Until recently, patent licensing arrangements for industry standards like MPEG and 802.11 have been relatively benign and invisible to the general public. Times have changed, though, and the explosion of smartphone patent litigation has made the once unfamiliar acronym FRAND the subject of mainstream conversations. In particular, there's a major debate over the fairness of patent licenses and how patents essential to wireless standards like 3G can be used in litigation. It's a wonky and in-depth argument between huge players like Apple, Microsoft, Motorola, Google, HTC, and Samsung that's playing out in courtrooms and government agencies all over the world — and the end result will dramatically affect the technology landscape for years to come. Let's take a look.
What is FRAND?
FRAND is simply an acronym that describes the goal of a certain type of patent license: "fair, reasonable and non-discriminatory." Various standards associations assign their own lingo and tweaks to the basic acronym, but the principle is pretty much the same industry-wide: as a trade-off for investing in technology standards like 3G, companies large and small agree to license their relevant patents to everyone else in the industry on fair, reasonable, and non-discriminatory terms. That means that anyone, friend or foe, must be allowed to license the technology after paying a reasonable fee. Exactly what "fair, reasonable, and non-discriminatory" actually means is left unsaid, however — it's something of a gentlemen's agreement throughout the industry. Everyone signs a contract promising to be fair, but those contracts don't say what fair actually means.
If standards licensing works as intended, both the industry and consumer win
Ideally, fairness just works itself out: everyone in the industry who participates in a standard gives something up and gets something in return. Patent owners give up exclusive rights to their patents but get industry adoption of their technology and some level of licensing revenue in return. Other companies without patents pay licensing fees in exchange for the rights to use technology that might not otherwise be available to them. If it works as intended, both the industry and the consumer win: the industry wins because all of the willing players get access to otherwise proprietary technology with an eye toward universal acceptance while also spreading costs among a larger group. The consumer wins because widespread standards adoption reduces compatibility headaches and fosters competition, resulting in better products at lower prices.
And that's how standards licensing actually works most of the time — everything from USB to HDMI to Blu-ray is governed by a standard group, and most of them work well together. But the sheer amount of money and potential in the mobile industry has thrown things way off the rails, and FRAND issues have become a major focus in almost every mobile patent lawsuit in the world today.
What's gone wrong?
Although it's fun and sensational to look at mobile patent cases through the frame of Apple going after companies like Samsung and Motorola with patents covering things like the iPhone's "slide to unlock" gesture, the FRAND debate is rooted in a much deeper set of policy concerns. The argument isn't about the target of the lawsuits, it's about the bullets in the gun: companies like Samsung and Motorola are becoming increasingly more comfortable using their patents essential to standards like Wi-Fi and 3G technologies as live ammunition.
The argument isn't about the target of the lawsuits, it's about the bullets in the gun
Since there's no way to build a phone without using Wi-Fi or 3G technology, the concern is that companies like Motorola and Samsung are acting against their FRAND promises when they go to court with patents on standards — especially when they seek to block sales of products that infringe those patents, as both companies have done against Apple throughout the world. These patent actions have real results, since it's a slam dunk that any cellphone infringes patents essential to various wireless standards; Motorola just won an injunction against Apple in Germany based on a 3G patent.
Think of it this way: by joining a standards group and promising to license your patents under FRAND terms, you're agreeing up front that all you want in return for those patents is a fair amount of money. (How much money is "fair" is an open dispute as well, but that's still just money.) But by suing to block Apple's sales with these patents, Samsung and Motorola are now saying they want more than a fair amount of money — they're explicitly arguing that each iPhone sale causes harm that can't be fixed with cash. That seems like it flies in the face of FRAND: you can't promise to license your patents at a fair rate to anyone who asks and then say it'll take anything more than a fair amount of money to resolve a dispute.
Not surprisingly, Apple has voiced its concerns. It began actively raising objections last year with its harmonized defenses — including allegations of FRAND abuse — against Samsung's infringement lawsuits around the world. Apple isn't new to the idea of defending against standards patents: Nokia asserted several patents related to GSM and UMTS standards against Apple back in 2009, but that case eventually settled, with Apple agreeing to pay a one-time settlement fee and ongoing royalties. Lately, Apple's had more success with these patent defenses, even convincing a Dutch court to rule that Samsung is indeed obligated to offer Apple patent licensing under FRAND terms, but Apple's taking the fight straight to the top and trying to change the nature of FRAND licensing altogether.
