The rise of 5G is set to frustrate FRAND negotiations and drive more litigation, according to in-house counsel from top filers of the technology.
Senior sources at telecoms and technology companies say that the convergence of technologies across different industries such as autonomous vehicles and internet of things (IoT) will lead more companies to use 5G than used 4G.
Patent holders will subsequently have to have more negotiations to license their 5G technologies successfully under fair, reasonable and non-discriminatory terms (FRAND), and with companies that are not necessarily familiar with standard essential patent (SEP) licensing procedures.
Rights holders will also need to spend more time and money understanding new entrants’ different verticals to work out how much these potential licensees should pay for a licence.
In-house lawyers say the lack of experience from both licensors and licensees has the potential to hinder negotiations and delay revenue streams derived from SEP licensing royalties to a greater extent than with other standardised technologies.
“A differentiating characteristic of 5G is that it will be driven by lots of new players with no experience of licensing and that tend to look at it as a frightening and complex process,” says the head of IP affairs at a global telecoms company.
The vice president of IP at another global telecoms company adds that negotiating with new verticals will be by far the bigger challenge in the 5G licensing equation.
“Within the cellular handsets vertical, there are some new players becoming bigger in areas of the world where their background is not in cellular – but the bigger challenge will be new technologies using 5G outside of the handset space,” he says.
“It is a matter of unfamiliarity on both sides at a high level, because of their products and not understanding R&D expenditures and licensing expectations on our side,” he adds.
He points out that greater resources will have to be directed to these negotiations because licensing discussions scale with the number of licences that the business is looking to sell.
“That is an administrative challenge we face – but of course we will look to scale it based on our revenue expectations.”
Some sources from top 5G patent holders point out that it is not certain that these specific problems will emerge, and that different challenges could be raised depending on how the 5G roll out works.
The vice president of IP at an electronics company in the US says that while people are excited about the opportunities 5G could offer – such as the development of self-driving cars that are made cheaper and lighter by pushing systems to the cloud – there is the trade friction between the US and China to consider.
“The US is kicking Huawei, the biggest patent holder of this technology, out of 5G development. That means you could end up with two or three separate internets; one led by the US, one by China and possibly one by the EU because of its rules around copyright and privacy.”
He adds that those developments may halt some of the predicted 5G use cases, such as the millions internet-of-things (IoT) connected devices that have yet to come to market.
In any case, licensing royalty delays are not a welcome prospect to businesses that have invested heavily in 5G innovations and that have felt the sting of delayed revenue when trying to commercialise their SEPs in the past.
“Our problem is that it can take years to see profits from SEP work,” the head of litigation at a telecoms company tells Patent Strategy. “That means that we need an efficient way to come to a solution in these complex FRAND negotiations.”
He adds that the problem lies in the interpretation of FRAND as a concept, which could be exacerbated by the number of new players entering the 5G market if they question whether a licence rate based on the value in their vertical is fair and reasonable. A report from market intelligence firm IP Lytics published in April 2019 shows that there was an enormous spate of 5G filings last year. Top filers of the technology include Huawei, Qualcomm and Intel.
Vertical challenges
Sources explain that the influx of new verticals into the 5G market is difficult for those patent holders that operate a use-based licensing system and choose to license their innovations at the level where the value of said technologies is realised.
“Consider a book – if you go down to the person who manufactures the paper and binds it together, there is not a lot of value there,” says the telecoms head of IP affairs. “It is only once you put in the IP that comes from the author that all of a sudden you have something that is worth more than $1 or $2.”
He points out, however, that identifying this value and finding the most efficient place to license a patent in a new market can be tricky. Licensing 5G to the car industry is relatively simple in theory because there are about 20 manufacturers that charge a lot for their connectivity package and have the ability to pay. But with other IoT products, it is more difficult to determine a licensing scheme that is efficient and practical.
“We want people to use the tech and want to collect licensing fees – the most important thing is to have a single licence at a single level rather than multiples licences and different levels, which creates transactions costs and attorney fees.”
But in-house counsel point out that the inexperience on both sides could lead to more instances of expectation mismatches that end in litigation. The IP vice president says that in his experience, entering new markets can create such mismatches.
“If we are forced to litigate because the expectations on either side are so different, we will need more outside counsel to come in and support those cases,” he says.
“I hope that we can resolve these disputes amicably, but if there is a complete mismatch on expectations based on principles or philosophical differences that makes the royalty calculation radically different on both sides, there is no other solution but litigation,” he continues.
He adds that litigation will likely be necessary in some verticals as 5G licensing starts to ramp up.
Patent Strategy reported last year that 5G licensing was likely to cause friction between telecoms companies and car manufacturers. In-house sources explained that automotive companies had developed a culture of wanting to buy components from suppliers that were free from third-party rights, but telecoms firms and some other SEP owners traditionally filed infringement actions against parties at the end of a value chain.
“Driverless car makers are now in a situation where they could be attacked for patent infringement because their suppliers did not get a licence for the technology, and they have never really had to worry about third-party rights before,” says the IP manager of a car parts manufacturer.
The better licensing path
Despite the challenges of 5G licensing, licensors tell Patent Strategy they are confident that the market will settle once both sides have had a chance to understand the landscape.
In an effort to educate licensees that are unfamiliar with licensing under FRAND terms, patent holders have worked with standards associations and the EU to create a licensing code of conduct and a set of 5G licensing guidelines.
In the aftermath of the publication of the European Commission’s Communication on SEPs, two rival workshops were established within the framework of the European standards organisations CEN and CENELEC with the purpose of establishing a code on best practices for SEP licensing.
The final draft of the Core Principles and Approaches for Licensing of Standard Essential Patents was published in January 2019.
“The most important thing in 5G licensing is education,” says the telecoms head of IP affairs. “People should understand that the process is not complicated and should be aware of the paradigm that we only have a few companies investing in this tech and hundreds or thousands of companies that are implementing it.”
He adds that for businesses in 5G-implementing supply chains, it is very important to understand that not everyone needs a licence and that typically one point in the chain can cover everyone else.
The telecoms vice president of IP agrees that education is important, but adds that perhaps a more important factor is conducting good-faith negotiations with a certain level of transparency.
He points out that telecoms companies have made efforts to implement transparency in their licensing practices. Nokia announced last year that the licensing rate for its 5G SEP portfolio would be capped at €3 ($3.38) per device for mobile phones that implement the 5G New Radio standard.
But he adds that licensees also need to show a degree of transparency and share economic information that will help licensors determine that the value of their 5G tech has been realised.
“If we are to have good-faith negotiations, we must understand how much value we contribute. If we do not have transparency on this value, we are missing a key element that will help us to set the right price.”
The sheer scale of negotiations and the relative inexperience of the parties involved in those discussions is going to create an uphill battle for 5G licensors – at least for a while. Once the dust has settled, the landscape will be less tumultuous. But for that to happen, both sides need to better understand the other and enter into discussions with open minds.
