Two dollars and fifty cents, a historical denomination associated with the famous quarter eagle gold piece, will be the maximum amount of royalty the phone manufacturers need to pay to Huawei for every multi-mode smartphone in exchange for a license to implement its patented 5G technologies.
According to an announcement by Jason Ding, head of Huawei's intellectual property rights (IPR) department, at the Forum on Innovation and IP Prospects in 2021 and Beyond held at the company's Shenzhen headquarters on March 16 2021, for every multi-mode 5G smartphone, Huawei will provide a reasonable percentage royalty rate of the handset selling price, and a per unit royalty cap at $2.5.
Considering that Huawei has always been a major contributor to 5G standards and is holding one of the largest 5G standard essential patent (SEP) portfolios in the world, the above royalty cap is a bit lower than expected by the industry.
Huawei's understanding of the reasonable level of royalty is kind of converging with Samsung, a long-standing opponent, who had been arguing tenaciously during the three-year litigation with the Chinese company against royalty overcharging based on concerns of royalty stacking and ineffective value apportionment. This is consistent with the fact that both are currently not only the main patent holders but the largest end-user device manufacturers in the telecommunication industry, in other words, net implementers.
At the other end of the spectrum, net patent holders, especially patent assertion entities (PAEs) like Conversant Wireless and InterDigital, have been advocating a much higher level of royalty ever since the days of 3G and 4G. InterDigital is asking for a 5G royalty rate of 0.6% with a $200 cap of unit price, which results in a per unit royalty cap about half of that for the license of Huawei, but only with a substantially smaller SEP portfolio.
Most of the disputes about telecommunication SEP licensing around the world in the past 10 years could be attributed to the above disagreement on royalty level between patent holders and implementers. While the European Telecommunications Standards Institute (ETSI), the major standards development organisation (SDO) in the industry, has attached in its IPR policy statement the adjectives of fair, reasonable and non-discriminatory (FRAND) to the terms and conditions of licenses, there is no definition of FRAND in the first place, not to mention what 'reasonable' means when it comes to royalty level.
Determining the royalty base
The share of royalty for a single unit is the product of two components: a royalty rate and a royalty base. The reason for introducing a royalty base instead of multiplying the royalty rate with the whole unit price directly is that the patented technology is often embodied only in a few components of the unit, thus value apportionment is required to reflect the actual contribution of the patent.
One of the methods of determining the royalty base is the smallest saleable patent practicing unit (SSPPU) approach, which calculates the royalty based on sales of the smallest component that embodies the claims of the patent and that is sold in the marketplace. In contrast, sometimes the entire market value rule (EMVR) is applied where the patented feature is believed to be the driving factor of the customer's purchase, in this case the entire market value of the product is used as the royalty base.
For the royalty base of a mobile phone, the SSPPU approach could be used to result in the price of the baseband chip, and the EMVR the whole unit price. Past practice in the mobile phone industry is to set the royalty base according to the EMVR as the whole unit price, which is typically subjected to a preset cap (for example, Qualcomm usually caps the phone royalty base at $400) for the sake of value apportionment.
While the SSPPU approach is rarely used, an 'equivalent' low royalty level could be achieved once the subject of licensing is switched from the phone to the chip, as the royalty base could never go beyond the price of the product.
In the 2017 antitrust lawsuit filed by the Federal Trade Commission (FTC) against Qualcomm, District Judge Lucy H Koh ruled, among other things, that Qualcomm had an obligation to license its mobile phone patents to other baseband chip manufacturers as outlined by its commitments to two domestic SDOs, the Alliance of Telecommunications Industry Solutions (ATIS) and the Telecommunications Industry Association (TIA). While the case was then believed to seriously endanger the San Diego company's profit model, it was later reversed by the Court of Appeals for the Ninth Circuit.
Changing technologies
Circumstances change with the passage of time, the quarter eagles have long been out of circulation along with the abandonment of the gold standard. Telecommunication technologies are also undergoing profound changes since 5G, as the derived applications are no longer merely or mainly for mobile phones, but for various scenarios unprecedented in the previous generations.
