Searching for FRAND in FRAND valuations – Part 3 / 3

Continuing from my previous posts (part 1, part 2) this post analyses various aspects of a F/RAND scheme and suggests certain aspects that could be incorporated into a F/RAND licensing framework.  As such this an academic post, and builds on several concepts introduced in the Motorola v. Microsoft decision and the Innovatio IP Ventures case.  More importantly, the framework described in this post tries to balance the stakes between the IP holder and an IP implementer. One feature (distributed infringement) that I suggest be used to determine F/RAND royalty rates may be discussed by the US Supreme Court in a different context in a litigation between Limelight and Akamai.  Long post follows.

In the interest of full disclosure, readers may note that my law firm Saikrishna & Associates represents Micromax against Ericsson at the Competition Commission and also at the Delhi High Court.  See Prashant’s posts (here, and here) on a few of the issues.

There are two critical issues in a cellular communication F/RAND analysis that are analysed first: Confusing marketing with technology; and second but more importantly for F/RAND royalty determination, distributed infringement issues – there is no cellular phone that can work without a network operator.   Current judicial framework discusses neither and as such these two factors (in my opinion) are extremely important for determining a proper rate.

The first issue is that of marketing concepts mixed with technology.  Let me elaborate.  Most of us have heard of 2G, 2.5G, 3G, 3.75G, 4G and so on–turns out that all these G’s were pure marketing terms developed by operators to describe their networks to gullible consumers.  For a more detailed discussion about the issue, see the excellent article by Chris Zeigler on Engadget.

I believe one possible way to overcome the problem of the marketing G’s is to go by the definition of technology provided by the engineers who developed the standards.  For example, in their book “The Creation of Standards for Global Mobile Communication, Hillebrand, Rosenbrock and Hauser demarcate each technology standard or “release” according to the uplink and downlink speeds, and accordingly divided the releases by technology leap.

Because the release of 3GPP technologies represents a consolidated overhaul of all wireless concepts (SEPs) that work in tandem, it makes more sense to make base the royalty on a technology release.  This way there is no ambiguity in definition of 2G, 2.75G, 3G, 3.5G.

The second issue is regarding the structure of mobile / cellular communications.  By definition, the structure requires two actors (or three depending on how they are counted.  I include a base-station and a handset as the two actors (the other handset is, well, a handset).  This aspect is described in more detail below.

FRAND Framework for cellular technology – built upon the concepts laid down in Georgia Pacific and as applied in Innovatio and Microsoft v. Motorola: The most important aspect that the cases Microsoft and Innovatio provided is that the royalty base be a chipset (in Microsoft), or a Smallest Saleable Patent Practising Unit (SSPPU).  One handy chart that provides an estimate of the various costs of components in a smartphone can be found here.

I had summarized the valuation in Innovatio case pictorially, and the same forms the starting point of the frameworks developed for cellular technologies:

The second factor is the use of SEPs by network operators: The use of any 2G and 3G patents relies on the Network operator, and a Handset (within which the SSPPU is the component relevant for communications).  Consequently, the burden a handset manufacturer should bear is only for those SEPs that may solely be attributed to the SSPPU.  Given that a 2G / 3G communications system is an all-digital system, all SEPs are necessarily involve a network operator, or base-station, (either transmit to / or receive from).  See Figure below – (Figure 1.2, ‘Digital Communications’ by Sklar, 1988. Figure 1.2: Block Diagram of a typical digital communication system) – showing the different entities involved in a digital communication process. Image from here.

Given that a network operator handles the communications (the equipment involving implementation of 2G / 3G patents) between at least two different users (calling party – called party), it involves at least 67% of the resources / implementation of SEPs (with 1/3^rd of the resources handled by the SSPPU and the rest by the Network operator).  However, this is a simple case – there are cases where a network operator (through a base-station controller) gathers information about current channel conditions from different mobile handsets, to direct further operations.  These cases involve the use of handsets, but it is the network operator that actually directs the resources.  Cases like these involve additional resources / implementation of standards at the network operator and hence the SEPs implemented at a network operator go up to 90%.  

This issue of distributed infringement may also be discussed at the US Supreme Court also.  Interestingly, it is US government’s position that the US Supreme Court Reject Federal Circuit’s Divided Infringement Jurisprudence.  See Dennis Crouch’s post here.

Accordingly, I propose that any framework for royalty for SEPs in wireless communications also take into account these two factors (distributed infringement and proper nomenclature) to determine an appropriate F/RAND rate.