Speakers’ Corner: The high-stakes ‘Phoney Wars’

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Guy Burkill, QC at UK patent barristers Three New Square, gives his view of the legal battles between smartphone manufacturers over technology patents

Various telecoms manufacturers are currently fighting each other over patents in courts all over the world. This outbreak of disputes is coming to be known as the ‘Phoney Wars’, but it is serious and the stakes are high

Why? Well, handheld devices are remarkable in two respects. Firstly, there is an amazing amount of technology built into them. Secondly, all of them are compatible with the same operator networks, a consequence of standardisation. The relevant standards documents cover all aspects of interaction between phones and base stations.

Manufacturers need to innovate to compete, but also need to comply.  It’s this interplay that is giving rise to complicated lawsuits over patents.

The patent system recognises ideas are expensive to develop, but cheap to copy. So in return for disclosing a new invention, the inventor is granted exclusive rights to it for a time.

Some telecoms inventions, though new when conceived, are so useful they later become standards. Once a standard is defined, all manufacturers must be able to comply with it.

So standards-setting bodies insist owners of any patents considered to be “essential” to a standard should give up exclusivity and agree to grant licences on “Fair Reasonable and Non-Discriminatory” (FRAND) terms.

Such an “essential” patent is still very valuable: all devices operating to the standard must fall within its terms, so the patent owner can demand royalties.

But many patents don’t survive a challenge in court. Determined opponents often raise new points not previously considered by patent offices. In Qualcomm v Nokia, a UK trial in 2008 involving just two patents, the judgment ran to 480 detailed paragraphs.

So the questions of whether a patent is valid, whether it is essential, and whether a rival is infringing it, are issues that are ending up in court.

But the hardest question of all may be: what are FRAND terms and how do you decide? At the most simplistic level, what a patent owner may see as fair can look extortionate to a licensee; conversely a licensee’s suggestion of a “fair” royalty offer may look derisory to the inventor.

Considering that worldwide sales of mobile phones now exceed one billion units per year, the stakes are enormous – fractions of a penny per handset are worth arguing over.

Some industries have a settled “going rate” for patent licences – say, 5-10 per cent for mechanical inventions, rather more for pharmaceuticals. But in the mobile industry, a single handset may fall within the scope of hundreds of patents owned by many different manufacturers.

So a five per cent royalty on each, or even a flat five per cent to each patent owner, is commercially impossible: the handset would be instantly unprofitable.

Some of the major manufacturers, including Sony Ericsson and Nokia, issued a release in 2008 suggesting a reasonable maximum aggregate royalty level for essential patents in handsets should be a single-digit percentage of the sales price. In short, they proposed a royalty cap so total royalties could not exceed 10 per cent of the value of a given phone.

But even a capped aggregate royalty can give rise to problems: who gets how much of the “pot”? A split based on the number of relevant patents owned by each participant would seem straightforward, but would encourage companies to play the system by filing and/or declaring applications of questionable validity.

Alternatively, an assessment based on the validity or quality or value of patents would require enormous effort auditing them. Since no other independent mechanism exists for deciding who holds the strongest hand, and nobody can agree, the courts are now being asked to rule on individual patents: an enormous task as there are so many.

The final ingredient for dispute is the existence of non-essential patents: those that cover improvements that aren’t part of a standard, for example a better way to make a display screen.

As mobile phones become smarter and add functionality over and above core telephony features, inessential patents become increasingly significant, and can be more valuable than essential ones if infringement can be proved.

This is because royalties, or damages for past infringements, may be sought without the fetter of FRAND licensing requirements – and patents carry the threat of an injunction to enforce the patent monopoly.

So inessential patents are also being fought over in court. As well as having potential value in their own right, they strengthen negotiating positions over the FRAND issues.

These Phoney Wars will take time to resolve: cases may take several years to come to trial and typically only a few patents can be considered at a time.

The bigger question is how to balance two needs fairly: manufacturers need to be rewarded for innovation but they also need to be able to sell standards-compatible products without incurring crippling royalty payments to others.

The sums at stake are so large the high cost of litigation is no deterrent. That makes it difficult to foresee how it will all end.

Piecemeal resolution or settlement of individual cases, while necessary, still leaves open industry-wide questions of how to quantify, to limit, and to allocate, an overall royalty pot.

1 COMMENT

  1. When you've got so few people on your network it's easy to offer greater data allowances. If they ever get a decent customer base on the network then we may see similar allowances to the big 3

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