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WorkingPaperSeriesNo.12

Patentsand“PatentsWars”inWirelessCommunication:AnEconomicAssessment

DavidJ.Teece,1EdwardF.Sherry2andPeterGrindley3

20August2014

1 Tusher Professor, Haas School of Business, University of California at Berkeley, and Chairman, Berkeley Research Group 2 Chief Economist, Expert Research Associates 3 Director, Berkeley Research Group

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I. Introduction

Boththepopularpressandtheacademicliterature4havedevotedmuchattentiontothesocalled“patentwars”thathavetakenplaceinrecentyearsinconnectionwithwirelesscommunicationssystems(includingbothcellularandWi-Fi).Dozensofpatentsuitshavebeenfiledinnumerousjurisdictionsworldwide(includingtheU.S.InternationalTradeCommissionandcourtsintheU.S.,theU.K,Germany,SouthKorea,andAustralia)since2009.PartiestothosedisputesincludehighprofilefirmssuchasApple,Nokia,Motorola,Microsoft,Samsung,Google,Oracle,S3Graphics,Ericsson,Qualcomm,Broadcom,Huawei,RIM,ZTEandnumerousothers.Thoughlitigationtodatehaslargelybeenfocusedonselectedjurisdictions(especiallytheU.S.),thedisputeshaveworldwidesignificance.

Patentlitigationiscostly,timeconsuming,andrisky.TheAmericanIntellectualPropertyLawAssociation’s2013“EconomicSurvey”estimatesthattheaveragecost(perparty)ofU.S.patentlitigationforcaseswithmorethan$25millionatstakeis$3.9millionthroughtheendofdiscoveryand$5.9millionthroughtrial.5Costsincreasesignificantlyifthereareappealsorretrialsandadjudicationsinmultiplejurisdictions.

Thispaperendeavorstoput“patentwars”intoperspectivebyhelpingtoexplainthatpatentdisputesareinlargemeasureanaturalcorollaryofcombinationalinnovation(i.e.,innovationwhichcreatesnewproductsembodyingmanyinventionswhereinventionsaresourcedfrombothinsideandoutsidethebusinessenterprise).Withmanyparties,manyinventions,andmanyproducts,disputesshouldbenosurprise,especiallygiventhenaturalreluctanceofsomecompaniestopayothersfortechnologywheninfringementlookslikeitmightbethelowercostoption.

4See,e.g.,GrahamandVishnubhakat,“OnSmartPhoneWarsandSoftwarePatents,”27J.Econ.Perspectives67-86(2013).5Seehttp://www.patentinsurance.com/custdocs/2013AIPLA%20Survey.pdf.AsurveybyFreshfieldsestimatedthatthecostsofaU.K.patentcasewhichreachestrialis£1.5millionforeachside.Freshfields,“AGuidetopatentlitigationinEnglandandWales,”September2011,availableathttp://www.lexology.com/(F(BEw2FJy5rTK4kdbQLu71_El9j82pfWQW7df6w5waS66nM9FmtD1Is23iPbbXG6ktmTFrgb-vUthCVqvJp7OiTVaqzQxfk-aRC9GEoWHWPiFgGp3-C2AkMDRei1aG4lQsIXRvC6nQjZnAjqHs7SOt-2KChKyYo0kezBGdQFfB6Ro0MY85MdwoGZo8oiFVSSyNIdKw1_zw8qQ-mG_BYWy-CyOUGkU1))/library/document.ashx?g=825e3ca2-b357-45af-9dbf-2856a08af440&b=Zex1D0DQ9fSBBjPl39830qFXyHgdQ27FJik4TjLnuHw%3D&bt=2014-06-25T05%3A28%3A55.6503014%2B01%3A00&noredirect=1McDonaghandHelmersestimatedthatcostsrangebetween£1millionand£6millionpercase(notperside)forcasesinitiatedduring2000-08.McDonaghandHelmers,“PatentlitigationinEnglandandWalesandtheissue-basedapproachtocosts,”32CivilJusticeQuarterly369-384(2013),availableathttp://www.google.com/url?sa=t&rct=j&q=&esrc=s&frm=1&source=web&cd=3&ved=0CCwQFjAC&url=http%3A%2F%2Fwww.chelmers.com%2Fapp%2Fdownload%2F7707164286%2F2013_CJQ_Issue_3_McDONAGH.pdf%3Ft%3D1398746302&ei=akrAU6OuKY-JogTMu4GoCg&usg=AFQjCNEOzpC4_2zA9k3mjmQkSUhUcYBJqA&bvm=bv.70810081,d.cGUWearenotfamiliarwithsimilarstudiesofpatentlitigationcostsinotherjurisdictions.Arecentstudyof“PatentLitigationinEurope”providessomeempiricaldataonpatentlitigationoutcomesinfourEuropeanjurisdictions,butdoesnotprovidemoredataonlitigationcosts.SeeCremerset.al.,“PatentLitigationinEurope,”DiscussionPaperNo.13-072,ZentrumfὔrEuropäischeWirtschaftsforschungGmbH,availableathttp://ftp.zew.de/pub/zew-docs/dp/dp13072.pdf.

