Since technology firms can get a court order to prevent firms from using their R&D without paying for it, some argue this can result in a ‘hold-up’ where the technology is withheld until royalty is paid.
Though some manufacturers like Apple and Cisco have tried to argue that the patent models followed by technology innovators like Qualcomm and Ericsson can potentially jack up royalties to prohibitive levels—if each innovator company wants 3-4% of the device sale price as royalty, overall royalties could rise to even 25-30% of a device’s price due to ‘patent stacking’—IDC data show this is far from happening. The average prices of smart phones have fallen from $453 in 2007 to around $135 in 2016 while tablet prices have fallen from $701 in 2010 to $223 in 2016—none of this would be possible if ‘patent stacking’ was taking place in any meaningful manner. Nor is this surprising since, unlike in the 1990s when just a handful of companies owned patents—and cross-licensed these to one another—the number of manufacturers of chipsets, mobiles, etc, grew manifold once Qualcomm-Ericsson-type technology was available to any manufacturer in return for royalty payments; some of these firms like Xiaomi and OnePlus have even chalked up significant market shares.
Under this model, licences are given to any manufacturer, as long as they agree to pay the royalty. While the model has—where a standards body examines patents and declares some of them to be Standard Essential Patents (SEPs)—worked well, there have been cases of manufacturers that have tried to avoid paying; in such a case, technology suppliers have the right to seek a court injunction. The model is different from the one in pharmaceuticals where the technology supplier decides who will manufacture the medicine since everyone gets a licence on a Fair Reasonable And Non-Discriminatory (FRAND) basis.
Since technology firms can get a court order to prevent firms from using their R&D without paying for it, some argue this can result in a ‘hold-up’ where the technology is withheld until royalty is paid. Another argument is that royalty should be charged on the actual component being sold—say, a chipset—and not on the overall phone. While component-level licensing sounds reasonable, the patent does not always reside in just the chip but could also be in the handset—and if a patent helps utilise spectrum better, should the chipset-maker pay the royalty, or the telco or the handset company?
While both sides lobbied regulators, technology firms appear to have got an endorsement from various countries ranging from the US to the EU and Japan. In the US, Makan Delrahim, assistant attorney general and the head of the antitrust division, has said, “I worry that we as enforcers have strayed too far in the direction of accommodating the concerns of technology implementers”. If, he argues, technology implementers don’t take a license until this is given on their terms—a ‘hold-out’ problem—innovators may simply stop or reduce their levels of R&D.
In Japan, the Japan Patent Office was examining the issue of what the appropriate level of royalty should be, but has shelved this. And in Europe, while the EC has said it will set up an expert group to gather industry practice and additional expertise on FRAND licensing, patenting guidelines just published no longer talk of “licensing to all”—if this was done, technology firms could not determine royalty levels or seek court injunctions—or of “component level licensing” that some have been asking for.