Apple's damages claim, Windows freebie raise question of patent royalty base for Android

In all the patent cases I watch, the only defendant with which I have sided (and continue to side) against two different right holders (Samsung and Google/Motorola Mobility) is Apple. By comparison, I've sided with others against only one plaintiff each (BlackBerry against Mformation, Marvell against CMU, Micromax against Ericsson, Microsoft against Google's Motorola, and now Samsung against Apple in connection with the ongoing trial).

When I became aware of Apple's $40-per-device damages claim last month, the first reaction is that I was thoroughly disappointed because Apple's positions up to that point had been reasonably consistent (design patent damages have a different legal framework). Not just disappointed but even angry. Angry because I had called for antitrust sanctions against Samsung because of its SEP royalty demand of approximately $12 per device (for a whole portfolio of wireless SEPs), which I still think is way too much but which now looks cheap compared to Apple's demand of $40 for only five Android-related patents. Apple is actually seeking damages for just one patent (the '647 patent) -- more than $12 per unit -- that are at a level with Samsung's total SEP royalty demand. It didn't take me even one second to figure out that I would now have to side on this key issue with Samsung for basically the same reasons for which I still side with Apple in two other disputes -- even more so in light of Samsung's voluntary withdrawal of two standard-essential patents-in-suit from the second California case, as a result of which Samsung went into the retrial with a perfectly consistent position on patent damages.

It's obviously imperative to distinguish between the criteria for reasonable royalty rates (and royalty-type damages) on the one hand and the consequences of excessive demands on the other hand (remedies, antitrust fines etc.). Absent a FRAND commitment and what is called a license of right, it's not impossible but far more difficult to allege violations of competition law. And patents are, in principle, exclusionary rights, so someone who does not have a FRAND licensing obligation due to a FRAND pledge or some other valid reason can elect to withhold a license altogether. But that does not make the sky the limit for non-SEP royalties in the context of Georgia-Pacific royalty-type damages: a damages theory that is all about what royalty rate the parties would have agreed upon at the end of a reasonably-led negotiation. The way to enforce exclusivity is through injunctions.

One key aspect of a reasonable royalty is the appropriate royalty base. It's often the most important question. More than two years ago, I published a letter that Apple had sent to standard-setting organization ETSI with suggestions to ensure that right holders honor their FRAND licensing commitments, and I supported Apple's advocacy of a "common royalty base" for wireless baseband patents: "This common base, as between two negotiating parties, should be no higher than the industry average sales price for a basic communications device that is capable of both voice and data communications."

About a year ago Apple made this argument again in a filing with the ITC (in its efforts to avoid an import ban, which was ultimately vetoed). It argued that the proper royalty base for Samsung's wireless SEPs is the price of a baseband chip, i.e., approximately $10. Apple frequently compares (as do defendants against SEP damages claims and royalty demands all the time) the royalties sought by Samsung and Google to the price of the baseband chip, and on that basis (rightly in my opinion!) finds those royalty demands excessive.

But what's good for the goose is good for the gander.

Apple's patents-in-suit in the ongoing trial are software patents relating to Android. Four of them are just about Android, and the fifth one, slide-to-unlock, is a feature all Android device makers add to "stock Android" (and it involves mostly Google's program code as well). I'm unaware of any explanation by Apple of why the total cost of patent licenses relating to Android should not be limited to a percentage of the contribution that Android makes to the market value of a smartphone or tablet computer.

Only because Judge Koh is much more permissive with respect to damages claims than Judge Alsup (in the same district), Apple apparently didn't have to explain this striking contradiction between its "royalty base" position and its damages claims in the ongoing trial. The apportionment question came up in Oracle v. Google, and in that case it was not about the difference between the operating system and the complete device but just about the part of the Android mobile operating system that Oracle's asserted intellectual property rights represent. (I have said repeatedly that I consider the most likely next step in that case to be a remand to the district court, so there will likely be a damages trial.) Judge Alsup made very clear, however, that a zero royalty -- just because Google gives Android away for free -- was out of the question. Oracle was allowed to base claims on the mobile advertising revenue generated by Google and even the indirect network effects of Android benefitting Google's non-mobile businesses.

It would also be preposterous, of course, to argue (which no one has tried in any of the disputes I watch) that Apple should not be entitled to any royalty-type damages relating to Android because Google gives Android away for free. But Apple can't ignore -- and the court should never ever have allowed Apple to ignore -- the fact that mobile operating systems do not account for sky-high percentages of the entire market value of a smartphone or tablet computer. The fact that Microsoft now grants royalty-free Windows licenses to makers of small devices (anything with a screen smaller than 9") -- a decision by Microsoft that makes a lot of sense to me and is procompetitive -- makes it even clearer that Apple is out of touch with reality as far as reasonable royalties (and damages) relating to Android are concerned.

There's no shortage of right holders asserting patents against Android, so this question is going o continue to be an important one.

Last summer I found out that a replacement screen for the phone I used then (the Note 2, but I then bought the Galaxy Mega 6.3 instead of having it repaired) would cost me almost 300 euros ($400). The replacement would not have been limited to the screen: the spare part contained various other hardware components. Still this is one of various indications of the non-operating-system components of the total cost and market value of a smartphone (or tablet). Apple can't just ignore the value of all the high-end hardware that goes into these devices when making royalty demands over software patents.

On the other hand, the price at which a component lacking key patent licenses (whether it's an operating system or a baseband chip) is sold is not a sufficient royalty base because infringement can't have the effect of devaluing intellectual property. That is another reason why the royalty-free Windows deal for smaller devices is so interesting. Microsoft does secure patent licenses it needs, and shields its customers from patent assertions. The combination of Microsoft and Google's operating system-related pricing decisions is relevant. Apple should not turn a blind eye to such market parameters.

The purpose of this post was to raise a question and to highlight some key facts in this context, not to give a definitive answer on a highly complex issue. I will address this question on more occasions going forward and will, over time, take reasonably firm positions. But that is not necessary to establish the unjustifiability of Apple's damages claim in the Samsung case. On Tuesday I mentioned several experts who agree with me on Apple's damages claim in the ongoing trial. I still haven't become aware of anyone supporting it, but I have Rutgers Law School's Professor Michael Carrier to add to the list based on this interview with Bloomberg Law.

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German VP8 infringement cases show Google's inability to cut through the codec patent thicket

I don't think any responsible standardization body will be able anytime soon to declare VP8 a "royalty-free" codec. Everyone in the industry knows -- though a few deny against better knowledge -- that there's a whole patent thicket surrounding video compression techniques, and that all codecs implement more or less the same fundamental concepts. Only a fool could believe Google when it originally claimed that there were no issues concerning third-party rights. Google's license deal with 11 MPEG LA contributors comes with terms that Google certainly wouldn't have accepted if it had not been seriously concerned about the risk of litigation brough by those right holders. And with Nokia refusing to make its patents available for VP8 on royalty-free or even FRAND terms (Nokia reserves the right to seek injunctions, or to charge as much as it wants, no matter how much above a FRAND rate it might be), there's at least one company that is actually suing over VP8.

Nokia brought its latest patent assertion against VP8 as part of an ITC complaint and its first two infringement actions over VP8 in Mannheim, Germany, and this post is mostly about the trial held on Friday over the second one of these cases. Also, since my last post on VP8 I've had the opportunity to read the full text of the order to reopen the proceedings in the first case. As I wrote two weeks ago, that order wouldn't have come down without at least a finding of a likely infringement. It relates to the possibility of staying the case pending a parallel nullity proceeding, and German courts don't reach the question of a stay if they can outright dismiss a case for lack of infringement. The order says one can conclude that devices implementing VP8 infringe EP1206881 if the asserted claim (claim 46) is interpreted "broadly", in which case there is room for invalidity contentions (which, as the order doesn't say explicitly because it's clear to patent litigators, wouldn't be relevant to a narrower claim construction). Therefore, the court now wants to take a closer look at a particular invalidity theory. While the court could still reach a different conclusion on infringement, it would have dismissed the case immediately (to conserve court and party resources) if Google and HTC had convinced the court that Nokia's claim construction is overbroad. Absent a relatively unlikely change of mind by the court, the likely outcomes are a stay or an injunction. A stay would mean that an injunction will issue if the asserted patent claim survives the nullity proceedings in its granted form, or in a form that still warrants an infringement finding. This means that Google won't have legal certainty concerning the German part of EP'881 (courts in other European countries will not be bound by the related German decisions) for years to come.