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II. Themulti-inventionsworld

Patentdisputesincommunicationsarenothingnew.EvenAlexanderGrahamBellwasinvolvedinsome600lawsuitsoverpatentsrelatingtotheinventionofthetelephone.6

Inmanyhigh-technologyindustries(pharmaceuticalsbeinganotableexception7),theworldofoneproductandjustafewpatentshaslonggone.Manyadvancedproductsrequiretheuseofhundredsifnotthousandsofpatentedtechnologies.Disputesarisethatinvolvehardware(includingbothcellularbasestationsandconsumerequipmentsuchascellphones,laptopsandtablets),operatingsystems(suchasGoogle’sAndroid),computersoftware(suchasOracle’ssuitagainstGoogleoverJava),andotherproducts.Someoftheassertedpatentshaveapparatusclaims;othershavemethodsclaims;othershavesystemclaims.Allegedinfringershavebeenaccusedofdirectinfringement,contributoryinfringement,orinducementtoinfringe.Suitshavebeenbroughtatmultiplelevelsinthe“valuechain,”fromchipsetmanufacturerstodevicemanufacturerstoendusers.

Thereisnodisputethattechnologyhasadvancedsignificantlysincetheearlydaysofwirelesscommunication.Noristhereanydisputethattherehasbeenasurgeinpatentinginthefield,thoughexplanationsforthesurgediffer.Somedifferentiatebetween“offensivepatenting”(patentingtoobtainpatentstoassertagainstothers)and“defensivepatenting”(patentingtoobtainpatentsthatcanbeusedas“bargainingchips”inlicensingandcross-licensingnegotiations,and/ortopreventothersfrompatentingtheinvention).Somedeplorethegrowthin“defensivepatenting”asnotcontributingtoinnovation.Itisaphenomenonthatneedstobebetterunderstood.

Standardsplayasignificantroleinwirelesscommunications,ensuringthatequipmentfromdifferentsuppliersiscompatibleandinteroperable.Standardscanhavebothmandatoryfeatures(thatallstandards-compliantproductsmusthave)and“optional”features.

Formalstandardsareadoptedbystandardsettingorganizations(“SSOs”).Developingstandardstakesaconsiderableamountoftime.Evenafterthestandardisformallyadopted,itoftentakesseveralyearsbetweenthedatethatastandardisadoptedandthetimethatproductscomplyingwiththestandardfirstreachthemarket.Asaresult,SSOsareoftenseekingto“pushtheenvelope”byincorporatingthelatestcutting-edgetechnologyintonewstandardstogovernthenext-generationproducts.Suchtechnologyisoftenpatented.Consequently,most(thoughnotall)SSOsarewillingtoincorporatepatentedtechnologyinastandard,aslongasthepatentholderiswillingtocommititselftomakinglicensesforitsstandards-essentialpatents(“SEPs”)availableon“reasonableandnon-discriminatory”(“RAND”)or“fair,reasonableandnon-discriminatory”(“FRAND”)termstothoseseekingtomakestandards-compliantproducts.SuchRANDorFRANDcommitmentscanbepatentspecific,listingparticularpatents,orcantaketheformof“blanket”declarationsthatanypatentedtechnologythatthefirmmayhavethatturnsouttobe“essential”tomakestandards-compliantproductswillbeavailable

6AntonHouderman,TheWorldwideHistoryofTelecommunications(2003),pp.176-177.7Eveninthepharmaceuticalindustry,theincreasingnumberofpatentson“researchtools,”coupledwiththeuseof“reach-throughroyalties”inlicensingsuchtechnologies,meansthatmanypharmaceuticalsbearmultipleroyaltyburdens.

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forlicensingonRAND/FRANDterms.Ifsuchcommitmentsarenotforthcoming,mostSSOsareunwillingtoincorporatethepatentedtechnologyintoastandard.Formanystandards,therearehundredsorthousandsofpatentsthathavebeendeclaredtobeessentialtopracticethestandard,ownedbydozensofdifferentfirms.Notallsuch“declaredessential”patentsturnouttobeactuallyessential.

