Patent pools in China: getting the details right
At a series of recent events in Beijing, IP leaders from all sides of the industry weighed in on the finer points of patent pool practices
By Jacob Schindler
China Dispatch is a regular Sisvel Insights feature that leverages Sisvel’s strong presence in greater China to keep the IP market informed of important local currents in policy, law and technology, and explain their potential impact on the global SEP market.
A delegation from Sisvel recently visited Beijing for the LES China Annual Conference, the China Intellectual Property Annual Conference and a series of high-level meetings with private and public-sector IP leaders.
Throughout the week, patent pools repeatedly emerged as a topic of discussion as both patent owners and implementers chatted about the licensing landscape. Indeed, as noted in the previous instalment of this column, pools are a hot agenda item in China and drove plenty of headlines over the summer.
There is clear recognition that pool-based licensing solutions are gaining traction in key emerging technology areas, and that they can bring important efficiencies to the market when well-executed. To maximise these benefits, however, it’s critical to get the details right.
Several key elements of pool practice were discussed in depth.
Transparency
Transparency was stressed by a number of speakers during the LES conference. Part of pools’ function is to provide clarity to the market, particularly regarding cost. This is especially critical when a technology or vertical is new and companies are still in the process of forming business cases. Having royalty rates, licence terms and patent lists in the public domain creates a reference point and can help to build trust among licensees that terms are FRAND.
Discussing the buildup to the 2022 launch of Sisvel’s Cellular IoT pool, programme manager Sven Torringer pointed out: “We had a unique situation in which we had licensees contacting us asking for more information about royalties. That outreach from the implementor side is something you don’t often see, and it’s very telling about what the industry saw as a lack of clarity from licensors.”
It was also noted that transparency can be a two-way street. Licensees often demand it during the negotiation process, only to insist on the confidentiality of their own transaction after it closes. This can make it difficult for licensors to be as transparent as they might wish.
Balance and pricing
Balance was another watchword raised by several Chinese industry representatives in the context of royalties. Pricing appears to be a key focus of recent Chinese antitrust regulations pertaining to patent licensing.
A well-executed pool will reduce aggregate royalties and transaction costs in comparison with a multitude of bilateral deals. A rate that’s too high can discourage licensing and extend the time to revenue for a programme, while a low-ball rate will make it difficult to attract enough patent owners to create a strong value offering.
Huawei head of IP Alan Fan stressed the company’s preference for a balanced approach, noting that excessively high or low rates are both contrary to the company’s interests. It’s extremely important to listen to all voices in the market during pool formation, he added.
This balance emerges most effectively when rates are defined in a context where both licensors and licensees are present, for example as pool members. Companies with a foot in each camp have a particular interest in establishing terms that make sense commercially while sufficiently rewarding innovators. Participation from these licensor-licensees in a pool, it was noted, sends a very strong signal to the market that a pool’s royalties are reasonable.
Torringer also noted that balanced representation across geographies is also important in certain programmes. “If you look at our cellular IoT pool, it includes a very strong share of Chinese-owned patents. China has invested a lot of money in R&D in this field, and as the largest deployer of cellular IoT, it is the society that has benefitted the most from these advances. That puts our programme in a position to generate licensing revenue that incentivises Chinese innovators to continue driving the IoT revolution forward.”
Education
A final point noted by multiple speakers is that pools are often set up on the frontiers of licensing to address new verticals and industries. That means dealing with product companies that, as in the case of cellular IoT, may be entirely unfamiliar with the basics of SEPs and FRAND licensing. “You need to make a quite significant investment in education and communication”, Torringer observed. The transparent and public-facing nature of pools make them natural vehicles for this kind of informational campaign.
One takeaway emerging from all this discussion is that as positive as the patent pool model is as a whole, it’s difficult to make generalisations about it as a dealmaking structure. By all appearances, Chinese patent stakeholders will continue to evaluate individual programmes on their own merits.
China tech in brief
What’s going on in the broader China tech scene?
3GPP approved the first substantive 6G standard project, entailing research into 6G use cases and requirements, at a meeting in Melbourne. A China Mobile representative will serve as rapporteur; this marks the first time a Chinese company has led the inaugural project for a new generation of cellular technology.
Huawei unveiled a $2,800 tri-folding smartphone, going head-to-head with Apple by announcing it on the same day as the newest iPhone model. Huawei’s HarmonyOS recently overtook iOS as the second-most popular mobile operating system in China after Android. An updated version, HarmonyOS Next, will discontinue support for Android apps and is expected to launch soon. Huawei is investing nearly $1 billion to incentivise developers to create Huawei-native apps and services.
Home appliance giant Midea Group raised nearly $4 billion in Hong Kong’s biggest IPO in nearly three years. The Shenzhen-based company says the proceeds will fuel its international expansion, and that it plans to recruit up to 1,500 R&D staff over the next three years.
Auto giant BYD announced plans for a $2.8 billion R&D centre in Shenzhen which will provide 35.6 million square feet of research space. With 110,000 engineers and scientists on staff, the company says it has the largest R&D team in the industry.
The Biden Administration plans to raise tariffs on a raft of Chinese goods, including electric vehicles, EV batteries and battery parts, semiconductors and solar cells. It is also tweaking rules to make imports from Chinese e-retailers that compete with Amazon, such as Temu and Shein, costlier.
IBM announced the closure of its R&D facilities in China, affecting more than 1,000 local employees. According to the South China Morning Post, tech multinationals including Amazon, Intel and Tesla have also made cuts to their China workforces this year.
A report on plunging startup formation in China caused a stir in the sector. While there is disagreement over the number of new businesses being launched, sources agree that the domestic climate for VC investment remains on the chilly side.