In particular, compared with enhanced Mobile Broadband (eMBB) for the traditional phone scenario, the power of Ultra Reliable Low Latency Communications (URLLC) and massive Machine Type Communications (mMTC) will not only enable brand new applications such as autonomous vehicle but expand the scope of application of existing technologies like internet of things (IoT).
As the technologies become more intricate and complex, it is expected to valuate the SEPs in a more comprehensive manner to adapt to the new trends in licensing. For instance, when the questioned product is so complicated and expensive as in the case of autonomous vehicle, the previous practice of licensing at the end-user product level and going for an EMVR-based royalty base may not seem justifiable. In seeking a component-level licensing, Daimler and its suppliers have already brought FRAND complaints against Nokia in both Europe and the US. The problem will become more prominent in the 5G scenario.
Another application sector to be significantly affected by the new generation of SEP licensing is IoT, where in case of the applications for which neither high connectivity rate nor low latency is ever required, the premium part of the royalty corresponding to irrelevant eMBB/URLLC technologies could be an excessive overcharge upon the implementer.
Special report data
It is often necessary in licensing disputes to valuate the 5G SEP portfolio of one of both of the parties, in which case reference can be made to the public-accessible ETSI IPR online database for the SEP declarations of ETSI members (according to the ETSI IPR policy, during the proposal or development of a standard, ETSI members must inform in a timely fashion if they are aware that they hold any patent that might be essential). In particular, an extract of the database could be found in the special report, which is published twice a year.
However, the special report will not directly tell you how many 5G patents/patent families each individual company has, there are some factors needed to be taken into consideration beforehand.
Firstly, the special report contains a number of duplicated data items of declaration, each one of which will be counted as an individual patent in the statistics. The reasons behind the duplication include that a company might declare one single patent family several times in the name of its family members, respectively, that a new patent owner (e.g. an assignee) might declare the same patent in its own name in addition to the previous declaration by the former owner, and that the data processing of the ETSI might also expand the record of a declared patent according to the entire patent family, etc.
Secondly, a declaration does not necessarily translate into an effective SEP in the portfolio. While a patent/patent application may have a time-varying legal status such as being pending, rejected, withdrawn, granted, expired, invalid, or partially invalid, only those that are granted and not wholly validated at a specific time point count as effective. Further, if the valuation is connected with a time point in the past, the data downloaded from the database must be processed to reflect the actual legal statuses at that time.
To identify the truly valuable patents in a portfolio, patents are better processed and assessed on a one-by-one basis. Some of the patents are included due to errors like priority-based expansion of declaration records, and thus can be easily eliminated at first glance for being apparently not related to the standards in general. Further filtering can be made by referring to the detailed information in the declaration such as generation information (3G/4G/5G), project and standard/specification numbers, etc.
However, the data might be incorrect due to a variety of reasons. For example, while the claimed solutions in the patent were aimed at contributing to the declared section of standard at the time of declaration but are not adopted by the later established standard. Also, the declaration by the patent holder could be inaccurate in the first place, either inadvertently or intentionally. Therefore, the most reliable way is to read the claims and possibly the specification of the patent in question by an expert.
In contrast with 2G/3G/4G, 5G standards may correspond to a variety of different application scenarios, including autonomous vehicle, IoT, and the like, which would assign different weights to the patents in terms of valuation.
Moreover, the value weighting of a patent is also closely associated with the subject matter of its claims. For example, a cellphone manufacturer will pay more attention to the claim of a user equipment or a method performed by a user equipment, while an infrastructure patentees will be more interested in claiming a base station. The overall evaluation involves not only essentiality assessment but also technical classification of the patent to determine its weight in various situations.
A further crucial problem in processing special report data is the definition of 'patent family', for which a plurality of candidates are available. For example, one could define a family with at least one valid member as a 'valid' patent family, and a family with at least one member essential to 5G standards as an 'essential' patent family. No matter what the definition is, it should be reasonable and easy to verify by reproduction to make the resulting statistical results acceptable by most people.
