Live blogging Feed

Wednesday, November 10, 2010

The "Phoney Wars": Standardisation vs. Innovation

The "Phoney Wars": Standardisation vs. Innovation: "

A barrister with experience in telecoms patents cases explains why nobody seems to be able to come to a friendly agreement over smartphone patents: because it's about a lot of money

Guy Burkill QC, at Three New Square, is one of the UK's leading patent barristers, with particular expertise in telecoms-related and electronics patents.

The major telecoms manufacturers are currently fighting each other – in an increasing number of cases and various combinations of adversarial pairings – in courts all over the world. This outbreak of disputes is coming to be known as the 'Phoney Wars', but it is serious. And the stakes are high.

To understand why, we need to look at the nature of a handset. The fact that a mobile phone 'just works' is something we take for granted. But these indispensable handheld devices are remarkable in two respects.

• First, the amazing amount of technology built into them: smartphones like the Blackberry, iPhone, or Windows mobile devices continue to evolve at an astonishing pace.

• Secondly, despite the enormous choice of different products available, all are compatible with the networks and base stations of the various service providers - so e.g. Apples and BlackBerries both work on Orange's or O2's networks. This is a consequence of standardisation. The relevant standards documents are huge and cover all aspects of the interaction between phones and base stations.

Both these aspects benefit consumers, who want the latest technology but in a device that works on existing networks wherever they go. It's the interplay between those aspects that is giving rise to complicated lawsuits over the patents involved.


A schema from a Nokia patent. Photo by Micky.! on Flickr. Some rights reserved

Both the newest must-have technologies, and the creation of industry standards, have required enormous investment in research and development; complex electronics and engineering don't happen by accident.

The patent system is intended to protect and encourage such investment. It recognises that ideas are expensive to develop, but cheap to copy. So in return for disclosing a new invention, the inventor is granted exclusive rights in it for a time.

Unsurprisingly, the major telecoms manufacturers all hold extensive portfolios of hundreds or even thousands of patents. Qualcomm has a wall covered with reproductions of its patents.

'Essential' patents and standards

Some inventions, though new when conceived, are so useful that they later become standards. For example, one covers a particular technical method of controlling the output power of handsets, so each can be detected by a base station – and the nearer ones don't drown out the signals from distant ones.

Once a standard is defined, all manufacturers must be able to comply with it. So standards-setting bodies insist that any owners of patents considered to be 'essential' to a standard should give up exclusivity and instead agree to grant licences on 'Fair, Reasonable and Non-Discriminatory' (FRAND) terms under those patents.

An 'essential' patent is still very valuable: all devices operating according to the standard must by definition fall within its terms, so the patent owner can demand royalties under a FRAND licence.

But many patents don't survive a challenge in court. Determined opponents often raise new points not previously considered by patent offices. In a trial, patents undergo intense scrutiny: in Qualcomm v Nokia, a UK trial in 2008 involving just two patents, the judgment ran to 480 meticulously reasoned paragraphs, many decorated with technical diagrams or equations.

So the questions of whether a patent is valid (in particular, whether the invention is new and non-obvious), whether it is essential, and whether a rival is infringing it, are all issues that are ending up in court.

Deciding licence terms

But the hardest question of all may be: what are FRAND terms and how do you decide? At the most simplistic level, what a patent owner may see as fair and reasonable can look extortionate to a licensee; conversely a licensee's suggestion of a 'fair' royalty offer may look derisory to the inventor. And since most manufacturers own patent portfolios themselves, but also need to use the essential patents owned by others, there can be conflicting views on what royalty rates are 'fair' even within a single organisation.

Add to that worldwide sales of mobiles now exceeding 1 billion units per year, and the stakes are enormous – fractions of a penny per handset are worth fighting over.

Some industries have a settled 'going rate' for patent licences – say, 5-10% for mechanical inventions, rather more for pharmaceuticals. But in the mobile phone industry, a single handset may fall within the scope of hundreds of patents in the portfolios of many different manufacturers. So a 5% royalty on each patent, or even a flat 5% to each patent owner, is commercially impossible: the handset would be instantly unprofitable.

Some (but far from all) of the major manufacturers including Sony Ericsson and Nokia issued a joint press release in 2008 suggesting that a reasonable maximum aggregate royalty level for essential patents in handsets should be a single-digit percentage of the sales price. In short, they proposed a royalty 'cap' so that total royalties could not exceed 10% of the value of a given phone.

But even a capped aggregate royalty can give rise to problems: who gets how much of the royalty 'pot'? A simple split based on the number of relevant patents owned by each participant would seem straightforward, but would encourage companies to play the system by filing and/or declaring essential numerous applications of questionable validity. Alternatively, an assessment based on the validity or quality or value of patent portfolios would require enormous effort auditing them. And who would be deemed sufficiently independent to decide?

And so, since no other mechanism exists for deciding who holds the strongest hand, and nobody can agree, the courts are now being asked to rule on individual patents – a massive task, since there are so many of them. To misquote Clausewitz, 'law is negotiation by other means'.

Inessential patents

The final ingredient in this recipe for dispute is the existence of non-essential patents: those that cover improvements that aren't part of a standard and so nobody has to use, such as a better way to make a display screen.

As mobile phones become 'smarter' and add functionality over and above core telephony features, inessential patents become increasingly significant, and can be more valuable than essential ones if infringement can be proved. This is because royalties, or damages for past infringements, may be sought without the fetter of FRAND licensing requirements – and patents carry the threat of an injunction to enforce the patent monopoly.

Unsurprisingly, inessential patents are also being fought over in court. As well as having potential value in their own right, they strengthen negotiating positions over the FRAND issues.

Where we are now

All these factors have come together to cause the so-called 'Phoney wars' – an outbreak of litigation in various jurisdictions, often in parallel, between various combinations of phone manufacturers. This will take time to resolve: cases may take several years to come to trial and typically only a few patents can be considered at a time.

The bigger question is how to balance two needs fairly. Manufacturers need to be rewarded for innovation, for both essential and inessential inventions; but they also need to be able to sell standards-compatible products without incurring crippling royalty payments to others.

The sums at stake are so large that the high cost of litigation is no deterrent. That makes it difficult to foresee how it will all end. Piecemeal resolution or settlement of individual cases, while necessary, still leaves open industry-wide questions of how to quantify, to limit, and to allocate, an overall royalty 'pot'.

The good news is that end users are benefitting both from standardisation and from the overall operation of the patent system. Standards provide phones that 'just work', while patents have supported the innovation that has led to the astonishing pace of development of products which consumers really want.

© Guy Burkill 7/11/2010; Guy Burkill also asserts his moral rights hereto under the CDPA 1988. © Guardian News & Media Limited 2010 | Use of this content is subject to our Terms & Conditions | More Feeds


No comments: