Standard-Setting Patent Strategy

Standard-setting organizations (SSOs) create technical specifications that products must implement to interoperate — and companies that hold patents on mandatory aspects of those standards hold Standard Essential Patents (SEPs) which are among the most commercially valuable patents: HOW STANDARDS ARE SET: MAJOR SSOS: IEEE (Institute of Electrical and Electronics Engineers): 802.11 Wi-Fi; 802.3 Ethernet; 802.15 Bluetooth (working group with Bluetooth SIG); 802.16 WiMAX; ETSI (European Telecommunications Standards Institute): LTE (4G); 5G NR (New Radio); GSM; UMTS; 3GPP technical specifications (ETSI is the SDO for 3GPP specs in Europe); 3GPP (3rd Generation Partnership Project): global consortium; 4G LTE; 5G NR detailed technical specifications; voice (VoLTE); SMS (SMS over IP); W3C (World Wide Web Consortium): HTML; CSS; HTTP; WebRTC; MPEG (now part of ISO/IEC SC29 WG11): MP3; AAC; H.264; HEVC; IETF (Internet Engineering Task Force): TCP/IP; HTTP/2; HTTP/3 (QUIC); TLS; DNS; BLUETOOTH SIG; USB-IF; HOW STANDARDS PARTICIPATION CREATES SEPS: (1) TECHNICAL CONTRIBUTION: send technical contribution to working group specifying a particular technical approach; (2) ADOPTION: if the working group adopts the contribution in the specification, any patent covering that adopted approach becomes a SEP; (3) TIMING IS CRITICAL: companies file patent applications BEFORE making the contribution; upon adoption, the patent reads on the mandatory specification element; the patent is now 'standard essential'; (4) SSO IPR POLICY: all major SSOs require disclosure of potentially essential patents and commitment to FRAND licensing; the commitment is made by declaration; typically irrevocable and runs with any assignment of the patent; STRATEGIC CONTRIBUTIONS: successful SEP strategies involve contributing technically superior solutions that are likely to be adopted because they solve a real problem; the best SEP strategies combine genuine technical innovation with strategic filing to create valuable IP that others must license; EXAMPLE — LTE RADIO PROTOCOLS: specific OFDM (Orthogonal Frequency Division Multiplexing) symbol mapping; specific MIMO (Multiple Input Multiple Output) precoding matrices; specific hybrid ARQ (Automatic Repeat reQuest) protocol; specific channel coding (Turbo codes; LDPC; Polar codes in 5G); these are all required elements of the LTE/5G specification; patents reading on mandatory implementations = SEPs.

FRAND (Fair; Reasonable; and Non-Discriminatory) commitment is the cornerstone of the SSO system — it is the promise that SEP holders make to license their essential patents so standards adoption is not blocked by IP barriers: FRAND COMMITMENT — THE BASICS: WHAT IS A FRAND COMMITMENT: when a company declares a patent as potentially essential to an SSO, most SSO IPR policies require the company to commit to license the patent on FRAND terms to anyone seeking to implement the standard; IRREVOCABILITY: the commitment runs with the patent — if the SEP is sold to an NPE or another company, the FRAND obligation travels with it; Nokia sold patents to ACACIA RESEARCH; commitment remained; WHAT FRAND REQUIRES — ONGOING DEBATE: FRAND sets a process obligation (must license); but it does NOT set a specific royalty rate; the rate is negotiated (or adjudicated) in each deal; courts and arbitrators have been asked to set FRAND rates when parties cannot agree; US FRAND RATE DETERMINATION: US courts apply the comparable license method + top-down analysis + incremental value (smallest salable patent practicing unit; SSPPU); Georgia-Pacific factors adapted for FRAND; KEY FRAND CASES: Unwired Planet v. Huawei (UK S.Ct. 2020): FRAND rate can be set globally by a UK court for the entire global patent portfolio; Huawei must take the license or face injunction in UK; Sisvel v. Haier (BGH Germany 2021): implements CJEU Huawei v. ZTE 5-step sequence; willing licensee defense; Conversant v. Huawei China courts: Chinese courts setting global FRAND rates; anti-suit injunctions blocking enforcement in other courts; PATENT HOLD-UP AND AMBUSH: HOLD-UP: SEP holder uses threat of injunction to demand supra-FRAND rates; most problematic when standard has already been widely adopted and switching costs are high; PATENT AMBUSH: company deliberately conceals patents during standard-setting; does not declare as potentially essential; then asserts post-adoption; Rambus (DRAM memory interface): participated in JEDEC; failed to disclose patents related to specification it was helping to draft; FTC sued; eventually required to license patents at zero royalties in some countries; FRAND INJUNCTIONS: post-eBay (2006): courts increasingly reluctant to issue injunctions for FRAND-encumbered SEPs; ITC has questioned whether exclusion orders appropriate for FRAND SEPs; German courts: Huawei ZTE 5-step sequence must be followed for FRAND defense to bar injunction.