Yesterday's patent-in-suit, EP1186177 on a "method and associated device for filtering digital video images" is less likely to be deemed infringed when the Mannheim court announces a decision on August 2, but Nokia can and presumably will appeal a dismissal, and despite the inclination indicated by the court at yesterday's trial, EP'177 is indicative of VP8's patent issues because it's within striking distance of VP8: the whole case hinges on only one claim element. All other claim limitations are considered satisfied by HTC's VP8-implementing devices. That fact reduces to absurdity all those claims that VP8 is so very original that no third party patented anything that might read on it.

While video compression techniques involve advanced mathematical operations, it's actually quite easy to explain the only claim limitation that may (and, apart from the possibiltiy of an appeal, probably will) help Google and HTC avoid an infringement finding:

Video codecs -- and this is true of H.264 as it is of VP8 -- divide an image into macroblocks (rectangular areas). Each macroblock is processed separately. End users just see the overall image and shouldn't notice the edges of macroblocks, which are only an internal thing. But they would notice those borders if certain mathematical operations resulted in artefacts (unwanted elements that appear in an image but don't exist in reality) that a codec failed to filter out. The patent relates to this filtering process. The codec looks at the overall image and identifies actual vertical and horizontal lines that were filmed (for example, a corner of a building). Only artefacts at the edges of the macroblocks are filtered out; real-world lines are preserved.

For each macroblock there are different compression methods. The patent mentions "intra coding", "copy coding", "motion-compensated prediction coding", and "not-coded coding". Google and HTC can't dispute that VP8 uses all of these. But their non-infringement argument, which the court views favorably, is that VP8 does not "determin[e] at least one parameter of the filtering operation based on the types of the first and second prediction encoding methods". They say VP8 analyzes the pixels of two neighboring macroblocks, but it does not make a determination by directly checking on which encoding methods were used for the two blocks in question. Nokia, however, says that the pixels result from processing of a macroblock using a certain encoding method, and that there are correlations between the encoding methods used and at least one parameter (they particularly stressed the number of pixel rows/columns subjected to filtering).

At German patent trials claim construction and infringement analysis usually aren't separated as systematically as in U.S. lawsuits, in which the court firstly provides interpretations of disputed terms (which are later put before a jury if a jury trial is requested, which is the case in most U.S. patent infringement cases). In a U.S. proceeding over the same patent (I couldn't find a granted U.S. equivalent of this particular one, but let's assume so for the sake of the argument), the term "determining at least one parameter [...] based on the types of the first and second prediction encoding methods" would have resulted in a claim construction dispute, with Google and HTC trying to defeat Nokia's infringement theory by inserting into the court's construction of the term a word like "directly", while Nokia would probably have argued that the plain and ordinary meaning is fine and has scope for its infringement theory, possibly also proposing an alternative like "depending on" (for "based on"), which is even broader. Additionally or alternatively, the defendant and the intervenor would have tried to have "the first and second prediction encoding methods" interpreted as "the types of the first and second prediction encoding methods".

At yesterday's German trial the question was not how to rephrase the term, but the analysis that had to be performed was the same. Both parties advanced reasonable arguments. Google's counsel pointed to items (a) and (d) in paragraph 24 of the patent specification. Item (a) is "the type of block on either side of the boundary", while (d) relates to "differences in pixel values", which are only influenced by the encoding method types. Google plausibly argues that the description of the patent therefore distinguishes between these two (and two other) criteria. So far, so good. It makes a lot of sense, but it doesn't prove beyond reasonable doubt that the disputed claim term relates to only item (a) and not item (d). Nokia pointed to other parts of the description which, such as paragraph 37, show that the patent discusses an analysis of pixel values.

In order to back up its "royalty-free" claims, Google needs legal certainty, but there are just too many patents in this field covering the same or at least very similar techniques as those used by VP8. There's clearly a lack of certainty if the outcome of a single infringement case depends on whether "based on" can or cannot be reasonably understood to have the meaning of "depending on". And as I wrote further above, the first finding of a likely infringement has already been made in connection with another Nokia patent.

Nokia and Google may also have some patent issues to sort out over Google Maps according to a TechCrunch article. At this stage I just wanted to mention this nonjudgmentally.

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European Commission looking into competition-chilling effects of Android licensing practices

Yesterday the Financial Times, the most influential newspaper in EU circles, reported on a leaked document showing that the European Commission's competition enforcement division has sent out a reasonably detailedquestionnaire to "device makers and mobile operators", and the 82 questions indicate that a recently-lodged complaint by industry players including Nokia, Microsoft and Oracle over Google's Android business model and licensing practices has led to preliminary investigations. At this stage it's not a given that there will be a full-blown, formal inquiry. And even when formal investigations start, they don't always result in antitrust charges. It's too early for a guilty verdict, but I am convinced that the European Commission is right to take this issue seriously.

After the filing of the complaint became known, certain Google-aligned critics of the initiative primarily made the following two points:

• The complainants are Google rivals.

• Android is open source.

The first point is completely irrelevant: in this context, only merits matter, and motives don't. Obviously companies that depend on Google in commercial terms are not going to bring a complaint against it, but Google's own partners could ultimately benefit from whatever comes out of this process. The second point -- open source -- is a distortion, but to the extent it holds truth, this is just one of various considerations in a competition context and not a definitive answer. In this post Id like to quickly share a few thoughts about this.

The accurate characterization of the licensing situation for Android's software code is not "open source", but "mixed source". There are some key closed-source components, and Google requires device makers to distribute them if they want to use the Google logo and, especially, the little green robot logo, and it will give them those apps (such as the Google Play app store client) only if they accept Google's terms. And it's not just about the code: for commercial reasons most device makers also license the Android trademark. The Android license most device maker take is a mixed-IP license, and the software part of the license it's a mixed-source offering.

The Skyhook-Google litigation brought to light hundreds of pages of Google-internal dccuments that show how tightly the search engine company controls its mobile operating system and ecosystem especially through its arbitrary approach to "compatibility", which one internal email says Google using as a "club to make [device makers] do what [Google] want[s]".

There's a fundamental difference between Free and Open Source Software (FOSS) philosophy and competition theory. FOSS is all about the theoretical freedom of end users to inspect and modify code, and to use and redistribute not only the original version but also the modified one, while competition theory is about the commercial realities in a given market. You can be "free" from a FOSS point of view to modify and use a codebase, but you can still be constrained i practical, commercial terms due to customer expectations. You can have freedom, but will people buy what you build?

Such constraints are not a binary question like being free or in jail in a Monopoly game. Different players will be constrained to different degrees if they serve different markets and/or pursue different business models. The fact that Amazon uses large parts of Android without a license from Google doesn't mean that the same would work for Samsung or HTC; and companies focusing on the Chinese market are in a different position than those who generate most of their sales in the U.S. and Europe (even in China there's profound concern over Google's heavy-handedness with respect to Android). If something works for some companies under special circumstances, it doesn't necessarily work for most of the market. But the functioning of the overall market is what competition enforcers care about.

Competition is all about choice. Customers get the greatest benefit if different business models co-exist and compete. I have been defending open source interests for some time, but I wouldn't want to live in a world in which open source is the only type of business model that works because certain kinds of innovation aren't financially viable on open source terms.

