Pekka Sääskilahti

2 July 2017

CRESSE presentation

Over-declaration of Standard Essential Patents and Determinants of Essentiality

Co-authors: Robin Stitzing, Jimmy Royer, and Marc Van Audenrode

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Views expressed in this presentation are solely mine, based on recent economic literature, and do not necessarily represent those of my employer, co-authors, or other parties mentioned in this presentation.

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WHAT IS AN ”ESSENTIAL” PATENT?

Technical standards regularly incorporate patented technology

SSO IPR rules require the patent owner to inform the SSO of patents which might be essential to a standard under development

– Catch negative declarations that would halt the standardisation

– Prevent patent ambush and blocking of the implementation

– Severe disincentives for patent owner not to disclose potentially essential patents

Contributing firms typically obliged to commit to licensing declared essential patents (e.g. on FRAND terms)

”Standards-compliant” product implements the standardised technologies

“hard core”: actually essential, valid, and infringed

actually essential and

infringed

actually essential

declared essential

PA Consulting: ~25-35% of declarations actually essential

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OUR GOALS

Correct economics literature on standardisation and standard essential patents, and introduce new approaches for measuring patent quality

Guide policy development related to standardisation and standard essential patents

Mitigate information-based inefficiencies in licensing of standard essential patents

1.

2.

3.

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ETSI IPR POLICY APPLIES TO THE DEVELOPMENT OF 3GPP CELLULAR COMMUNICATIONS STANDARDS

Patent holders do not have to be 100 % certain of declaring nothing but truly essential patents

Patent holders need to give a promise in writing to license on FRAND terms timely, and it could be subject to reciprocity

ETSI requires the disclosures and FRAND licensing promise to be made using specific forms

Declaration against a project (”standard”)

Declaration against specific work item (technical specification, or ”TS”)

Declaration against specific TS section

Declared patents

IPR Information Statement Annex

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OVER-DECLARATION AND “TRUE” ESSENTIALITY

SSOs are engineering-driven organizations, focused on creating and adopting the best technological solutions

Assessments of essentiality of declared SEPs are not part of SSO objectives nor tasks

Technical essentiality assessments are expensive and legal certainty is not possible without litigation

Heterogeneity between contributing firms results in varying rates of over-declaration

– Differences in internal processes to review and make declarations

– Varying levels of technical knowledge

– Asymmetric incentives related to licensing SEPs (implementer – contributor, incumbent – entrant, ...)

Over-declaration rates are estimated to be significant

– EC (2014): ~20% of declarations actually essential

– PA Consulting: ~25-35% of declarations actually essential (UMTS and LTE stds)

– Similar results by Fairfield Resources (GSM, CDMA, UMTS) , Article 1 (LTE), and Cyber Creative (LTE)

In Nokia vs. Interdigital, InterDigital had to drop essentiality claims for 26 of its 31 (84%) UMTS SEPs in 2005 UK litigation (Bekkers & West 2009)

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OUR CONTRIBUTION AND WHY IT MATTERS

Why should we care about over-declaration?

New standards build on older ones, and mobile technologies becoming implemented in new industries (cars, IoT, CE,...)

SSO policies might create incentives to over-declare or ”pad” SEP declarations leading to, among others – lack of transparency and asymmetry in over-declaration rates – opportunistic behaviour in standardisation – unjustified licensing royalty claims (high or low) – excess litigation – refusal to engage in licensing negotiations – delays in implementation of standardised technologies

Over-declaration as a topic has been largely ignored by economics literature, except for Legros & Dewatripont (2013)*

Asymmetric over-declaration rates are contributing to inefficiencies in SEP licensing market

*) See also discussions in Bekkers & West (2009), Bekkers et al (2011)

We study a proprietary dataset on technical essentiality assesments and observable patent characteristics of declared SEPs for the cellular 4G LTE standard developed by 3GPP / ETSI

