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"At the 2024 China Intellectual Property and Innovation Summit (CIPIS Summit), representatives from Huajin Intellectual Property, Xiaomi Group, Meizu Group, and ECARX Technology conducted in-depth discussions on topics such as the reasonable level of SEP licensing in the context of the Internet of Things and the method of determining the value of patent portfolios, focusing on the core purpose of exploring and returning to the true value of SEP itself."
Source: IPRdaily Chinese Network (iprdaily.cn)
Author: Heluo
With the advent of the era of the Internet of Everything, technical standards have increasingly become a "battleground" for countries around the world to compete for technological leadership and build strategic competitive advantages. The development and application of standards are inseparable from the support of technical solutions and related patents, and the natural contradiction between the public nature of standards and the private nature of patents has made the discussion on standard essential patent (SEP) licensing continue to rise in recent years. In addition to the controversy and disputes, the various stakeholders also expect to find a way to reconcile licensing practices and differences that are fair and just, mutually beneficial, win-win cooperation, and benefit the end consumer.
From April 18th to 19th, the 2024 China Intellectual Property and Innovation Summit (CIPIS Summit), hosted by Conways, was successfully held in Shanghai. As one of the most influential IP industry events in the Asia-Pacific region, this year's CIPIS Summit set up a panel discussion session with the theme of "Carrying the Sword of SEP and Creating a Healthy Intellectual Property Development", inviting representatives from Huajin Intellectual Property, Xiaomi Group, Meizu Group, and ECARX to conduct in-depth discussions on topics such as the reasonable level of SEP licensing in the context of the Internet of Things and the method of determining the value of patent packages around the core purpose of exploring and returning to the true value of SEP itself.
Hierarchy Battle:
Explore a reasonable SEP licensing model in the context of the Internet of Things
With the convergence of technologies, the development of the Internet of Things has spread the influence of mobile communication technology to more traditional industries. Unlike the more mature communications industry, the inherent characteristics of the upstream and downstream supply chains of industries such as automobiles are longer and more complex, which makes disputes over the SEP licensing level more and more prominent.
ECARX Senior Patent Engineer Zhang Hong
Zhang Hong, Senior Patent Engineer of ECARX, mentioned in her speech that there are two different licensing models in the SEP licensing theory, the so-called "license to all" and "access to all". Among them, "licensing to any person" means that any implementer at any level of the industrial chain can directly obtain SEP authorization, including terminal manufacturers and parts manufacturers; "Open to anyone" means that the right holder needs to follow the principle of fairness, reasonableness and non-discrimination (FRAND) so that any willing implementer can obtain a license, but is not obliged to grant a patent to any implementer. Zhang Hong pointed out that the main difference between the above two licensing models is the degree of retention of control and decision-making power of SEP licensing by rights holders. Under the "open to anyone" model, the right holder has a greater initiative and can choose the implementer according to its own business strategy and interests. In the "license to anyone" model, the implementer has a greater initiative and can obtain SEP permission from the right holder according to its own wishes.
The traditional transaction model in the automotive industry is for upstream suppliers to handle the patent licensing issues involved in the supply module. After entering the automotive industry as a special "module", the communication patent license did not follow the traditional transaction model of the automotive industry, but tried to change the traditional transaction model of the automobile industry that has been running stably for decades. Therefore, the conflict brought about by change is inevitable. Regardless of the conflicting interests and licensing preferences of SEP rights holders and standard implementers, which of the above licensing models is more in line with the normative requirements of laws and policies? Zhang Hong pointed out that from the perspective of relevant laws and regulations in mainland China, although the Patent Law and the Anti-Monopoly Law do not require the patentee to "license to any person", nor do they require "open to anyone", SEP rights holders should only collect a license fee from the standard implementers of each license level in the same supply chain, and cannot charge them repeatedly. At the same time, in order to ensure the openness of SEP licensing, some injunction requests by rights holders may also be prohibited due to their anti-competitive nature.
