Tensions are rising in Europe as the European Commission creates rules on how standard-essential patents (SEP) should be licensed, to help the region’s budding internet of things industry.
Research and development organisation IP Europe is pushing for an SEP code of conduct for 5G and the internet of things, which it claims will “help technology contributors and users in the internet of things ecosystem find fair, reasonable and non-discriminatory (FRAND) outcomes to licensing negotiations, and avoid the further spread of litigation”.
Vehemently opposed is the App Association (ACT), which argues that such a code of conduct, and any potential for the use-based pricing of technology essential to 5G and the internet of things would “allow SEP holders to charge internet of things developers higher fees to use their technology and deter investment and innovation—a serious mistake that could hamper, not help, the development of the internet of things in Europe”.
Barney Dixon spoke to Morgan Reed and Brian Scarpelli of ACT to find out more.
What is the difference between use-based pricing and other forms of SEP licensing?
Brian Scarpelli: The use-based pricing concept would essentially give an SEP holder the unilateral ability to arbitrarily dictate higher royalties based on two things that have little to do with the SEP itself: the contributions from other innovators within that standards process, and the innovations of downstream companies.
Morgan Reed: Some have been claiming that use-based pricing is the norm and that there have never been any problems with it. They are criticising us for coming to the table with these questions about use-based pricing, but we haven’t seen examples of use-based pricing in the wild. Contrary to some claims, use-based pricing is simply not a norm in today’s ecosystem.
It’s important to note that the concerns we have been raising about use-based pricing are very similar to concerns raised by Ericsson in 2007. This makes it very confusing for us when people ask us why we are worried about use-based pricing, as we share Ericsson’s views from this time. Ericsson’s business has apparently changed, but the company’s 2007-held viewpoint that use-based pricing may have an impact on downstream innovators still applies, making its altered position confusing. Despite some public attempts at deflections, in an attempt to minimise our views, ACT’s community is deeply affected by SEP licensing policies, and even more so with the rise of the internet of things, where literally every small business may be looking at how they invent things, in order to reach new markets and customers. The latter are not traditionally part of the SEP licensing ecosystem today—smartphones being the well-worn use case—but absolutely will be negatively affected by use-based pricing.
What are ACT’s key contentions with use-based pricing?
Reed: The idea that the way you use an open standard will change the price of your licence has a profound impact in a couple of ways. First and foremost, it means that there will be an enormous burden of tracking and self-auditing. Let’s say you start a company and, using an SEP, you create an innovation embedded in all sorts of different devices, for example, refrigerators, weather balloons and home theatre systems. There, you have three wildly different uses. The problem with use-based pricing is that, depending on the licence you’re forced to sign, if, unknown to you, the chips were also found to be incredibly useful in say, bridges, and a company buys those chips from you and embeds them in bridges to say, detect air motion, all of a sudden you are required to audit the uses of the technology across the entire ecosystem, and report back to the SEP holder how much money you owe them.
Your company isn’t just responsible for signing the licence, it’s also responsible for monitoring your buyers and users.
Imagine that another use of your innovation came along and you didn’t know about it. If you get audited you may suddenly have to pay a penalty for a use of your chipset that you didn’t even know was happening.
Scarpelli: The whole reason we are advocating on SEP licensing is because the FRAND commitment is intended to offset the inherent anti-competitive nature of standard setting. The FRAND obligation is, above all else, intended to provide clarity to future, even unknown, licensees of that SEP that use those open standards to create a new innovation in a market we never even thought of. Many of our own companies find that a use-based pricing system is incompatible with that FRAND clarity. It gives the SEP holder the unchecked and arbitrary ability to dictate royalties.
Reed: Bringing in use-based pricing will be a deterrent for people to innovate, for fear of unforeseen pricing. The consequences will be less choice, higher prices and less innovation, and ultimately that will affect the consumer and the development of the internet of things in Europe.
The people who will suffer the most from this abuse are small and medium-sized business, which don’t have the cheque books to sign a big patent portfolios.
The rich companies can foot the bill, if this were to come to pass.
What would ACT do differently?
Reed: We are big supporters of ‘licence to all’. It’s important to look at this in the framework of Europe, which has always been very supportive of open standards. None of these activities we’re describing are forced upon these companies. They come to the table to voluntarily participate in a standards body. You are making a decision to allow your technology to be used widely by everyone. The exchange is to either make a little bit of money from high volume, or that the ensuing products will benefit other products you have in the market. Voluntary standards represent a decision a company makes on how it participates in the larger ecosystem.
Scarpelli: Standard-setting systems were not created to be a business model for SEP holders; they were created to promote competition and interoperability. Technology leadership and other angles like that are huge reasons that companies come to the table.
People should be rewarded for innovation. Use-based pricing as an undefined and nebulous concept, if endorsed by any government body, would take all of the precedent and policy that exists to date about what falls within FRAND as licensing behaviour, and completely throw it out of the window. If endorsed, a use-based pricing system provides an easy loophole to the entire FRAND concept by making it possible to refuse licences to competitors or others in pure violation of the FRAND obligation.
Is CEN/CENELEC the proper forum for this type of discussion? If not, where should this be discussed?
Reed: We thought the European Committee for Standardisation (CEN) and Electrotechnical Standardisation (CENLEC) workshop proposal was an opportunity to be heard and make our case for the licensing of SEPs. But, during the proceedings it became clear that meaningful participation was only available for people looking to support the findings that the sponsors of the workshop were putting forward.
In CEN/CENLEC’s defense, they were very candid after the fact that the workshop was not intended to be a forum to hear and consider all viewpoints. They said they were carrying the viewpoints of the group that was sponsoring the effort and that the sponsor would have a say in what would be the final determination.
In one sense, we don’t have a problem with that. But, our issue is that, immediately following the opening session, the workshop sponsors tried to create a narrative that there was an industry consensus on the matter. It’s clear to everyone that it was not a consensus, and in fact represented a minority viewpoint, one that sponsored the effort.
What is the process from here? Will this be discussed further?
Reed: The expectation of our organisation is that CEN/CENLEC and the supporters of this workplan will move the work plan forward under the description that it currently has, and there will be a document that comes out of that.
Our effort will be to make it clear that, if it is the identical work plan and the identical determinations that were made, this is not a consensus document and not a wide-ranging code of conduct that has had input from all segments of all effective industries. I would not be surprised if some of the countries that are involved in CEN/CENELEC raise some points of concern. There are some concerns from national standard-setting bodies on this issue.
What we can do is make sure our voice is heard and encourage the national standard-setting bodies to take our views into consideration, push back if possible and make sure they treat the final document appropriately as one that only reflects one point of view.