Co-published editorial

Patent pools in China

Samsung. This technology needs to be China was initially suspicious of licensed to third-party manufacturers, so patent pools, viewing them as a could not be effectively used unless the threat to national interests. However, group got together and jointly agreed on and there is now a growing appreciation deployed the technology. of the importance of joining pools Patent pools today and creating its own technologies, Patent pools enable diverse technology rather than resisting them owners to create a resource for their collective benefit. Patent pools enable many industries to function effectively; to operate By Nicholas Redfearn, Rouse Legal, in the simplest manner possible to reduce Hong Kong the costs of negotiating individual licences for each patent; to reduce the risks of trading Patent pools are consortia of patent owners in that arena; and to enable sensible that place patents into a pool and then, as a management of royalties. Often, patent pools group, cross-license them. The patents are licensed into separate corporate vehicles, normally relate to a particular technology such as Sisvel, which manages the patent (eg, RFID, Bluetooth or MPEG). This article pools for RFID and MPEG, among others. In explores their impact on and use in the PRC the case of DVD players, there are a myriad market in recent years. of different DVD patent pools controlling different technologies, depending on the Origins precise type of DVD technology in question. Patent pools originated for two reasons. One criticism of patent royalty Initially, they were a way to avoid competing structures (indeed, this applies to copyright technology owners suing each other too), is the difficulty of seeking licences for endlessly to seek to exclude each other from all necessary patents. A pool is designed to the particular technology area. This was the overcome this by creating a central place to reason behind one of the first patent pools, seek licences and negotiate royalties. which was established in the 1800s by However, it is a complaint that many pools various sewing machine manufacturers, are not effectively managed and that, in including Singer. More recently, pooling has practice, one or two companies dominate. become an imperative because many Given that licences and royalties need to be technologies involve multiple patents with agreed, it is a hindrance if pools are different owners and simply cannot be disorganised. This is a particular problem deployed into the market for use by others where sophisticated operators such as without an agreed structure. So, for Philips or Hitachi have to share pools with example, one type of technology in DVD smaller companies that do not have the discs, players, drives, recorders and resources to handle the volume of work that decoders is covered by patents in a pool pools generate. As a result, many pools are called the DVD6C Licensing Group. The outsourced to professional management patents are owned by its nine members: companies such as Sisvel. Dolby Hitachi, JVC, Panasonic, Mitsubishi, Sanyo, Laboratories has set up a subsidiary called Sharp, Toshiba, Warner Home Video and Via Licensing to exploit its own and third-

