New frontiers of SEP licensing – A wide ranging conversation with industry experts

Just last month I was able to interview some of the most knowledgeable experts on SEP licensing during this years “Global Standards Leadership Conference 2024” held at the University of California, Berkeley, Haas School of Business

The panel featured:

John Han , Senior Vice President and General Manager at 高通 ;

John Kolakowski , Director of Licensing at 诺基亚 ;

Ran Xu , General Manager of Corporate IP Strategy at 小米科技 ;

Mike Crowley , Senior IP Counsel at @HP Inc.; and

Ryan Cunningham , Senior Associate at Sheppard Mullin Richter & Hampton LLP Mullin.

Find below a summary of the panel discussion. For the video recording of the panel follow the link here: https://youtu.be/MUcnhU-ceuQ

SEP licening the current practice in new industry verticals

I initiated the discussion by acknowledging the contentious nature of SEP licensing and underscoring the need for a thoughtful and informative dialogue. To ensure a well-rounded perspective, I invited representatives from both the licensors of SEPs and those who implement these standards. Additionally, to address the global dimensions of the issue, speakers were selected from the US, Europe, and China.

The conversation began with Ran Xu of Xiaomi, who elucidated the company's transition from a focus on smartphones to embracing IoT devices and electric vehicles. Ran highlighted the imperative to reassess SEP licensing strategies in light of emerging technologies, underscoring the importance of understanding the intrinsic value of patents, particularly in novel vertical markets like IoT, which demand distinct connectivity and data specifications compared to traditional smartphones.

John Han from Qualcomm elaborated on the notion of consistency and value in SEP licensing. He emphasized the criticality of a coherent approach to valuing SEPs, especially in nascent verticals. Han detailed Qualcomm's licensing methodology, which includes a publicly known % royalty rate on the net selling price of phones, supplemented by caps to prevent exorbitant charges. He posited that the valuation of patented technology should be directly proportional to the benefit it confers to the end device and user.

The discussion also broached the perennial challenges in valuation, with Han critiquing the industry's inconsistent practices. He noted the divergence between the industry's stated principles and its actual practices, advocating for a valuation method that genuinely reflects the contribution of the patented technology. The panellists acknowledged ongoing issues in established markets such as smartphones, stressing the need for consensus on royalty rates, particularly for 5G technology. They also explored the intricate dynamics of licensing in emerging markets like cellular IoT devices, which exhibit distinct usage patterns and technical requirements.

The dialogue underscored the necessity for adaptable and transparent licensing frameworks as technological landscapes and application areas evolve. A recurring theme was the importance of continuous dialogue and cooperation among industry stakeholders to effectively address and resolve licensing challenges. The panel provided profound insights into the evolving SEP licensing landscape, highlighting the need for consistent valuation methodologies, transparent practices, and collaborative efforts to navigate the complexities of new technology markets.

John elucidated Qualcomm's approach to SEP licensing, particularly emphasizing the importance of valuation based on the benefit that patented technology confers to the end device and user. He used the example of Qualcomm's pricing model for 5G phones, which charges a royalty rate of the net selling price, capped at a certain amount to ensure fairness. Han argued that applying the same royalty rate to devices with vastly different usage profiles, such as smart meters or IoT devices that use minimal data, would be unreasonable. For such use cases, Qualcomm charges significantly lower royalties, reflecting the different value derived from the technology.

John Han further argued against the notion that price differentiation constitutes price discrimination, emphasizing that different verticals should be priced according to their specific use cases and benefits derived from the technology. He illustrated this by comparing the licensing practices for connected cars, where Qualcomm charges a flat rate per car, irrespective of the vehicle's price, allowing flexibility in the licensing process along the supply chain. He stressed that effective SEP licensing should take into account industry practices and the operational realities of different sectors. For example, the IoT sector comprises numerous small businesses that integrate modules into their devices rather than designing chips themselves.

“By licensing a handful of module makers, Qualcomm can efficiently manage the vast array of IoT applications without overcharging or undervaluing the technology.”(John Han)

John Han concluded by underscoring the importance of maintaining the integrity and value of intellectual property rights, warning against the commoditization of patents. He criticized practices such as patent counting and blanket declarations, which fail to reflect the true value of innovative technologies.

The need for greater transparency of royalty rates and SEP ownership information

Following John Han, Mike Crowley from HP elaborated on the practical challenges faced by implementers in the SEP licensing landscape. Crowley highlighted the difficulty in determining the relevant SEPs for their products, especially given the diversity of technologies embedded in devices such as laptops versus smartphones. He pointed out that licensing costs for these embedded technologies constitute a significant part of the bill of materials, impacting overall product pricing.

