Speaking to the IAM blog Ericsson chief IP officer Gustav Brismark has made his first public comments on the judgment handed down by a California court just before Christmas in the Swedish telco’s high-profile FRAND licensing dispute with Chinese mobile manufacturer TCL. The decision, which was filed on 21st December, is the latest case involving standard essential patents (SEPs) to hit the courts and is largely seen to have gone against Ericsson.
Brismark pointed to what he called “methodological and mathematical errors which we feel will be corrected in the appeal process”, which had a depressing effect on the licensing rate that the judge ruled Ericsson could charge for its SEPs relating to 2G, 3G and 4G mobile technology. The Ericsson IP supremo claimed that the top-down methodology applied for the most part by the judge to determine the rate was, “highly biased in favour of infringers”.
The dispute between the two companies has been closely watched since TCL filed suit in 2014 in the Central District of California alleging that Ericsson was in violation of its FRAND obligations. A large part of the interest in the case stemmed from the fact that the decision promised to determine a fair and reasonable royalty rate for the entirety of Ericsson’s mobile portfolio. That’s significant because the Swedish telco owns one of the leading IP arsenals in the space.
As this blog reported last month, interest in the case had mounted among members of the licensing community after the California judge announced in early November that he had reached a decision and then gave both sides well over a month to request redactions of confidential information. Ericsson had asked for that time to be extended, which fuelled speculation that the decision had gone against the company.
Not surprisingly, since Judge Selna’s decision was published, the patent world has been aflutter with what it might mean for SEP owners and implementers, with the ruling widely seen to benefit the latter. For an overview of the decision, Richard Vary of Bird & Bird and Professor Jorge Contreras of the University of Utah have both put out summaries that are well worth reading.
In his ruling, Judge Selna largely applied a top down approach to determining how much TCL should pay. That method, similar to one used by English judge Mr Justice Birss in his decision last year in Unwired Planet v Huawei, determines how much a standard is worth in terms of the proportion of a device’s price, calculates how many patents are essential to the standard and then what proportion of those essential patents are owned by the company in question.
The Los Angeles-based judge then looked at comparable licences for other major device manufacturers to ensure that the royalty rate did not discriminate against TCL. Although the Chinese company is toward the lower end of the market and therefore can’t charge as much for its devices as, say, Apple does for the latest iPhone, Judge Selna ruled that a comparable group of mobile manufacturing licensees should include the Cupertino-based giant as well as other market players such as Samsung, LG and Huawei. That’s notable because market leaders like Apple and Samsung tend to receive a volume discount on their licensing rates from SEP owners.
In his comments to the IAM blog Brismark raised questions over the way that the judge applied the top-down approach, much of which was borrowed from proposals put forward by TCL. “As applied here it over-estimates the total number of standard essential patents in the industry, meaning that when you calculate Ericsson’s share of SEPs as compared to the total it deflates our share,” he commented.
Brismark’s principal criticisms here focused on two points: first taking all of the patents declared as essential to ETSI as the starting point; and, second, then spending insufficient time on analysing the IP and determining which grants were essential to the standard. The engineers employed by TCL spent an average of 20 minutes per patent evaluating a sample of the declared SEPs from a group of the largest patent owners in the sector. The core of Brismark’s argument is that TCL’s analysis was simply not thorough enough. Judge Selna did not accept all of TCL’s proposed approach, but in a comment that is sure to be pounced on by other prospective licensees, he declared in his ruling that Ericsson’s patent portfolio is “certainly not as strong or essential as it has claimed”.
Among his other criticisms, Brismark also suggested that the decision erred in analysing Ericsson’s licensing deal with Samsung, which was the principal comparable agreement that the judge focused on. The decision used data on handset prices from market intelligence firm International Data Corporation (IDC) which Brismark insisted was not consistent with the approach typically taken in licensing agreements. “IDC, when looking at handset revenues, uses the retail price and retail prices are never part of any licence agreements,” he asserted. “Instead licence agreements look at the price that the handset maker itself is paid, not what the consumer pays.” The difference between the two prices, Ericsson’s IP chief claimed, can be as much 35% to 40% in extreme cases.
Judge Selna’s ruling did not entirely go against Ericsson as he found that the telecoms giant had negotiated in good faith and had not breached its FRAND obligations. Brismark also said the company welcomed the finding that TCL should be on the hook for royalties for the period while the two companies were in licensing negotiations and then in litigation, and that charging a royalty based on a proportion of a device’s price is FRAND and is the right approach.
Ultimately, though, that may provide little solace from a ruling that proposes significantly lower rates for Ericsson’s 2G, 3G and 4G patents than the Swedish company had proposed. There’s no doubt that it’s a decision that will be welcomed by most device manufacturers who fall on the licensee side of the equation. Xiaomi’s vice president of IP strategy Paul Lin described it as “a wake-up call to licensors” and also called for more transparency around licensing terms from patent owners which he said would make them “more credible” in negotiations.
Judge Selna’s decision offers a stark contrast to recent comments from Makan Delrahim, the new antitrust chief at the Department of Justice in the US. In a speech in November Delrahim signaled that US policy had skewed too far in favour of implementers at the expense of patent owners, which risked undermining incentives for IP creators. For owners of large SEP portfolios buoyed by Delrahim’s comments and hopeful of an improved licensing climate in the US, Judge Selna’s decision comes as a considerable blow.