Sunday, November 01, 2009

Nokia v. Apple -- FRAND and the Standards Wars

Erica Ogg over at CNET explained what is really going on on the business side in the big Nokia/Apple patent blowout -- The biggest handset maker, fallen on hard times, competes in the courtroom with the up-and-comer, seeking to add $6-12 per phone to Apple's costs

But, when the parties actually get to court, what is this case really going to be about and how will it get resolved? For the answer, you have to look at the history of how the imposition of technical standards throws a big monkey wrench into both patent litigation and antitrust law.

After Teddy Roosevelt got through with the "trusts" which strangled the economy in the late 19th Century, it became illegal for competitors to get together to fix the prices of the goods they sold -- in fact you can go to jail for it. In fact, the Justice Department doesn't like competitors getting together to do much of anything.

This applies equally to licensing of patents -- competitors can't get together to set the rates at which they will license their patents.

However, this posed a problem for some industries in which the products of all companies have to work in the same way -- all electronic appliances have to use the same shape plug, for example.

In the present high-tech world, where many different types of computers have to equally work over the Internet, having a set of common standards has been critical.

And in the communications field, where every phone has to be able to talk to every other phone, without standardization, you could only talk to phones made by the same company that made your phone -- totally unacceptable.

So, there are various US and international bodies who come up with standards (like 3G) that will enable everyone to talk to everyone else. These standards are constructed from the patents submitted by the various industry leaders.

Sometimes, these patents are licensed in one portfolio with the blessing of the antitrust authorities (like the well-known MPEG-LA group).

But in many cases, like this one, the various contributors to the standard claim that their patents are "essential" to the standard -- i.e., that if your product practices the standard, you must be infringing their patent.

The determination that patents are "essential," however, is not made by the standards group -- but is simply declared unilaterally, by each company. The deal the companies make with the standards group (to get the group to include their patents in the standard) is that they will license the patents to all comers at Fair, Reasonable And Non-Discriminatory rates (known as FRAND.

As with the decision as to whether a patent is "essential," the determination that the rate offered by the patentholder is "fair" and "reasonable," is made unilaterally and usually secretly.

So, what is really going on between Apple and Nokia in the lawsuit and how might it be resolved?

Personally, I disagree with Jason Schultz, quoted in Ogg's article, that Apple will try to show that Nokia does not own the patents or that the patents are invalid -- proving either is too hard and there are simply too many of them.

I believe that Apple's strategy will be two-fold: (1) To show that the Nokia patents asserted in the lawsuit are not really "essential" to the GSM, 3G or WiFi standards; and (2) to show that the rates demanded by Nokia are neither "fair" nor "reasonable" and that the patents are relatively insignificant to the standards. Under a recent Federal appeals court decision (Lucent v. Gateway), the lower courts are instructed to limit a plaintiff's recovery of damages to the value the patent actually has.

It's obvious that Apple doesn't have as high an opinion of these patents as Nokia does.

Showing that Nokia may not have real confidence in either the value of its patents or its ability to compete with Apple in the marketplace, it is also trying to recover damages for Apple's appropriation of Nokia's market share.

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