Apple sent a letter last November to the European Telecommunications Standards Institute (ETSI), the European standards organization that maintains 2G and 3G standards like EDGE and UMTS. While Apple doesn't mention Samsung or others by name, the letter identifies two primary areas where it believes FRAND principles have failed: unreasonably high royalty requests from owners of essential patents, and the use of essential patents to seek injunctions against the sales of devices like the iPhone. It's easy to see why Apple would complain; standards patents are supposed to be licensed under FRAND terms to all comers, not used defensively in litigation. What's more, it turns out Apple isn't the only one complaining.
Governments take notice
Governments around the world have also begun to express concern about the use of FRAND patents in litigation. While fairness is of obvious concern, the real issue centers around competition — or, to be more precise, anti-competitive behavior. For example, the EU Commission announced last month that it was formally investigating Samsung for asserting standards patents in European patent litigation, expressing its concern that using these types of patents in litigation could "distort competition" and amount to "an abuse of a dominant position" prohibited by law. For its part, Samsung has said that it's confident that it's in compliance with all applicable competition rules.
The EU is investigating Samsung for using FRAND patents to "distort competition"
The EU is still in the middle of the investigation, so there's no way to predict exactly what will happen — but it's unlikely Samsung will get blanket approval for its patent strategy in the end.
There's also an elevated worldwide interest in Motorola's standard-patent-related tactics against Apple in both Europe and the US. Just this week the EU announced that it was approving Google's purchase of Motorola, and within hours of that development, the US Department of Justice similarly announced that it was going to allow the deal. Neither the EU Commission or the DOJ announced any formal investigations into Motorola's patent licensing tactics, but both expressed wariness that Motorola's standard-related patents could be used in an anti-competitive manner. The DOJ was especially blunt, saying that "how Google may exercise its patents in the future remains a significant concern."
If Google's recent letter to the IEEE standards body accurately lays out its future plans for Motorola's essential patents, we can expect this debate to rage on. In that letter, Google acknowledged and adopted Motorola's policy of demanding a maximum royalty of 2.25 percent on the sales of devices like the iPhone — a royalty rejected by Apple as excessive. On the issue of using standards patents to seek injunctions against competitors, Google promised that it wouldn't immediately try and block sales, but reserved the right to file for an injunction if its 2.25 percent royalty demand is not accepted after 30 days. They're presumably asking Apple for the maximum 2.25 percent royalty, and that's a huge amount, especially considering that standard-essential patents typically only cover a specific and inexpensive component of the overall device. It's unlikely many companies would accept such an offer under these circumstances.
Microsoft chimes in
It's not just Apple and government agencies that have started to pay attention to FRAND issues. Both Microsoft and Cisco issued statement on the issue last week, and Microsoft's overall position can be summarized with these two sentences from its statement:
The international standards system works well because firms that contribute to standards promise to make their essential patents available to others on fair, reasonable and nondiscriminatory terms. Consumers and the entire industry will suffer if, in disregard of this promise, firms seek to block others from shipping products on the basis of such standard essential patents.
Like Apple, Cisco sent a letter to the ETSI. Cisco's letter takes a more diplomatic approach in expressing its concerns over the use of essential patents as weapons, but the company ultimately agrees with Cupertino: it believes participants in the development of wireless standards "should grant licenses on terms that are consistent with the framework set out in Apple's letter."
It's natural to question the motives of Apple and Microsoft, especially to the extent that both companies are aligned against Google, but these concerns about FRAND licensing are widely shared throughout the industry. A resolution is coming one way or another, and it will almost certainly involve various governments — and we can't underestimate the influence these corporations will have on the outcome. The squeaky wheel is getting a lot louder.
Yes, FRAND licensing is extremely dry and boring, but it's also very much the backbone of the modern tech industry. Without effective standards patent licensing, there simply wouldn't be any standards, and standards groups all work because the participants realize that the benefits of working together far outweigh the costs of keeping their patented technologies locked up.
There's no point in joining a standards group if your product can be blocked for relying on that standard
The use of standards patents in all these smartphone lawsuits directly threatens that balance — if the industry can't come to an agreement on the appropriate use of standards patents in lawsuits and negotiations, then the standards system will break down, perhaps irreparably. There's no point in joining a standards group and pledging to work together if another member can block your product for relying on that standard.
Given the frenetic pace of litigation in the smartphone industry and the extreme focus on FRAND responsibilities in each case around the world, it shouldn't be long before we start seeing court rulings addressing exactly what a patent owner can and cannot do with its standards patents. We're also sure to see far more decisions by government agencies and perhaps the standards bodies themselves in the next year that outline exactly how fair, reasonable, and non-discriminatory FRAND has to be — and as governments get involved, it would seem that the age of the gentleman's agreement is over.
Nilay Patel contributed to this report.