It's a fallacy to take a short-term perspective and not worry about an antitrust complaint alleging that the market leader provides its platform on a "sub-cost" basis. Sure, today we'll all save money if someone gives something away for free. But if there are strings attached, we may all ultimately pay a greater price. We'll be locked in, and some innovation that would enhance our lives won't happen further down the road. Antitrust law is there to prevent this from happening.

The European Commission has previously recognized that "open source" must not be beyond the reach of competition enforcement. Its in-depth investigation of Oracle's acquisition of MySQL (as part of Sun Microsystems) delayed the closing of that transaction by about five months. I was a vcocal opponent of the deal. In a guest post I wrote for the Brussels-based BlogActiv.eu platform I reached the following conclusion:

Given the increasing importance of "free" and "freemium" business models, there can be no doubt that the related case-law will continue to be developed over the coming years and decades. The rule of law must be adjusted to these new realities, not surrender in their face.

Values persist; methods evolve.

Google's Android strategy is such a new reality involving a "free" business model.

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Google's FRAND-zero patent license for VP8 threatens to divide Web and FOSS communities

Google is already promoting the VP9 video codec, which may very well raise new patent issues, while pushing for adoption of VP8 as an Internet standard. But the patent license it has drafted for VP8 and just published doesn't meet the requirements of the Open Source Initiative's definition of open source, says the President of the OSI's Board of Directors, Simon Phipps, in a blog post. According to Mr. Phipps, the draft license "shows signs of unfamiliarity with the tenets of software freedom". The OSI can't speak for the Free Software Foundation, of course, but the two organizations share many values and the FSF's emphasis of software freedom ("[t]he issue is not about price") entails even stricter requirements for acceptable license terms. Simply put, if your proposal doesn't please Simon Phipps, know that Richard Stallman ("RMS") is harder to please.

Historically, the World Wide Web Consortium (W3C) has applied its royalty-free (RF) licensing requirements in ways that ensured compatibility of HTML-related essential patent licenses with the philosophies of Free and Open Source Software (FOSS) organizations, particularly the FSF and the OSI. The Web movement and the FOSS movement have succeeded symbiotically and in tandem: FOSS powers large parts of the Web and drove its adoption, while the Web has allowed FOSS to thrive and contributed greatly to its popularity. If Google wants the W3C to consider its proposed VP8 patent license an acceptable W3C RF license, it effectively asks the W3C to part ways with the FSF and the OSI, after approximately two decades of close and fruitful collaboration. This is utterly divisive.

Shortly after the announcement of an MPEG LA-Google license deal relating to VP8 I was confused about Google's intentions to comply with the W3C patent policy when I saw a Google employee link to a web page that involved FRAND licensing commitments when he said they were planning to comply with the W3C's patent policy. Now that Google's proposal has been published, the answer is that Google's proposed VP8 patent license is not a permissive RF license but a typical FRAND-zero (or, synonymously, "RAND-zero") license. Zero license fees to be paid by licensees (though Google presumably paid or pays MPEG LA) -- but reasonable and non-discriminatory terms (field-of-use restrictions, reciprocity) are imposed and, which Mr. Phipps considers the most significant issue with the proposal, "gaining benefit from the agreement requires individual execution of the license agreement".

The final two sentences of the OSI President's blog post declares Google the loser and VP8's rivals the winning camp:

"This document seems to me to be an effective outcome for those in MPEG-LA's patent-holder community who want to see VP8 disrupted. It has provoked an autoimmune response that must have Google's enemies smiling wickedly."

I don't want to speculate about the intentions of the 11 originally-unnamed, meanwhile-disclosed companies that contributed patents to the MPEG LA-Google deal, or of the MPEG LA pool firm. Frankly, it doesn't matter what company A or company B wants to achieve in this context. At least for now, Google's own license grant under Section 3 of that proposed agreement raises the same issues that Mr. Phipps criticizes with respect to the other patents involved -- Google isn't being more generous than the MPEG LA group in those respects. At any rate, conspiracy theories aren't even needed when simple business logic can explain everything. If a company believes that video codecs should be available on affordable terms, but that intellectual property holders should be compensated somehow, then it can be Google's best friend and will nevertheless attach certain conditions to a license grant. Such conditions can be monetary and non-monetary. The financial part has been resolved. While I doubt that the patent holders gave Google a freebie (considering that they don't even do this in connection with H.264, the standard they promote), Google can apparently afford those royalties without having to charge end users. There's major strategic value for Google to gain in controlling an Internet standard, as non-MPEG LA-contributor Nokia's comments on its decision to withhold a license implied. So Google picks up the bill. But the non-monetary terms shine through its proposed "VP8 Patent Cross-license Agreement".

Mr. Phipps says it's probably "unworkable" for the FOSS community, and at the very least unacceptable, that a licensee must identify itself and sign up to get a license, including downstream users since there's no right to sublicense. The FOSS approach is that someone just grants you a license and the downstream is automatically licensed, too, so you can share freely without any bureaucracy or loss of data privacy involved for anyone. But let's think about the modus operandi of those third-party patent holders, wholly apart from any theories of world domination or destruction. They want a reciprocal license (Section 5 of the proposed VP8 license). That's why Google calls this a "cross-license". It would be foolish for them to make their VP8-essential patents available when a beneficiary of their license grant can withhold a license. But they must have a reasonable degree of legal certainty that they can use the other party's back-licensing obligation as a defense to infringement claims. And that's why they need a formal cross-license agreement in place. Otherwise the licensee could later claim that it never consented to that license grant.

Google itself is a good example -- "good" only in terms of suitability, though bad in terms of behavior -- of why reciprocal-licensing commitments must be formalized. Courts in three different countries have already found Google to fail to honor grant-back obligations vis-à-vis Microsoft -- two of them formally ruled on this (England and Wales High Court, Mannheim Regional Court; both in connection with ActiveSync), and the third one (the United States District Court for the Western District of Washington) did not formally adjudge the issue because Google itself (only its Motorola Mobility subsidiary) was not a party to the relevant case, but nonetheless stated that Microsoft was an intended third-party beneficiary of the Google-MPEG LA agreement concerning H.264. And in those cases, Google had identified itself and formally signed license agreements, but it still disputed the applicability of those terms. Now imagine what would happen if someone with Google's mentality, which a U.S. judge described as "what's mine is mine and what's yours is negotiable" , refused to honor a grant-back obligation and claimed that there wasn't even an enforceable agreement in place... especially in jurisdictions that don't even recognize the concept of third-party beneficiaries to an agreement.

As for field-of-use restrictions, Mr. Phipps criticizes that the license doesn't cover you "[i]f you're writing any multipurpose code or if the way you're dealing with VP8 varies somewhat from the normal format -- perhaps you've added capabilities". Again, let me remind you that Google's own license grant under the proposed agreement comes with the same restrictions. Google itself apparently doesn't want people to modify VP8. It wants to control it. Just the way it controls Android through its arbitrarily-applied compatibility definition. Even if Google ultimately agreed with Mr. Phipps and allowed modifications with respect to its own patents, it would still have to convince those third-party patent holders to grant an equally permissive license. But in that case, someone could use patents that also read on, for example, H.264 and call it a modification of a licensed VP8 codec. Just like Mr. Phipps considers certain aspects of the proposed license "unworkable" for open source, so would it be unworkable for patent holders who generally license their patents on commercial terms to grant a license without any field-of-use restriction (and to an unidentifiable, unlimited number of beneficiaries).

The OSI President hopes that Google will improve this license agreement. But whether it can is another question. It can probably make improvements with respect to its own patents, and I believe that's what it should do at a minimum. This would affect its ability to monetize Motorola Mobility's H.264 declared-essential patents, but those have been found to have very little commercial value anyway. At least Google would show that it respects the FOSS philosophy.

