In our previous blog we dealt with “IPR made easy” and argued that standardizers don’t have to consider IPR as a difficult topic when they involve the proper functions within their company. One reason why people are uncomfortable with IPR is because of the legal aspects (incomprehensible jargon, sanctions on violations), which we discussed in the previous blog. Another is the uncertainty about the cost of the license fees in case of a RAND or similar clause in the membership agreement. In this article therefore we look at what may be considered “reasonable” from a variety of angles.
Is it really reasonable, for example, to ask for a license fee on patents that are part of a standard? Well, yes and no. Development of any new technology requires R&D and this can be costly, so new standards depend on the willingness of companies to contribute their inventions, technology and resources. One could thus argue that acquiring the standardized technology is a make-or-buy decision: either you spend on the R&D to lead and master it, or you follow and buy it when it is ready. In this case it’s fair to pay a fee for being able to play. Or you can look at it the other way round: without an incentive, wealthy R&D companies may become reluctant to contribute, and a standard would not materialize or may be less advanced.
This argument also highlights the upper limits regarding a “reasonable” price: roughly the difference in R&D percentages between technology leaders and followers. Making the price higher would be an incentive for followers to make-instead-of buy, or search for alternative offers. Alternatives are usually abundant in the early stages of a new technology, and that’s precisely why standardization is needed. IoT technology and standards may serve here as the latest example.
Some other refinements on what is “reasonable” include the following: The sum of the license fees of individual patent holders on a particular standard (royalty stacking) should still be reasonable. That’s where patent pools provide help and create clarity and manage the expectations of patent owners. Licensing can lawfully occur at only one point in the value chain. Licensors may prefer the end product where more money can be made, but a large body like IEEE finds it more reasonable to target the component suppliers. The license fee should relate to the part of the product that is impacted by the standard, and not necessarily the whole product. For example, mp3 is not merely an interface standard, it determines the way of handling and storing audio by a device and enables functionality which did not exist before.
On the other hand, the license fee for an HDMI- or USB connector that adds connectivity to a laptop should not be related to the price of the entire laptop, but only to the value of the particular connectivity addition. One could go one step further and argue that “reasonable” license fees for connectivity standards could be as low as zero. These standards enable new ecosystems and products with new features and systems opportunities that were impossible before, all of which are helped by bandwagon- and network effects. Uncertainty, politics or complex licensing discussions can delay rapid adoption and market growth. In such circumstances, IPR owners who would otherwise thrive on a large new ecosystem may think through the numbers again and sacrifice on license income in favor of business income. And it looks like this is what’s happening in practice.
In a sample of some 30 connectivity standards, roughly half have royalty-free conditions and the other half have RAND conditions. Among the first are Bluetooth, Thread and KNX; among the latter are WiFi (IEEE 802.11), EnOcean and WiSun.
IEEE recognized the problems with its earlier patent policy and made changes to the benefit of licensees. As Cisco’s general counsel said: “the Justice Department recognized that the updates to the IEEE patent policy will help promote innovation and competition by preventing implementers of standards from being held up by patent owners, and by giving participants in licensing negotiations a better sense of what patents which are required to implement standards are worth. Cisco and other tech industry leaders [like Apple, HP, Intel, Microsoft, and Samsung] agree.”
As for Zigbee, the leading standard for wireless sensor networking, the board recently decided to change their licensing rules from RAND to RAND-zero, to take away licensing uncertainties and accelerate further market adoption.
We recommend that all standardization managers, legal counsels and others who want to understand the underlying essentials attend our next Standards-based Innovation Masterclass (SIM), where this will be one the topics we’re going to cover. Check our website www.sim-masterclass.com. For questions, contact us at www.neovate-ip.com.