Asnoted,complexproductssuchascellphones(orPCs)haveembeddedwithinthemthousandsofpatentedtechnologies.8Thisreflectsthefactthatalotof“common”(yetproprietary)technologyisemployed,inpartbecauseofstandards,andinpartbecauseconsumersexpectcertaincommonfeaturestobeinallqualityproducts.Inonesenseitisquiteremarkablethatdiversetechnologiesofdifferentoriginandownershipgetcombinedsoharmoniouslyinmarketableproducts.

Inourexperience,active“patentwars”aremostcommonwhenfirmsare“jockeyingforposition,”tryingtohammeroutdisputesabouttheirrespectiverightsandthetermsoftheirrelationshipswithoneanother.Suchdisputesareespeciallylikelywhenfirms’marketpositionsandtechnologicalcontributionsarechangingovertimeandwhentheindustryislarge(andgrowing)andprofitable(sothatthereisalotofmoneyatstake),wherethereisastrongasymmetryinthetechnologicalcontributionsmadetothestockofknowhowintheindustry,wherefirmspursuedifferentbusinessmodels(sothatresolutionviaexplicitcross-licensingorinformal“Mexicanstandoff”relationships,inwhichonefirmdoesnotassertitspatentsagainstanotherfirm’sproductsbecauseoftheprospectthattheotherfirmwouldassertitsownpatentsagainstthefirstfirm’sproducts,islesslikely),andwhentheparties’respectiveIPrightsaredisputed.

Oncethereisa“trackrecord”ofdecisionsregardingwhosepatentsarevaluableandwhosearenot,theindustrycansettledowntoasituationinwhichfirmsengageinexplicitcross-licensingorinformal“standoff”relationships.Butwhenthelegalsituationisuncertain,suchresolutionisdifficulttoachieve,especiallywhensomuchmoneyispotentiallyatstakeandwhenpartieshavedivergentbeliefsaboutthelikelyoutcomesoflitigateddisputes.Hence,thechanginganduncertainlegallandscapeisitselfoftenthebiggestcontributortodisputes.

Thisisnottosaythatsmartphonepatentwarsareatransientphenomenon.Themulti-inventionnatureoftheindustry,coupledwiththerapidpaceoftechnologicalinnovation,theamountofmoneyatstake,andtheprobabilisticnatureofpatentrights,allsuggestthatdisputesarelikelytopersistevenafteraninitial“shakeout.”Butweanticipatethatthepaceoflitigationwillslow.

III. Technologycommercializationstrategies

Thediversityofeconomicrolesplayedbyinnovatorsandimplementers–from“pureplay”technologycompaniesthatrelyonlicensingtheirinventionstoothers,to“non-practicingentities”thatoftenbuyandcommercializepatentsdevelopedbyothers,tochipsetmanufacturers,todevicemanufacturers,tosoftwaredevelopers,tocellularserviceproviders(carriers),tobusinessesthatoperateWi-Finetworks

8DeepakSomaya,DavidTeece,andSimonWakeman,“InnovationinMulti-InventionContexts:MappingSolutionstoTechnologicalandIntellectualPropertyComplexity,”CaliforniaManagementReview,Vol.53,No.4(Summer2011),pp.47-79.

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ontheirpremises–hasledtoasituationinwhichdifferentfirmspursuearangeofdifferentcommercializationstrategies.Manyfirmsintheindustry“wearmultiplehats.”Asinnovators,theydeveloptechnologyandcommercializeit,whetherbyusingitthemselvesorbylicensingittoothers.Asimplementers,theyoftenneedtouseothers’patentedtechnologytomakeandselltheirownproducts.Cross-licenses(whetherroyaltyfreeorroyaltybearing)arecommon.

Patentholdershavesoughtsignificantroyaltiesforothers’useoftheirpatentedtechnology,althoughtodatecourt-awardeddamageshavebeenrelativelymodest.Dozensoflicensesandcross-licenseshavebeenenteredinto,somefollowinglitigation.

