Many--obviously not all--policy makers and judges way overestimate the "innovation" behind standard-essential patents (SEPs). In reality, the intrinsic value of the "inventions" covered by SEPs is usually anything but impressive, and most of what licensees agree or are forced to pay for SEP licenses is due to patentees mostly capturing the value of the standard.
A rational valuation needs to focus on the commercial value of the incremental technical benefits of a claimed invention over the state of the art. That delta is all it's worth. Typically, that value is very low because there are numerous ways--sometimes practically an infinite number of them--to solve the kind of technical problem at hand, such as encoding a data stream for the purpose of radio transmission or giving priority to the handsets of first responders over regular users of a network at its capacity limit. But once a patent becomes a SEP because a particular technical solution (again, usually one of many viable options) it covers is adopted as part of a standard, all implementers of the standard need a license. Otherwise, if the patented technique hadn't made it into the standard, very few companies or maybe even none at all would pay for a license, given the availability of numerous replacements or workarounds.
It happens all the time that technically superior inventions are not adopted as part of the standard, especially because standard-setting is a horse-trading exercise along the lines of "I'll vote for some of your technical proposals today if you support some of mine tomorrow."
Those sitting at the standard-setting table aren't always true innovators. You find companies there that spends billions of dollars on research and development, and a portion of it on the kinds of techniques become part of a standard. But you also find plenty of opportunists who capitalize on their involvement in the process, and whose "engineers" don't truly invent useful things but primarily seek to anticipate where the standard-setting discussion is headed in order to file for SEPs. Those aren't engineers in a traditional R& D sense--they're practically patent engineers.
I prefer not to name examples, but I'll describe a couple without identifying them. There's a former handset maker that has massively reduced its investment in genuine R&D and is nowadays far more interested in opportunistic patenting. There's a non-producing entity that participates in standard-setting and litigates quite often, but contrary to what they claim, companies focused on making products believe that the NPE's "engineers" spend the bulk of their time just writing opportunistic patent applications.
Two researchers, Byeongwoo Kang and Rudi Bekkers, authored a paper on this subject on behalf of the Eindhoven Centre for Innovation Studies (ECIS), entitled "Just-in-time inventions and the development of standards: How firms use opportunistic strategies to obtain standard-essential patents (SEPs)". They examined the patenting behavior of participants in standard-setting and identified unusual filing activity around key standard-setting meetings:
"Our data reveals a strong relationship between patent timing and the occurrence of meetings. We observed a remarkable phenomenon that we call 'just-in-time-inventions': the patent intensity of about-to-become claimed essential patents is much higher during or just before these meetings than in other periods. At the same time, they are of considerably lower technical value ('merit'). This suggests that the just-in-time inventions are only beneficial to their owners, whereas for the public they merely invoke unnecessary costs. Finally, we observed that the phenomenon of just-in-time inventions is highly concentrated among specific types of firms, above all vertically integrated ones, and the incumbent champions of the previous technology standard."
Obtaining SEPs is a high-leverage form of patent engineering. The fruits of that effort are sometimes sold to non-practicing entities, which is called privateering. Yesterday, counsel for Huawei in the UK Supreme Court hearing in Unwired Planet v. Huawei (consolidated with Conversant v. ZTE) explained the business models behind those SEP assertions:
"You need to feed into the mix that these are actions by NPEs, non-practising entities, owned by private equity funds [separately, Mr. Howard clarified that there's nothing wrong with private equity and he frequently represents such firms] who see an opportunity to profit through this tactic. That is revealed -- I mean it is fairly startling. If you could go to the supplementary bundle and to Apple's intervention, [...] and what has happened, what one first got was the Unwired Planet case. Following that Conversant jumped on the band wagon against Huawei. What has given rise to the $8 billion claim against Apple and this is based upon -- so what you get is a golden ticket or a golden patent, you establish this '818 [patent] works and you then get up, gather round a whole lot of other patents and of course the owners of them, who have them in a portfolio, people like Ericsson and Nokia, would be quite happy to sell off a proportion of their patents which they have in a portfolio in order to allow this to take place where they also get part of the return [...]"
Mr. Howard also discussed specifically the strategic situation of Nokia and Ericsson, the companies that provided patents to Conversant and Unwired Planet:
"Yes, and one can infer that is what is happening in the other one. The reason -- one needs to it look at the commercial reality of this. Nokia and Ericsson have these portfolios of patents. Why are they commercially doing this? It is, when they embark on cross-licences as is what had been happening with people like Huawei, then they get a certain value but then they are getting mostly done through the cross-licensing effect, but as their interest in mobile phones has declined because they missed a trick in the market and they got overtaken by Huawei, Apple, Samsung and so on, they exploit [he means through making products] the patents less and they have an opportunity -- and this is in the evidence, the judge dealt with this -- Ericsson for instance saw this as a means to extract more money. I do not say again there is necessarily anything wrong, but what one does need to see is that this case, Unwired Planet and Conversant and the claim against Apple is all about a form of leveraged financial engineering. One should not, I would respectfully suggest, have one's blinkers on about that." (emphasis added)
A few minutes prior to the last passage I quoted, Mr. Howard named the investors behind the privateers:
"At paragraph 5 Apple explain who Unwired and Conversant are and they have brought up these patents. If you look at footnote you will see that PanOptis, which is the company that owns Unwired, is owned by funds managed by affiliates of Brevet Capital Management, a private equity company and Conversant is owned by a group of investors led by Sterling Partners, another private equity company. I am not saying there is anything wrong with private equity. Fortunately, they often send me instructions. But what I do say is that what one has to recognize is that this case is about what is perceived to be an opportunity to leverage. What is happening is the English courts' injunctive powers are being used in order to, frankly, make a nice return." (emphasis added)
If that leverage incentivized true innovation, it could still be a good deal for society at large. But for the reasons explained further above, that's not the case, at least not to the tune of $8 billion (the claim against Apple alone), which has several more zeroes than the intrinsic value of the claimed inventions--the one they'd still have it they had never made it into the standard.
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