FRAND royalty and mobile telecoms SEPs – an analysis of recent court cases

One question has dominated patent licensing discussions in the telecommunications industry for about a decade: “What is FRAND?”

The concept of fair, reasonable and non-discriminatory (FRAND) royalty rates itself hardly requires further introduction, at least not to those working in the field of patent licensing. Common business practices are constantly evolving under the guidance of courts and regulators, and a framework of requirements is being created. The question remains as to what a reasonable royalty for a portfolio of standard-essential patents (SEPs) actually may be. The bottom line is this: finding the appropriate royalty determines whether companies find resolution amicably or go to court and fight.

Earlier analyses have shown that SEP portfolios differ greatly in terms of family size, legal status and grant rate, as well as in value, technical contribution and relevance to the standard (for further details see “Landscaping standard-essential patents”). Therefore, SEP analysis must accurately reflect the value of a portfolio, as not all patents have the same strength and application, for various reasons. SEP counts and relevance measures help to quantify the size, magnitude and value of the declared SEP portfolios (for further details see “How to count and valuate standard-essential patents”). SEP declarations at standard-developing organisations (SDO) often serve as starting points. SDO databases may record tens of thousands of SEPs for a single standard; and this trend is growing. The declarations are based on a self-assessment by the patent holder and are not subject to scrutiny regarding the essentiality of the declared patent, which can evolve during the standard adoption procedure. Therefore, patent declarations must be carefully considered and processed, cleaned, deduplicated and further analysed (eg, concerning legal status and relevance to the standard). The European Commission also acknowledges this (for further details see “Communication from the Commission to the Institutions on Setting out the EU Approach to Standard Essential Patents”).

Patent stack
Recently and in the past, various courts have rendered verdicts on the effect of FRAND on required royalties for SEPs. These courts have aimed at striking a balance between the detailed studies of the subject from the disputing parties. These studies typically consider not only SSO databases, but also a variety of relevant elements such as a company’s involvement in standard-setting activities. Most contentions in court and most public licensing efforts focus on end user products. Therefore, for this analysis we will exclude SEPs that relate solely to network equipment.

From recent judgments, we can deduce the following:

The presented numbers are the result of in-depth studies of various sources of information and the combined efforts of the various experts working on these court cases. Such analysis may include:

• claim charts;
• patent-relevance measures (for further details see “How to count and valuate standard-essential patents”);
• standard contribution data; or
• third-party determination (eg, courts and independent evaluators).

Royalty stack
In the early 2000s, various leading companies – predominantly manufacturers – in wireless communication (eg, Nokia, Ericsson, Siemens and DoCoMo) started an initiative with the aim to promote the adoption of the 3G standard rolled out in Europe, China and elsewhere. One of the key elements in this initiative was a declaration of mutual commitment to a framework for establishing predictable and more transparent maximum aggregate costs for licensing IP rights relating to European 3G technology, W-CDMA. These companies announced that anyone manufacturing wireless phones and network infrastructure compatible with W-CDMA would pay less than 10% of the sale price of the product in royalties to the patent holders. This announcement was made more concrete by the following statement: “This initiative is meaningful for promoting the W-CDMA services by keeping cumulative royalty rate below 5%.” The stated threshold of 5% also corresponds to a rate proposed by the Universal Mobile Telecommunications System Intellectual Property Association in 1999 (at least Qualcomm disagreed with the proposed 3G arrangements).

The same initiative was started by a group of companies including Alcatel-Lucent, Ericsson, NEC, NextWave Wireless, Nokia, Nokia Siemens Networks and Sony Ericsson after the finalisation of the LTE standard in 2008. These companies announced that they “support that a reasonable maximum aggregate royalty level for LTE essential [IP rights] in handsets is a single-digit percentage of the sales price“. However, the combined royalty rate of LTE licences active in the field is estimated at 14.8% or higher (for further details see “Royalty Rates and Licensing Strategies for Essential Patents on LTE”).

In short, a 5% royalty rate for all combined 3G SEPs and a 9% royalty rate for all combined 4G SEPs are considered by various courts as patent stack and as a starting point in the perception of companies that manufacture 3G and 4G-enabled products.

According to Strategy Analytics, the global average sales price on wholesale level in 2016 was $188 for handsets, $233 for 3G handsets and $266 for 4G handsets (€169, €210 and €240, respectively).

Applied on the average smartphone price and the proportional position in the total field of patents essential to 2G, 3G and 4G LTE results in the following:

*According to Strategy Analytics (2017)
**Following the court
***As implied by the court
****No percentage-based royalty stack has been indicated – royalty stack of $7.65 to $14.71 has been argued, therefore 5% is assumed

Rates in court
In the fields of 2G, 3G and 4G LTE, there have been several court rulings on reasonable compensation to the patent owners of such SEPs in consideration of the infringment by the defendants. These decisions are summarised in the table below, where the determined rates are applied against the average wholesale price of a smartphone.

*MM = Major markets
**CN = China and other markets

Rates in pools
As patent pools are often considered a pro-competitive element in licensing patents in a defined field of technology (for further details see “Patent Pools and Antitrust – a comparative analysis”, “Setting out the EU approach to Standard Essential Patents” and “Antitrust Guidelines for the Licensing of Intellectual Property”), the rates of such joint licensing efforts may be considered an example for positions of the licensors in amicable licensing discussions.

In the field of telecommunications standards, there are four relevant active pools:

• the Avanci programme (2G/3G/4G LTE);
• Sisvel’s mobile communication programme (3G/4G LTE); and
• Via Licensing’s WCDMA patent pool (3G) and LTE patent pool (LTE).

Among these efforts, only Sisvel’s mobile communication programme provides public information that permits comparisons with the aforementioned court cases.

*no information publicly available

Comment
Numerous court cases worldwide suggest wide-ranging royalty rates for implementing 2G, 3G and 4G SEPs in handsets. This outcome is further confirmed by one of the active patent pools that offers 3G and 4G SEP licences.

The results of the court cases show that analysing and counting SEPs is not straightforward. Studies presented in court consider not only SEP declaration databases, but also a variety of elements such as SEP relevance measures (for further details see “How to count and valuate standard-essential patents”) and analyses of patent claims in order to quantify the size, magnitude and value of the declared SEP portfolios.

While this analysis of court cases provides an understanding of royalty rates for 2G, 3G and 4G SEPs used in handsets, further analysis is required for other industries such as the Internet of Things and automotive (for further details see “Patents and standards in the auto industry”).

This report is an extract of an ongoing study around patent valuations of declared standard-essential patents. The analysis conducted by IPlytics intends to shed light on the actual number of active and highly valuable SEPs. While these counts and measures will not replace essentiality checks, they increase the understanding of a more accurate number of actually essential patents. IPLytics’ platform uses a variety of data sources to provide clarity on the value of SEPs including the information which patents are subject to court cases and/or patent pool offerings