Mobile IP: Don’t hate the player, hate the game

Earlier this month a Chinese court issued a ruling against US IP leader InterDigital in their lawsuit with Chinese handset leader Xiaomi. Here is a good rundown of the case from South China Morning Post (owned by Alibaba founder Jack Ma). As that piece makes clear, the ruling itself is fairly remarkable, but we see other clear signs of yet another fight escalating over global handset intellectual property (IP).

Some background. In theory, patents exist to encourage research and innovation. Produce something new and you should be able to benefit from your work without fear of being copied. Over the years, the whole field of IP law has gotten immensely complicated. In mobile phones, IP became especially important because of the existence of mobile standards. All mobile networks operate on a set of standard protocols that handle the way calls move around networks. This allows for someone to make a call in Mountain View and have a reasonable degree of confidence that the mobile subscriber in Mombasa will receive the call. These standards are formalized by a group led by global telecom operators, but crucially much of the work of designing the standards is done by other companies, largely suppliers to the operators. This used to be companies like Nokia and Ericsson who were selling base stations that ran that IP. Then Qualcomm entered the business and their R&D work did a lot to make 3G (and arguably 4G and 5G) possible. Much of the core pieces of the standard were developed in Qualcomm’s labs, and patented by the company. When handset vendors set out to build phones using that standard, Qualcomm “asked” those vendors to pay to use that IP. And Qualcomm was not the only company doing this, InterDigital has long been a very active participant in development of the mobile standards.

At this point, most people have a pretty strong emotional reaction. Many would argue that this is an abuse of the standards process. Those patents should be widely available to all, for the betterment of humanity. Something about this practice sits wrong with a lot of people. For their part, the IP holders make a reasonable argument that their upfront work is what made the standards possible. How can we expect the standards work to progress without someone doing the R&D, and shouldn’t those people have the right to recoup their considerable investment?

At this point, set aside all emotion on the subject. Pretty much every lawsuit testing this has gone in the favor of the IP holders. These are just the facts on the ground.

Enter China. For decades, a key complaint among US and European companies about Chinese trade practices was the rife IP infringement there, from pirated software to KoKa-Kola soda. Foreign companies trying to chase all of these down had very limited success going after individual actors. Instead, the big US companies, especially in tech, realized that a much better strategy would be to encourage Chinese companies to build their own IP. And then everyone could form common cause in advocating for stronger IP enforcement inside China.

And that is largely what happened. The combination of Internet connected entertainment largely wiped out the pirated DVD/software market. And Chinese companies have become major IP creators and litigants. The Chinese handset vendors, notably Huawei, Xiaomi and Oppo have all become very active in IP markets, both creating their own IP and buying licenses of or acquiring IP developed elsewhere.

But then protectionism and politics entered the mix.

China is trying to build up its technology industry, most notably around semis. Around a decade ago, the government began applying pressure to foreign companies to “level the IP playing field”. This ran the gamut from subsidies incentives for Chinese companies developing IP to forced IP transfer from foreign companies. Many US tech companies were pressured encouraged to set up Joint Ventures (JVs) with Chinese parties if they wanted to do business in China. And while the government never required these companies to transfer IP to the JV, every potential JV partner insisted on such transfers. Every. Single. One. Almost as if they were all following the same set of instructions from someone.

A decade ago, Qualcomm ran right into this. They suddenly came under investigation from multiple branches of the Chinese government. Eventually, they were forced to settle, and this settlement included establishing a JV in China to develop CPU chips (see above). Another key aspect of the settlement required Qualcomm to offer discounted licenses to Chinese handset companies for their IP. At the time, there were hundreds of handset makers in China, and none of them had the scale to negotiate good terms with Qualcomm, and were thus paying maximum license rates. China’s government effectively served as a collective bargaining agent and “negotiated” down Qualcomm’s rates.

This case highlighted how important mobile IP licenses had become. China’s government was aware that Samsung’s and LG’s royalty payments were so meaningful as to appear as stand-alone items in their balance of payments economic data. China’s government did not want to go down this path. The typical mobile phone has around $20-$40 of IP costs bundled into it for a host of technologies (not just Qualcomm). As China’s handset industry consolidated into a handful of large players, those companies have begun to test the limits of the world’s IP regime.

Huawei who is among the largest patent creators in China even went so far as to set up a licensing scheme for companies looking to use its IP. There is no tried and true test to determine whether one company has to license IP from another company to be compliant with the mobile standards, but by many metrics Huawei’s contributions to 4G and 5G have put them among the top tier of holders of standards-related IP.

Which brings us to the latest developments. Interdigital has not been collecting much in the way of royalties from Chinese companies. They have alternated between getting paid by Huawei and getting sued by Huawei. And generally getting little from anyone else. Interdigital reasonably felt that handset vendors in every other country paid them royalties for their mobile IP and sought to collect from China’s companies as well. They could have developed a comprehensive IP scheme, brought in local stakeholders and nurtured an ecosystem of domestic allies. Instead, they sued. The results of that are surprising only in so much that Chinese courts have not only pushed back against Interdigital’s ability to sue in China, but are now looking to limit the company’s ability to sue anywhere.

There are two ways to view the current situation. On the one hand, foreign companies can reasonably complain that the playing field is not level. China’s courts are seen as having a strong bias against foreign companies. This is not entirely true, but it is clear that China’s courts have a high degree of alignment with government politics. And that is likely doubly true now, given current trade tensions. Foreign companies can argue that all of this gives Chinese handset companies an unfair cost advantage by not paying for IP.

On the other hand, Chinese companies can reasonably counter that they have made tremendous strides in developing mobile IP and should be able to enforce those rights just as they have had others’ IP rights enforced on them.

In our view, both sides have merit. Chinese companies have never really paid the same royalties as other handset makers. But then again, Apple went a decade without paying royalties to Qualcomm either. Foreign companies cannot really expect a fair hearing in China’s courts. But how many people really feel comfortable about US patent policies and IP courts? Transparent, but also in need of reform.

For now, it looks like all this will head to the World Trade Organization, which means a multi-year negotiating process. That being said, as we argued back in this piece, IP in general, and mobile standards in particular, have become strategic assets. So we are very likely going to see a lot more wrangling over IP in the near future.

Photo by Larry Costales on Unsplash

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