In addition to the mandatory provisions of the law, the intellectual property policy of the standards organization also has important reference significance for the determination of the reasonable license level. Zhang Hong pointed out that the current mainstream international and domestic standards organizations have different expressions on the reasonable license level. For example, the European Telecommunications Standards Institute (ETSI) and the International Telecommunication Union (ITU) have clearly required SEP holders to license or negotiate licensing issues on fair, reasonable and non-discriminatory (FRAND) terms and conditions in their intellectual property policies, but neither of them has clarified the level and scope of the license, and has maintained a relatively vague or open attitude on this issue.
In contrast, the Guidelines for Licensing Standard Essential Patents in the Automotive Industry (2022 Edition) jointly issued by the Intellectual Property Branch of the Society of Automotive Engineers, the IMT-2020 (5G) Promotion Group and the Automotive SEP Working Group clearly stipulate that "any bona fide patent implementer has the right to obtain a license for a standard essential patent, and the standard essential patent owner has the obligation to grant a license to the implementer who intends to obtain the license, regardless of the level of the industrial chain." In addition, the Institute of Electrical and Electronics Engineers (IEEE) has also required SEP holders in its IEEE Standards Committee Charter to make a license guarantee that covers "any compatible embodiment of an IEEE standard that uses an essential patent claim," including the final product and components. Judging from the above textual expression, there is no lack of policy support from standards organizations at the domestic and international levels for the licensing model of "licensing to any person".
The controversy over licensing tiers is not only about the selection of SEP licensees, but also about the basis for determining the licensing rate. Zhang Hong mentioned that the current licensing parties also have different views on this issue. The right holder usually advocates that the license rate be determined by the price of the terminal product, on the grounds that the SEP component is included in the terminal product and can only be fully implemented after it is loaded into the terminal product, thus forming the basis of consumer demand. Therefore, the SEP corresponds to the end-market price, and the SEP right holder should also be entitled to a certain share of the selling price of the end product, while the price of SEP components (such as the minimum saleable unit) cannot fully reflect the actual use value of the SEP. On the implementer's side, the view that the license rate is determined by the module price is the mainstream, mainly because the actual value of the SEP has been and is only reflected in the SEP module, and the price of the end product should be regarded as the added value given by the horizontal and vertical integration of the industrial chain by the machine factory based on the application scenario, rather than the value gain brought by the SEP itself.
Han Litong, Director of Intellectual Property of Meizu of Xingji
Han Litong, Intellectual Property Director of Meizu Group, further pointed out that due to the characteristics and practices of the industry, different industries have different choices of licensing models. Specifically, in the automotive industry, the communication SEP component is only in an auxiliary position in the whole vehicle, and has nothing to do with the core function of the whole vehicle. In this case, it is clear that the rate calculation based on the module price is more reasonable. In addition, unlike the mobile phone industry, where SEP licensing fees are usually borne by mobile phone terminal manufacturers, in the automotive industry, especially in China's automotive industry, upstream and downstream manufacturers often agree on the sharing of patent licensing fees. Therefore, even if the SEP right holder chooses to charge the host manufacturer, the license fee will inevitably be deferred to a large number of upstream parts and components enterprises to decompose and bear. At present, under the high rates advocated by some SEP rights holders or patent pools, parts and components companies may be overwhelmed. In summary, Han Litong said that SEP rights holders should recognize and respect the current situation of China's automotive industry, consider the cost affordability of manufacturers at all levels, and design a flexible charging model accordingly, so as to ultimately achieve a win-win goal for both licensors and parties.