Patentportfoliosinthefieldcanbeextremelyvaluable.Severalsignificantportfoliosofpatentsrelatingtocellularcommunicationshavechangedhandsforconsiderablesums,includingthe$12.5billionthatGooglepaidforMotorolaMobilityanditsportfolioofsome24,000patentsandpatentapplications,9the$4.5billionthatacoalitionoffirmsincludingApple,RIM,Sony,MicrosoftandEMCpaidforaportfolioofsome6,000NortelpatentsfollowingNortel’sbankruptcy,10andthe$1.1billionthatMicrosoftpaidforaportfolioofsome800AOLpatents.11

Thoughsomehaveexpressedconcernsaboutthepossibilityof“patentthickets”and“royaltystacking,”inwhichimplementersneedinglicensestopatentsheldbymultiplepatentholdersmayhavetopaysignificantcumulativeroyaltiestomultiplepatentholders,theprospectofsociallyundesirableroyaltystackinghasnotbeensufficienttodeterthewidespreadanddramaticcommercialsuccessofcellularcommunicationsstandards.Indeed,thesuccessofmanyproductsstemsfromtheiremploymentofmultipleinventions.“Stacks”aredesirableifthetechnologiesrepresentnetvaluetotheconsumer.

IV. EconomicFactorsthatHelpExplainDisputes

Severalfeaturesofthepatentsystemandthecurrent“patentwars”areworthviewingthroughthelensofeconomicanalysis.

Itisoftenforgottenthatpatentsarenotself-enforcing.Unlikethesituationwithtangiblegoods,wherethesupplierisunlikelytosupplythegoodsunlessitispaidtodoso,infringerscananddousepatentedtechnologywithoutpayingforit.Unlikethesituationwithtangiblegoods,patentholderscannotphysicallywithholdtheirtechnologyfrominfringers.Inordertogetrecalcitrantinfringerstopayfortheuseofpatentedtechnology,patentownersmustappealtothecourts,andpatentlitigationiscostly9CNNMoney,“Googleseals$13billionMotorolabuy,”May22,2012,availableathttp://money.cnn.com/2012/05/22/technology/google-motorola/.10WallStreetJournal,“Nortel$4.5BillionPatentSaletoApple,Microsoft,OthersApproved,”July11,2011,availableathttp://online.wsj.com/news/articles/SB10001424052702303812104576440161959082234.11NewYorkTimes,“MicrosoftAOLDealIntensifiesPatentWars,”April9,2012,availableathttp://www.nytimes.com/2012/04/10/technology/microsoft-to-buy-aol-patents-for-more-than-1-billion.html?pagewanted=all&_r=0.

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(bothforthepartiesandforthelegalsystemitself),timeconsuming,riskyanduncertain.Patentedtechnologyis,inonesense,thereforthetaking,sinceadescriptionoftheinventionispublishedforalltoseewhenthepatentisawardedorthepatentapplicationismadepublic.12Unlikethesituationwithtradesecrets,whereinformationaboutinventionsiskeptsecretfromrivals,withpatentstheinventionisdisclosedandasaresultcanendupbeingused(thoughnotlegally)byinfringers.Itispossibletousepatentedtechnologywithoutexplicitcopying.Competitorsmaydosoinignoranceofthepatentoritsscope.“Independentinvention”iscommon,butitdoesnotsufficetooverrideapatent.Thesituationinwhichimplementersignoreotherfirms’patentsunlessanduntiltheyaresuedforinfringementiscommoneveniftheimplementerhasgoodreasontobelievethatsuchpatentsexist.13Ofcourse,suchconductcontributestothenumberofpatentinfringementsuitsbrought.

Themetesandboundsofpatentrightsareoftenunclear.Thisalsoincreasesthelikelihoodofdisputes.Patentclaimsdonotconstruethemselves,andclaimconstructioncanbeandoftenishighlydisputed.Evenafteracourtconstruesthepatentclaims,thepartiesoftendisagreeastowhetherornotparticularproductsinfringetheclaims.Empiricalstudiesof“winrates”inpatentlitigationshowthatpatentholdersonlywinabouthalfofthetime.14Economistshavelongacknowledgedthe“probabilistic”natureofpatentrights.15

Muchhasbeenmadeofthequalityofissuedpatents,withcriticsarguingthatfartoomany“poorquality”patentshavebeenissuedandurgingthePTOtoimprovethequalityofthepatentexaminationprocess.16Webelievethattherealprobleminthisregard17liesintheprospectofa“mismatch”betweenthescopeoftheinventionactuallymadebytheinventorandthescopeofthepatentclaimsgranted.ThisisillustratedinFigure1,whichcomparesthescopeoftheinventionactuallymadeagainstthescopeoftheissuedpatentclaims.