5G patent prosecution
While 5G is a whole new generation, it nevertheless contains a set of progressive optimisation and improvement on the basis of 4G communication technology. As a result, in certain developed 5G communication technologies, we can always see a 'shadow' of 4G technologies. These 4G legacy technologies are sometimes referred to as prior art to challenge the inventiveness of 5G-based applications by examiners in the process of prosecution.
It is often not easy to defend the inventiveness of a 5G innovation against seemingly similar prior art disclosure in its 4G predecessors. A strategy worth trying is to assess the technical solution of 5G application as a whole in the context of the 5G technical background, in particular, in combination of the application scenarios of 5G.
We will conclude with a case example in 5G patent prosecution, which shows how the inventiveness of a 5G application could be argued in the context of a 'similar' 4G prior art.
The application has proposed a scheme related to finding a network node AMF for a user equipment in a 5G mobile communication system. The examiner rejects its inventiveness with the prior art Document 1 (D1), which involves the network node MME in 4G mobile communication system having a similar function as that of AMF in 5G.
While the functions of AMF and MME are similar, the difference introduced in 5G in terms of application scenarios helps to build the case. In general, certain application scenarios have only been enabled since this particular generation. For example, in autonomous driving, even a one-millisecond delay could be fatal, and an extremely high reliability of communication is required. On the contrary, in the scenario of smart meter readings, data delay is no big deal, and mobility-related functions such as handover are completely unnecessary.
For the background of the application, the selection of AMF sets is based on network slices (services), which is originated from the inherent nature of a 5G network that communication support is available for a variety of service requirements. In contrast, in a conventional 4G network where typical communication services are provided, the quality of service (QoS) only depends on, for example, delay rate and signal loss rate to prioritise the service requirements.
Consequently, a terminal in a 5G system should select not only the network nodes that the UE can communicatively connect to, but also those network node that can provide the service that the UE desires, thereby providing effective services in the 5G mobile communication environment.
It was therefore argued that the term 'AMF set' in the application is endowed with a particular meaning, that is, AMF set composed on the basis of the supported network slices, which deviates from the traditional 'MME group' in D1 referred to by the examiner. The patent was soon granted afterwards, which would be unthinkable but for the aforesaid clarification of terms of network nodes.
Guang Hou
Patent attorney
Liu Shen & Associates
T：+86 10 6268 1616
Guang Hou is a patent attorney at Liu Shen & Associates. He specialises in patent prosecution, re-examination, patent invalidation, IP litigation, and client counselling with a focus on communication, computer networks, multimedia, electronics, and physics.
Guang has been providing legal opinions in litigation and consultation cases since 2011. In particular, he has worked independently in the fields of standard research, prior art searching, infringement analysis, and invalidation analysis in many cases. He is seasoned in FRAND licensing/infringement litigation and invalidation proceedings of standard-related patents.
Guang has a PhD from the University of Science and Technology of China (USTC). Before joining Liu Shen & Associates, he worked as a postdoctoral fellow at USTC for three years.
Hongbo Jia
Patent attorney
Liu Shen & Associates
T: +86 10 6268 1616
Hongbo Jia is a partner at Liu Shen & Associates. He specialises in patent prosecution, patent invalidation, litigation and client counselling with a focus on communication standard essential patent (SEP).
Hongbo is familiar with 3GPP communication standards and has handled more than 200 SEP standard cases in patent relevance and validity evaluation, patent invalidation and litigation.
Hongbo has a master's degree in communication engineering from Beijing Institute of Technology.
Ziqing Wu
Patent attorney
Liu Shen & Associates
T: +86 10 6268 1616
Ziqing Wu is a patent attorney at Liu Shen & Associates. She specialises in patent prosecution, re-examination, patent invalidation, IP litigation, and client counselling with a focus on electrical engineering, telecommunication, artificial intelligence, Internet of Things as well as big data.
Ziqing handles a number of cases relating to patent examination, reexamination, invalidation, infringement lawsuit and other IP-related matters.
Ziqing has a master's degree in electrical science and technology from Beijing Institute of Technology.
