Licensing of standard essential patents (SEPs) is a longstanding tradition in the telecommunications and consumer electronics sectors. Performing valuations, determining appropriate royalty rates, and licensing on a fair, reasonable, and non-discriminatory (FRAND) basis is an expected, but often complicated, practice for use of technologies, including wired and wireless connectivity, video encoding, and charging, to name a few.
With the advent of 5G and wireless functionality starting to proliferate to a broader and more diverse set of consumer and commercial products, SEP owners are ready to extend their reach. As a result, 5G FRAND rates may account for different use cases in consumer products such as: smart home devices, wearables, and automobiles (so-called Internet of Things, or IoT); a wide variety of commercial verticals such as medical devices and patient monitoring (healthcare IoT); and smart manufacturing, smart warehousing, power management, pipelines, refineries, and construction equipment (industrial IoT).
At Stout’s first IP Insights webinar in January, several of Stout’s leading professionals weighed in on the topic. John Bone, Managing Director in Stout’s Disputes, Compliance, & Investigations group, moderated the webinar. He was joined by Mitch Rosenfeld, Managing Director in Stout’s Intellectual Property Advisory and Transactions practice, and Scott Weingust, Managing Director in Stout’s Intellectual Property Valuation practice.
Below we summarize key insights shared during the webinar.
The submission process of declaring essential patents to the standardization organization (ETSI) is significantly flawed, resulting in numerous errors in the ETSI declaration database. Resolution of these errors, normalization of the data, and tracking ownership changes of declared SEPs is a non-trivial but vital process before determining and assessing the 5G landscape.
The 5G patent landscape includes over 29,000 patent families – more than 125,000 active patents and applications – declared as essential to 5G (estimate based on Stout’s proprietary database*) and will continue to increase. Rosenfeld emphasized that conducting infringement analysis to determine which of those patents are in fact essential to the 5G standard, is a monumental, if not practically impossible task.
Rosenfeld further stated that the patent landscape is heavily concentrated with the top four companies owning close to 50% of all declared patent families. Compared with prior 3GPP generations, the 5G patent landscape is larger; however, half of the 5G declared patents are also declared to the prior standards. The overlapping declarations are largely due to technological similarities in the radio portion of the standards – TS36 for 4G and TS38 for 5G.
The top-down approach starts with a determination of what we often call an aggregate royalty burden (ARB). That is essentially the royalty that an implementer of the standard would have to pay to license all the technologies that make up that standard. The ARB is then apportioned to the specific SEPs that are being licensed within a given transaction by determining the share of those SEPs in relation to the entire patent landscape.
The second method is the market-based (or bottom-up) approach which looks as rates paid for other SEPs, or other comparable assets, as a basis for determining the rate for the SEPs that one is trying to license.
Weingust addressed the difficulties in determining the appropriate ARB due to a lack of publicly available information. In some instances, such as for 4G SEPs, there are relevant judicial opinions that provide a perspective on an ARB. However, such information doesn’t currently exist for many other standards. When publicly available information specifically related to an ARB doesn’t exist, other methods to determine an ARB include finding FRAND rates for certain portions of a standard and using those to imply an ARB for the entire standard or applying more of an economic perspective by estimating the increment economic benefit that a standard adds to a particular product category in which it is being used.
Furthermore, Weingust emphasized that considering the value of all the technologies in a standard is just a first step toward determining an ARB, as professionals know that some of those technologies are not covered by patents, some of the patents might have expired, and there are situations where one is looking to license patents in a particular country. “We want to essentially adjust the ARB down to a rate one would pay for all the active patents in a particular standard, and that becomes a new starting point for thinking about an ARB,” he said.
Despite patents being inherently unique, what the telecommunication industry has seen is that in some of the seminal court cases addressing FRAND terms, the courts have made a simplifying assumption that each of the patents in a particular standard are equally valuable.
Weingust believes that one has to at least consider both approaches as part of determining FRAND terms for SEPs. “The best method ends up really being dependent on the facts and circumstances of each valuation effort,” he said.
The top down approach has been used regularly in 4G SEP licensing as well as in several seminal judicial decisions, while market-based approaches have been used with other standards, such as Wi-Fi. Rosenfeld agreed and added that the use of different approaches is based in part on custom and perhaps the differences in the declaration process with respect to different standards.
Bone concluded the webinar by asking the panel for their view on the impact of different “use cases” with respect to 5G licensing of IoT products (i.e., how the 5G technology is implemented in the specific IoT product). From an economic perspective, Weingust believes that one should think through the value of the standard in the context of the use case. For example, the Wi-Fi standard may provide more value to a Wi-Fi router, whose sole purpose is to provide Wi-Fi services, compared with a smartphone, which also has other methods of wireless communication. Each individual use case may lead to a different answer on the ARB, or value of the particular set of patents, regardless if you use a bottom-up or top-down approach.
To hear more insights, view the entire webinar.
For more information about Stout’s proprietary SEP database, please contact a member of Stout’s Intellectual Property Advisory and Transactions team.