(InsertFigure1aroundhere)

Patentslyingalongthe45-degreelinehaveissuedclaimsthatmatchthescopeoftheinvention.Patentslyingabovethe45-degreelinehaveissuedpatentclaimsthatarebroaderinscopethantheinvention

12Thoughsomefirmsforbidtheiremployeestoexamineotherfirms’patentsorpatentapplications(largelybecauseofconcernsaboutbeingfoundliablefor“willfulinfringement”andhavingtopayup-to-trebledamagesiftheyhaveactualknowledge,notmerelyconstructivenotice,ofothers’patents),thereareotherwaysoflearningaboutothers’technologythanbyreadingpatentsorpatentapplications.Inaddition,thereisthepossibilityof“independentinvention.”13SeeLemley,“IgnoringPatents,”2008Mich.St.L.Rev.19-34.14SeeEdwardSherryandDavidTeece,“Royalties,EvolvingPatentRights,andtheValueofInnovation,”ResearchPolicy,33:2(March2004),pp.179-191,andarticlescitedtherein(dataonU.S.patentcases).SeealsoCremerset.al.,supranote5(dataonpatentlitigationoutcomesinfourEuropeancountriesshowlowerpatentholderwinratesthanintheU.S.).15SeeMarkLemleyandCarlShapiro,“ProbabilisticPatents,”19J.Econ.Perspectives75-98(2005).16ArecentworkingpaperconcludesthattheEPO[EuropeanPatentOffice]provideshigher-qualityandmoreexpensivepatentsthantheUSPTO.”delaPotterie,“Thequalityfactorinpatentsystems,”ECARESworkingpaper2010-027,availableathttp://www.epip.eu/conferences/epip05/papers/van%20Pottelsberghe.pdf.17Inadditiontotheinherentdifficultyinreachingagreementamongthepartiesastotheactualscopeofpatentprotectionandpatentvalidity.Thatdifficultyisexacerbatedifpatentclaimsarenotclear.

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warrantsandarethus“toobroad,”whilepatentsbelowthe45-degreelinehaveissuedpatentclaimsthatarenarrowerinscopethantheinventionwarrantsandarethus“toonarrow.”Oursuggestionisthatimprovingthequalityofpatentswouldinvolvemakingitmorelikelythatissuedpatentsfallonorclosetothe45-degreeline,not“strengthening”or“weakening”patentsperse.

Itisimportanttodifferentiatebetweenaproductfeatureandthescopeofthepatentsrelatingtothatfeature.Itisoftenpossibleto“workaround”particularpatentsandprovidevirtuallythesamefeatureorfunctionalitywithoutusingthepatentedtechnologyandwithoutsignificantlyaffectingconsumerdemand(thoughtheremay,ormaynot,becostconsiderationsassociatedwiththework-around).Thatsaid,disputesastowhethersuchproposedwork-aroundsdoordonotavoidinfringementcanoccurandmaythemselvesresultinfurtherlitigation.

Thecellularcommunicationsindustriesaremadeupofanumberofrelated“valuechains,”frominventors,tochipsetmanufacturers,todevicemanufacturersofbothcarrierequipment(e.g.,cellularbasestations)andconsumerproducts(e.g.,cellphones,smartphones,cellular-enabledlaptopsandtablets),tocellularserviceproviders(carriers),toend-users(individualsandbusinesses).Beingabletousepatentedtechnologyatmultiplelevelsinthevaluechainmayaugmentitsvalue.Patentsuitshaveoccurredatvariouslevelsofthevaluechain,andfirms“upstream”havesometimesintervenedincasesbroughtagainstthose“downstream”fromtheminthevaluechain,especiallywhenthe“downstream”entitiesareseekingindemnificationfromtheir“upstream”suppliers.

Alegaldoctrineknownasthe“patentexhaustiondoctrine”alsoplaysasignificantroleinlicensingandindisputes.Tosimplifysomewhat,the“patentexhaustiondoctrine”saysthat,ifapatentholderlicensesanentityatonelevelofthe“valuechain,”thatlicense“exhausts”thepatentholder’srightstocollectadditionalroyaltiesfromentities“downstream”inthevaluechainfromthelicensee.Thusifapatentholderlicensescellularchipsetmanufacturers,itcannotgoafterdevicemakerswhoincorporatelicensedchipsetsintheircellphones,orcellularcarrierswhousecellphonescontaininglicensedchipsets,orend-userswhousesuchphones,despitethefactthat,withoutalicense,thoseothersmightbeliableforpatentinfringement(whetherfordirectinfringement,contributoryinfringement,orinducementtoinfringe).Thissuggeststhatitisimportantforapatentholdertochoosetolicenseatthe“right”levelofthe“valuechain.”