Finally I'd like to talk about what the terms of the proposed license say about the need Google saw to take a license from those 11 MPEG LA contributors. After the announcement of the license deal some people argued that Google merely wanted to avoid litigation but that the agreement didn't constitute an admission of the very third-party patent infringement issues Google had denied for a long time. In other words, they said Google was paying for peace of mind, not for essential intellectual property.

It's true that sometimes license deals are struck even though the licensee is convinced of the merits of its case. That's the nuisance-value business model of certain patent trolls: they'll sue you over meritless claims and offer a license at much less than the cost of a proper defense (which is usually not recoverable in the United States). However, I believe that when all the parties to an agreement are not patent trolls but (as Judge Robart described Google in the MPEG LA H.264 context) "sophisticated, substantial technology firm[s]", then I believe there must be a strong presumption that a license deal doesn't just involve bogus claims. And that presumption is further strengthened if a licensee insisted over the years that certain claims had no merit.

Granted, a presumption, even a very strong one, still isn't proof. One needs to know the actual terms of an agreement to have clarity. None of them were announced two months ago. It's just clear that whatever Google pays is enough that Google can just absorb the costs for the downstream. The amount of money involved could be more, or even much more, than what is needed to prove that Google took those infringement allegations seriously, but if Google pays for it silently (because it can afford it), we won't know. Now at least some of the non-monetary terms are clear -- or they will be clear with definitive certainty if Google, despite criticism from Mr. Phipps and others who will agree with him (or even go beyond his criticism), can't offer a license to those third-party patents on permissive terms. The non-monetary terms demonstrate that Google took those infringement allegations seriously. Otherwise it wouldn't have drafted a license that threatens to divide the Web and FOSS communities, which in turn would have major impact on Google's own open source reputation. The non-monetary price Google is willing to pay here is so substantial that I believe it would have chosen to defend itself in court against any infringement claims (which it could have done proactively through declaratory judgment actions) if it had truly thought that all those infringement allegations were bogus, as it would have had all of us believe.

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Setback for Google's VP8: Nokia refuses to commit patents to royalty-free or FRAND licensing

Not only does Nokia own a patent on tethering (and has already defeated Google on claim construction in an ITC investigation) but its strong intellectual property position is also of growing concern to Google in connection with its initiative to make the allegedly royalty-free VP8 codec (part of the WebM Project) an Internet Engineering Task Force (IETF) video standard. I reported on a German VP8 patent infringement trial held two weeks ago and found out about another one coming up in mid-June. The latest news is that Nokia has made an official IPR (intellectual property rights) declaration to the IETF with respect to the VP8 Data Format and Decoding Guide listing 64 granted patents and 22 pending patent applications (I've reformatted the list further below).

Obviously those 86 declared IPRs aren't 86 different inventions: these are a few patent families with multiple international registrations per patent. Still, the number is significant, especially because a patent that is, for example, declared invalid in one jurisdiction may still be enforced successfully in another. Or a judge in one country may find it not to be infringed, while a judge in another country will.

This declaration would be just perfect for Google's purposes if Nokia had committed to royalty-free licensing. And if Nokia had not been that generous but had at least made a FRAND licensing commitment, VP8 still wouldn't be "free", but at least there would be a guarantee that licenses to Nokia's relevant patents are available at all (and that they are available on prices that won't be excessive). But in Section IV, Licensing Declaration, Nokia bluntly says the following:

Unwilling to Commit to the Provisions of a), b), or c) Above

This couldn't be clearer. The precise meaning of a), b) and c) can be found in Section 6.5 of the relevant IETF document, RFC 3979:

Specifically, it is helpful to indicate whether, upon approval by the IESG for publication as RFCs of the relevant IETF specification(s), all persons will be able to obtain the right to implement, use, distribute and exercise other rights with respect to an Implementing Technology

• a) under a royalty-free and otherwise reasonable and non-discriminatory license, or

• b) under a license that contains reasonable and non-discriminatory terms and conditions, including a reasonable royalty or other payment, or

• c) without the need to obtain a license from the IPR holder.

(emphasis and bullet points added)

So option a) is what is called "RAND-0" ("RAND-ZERO"), meaning it's a royalty-free license and any non-monetary terms (such as grant-back obligations) must be FRAND, option b) is FRAND with royalties, and option c) is so permissive that a right holder doesn't even require the conclusion of a license agreement. Nokia rejects all three. And given that it's already seeking injunctions against HTC in Germany over two VP8 patents, there can be no doubt that it means business and that a no is a no. They're not just saying they have patents that read on VP8; they're actually suing.

Nokia doesn't have an obligation to make a FRAND promise with respect to VP8. It wasn't involved in VP8 standard-setting. VP8 was and in practical terms (even if not in formal terms) still is a single-company project (when Google says "open", it usually means "control"), and that's why no one can be forced to support it. By contrast, H.264 was an industry-wide initiative and everyone sitting at the standard-setting table agreed to FRAND licensing from the beginning.

What Nokia is doing here is simply the normal course of business if a patent holder (Nokia) does not share the vision of another company (Google) with respect to a proposed standard and reserves all rights. What motivation could Nokia possibly have to donate something to a Google initiative? None. No motivation, no obligation, no license. Simple as that.

This doesn't mean that Nokia will categorically rule out granting licenses to someone like HTC. If the price is right, it can always do so. But there won't be any freebies, and in licensing negotiations it can ask for any amount of money because there's no FRAND promise that it could possibly breach by making a blatantly non-FRAND demand, while Google (Motorola) does have a FRAND licensing obligation with respect to H.264.

Again, it's the normal course of business, and if Google had not acquired Motorola Mobility, then (apart from saving Google $12.5 billion for a patent portfolio that consistently fails to give its acquirer any leverage) Motorola would certainly have done the same thing. Motorola never joined the VP8 initiative before Google decided to buy it. Motorola, too, reserved the right to enforce any VP8-related patents it might own: to seek injunctions or to demand any royalty it wants.

It would be interesting to know where AT&T stands. AT&T was involved in H.264 standard-setting but didn't contribute its patents to the MPEG LA AVC/H.264 pool. If any AT&T video codec patents read on VP8, then AT&T, like Nokia, doesn't have a FRAND licensing obligation.

IPRs listed in Nokia's VP8-related declaration to the IETF

I took the list published by the IETF and reformatted it:

