Fair, Reasonable, and Non-Discriminatory (FRAND) licensing obligations are enjoying their time in courts and negotiation rooms of late. Licensors are making claims that their historical licensing rates are FRAND while licensees are expected to accept these claims on faith. The information asymmetry confronting licensees makes sound, FRAND based licensing challenging and leads to increased litigation. The 2017 TCL v. Ericsson case highlighted both the LTE FRAND rate discrimination and information asymmetry that favors licensors. As was shown in the case after discovery and a time-consuming unpacking of the terms of Ericsson’s reported licenses, not all licensing rates for Standard Essential Patents (SEPs) are fair, reasonable, or even non-discriminatory – some licensees are being asked to pay 500% or more on a revenue basis than what their competitors are paying for similar LTE FRAND licenses.
The record from the TCL v. Ericsson case showed that Huawei was paying Ericsson effective royalties that were about 75% higher on an alleged infringing revenue basis than Apple for LTE. This was true even when taking into account the value of Huawei’s cross-license to Ericsson’s infrastructure business. It does not require much imagination to connect this seeming unfairness with the investigation started in 2019 by China’s State Administration for Market Regulation (SAMR) into Ericsson’s licensing practices.
Apparently, Ericsson did not view TCL, who was the 10th largest phone brand in the world in 2017, as qualifying for the same pricing as Apple, Samsung, LG, or even HTC, which did not figure among the top 10 phone brands then. Instead, Ericsson offered TCL two options that were significantly more than what others were paying in 2017. The court found one option was almost 500% higher than the others, based on an allegedly infringing revenue, while the other was “only” 200% higher. The court acknowledged comparisons are always difficult but concluded the offers were so “radically divergent” that Ericsson had violated its FRAND obligations. The effective royalties based on alleged infringing revenues disclosed to the court are summarized below.
Ericsson testified to the court that as a rule its licenses with other parties were based on running royalties. In a number of cases though, Ericsson accepted lump sum payments, accounted for the release of past activities differently from future activities, accounted for the value of cross-licenses, and/or accepted the transfer of patents as a balancing payment. In order to arrive at comparable figures for Ericsson’s licenses, the court in TCL v. Ericsson had to unpack Ericsson’s licenses with companies that were deemed to be similar to TCL, including Samsung, Apple, LG, Huawei, ZTE, and HTC. The unpacking was done with a consistent formula to ensure comparability. The unpacking was also applied to the running royalty offers made to TCL in 2017. Cross licenses benefitting Ericsson from Apple, Samsung, LG, ZTE, and Huawei were taken into account. The court concluded that in order to arrive at royalty rates that could be compared, it was necessary to express the rates as a percentage of the licensee’s global 4G revenues as reported by IDC through 2015 and then apportioned for any licensed years after that.
When reviewing the court’s results, one is struck by how expensive LTE can be using the global rates proposed by Ericsson to TCL in 2017. Assuming that all owners of 4G SEPs claim a royalty proportional to Ericsson’s rates, the royalty stacking could amount to 14.2% or 26.4% of TCL’s global 4G revenue, depending on whether TCL chooses option A or option B. This is based on Ericsson’s claim that it owns 7.5% of the patents found by TCL’s experts to be essential to LTE. TCL, of course, claims that Ericsson only owns 4.6% of the LTE SEPs and thus the cost of implementing LTE on a fully stacked basis would be 22.5% or 41.7%, again depending on whether TCL chooses option A or option B. The fully stacked cost of LTE set up by Ericsson’s options A and B offered to TCL in 2017 is significantly higher than the maximum aggregate royalty cost of 6% - 8% per handset retail price intimated by Ericsson in 2008 to encourage, as found by the court, the adoption of LTE over WiMAX.
The TCL v. Ericsson case draws out one of the major obstacles to FRAND negotiations. Namely, the asymmetry of information between TCL and Ericsson. Much of the analysis performed by the court is only as good as the often subjective information supplied by the parties to the dispute. In the case, Ericsson claimed to own 111 US patent families essential to LTE out of a total of 1,481 US families or 7.52% of all US LTE SEPs. TCL, for its part, posited that Ericsson only owns 69 US patent families essential to LTE or 4.76% of the US LTE SEPs. The difference is stark, representing 2.76 percentage points over 1,481 patent families, and can only be reconciled through expensive infringement litigation - or can it? An independent analysis is needed that does not rely on the parties’ subjective views.
Unified Patents has developed a tool that allows for such an analysis. Using machine learning, Unified Patents has developed its Objective Patent Landscaping (OPAL) algorithm to identify essentiality based on semantic similarities between the US patents identified by TCL’s experts to be essential to LTE and any other US patent. Starting from the premise, agreed by TCL and Ericsson, that there are 1,481 US patent families essential to LTE, the OPAL algorithm finds that Ericsson owns only 61 (or 4.1%) of those families based on a high similarity score of 64.56 (basis is 0 - 100, with 100 being the highest similarity between a US patent found by TCL’s experts to be essential and any other US patent). If Ericsson maintains its position that it owns 111 US LTE SEPs, the similarity score would have to be lowered to 59.43 to capture 111 US patent families owned by Ericsson that would correspond semantically to the US patents identified as being essential to LTE. This in turn would expand the universe of US LTE SEPs to include 2,787 US patent families and lower Ericsson’s ownership of all US LTE SEPs to 3.9%.
Unified Patents’ OPAL tool can help parties and courts form an objective view on the essentiality of a portfolio without having to resort to expensive litigation. Using the OPAL tool and several decades of licensing expertise, Unified Consultants can help LTE implementers understand the LTE patent landscape and quickly assess their negotiation strengths to get to a LTE license that is more in line with FRAND. The time saved could result in less litigation, quicker licensing, and more time for product development.