Crowley noted that the lack of a centralized repository for SEP information complicates licensing negotiations and valuation. He emphasized the need for:

“Greater transparency and a more nuanced understanding of how different technologies contribute to the final product.” (Mike Crowley)

This, he argued, would help ensure that licensing costs are fair and reflective of the actual use and value of the patented technologies.

Mike further explained the principle of charging licensing fees reflective of the benefit derived from the patented technology, using the example of 4G technology priced between $7 to $9 per phone. He emphasized that it would be unreasonable to charge the same for devices with minimal data usage, like smart meters, which might only be charged cents per use case, highlighting the necessity of price differentiation based on usage.

He further elaborated on the challenges implementers face in determining the royalty burden for products. He noted the difficulties in assessing the relevance of numerous declared SEPs to their products, given the lack of a centralized database. Ryan underscored that consumers ultimately bear the cost of these royalties, which complicates pricing strategies.

Ryan Cunningham Senior Associate at Sheppard Mullin., an attorney representing both implementers and SEP owners, discussed the smart meter industry, where newer technologies like 5G offer little benefit over older standards due to low data requirements. He mentioned the high cost of 5G royalties despite minimal technical benefits, which reduces profit margins without enhancing product value. Ryan also criticized the oversimplification of SEPs, which masks the variability in technology implementations across different devices.

John Kolakowski, Director of Licensing at Nokia Technologies provided insights into Nokia's strategy of licensing in new sectors, such as over-the-top streaming and Internet of Things (IoT). He explained how Nokia adapted its licensing models to align with industry practices, such as working with chip suppliers like Nordic Semiconductor to provide licenses through chip sales. This flexibility aims to ensure fair valuation and easier adoption by licensees.

The panellists collectively stressed the importance of flexibility and industry cooperation in SEP licensing. They acknowledged the need to balance obtaining fair value for patented technologies while accommodating the specific needs and practices of different industries to foster successful licensing agreements and technology adoption.

SEP licening in the value chain – the indemnification issue

The dialogue revealed a nuanced understanding of how SEP licensing is negotiated, particularly in sectors like automotive and consumer electronics. One key issue discussed was the challenge faced by Tier 1 suppliers in the automotive industry when dealing with SEP indemnities. It was highlighted that these suppliers often did not factor in the potential costs of IP indemnification into their pricing models. Consequently, this oversight could lead to financial strain or even bankruptcy if indemnification demands exceeded their budgetary provisions. The panel noted, however, that this problem was being mitigated through flexible solutions where Tier 1 suppliers and automakers collaboratively share the financial burden. This cooperative approach is seen as a positive development, allowing for more practical problem-solving rather than rigid adherence to contractual terms.

The discussion extended to similar indemnification issues in other industries, such as smart meters and air conditioning modules. The panel expressed hope that the automotive sector’s experience could serve as a model for other industries grappling with IP indemnification challenges. It was suggested that a better understanding of these dynamics could lead to more informed decision-making and pricing strategies, preventing potential disputes and fostering smoother business operations.

How to determine an aggregate FRAND rate? Can pools and platforms help?

When the conversation shifted to specific questions from the audience regarding the cost of SEP licenses, it became evident that there is considerable uncertainty surrounding the total financial impact of these licenses. The panel acknowledged that while patent pools, such as those managed by Avanci, have successfully addressed some issues by aggregating the majority of key patent holders in a single licensing platform, other sectors, lack similar comprehensive arrangements. This disparity results in complex negotiations where companies must individually seek licenses from numerous patent holders, adding to the difficulty in predicting and managing costs.

The effectiveness of Avanci’s patent pool in the automotive industry was particularly praised for reducing the "royalty stacking" problem by consolidating multiple patent holders into one licensing agreement. Despite this success, the panel noted that such pools have not been universally adopted across all sectors, partly due to varying industry practices and the reluctance of certain stakeholders to participate in pooled arrangements.

In addition, concerns were raised about the transparency and fairness of licensing agreements. The panel underscored the importance of ensuring that SEP licensing terms comply with the Fair, Reasonable, and Non-Discriminatory (FRAND) standards. This requirement is crucial for enforcing agreements and preventing disputes, as any attempt to impose exorbitant fees could ultimately lead to legal challenges and undermine the enforcement of these patents.

The discussion also touched upon the broader issue of evaluating patents, noting the difficulty in assessing patent quality versus quantity. Many stakeholders focus on the sheer number of patents held, but this metric does not always reflect the actual value or strength of the patents. Alternative methods for evaluating and comparing patents were suggested, though the panel acknowledged that practical, standardized measures are still lacking.

