Standard Essential Patents

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1 Cipher Briefing Standard Essential Patents January 05 Standardization drives innovation by establishing interoperability between products and by facilitating market adoption of innovative technologies. Patents and standards - European Commision Report 5 March Long Acre London, WCE 9RA +44 (0)

2 Cipher Briefing Standard Essential Patents Cipher Briefings Cipher Briefings provide more detailed information about the data contained in Cipher and its relevance to an understanding of the drivers of IP value and risk. This briefing focuses on Standard Essential Patents, which is one of the value drivers in Cipher. Nigel Swycher, CEO AISTEMOS Limited January 05 Executive Summary Standard Essential Patents (SEPs) are intellectual property s most significant contribution to the development of standards. Standards and standardisation have, however, existed since the beginning of time. They are, without doubt, a good thing. They lie at the heart of interoperability and impact every aspect of our lives. Examples of standards include everything from plugs to railway lines. SEPs are a niche topic within this context, and have taken centre stage since the advent of the internet and mobile telephony. This Guide provides an introduction to SEPs and explains why we have surfaced this publically available SEP data in Cipher. What is a Standard Essential Patent? A Standard Essential Patent (SEP) is a patent that must be used to implement a technical standard, i.e. it is essential to the implementation of the standard. In the digital age standards lie at the heart of interoperability, and companies who wish to design, manufacture or sell products into the high-tech market will very often need to design their products to meet or comply with the relevant standards. In order to do this, they require a licence to use the SEPs. The terms on which the licence is available varies by standards. Broadly, they fall into two camps: Royalty-free - where all SEPs are available for use without charge, e.g. the world wide web and Bluetooth Bluetooth and the World Wide Web The World Wide Web Consortium (W3C) was formed in 994 at Massachusetts Institute of Technology, with support from CERN, DARPA and the European Commission. W3C is still led by its founder, Tim BernersLee, widely regarded as the inventor of the world wide web. W3C has nearly 400 members and controls 30 web-related standards. W3C will not approve a standard if it is aware of SEPs that are not available on a royalty-free basis. The Bluetooth Special Interest Group (SIG) was established in 988 by 5 companies. Four months later, there were 400 members and today there are over 4,000 companies united within the Bluetooth SIG network. In exchange for use of a Bluetooth trade mark and a commitment to be technically compliant, all members agree to grant all other members royalty-free licenses of their Standards-Essential Patents. FRAND - where the owners commit to licence the SEPs on Fair, Reasonable and Non-Discriminatory (FRAND) terms. For the purposes of this Guide, we make no distinction between FRAND and RAND commitments. One of the earliest standards was the Egyptian logging of 436BC as the first year in recorded history.

3 Cipher Briefing Standard Essential Patents The regulation of SEPs varies, depending on the standard setting organisation (SSO) that controls the standard. SSOs can be single companies, formal standards developing organisations (SDOs) or informal forums or consortia. Included in Annex a and Annex b are examples of SSOs, and standards they control. How do Standard Settings Organisations operate? In this Guide we focus on formal standard setting organisations, which have standards with identifiable and approved specifications. SSOs create the administrative infrastructure to support the work of their members. At the heart of all SSOs are the bylaws and membership rules, which regulate fundamental matters such as membership, consensus building, voting and dispute resolution. Many SSOs have an Intellectual Property Right (IPR) policy in one form or another. standards are good because they create the level playing field on which all can compete. More than that, good standard-setting helps consumers, boosts competitiveness and can spur market growth. Former European Commissioner for Competition, Mrs Neelie Kroes 5 October 009, Brussels How do IPR policies operate? Once a standard is set, it is widely adopted. The IPR policy of the SSO will regulate the terms on which the SEPs will be licensed. There are unlikely to be issues where the SEPs are available royalty-free. There has, and continues to be, significant controversy surrounding those patents that are subject to FRAND commitments. The basic problem stems from the vagueness and uncertainty inherent in what is or is not fair, reasonable and non-discriminatory. We have highlighted below some of the major problems that have arisen: Essentiality Certainty FRAND Most SSOs work on the basis that members disclose patents which they believe to be essential. However, the essentiality is often not tested until litigation. Many SSOs do not require members to specifically identify which patents are essential to which elements of the standard. This can make it hard for third parties to assess what licences are required and at what cost. Also the amount and quality of the data provided by SSOs varies considerably, which works to the considerable disadvantage of new entrants. In many of the mobile standards, e.g. 3G, 4G, LTE, the majority of SEPs are owned by a handful of companies. (Annex includes a breakdown of SEPs declared across a range of technologies). This creates issues on a number of levels. First, the problem of calculating a single royalty for all SEPs owned by a company (generally FRAND works best at a single-patent level). Secondly, the cumulative effect of aggregating FRAND royalties across multiple licensors. The so-called royalty-stacking problem. Winners and Loses - achieving the balance The controversy around SEPs centres on balancing economic interests. Companies that make substantial investment in innovation, which culminates in an industry standard, require compensation. This is the essence of the patent system. However, seeking the right balance is hard when the technology is standardised, such In the 3G litigation between Nokia and Interdigital, the claim started with 3 patents, reduced to 4 by trial and a decision in December 007 that only one of the Interdigital patents was essential.