Muchconcernhasbeenexpressed,especiallyintheU.S.,18regardingso-called“patenttrolls,”sometimesreferredtolesspejorativelyas“non-practicingentities”or“NPEs”,entitiesthatdonotthemselvespracticethepatentedtechnologybut(insomecases19)insteadacquiredthepatentfrom

18Thoughanumberofnon-practicingentities(notablyIPCom)havebroughtpatentinfringementsuitsinEurope,muchofthepublicly-statedconcernabout“trolls”appearscenteredintheU.S.,whereso-called“trolls”accountforanincreasingshareofpatentlitigation,especiallyagainstend-users.ThefactthatintheU.S.,eachpartybearsitsownlitigationcosts,whereasinmanyEuropeanjurisdictionstheloserpaysthewinner’sfees,maypartiallyexplainthedifference.19OtherNPEs(suchasuniversitiesandpure-playtechnologycompaniessuchasRambus)developedthepatentedtechnologybutdonotpracticeit.Somepracticingentitieshave“spunoff”aportionoftheirpatentportfoliostoNPEsthatseektolicensethepatentsforroyalties.Otherformerly-practicingentities(suchasNortel)havegone

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othersandseektocommercializeitbylicensingitinexchangeforroyalties.Noneofthemost-widely-publicized“patentwars”incellularcommunicationinvolve“trolls,”thoughcertainNPEshavebeeninvolvedinless-widely-publicizedlitigation.ManyoftheNPEsacquiredtheirpatentssubjecttoRANDcommitments,whichimposecertainconstraintsontheirabilitytoexploittheirpatents.

BecauseNPEsdonotmakeorselltherelevantproducts,theydonotneedlicensestouseothers’technology.Consequently,theyarenotinterestedincross-licensing.Thisisoftenupsettingtootherfirmsthatareusedtoengagingincross-licensingwithothers,whetherroyalty-freeorforrelativelylow“balancingpayments.”

Itisimportanttonotethatdespitethelargenumberofpatents,andthelargenumberofunlicensedfirms,therehavebeenarelativelysmallnumberofpatentdisputes.20However,manydisputeshavebeenwidelypublicized.Thisisinpartduetothestakesinvolved,tothebusinessrelationshipsbetweentheparties,andtothevistasprovidedintobusinessdecisionsandbehaviorsthroughopencourtlitigation.

V. Standardssettingandpatentlicensingdisputes

Manyofthepatentsinvolvedin“patentwars”suitsarestandard-essentialpatents(SEPs),whicheveryfirmmakingstandards-compliantproductsmustuse(atleast,ifthepatentreadsona“mandatory”partofthestandard).OthersarenotSEPs,butinsteadarepatentsonso-called“differentiatingfeatures.”The“designpatents”thatAppleassertedagainstSamsungfallintothiscategory.Holdersofsuchpatentshavetypicallynotmadecommitmentstolicensethem(onRANDtermsorotherwise),butinsteadoftenprefertokeepthepatentedtechnologyfortheirownexclusiveuse.

Themeaningoftheterm“RAND”or“FRAND”isitselfsubjecttodispute.ManycommentatorshavelamentedthefactthatmostSSOsprovidelittleornoguidanceastowhetherparticularlicensetermsareorarenotRAND,leavinglicensingtermstobenegotiatedbetweenthepartiesoutsidetheSSO,and

bankruptandhavesoldtheirpatentportfoliostoothers.StillotherNPEsareformerlypracticingentitiesthathaveexitedtheproductmarketandseektolicensetheirpatentedinventions.20Talkofa“litigationexplosion”needstobeputintocontext.Giventheincreasingnumberofpatents(thoughthenumberofpatentsissuedperbilliondollarsofGDPhasstayedrelativelyconstantovertime),itwouldnotbesurprisingthatthenumberofpatentlawsuitshasincreased(thoughtheavailabledataindicatethatthelitigationrateperissuedpatenthasstayedroughlyconstantovertime).CompareBesenandMeurer,“ThePatentLitigationExplosion,”(October20,2005),BostonUniv.SchoolofLawWorkingPaperNo.05-18,availableatSSRN:http://ssrn.com/abstract=831685withMossof,“The‘PatentLitigationExplosion’Canard,”18October2012.http://truthonthemarket.com/2012/10/18/the-patent-litigation-explosion-canard/,andConnollyIP,“PatentLitigationRates:WhatTheyTellUsandWhatTheyDon’t,”October23,2012.http://connollyip.com/patent-litigation-rates-what-they-tell-us-and-what-they-dont/.

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leavingdisputestothecourts.TherehavebeenanumberofproposalsforSSOsto“clarify”whattheymeanbyRAND,buttodatenoneofthemhavebeenaccepted.

