The world of patent licensing often seems like a maze of twisty little passages, all alike, but every so often the industry stumbles into a new tunnel — or, at least, one that seems new at first glance. Such is the case with Apple, which has asked the European Telecommunications Standards Institute (ETSI) to establish a set of basic principles governing so-called fair, reasonable, and non-discriminatory (FRAND) licensing of patented technologies included in wireless communications standards. That sentence may make many consumers’ eyes glaze over, but it boils down to this: Apple wants rules saying that if a company contributes their technology to a standard, they don’t get to use that technology to beat up competitors who use that standard.
The letter — which was apparently sent in November — was first reported by The Wall Street Journal (subscription required) and reproduced in full in Florian Mueller’s FOSS Patents blog. In the letter, Apple claims the telecommunications industry is suffering from the lack of consistent licensing schemes for many of the technologies used to make modern mobile devices. Apple then outlines a three-point framework to help normalize royalty rates, and proposes that the framework be extended to all ETSI members equally.
Why does the state of FRAND licensing matter to Apple, and what’s at stake for the broader mobile industry?
Why FRAND is important
Almost all the technologies in modern mobile devices — from touchscreens to Wi-Fi to 3G to batteries to flash storage to USB to accelerometers to GPS — all involve a myriad of patented technologies held by a broad number of companies. One company might hold a patent for frequency multiplexing technology used to boost Wi-Fi performance, while another company might own a patent on a similar technique to boost 3G mobile broadband performance. Another might hold a patent on rapid USB charging; still another might hold a patent on a particular way of making scratch-resistent cases. It goes on and on: Patents are involved in almost every aspect of a device, from the way its components are manufactured and how they communicate with each other to how the screen is designed to how it manages battery power.
While some companies have truly monumental troves of patents (IBM and Microsoft tend to lead American firms, with names like Samsung and Canon right in the thick of things) no single company outright owns all the intellectual property necessary to make a modern mobile device. The same is true for most digital technology, from PCs to routers to phones to televisions. As a result, companies usually form coalitions to develop technology standards.
In broad terms, these standards have two primary advantages. The first is that they set a single, unified version of a technology that the entire industry can use: this lets devices from different manufacturers work with each other transparently. The second is that it advances the industry, because each company whose patented technology is included in the standard grants a license to everyone else using the standard. The standards, usually administered by industry groups, therefore more-or-less represent patent pools: Anyone who wants to use the standard can license the entire pool of patents. This doesn’t mean companies are giving away their technology for free. Each company whose tech is incorporated into the standard gets a share of the licensing fees. The specifics vary widely: Some standards set rates and royalty fees for all participants right up front, while others leave it to the goodwill of participating members to hand it themselves. But the technology pools can create the basis of product ecosystems, and let economies of scale operate — ultimately, that means if the technology takes off, it can be cheaper for everyone.
The key to this patent pool idea is fair, reasonable, and non-discriminatory licensing — usually known as FRAND, but sometimes just RAND. However, the meaning of the term is not set by law: it’s determined (or not!) by the particular standards group or groups managing the technology. So, while there’s no single definition, FRAND usually means licensing terms for patents contributed to a standard must be:
- Fair, so the terms wouldn’t be considered illegal if they were dictated by a dominant firm in their market. That means license terms can’t come with exclusivity requirements, stipulations that licensees license their own technology to the patent holder, or that the license is only available in bundles of other, unrelated patents.
- Reasonable means the licensing fees can’t be out-of-this-world. This is the vaguest of the terms, but generally means that patent holders (singly or collectively) can’t charge so much for the use of their technology that the standard can’t compete in the industry. Otherwise, the standard would be ignored, defeating its purpose.
- Non-discriminatory means all potential licensees have to be treated in the same way: patent holders can’t use the licensing process as a way to play favorites with their friends and screw over their competitors, such as dragging out the licensing process by conveniently “losing” paperwork.
Guess which term concerns all the hubbub with Apple? Reasonable.
Apple’s letter to ETSI decries that the telecommunications industry “suffers from a lack of consistent adherence to FRAND principles in the cellular standards arena.” And Apple has been bearing the brunt of this lately: Motorola just managed to get some of Apple’s iOS products pulled briefly from its online store in Germany because of a dispute between the two companies over 3G technology patents. Apple and Samsung are embroiled in a similar dispute over 3G technology, and Samsung is currently the subject of an apparently-related formal EU investigation.
Both Motorola (which is in the process of being acquired by Google, let’s remember) and Samsung appear to be taking a similar approach with Apple. Both have contributed patents to 3G technology standards used in many of Apple’s iOS devices, and both companies have acknowledged Apple has approached them about negotiating FRAND licensing deals for the technology. However, the companies have not been able to come to an agreement on terms of the licensing. As a result, both Samsung and Motorola claim that Apple is using their technology without license. In Samsung’s and Motorola’s view, that amounts to patent infringement, so sales of Apple products with the technology ought to be halted.
