Patents in Telecoms and the Internet of Things

7 & 8 November 2019University of Tokyo

Panel 6: FRAND Determination Methodologies II – Top Down & Bottom UP

MODERATOR: Wim Maas (Taylor Wessing)

• Noriko Fukuoka (Panasonic IP Management)• Shuichi Endo (Uldage)• Keith Mallinson (WiseHarbor)

Panel 6: FRAND Determination Methodologies II – Top Down & Bottom UP

• Noriko Fukuoka (Panasonic IP Management)

By Noriko Fukuoka Panasonic IP Management Co., Ltd

Patents in Telecoms and the Internet of Things

FRAND Determination Methodologies II – TOP Down and Bottom UP

2019 November 08

Panasonic Overview

Sales RevenueRegion

Japan

NA

EU

China

Asia

2019 Q1 Accumulate Sales and Revenue

Major Products Appliance Eco Solutions

Connected Solutions Automotive & Industries

22019 November 08

Panasonic Technology 10 Year Vision

AI, IOT, Sensing, UI/UX technologies provide Value to Customershttp://www.panasonic.com/jp/corporate/technology-design/10years-vision.html

AI ･ Robotics CE Customer Service Solution

Self-Driving ･ Commuter Advanced Logistics ・ Transport

Liberation from housework- Living data analysis- Emotion estimation- Recommendation- Automatic cleaning/

storage

No Accident No Traffic Jam- Obstacle detection- Outside recognition- Action Plan- Person state

recognition

Improve Customer Service Quality- Multilingual speech

translation- Dialogue- Behavior prediction- Automatic inventory

& replenishment

Eliminate Labor Shortages- Object recognition- Irregular picking- Human-cooperation

work- Autonomous movement

32019 November 08

Bottom-Up Approach

Royalty(total)= R(A)+R(B)+R(C)+R(D)+R(E)+・・・+R(X)

A CB ED X

α γβ εδ ω

・・・

・・・

SEP Holders

Implementers

It’s impossible to predict or estimate final accumulate royalty amount. However, easy to predict a lot of time and money is required for all license negotiations.

Pat 1

uEvaluate the contribution of individual patented invention to the implementation based on its claims, validity and enforceability

uFigure out royalty condition based on such evaluation

Pat 2

Pat n

+

+

+

・・・

Country 1+

+

+

・・・

Country 2

Country n

2019 November 08 4

Top-Down Approach (1)

Aggregate Royalty Rate / Amount

Total number of SEPs in the worldwide

Total number of SEPs owned by a licensor

Reasonable Royalty of such licensor

÷

X

A

B

C

2019 November 08 5

A CB ED X

α γβ εδ ω

・・・

・・・

SEP Holders

Implementers

Royalty(total)= R(A)+R(B)+R(C)+R(D)+R(E)+・・・+R(X)

u Ceiling the patent risk u Easy to figure out the Reasonable Royalty of a bilateral license.

Top-Down Approach (2)

Aggregate Royalty Rate / Amount

Total number of SEPs in the worldwide

Total number of SEPs owned by a licensor

Reasonable Royalty of such licensor

÷

X

A

B

C

Q. Who and how decide reasonable aggregate royalty rate / amount ?

Q. Enforceability of such aggregateroyalty rate / amount?

Q. How to coｌｌect all information of SEPs in the world?

Q. Who evaluate essentiality of each patents? Who pay such cost?

Q. How to evaluate value of each SEP?

Q. What is reasonable allocationrule?

Q. Country by country, worldwide ?

2019 November 08 6

Service

Terminal

uAggregate royalty forØ promoting adoption of a subject standard, and Ø incentivizing innovations for contributing the standard activities

uFair share among beneficiaries of a subject standarduEstablishing Level Playing FielduAvoiding HOLD-UP and HOLD-OUT

Top-Down Approach

Module

ChipAggregate Royalty Amount

2019 November 087

Market size utilizing a subject standard

Pool License is one of solution to establishTop Down Approach (Ex. MPEG2 Pool License)

License Start on July 1997 as of Jan 2010

7 Licensees 1547 Licensees

Licensors

Licensees

MPEG2 compliant products sold to end users

SEPs of MPEG-2 Video Standard

27 patents 772 patents

＄４／unit

Licensed Patents

Royalty

8 Licensors 25 Licensors

Independent experts in US, EU, Japan, KoreaEvaluators

＄2／unit

Ø Fixed per unit royalty regardless of number of licensors and patents

Ø Neutral and independent patent evaluation system

Ø Getting more licensees invites more licensors and vice versa

Ø Establishing FRAND benchmark

Ø Ceiling Accumulate SEP royalty

Ø Adequate award to SEP owners

Ø Establish Level Playing Field in the market

A CB ED X

α γβ εδ ω

・・・

・・・

SEP Holders

Implementers

Patent Pool

2019 November 08 8

Thank you for your attentionご清聴有難うございました

2019 November 08 9

Noriko Fukuoka

Panel 6: FRAND Determination Methodologies II – Top Down & Bottom UP

• Shuichi Endo (Uldage)

Patents in Telecoms and the Internet of Things

FRAND Determination Methodologies II – TOP Down and Bottom UP

By Shuichi Endo, ULDAGE Inc.