We identify the determinants of

assessed technical essentiality status using logit regressions

We introduce new observable patent

characteristics to the literature

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OUR DATASET

N = 3,914 declared US SEPs of which

35.2 % have been deemed technically essential by PA

20.9 % are patent applications

86.9 % have been declared against a specific technical specification

Data Source Content

PA Consulting Essentiality assessments of US family members of patents declared essential to 3GPP 4G LTE standard

– By independent technical experts

– ~ One hour per patent

http://www.paconsulting.com/our-experience/lte-essential-ipr-report-and-database/

Patstat (EPO) Bibliographical information and the legal status of patents

Compustat (S&P) Financial and company information about inventors and owners of patents

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LOGIT REGRESSION MODEL DEPENDENT VARIABLE: PA’S ESSENTIALITY ASSESSMENT (0/1)

Declaration characteristics – Declaration against technical

specification (0/1)

– Earlier declaration to 2G / 3G (0/1)

– Year of earliest declaration

– Declaration owner same as inventor (0/1)

– Declaration by NPE (0/1)

General patent characteristics – Normalized forward citations

– Family size

– Legal status

– Application year

Ownership characteristics – Owner fixed effects

– Declaration owner RoA, R&D expenses, no. of employees

– Application owner RoA, R&D expenses, no. of employees

– No. of distinct owners of patent family

– No. of ownership changes

Claim characteristics (granted patents) – No. of independent claims

– Length of first claim

– Similarity of first claim of EP and US grant

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DEVELOPMENT OF 4G LTE AND SEP DISCLOSURES

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MAIN RESULTS 1

General forward citations do not predict essentiality (as assessed by PA), but citations from other SEPs of the same standard do

Earlier declarations have higher likelihood of essentiality, compared to declarations that are done later during standardisation; these early declarations may cover more fundamental and unique solutions

Declarations to earlier standards (2G, 3G) however do not explain essentiality for 4G

Family size does not predict essentiality

Granted patents are 8 % less likely to be essential

Citations from other SEPs

One SD of age-normalised citations (ca. 3 citations) increases likelihood of essentiality by 3 %

Effect driven by citations from judged essential patents

Granted patents

Standard specification can change during and after examination process

Examination can narrow down patent claims

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MAIN RESULTS 2

Declaration against a specific technical specification increases likelihood of essentiality by 39 %

Ownership changes, or declaration by NPE, do not affect likelihood of essentiality

Financial proxies for investment, innovation activity, and firm size do not affect likelihood of essentiality, controlling for firm fixed effects

Claim analysis confirms that variables linked to validity do not explain essentiality, but variables linked to infringement do

Granted patents subsets

Length of first claim negatively correlated with essentiality with one SD (ca. 14 words) decreasing the likelihood by 3 %

One more independent claim increases essentiality likelihood by 1 %

Practitioners use claim similarity between US and EP family members as a measure of patent quality, but we do not find correlation with essentiality

Declaration against a specific TS

Possible explanations for this include – Better knowledge of patent contents and the

technologies under standardization – Better knowledge of standardization process – Better internal reviews and declaration practices

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CONCLUSIONS

Need for recognition of the issue of uncertainty about essentiality of SEPs in economic literature

Our results increase transparency surrounding standard-essential patents resulting in reduced impediments to SEP license agreements

Controlling for firm fixed effects, we find no evidence of systemic strategic over-declaration by certain types of innovators

We provide guidance for policy proposals looking to improve standard development, SSO practices, and SEP licensing market

Literature should continue exploration of new patent quality indicators

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Independent Variable: Assessed Essentiality (0/1) KEY RESULTS 1, LOGIT RESSION, MARGINAL EFFECTS

General forward citation count standardized, normalized by age and IPC class

SEP forward citation count standardized, normalized by age

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Independent Variable: Assessed Essentiality (0/1) KEY RESULTS 2, LOGIT RESSION, MARGINAL EFFECTS

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Independent Variable: Assessed Essentiality (0/1) RESULTS 3, LOGIT RESSION, MARGINAL EFFECTS, US-EP GRANTS ONLY