Smart Patents at War

The mobile communications industries is encountered by a so far unexampled burst of patent infringement claims. Almost all big market players are either faced with infringement claims driven by competitors or self taking court action. And also a few enterprises, which on the first sight having nothing to do with mobile communications like Eastman Kodak are involved in the quarrel. The recent developments in the industries in particular the rise of so called smart phones which comprise any possible functionality in just one device appears to accelerate the conflict. We found a nice graphics which show the actual involvements. In face of the latest news about the Motorola vs. Apple dispute we would have a closer look to the background.

Unlike any other industries mobile communications products are heavily standardized to achieve the highest grade of interoperability across national borders as well as beyond proprietary limits. Only this way strong network effects appear which found the success of global wireless communication systems by fostering the installation of the widest user basis. Therefore standardization takes part at international Standard Setting Organizations (SSOs) like ETSI (European Telecommunications Standards Institute) under participation of all market players which agree there on one technical product design. Doing this it is more the rule than an exception that also patent protected technology is included within the standard. Patents covering technology which essentially must be implemented to build a standard compliant product are called essential patents. These essential patents are the starting point in most cases mentioned above.

It is common sense that including patented technology into standards is hardly avoidable. That is true for some reasons like superiority of patent protected technology, customer demands, and also the general use of the patent system which permits blocking and fencing tactics and thus increasing the total amount of patents at all. Actually, present mobile communications standards like GSM (2G), UMTS/CDMA (3G) and the next generation LTE (4G) essentially require the implementation of technology covered by thousands and more patents. This results in an overlapping set of patent rights requiring that those seeking to commercialize this technology obtain licenses from multiple patentees. A situation for which Carl Saphiro, University of California at Berkeley, coined the term patent thicket.

We will come back to some specific problems arising from essential patents but before we do so we would make some considerations about the commercial impact of a standardized product market. The welcome effect of standardization is also its burden since the standardized products will not differ technically any longer. This means nothing more than that formerly competing companies build technically identical products. The main functions of the product for which the customer regularly buys the product do not differ and could not set any sales appeal. The battle over market share – at least the battle for the return of investment – must therefore be conducted by other means than technical product design. The inclusion of patent protected technology into standards must also be seen in these premises.

Essential patents are problematic in many respects. The patentee gains significant market power. He could misuse its position by gaining excessive royalties while the licensee is on a take it or leave it position. Also the simple amount of essential patents is problematic. The single royalties for licensing could stack up to prohibitive total costs of licensing resulting in a significant threshold for market entry (Licensing costs of recent mobile handsets often sum up to a double-digit amount, check isuppli.com). In order to reduce the benefit of essential patents for the proprietor, SSOs regularly requesting them to make a so called FRAND licensing commitment. By such commitment the patentee irrevocably declares its general willingness to grant licenses on fair, reasonable and non-discriminatory terms to any interested party. Unfortunately, the FRAND licensing commitment is not the solution of the essential patents problem but part of it, because it is absolutely not clear what FRAND means. For this reason, many negotiations about licensing essential patents were unsuccessfully closed.

The conflict about licensing essential patents is strong connected to the recent patent infringement proceedings between Nokia and Apple, Apple and Motorola, Apple and HTC, and so on. With the incredible market success of so called smart phones the whole conflict intensifies. Smart phones are devices which comprise almost any thinkable function, like photographing, navigating, music and video player functionalities and also internet applications. Built up on the core functionality of mobile communication (in particular data transmission), the devices emerge to real Personal Digital Assistants. One main problem with such increasing functionalities is usability. The new big market players, HTC, Google, and best of all Apple, made these multi-use devices usable in a new, coherent and also often patent protected way and considerably contribute to the market success. The former dominant enterprises like Nokia and Motorola lost a significant amount of market share. And also enterprises like Eastman Kodak suffer as  the implementation of photographing functionalities into mobile handsets decreases the total sales of photo cameras significantly.

The problem of firms like Nokia and Motorola is not so much envy about the success of new market entrants but that these regularly did not contribute to the core functionalities of the mobile devices (i.e. core network, radio transmission, etc.). The base technology was developed and standardized under participation of firms like Motorola and Nokia (and, of course, many others) and is in substance their merit. While it was used to make the technology available among all standardization participants via cross licensing, the new market entrants have – at the first sight – nothing to offer. But  they could refer to the FRAND licensing commitments of the standardization participants. Considering this, the recent claims are more comprehensible. By bringing their patents in position against each other, the firms try not only to ensure their market positions but to ensure their share of the market success of the product. Last but not least it is all about a new valuation of the technology contributions. By the way, the value of usability should not be underestimated. A lot of the new functionalities of mobile devices have been implemented for a quite while. But they lead a shadowy existence because the were next to uselessness.

It is not likely that the actions are brought to a conclusion because no one is really interested in negotiating market shares and returns before a court. The infringement claims are just a means to increase the pressure to the opposite partner in the (future) licensing negotiations. And also Apple’s recent compliant about Motorola before the US International Trade Commission (USITC) must be seen in this connection. The USITC could impose an import ban much faster than any court comes to a solution in an infringement proceedings. Thus, Motorola would be even more motivated to find an acceptable negotiation solution.

From the whole area of conflicts arises the question about shortcomings of the current patent system. The patent systems stems from a time in which regularly one patent covered only one single invention. The single inventor of a product was dependent on the patent and its protection against counterfeiting. Today competitors each contribute particular parts or functionalities to a product. Mostly such a product is only marketable if it combines technology of most variable origin. That means that competitors are not opponents but dependent on each other. Their technology is complementary.  The conflict is also rather about how to distribute the total product returns between all contributors. The current patent system does not give an answer to this question. In respect of the unexampled burst of patent infringement claims in high tech industries like mobile communications this failure of the patent system becomes evident.

Stephan Dorn

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