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party technologies, including Advanced The Chinese government sees patent Audio Coding (AAC), Digital Radio royalties as a hindrance to the growth of its Mondiale and MPEG Surround. own innovative industries because it argues Another variant is the DVD format that domestic companies cannot enter the licensing pool. This is managed by a company market without first paying fees while called DVD FLLC, which licenses the non- manufacturing for export. Patent royalties patented know-how to produce DVD disc can form large portions of the total unit formats along with the DVD logo trademark. cost (in some of the DVD disputes, US$15 It is also the manager of what will probably to US$20 per player). As such, patent pools become an unsuccessful HD DVD format. whose purpose is entirely to generate royalties are seen as the worst Electronics manufacturing in China and manifestation of overseas patent control in patent pools China. The converse argument, of course, is China has become the centre of that R&D costs and a reasonable profit need manufacturing for the world and in to be recouped, and a royalty is a fair per- particular for electronics. In 2002 Chinese unit method of doing this. PRC industries DVD player makers were at the centre of a are at liberty to conduct their own R&D and dispute when Philips alleged that Chinese develop technologies and join these DVD player manufacturers unjustifiably consortia. The problem is that China is still won market share by avoiding paying patent at an early stage in its R&D cycle, with R&D royalties. Customs officials outside China still comprising quite limited activities in then seized exported low-price DVD players most businesses. The PRC government from China which were alleged not to have recognises this and has emphasised the had full royalties paid on them. The Chinese imperative of conducting R&D in its manufacturers, however, argued that they National IP Strategy. were just assemblers; that key parts such as loaders and decoder chipsets were supplied China’s reaction by others; and that these contained the Partly as a result of the “DVD wars”, in 2003 majority of the patented technologies (ie, so China announced a new optical disc format patent rights had been exhausted). It was called the enhanced versatile disc (EVD). It also alleged to be unfair that the consortium was established with a slightly different members were themselves manufacturers of technology behind it to counter the popular DVD players, so were distorting the market. DVD format. It was hoped it would create a The dispute became politically charged, as it new standard to be used throughout the was felt that China’s export manufacturing industry so that Chinese companies could industry continually had to pay substantial make EVD players with reduced royalty royalties to overseas patent owners. The payments, so at greater profits and also dispute was eventually settled after the without payments to foreigners. It was Chinese government intervened to help developed by a multi-company partnership resolve them. which applied for 25 patents. Ultimately, the Increasingly, R&D is conducted away from initiative failed for market barrier reasons. product manufacturing both in geography Only four major films appeared on the EVD and in business entity. Today the situation format and so no manufacturers would make differs from 2002, in that few patent pools them, as demand was expected to be minimal. even manufacture products themselves. But The next in the video technologies the disputes remain. MPEG LA is a series to cause such problems is likely to be consortium of patent holders, including Blu-ray, which began life as one side of the Apple Computer and Sun Microsystems, format war with Toshiba’s competing HD which developed the MPEG-2 digital video video format. However, HD was abandoned compression technology. However, most of and Blu-ray became the industry standard the hardware, including digital pay-television for high-density optical discs. As of April set-top boxes, is made in southern China. 2008, no joint licensing agreement for Blu- The set-top boxes need to include the ray discs had been finalised and at present, MPEG-2 digital video compression to manufacture players, you need to go to technology because digital broadcasts usually each individual company that owns one of employ MPEG-2 technology. As a result, the the Blu-ray disc patents. China’s EVD set-top box manufacturers are all charged a standard has now reared its head again with royalty of US$2.50 per system. A group of the development of a competing so-called them, including Konka, one of China’s top “Red Ray” system. Although a number of consumer electronics makers, objected and in manufacturers have announced models at late 2007 a dispute over the size of the prices below Blu-ray players, it is doubtful royalties blew up. whether it will catch on. The principal www.iam-magazine.com Intellectual Asset Management September/October 2009 103 Co-published editorial

reason for this is that, unlike in previous goal is to improve the television makers’ generations, content providers are now positions within the standard by collective major players in the pool not only as action and, by improving their bargaining members (Warner Home Video owns some position, to negotiate royalty reductions. of the Blu-ray patents), but also because the major film studios signed deals with the Standards Blu-ray owners to ensure their titles would An important interaction with patent pools be available on that format. It now seems to is the issue of standard setting. Governments be a trend on the part of content owners to and industries get together to set standards, participate in ownership of the underlying particularly in the electronics sector. These hardware technology, which may then efforts are often driven by key players whose increase their influence (previously they had primary interest, of course, is to ensure that none) and thus sales of films. their own technology dominates. When standards are adopted internationally and China fights back become the only commercially viable method Apart from the resistance to paying of using a technology, manufacturing royalties and the disputes that have ensued, countries such as China have no choice but a new manifestation is challenging patent to implement them. Increasingly, there are pools. The 4C DVD patent pool controls a patent pools behind the standard, so Nicholas Redfearn set of patents also necessary to manufacture royalties must be paid accordingly. One Partner a DVD player. When looking at the patent currently under discussion is the Rouse Legal pools, a number of Chinese academics international 3G standard whose pool’s Hong Kong discovered that Philips, one of the members, patent licensing structure has not been fully Tel +852 2302 0832 owned a patent which the academics settled. A criticism is that standards are [email protected] believed was not novel because it described often controlled by large patent owners and matters which were in the public domain. non-patent owner stakeholders are rarely Nicholas Redfearn is a partner The inclusion of this patent in the pool involved. China claims that it is cheated at Rouse and has a wide range created a royalty flow to Philips which was because it is unable to build up its own of IP experience, having worked felt to be unfair on Chinese manufacturers standards and therefore must simply pay with Rouse in Indonesia, United if the patent were invalid. So the academics patent royalties to the international pools Kingdom, Dubai, Vietnam and filed a case at the Patent Re-examination that control the standards. the Philippines. He is now based Board to invalidate the patent. The case A PRC alternative standard called AVS in Hong Kong. Mr Redfearn eventually reached a settlement under has been created to compete with MPEG. advises IP holders on all which Philips removed the Chinese patent Justified as being better than outmoded aspects of IP protection in Asia. from the list attached to the patent licence MPEG-2 and less expensive than MPEG-4, He counsels corporations on agreements and agreed no longer to assert AVS is China’s own independent standard patent procurement and patent it. The invalidation case was withdrawn. for compression, decoding, processing and enforcement in the developing Ultimately, this did not affect the royalty representation of digital audio-video. Now markets of Asia, as well as charge, so may seem a hollow victory. But it run by the AVS Workgroup, it comprises advising Asian companies on is illustrative of the tension that patent over 170 PRC and multinational companies, international patent protection pools and the associated royalties create in all of which use the standard and license the strategies. China and how China is fighting back. patent pool. Another strategy is to work within the patent system to build an IP portfolio either Antitrust to resist or to gain entry to a patent pool. In Antitrust and equivalent laws around the 2007 10 Chinese television makers world also impact on patent pools because, by (including the largest television maker, TCL, definition, pools have an effect on trade. In and other manufacturers such as Haier and 2005 Chinese DVD player manufacturers Xoceco) founded a company to develop new sued the 3C DVD patent pool in the United technology, to research and identify for States, claiming violation of US antitrust inclusion existing patents, and to negotiate laws because the group’s licensing regime royalty reductions with the 170 or so patent limited their ability to compete effectively in holders of the ATSC TV standard, including the DVD player market. However, antitrust Sony, Thomson and Tri-Vision. The policy generally regards patent pools as company, Shenzhen Zhongcai Union justifiable monopoly practices because the Technological Co Ltd, compiled a pool of positives outweigh the negatives – the 500 digital television patents owned by PRC positives being that patent pools enable the companies that might be relevant. It deployment of technology which would analysed domestic and international IP otherwise be too difficult to use. However, in resources for China’s television industry some circumstances patent pools can produce and aims to share technologies and so anti-competitive effects (eg, if non-essential enhance R&D in the television industry. The patents are included, licensing terms are

