Standard Essential Patents in Context

http://www.fosspatents.com/2013/04/apple-defeats-samsung-in-california.html

http://www.fosspatents.com/2014/02/korea-fair-trade-commission-clears.html

In the last blog, I talked about what is Standard Essential Patents (SEPs) and what are the issues caused by them. Now, I would like to pay a close attention to the smartphone industry and explore some of the battles among companies and what are the implications.

“In the smartphone and device space, many SEPs pertain to WiFi, 3G and 4G (such as WiMAX and LTE) technology that allows all wireless broadband devices to utilize the networks of wireless broadband providers.”

Standardization can have a lot of benefits. If we think about wall sockets, there are all exactly the same so that we can charge many different electronic devices using the same socket. Because of standardization, we can have more robust innovations in a particular industry since they are very similar to one another and they must compete on R&D in order to gain market share.

Samsung was accused of abusing its SEPs and breaking the antitrust laws by Apple, but Korea Fair Trade Commission (KFTC) found the otherwise to be true and I cite it here: "more than 50 companies hold over 15,000 SEPs relating to 3G wireless communication (UMTS/WCDMA) technology". Therefore, KFTC ruled that Samsung has not used its SEPs in a monopolistic way.

So far, there is only one SEP infringement lawsuit filed by Samsung prevailed, U.S. Patent No. 7,756,087, and the rest of them are not successful. What’s more striking is Samsung actually has zero successful non-SEP assertions worldwide. It has failed miserably in Germany (three times already), in France, in Italy, and in the Netherlands. I think purely based on the statistics, we can derive some interesting insights:

- Does Samsung really have a case here?

- What are they trying to achieve by filling these SEP infringements?

- Are they abusing SEPs?

- If a SEP related lawsuit prevails, what would the defendant have to lose?

A Deeper Look into Standard Essential Patents

http://www.fosspatents.com/2014/02/korea-fair-trade-commission-clears.html

Standard essential patents (SEPs) have gained its publicity in the press recently due to a chain of SEP litigations between Apple and Samsung. In the past decade or so, SEPs have increasingly becoming an issue for many sectors. I thought I would like to explain what is SEP and how does it work.

So imagine that you are Apple and you are trying to enter the Korean market. In Korea, there is a number of technologies that are established as the standard in the smartphone industry. It could be de facto, which means that there isn’t an explicit agreement within this industry but firms have adopted the standard. The standards can also be de jure, which means a government agency has imposed that standard on the industry.

So when Apple wants to enter the Korean market, Apple should incline to meet the standard of technologies. And now let’s assume that Samsung has either developed or acquired a bunch of technologies which are now the SEPs for the industry in Korea. Therefore, Apple would have to pay royalties to Samsung in order to acquire license on these technologies. Samsung, being the SEP owner, should offer a fair price for anyone who comes to them seeking for licensing. Nonetheless, if Apple chooses not to purchase but later got found out that it has infringed Samsung’s SEPs, then it will be forced to pay royalties as well as a fee for damages.

Since SEPs can create barrier of entry in certain industries, SEPs are required to be offered at a fair, reasonable, and nondiscriminatory (FRAND) price so that other firms can have access to the market. However, the definition of FRAND is really arbitrary and there isn’t a regulation over it, unless the SEP owner voluntary agrees to be bound by a standard setting organization (SSO). Sometimes, the owner of SEPs would actually bundle SEPs with some non-SEPs and license them out together. This can really complicate things. Hypothetically speaking, if Samsung is actually licensing out a portfolio of both SEPs and non-SEPs, how much should Samsung charge the licensees for? Should it still follow the FRAND rule if non-SEPs are involved? Again, there isn’t any regulations that specify the mandatory pricing strategy for this situation.

We can clearly see that the legal system for SEP related regulations is far from completed. I personally feel the follow aspects should be regulated:

- SSEP owners’ duties and rights

- Licenses’ duties and rights

- Standard for FRAND

- Pricing strategy for non-SEPs or the bundle of SEPs and non-SEPs

- Prevention of SEP abuse

- Legal damage payment for infringing SEPs 

Functional Claims Explained

http://patentlyo.com/patent/2011/07/the-frequency-of-means-plus-function-claims.html

http://patentlyo.com/patent/2014/01/functional-language-patents.html

What is functional claims?

A Functional claim will be written in what is called means-plus-function form. In patent law, claim defines the scope of your monopoly patent right over the market. Therefore, an inventor would want the claim to cover as wide as possible to protect his innovations from competition and patent infringements.

There are two ways to structure a claim: functional limits and structural limits. Like the words suggest, functional limits would describe the function of the patented technology, whereas structural limits would go into the details of the construction of the patented technology.

In proper functional claims, we can expect to see the following phrases:

-         -  Means

-         -  Means for

-         - Configured to

Why draft functional claims?

