Smart weapons in Smartphone wars

Why grant patents?

There are two basic approaches as to why the grant of patents is necessary, even desirable. The first, called the "reward theory", stresses the need to reward and remunerate the successful innovator, thereby stimulating further innovation and encouraging investment in R&D, while preventing "free-riders" from exploiting other people’s innovations without contributing to the innovation effort. The second, called "contract theory", assumes that in the absence of protection, innovators would simply not disclose their innovations. This would be detrimental to society as a whole, as the wheel would constantly need to be re-invented. For that reason society should grant patents to innovators in exchange for disclosure and the maximisation of efficiency throughout the economy. These two macroeconomic observations are equally applicable to mobile devices in the telecommunications sector.

Patent protection in the UK and beyond

In the UK a patent may be secured through the UK Intellectual Property Office (UKIPO) or the European Patent Office (EPO) in Munich. If granted, a patent protects the scope of whatever is covered by the patent's claims and specification for the duration of up to 20 years. In certain circumstances this period may be extended further (although extensions are unlikely to apply to mobile devices patents).

As patents are territorial, a UK patent does not protect the invention in other jurisdictions. The international Patent Co-operation Treaty ("PCT"), to which 144 countries are party, offers a central application procedure, which allows a patent application to be considered separately in multiple jurisdictions in order to achieve maximum geographic protection for the patentee.

Licence... not to kill, but to monopolise

A patent is a licence – not quite to kill competition – but certainly to monopolise the use or commercial exploitation of the invention in question. In a fairly concentrated market, such as the mobile devices sector, a legitimate and watertight monopoly over any given invention or innovation will always be an invaluable commercial asset and will, almost invariably, be deployed strategically to the benefit of the patentee.

Strategic patent portfolios and monetisation

The strategic value discussed above has led to a wave of multi-billion pound transactions for the sale and purchase of patent portfolios, especially in the telecoms sector.

Virtually all of the main players in the smartphone and tablets market are currently engaged in a great number of high-value claims and counterclaims in patent actions against one another, in what has come to be known as the "smartphone wars".

The basic purpose of these multi-jurisdictional court proceedings is to seek licence fees from users of the invention by upholding the validity of one's own patents, while seeking to knock out rivals' patents by having them declared invalid. If the validity of a particular patent is upheld, the patentee may look to enforce injunctions against infringing products and seek to have them removed from the jurisdiction(s) in question. A whole product line of a competitor can be banned and the injuncted party's market position and reputation can be seriously undermined. Alternatively, as a less extreme measure, the patentee may claim licence fees for infringed patents, although those fees will have to be agreed upon on fair, reasonable and non-discriminatory ("FRAND") terms. The prospect of licence fee income has also led to non-manufacturing entities (so-called "patent-trolls") entering the arena for mobile devices patents.

Technical standards: FRAND-encumbered or FRAND-free?

In the mobile devices sector, as in many other technology-rich sectors, a great amount of standardisation is necessary to ensure that the products available are compatible with one another and operate on the available networks. Standard-setting organisations require patentees of patents "essential to the standard" to licence these on FRAND terms. That means that "essential" patents must be licenced to rivals, whereas "non-essential" patents permit the patentee to prevent its competitors from using the invention(s). For that reason, "essential" patents are referred to as FRAND-encumbered, while "non-essential" ones are known as FRAND-free, enabling the patentee to choose whether he wants to prohibit competitors altogether from using the invention in question or merely insist on licencing arrangements.

What can the infringer do?

The possibility of injunctions has serious implications and the prospect of having to pay a competitor fees for using a patent which is indispensable makes a significant difference to the bottom line.

Sometimes it is possible to make an effective product, while staying outside the scope of the patent in question. If feasible, the problem may be remedied by technical adjustment to ensure a continuous presence of the affected product line in a given jurisdiction.

If it is not feasible technically to work around the infringed patent, the infringing party can seek to settle the dispute and agree to pay licence fees or refrain from making use of the patent.

It is obviously a tremendous advantage to the infringing party if it, in turn, has in its portfolio patents which are actually or potentially being infringed by the party enforcing its patent(s) against the infringer. In this context the strategic value of large patent portfolios becomes crystal-clear: Not only may a patent portfolio be used as a way of pursuing rivals (as a "sword") but also as a line of defence (as a "shield"), once pursued by a competitor for an alleged or actual infringement. Actual and potential counter-claims may be used to good effect during negotiations, in particular cross-licencing negotiations, where the liabilities from using a competitor's patent may be offset by the assets contained in one's own patent portfolio.

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