W3C home > Mailing lists > Public > www-patentpolicy-comment@w3.org > October 2001

Advice from a Modem War Survivor

From: chuck weinberger <chuckhw@pacbell.net>
Date: Fri, 05 Oct 2001 20:38:11 -0700
To: www-patentpolicy-comment@w3.org
Message-id: <000301c14e18$53280d80$9321c93f@officecomputer>
I am new to this board and to the debate regarding the W3C PPF Working
Draft.  I freely admit that I have not read the draft, nor have I
participated in any W3C activity in the past.  I have, however, had
extensive experience with the RAND model in the world of ITU standards, and
I can tell you for a fact that a RAND model (I) slows down the pace of
adoption of new standards and (II) makes it extremely difficult for small
companies to compete with established (read, large) technology companies.
In this posting I will give you examples of how RAND models are abused and
one suggestion to minimize that abuse.

As most of you know, the ITU-T establishes modem communications standards,
including V.32, V.34, V.90, etc.  The ITU-T follows a RAND licensing policy.
See http://www.itu.int/ITU-T/dbase/patent/index.html for more details on the
ITU-T's policy and a database of all of the companies that believe they have
patents on various components of the ITU-T's standards.  The ITU-T's RAND
policy has resulted in problems both prior to the adoption of a standard and
post adoption.

The problems that occur prior to the adoption of a new standard are
motivated by the politics of back room negotiations and by posturing.
Committee meetings are secondary to the back room meetings of the companies
that have made proposals for the standard.  Companies will attempt to
solicit allies by offering their backing on other components of the standard
or via other stimulus.  For example, during the V.34 adoption proceedings
Motorola allegedly offered to license its patents for a de minimus amount.
Once the V.34 standard was adopted Moto turned course and attempted to
charge a several dollar royalty for its patents.  Moto's actions took center
stage in the law suits Motorola v. Rockwell and Motorola v. U.S.
Robitics/3Com.  More often, however, is the situation where a company will
simply say to another company, if you support my proposal for this component
of the standard I will support your proposal for that component.  These
companies often have "technology lobbyists" on their payroll so to represent
the company's interest in the process.

The posturing from the various ITU member companies can be quit funny.
Companies will stop at no ends just to submit a proposal for a standard.
This is because they want to sign the ITU patent policy disclosure statement
and be included on the ITU's list of possible patent holders - "possible"
being the key word.  Just being on the list increases a company's argument
that it has patents that are necessary to implement the standard.  This is
true even though the company's proposal might not have included patented
subject matter in the first place, much less, been incorporated into the
final standard.  As a result, engineers waste time writing up proposals that
are never going to go anywhere and committee participants waste time
reviewing those proposals.  Still, being on the ITU's list of contributors
is often enough to push a company to take an aggressive patent stance by
sending out royalty demand letters.  Almost none of these letters lead to
the actual receipt of royalties; again, most simply reflect posturing.  But
they do result in lost time, both by engineers who have to review patent
applications and by business people who have to analyze the risks.

The end result of the politicking and posturing is that (I) there are
significant delays and in-fighting between competing alliances, (II)
standards often incorporate politically convenient solutions rather than the
most technically savvy solution to the problem and (III) smaller companies
are placed at a disadvantage because they rarely have as much to offer in
any technology alliance and because their posturing does not result in the
same fear as the identical posturing of a billion dollar company.

The problems of the ITU's RAND policy become much more significant once it
adopts a standard.  The ITU does not attempt to determine which of its
contributing companies have patents that are necessary to implement the
ITU's standards.  Additionally, the ITU does not attempt to establish a
"reasonable" royalty for the "pool" of  patents needed to implement the
standard.  Finally, companies can manipulate the term, "non-discriminatory"
at will due to its ambiguous nature.  The result is a huge amount of
commercial uncertainty that almost always puts small companies at a great
disadvantage.

Because there never is any certainty about which companies have patents in
an ITU standard only those companies with huge patent portfolios are
relatively assured of not having to pay any patent royalties to implement
the standard.  Even if these companies do not have patents needed to
implement the standard, their patent portfolio in related areas makes them
"untouchable" by smaller companies even if the smaller companies have
patents that are essential to implement the standard.  And as for other
large companies that hold patents in the standard, the two companies often
have either a patent cross-licensing agreements in place or they participate
in an unspoken "mutually assured destruction pact".  Smaller companies are
at risk of lawsuit, however.  And, they often do not have the resources to
fight a multi-million dollar patent suit, even if they are in the right.
The result is that large companies often do not have to pay patent royalties
to implement ITU standards but small companies do.

Companies with strong patent claims will attempt to establish a "reasonable"
royalty rate by pointing at their development cost rather than the price
that an end user would pay for the product that incorporates the new
standard.  Even worse, some companies will try to charge a royalty based on
the end user cost of the eventual product, even if the standard makes up
only a "small" part of the end product.  The royalty rates very rarely
decrease, even if the standard is out of date and is used just to assure
backwards compatibility.  As a result, in the modem world, the cumulative
requested patent royalties for any V.90 compliant modem is several multiples
higher than the bill of materials for the actual modem, and, defying all
laws of economics, can be even higher than what an end user would pay for a
V.90 modem.  Unless you are willing to enter the marketplace with the threat
of a lawsuits by billion dollar companies hanging over your head, only
already established companies can compete.

The term, "non-discriminatory" is extremely vague and can be manipulated to
become meaningless.  Nobody in the ITU world ever simply agree to a royalty
demand without a negotiation.  These negotiations always include a large
amount of horse trading, either via a patent cross-license or via a
technology cross-license, even if there is very little value in the item
being traded.  Why would a patent holder lessen its demand for royalties in
exchange for a piece of technology that is meaningless to its business?  The
answer is that the patent holder wants to finalize that particular
negotiation but that it wants to make it impossible for its next potential
licensee to argue for the same exact royalty rate.

Just as bad, patent holders will often establish their royalty rates by
tying royalty rate increases to points in time (e.g., "our royalty rates are
$X/copy if you sign our license agreement in the first year after the
standard is adopted, buy they are increased by $Y/copy each year
thereafter).  They then apply these rates in a "non-discriminatory" manner.

The only way for a small company to compete in such an arena is to either
attempt to stay under the radar of the larger companies or to partner/be
acquired by a larger company.  But even then, the acquisition route is a
bitter pill to swallow because the threat of lawsuit hanging over your head
with destroy your valuation.

The only solution I can think of to the above, and I agree that this is a
partial solution at best, is for the W3C to create a binding patent review
board that makes a final determination of (I) which companies have patents
that are essential to implement the standard, (II) the relative value of
each patented technology in the standard and (III) a royalty rate for
licensing the entire pool of patents.  Every company that implements the
standard would then have to pay the determined royalty to the patent review
board and the board would distribute the collected royalty to the determined
patent holders using the determined percentage of relative value.  I agree
that this approach is administratively burdensome, but, I see no fairer way
to implement a RAND policy.
Received on Friday, 5 October 2001 23:37:52 GMT

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