Apparently, drafting a function claim gives you broader scope to describe your patents. To give you an example, it’s easier to protect your design for the first cellphone in the market by claiming ownership over “a device that’s mean for remote, wireless communication over a radio link” than “a device that’s made of a plastic or metal rectangular piece with a screen, speakers and buttons.”

When to use functional claims?

It’s more reasonable to utilize function claims for electrical and electronic devices since the physical structure can be rather hard to explain in a clear manner. There might be too many parts and configurations that inventor has to cover in order to achieve his goal. On the contrary, using a function claim can characterize the innovation using significantly fewer claims.

Software is another good example for proper usage of means-plus-function forms. Since software can be written by many programmers who can use different codes to achieve the same purpose, it would be better to emphasis on protecting what the software can accomplish rather than simply protecting the actual lines of codes.

Patent Troll: “Carrot and Stick”

http://www.fosspatents.com/2014/01/huawei-settles-with-rockstar-consortium.html

In late January this year, Huawei and Rockstar Consortium filled a joint motion to dismiss the lawsuit against Huawei on its Android-based devices. We don’t know the amount of money that Huawei had to pay to Rockstar, but one thing for sure, it’s certainly not a small amount that Rockstar would like to settle for letting Huawei off the hook.

Rockstar is known to be a patent troll for its exploitation of ex-Nortel patent portfolios. Its core value lies in reengineering existing products on the market and collecting evidences that they have used Nortel patents. This way, Rockstar can therefore generates financial rewards by suing these companies for patent infringements.

There are two ways for patent troll to make money, and we would like to use the carrot and stick analogy to explain this. In Rockstar’s case, a carrot licensing would be Rockstar goes after firms and tries to sell its patents by claiming “my patented technology is cheaper/ better/more efficient/more appearing, etc.” This way, Rockstar can friendly lures target companies to licensing its products. So the licensee is not under compulsion but rather persuasion to license the patent.

In contrast to carrot licensing strategy, stick licensing approach is Rockstar actively sources firms that have been using ex-Nortel’s patent technologies, and approach them with a threat of patent infringement lawsuit. “The value proposition here is ‘take a license or else… (I will see you in court).’” It’s an interesting argument that if it is not the fear for lawsuits, nobody would ever buy license. Hence, “every carrot license is really a stick license in disguise”.

Patent Licensing in a Nutshell

http://patentlyo.com/patent/2014/01/acquired-patent-licensing-guest-post-by-prof-risch.html

Why license your patent?

Should you license or manufacture your own invention? This difficult question has always troubled inventors. When should the inventor invest massive amount of time and energy figuring out the best business plan and execute it?

If we think about it, producing a product might sound easy, but there are many steps involved. First of all, you need to invest in factories and warehouses. And this is a whole lot of money upfront. Then you have to work with engineers and designers to further improve the product. Most importantly, you will need to establish a sales and marketing team to negotiate with various distribution channels and get your products on the shelf. These steps cannot be done overnight. They are capital-intensive and time-consuming, so before you are absolutely certain that you can make your money back, think twice about the amount of financing that will be needed before producing the products on your own.

On the other hand, licensing your patent out can make things easier, and it will be less-expensive for you to start generating returns. The drawback is of course your profit margin will go down. Be mindful, certain products might be very easy to get a head start, so it makes sense for you to start your own small business, while some other products are too complicated in nature that licensing would be the best way to go about it.

How to make money?

“A license is simply an agreement in which you let someone else commercially use or develop your invention for a period of time.” You can sell your patent outright, or you can simply license out your invention and collect royalties.

An exclusive license is a permanent transfer of ownership rights from you to the licensee. You give up the rights to use the patent and the right to sue for patent infringement. The licensee now take over all the rights you had previously. A non-exclusive license is giving rights to the licensee for using your patent; essentially, you are promising that you won’t sue the licensee for patent infringement.  As an inventor-for-royalties, you are pretty much waiting for the paychecks to come periodically while having more time to allocate to creating more innovations. 

If You Can't Beat Them, Sue Them

http://www.fosspatents.com/2013/11/failed-44-billion-bid-for-nortel.html

Rockstar, a consortium formed to negotiate licensing for patents acquired from bankrupt Nortel Networks, is consisted of six industry giants: Apple, Inc., BlackBerry, Ericsson, Microsoft, and Sony.

To understand why Rockstar has been numerously accused for being a patent troll, we need to first of all understand its nature. It’s a patent licensing company that owns more than 4,000 patents, which are developed by Nortel. The business model is claimed to be patent licensing and patent sales.

Something very interesting about Rockstar is when you go to its website, there is a tab called “Innovation”. However, instead of talking about how the firm can bring new technologies and innovations to the society, it talks about “protect when necessary” and “when patent infringement occurs”. So what Rockstar essentially does is to help its six members defend their patents against infringement. Its business roots in multi-million and sometimes multi-billion dollar settlements, and of course, forced licensing agreements.