Are the license fee rates necessarily different for different types of end products? Is the higher the price, the higher the license fee rate for different types of end products? Marta Beckwith, founder of TechSea Law, mentioned an interesting example in one of her blogs. ”… You go to the pet food store to buy dog food. While waiting in line, the pet store owner asked the people at the counter what kind of dog they had and where they bought it. It turned out that they had a small mongrel dog that they had bought from the Society for the Prevention of Cruelty to Animals. The pet shop owner told them that the dog food was $3. The next person in line wants to buy the same amount and type of dog food. The pet shopkeeper asked the second person what kind of dog they had and where they bought it. The second person had a Labradoodle, also bought from the Society for the Prevention of Cruelty to Animals. When the second person hands the pet shop owner $3, the pet shop owner says the second person should pay $5. Now it's your turn and you want to buy the same amount of dog food as the other two. You live on a ranch. You tell the pet shop owner that you have a working cattle dog, which was bought from the breeder, and you train it yourself to work on the ranch. The pet shop owner tells you that pet food costs $20. When you ask why it's so much more expensive than others, the pet shop owner tells you that you need to pay more for the same dog food because your dog is more useful and therefore more valuable. Because you feed a more useful and valuable animal with dog food, dog food is worth more money to you." [1] Although there is a certain difference between the example of this analogy and the actual situation, it is a question worth thinking about in the industry.
Pricing Battles:
Reasonable pricing of SEP patent package licensing should return to the value of the basics
In SEP licensing negotiations and disputes, no matter what licensing model is adopted and what licensing level is chosen, determining the license rate in line with the FRAND principle is always the core, and it is also a long-term difficult problem for the licensees and the judiciary, administrative departments, academic researchers and even the public.
For example, in the article "The rate issue is the core of the current SEP negotiation of car companies, it is neither fair nor credible to break away from the unilateral fault of the rate negotiation", and "see if there is any analysis of the reasonableness of the rate". [2]
Xiaomi's Director of Patent Licensing, Bei Wang
Regarding the patent package rate, Wang Bei, director of patent licensing of Xiaomi Group, pointed out a reasonable and feasible SEP patent package pricing path in her speech, that is, to return to the commodity attributes and true value of SEP itself, and seek fair final pricing through frank and full technical negotiations.
1) General R&D investment should not directly determine the license pricing
What should be the benchmark for the pricing of SEP patent packages? In this regard, there has long been a popular view in the industry that one-sidedly correlates R&D investment with licensing pricing, that is, since the patentee has invested heavily in the R&D of SEP, it has a reason to obtain a high patent licensing return. "We appreciate these companies that are willing to make high investment in R&D, and the development of the industry and the progress of society are indispensable to the continuous investment of innovative subjects. Xiaomi is not only an implementer of technology, but also an active and important technology innovator, and has always attached great importance to R&D and increased R&D investment year by year. According to the "Global 5G Standard Essential Patents and Standard Proposals Research Report (2023)" released by the China Academy of Information and Communications Technology, Xiaomi entered the top 10 in the global declaration of 5G standard essential patents with a high growth rate. Wang Bei said in her speech.
However, Wang Bei also pointed out that respecting intellectual property rights does not mean accepting the one-sided claims and unreasonable licensing conditions of the right holder, and there are many problems that cannot be bypassed but difficult to explain reasonably from the single perspective of the right holder's R&D investment. First of all, R&D investment and output are not necessarily proportional, in many cases, even if a high amount of R&D investment is made, it is often only possible to produce a small amount or even no technical solutions corresponding to SEP. Second, even if a patentee obtains SEP output while investing in R&D, the correspondence between the two is worth further studying. In fact, a considerable number of technology R&D companies in the market have the status of product companies, and a considerable proportion of their R&D investment is likely to correspond to product development work, even including various products that are not related to their SEP patent portfolio. The main R&D investment of these companies is to help develop and produce related base stations or mobile phone products. SEP patents are usually completed by a small number of pre-research teams or research teams, accounting for a small proportion of the company's total R&D investment. In addition, Han Litong also said that from the overall industry dimension, the R&D investment of car companies is often much higher than that of communication companies, and if the level of R&D investment is used as the standard for determining the value of patent packages, then the value of patent packages of communication companies should be much lower than the value of patent packages of car companies. In summary, we believe that in most cases, R&D investment should not directly determine licensing pricing.