Inrecentyears,anumberofU.S.courts,notablyintheMotorolav.Microsoft21andInreInnovatio22cases,havegivensomeguidanceastowhatconstituteRANDterms,acknowledgingthat“RAND”isnotasinglenumberbutarangeofpossibleroyaltystructuresandrates.Wearenotawareofanynon-U.S.courtsthathaveaddressedtheissueyet,thoughcasesarependinginanumberofEuropeanjurisdictions.TheEuropeanCommissionrecentlysaidthattheCommissiondoesnotdeterminewhatRANDtermsare,leavingsuchissuestocourtsorarbitrators.23

OneissuethathasgeneratedconsiderablecontroversyiswhetherapatentholderthathasmadeaRANDcommitmentshouldbeabletoseek(notnecessarilyobtain)injunctivereliefagainstthosewhouseitspatentedtechnologywithoutpayingforit.Toourknowledge,noSSOhasexplicitlyaddressedthisissue.Somecompetitionauthorities24havetakenthepositionthatapatentownerthathasmadeaRANDcommitmentshouldnotbeabletoseekinjunctivereliefagainsta“willinglicensee”eveniftheaccusedinfringerelectstochallengetheassertionthatthepatent(s)beingassertedarevalidand/orinfringedincourt.25SomecommentatorshavepointedoutthatRANDcommitmentsarecontractualcommitments,andshouldbeinterpretedinaccordancewithstandardcontractinterpretationguidelines,andhavearguedthatnothinginaRANDcommitmentexplicitlywaivestheright(whichpatentownersclearlyotherwisehave)toseekinjunctivereliefagainstunlicensedfirms.26

BesidesRANDcommitments,anumberofmechanismshaveevolvedtoaddresstheissueofroyaltystacking.Theseincludeexplicitcross-licensing(eitheronaroyalty-freebasisorforrelativelysmall“balancingpayments”thatreflect,notthefullvalueofthecross-licensedtechnology,butthedifferenceinvaluebetweenthetwocross-licensedportfolios)andinformal“Mexicanstandoff”/“mutually

21“FindingsofFactandConclusionsofLaw,”April25,2013,Microsoftv.Motorola,Inc.,CaseNo.C-10-1823JLR,U.S.DistrictCourt,WesternDistrictofWashingtonatSeattle(JudgeRobart),availableathttp://essentialpatentblog.com/2013/05/an-annotated-version-of-judge-robarts-microsoft-motorola-rand-royalty-setting-order/.22“MemorandumOpinion,Findings,Conclusions,andOrder,”InReInnovatioIPVentures,LLCPatentLitigation,MDLDocketNo.2303,CaseNo.11C9308(JudgeHolderman),October3,2013,p.37,availableathttps://docs.google.com/a/umn.edu/file/d/0B8xYsG-VkgXNaW9tOTY3N1VDbkE/edit?pli=1.23EuropeanCommission,Memo,“Antitrustdecisionsonstandardessentialpatents(SEP),”April29,2014,availableathttp://europa.eu/rapid/press-release_MEMO-14-322_en.htm.24TheEuropeanCommissiontookthepositionthatMotorola’sattempttoseekaninjunctionagainstAppleovercertainMotorolaSEPsrelatingtoETSI’sGSM/GPRSstandardconstitutedanabuseofadominantpositioninviolationofEUcompetitionlaw.Seehttp://europa.eu/rapid/press-release_IP-14-489_en.htm?locale=enTheoneUSappellatecourtthathasaddressedtheissueheldthatthereisnoblanketruleprohibitingholdersofSEPsfromseekingorobtaininginjunctiverelief,andthatthefour-factortestforobtaininginjunctiverelieflaidoutineBayv.MercExchangeappliestoSEPsaswellasnon-SEPs.SeeApplev.Motorola(FederalCircuit),April25,2014,availableathttp://cafc.uscourts.gov/images/stories/opinions-orders/12-1548.Opinion.4-23-2014.1.PDF,p.7.25EuropeanCommission,Memo,“Antitrustdecisionsonstandardessentialpatents(SEP),”April29,2014,availableathttp://europa.eu/rapid/press-release_MEMO-14-322_en.htm.26RogerBrooksandDamienGeradin,“TakingContractsSeriously:TheMeaningoftheVoluntaryCommitmenttoLicenseEssentialPatentson‘FairandReasonable’Terms,”availableathttp://www.cravath.com/files/Uploads/Documents/Publications/3233990_1.pdf

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assureddestruction”situations(inwhichonefirmdoesnotassertitspatentsagainstanotherfirmbecauseitknowsthattheotherfirmhaspatentsofitsownthatitcouldassertagainstthefirstfirm’sproducts),and“repeatplay”and“reputation”effects(afirmthatseekstoaggressivelyexploititspatentsinconnectionwiththecurrentstandardmayfindthatSSOswillrejectitstechnologywhenitcomestodevelopingfuturestandards).

