IPR – The power of precedent.

 

 

 

 

 

  • The punch-up over standard essential patents continues.
  • This time the focus has moved to the Western District of Wisconsin where Motorola and Apple are slugging it out.
  • Here Apple stands accused of infringing Motorola’s standard essential patents without taking a licence.
  • On Monday 5th November, there will be a hearing to decide the FRAND rate that Apple will have to pay for access to Motorola’s standard essential IPR for GSM/GPRS/UMTS.
  • Apple has filed a motion saying that it will accept any decision that determines a rate of $1 or less per unit as a royalty.
  • If the court decides that the rate should be higher than $1 per unit, Apple will appeal the decision and exhaust all of its legal options before coughing up.
  • If this offer is rebuffed, it will then appeal the decision and the fight will continue, probably for some considerable time.
  • A royalty of $1 on an iPhone 5 equates to a royalty rate of 0.15% which Apple believes is a fair, reasonable and non-discriminatory royalty rate (FRAND).
  • When anyone licences a standard essential patent, it must be licenced under this principle.
  • Unfortunately, like all principles, it is subject to considerable interpretation and the ruling of the court is unlikely to be to Apple’s liking.
  • Hence I suspect that this “offer” by Apple is merely a legal tactic to show the court that it is willing to negotiate in an attempt to be seen in a more favourable light.
  • There is no one royalty rate that determines FRAND and
    so, like all legal proceedings, the court will examine history in order to make its ruling.
  • By my analysis, Qualcomm currently gets around 2.3%, Nokia 1%, Ericsson 1% and Interdigital around 1% for their IPR portfolios which contain both standard essential and implementation patents.
  • These are the benchmarks that the court will look at when it comes to setting the royalty rate.
  • Furthermore, because these agreements are in place, licensees have implicitly agreed that these rates confirm to FRAND.
  • If Apple where to get a meaningfully lower rate, I would argue that it breaches FRAND as Apple would have an unfair advantage (though a lower royalty rate) compared to other handset makers.
  • Hence, I think it very likely that the court will decide that a royalty rate of around 1% or $6.3 per unit is the right level.
  • Apple will of course appeal and so the fight will go on much to the entertainment of commentators and the prosperity of the respective legal councils.
  • However at the end of the day I suspect that Google will end up with a royalty rate somewhere around 1% of the wholesale price of the device.
  • A key question to ask here is how does this benefit the Android community?
  • Google blew $12.5bn of shareholder’s money on the acquisition of this patent portfolio but so far has achieved nothing in terms of protecting Android against the ravages of Apple and Microsoft.
  • Android handset makers remain pretty much on their own with only Samsung having much chance of presenting a robust defines despite its track record to date being pretty abysmal.
  • While there is likely to be a victory here for Google at the end of the day, it is likely to be a pyrrhic victory that does Android no good whatsoever.
  • This further supports my contention that Android is extremely vulnerable on a number of fronts leaving the door wide open for Microsoft.

 

RICHARD WINDSOR

Richard is founder, owner of research company, Radio Free Mobile. He has 16 years of experience working in sell side equity research. During his 11 year tenure at Nomura Securities, he focused on the equity coverage of the Global Technology sector.