Playing the long game

In a challenge to the status quo not seen for 20 years, in February 2015 the Institute for Electronics and Electrical Engineers (IEEE) adopted changes to its policy on the licensing of standard-essential intellectual property, most notably standard-essential patents (SEPs). Not since the failed adoption by the European Telecommunications Standards Institute (ETSI) in the early 1990s of rules specifying the terms and conditions of fair, reasonable and non-discriminatory (FRAND) licensing has a standard-making body dared to step into the commercial debate between owners of SEPs and standards users. Since those early heated debates in ETSI, SEP or FRAND licensing has developed from the artisanal to an industry. Business models around SEP licensing have outlived those based on the manufacture and sale of products. At the same time, SEP licensing has courted controversy and seen high-profile legal disputes, with Microsoft v Motorola and Huawei v ZTE being recent examples. How then should a chief IP officer (CIPO) or head of intellectual property (HIP) best implement such an established, yet changing and challenged, IP licensing-based business model today?

A would-be SEP licensor faces some fundamental choices – most notably, perhaps, whether to license alone or join a collective licensing scheme, such as a patent pool. Patent pools, long held to be anti-competitive, emerged as a viable alternative in the mid-1990s with the establishment of the MPEG-2 patent pool by the eponymous MPEG LA. Twenty years later, the MPEG-2 pool is still running and continues to return sustained long-term value to its participants. MPEG LA now has competitors, such as Via Licensing and Sisvel, and a putative licensor needs to consider the range of outsourced, shared-cost alternatives before going it alone.

It is a mantra of IP licensing to play the long game and few games are longer than SEP licensing. With timescales that can be measured in decades, programmes can outlive the professionals that create them, making stability and continuity essential. In this context, the role of the CIPO or HIP – always critical – becomes vital and also exposed. They need to have a vision well beyond their own tenure, with early high costs for targeted IP creation being offset only gradually – if at all – by downstream licensing revenues. Therefore, as well as soundness in execution, gritty determination is needed. SEP licensing is not for the faint-hearted, but notable members of the IAM Hall of Fame have established enviable reputations with the necessary qualities of intellect and character.

Undoubtedly, quality is the key to success for any IP licensing programme and this is particularly true of SEP licensing. While IP portfolio licensing may obscure a mixed bag of patents, the common requirement to at least identify what are quaintly referred to as ‘proud patents’ means that reliance on mediocre patents is harder when licensing SEPs. For a CIPO or HIP, driving quality into a standard-related patent portfolio requires effort, coordination and cooperation between R&D, IP creation and management and IP licensing functions, which may well go against high-efficiency, low-cost models of IP management.

The independence of an IP function is critical to sustained, long-term success for SEPs licensing. While IP functions often start life as part of an R&D function, the opportunity of delivering revenue is best served by having an IP function control its own profit and loss. This enables the targeted creation and management of intellectual property and coordination of these activities with an integrated IP licensing function. An independent IP function with direct board governance will ultimately deliver better value creation and realisation, whatever the strategic goals – be they enhanced product margins, asset creation or IP licensing.

Not every SEP licensing programme succeeds, not least because it requires the relevant standard to succeed. History is littered with failed or superseded standards, as well as stand-out successes. Where standards are only marginally successful, hard-negotiated licences may produce revenues that barely trickle in. Licensing on more successful standards can be tough and when negotiation fails, assertion – by litigation or other means – may be necessary, which will expose those proud patents to the sternest tests and, if lost, put the whole licensing programme at risk. Yet such challenges and difficult choices become inherent in a programme’s survival, because not all licensees are polite enough to come quietly.

Not all risks and threats are existential. The timescales of at-risk licensing are such that shifts in the geopolitical landscape of intellectual property can undermine the assumptions underpinning an SEP licensing programme. Attitudes to intellectual property shift, and changes to jurisprudence continually and subtly rebalance the relationship between risk and opportunity, so the rules to be followed are a moving target. There is art in not only staying the course with SEP licensing, but also responding and adapting to the changing environment.

Will the changes to the IEEE IP rules cause a major change to the SEP licensing landscape? It is too early to say, but with the SEP licensing market worth many billions of dollars, it unlikely that change will happen quickly or without some reaction from those with vested interests. What is certain is that this will be only one element of the broader landscape of SEP licensing, which will challenge and engage us for decades to come.