2) Adjustment of licensing pricing after the same patented technology enters multiple fields
Taking a step back, if it is ideally assumed that the R&D investment and output are constant, and that the R&D investment of the relevant pre-research team is correctly calculated, then the R&D investment of a certain SEP patent package can correspond to the licensing income, which means that the patentee should maintain a relatively constant total license return. As a result, when the application scenarios of some existing cellular technology SEPs are extended from traditional mobile phones and other devices to automobiles and IoT products, patentees may use the same patent package to obtain more licensing revenue channels, and they should reduce the original licensing rates for mobile phones and other devices. What we know so far, this is not happening in reality.
and 3) call for frank technical negotiations to underpin licensing pricing
Wang Bei further said that the patent or patent package to be licensed is still a special commodity in essence, and the pricing of the commodity is always based on the quality of the product itself. Accordingly, patent licensing negotiations are also within the scope of commercial communication, and SEP rights holders should have an honest attitude in promoting their products, and fully demonstrate to the standard implementers the richness, service life, technical fields and regions covered, and correspondence with the standards. At the same time, the licensor and the licensor should conduct in-depth technical discussions on issues such as the correspondence and stability of the patent portfolio. Wang Bei pointed out that from a practical point of view, rights holders who are more confident in their own patent portfolios are often able to provide a claim chart matching the size of their patent portfolio in licensing negotiations, and are not afraid to conduct technical negotiations to support their licensing offers. On the contrary, some rights holders not only do not actively provide sufficient claim comparison tables, but also remain secretive about technical negotiations, which often affects the mutual trust between the licensors and hinders the final conclusion of the licensing agreement.
Outside of negotiation, the comparable agreement approach is also a common method for determining FRAND licensing rates. Wang Bei pointed out that in the past, the application of the comparable agreement method was limited due to the reluctance of the right holder to provide its prior license agreement, or deliberately used a license agreement that deviated from the actual situation of the current license (such as the license agreement signed with some small implementers) to claim excessive rates, and even dismantled the rate of comparable licenses in an attempt to increase the license amount regardless of the factual basis formed by the license agreement. However, with the High Court of England and Wales in May 2023 in Optis v Apple, which pioneered the use of the law of comparable agreements, the application of the comparable agreement law will be more transparent and fair. The judgment also suggests that SEP rights holders should use a uniform comparable agreement that excludes litigation and the threat of injunction for implementers with similar sales volume, product types and market coverage in the licensing negotiations, and dismantle them at reasonable rates according to the actual situation in the licensing negotiation process, so as to facilitate the two parties to reach a licensing agreement with reasonable terms as soon as possible.
Wang Bei concluded that the determination of the SEP license rate not only determines the reasonable return that the patentee can obtain, but also is related to the popularization of standard technology and the sustainable development of related industries, and is also closely related to the vital interests of end consumers. Therefore, it is called upon that both the patentee and the standard implementer should pay attention to the role of technical negotiations, especially the stability discussion session, and. Only by fully discussing and arriving at the license rate that is closest to the true value of the patent can we maintain the balance between the interests of the licensor and the public for a long time, and truly realize the innovative vision of "allowing everyone in the world to enjoy a better life brought by technology".
Exegesis:
[1]https://www.sepessentials.com/post/the-myth-of-use-cases-les-svc-part-2
[2] The issue of rates is at the core of the current SEP negotiations of car companies, and it is neither fair nor credible to negotiate unilateral faults without https://mp.weixin.qq.com/s/2qDxdspr3nXIZC8ZLYiaUg rates
(Original title: Return to the Fundamentals of Value: Discussion on the Core Issues of SEP Licensing in the Context of the Internet of Things)
Source: IPRdaily Chinese Network (iprdaily.cn)
Author: Heluo
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