4 Cipher Briefing Standard Essential Patents 3 that market participants have no choice but to take a licence of the technology. This gives back monopoly power (with the tendency towards monopoly pricing) at exactly the moment the market wants the technology to proliferate. The balance is currently held in the words Fair and Reasonable which has led to considerable litigation. We have briefly described the controversy around injunctions in the box below: SEP and Injunctions If A owns a SEP and B makes a product to the relevant standard, it needs a licence. If A and B cannot agree the FRAND royalty, B is infringing. A is entitled to an injunction. The granting of an injunction will increase A s negotiating power. So, is the answer not to grant an injunction if B is willing to pay the FRAND royalty when determined? That puts the burden on the patent holder to litigate, while the infringer continues to make sales and not pay. There is currently no one answer to this question, not least because the disputes are spread across the globe (specifically US, Germany, Netherlands, Japan and China). The consequence of this is that a global issue is now being viewed through a variety of national, political, economic and legal lenses. This is far from ideal. Cipher and SEPs A recent European Commission report on Patents and Standards summarises the position perfectly: Efficient licensing of IPRs is crucial for achieving broad, rapid diffusion of innovation and comments on efficiency as follows: SEP licensing is efficient if licenses are concluded with a minimum of search, negotiation and dispute resolution costs to both parties and on terms that guarantee the technology contributor a fair return on his investment while enabling the implementor to use the standard 3 at reasonable costs and on a level playing field. Many of the improvements suggested in the European Commission report focus on improving transparency of data relating to SEPs. The starting point for an efficient SEP licensing system has to be that any third party can determine who owns what patents relating to which standards. This is not straightforward for a whole array of reasons outside the scope of this Guide. What we have achieved in Cipher is to surface patents that have been declared to the main ETSI standards (detailed in Annex 3). We have linked this information to the patent data in Cipher, thereby providing up-todate status and ownership information. We have also taken ownership of SEPs as a value driver, and where the Target (or a Comparable) owns SEPs, this is included in the overall assessment of value. Whilst the resolution of policy relating to Standard Essential Patents is a significant and ongoing challenge, our view is that all available data should be readily accessible - otherwise it is not public in any real sense of the word. AISTEMOS January 05 3 Patents and Standards - European Commission Report (04) 9770, 5 March 04

5 Cipher Briefing Standard Essential Patents 4 Annex a - Examples of formal SSOs and their standards SSO Examples of Standards Webpage 3GPP GPRS, EDGE ANSI ANSI-NSF, ANSI/APSP ASME BPVC, PTC AES AES/EBU, MADI CEN EN 7 DMTF CADM, WBEM, SMBIOS DVB ISDB-T, DVB-S, ATSC ECMA ECMAScript ETSI 3G, 4G, UMTS, LTE IEC IEC 6047, IEC IEEE IEEE 80.3, IEEE ISO ISO 9000, ISO ITU ASN., ISDN OASIS AMQP, BCM, CAP OMA MMS, OMA DRM, FUMO SMPTE SMPTE-TT TIA TIA-94, TIA-568-C VESA VFC, FDMI, DDC W3C XML, XHTML, XQuery Annex b - Examples of industry forums, consortia and their standards SSO Examples of Standards Webpage AVnu Alliance AVB A4WP Rezence ATIS ATIS Bluetooth SIG Bluetooth HDMI Forum HDMI Power Matters Alliance PMA Open Handset Alliance Android SD Association SD Card PCI-SIG PCI, PCIe ZigBee Alliance ZigBee Wireless Power Consortium Qi IETF Internet protocol suite (TCP/IP)

6 Cipher Briefing Standard Essential Patents 5 Annex - ETSI SEPs and their owners across technologies Mobile Others 37% Google NTT DoCoMo Nippon Telegraph and Telephone CorporaHon Samsung 8% Qualcomm 8% Motorola 4% Audio Ericsson 5% Digital TV Dolby Motorola Orange Philips LG InterDigital 6% 5% Motorola 5% Others Nippon Telegraph and Telephone LG CorporaHon Orange Ericsson Siemens Huawei 9% Nokia 0% InterDigital 5% Google 9% Qualcomm 5% Others 3 Samsung 6% Nokia 8% Nokia 5% Samsung LG 9% Huawei Siemens 4% Qualcomm InterDigital 8% 7%

7 Cipher Briefing Standard Essential Patents 6 Annex 3 - ETSI standards in Cipher Number of SEPs and standards included in Cipher. Technology Mobile Digital TV Two Way Radio Communications Infrastructure Streaming Cordless Telephone Wifi Connected Homes Electronic Signatures Semiconductors Audio Number of SEPs Number of Standards

8 Cipher Briefing Standard Essential Patents 7 Glossary Sources & Further Reading ETSI is the European Telecommunications Patents and Standards European Commission Report European Commision, 5 March 04, 9770 Available online at: 3/attachments//translations/en/renditions/pdf Standards Insitute and is the largest SSO in the mobile communication sector. ETSI SEP data is included within Cipher as a value driver. FRAND is used to describe a Fair, Reasonable and Non-Discriminatory Royalty (and RAND is the same without fairness). What is FRAND in any given situation is the source of much debate and dispute. Royalty stacking is the problem caused by aggregating multiple FRAND (or other) royalties, which can render uneconomic the manufacturing and sale of a product. SEPs are Standard Essential Patents. Patents which must be used (aka essential) to make a product compliant with the standard. Standards-Essential Patents and Injunctive Relief Jones Day, April 03 Available online at: Understanding patents, competition & standardization in an interconnected world ITU, July 04 Available online at: European Competition Law, Non-Practicing Entities, And FRAND Commitments Philippe Chappatte, Paul Walker, 00 SSOs are Standards Setting Organisations which set and administer technical standards. Standards are at the heart of interoperability, and span all industrial and technical development from plugs to train tracks. In the digital age, standards are at the epicentre of the development of the internet and mobile communications. 05 Aistemos Patented standards: In search for co-existence Tyrone Berger, Australian Intellectual Property Journal, 04 Available online at: Standard-Essential Patents Josh Lerner, Jean Tirole, Working Paper, Harvard Business School, 03 Available online at: 90 Long Acre London, WCE 9RA +44 (0)