1. Country:DE:Filing date:22.05.1998, Filing number:98660050.0, Pub.number:0884911, Grant number:69825220
2. Country:FR:Filing date:22.05.1998, Filing number:98660050.0, Pub.number:0884911, Grant number:0884911
3. Country:GB:Filing date:22.05.1998, Filing number:98660050.0, Pub.number:0884911, Grant number:0884911
4. Country:NL:Filing date:22.05.1998, Filing number:98660050.0, Pub.number:0884911, Grant number:0884911
5. Country:US:Filing date:09.06.1998, Filing number:09/094177, Pub.number:NA, Grant number:6504873
6. Country:CN:Filing date:10.08.2000, Filing number:00814037.5, Pub.number:1378750, Grant number:ZL00814037.5
7. Country:DE:Filing date:10.08.2000, Filing number:00957359.3, Pub.number:1206881, Grant number:60015566.8
8. Country:FI:Filing date:10.08.2000, Filing number:00957359.3, Pub.number:1206881, Grant number:1206881
9. Country:FR:Filing date:10.08.2000, Filing number:00957359.3, Pub.number:1206881, Grant number:1206881
10. Country:GB:Filing date:10.08.2000, Filing number:00957359.3, Pub.number:1206881, Grant number:1206881
11. Country:IT:Filing date:10.08.2000, Filing number:00957359.3, Pub.number:1206881, Grant number:1206881
12. Country:NL:Filing date:10.08.2000, Filing number:00957359.3, Pub.number:1206881, Grant number:1206881
13. Country:US:Filing date:11.08.1999, Filing number:09/371641, Pub.number:NA, Grant number:6735249
14. Country:US:Filing date:13.02.2004, Filing number:10/778449, Pub.number:20040165664, Grant number:7149251
15. Country:US:Filing date:12.12.2006, Filing number:11/609873, Pub.number:20070140342, Grant number:NA
16. Country:JP:Filing date:09.04.2008, Filing number:2008-101068, Pub.number:2008-178149, Grant number:NA
17. Country:AU:Filing date:22.01.2001, Filing number:30275/01, Pub.number:NA, Grant number:778990
18. Country:CA:Filing date:22.01.2001, Filing number:2374523, Pub.number:NA, Grant number:2374523
19. Country:CN:Filing date:22.01.2001, Filing number:01800565.9, Pub.number:1365575, Grant number:ZL01800565.9
20. Country:CN:Filing date:06.10.2005, Filing number:200510113767.6, Pub.number:1756362, Grant number:NA
21. Country:FI:Filing date:20.01.2000, Filing number:20000120, Pub.number:NA, Grant number:117533
22. Country:HK:Filing date:10.01.2003, Filing number:03100263.7, Pub.number:1048411, Grant number:1048411
23. Country:HK:Filing date:17.08.2006, Filing number:06109148.6, Pub.number:1089030, Grant number:NA
24. Country:RU:Filing date:22.01.2001, Filing number:2002100648, Pub.number:NA, Grant number:2295203
25. Country:RU:Filing date:10.11.2006, Filing number:2006139951, Pub.number:2006139951, Grant number:2358410
26. Country:SG:Filing date:22.01.2001, Filing number:200107086.1, Pub.number:NA, Grant number:84926
27. Country:SG:Filing date:17.09.2004, Filing number:200405663.6, Pub.number:128476, Grant number:128476
28. Country:US:Filing date:19.01.2001, Filing number:09/766035, Pub.number:20010017944, Grant number:NA
29. Country:AT:Filing date:22.01.2001, Filing number:01902442.1, Pub.number:1186177, Grant number:1186177
30. Country:FR:Filing date:22.01.2001, Filing number:01902442.1, Pub.number:1186177, Grant number:1186177
31. Country:DE:Filing date:22.01.2001, Filing number:01902442.1, Pub.number:1186177, Grant number:60145194.5
32. Country:IE:Filing date:22.01.2001, Filing number:01902442.1, Pub.number:1186177, Grant number:1186177
33. Country:IT:Filing date:22.01.2001, Filing number:01902442.1, Pub.number:1186177, Grant number:1186177
34. Country:NL:Filing date:22.01.2001, Filing number:01902442.1, Pub.number:1186177, Grant number:1186177
35. Country:ES:Filing date:22.01.2001, Filing number:01902442.1, Pub.number:1186177, Grant number:1186177
36. Country:SE:Filing date:22.01.2001, Filing number:01902442.1, Pub.number:1186177, Grant number:1186177
37. Country:TR:Filing date:22.01.2001, Filing number:01902442.1, Pub.number:1186177, Grant number:1186177
38. Country:GB:Filing date:22.01.2001, Filing number:01902442.1, Pub.number:1186177, Grant number:1186177
39. Country:BR:Filing date:22.01.2001, Filing number:PI0107706.6, Pub.number:0107706, Grant number:NA
40. Country:CA:Filing date:22.01.2001, Filing number:2397090, Pub.number:NA, Grant number:2397090
41. Country:CA:Filing date:15.01.2007, Filing number:2572566, Pub.number:NA, Grant number:2572566
42. Country:CN:Filing date:22.01.2001, Filing number:01806682.8, Pub.number:1418436, Grant number:ZL01806682.8
43. Country:CN:Filing date:11.03.2005, Filing number:200510056330.3, Pub.number:1658677, Grant number:200510056330.3
44. Country:FI:Filing date:21.01.2000, Filing number:20000131, Pub.number:NA, Grant number:116819
45. Country:HK:Filing date:10.09.2003, Filing number:03106477.6, Pub.number:NA, Grant number:1054288
46. Country:HK:Filing date:04.01.2006, Filing number:06100170.6, Pub.number:1080653, Grant number:1080653
47. Country:JP:Filing date:22.01.2001, Filing number:2001-553307, Pub.number:2003-520531, Grant number:NA
48. Country:KR:Filing date:22.01.2001, Filing number:2002-7009307, Pub.number:NA, Grant number:714355
49. Country:SG:Filing date:22.01.2001, Filing number:200204136.6, Pub.number:NA, Grant number:90389
50. Country:US:Filing date:19.01.2001, Filing number:09/766193, Pub.number:20010017942, Grant number:6907142
51. Country:US:Filing date:06.06.2005, Filing number:11/146196, Pub.number:20050254717, Grant number:7295713
52. Country:ZA:Filing date:22.01.2001, Filing number:2002/5506, Pub.number:NA, Grant number:2002/5506
53. Country:JP:Filing date:20.09.2007, Filing number:2007-244456, Pub.number:2008-054335, Grant number:NA
54. Country:CA:Filing date:17.12.2007, Filing number:2614571, Pub.number:NA, Grant number:NA
55. Country:US:Filing date:09.10.2007, Filing number:11/869445, Pub.number:20080247657, Grant number:7567719
56. Country:DE:Filing date:22.01.2001, Filing number:01902443.9, Pub.number:1249132, Grant number:60144513.9
57. Country:NL:Filing date:22.01.2001, Filing number:01902443.9, Pub.number:1249132, Grant number:1249132
58. Country:GB:Filing date:22.01.2001, Filing number:01902443.9, Pub.number:1249132, Grant number:1249132
59. Country:JP:Filing date:20.04.2012, Filing number:2012-096255, Pub.number:2012-170122, Grant number:NA
60. Country:BR:Filing date:08.05.2001, Filing number:PI0110627.9, Pub.number:0110627, Grant number:NA
61. Country:CA:Filing date:08.05.2001, Filing number:2408364, Pub.number:NA, Grant number:2408364
62. Country:CN:Filing date:08.05.2001, Filing number:01812464.X, Pub.number:1457606, Grant number:01812464.X
63. Country:EE:Filing date:08.05.2001, Filing number:P200200627, Pub.number:P200200627, Grant number:5487
64. Country:EP:Filing date:08.05.2001, Filing number:01931769.2, Pub.number:1282982, Grant number:NA
65. Country:HU:Filing date:08.05.2001, Filing number:P0302617, Pub.number:P0302617, Grant number:NA
66. Country:JP:Filing date:08.05.2001, Filing number:2001-583055, Pub.number:2003-533142, Grant number:4369090
67. Country:KR:Filing date:08.05.2001, Filing number:2002-7014937, Pub.number:2003-11325, Grant number:772576
68. Country:MX:Filing date:08.05.2001, Filing number:PA/A/2002/010964, Pub.number:NA, Grant number:229275
69. Country:MX:Filing date:02.06.2005, Filing number:PA/A/05/005901, Pub.number:NA, Grant number:259781
70. Country:SG:Filing date:08.05.2001, Filing number:200206648.8, Pub.number:NA, Grant number:92888
71. Country:US:Filing date:08.05.2000, Filing number:09/566020, Pub.number:NA, Grant number:6711211
72. Country:US:Filing date:03.02.2004, Filing number:10/770986, Pub.number:20040156437, Grant number:6954502
73. Country:US:Filing date:07.09.2005, Filing number:11/219917, Pub.number:20060013317, Grant number:NA
74. Country:ZA:Filing date:08.05.2001, Filing number:2002/8767, Pub.number:NA, Grant number:2002/8767
75. Country:US:Filing date:17.04.2007, Filing number:11/736454, Pub.number:20080095228, Grant number:NA
76. Country:AU:Filing date:29.08.2007, Filing number:2007311526, Pub.number:NA, Grant number:2007311526
77. Country:BR:Filing date:29.08.2007, Filing number:PI0718205.8, Pub.number:NA, Grant number:NA
78. Country:CN:Filing date:29.08.2007, Filing number:200780044601.0, Pub.number:101548548, Grant number:200780044601.0
79. Country:EP:Filing date:29.08.2007, Filing number:07826205.2, Pub.number:2080375, Grant number:NA
80. Country:IN:Filing date:29.08.2007, Filing number:2656/DELNP/2009, Pub.number:NA, Grant number:NA
81. Country:JP:Filing date:29.08.2007, Filing number:2009-532920, Pub.number:2010-507310, Grant number:4903877
82. Country:MX:Filing date:29.08.2007, Filing number:MX/a/2009/004123 , Pub.number:MX/a/2009/004123 , Grant number:NA
83. Country:PH:Filing date:29.08.2007, Filing number:1-2009-500724, Pub.number:NA, Grant number:NA
84. Country:RU:Filing date:29.08.2007, Filing number:2009117688, Pub.number:NA, Grant number:NA
85. Country:SG:Filing date:29.08.2007, Filing number:200902620-4, Pub.number:NA, Grant number:151785
86. Country:VN:Filing date:29.08.2007, Filing number:1-2009-00996, Pub.number:22209, Grant number:NA