With a group of smart engineers - many of whom are patent holders themselves - Rockstar however does not focus on research and development. Its engineers are too busy reverse engineering on its six owners’ competitors’ products, and suing them for damages.

Rockstar filed lawsuits against Google, Samsung, HTC and other Android manufacturers, and most likely file more in the future. This Nortel patent portfolio is truly a nuclear stockpile; it can be very dangerous in the wrong hands. If Google owns it, it would further strengthen Google’s portfolio and gives it more monopoly rights over the market. Nonetheless, the technology giant Google failed to win Nortel over with its highest bid $4.4 billion against Rockstar’s $4.5 billion bid. Some people were relieved when Google didn’t take over Nortel, but now it seems that Nortel is still in the wrong hands after all. Innovations are discouraged and customers are ultimately negatively affected.

Impact of Patent War on Smartphone Ecosystem and Its Implications

The smartphone patent war is a maze. All the major players are tangled up together and each one of them is trying to find a way to block others, while finding the best way out.

However, with more than 250,000 patents in play in the smartphone ecosystem, it is virtually impossible for either company to achieve a decisive victory. And it seems like there is no significant influence on brand recognition regardless of the result. Then why are companies so pumped at beating each other knowing it won't knock them down? Do they really need the billions of dollars claimed? Will it even product positive cash flows when firms are feeding all the expensive law firms to help them fight for the case?

The answer is simple: Firms want to slow down the competition while enjoying dominating the market sales. They are dragging each other from the back to prevent them from creating newer and better technologies to regain the market.

Go back to the question, does winning a patent infringement lawsuit has any material impact on the brand name? Currently, it seems that stockholders would respond to the lawsuit's outcome, but consumers are indifferent regarding to what is happening in the court room. To customers, a smartphone is a smartphone, a device that can allow people to communicate and social with each other, play games, track calenders, etc. It doesn't really bother a customer that Samsung copied Apple's rounded corners design; the thing that a customer cares about is really just how much he likes the device in terms of functionality and usability. 

But look at what patent war has done to the smartphone ecosystem. It slows down innovation generation. It's anti-competitive. Firms spend $1,000 per hour on IP lawyers instead of engineers to defend its products. All in all, it's counterproductive to what would actually benefit costumers. The patent war is malicious; in the long-run, it will create a vicious cycle that would severely damage the smartphone ecosystem.

The Curious Case of Motorola Changing Hands

First announced in August 2011, Google offered $12.5 billion to acquire Motorola Mobility. Motorola is great at making devices with a total history of over 80 years, and Google on the other hand, is the pioneer at software innovation, so the marriage of these two seems to be a great idea at that time to many people. Google needed Motorola to strengthen its patent portfolio, which was crucial for Google to defend itself from numerous lawsuits from Apple, Microsoft, Oracle, along with other aggressive competitors. At the time, Motorola had 17,000 patents, with 7,500 more patents pending. It's the treasure land for Google to dig up armors and swords, and be more offensive in the smartphone patent war in order to defend its Android operating system.

It was a very interesting case because at that time, Google got outbid by Apple in a $4.5 billion acquisition deal of acquiring Nortel Networks, a Canadian telecommunications manufacturer. This gave Apple strategic advantages to go head-to-head in the battle with its main competitors in the market, including Google Android system. Ever since acquired Nortel, Apple started filing massive amount of patent infringement lawsuits in order to slow down the competition, and dominate the fast-growing market.

Just a few days ago on January 29th, Google once again dropped a bomb announcing that it would sell Motorola Mobility to Lenovo for $2.91 billion. This brings some whole new dynamics to the game. Lenovo is a Chinese technology company which acquired IBM personal computer division in 2005, and found its way to enter the US market with IBM's solid PC products.

"Using Motorola, just as Lenovo used the IBM ThinkPad brand, to gain quick credibility and access to desirable markets and build critical mass makes a lot of sense."

It's obvious for us to see the Lenovo is eager to cut a share in the U.S. smart phone market. Previously, Lenovo, among other Chinese brands such as Huawei, is experiencing distrust from U.S. customers. Chinese products are perceived as low quality and have potential security issues. But accessing Motorola's patents and having this brand name would allow Lenovo to muscle its way into the playground of smartphones, and potentially adds more conflicts in the patent wars.

If we think about it, there are many reasons why a company would want to acquire another existing business, but for the three above cases we have seen here, there is one fundamental reason for them to do the acquisition: to expand its patent portfolio, to build higher and more solid wall around its castle, which also enables the firm to attack better. Acquisitions add value in a different way that it is more strategic rather than valuing the company's intrinsic value.