What do Samsung and Motorola want? Although terms of FRAND licenses don’t often make it into the public record, the legal battles of the companies in Mannheim, Germany, have brought the numbers to light. Samsung wants 2.4 percent of revenue from sales of iOS devices using their technology. Motorola wants 2.25 percent.
At first glance those numbers might not seem outrageous. After all, merchants often pay in the neighborhood of 3 percent of every credit card transaction to banks: numbers that small are just the cost of doing business, right? Well, that’s not true in the case of technology patent licensing. Earlier we outlined the vast number of patented technologies that are commonplace in essentially every modern mobile device. If every owner of those patents came to Apple — or any other electronics company —demanding more than 2 percent of their sales revenue for use of the technology, patent licensing requirements would very rapidly account for well over 100 percent of the price of a product. And, since the rates are based on percentages, raising the price won’t help: The product would still be encumbered by a patent licensing burden it could never hope to meet. Hence, the product would never be developed, let alone sold. If that were the way FRAND licensing worked, we wouldn’t be living in a world of smartphones and widespread Internet connectivity. We’d be reading printed newspapers, going to libraries, and sending postcards.
Apple — in general, but in particular as one of the world’s most valuable companies — can never agree to those rates. It would set a precedent for all other FRAND patent licenses and potentially make the entire mobile industry untenable.
And Apple isn’t the only company in the crosshairs on these issues. Separate from Motorola’s actions against Apple, Motorola is also pursuing Microsoft over patents essential to the H.264 video codec. As part of the technology standard, Motorola’s patents are to be made available on FRAND terms. However, as in its dealing with Apple, Motorola has been unable to come to terms with Microsoft, and — again as in its dealings with Apple — Motorola feels its entitled to 2.25 percent of the cost of products implementing H.264. That includes the Xbox 360 and Windows 7.
In a surprising move, Microsoft issued its own statement today re-iterating its support for FRAND standards, and promising it would never abuse the licensing of patents it has contributed to industry standards or (emphasis mine) seek an injunction or exclusion order against for any firm’s use of those patents. Microsoft has recently pointed to its success extracting license fees from Android device makers as an example of the patent system working as it should.
Apple’s plea to ETSI
Apple’s letter to ETSI outlines three principles it believes can be used as a basis for FRAND licensing: an appropriate royalty rate, a common royalty base, and that companies contributing patents to standards would not be able to seek injunctions against companies implementing the standard.
Apple’s first point would require technology contributors to base their royalty rates in a way that reflects the patent holder’s overall portfolio of patents (and patent applications) in the field relative to the entire industry. In other words, for Motorola to demand a 2.25 percent royalty, it would have to account for about 2.25 percent of all the essential patents relative to the technology.
Apple’s second point is perhaps the most important: the company proposes royalty rates be calculated not on the retail price or revenue of products incorporating the technology, but instead be “no higher than the industry average sales price for a basic communications device that is capable of both voice and data communications.” In other words, an über-expensive bling-encrusted crystal-and-gold designer handset that sells for five figures would pay the same royalty rate for mobile technology as a bare-bones handset implementing the same standards. Patent holders wouldn’t be able to demand more money just because the sale price of a particular end product was more expensive than another.
Finally, Apple proposes that any move to seek an injunction or exclusion order on products implementing standards technology be considered a violation of FRAND terms. In other words, even if companies had trouble working out terms of a licensing agreement, patent owners wouldn’t be able to try to block products using those standards from going on sale. Doing so would violate their agreement with the standards body, and potentially expose them to major legal liability.
And, of course, Apple concludes its letter with a veiled threat. Although Apple doesn’t hold many patents related to 3G services—the company didn’t get into the mobile phone business until 2007, after all — it does note that it holds some 140 patents and applications that might become essential to LTE, UMTS, GSM, and other technologies. In other words, it would be a pity if Apple had to put the screws to other companies using those standards later because (in its view) Motorola and Samsung are abusing the FRAND process now.
What happens now?
Apple’s letter to ETSI carries absolutely no authority. Apple’s UK subsidiary is just one member of ETSI, along with more than 700 other companies and subsidiaries. And Apple apparently isn’t currently interested in making its claims of FRAND abuse public: The company wrote its proposal all the way back in November, well before Motorola’s current successes against the company in Mannheim. If Apple wanted to raise a public stink about FRAND licensing, it’s going about it all wrong. The letter to ETSI never mentions Motorola or Samsung by name, and Apple’s proposed framework for FRAND licensing would apply to Apple as well as all other ETSI members.
In the meantime, Motorola and Samsung are likely to continue pressing their infringement cases against Apple in Mannheim, which is a particularly favorable venue for them thanks to some quirks of German intellectual property law. The next move will likely come from Motorola in a few weeks, which will attempt to (once again) prevent Apple from selling allegedly-infringing iOS products in Germany.
The broader battle over possible abuse of patents contributed to broader technology standards will, unfortunately, probably take years to play out.