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Qualcomm restructures company due to concerns over impact of open source licenses on patents

These days, when companies announce a restructuring (or the exploration of "strategic alternatives") with respect to their patent portfolios, it usually means that someone hopes to sell out or to ratchet up monetization. Today, Qualcomm announced a restructuring that is simply a precautionary measure. Qualcomm keeps almost all of its patents in the existing parent company but spins off research and development. Qualcomm forms "a new wholly owned subsidiary, Qualcomm Technologies, Inc. (QTI), which, along with its subsidiaries, will operate substantially all of Qualcomm’s research and development activities, as well as product and services businesses, including its semiconductor business, QCT". This is because "the company expects that QTI and its subsidiaries' product and services businesses will increase their work with open source software in the future and this restructuring will, among other things, help ensure that QTI and its subsidiaries’ activities do not result in the licensing of any of Qualcomm Incorporated's patents, including its 3G and 4G patents".

What does this mean? Qualcomm knows that its patents are the crown jewels of the company and is concerned that it could lose its ability to enforce some of those crown jewels against third parties just because of the patent-related pitfalls involved with open source licensing. This would adversely affect Qualcomm's licensing business and its shareholder value.

Open source licensing is a tricky thing. At first sight, many people are led to believe that such licenses as the GPL, the Apache license or the various BSD-style licenses are straightforward and have no significant downside. But those who contribute to open source projects or redistribute software under open source licenses may indeed restrict their ability to enforce patent rights against others. Open source licenses are primarily copyright licenses, but some contain clauses on patents and even those that don't mention patents at all can be construed to constitute a grant of an implicit patent license. Open source software is free, and for a company like Qualcomm it would be devastasting if some of its patents could be used on a royalty-free and largely or entirely restriction-free basis just by incorporating certain open source code with which Qualcomm is involved (as a contributor and/or redistributor) into third-party products.

BSD-style licenses are very short and usually don't mention patents explicitly. The GPLv2 (the license under which Linux, MySQL and many other open source programs are published, though it's less popular now than it used to be) makes some references to patents but lacks clarity in this area. That's why the GPLv3 was primarily created in order to make up for the GPLv2's patent-related shortcomings, but GPLv3 is ideologically-charged and much less popular. The Apache Software License also makes explicit reference to patents but is more palatable to commercial players than GPLv3. Still, the philosophy behind open source licenses is usually hostile to patents.

For a large organization like Qualcomm, it's very difficult to manage the use of open source licenses on a company-wide basis. If you have an engineer somewhere who isn't aware of the legal issues involved but contributes some code to an open source project, or incorporates open source software into some Qualcomm technology, the impact on Qualcomm's patents could be far-reaching -- and the company might not know it until it sues someone over a patent and suddenly faces a license-related defense. It's impossible to have a lawyer look over every engineer's shoulder all the time. Qualcomm was apparently aware of these risks and opted for a new corporate structure under which it can counter any license-based defense by pointing to the fact that a subsidiary cannot license out its parent company's patents.

The effort of restructuring a company of Qualcomm's size is very significant. The fact that Qualcomm undertook this effort shows how protective its management is of its patents and how profound its concern over the implications of open source licenses must have been.

The organizations behind certain popular open source licenses, such as the Free Software Foundation (GPL) or the Apache Software Foundation, will probably look closely at what Qualcomm is doing and discuss internally whether Qualcomm's restructring is a blueprint for all those who seek to circumvent the patent clauses of open source licenses in a way that runs counter to the spirit of those licenses or, even worse, renders the patent clauses of those licenses ineffectual. There will probably be some lively debate on certain internal (or even public) mailing lists.

And many other companies that make use of and/or contribute to open source software will also think about whether their corporate structure poses a risk to the enforceability of their patent rights.

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Latest Nokia statement indicates potential for multi-year court battle over nano-SIM patents

After Apple made its royalty-free patent licensing offer related to nano-SIM, Nokia said it was not aware of "any Apple IP which it considers essential to its nano-SIM proposal" (though Apple declared a U.S. provisional patent application to be potentially essential) and reiterated, as its primary concern, its positions that its own proposal is superior and that "Apple's proposal does not meet the pre-agreed ETSI requirements". Today Nokia issued another statement according to which it won't make its patents available to implementers of the nano-SIM standard should Apple's proposal be "selected in violation of ETSI's rules".

Nokia claims to hold "more than 50 patent families covering SIM related technologies that [it] believe[s] may be essential to Apple's proposal". Nokia states that it will, however, honor its "existing commitments to license its standard essential patents under FRAND terms to earlier adopted ETSI standards".

If -- I repeat, if -- it is true that Apple's nano-SIM proposal "does not meet ETSI's technical requirements" and that it could only be adopted in contravention of ETSI's own rules, then Nokia certainly has the right to argue that its FRAND licensing obligation, which it has in its role as a member of the committee working on this particular standard, does not apply to nano-SIM. Given the complexity of the technical issues Nokia raises, a court battle over this question could take years. ETSI is based in France, so any disputes might have to be brought before French courts.

In such a litigation, it would have to be established whether Apple's proposal was in line with ETSI's rules. Another question would be whether Nokia would have an obligation under antitrust law to support such a new standard regardless of an alleged breach of rules.

And that may not even be the end of the story: assuming that Nokia was found to have a FRAND licensing obligation, there could be another multi-year dispute over the royalty rates Nokia would demand from implementers of a standard it vehemently opposed.

Nokia apparently hopes that the prospect of protracted litigation is going to dissuade enough ETSI members from voting in favor of Apple's proposal. Additionally, Nokia accuses Apple of "mis-using the standardization process, seeking to impose its own proprietary solution on the industry and using ETSI merely to rubber stamp its proposal". Given that Apple is willing to make its own IP essential to nano-SIM available on a reciprocal, royalty-free basis, I don't think it's accurate to label it a "proprietary solution". Also, it must have something to offer given that most European network operators support it, according to the Financial Times.

Nokia argues that Apple's approach "is not in the best interests of the industry or, more importantly, of consumers" and insists that "the integrity of ETSI's standardization process should be upheld, with pre-agreed requirements and selection criteria used to ensure fair selection of the best technology". In my personal opinion, pre-agreed criteria should be treated with a certain degree of flexibility when it comes to a vote, especially in an industry with fast-changing needs. And I like the idea of letting companies vote without uncertainty about whether the essential patents will or will not be available on FRAND licensing terms.