Qualcomm and Ericsson represent the two most successful SEP licensing programs — offering different models that other companies attempting to build SEP portfolios should study: QUALCOMM SEP STRATEGY: HISTORY: Qualcomm developed CDMA (Code Division Multiple Access) technology in the late 1980s; made CDMA the basis for 3G standards; built an enormous patent portfolio; MODEL: device-level royalties = 5% of the net selling price of the complete phone; this is based on Qualcomm's claim that CDMA/LTE patents are valuable to the phone-level system; per-phone pricing = huge royalties as phone prices increased; PORTFOLIO SIZE AND COMPOSITION: 140,000+ patents worldwide; covers CDMA; WCDMA; LTE; 5G NR; also non-SEPs (implementation patents important for cross-licensing); DUAL BUSINESS: QTL (licensing) + QCT (chips); this combination was contested: FTC argued 'no license no chips' policy was anticompetitive; Qualcomm won at 9th Circuit 2020; ROYALTY BASE CONTROVERSY: Apple; other manufacturers challenged device-level royalty base; argued SSPPU doctrine should apply (royalty on component; not phone); Qualcomm settled with Apple in 2019 ($4.5B payment + multi-year chip supply agreement + multi-year licensing deal); ERICSSON SEP STRATEGY: HISTORY: Ericsson has been the largest SEP holder in 2G; 3G; 4G; significant 5G contributor; MODEL: bilateral licensing + pool participation (Avanci for connected vehicles); primary targets: handset manufacturers; PORTFOLIO: 57,000+ US patent families declared essential to various standards; actual essentiality rate varies (declared vs. truly essential); multiple court proceedings establish validity and essentiality; AVANCI: Ericsson is a founding member; Avanci pools 5G standard essential patents from multiple contributors and licenses automotive OEMs on a per-vehicle basis ($20/vehicle for LTE; $150/vehicle target for 5G); reduces licensing burden on OEM; provides collective licensing income to pool members; NOKIA SEP STRATEGY: Nokia Technologies post-handset sale; targets smartphone makers; global bilateral licensing; Avanci; Nokia vs. OPPO (2021-2022) global multi-court litigation led to OPPO exit from several markets; Nokia vs. Apple recurring disputes; BUILDING A SEP PORTFOLIO: STEP 1: identify which SSOs your target markets rely on (5G for telecom; Wi-Fi for IoT; USB for devices; W3C for software); STEP 2: assign engineers to standards working groups; STEP 3: file patent applications BEFORE making technical contributions; STEP 4: when contribution is adopted, declare to SSO and maintain FRAND commitment; STEP 5: build portfolio depth in 2-3 areas of a standard (one or two SEPs is insufficient for a licensing program; need critical mass).

Standard-setting patent strategies carry significant antitrust risk — when SEPs are used to foreclose competition; extract supra-FRAND royalties; or the patent holder conceals essential patents during standard-setting — regulators and courts in the US; EU; and Asia have intervened: US ANTITRUST IN STANDARD-SETTING: FTC v. RAMBUS: FACTS: Rambus participated in JEDEC memory standard working group; Rambus manipulated the standard to include features covered by its patents without disclosing those patents; Rambus then demanded royalties after widespread adoption; FTC DECISION: patent ambush = anticompetitive conduct; ordered royalty-free licensing for some claims; REMEDIES: FTC can impose licensing requirements as antitrust remedy; DOJ CONSENT DECREES: Microsoft; Oracle; and others have faced DOJ review of standard-setting patent practices; SECTION 2 SHERMAN ACT CLAIMS: 'Walker Process' fraud: if a patent holder obtains SEP position through fraud on the SSO (concealing patents; making false FRAND commitments); antitrust liability under § 2 possible; APPLE v. QUALCOMM ANTITRUST THEORY: Apple argued QTL 'no license no chips' policy was monopolization; FTC similarly argued; Qualcomm won in 9th Circuit 2020 (no anticompetitive effect because rivals could enter chip market); EU ANTITRUST: EUROPEAN COMMISSION INVESTIGATIONS: Motorola Mobility (Google): abuse of dominant position for seeking injunctions on FRAND SEPs in Germany while FRAND negotiations ongoing; EC found violation; Samsung Electronics: threatened injunction in UK proceedings while FRAND licensing negotiations ongoing; EC accepted commitments to offer FRAND terms; QUALCOMM EU INVESTIGATION: EC fined Qualcomm €997M for exclusivity payments to Apple to use only Qualcomm chips (not SEP-related; but demonstrates EC scrutiny of Qualcomm business practices); CHINESE ANTITRUST: NDRC (National Development and Reform Commission) fined Qualcomm ¥6.088 billion ($975M) in 2015 for monopolistic conduct in mobile phone SEP licensing in China; required change to royalty base and royalty reduction for China; KOREA KFTC: fined Qualcomm KRW 1.03 trillion (~$865M) in 2016 for abusing dominant market position in modem chip supply; LESSONS FOR SEP STRATEGY: disclose timely to SSO to avoid patent ambush allegations; make genuine FRAND offers before seeking injunctions (follow Huawei v. ZTE sequence); avoid tying SEP licensing to chip supply or other products; ensure FRAND rates are defensible through comparable license analysis; maintain documentation of good faith licensing negotiations.