Mobile Phone Cases Test Royalties’ Link To Patent Quality

By Tatum Anderson for Intellectual Property Watch

When should a patent be considered higher quality? Qualcomm, the United States mobile technology firm at the heart of countless patent infringement court cases, has justified the royalties it charges on mobile phone patents in a paper released earlier this month.

The company’s rebuttal challenges complaints from the mobile equipment manufacturing community that Qualcomm’s royalties are disproportionately high and do not reflect the amount of intellectual property, or numbers of essential patents, it contributed to the mobile phone technology called 3G WCDMA.

The paper, written by two legal advisers to Qualcomm, suggests that although the company has not filed as many 3G WCDMA patents as other manufacturers, like Finland’s Nokia, or Sweden’s Ericsson, the quality of the patents it has filed justify the royalty fees.

In the paper [pdf], Donald Martin, a former adviser to the US Federal Trade Commission, and Carl De Meyer, head of intellectual property at the Howrey law firm in Brussels, slammed patent counting as “naive and inappropriate for the purposes of valuing intellectual property and allocating royalties among patent holding participants.”

The disagreements over the value of Qualcomm’s patents have rocked the mobile equipment manufacturing fraternity and prompted European Commission investigations and legal action from the United Kingdom courts to the US International Trade Commission.

Manufacturers have argued that Qualcomm has reneged on agreements it signed at the international standards bodies that oversee the development of new technologies. These agreements require everyone to charge royalties on a fair, reasonable and non-discriminatory (FRAND) basis.

Qualcomm’s royalty fees are unreasonable and discriminatory because they can be out of proportion to the amount of intellectual property it has contributed and are arbitrarily set, they believe. Some manufacturers, including Nokia and Texas Instruments, have even accused Qualcomm of setting royalties that have prevented some competitors from entering the market.

Angered by royalty levels, mobile operators in Angola, Brazil and India last year threatened to stop using another technology Qualcomm was largely responsible for creating because its royalty payments make handsets too expensive for many people on lower incomes in the developing world, they said. Royalties for CDMA, an older technology, in handsets sold in India are reportedly 7 -8 percent compared with the 4.5 percent levels in Europe.

However, proving that a royalty is unreasonable is particularly tricky. Most of the arguments surrounding royalty fees revolve around the difficult task of determining that Qualcomm’s patents are not as valuable as it claims.

Royalty Fees Seen as High and Rising

Royalty payments are already controversial because they are becoming increasingly expensive. The rising costs reflect the growing number of companies now collaborating to create mobile technologies. Each company that contributes an important piece of knowledge to the new technology also sets a royalty fee. When added together, royalty fees hike the final cost of equipment.

Many in the industry are worried that high fees are driving up the cost of new mobile equipment so that ultimately the industry could be stifled. Mobile giants like Vodafone have even complained to the European Commission about royalty fees. Indeed, Nokia suggests 3G royalties can be responsible for over a quarter of the cost of equipment. Estimates suggest the industry could spend US$80-100 billion on 3G WCDMA-IP-royalty payments by 2017.

Qualcomm is the focus of much criticism surrounding royalties because it has a particularly controversial business model. It invests considerably more resources in acquiring patents and enforcing patent claims than selling equipment, compared to other manufacturers.

“Given the opposing interest these companies have, the amount of money at stake, and the fact that Qualcomm is far more dependent on exploiting its patent portfolio than Nokia, it is hardly surprising that they’re having difficulty agreeing how to value their respective patents,” said Mark Ridgway, associate in the IP group at law firm Allen & Overy.

In its defence, Qualcomm says that its inventions underpin technologies used in mobile phones throughout the world and that if its royalty fees were too high it would not have over 130 licencees.

There are concerns that Qualcomm may soon start to demand royalty fees on new technologies, like WiMAX, which is widely regarded as crucial for bringing the Internet to the developing world by many governments including India’s.

For one thing it has already acquired two companies with patents in technologies that are crucial to a WiMAX standard. In April 2006, a small manufacturer called Soma Networks became the first to pay royalties to Qualcomm for this technology. Industry observers say it will not be long before the company starts to lean on other manufacturers for royalty payments.

“Qualcomm makes lots of money from royalties, and this is a business they know. If they can get some royalties from this technology, I bet they will try to,” said Julien Grivolas, senior analyst at telecoms research firm Ovum.

Industry, Standards Bodies React

The industry is now embarking on a series of measures to rein Qualcomm in. Nokia and five other manufacturers in 2005 filed complaints to the European Commission accusing Qualcomm of contravening competition law.

Some standards bodies are now overhauling their intellectual property rules. Some manufacturers have proposed that one body, the European Technology Standards Institute (ETSI), consider controversial proposals to limit future royalty payments to a single-digit percentage and make companies divide the royalty between them, with a larger proportion going to those with more important patents.

The changes are yet to bear fruit, however.

EU competition law investigations are notoriously slow. Measures taken by standards bodies may be limited because of disagreements amongst manufacturers over the relative merits of their own intellectual property. And if royalty payments caps are introduced within the WiMAX forum, the standard body responsible for WiMAX technology, it would still not prevent Qualcomm from demanding royalties because it is not a member and not bound by its rules.

However, many are putting their faith in a legal action brought against Qualcomm with the US Delaware Court of Chancery in August. Nokia has asked the court to establish what exactly what fair, reasonable and non-discriminatory terms should look like, as part of the case. A decision in the case is expected this year.

The court’s decision could be crucial, according to Ilya Kazi, partner at patent and trademark attorneys Mathys & Squire. If the court provides guidance on how to define FRAND, Qualcomm may find it difficult to justify and enforce royalty payments for any of its patents, whether in WCDMA or WiMAX in other courts. Kazi said: “It is by no means globally binding but will be significant if the court gives some clear principles which other courts are likely to agree with and apply to other cases.”

Tatum Anderson may be reached at info@ip-watch.ch.