Patent War Economics: Are ‘Grantbacks’ Unreasonable?

(by Bruce Lyons)  I recently wrote on the boundaries of competition policy and IPRs, including the thicket of patents embedded in mobile phone standards.  An interesting new twist arose just before Christmas when Apple filed against Nokia in the USA.  The issues include not just ‘unreasonable’ pricing of a patent, but also whether it is wrong to demand a licence to an ‘unrelated’ technology as part of the price.

The backdrop is that Nokia has been losing market share to the Apple iPhone.  Round 1: in October, Nokia filed a lawsuit in Delaware claiming Apple was infringing 10 of its patents. The claim was that these, including wireless data, speech coding, security and encryption patents, are fundamental to 3G technology.  They are used by Apple who, according to Nokia, is unwilling to pay a ‘reasonable’ royalty for their use.  One analyst suggests that Nokia might want $270m p.a. or 2.6% of Apple’s pre-tax profits – clearly a sum worth fighting for with all available weapons including competition law.

Round 2: in December, Apple countersued claiming that Nokia was seeking an ‘unreasonable’ return in demanding ‘grantback’ licenses to Apple knowhow, including touch-sensitive technology that is not part of the 2G or 3G standards.  To add a little spice, it also claimed that Nokia had infringed 13 of its own patents.

It is not clear from newspaper reports whether Nokia has been trying to act opportunistically in raising royalties after the standards were agreed, or perhaps when the competitive threat and success of the iPhone became apparent.  This aspect seems similar to the Qualcomm case discussed in my 10th December post.

It is the ‘grantback’ demand that introduces the apparently new competition issue.  But is it new from the economics perspective?  On the face of it, there is little economic merit in the claim that this is particularly unreasonable behaviour. Why should a reciprocal licensing agreement between a patent embedded in a standard and a patent outside the standard, be treated as ‘unreasonable’ at the same time as it is widely agreed that an exchange of rights by patent owners within a standard is highly desirable?  Both encourage downstream entry and competition. 

Both also appear to enhance the incentive to invent unless either: the grantback is used discriminatingly to extract rents ex post from successful inventors; or there had been some subterfuge in getting a patent adopted in the standard and this is being exploited to achieve an unreasonable return (see my post on Rambus).  It remains to be seen whether either of these applies to the Apple-Nokia dispute. And even if they do, they would be the same whether that return was demanded in cash or licences, unless the grantback facilitated discrimination between licensees.

In the competition policy jargon of FRAND pricing, the economic interest of this dispute seems less about ‘Fair and Reasonable’ and just possibly more about ‘Non-Discriminatory’ pricing.

One Response to Patent War Economics: Are ‘Grantbacks’ Unreasonable?

  1. […] caused by hold-up as investment incentives are eroded by fear of renegotiation.   [See also my post on Apple vs Nokia (now in partnership with […]

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