Summary of Presentation

• Introduction of ULDAGE, Inc. and its activities

• 2K ARIB DTV Patent Pool in Japan

• FRAND determination (bottom up, top down or else?)

• Factors for the success of the patent pool

• Possible Solution of SEP Issue

Introduction of ULDAGE, Inc. and its activities

ULDAGE, Inc.(United License for Digital AGE)

• Established in 2006

• Shareholders:

• Role: Promoting the SEP licensing in Japan for the benefit of patent holders and potential licensees through the patent pool scheme.

Background

• In addition to the fear of uncertainty regarding patent issues, there was the risk of potential royalty stacking when the digital broadcasting service based upon ARIB Standards was launched in Japan in 2003 since many patent holders submitted FRAND declaration to SSO. (Stacking of FRAND makes it unreasonable!)

• To overcome such obstacles and to achieve wide spread of the DTV services, the SEP holders started discussion and reached the consensus to establish a patent pool program and a new licensing agent.

→ Issue of bottom up

Introduction of ULDAGE, Inc. and its activities

• Licensing Programs:

• 2K ARIB DTV (Terrestrial and BS/CS Satellite)

• 2K CATV

• 4K Satellite UHDTV

• 4K CATV UHDTV

Activities Facts• 2K ARIB DTV

• Licensor: 19

• Licensee: 320

• Licensed Patents: over 700

• Capture Ratio ≒ 100%

• License to both device

• Technically Essential Patents Only

• Essentiality Evaluation by neutral third party organization, Japan Intellectual Property Arbitration Center (JIPAC)

and broadcasting services

2K ARIB DTV Patent Pool in Japan

• How or on what basis the royalty rates were determined

i. Estimate the popular price of the 2K terrestrial tuner STB (JPY 5,000) regardless of the size of TVs

ii. Charge the standard royalty rate familiar with the TV industry (NSP x 2%) assuming that all the patent holders will join the pool (Aggregate rate)

iii. Royalty also charged to broadcasting services

iv. Continuous efforts to capture licensees and patent holders as much as possible

Broadcastingwave form

Royalty Rates (JPY)

One Seg(Mobile)

50

Terrestrial 100

Satellite(BS/CS respectively)

100

Combination (Terrestrial and BS/CS Satellite)

200

Is this a top down approach or a market approach?

FRAND determination (bottom up, top down or else?)

Who determines FRAND ?

• SEP Patent Holder?

• (Potential) Licensee?

• Court or Arbitration?

• Expert or Professor?

Listen to the voices from the relevant Market to seek for “Reasonableness”

(Market approach with top down approach)

CourtArbitration

Licensee

SEP

Patent

Holder

Consensus

in the

relevant

Market

ExpertProfessor

“Reasonableness”

Patent Pool can make it possible!

Factors for the success of the patent pool

• Single Unified Pool

• Independency of Agent

• Same Royalties Charged to Patent Holders as the Implementors

• Higher Capture Ratio

• Technically Essential Patents Only

• Essentiality Evaluation by Neutral Third Party

• Transparency & Confidentiality

Factors (FRAND +) How to realize?

To meet the interests of both patent holders and licensees;

• Compensation for technical investments of Patent Holders with reasonable royalties:i. Royalty allocation schemeii. Royalty from all the relevant industriesiii. High capture ratio

• Safety of the business for Licensees under reasonable costs of implementation:i. Keeping level playing fieldii. No outsidersiii. Market recognition

Factors for the success of the patent pool

Met the Factors Different Situations

Possible Solution of SEP Issue

• Mandate the patent holders to obtain essentiality confirmation by a neutral third party, otherwise the patent holders should not be entitled to claim their patents as SEPs.

• Single United (Unified) Patent Pool for the applicable standards.

• Individual essential patent holders should join the single patent pool.

• Setting the royalty rates based upon the estimate of total market value.

• Continuous efforts to keep the royalty rates reasonable.

de facto FRAND

Possible Solution of SEP Issue

To realize sustainable society, wide promotion of the standardized technologies is essential. (De facto FRAND can make it possible!)

