Patent licensing in smartphone market may draw EU scrutiny

31 January 2017 9:55am

19 August 2015. By Matthew Newman and Lewis Crofts.

European regulators have already waded in on some of the bitterest fights between patent owners and mobile-phone makers, winning EU court backing for their approach on how to apply antitrust law to product injunctions.

But their scrutiny of the smartphone industry hasn’t resolved every battle. A separate fight over licensing practices could yet catch regulators’ attention.

A heated debate has erupted in recent years over whether patent holders should be obliged to license their technology to all companies in the smartphone industry “value chain.” This battle has spilled over into US courts and prompted probes by antitrust authorities in China, India and South Korea.

The dispute boils down to whether patent owners’ royalty rates should be based on the value of the entire smartphone, or on a component of the device that incorporates the wireless technology.

The fight pitches some of the biggest names in the mobile-phone industry — Qualcomm, Ericsson and Nokia — against smartphone makers such as Samsung and producers of Wi-Fi chipsets such as Broadcom and MediaTek.

Companies that pay royalties for wireless technology are leading the campaign. They want to pay lower fees, arguing that the contribution of wireless patents to the value of smartphones — which include high-resolution cameras and geolocation technology — is much less than when phones are made to just make calls and send text messages.

IEEE policy update

The issue has been given new impetus by a recent policy change by the Institute of Electrical and Electronics Engineers, a global standards organization that oversees Wi-Fi technology.

The update placed limits on the ability of patent holders to obtain injunctions on patents that are essential to an industry standard. More importantly, it required holders of those standard-essential patents, or SEPs, to make their intellectual property available to component makers, as opposed to only licensing to end users. Patent royalties or damages also should be calculated based on the “smallest saleable unit,” IEEE said in the revised policy.

This distinction is important because patent holders want to charge royalties based on the price of end-user products, such as smartphones, as opposed to the component part such as a chipset.

But device makers insist that patent holders are discriminating when they conclude licensing agreements with only the end-users in the value chain — the smartphone makers — rather than higher up the chain, such as the producers of wireless chips that incorporate their technology.

So far, the European Commission hasn’t started any investigation into alleged discrimination along the value chain. But companies are understood to have brought the issue to the attention of regulators.

Potential concerns

At issue is whether the SEP holder is breaking competition rules by suing or threatening to sue a rival chipset maker that doesn’t have a license and wants to integrate the standard-approved technology into chips and sell them to smartphone makers.

The commission could be concerned that the smartphone maker is obliged to obtain a license to avoid being sued by the SEP holder. If only one license is needed for the technology, why wouldn’t the royalty be based on the component in the phone — the chipset — rather than the value of the entire device, which performs other functions, such as that of a camera?

According to the commission’s antitrust guidelines, “If a company is either completely prevented from obtaining access to the result of the standard, or is only granted access on prohibitive or discriminatory terms, there is a risk of an anticompetitive effect.”

But would the EU antitrust watchdog want to launch a case that could potentially involve royalty rates?

So far, the commission has shied away from declaring whether companies are fulfilling their duties to license technology on fair and reasonable terms. Disputes over royalty rates are best decided by a national court or an arbitrator, the commission has said. It also hasn’t looked into alleged discrimination in licensing.

SEP holders could argue that there’s no harm as long as there aren’t any lawsuits against rival chipmakers.

The issue of alleged discrimination could also be an attempt by some handset or chipset makers to raise competition issues as a smokescreen for negotiating lower royalty rates, patent holders may suggest.

Still, the EU regulator could be persuaded to take a hard look if a complainant presents a clear case in which a dominant company’s alleged licensing discrimination has led to component makers losing businesses or European consumers facing higher prices for smartphones.

If a complainant unites the right facts, the commission could closely examine how royalty rates are set and whether alleged discrimination is harming competition.

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