Sorry, Qualcomm, Apple – your patents don't scare us

Google neutrality pacts has shifted the balance

Analysis Patent royalties make up a higher proportion of cellular device costs than in most other markets, so the IPR game has been a hard-fought and sometimes vicious one. At the start of 2015, various developments suggest that the playground bullies of the past will lose a lot of their power. Qualcomm is on the defensive in China, while the holders of fundamental mobile patents are hitting back against Apple.

As it becomes clear which firms really hold the crown jewels in LTE and beyond – with China and Korea taking major roles - that will hit Qualcomm, which has huge adjustments to make to its licensing model, to accommodate a world where China is the biggest device market.

But smartphone patents are not just about the modem any more. Equally important are higher layer technologies such as screens and user interface software. While usually not included in standards, this kind of IPR has been at the heart of the past few years’ waves of handset-related patent litigation.

The new complexity of the smartphone allowed Apple to become a new bully. It sought to use its arsenal of hardware and software IPR for two purposes - to dilute the royalties power of the firms with major holdings in 3GPP standards-essential patents (SEP), an area where Apple has not invested; and to weaken the competitive position of Android and Samsung, by getting devices banned and generally undermining confidence in the Google platform.

Google neutrality pacts shift balance against Apple

The ability of both Qualcomm and Apple, in their respective fields of IPR, to dictate terms from rivals is now severely constrained. Apple still has lawsuits outstanding with Samsung, in particular, but it is being squeezed on two fronts – by a series of Google-initiated neutrality pacts which unite many important players against unnecessary litigation; and by its weakness in standards-essential IPR.

Google – which made a serious misjudgement in assuming it did not need to invest in mobile patents when it initiated the Android revolution – recovered itself by acquiring Motorola Mobility and other significant mobile IPR holders, and by supporting the legal efforts of key allies (and patent-holders) like Samsung. In the later months of 2014, it also engaged in a series of non-aggression pacts with IPR heavyweights like Samsung, Cisco, Verizon and Ericsson, and even agreed to a limited truce with Apple.

Those pacts are important because their signatories commit to long term cross-licensing deals with very broad scope to cover future patents in many cases, reducing the likelihood of legal spats. When Verizon signed its deal with Google late last year, it portrayed it as a blow to trolls, which have been the other menace in the mobile world in recent years. The operator wrote in a blog post that the agreement would guard against the patent troll – “the Johnny-come-lately owner of a single patent can threaten an entire innovative ecosystem”.

By greatly reducing the risk of future litigation, these pacts remove one of the key arguments which Microsoft and Apple have used against Android – that the Google OS exposes its licensees to the risk of lawsuits. After agreements with Samsung in January 2014, followed by similar ones with Cisco and LG, Google is starting to counteract that argument. Samsung has signed similar agreements with Cisco and Ericsson, and others are going the same way, potentially creating a mesh of cross-deals between many of the mobile sector’s largest players, which could deter them from suing one another, as well as making it harder for outsiders like Apple, or for trolls, to attack.

Ericsson and Apple come to blows

However, this is not entirely an outbreak of harmony. Companies with strong SEP holdings are increasingly keen to improve their financial performance, in a world where product margins are tight, by exploiting their IPR more effectively. Giant SEP owners like Ericsson and Nokia traditionally derived limited revenue from licensing but used their patents mainly for bilateral cross-licensing deals which reduced their own costs, especially compared to rivals with no patents to trade. But now they are determined to increase their direct income – especially in the case of Nokia, which has sold its devices division and whose patents are housed in an autonomous business unit.

Apple is an obvious target, as one of the world’s largest mobile device vendors, but severely lacking in patents essential to 3GPP technologies. This was made clear in 2011, when it settled a two-year dispute with Nokia over patent licensing terms, a deal in which the Finnish firm triumphed, highlighting how the old handset guard might be declining in sales terms, but remained dominant in IPR. Reminiscent of that epic battle is a new fight between Apple and Ericsson, which have this week fired lawsuits at one another after two years of negotiations failed to resolve licensing terms for the Swedish giant’s huge portfolio of cellular patents.

Claims and counter-claims

Ericsson is claiming that Apple is infringing patents which are essential to cellular standards and therefore included in every 3G or 4G iDevice. Apple is countering with the same kind of arguments it has already used against Samsung and others – that if IPR does indeed constitute SEP, then Ericsson is over-charging, and failing to honour commitments that all SEP should be licensed under Frand (fair reasonable and non-discriminatory) terms.

Apple seems to be taking a belt-and-braces approach – as well as the Frand arguments, it also alleges that Ericsson’s patents are not essential to LTE standards, and that it doesn’t infringe on them anyway. It insists that, even if a court finds the IPR is fundamental to LTE, Ericsson must calculate its royalties as a percentage of the price of the chip (notably Qualcomm’s modem) not the whole device. It made these claims in a suit filed on January 12 in the US District Court for the Northern District of California, while Ericsson responded with its own legal action, placed in the US District Court for the Eastern District of Texas.

The industry has indeed moved towards chip-based, rather than device-based, royalties calculations, and regulators and governments have become increasingly determined to define and enforce Frand guidelines, with several companies – such as Samsung – being investigated for potential abuses by the European Commission. However, what constitutes Frand is not at all clear, and accusations of excessive or non-uniform charges have become a standard feature of licensing disputes in recent years.

In its countersuit, Ericsson insists that its patents are essential to the LTE standard and petitions the court to rule that its licensing policies, for its entire SEP portfolio, are fair. It claimed, perhaps disingenuously, that one reason for going to the law courts was to obtain an independent assessment of whether its licensing schemes do indeed comply with its Frand commitments.

Gustav Brismark, Ericsson’s VP of patent strategy, also told that Apple’s claims over royalties only covered a small percentage of the patents portfolio involved. “The Apple complaint only contains a small subset of the patent portfolios that are at issue,” he said. “Meanwhile the lawsuit that Ericsson has initiated primarily asks the court do the assessment and come to the conclusion that Ericsson’s offer is indeed in line with our Frand commitment.”

“We’ve always been willing to pay a fair price to secure the rights to standards-essential patents covering technology in our products. Unfortunately, we have not been able to agree with Ericsson on a fair rate for their patents so, as a last resort, we are asking the courts for help,” Apple said in a statement.

“We believe it is reasonable to get fair compensation from companies benefitting from the development we have made over the course of the last 30 years,” retorted chief intellectual property officer Kasim Alfalahi.

Ericsson had a similar run-in with Samsung, which also accused the Swedish firm of inflating its licensing demands when renewal time came around. The companies settled that case a year ago, with a multibillion dollar agreement. However, Samsung would have had more to trade in IPR terms, so the Apple case may prove harder to resolve. And it certainly reflects the new licensing world, where the SEP giants are exploiting their assets more aggressively.

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