The panel discussion illuminated the complexities of SEP licensing, the emerging solutions to address these challenges, and the ongoing need for flexible and fair licensing practices. The insights shared emphasized the importance of adapting licensing strategies to industry-specific needs while striving for transparency and fairness in patent valuations and negotiations.

How to determine SEP value?

In the panel discussion on the licensing of standard essential patents (SEPs), participants delved into the intricate and prolonged process of negotiating these licenses. The technical negotiations involved detailed exchanges of representative claim charts, which meticulously align each claim of a patent with specific elements of the standard. These claim charts, which can be extensive—sometimes spanning three to five pages per claim—require significant time and effort to review and discuss. The process typically entails a thorough examination of the centrality and validity of the claims, including detailed arguments about why certain claims may not be considered essential to the standard or are invalid based on prior art.

Moreover, the panellists highlighted the challenges associated with the valuation of SEPs, noting that the quality of claims and the incremental value they add to the standard play a crucial role. Yet, there is a tendency among some to bypass these detailed evaluations in favor of more straightforward numerical assessments, which are easier to manipulate but less informative about the true value of the patents.

The discussion also touched upon the difficulties faced by companies with limited resources, particularly in emerging sectors like the Internet of Things (IoT). These companies often lack the in-house capability to engage in rigorous technical negotiations and may therefore end up accepting higher royalty rates simply due to their inability to contest or negotiate terms effectively. The preference of some SEP holders to license at the end product level, rather than at the module level, exacerbates this issue, as it places additional strain on companies less equipped to handle such in-depth discussions.

Panelists agreed that while there is no standardized way to measure or to compare the quality of patents across companies, those within the industry often rely on direct exchanges and comparisons of claim charts and valuations to arrive at equitable licensing agreements. While data cannot be the only reference point it supports the negotiation to better understand the size and share of a certain SEP portfolio that is licensed in the market.

In essence, the panel emphasized the need for a nuanced understanding of patent quality and valuation, recognizing that the landscape of SEP licensing is both sophisticated and highly context-dependent.

Best practice licening models – lump-sum vs. per-unit pricing

In the discussion several key insights emerged about the dynamics and challenges of negotiating and enforcing these licenses. The conversation touched on various aspects of licensing strategies, including the preference for lump-sum versus per-unit payments, and the implications of these choices in both negotiation and litigation contexts. The panelists discussed how lump-sum agreements, while offering simplicity and predictability for licensors, often complicate the process of comparing and analyzing license terms, particularly in legal disputes. Lump-sum deals can mask the true value of patents by making it difficult to discern the effective royalty rates, especially when such agreements are reviewed in light of actual sales figures and market performance. This lack of transparency can create challenges during litigation when parties need to assess whether the terms reflect a fair and non-discriminatory rate.

The discussion concluded with a reflection on the variety of licensing approaches, from lump-sum payments to per-unit royalties, and the complexities involved in each. Lump-sum agreements, while providing certainty, require both parties to agree on sales projections, which can be challenging. Conversely, per-unit royalties can introduce variability and complexity into the negotiation process, especially when different expectations of future sales are at play.

The discussion also highlighted the practicality of lump-sum payments for licensors who prefer to avoid detailed and potentially contentious negotiations over per-unit rates. Such arrangements can provide a more straightforward basis for financial planning and reduce the complexity of re-negotiating terms based on market fluctuations. However, this simplicity can be at odds with the need for transparency and comparability in court settings, where detailed breakdowns of per-unit royalties might offer clearer insights into fair licensing rates.

The panellists noted the importance of trust and transparency in licensing negotiations. When entering into agreements, particularly with new or less established partners, licensors often utilize trusted mediators or build on past experiences with familiar parties to ensure fair treatment. They also discussed the role of public statements and patent pools as data points that help set benchmarks for licensing rates, though these are often subject to varying interpretations and applications.

Global SEP enforcement – towards SEP enforcement in emerging markets

As the conversation shifted to enforcement issues, the panellists expressed a range of opinions on the effectiveness of different jurisdictions. The current state of patent enforcement varies significantly across regions. While some jurisdictions, like the UK and India, offer promising venues for SEP litigation due to their robust legal frameworks and the possibility of obtaining injunctive relief, others, such as China, present challenges, especially for foreign patent holders facing protectionist tendencies, as seen in the case of Nokia vs. Oppo.

The panel concluded that despite the varying effectiveness of enforcement mechanisms across different jurisdictions, the global nature of technology markets necessitates a strategic approach to handling SEP disputes. They emphasized that while litigation should be a last resort, understanding and navigating these complexities are essential for both licensors and licensees in securing fair and effective licensing agreements. The discussion underscored the need for continued dialogue and cooperation within the licensing community to address these challenges and achieve equitable outcomes in SEP licensing.