The relationship between standards & Patents Roberto Dini London IP Summit London, 16th October 2017

Standard Essential Patents Patents & standards How could they work together STANDARDS intended for collective use and essential for the wide adoption of new technologies in the marketplace (interoperability) PATENTS exclusive right granted for an invention (monopoly) Standard Essential Patents Essential is a patent which discloses and claims an invention that is technically needed to practice a given industry standard

FRAND TERMS A balance of Interest FRAND commitment means no blocking patents It guarantees that essential patents are licensed under fair and reasonable terms and make tech transfer possible It offers a reasonable economic return to patent owners on R&D investments giving incentive for further innovation Patent Owner/Inventor Fair Compensation Return on Investment Market Avoiding monopoly Access to technology Innovators will face significant risks by investing in R&D without a solid ROI outlook. All activities conducted within SSOs require huge investments by all participants (in terms of R&D spending, but also for active participation to standardization meetings, presentation and discussion of proposals, pre-meeting preparations, etc.). For instance, the total cost (R&D spending + standardization process) for the development of the following well-know standard technologies have been estimated to approximately: MPEG 190 million € DVB-T 96 million € Royalty income is the only way to reward innovators who attend the standardization process and renounce their rights to have a monopoly on a certain innovation. Monetization of IP rights can generate additional revenue streams that can fund new business development and innovation. Through licensing, revenues from royalties for the use of a patented technology or a trademark can be re-invested in the company. This creates a self-sustaining “innovation loop”, in which intangible assets acquire a tangible economic value. Many companies and innovators will weight participation to standardization activities also in light of the potential Return on Investment (ROI) that they could generate by allowing access to their patented technology If their contribute is not recognized, some of them, to the detriment of innovation, may decide to avoid participation in the standardization process and revert to proprietary, closed solutions or trade secrets.

Reward to the IP Owners/Innovators The inventive loop Royalty income is the only way to reward innovators who renounce their rights to have a monopoly on a certain innovation Companies R&D dept Production Sale Profits Intellectual Property Licensing If their contribution is not recognized, some companies, to the detriment of innovation, may decide to avoid participation in the standardization process and revert to proprietary, closed solutions or trade secrets

Innovation and standardization costs Estimated total cost (innovation + standard) for the development of: 190 million € 96 million € All the activities conducted within SSOs require huge investments in terms of R&D spending, and also for active participation in standardization meetings, presentation and discussion of proposals, pre-meeting preparations, etc. These standardization costs are not paid by SSOs, but by the innovators who choose to contribute their technology to international standards and make it available to everybody, even if it is a patented technology

Innovation and standardization costs Article 101 TFEU “In the assessment of licence agreements under [competition law] it must be kept in mind that the creation of intellectual property rights often entails substantial investment and that it is often a risky endeavour. In order not to reduce dynamic competition and to maintain the incentive to innovate, the innovator must not be unduly restricted in the exploitation of intellectual property rights that turn out to be valuable. For these reasons the innovator should normally be free to seek appropriate remuneration for successful projects that is sufficient to maintain investment incentives, taking failed projects into account. (…) [Competition laws] cannot be applied without considering such investments made by the parties and the risks relating thereto.” Draft Communication from the Commission, Guidelines of the application of Article 101 of the Treaty on the Functioning of the European Union to technology transfer agreements

What is the economically efficient level of royalties? In view of creating innovation and spreading technology, the total aggregate royalty income, produced during its life by a patented innovation, should: Cover R&D and Standardization costs Cover the time delay between innovation development and its adoption (interest) Create a profit Cover the failure risk ROI Return On Investment Costs Benefits

Smallest Saleable Unit is not the right solution What is the economically efficient level of royalties? Smallest Saleable Unit is not the right solution Everyone would agree that the innovators of the mobile wireless industries should be remunerated for the benefits they bring to the world economy Clearly, the value is not provided only by the chipset, but by the entire phone connected to and operative on the mobile network It would be better to calculate royalty rates based on the functional unit, hence recognizing the value added by the licensed technology and the investments behind the development of said technology

Smallest saleable unit “Basing a royalty solely on chip price is like valuing a copyrighted book based only on the costs of the binding, paper, and ink needed to actually produce the physical product. While such a calculation captures the cost of the physical product, it provides no indication of its actual value.” Judge Davis in CSIRO v Cisco

PATENT POOLs For a industry-wide balance Patent pools, joint licensing programs and other forms of IP aggregation have significant pro-competitive effects, including: Defining FRAND licensing terms and conditions in a context where both licensors and licensees are present Avoiding royalties stacking by establishing a single royalty rate thereby reducing the likelihood of litigation Providing more certainty and predictability to the market with regards to IP costs Reducing transaction and administrative costs

Improving patent pool ENFORCement A certain degree of enforcement is necessary to ensure the success of a licensing program and the respect of licensees (IPXI case docet). “(…) time was just not right, and the obstacles – including potential licensees who challenged us to litigate instead of work with them – simply too insurmountable. IPXI’s business model offered fairness and transparency and relied upon patented technology users to be good corporate citizens. In the end, potential licensees made it clear that the only way IPXI would really get their attention was through litigation, and that’s exactly what our business model tried to overcome.“ Gerard Pannekoek IPXI President and CEO IPXI closed in March 2015

Improving patent pool ENFORCement Enforcement is a needed tool to collect revenue to reward innovation. It is also a tool to avoid market distortions (willing vs unwilling licensees). Enforcement is not only in the best interest of patent owners, but also in the interest of all licensees to ensure that others do not gain an unfair advantage in the marketplace. An independent administrator can also ensure that enforcement is conducted in an even-handed manner.

ENFORCing SEPs IN EUROPE Huawei v ZTE (ECJ) The ECJ Huawei v ZTE decision confirms the importance of maintaining all remedies against unwilling licensees in the context of licensing SEPs The ECJ confirmed that FRAND is a “two way street”: The transaction burden cannot be only on the side of patent owners, but should be also a duty of the implementers that desire to make use of a standardized technology “One way streets” would boost the free riders attitude

AN INTERESTING question Should the Huawei vs ZTE decision be applied also to no-competing companies?

Huawei vs. ZTE (ECJ) The ECJ Huawei v ZTE decision contains the following statement”: “The Court must strike a balance between maintaining free competition… and the requirement to safeguard that proprietor’s intellectual-property rights ” ”The patent at issue is essential to a standard established by a standardization body, rendering its use indispensable to all competitors which envisage manufacturing products that comply with the standard to which it is linked. In the ECJ decision the words competition/competitors are used 15 times! Why this decision should affect business and litigations between two companies that are not competitors? Like NPE and Practicing Entities.

THANKS FOR THE ATTENTION For any additional information, please contact roberto@dini.com www.sisvel.com