Apple and Google subsidiary Motorola Mobility wrestled over the meaning of fair, reasonable, and non-discriminatory (FRAND) on Wednesday, and more importantly, how to price patent licenses covered under FRAND commitments. The two companies met under the guidance of the International Telecommunications Union (ITU), the governing body that decides such things as what (patented) technologies are included in 3G, LTE, among other aspects of the telecommunications industry.
At issue is Apple, a "relative newcomer to the industry" as Motorola likes to chide, which competes by designing proprietary devices using proprietary software built on top of industry standard technologies like EDGE, 3G, and LTE. Apple makes money by charging a premium for its hardware, a premium based upon the fact that you (theoretically) can't get the features it invented in competing devices.
Motorola, on the other hand, develops technologies that sometimes get included in those industry standards. Motorola submits its patented technologies to standards organizations like the ITU. In order to get included in the standards, Motorola agrees to license the technology on a FRAND basis, and the company then profits by earning a small amount of money on each and every device that uses it.
Motorola Mobility also makes its own hardware, but the company is licensing third party software (for instance, Google's Android). Motorola hardware seldom fetches a premium because its devices are all based on such third party properties that can be found in many competing devices.
The Great Mobile Patent War
Enter the Great Mobile Patent Wars between Apple, Motorola, and other OEMs like Samsung and HTC. Faced with charges of infringing on Apple's patented design and utility technologies, Motorola, Samsung, and HTC fought back with the only thing they had: standards-essential patents (SEPs) as described above, patents covered by FRAND commitments.
Motorola and Samsung have both tried to bludgeon Apple into accepting patent infringement on Apple's inventions by forcing a situation where Apple was using (infringing) their SEP inventions without a license. Both companies have done so, in part, by demanding far higher royalty rates than paid by any other licensee—2.25 percent of the total retail price of the device.
By refusing to pay those rates, which Apple claimed violated Motorola's FRAND commitment, Motorola (and Samsung) hoped that Apple's infringement would earn the company import bans on Apple devices that would then cancel out any import bans Apple earned on Motorola's infringement of its design and utility patents.
So far, it hasn't been a winning strategy. In the case of Samsung in the U.S., a jury ruled that patent exhaustion protected Apple from infringement claims. This simply means that Apple was covered by the licenses already paid by the makers of the components that actually used Samsung's SEPs, such as wireless chipsets.
In the case of Motorola, courts and trade regulatory bodies have been loathe to grant import bans based on SEP infringement claims. A U.S. judge has already demanded that Moto honor its FRAND commitments, and in Germany, the company was forced to reach an agreement with Apple this past August.
In This Corner...
That's where Wednesday's meeting at the ITU comes into play. In that meeting, Apple argued that Motorola's demand of a percentage of the average selling price (retail price) penalizes companies like Apple, who sell premium products.
According to ZDNet, Apple chief intellectual property counsel BJ Watrous argued that "The average selling price [ASP] approach wrongly permits the patent holder to collect value unassociated with its contribution to the standard. Using the ASP of the end user product as the royalty base [is] discriminating against companies like Apple who sell high-value products."
Motorola argued that Apple simply doesn't know from FRAND because it's the new kid on the block. Motorola senior licensing counsel Ray Warren said, "For 20 years the [FRAND] licensing commitments made by innovators in the communications industry have been sufficient. Past experience would indicate that [FRAND] has been effective… but that doesn't mean there isn't room for improvement to improve the present situation."
All of which means that the two companies butted heads, that nothing was decided, and that everyone pretended some progress was made.
Calling the discussion a "heated debate," ITU Telecommunication Standardization Bureau chief Malcolm Johnson said, "Today's event has gone a long way to help clarify the positions of various stakeholders in determining the effectiveness of FRAND commitments and the impact of litigations surround standards-essential patents."
Codification Would Benefit All
The reality is that "FRAND" has never been codified. Motorola is correct to say that the existing FRAND framework has worked for decades, even if it is vague and nebulous.
At the same time, these are disruptive times. Apple caught the rest of the telecommunications industry flat footed with the original iPhone in 2007, and having a company that is not a participant in the SEP process—Apple has volunteered to have its SIM specification included as a royalty-free standard—competing with a bunch of other inter-dependent SEP participants completely upset the apple cart.
If this fight and these discussions result in FRAND being codified, the clarification of the rules will be better for all participants.
To that effect, The ITU's Malcom Johnson said, "Any attempt at providing market players with clear, transparent, effective and up-to-date patent policies and guidelines […] would work to the benefit of the industry as a whole."