Standardsettingintelecommunicationsisa“repeatedgame,”witholderstandardsbeingamendedovertimeastechnologyimproves,andwithnewstandardspromulgatedtosupplantolderstandards.Asaresult,patentholdershavetobeawarethatattemptstoaggressivelyexploittheirSEPsrelatingtoacurrentstandardcouldresultinasituationinwhichSSOselectnottoincorporatetheirtechnologyintofuturestandards.

Inshort,RANDandFRANDissuesprovideadditionalcomplexitytolicensingnegotiations.Notsurprisingly,disputesaremorelikelythemorecomplexthelandscapeandthegreatertheuncertainties.Regulatoryintervention,oreventhethreatofit,cancompounduncertaintyandamplifythelikelihoodofdisputes.

VI. Conclusion

Despitethe“patentwars,”variouswirelesscommunicationsstandardshavebeenverysuccessfulcommercially,withhundredsofmillionsofcellphonesembodyingmanythousandsofpatentedtechnologiesbeingsoldandbillionsofdollarsinrevenueatthechipset,cellphone,basestation,andcellularserviceproviderlevelsoftheindustry.Concernsaboutpatentsandthepotentialforpatentlitigationorthepotentialofhavingtopaydamagesclearlyhavenotdeterredfirmsfromenteringthemarketandsellingproducts.Onaquality-adjustedbasis(holdingperformanceconstant),realpriceshavebeenfallingdramaticallyovertime.Wearenotawareofanyevidencethatthelargeandgrowingnumberofpatentshasconstrainedproductandtechnologyinnovation.Tothecontrary,newproductswithnewfeatureshaveproliferated,andnewtechnologyhasdevelopedapace.

Overall,thesystemseemstobeworkingwell,Thepresenceof“patentthickets”andtheprospectof“royaltystacking”havenotstifledcompetitionorinnovation;thewirelessindustryisextremelyvibrant.Asnoted,patent“thickets”oftenreflectthepositiveplethoraofvalueenhancingtechnologieswhichcanbedesignedintoproductstosupporttherichfeaturesetsthatcustomersenjoy.Tobesure,“patentwars”arecostlyanddisruptive,andtheindustrycouldwellbebetteroffiftheywerereduced,27butitisdifficulttoseehowthingscouldbeotherwiseabsentsomemajorchangeinthesystem,28giventhepoorqualityofsomepatents,thefactthatpatentsarenotself-enforcing,thetendencyofimplementersto

27Todeterminewhetheraworldwithoutpatentwarswouldbepreferabletothecurrentworld,onewouldhavetoclearlyidentifywhatsuchaworldwouldlooklike.Onecould,forexample,eliminatepatentwarsbyeliminatingpatents,butsucha“cure”mightbeworsethanthe“disease,”asthedynamic-efficiency-enhancingbenefitsofthepatentsysteminencouraginginnovationarewell-recognized.28E.g.,ifpatentlitigationbecamesignificantlyfaster,lesscostly,andmorepredictable,orifpatentqualityweresignificantlyimproved.

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ignoreothers’patentsunlessanduntilsued,disagreementsaboutpatentvalidityandscope,andthestakesinvolved.

Weareinfavorofreformdirectedtowardimprovingthequalityofpatents,andinparticulartowardmakingthescopeofissuedpatentclaimsmoreaccuratelymatchthescopeoftheactualinvention.Enhancedclarityandpredictabilityisalsodesirable.ButmanyofthecurrentproposalsforreformofthepatentlawstrikeusaslittlemorethancosmeticBand-Aidsnotdirectedtothefundamentalunderlyingissues.Whateverreformsarecontemplated,itiscriticaltomaintain,ifnotexpand,incentivesforinventionandinnovation.Therearegenerallyfewerinventorsthanthereareimplementersoftechnology,soitisespeciallyimportanttokeeppoliticsoutof“reform”efforts,aspoliticsislikelytofavorthehereandnow.Goodpolicymakingfavorsthefuture.

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Figure1:Unmeritedbreadthornarrownessofpatentclaimsandprotection

Scop

eofProtection

ScopeofInventiveStep

Too Narrow

Too Broad