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Apple's U.S. patent application 61481114 might be essential to nano-SIM

Yesterday's news of Apple having offered to make, on a reciprocal basis, any of its intellectual property essential to nano-SIM available on a royalty-free basis has already drawn a lot of interest around the globe. One of the reactions was a response from Nokia consisting of two paragraphs. I'l quote and comment below each quoted paragraph:

"For Nokia, the principal issues remain the technical superiority of our proposal and that Apple's proposal does not meet the pre-agreed ETSI requirements."

I'm not going to take position on "technical superiority" per se. In yesterday's post I linked to a Financial Times article that mentioned concerns over Apple's intellectual property as well as the fact that Apple's opponents object on technical grounds. For those interested in further detail, I recommend this article by The Verge's Chris Ziegler. It compares the technical characteristics of the different proposals, and concludes that "Apple's design is in many ways the least controversial — it rocks the micro-SIM boat as little as possible, whereas Nokia is looking for a more thorough reboot of the now 20-year-old Subscriber Identity Module". (Obviously, "least controversial" is nonjudgmental on quality.)

Like in any situation in which royalty-bearing standards compete with royalty-free proposals, patent encumbrance must be justified with tangible benefits. I have consistently advocated a level playing field between royalty-bearing and royalty-free standards, letting them compete on the merits rather than exclude one business model categorically, but in any economic context, a premium cost must correspond to an appropriate level of premium quality or it's not worth it. That's one the hurdles that Nokia, Motorola and RIM face at this week's ETSI meeting. As a consumer, I wouldn't want to pay (indirectly) Nokia or anyone else patent royalties unless the cost I (indirectly) bear buys me a real benefit. Another success factor for Apple is the broadbased support it has among European mobile network operators.

This leads us to the second paragraph:

"With regard to intellectual property, we are not aware of any Apple IP which it considers essential to its nano-SIM proposal. In light of this, Apple's proposal for royalty free licensing seems no more than an attempt to devalue the intellectual property of others."

I trust Nokia that if they say they were "not aware of any Apple IP which it considers essential to [nano-SIM]", they really weren't, but a simple look-up of the ETSI IPR database, which Nokia is undoubtedly very well aware of because it's one of the biggest contributors, would have answered the question. In fact, several hours before I firstly saw Nokia's statement, a Dow Jones Newswires article on Apple's royalty-free offer had already referred to a document posted on ETSI's website. An updated version of the Dow Jones article can be found on the Wall Street Journal website -- the original one, however, appeared several hours prior to that version and already mentioned the ETSI document. And this link points to the relevant declaration by Apple. If you click on the "IPR information statement annex" tab, you get some additional information, including the number of Apple's U.S. provisional patent application that the declaration relates to: 61481114.

The problem with provisional patent applications is that they are never published. Within 12 months of filing, they must be converted into a "regular" patent application or else they just expire. Patent applications are in stealth mode for 18 months, so provisional applications never make it to the point of publication (except that "regular" patent applications later reference them because they are relevant to the priority date). Therefore, we can't see what's in that particular patent application (other than the title, "Compact Form Factor Integrated Circuit Card", which Apple's statement to ETSI contains), but frankly, the content of that application is not even the most important thing here. What really matters is that Apple's proposal is generous and in the public interest in this particular context.

The FT article showed that there was concern about Apple's patent-based control over the proposed standard. I don't know whether Nokia previously expressed that concern, contrary to its denial of awareness of essential Apple IPRs in the field, but somebody certainly must have told the press about it -- if not Nokia, then some of Apple's other rivals. The key thing is that Apple has not only alleviated but totally eliminated that concern now. The declaration published on the ETSI website relates to only one patent application, and it clearly shows that licenses are available on a reciprocal, royalty-free basis, but the most important thing is that the letter I saw makes the same commitment with respect to any Apple IPR essential to nano-SIM. No trap. No backdoor.

As long as Nokia adheres to FRAND licensing obligations, the Finnish company's position that it wants to cash in on its SIM card-related patents is just as legitimate, from a shareholder value point of view, as Apple's proposal that everyone adopt a royalty-free standard. But Nokia's desire to monetize standard-essential patents is not in the public interest unless its proposal offers major advantages that offset the cost of licensing and the higher transaction cost (which in connection with FRAND patents sometimes involves litigation as I see all the time now).

There are situations in which royalty-free is the way to go. For example, I wouldn't even want to think about what would have happened if Tim Berners-Lee had patented the World Wide Web and collected FRAND royalties on any technologies implementing it. SIM cards aren't comparable to the WWW, but they are such a basic component of wireless devices that a royalty-free standard would clearly be desirable unless it has major shortcomings.

Nokia owns many standard-essential patents, and it's understandable that it's concerned about anything that might "devalue" SEPs. However, since I monitor many litigations in this industry, I'm far more concerned about SEP holders that try to impose excessive license fees and other anti-competitive and anti-innovative terms and conditions than I am about devaluation. It appears that antitrust regulators have a similar perspective at this point.

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Apple offers royalty-free license to nano-SIM patents, a proposed standard backed by most European carriers

Last week, the Financial Times reported that Apple is at loggerheads with Motorola Mobility, RIM and Nokia over a proposed standard called "nano-SIM", a further miniaturization of the smart cards now known as "micro-SIM" cards. SIM stands for "subscriber identity module". Nano-SIM cards would be thinner and considerably smaller than micro-SIM cards. Apple has the support of "most of the European operators", according to the FT. The two camps are heading for a showdown later this week (on Thursday and Friday) at the Smart Card Platform Plenary meeting of the European Telecommunications Standards Institute (ETSI) in Sophia Antipolis (Southern France).

A perfectly reliable source that I can't disclose has shown me a letter dated March 19, 2012 that a senior Apple lawyer sent to ETSI. The letter addresses the primary concern of critics of the proposal. The FT said that "the Apple-led proposal has caused some concern among its rivals that the US group might eventually own the patents". But Apple's letter has removed this roadblock, if it ever was any, through an unequivocal commitment to grant royalty-free licenses to any Apple patents essential to nano-SIM, provided that Apple's proposal is adopted as a standard and that all other patent holders accept the same terms in accordance with the principle of reciprocity.

This shows that Apple is serious about establishing the nano-SIM standard rather than seeking to cash in on it. Last year I reported on two different stories (1, 2) about disagreements between Apple and the World Wide Web Consortium (W3C). Let's face it: Apple is a company that values its intellectual property and rarely gives it away for free. But as far as the evolution of SIM cards is concerned, Apple is clearly being generous and absolutely pro-competitive.

Apple's smart (card) move puts a lot of pressure on other companies in the industry. They can no longer claim that Apple will control this new standard, if it does become one, with its patent rights. Instead, they should now step up to the plate and match Apple's offer. In particular, Google is an outspoken advocate of open standards at the EU level, in its own name and through such organizations as Openforum Europe. Unless Chinese regulators still block the deal, it will soon own Motorola Mobility, and for that event, Google should now declare that it will support Apple's reciprocal, royalty-free licensing proposal, in the event that the nano-SIM standard gets adopted, and that it will support royalty-free licensing even if a competing standard won the vote. Openforum Europe, which constantly makes calls on European governments in connection with royalty-free standards, might encourage its member Google to do so, just to avoid the impression of open double standards...

Apple recently lodged a formal complaint over Motorola Mobility's alleged abuse of standard-essential patents with the European Commission. I watch Apple's litigation around the globe and I don't see them assert standard-essential patents, let alone seek injunctions based on them. In fact, another Apple letter to ETSI (which I published last month) takes a clear "no injunction" position on standards-essential patents. Wherever one stands on Apple's assertions of multitouch patents and other non-standard-essential intellectual property rights, Apple's attitude toward standard-essential patents sets an example that others, particularly Google, should follow.

