europe paper doubles down on it, with added layers of appeals to regional chauvinism, purported harm to innovation, and unfairness. Instead of a single, clear argument in favour of fairness – which could have been made long ago if they weren’t hobbled by Qualcomm being a contributing member and needing the status quo maintained – they’ve adopted a strategy inspired by the old Saturday Night Live “Taco Town” skit that more is better, including four mini-studies and a live blog that documents their efforts to gain support (which includes a panel at a conference sponsored by IP Europe with no less than 10 speakers on it). They hint at unknown complexities. The proposal is “detrimental to European interests,” they say, and “disadvantages all firms holding European patents” (reminding the commission folks that Nokia and Ericsson are European, as though they’d forgotten). “It undermines both European national courts and the nascent Unified Patent Court,” it says, “in favour of a new ‘Competence’ Centre at the EUIPO, which … has no current competence or experience in the complexities of standard-essential patenting or FRAND licensing valuation.”
Experience in the complexities of FRAND valuation? And what is that experience worth, when many major IP conferences feature a panel titled along the lines of “What is FRAND?”, with experts on both sides of the debate disagreeing wholeheartedly on the meaning. Would greater expertise in FRAND lead the European Commission to greater consensus on its meaning and economic value? On the contrary: the industry has proven that greater expertise in FRAND simply provides either side with the tools for greater disagreement.
Revenue realities
There’s an argument to be made that Qualcomm deserves what it gets – in terms of revenue, I mean. Certainly I’m in admiration of the company’s chip capabilities, which have given it so much leverage. Ask Apple what it’s like going without them. Ask Intel what it’s like competing with them, pouring money into mobile chip R&D year after year only to fall further and further behind before finally throwing in the towel (the company exited the mobile chip market in 2019). In a recent LinkedIn comment on an article by WiseHarbor’s Keith Mallinson, Eric Stasik, the former head of Ericsson’s IP division, argued that Qualcomm was the only company getting a FRAND rate because its tied chip and licensing businesses made it immune to holdout. It’s an interesting idea, but practically speaking I don’t think a licensing industry that charges mobile phone makers upwards of $40 billion a year would find favour in Brussels or elsewhere.
What’s the way forward? It may indeed be too late for the Nokias, Ericssons and others of the world to distance themselves from Qualcomm, so locked are they into arguing that all change is bad instead of lobbying for change to an unfair system that would preserve them. Based on the same Eric Stasik numbers, it looks like everyone except Nokia may just have to accept dramatically reduced revenues, which would be unfortunate because – when it comes to implementers wanting to change how licensing is done, with perhaps Apple in the lead – I don’t think Nokia, Ericsson and other licensors are the targets of the reform they’re advocating for. Indeed, Apple has just recently signed new agreements with Ericsson and, in the past few weeks, Nokia. I’m reminded of 2016, when Apple signed a licence with a major licensor, absent litigation, and sued Qualcomm a month later.
If it isn’t too late, the major licensors sans Qualcomm need to get together and bring something to Europe (or elsewhere) that would be prescriptive instead of destructive. They don’t think the European Commission’s proposed regulations are fair and smart? Propose some that are. But as long as they opt for arguments that attempt to drown the issue in an ocean of complexity, continue to pretend that their side represents varied interests when, economically, there is only one interest at play, and continue to try to defend a status quo that is, on its face, indefensible, the pro-SEP side will continue to lose.