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onerous or management practices are bad). strategy. Indeed, until China develops a more China enacted its first Anti-monopoly Law in sophisticated process to manage and exploit 2008. Given China’s unfavourable disposition its R&D (which is tied in to a whole range of to foreign patent pools, it may be possible to wider factors, from education to research use this law to restrict the effect of patent methods to freedom of ideas and expression), pools which unfairly distort commercial it may struggle to avoid being dominated by behaviour. The relevant provision (Article 55) nimbler industries abroad. An alternative is extremely brief and refers only to abuse of might be to acquire technologies – a strategy IP rights to eliminate or restrict competition. that the Japanese have employed. In the It is early days for the new law in China and meantime, patent pools are likely to remain a no investigations have yet been announced. contentious issue.

Chinese patent pools In May 2009 China’s State Administration of Radio, Film and Television called for the establishment of a China Mobile Multimedia Broadcasting (CMBB) industry alliance. The technology covers the infrastructure to deliver digital video broadcast from both satellites and terrestrial sources to handheld devices. The aim is to set and manage licensing policy and admittance of patent owners into the pool. Beijing TiMi Technologies Co, Ltd, is the MMB core patent owner, with nearly 40 patents. It also has a variety of other partners involved, from Nasdaq-listed Innofidei Inc to the Microelectronics R&D Centre of the Chinese Academy of Sciences. A variety of other PRC companies may be involved. In the long term, we can expect more successful patent pools as China successfully uses them to create economic value. As seen from the EVD failure, it is necessary to think ahead of the market and include technologies which have real value, not those created as a reaction to overseas pools.

Conclusion China is still working out its position on patent pools. Its cheap manufacturing base initially put it on the receiving end of royalty demands from the technology developers. In one sense, that was a cost of choosing to base its economy on export manufacturing. The patent pools were typically outside China, so it became characterised as a national interest issue and China started by trying to defend its position against them. However, there now seems to be recognition of the need to join pools and create its own technologies, rather than resist them. Thus, rather than trying to block royalty flows, it is perhaps a better strategy to balance outward Rouse Legal flows with inward ones. Hong Kong However, some patent pools do seem to 18th Floor contain questionable patents, which Golden Centre potentially opens the pool to attack and could 188 Des Voeux Road Central ultimately see challenges for being Hong Kong monopolistic. Developing pools and standards Tel +852 2302 0832 is a slow process, as it requires cutting-edge Fax +852 2736 6266 R&D and a sophisticated IP exploitation www.iprights.com www.iam-magazine.com Intellectual Asset Management September/October 2009 105