Huawei has brought InterDigital to court in China demanding a reasonable royalty. U.S. and British courts are part of a broken system that if unchecked would add 40% to 70% to the cost of an inexpensive smartphone.* That’s unacceptable if you believe connecting the world is important.

Huawei initially won a ruling in China that a “reasonable” royalty “should not exceed 0.019% of the actual sales price of each Huawei product.”

InterDigital is actively trying to move the case away from the Chinese court to Western-style arbitrators under Western law.

InterDigital doesn’t have as strong a patent position as Qualcomm, which is demanding 5%, but in the U.S. or Britain might win 100 times as much as the Chinese court ruled. That has been set aside on appeal, not common in China.

Inexpensive smartphones have been crucial to bringing the last two billion people to the Internet. The next two billion need even less expensive gear. That’s why truly reasonable royalties are important.

There are well over 2,000 patents involved in today’s cell phones. If companies like Qualcomm and InterDigital were paid what they are demanding, it would add at least 25% to the cost of the phone and probably more. The “precedents” in the U.S. and Britain are based on a product that might infringe a patent or three. The result is wildly high royalties when 2,000 patents are involved in a standard. The question is how the system can be changed.

Hamadoun Toure, ITU Secretary-General, told me in 2014 that “reasonable royalties” would normally total 5%-10% of the price of a cellphone. That makes intuitive sense. Reasonable royalties should reward research and inventors, but should not be as high as the total cost of manufacture.

China, like most of the world, wants a system that results in reasonable royalties. In 2013, the ITU convened a meeting on the topic. The United States shut it right down and made sure nothing happened. (I’m on the State Department ITAC and was probably the only person saying we were wrong.)

U.S. companies like Qualcomm and InterDigital currently collect royalties from most of the world. That will change, at least in mobile phones. Huawei and ZTE are leading the world in patent filings. If the money were flowing from the U.S. to China, the American position would be reversed. The disputes here are about power and money, not principle.

Jamie Davis at Telecoms.com explains the process:

 In most arbitration cases, each party selects a professional arbitrator, before the pair jointly select a third independent one. The idea is that the trio would assess all the information in the contract, look at market precedent as well as future developments, to decide a competitive and reasonable price for the transaction.

If the precedents are unreasonable, the verdict likely will not actually produce a reasonable price. The precedents in the West are for different products in a different world, where only one or a handful of patents dominate. When there are thousands of patents, a new system is needed.

InterDigital doesn’t produce many products so is little known. They are a major research house, not patent trolls. For example, I just received an important contribution to ITU Focus Group 2030 from an InterDigital engineer.

*Qualcomm recently raised the royalties demanded about 30%, to 5% of the total price of the phone. Ericsson, Nokia, Samsung, Huawei, ZTE, and InterDigital have strong patent portfolios, if not quite as many as Qualcomm. If they demanded a royalty proportionate to Qualcomm, that’s a total of 20% to 25%.

Slews of other companies are involved; I believe the Datang patents for Time Division are central to 5G, for example, and Sony has basic advances in phone cameras. France Telecom and NTT DOCOMO have very productive research labs. So do many others. It’s easy to see a 40% cost.

Adding 40% to the price would result in lower sales. The lower sales would in turn raise unit costs, increasing the impact. There’s no scientific way to provide a figure here, but if the royalties go unchecked it will certainly be enough to slow Internet growth.

If the rates were set at the level of the East Texas courts, it would be much higher. East Texas is the favourite of patent trolls because the judges and juries there accept outrageous claims. A key part of winning patent royalties is choosing the most likely location.

In practice, U.S. companies often found it impractical to collect royalties in Asia and Africa, putting a brake on the system. But that’s less true today, and the system is fraying.

Huawei China Proceedings
On December 24, 2018, InterDigital was notified that the Chinese Supreme People’s Court (the “SPC”) granted InterDigital’s petition for retrial of the October 16, 2013 Guangdong Province High Court decision which affirmed a Shenzhen Intermediate People’s Court ruling that the royalties to be paid by Huawei for InterDigital’s 2G, 3G and 4G essential Chinese patents under Chinese law should not exceed 0.019% of the actual sales price of each Huawei product.  The SPC also issued a mediation order that terminated the proceeding.  The SPC’s grant of InterDigital’s retrial petition suspends enforcement of the decision of the Guangdong High Court and, combined with the SPC’s issuance of the mediation order, effectively vacates the Guangdong High Court’s decision.