To achieve such goal, necessary mindset to realize de facto FRAND: → Let’s abandon patent holders’ ego and licensees’ ego and compromise with each other

• Patent Holders:

i. Change its mindset and expectation about the SEPs (It’s not a “cash cow”.)

ii. Co-existence and co-prosperity with licensees (“No hold up”)

• Licensees:

i. Change its mindset about the SEPs (It should not be free but reasonably compensated.)

ii. Stop using the bargaining power as the platformer or the superior market position (“No hold out and respect the valuable inventions”)

(“Give & Give Spirits”)

Thank you !

Note: The Logos and Trademarks used in this presentation are the ones of their respective owners.

Panel 6: FRAND Determination Methodologies II – Top Down & Bottom UP

• Keith Mallinson (WiseHarbor)

© Copyright 2019. WiseHarbor. All rights reserved.

Tokyo, 8th November 2019

Keith MallinsonFounder, WiseHarbor

Patents in Telecoms and the Internet of Things

FRAND Determination Methodologies IITop Down and Bottom Up

• Fine for those who voluntarily submit to such methods• Patent pool participants seeking low rates, administrative simplicity and low operational costs in

licensing• Bilateral licensors and licensees who also seek low royalty rates

• But failings are significant• Aggregate rates may bear little or no relationship to overall value of technologies in a standard• Methods for allocation of royalties among licensors are rudimentary, inaccurate and inconsistent

with patent law• For example, patents do not all contribute the same value• Schemes, such as patent pooling, using such methods commonly seek to minimize patent value or

diminish it below fair value

• Those who seek full and fair compensation in licensing should not be bound by• Top-down valuation methods, or• The inapplicable “comps” they set

Top Down

• “The requirement that a patentee apportion his damages in every case to the value of the patented features is well over a century old. As the Supreme Court explained in 1884, "[t]he patentee ... must in every case give evidence tending to separate or apportion the defendant's profits and the patentee's damages between the patented feature and the unpatented features.”

• “The court determines that the Top Down approach best approximates the RAND rate that the parties to a hypothetical ex ante negotiation most likely would have agreed upon in 1997, before Innovatio's patents were adopted into the standard.”

• “If the royalty is excessive in comparison to a chip manufacturer's profit margin on a chip, therefore, the royalty is too high.”

Innovatio Top Down Decision: Holderman, 2013

• “Dr. Leonard's method of basing the total potential royalty for all 802.11 standard-essential patents on the chipmaker's profit insures that the total royalty stack will not exceed an amount that would force chipmakers out of the business.”

• “Dr. Teece testified that in some cases, widespread infringement may have allowed manufacturers to set their prices very low, essentially ignoring the value of the intellectual property included in their products.”

• “In the record of this case, moreover, there is no evidence of widespread infringement of 802.11 standard-essential patents.”

• “The court agrees that the profit margin on an accused product is not always dispositive for determining a RAND rate.”

• “It is, however, something the court may consider as partof modified Georgia-Pacific Factors 12 and 13.”

Innovatio Top Down Decision: Holderman, 2013

• MPEG-2 video patent pool• Standard definition video for TVs, set top boxes and DVDs• 1,000 patents (mostly expired now)• 27 licensors and 899 Licensees• Maximum royalty per unit $2.00, 2002-2016, then $0.35

• MPEG-4 Part 10 (AVC/H.264) video patent pool• HD video for TVs, set top boxes, Blu-Ray and smartphones• >2,500 patents, majority of all SEPs, mostly unexpired• 38 licensors and 1,476 licensees• Maximum royalty per unit $0.20 since 2005

• Explanation: these patent pools are dominated by the same manufacturers, who might rather• Minimize royalty out-payments than• Maximize the royalties they receive• And possibly changed their minds about the “value” of their

patents when they checked net licensing payments?

Why would a newer standard be valued less than its lower-performance predecessor?

• MPEG LA • Many thousands of patents (too many to count)• 40 licensors and 287 licensees• Maximum royalty per unit $0.20 from 2013

• HEVC Advance• 2,430 patents• 27 licensors and undisclosed number of licensees• Maximum royalties rather more than double those for MPEG LA

• Some licensors are in both pools• E.g. Samsung Electronics

Ultra-High Definition video (HEVC/H.265) pools

• Alcatel-Lucent, Ericsson, NEC, NextWave Wireless, Nokia, Nokia Siemens Networks and Sony Ericsson

“agree, subject to reciprocity, to reasonable, maximum aggregate royalty rates based on the value added by the technology in the end product and to flexible licensing arrangements according to the licensors' proportional share of all standard essential IPR for the relevant product category.