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Google's WebM (VP8) allegedly infringes the rights of at least 12 patent holders

Google's attempts to promote "royalty-free" open source technologies just can't succeed in a world in which software is patentable -- a circumstance that Google increasingly realizes and complains about. No one can safely claim anymore at this stage that Android is a "free" mobile operating system without making a fool of himself, given that approximately 50 patent infringement lawsuits surround Android, an initial determination by an ITC judge just found Android to infringe two Apple patents (with many more still being asserted in other lawsuits), and ever more Android device makers recognize a need to take royalty-bearing licenses from Microsoft and other patent holders. Now Google's WebM codec project is apparently bound for a similar free-in-name-only fate as Android.

As a result, WebM seems unfit for adoption as part of a W3C standard, given the W3C's strict policy that its standards must be either patent-free or at least royalty-free.

In February I reported on MPEG LA's call for submissions of patents deemed essential to the VP8 video codec, a key element of Google's WebM initiative. I had already expressed doubts about Google's claims of WebM/VP8 being unencumbered by third-party patents shortly after WebM was announced more than a year ago. The commercial issue here is that Google's claims of WebM being "royalty-free" would be reduced to absurdity the moment that any patent holder rightfully starts to collect royalties on it.

I just became aware of a new streamingmedia.com interview with MPEG LA. MPEG LA serves as a one-stop shop for licenses to AVC/H.264 and other multimedia codecs; streamingmedia.com is the website of Streaming Media magazine. In that interview, MPEG LA stated affirmatively that there have been submissions relating to the February call, and disclosed, at a high level, a preliminary result of the vetting process that commenced subsequently to the submissions period:

Thus far, 12 parties have been found to have patents essential to the VP8 standard.

12 parties -- that's really a high number, and it could even increase in the future.

For now, MPEG LA doesn't want to name those companies. Chances are that there is an overlap between those 12 companies and the ones that contributed to MPEG LA's AVC/H.264 pool. I sent MPEG LA an email to inquire about this, but the only answer I received was that "confidentiality precludes [MPEG LA] from disclosing the identity of the owners".

Whatever the names of those companies may be, it's obvious that they wouldn't have submitted patents to MPEG LA if they weren't interested -- at least in principle and always subject to agreement on the particular terms -- in collecting royalties on WebM. While the Moving Picture Expert Group (MPEG) is a standardization body that also has plans for a (truly) royalty-free codec, MPEG LA is independent from MPEG and in the licensing business. Even MPEG LA offers freebies. For example, it doesn't charge for the use of AVC/H.264 for free Internet video. But that's fundamentally different from declaring a codec royalty-free without any field-of-use restrictions.

The WebM Community Cross-License intiative can't solve WebM's patent problem

I'm sure that none of those 12 companies is a member of the Google-led WebM Community Cross-License initiative. The companies behind the WebM CCL are Google partners who have committed not to assert their patents (should they have any that read on WebM) against that codec. The significance of that initiative was overestimated by some people. It's just a non-aggression pact. Those companies didn't commit to launch retaliatory strikes against patent holders who may bring assertions against WebM. Also, there's a notable absence: Motorola is a top three Android device maker and should be an obvious partner for Google but apparently reserves the right to sue WebM adopters. A Motorola subsidiary named General Instrument Corporation is suing other companies, such as Microsoft and TiVo, over various codec-related patents, including (but not necessarily limited to) U.S. Patent No. 5,949,948, 6,356,708, 7,310,374, 7,310,375, 7,310,376, and 7,529,465. If Google can't even get all of its Android partners on board, that shows how incomplete the WebM cross-licensing group is.

The process

Following a process similar to that of standard-setting organizations (though MPEG LA is a licensing body for patents related to standards previously set by others), MPEG LA evaluates the essentiality of such submissions, meaning that a group of patent experts has to make a determination on whether a patent declared essential really reads on a standard. Without such a vetting process, companies could declare patents essential only for the purpose of participating in a royalty-sharing agreement with those whose patents truly are essential to the relevant standard. In the Streaming Media interview, MPEG LA stresses that "[i]ndependent evaluations of patent essentiality are key to MPEG LA's pool licensing programs and have stood up well throughout its history".

While some have claimed all along that MPEG LA has a vested interest in WebM being deemed non-free (since that result takes a major differentiator away from AVC/H.264's competitor), it's important to consider that MPEG LA's credibility depends upon (among other factors) the quality of its essentiality assessment process. If the experts who perform this analysis overshoot and declare too many patents essential to a standard, MPEG LA's patent contributors will be concerned that their share in any royalty-sharing agreements related to a pool gets diluted. And if MPEG LA failed to recognize the essentiality of patents, licensees would be less likely to believe that MPEG LA is really a one-stop shop. MPEG LA doesn't give guarantees that it's a one-stop shop, but it certainly strives to form pools that minimize the risk of licensees facing infringement assertions related to patents that are not part of the given pool.

In the Streaming Media interview, MPEG LA said that there was a meeting "with VP8 essential patent holders in late June to facilitate a discussion among them whether and on what terms they may want to create a VP8 patent pool license", and that these efforts are continuing.

MPEG LA now has a clearer idea as to which patents would have to form part of the pool. Such a pool "typically remains open for the inclusion of additional essential patents", but there's now a group of a dozen patent holders who may or may not reach an agreement on the formation of a pool. To form a pool, they will have to determine what royalty rates MPEG LA would charge for the pool and how it would redistribute income from the pool to its contributors.

MPEG LA is a licensing -- not litigation -- entity

MPEG LA always stresses (in that interview and on previous occasions) that MPEG LA itself does not file patent infringement lawsuits on behalf of contributors to its pools. I guess that if a company uses a standard and refuses to take a license, MPEG LA will inform its contributors (maybe proactively, maybe just on request). But contributors don't appear to have an obligation to do so if an alleged infringer is unwilling to pay.

Obviously, if none of the actual patent holders ever sued an infringer, licensees might prefer to "roll the dice on litigation". If the 12 patent holders identified by MPEG LA so far (or possibly even more further down the road) join the pool, and if there are deep-pocketed organizations behind them that can afford to bring infringement actions, it's very likely that most of the alleged infringers would give serious consideration to a license deal.

Given that MPEG LA itself doesn't sue, it would be incorrect to claim that MPEG LA created this pool in order to litigate against Google or its partners. MPEG LA can legitimately claim that it offers a way for infringers to more efficiently address a problem that someone else (in this case, Google) may have created. It's not even that MPEG LA was needed to make the holders of those patents aware of the fact that their patents read on WebM. Those patent holders participate in a call for submissions, so it was the patent holders' own assumption that WebM infringes their rights.

It's important to understand that MPEG LA is just an aggregator. Even if MPEG LA didn't exist, those patents would still be around, and an adopter of WebM seeking to obtain a license to all of the declared-essential patents would have to talk to a dozen different companies.

A few months ago, the Wall Street Journal reported that the United States Department of Justice is looking into MPEG LA's activities. In that article, MPEG LA's CEO is quoted as describing his entity as "a convenience store" for licensing patents.

MPEG LA neither made software patentable nor filed the applications that resulted in the patents that were apparently submitted in response to its call for submissions. I believe a world without software patents would be a better place, and in such a world, MPEG LA wouldn't exist either. But in a world in which software is (unfortunately) patentable, MPEG LA can help to address the problem in one particular field.

I wouldn't even hold it against MPEG LA that Google itself didn't ask for the creation of a VP8 pool. The possible creation of an MPEG LA VP8 patent pool wouldn't be on the agenda if there weren't patents that read on VP8 according to their holders as well as MPEG LA's essentiality evaluators. This would also be a non-issue if Google had truly cleared all of the relevant rights instead of creating what could in the worst case become another lawsuit magnet like Android, potentially exposing a variety of companies and also non-profits like the Mozilla Foundation to the risk of litigation. I'm against the root cause of the overall problem, but MPEG LA is a partial solution in one field.

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