Specifically, the companies support that a reasonable maximum aggregate royalty level for LTE essential IPR in handsets is a single-digit percentage of the sales price. For notebooks, with embedded LTE capabilities, the companies support a single-digit dollar amount as the maximum aggregate royalty level.” (Emphasis added.)

• Explanation. At the time, these companies were more exposed in downstream product markets as users of others’ patented technologies, than they could gain as licensors of SEPs. For example Nokia had:

• 13% share of declared-essential 3GPP SEPs in 2005• 32% and 40% handset market shares in 2005 and 2008, respectively

Why did SEP owners seek to cap LTE royalties in 2008 Framework Agreement?

• Average aggregate royalties paid—no more than around 5 percent of smartphone sales prices and revenues

• Top three licensors with majority of SEPs—Ericsson, Nokia and Qualcomm—account for less than 2 percent of handset sales revenues in 2018

• Extensive netting off in cross-licensing among manufacturers

• Even implementers without patents to cross-license pay little or no more than averages

• Widespread non-assertion• Hold-out

• Courts whittle-down what is paid below maxima (e.g. TCL v Ericsson)• Regarding single-mode rates as multi-mode rates• Reductions for patent expiration• Reductions for geographies where there is less patenting

Nobody pays anything near aggregate maximum

• A methodology that is consistent with patent law• “The requirement that a patentee apportion his damages in every

case to the value of the patented features is well over a century old. As the Supreme Court explained in 1884, "[t]he patentee ... must in every case give evidence tending to separate or apportion the defendant's profits and the patentee's damages between the patented feature and the unpatented features.”

• Where patented features increase the utility, sales and profits it is appropriate to

• Apportion those values among patented and unpatented features• Compare costs of patented features with costs of implementing

reasonable alternatives to the patents that could have been adopted into the standard

Bottom Up

Similar spec, but at twice the price with cellular*

iPod Touch 5th Generation (no cellular capabilities)

iPhone 5c

*With equivalent comparison between iPads; cost of adding cellular is $32 in components plus $1 in manufacturing: http://www.isuppli.com/Teardowns/News/Pages/New-iPad-Air-Costs-Less-to-Make-Than-Third-Generation-iPad-Model-,IHS-Teardown-Reveals.aspx. **According to Apple’s US web site. http://www.apple.com

$199 price for 16 GB version, May 2015* $450 price, unlocked and contract/SIM free, for 8 GB version, May 2015**

And iPhones outsold all iPod models 46-fold in revenues and 12-fold in volume

46 x sales value of all iPods including iPod Touch

12 x sales volume of all iPods including iPod Touch

Apple generated more that $40 billion annually in gross profits on its iPhones with margins in the 40%-50% range

From Apple’s “10K” annual financial report to yearend September 2014

• Video accounts for 19% of 3 hours US daily smartphones usage and 60% of global network traffic

• Average monthly cellular mobile data consumption is 2.6 GB per connection and 4.7 GB per person worldwide

• Equivalent, per person, to 6.7 hours of standard definition 480p video streaming at 3 Mbps or 4.3 hours of high definition 780p or 1080p video streaming at 5 Mbps

• Technology needed to stream video from the Internet to smartphones while on the move is at least: 3G for SD, LTE for HD and LTE-A Pro or 5G for ultra-HD/4K

• Revenues significantly due to video streaming include• $1 trillion in cellular mobile services• $495 billion in mobile phone sales• $16 billion in subscriptions for Netflix• $3.4 billion ad revenues for YouTube in US alone

• SEP and NEP fees paid less than 1.5% of mobile ecosystem revenues

Bottom-up value in MBB for video streaming?

Keith MallinsonFounderWiseHarborPhone: +44 20 7193 0339

+1 617 418 3977Email: kmallinson@wiseharbor.comTwitter: @WiseHarbor

Thank You

WiseHarbor helps its clients solve commercial problems using market analysis.

Keith Mallinson is s contributor to IP Finance (http://ipfinance.blogspot.com) “where money issues meet IP rights". This weblog looks at financial issues for intellectual property rights. Keith Mallinson writes on the subject of intellectual property in standardised technologies such as those used in 3G, 4G and 5G mobile communications. He is also a regular contributor to the mobile communications trade press with industry analysis and opinion at RCR Wireless: https://www.rcrwireless.com/tag/wiseharbor-keith-mallinson

My articles with IP Finance and in trade publications arelisted and linked on the WiseHarbor web site: http://www.wiseharbor.com/publications.html