Byeongwoo Kang, Tokyo University Rudi Bekkers, Eindhoven University of Technology

1. Byeongwoo Kang, Tokyo University Rudi Bekkers, Eindhoven University of Technology IEEE-SIIT Conference 24 – 26 September 2013, Sofia Antipolis, France Just-in-time inventions and the development of standards How firms use opportunistic strategies to obtain standard-essential patents (SEPs)

2. Standards have complex relation to Intellectual Property Rights (IPRs) and essential patents in particular. “That as a general proposition patented design or methods not be incorporated in standards. However, each case should be considered on its own merits and if a patentee be willing to grand such rights as will avoid monopolistic tendencies, favorable consideration to the inclusion of such patented designs or methods in a standard might be given” 1932, ANSI’s Committee on Procedure Including patented technology can be a desirable thing: Standard’s design requirements often imply trade-offs and dilemma’s Valuable technology may improve standards’ performance, cost-effectiveness, or environmental friendliness Many valuable technologies are patented As long as benefits outweigh costs, inclusion may be legitimate But some standards include >3000 essential patent families by 60+ owners Is the inclusion process still rational? Introduction PAGE 3

3. Introduction Data based on Bekkers, R., Catalini, C., Martinelli, A., & Simcoe, T. (2012). Intellectual Property Disclosure in Standards Development. NBER conference on Standards, Patents & Innovation, Tucson (AZ), January 20 and 21, 2012. PAGE 3

4. Top standards in terms of number of disclosed patents Introduction Data based on Bekkers, R., Catalini, C., Martinelli, A., & Simcoe, T. (2012). Intellectual Property Disclosure in Standards Development. NBER conference on Standards, Patents & Innovation, Tucson (AZ), January 20 and 21, 2012. PAGE 3

5. Standards have complex relation to Intellectual Property Rights (IPRs) and essential patents in particular. “That as a general proposition patented design or methods not be incorporated in standards. However, each case should be considered on its own merits and if a patentee be willing to grand such rights as will avoid monopolistic tendencies, favorable consideration to the inclusion of such patented designs or methods in a standard might be given” 1932, ANSI’s Committee on Procedure Including patented technology can be a desirable thing: Standard’s design requirements often imply trade-offs and dilemma’s Valuable technology may improve standards’ performance, cost-effectiveness, or environmental friendliness Many valuable technologies are patented As long as benefits outweigh costs, inclusion may be legitimate But some standards include >3000 essential patent families by 60+ owners Is the inclusion process still rational? Introduction PAGE 3

6. Companies owning essential patents have a range of benefits: Revenue generating opportunities Good bargaining position for cross licenses getting access to SEPs and non-SEPs Influencing the standard to get closed to its own technological strength, know-how, existing products or product platforms, and markets and clients As a line of defense when attacked for infringement A valuable asset that may be sold in times of need All these advantages create incentives to obtain essential patents. Firms that do not own such patents are prepared to spend billions of dollars purchasing them, e.g. Google > US$5B, Rockstar (Apple, MS, Blackberry) <US$4.5B SEPs also may create risks (Non-availability of licenses, Ex post patent holdup, Royalty stacking) Special regime: F/RAND Introduction PAGE 4

7. Standards Essential Patents (SEPs) have become a fruitful research topic: Early conflicts. Good (EIPR 1999), Bekkers et al (EIPR 1999, RP 2001) Existence of standard essential patents. SSO patents database by Rysman & Simcoe (MS 2008), Interplay study for European Commission (2010), Open Essential IPR Disclosure Database (OEIDD) by Bekkers, Martinelli, Catalini and Simcoe (NBER, 2012) Features of SEPS. Rysman and Simcoe (MS 2008) Effects of SEPs on the standardization process. Farrell et al. (ALJ 2007), Dokko and Rosenkopf (OS 2010), Baron et al. (2012) Effects on the market and competition/antitrust concerns Lemley/Shapiro (TLR 2006), Geradin et al (BOJST 2008), Besen & Levinson (AJ2012), American Bar Association (Kobayashi & Wright, 2010), FTC (2011) Firm strategies with regard to SEPs. Leiponen (MS 2008). Bekkers et al. (RP 2011) Omachi (2004)., Berger et al. (RP 2012) Patent pools Merges (1999), Shapiro 2000 (NBER), Lerner & Tirole (AmER 2004), Ménière & Lévêque (2008), Baron & Delcamp (2010) Introduction PAGE 6

8. Diverse literature, but mainly focuses on the existence and impact of essential patents One apparent gap: how do these organizations manage to obtain SEPs in the first place? This study is (among the few) that focuses on the standardization processes and strategic behavior therein Builds on Bekkers, Bongard and Nuvolari (RP 2011) found that whereas patent quality indeed was a determinant of a patent being a SEP, the strategic behavior of the patent owner being involved in the standard setting process was yet a much stronger determinant This study aims to investigate such strategic behavior in more detail Introduction PAGE 7

9. The standardization process: Voluntary process of interested parties / stakeholders Takes place in Standard Setting Organizations (SSOs), usually in Technical Committees (TCs) Standards drafted by participants (usually firms), not SSO staff Set of rules and decision procedures that govern process: principles of openness, neutrality, consensus and decision-making, no collusion or anti-competitive conduct TCs may or may incorporate patented technology (and may or may not be aware) Essential patents and the standards process PAGE 8

10. How can a patent become essential? Depends on exact scope of (granted) patent, and exact text of (final) standard. -> Third scenario: 'Just-in-time inventions' Some insiders have even expressed concerns over this process parties can propose technologies: "just for getting patented technology into the standard rather than to improve the standard [...] No mechanism exists to determine whether a patent claim brings a standard forward (real innovation) or just tries to get a patent into the standard in order to make money.” Essential patents and the standards process PAGE 9

11. Hypotheses: H1: There is an increased intensity in essential patent filing just before and during a standardization meeting H2. Patents applied for just before or during a standardization meeting have an increased likelihood to become essential patents H3. Standard essential patents applied for just before or during a standardization meeting have a lower technical quality than comparable patents [H4, explorative]: Engagement in just-in-time strategies depends on a result of a firm’s different positioning (business model, world region, previous experience, etc.) Essential patents and the standards process PAGE 10

12. Data based on the 3G WCDMA standard and the 4G LTE standard Standard with major impact (over a billion worldwide users, and successor of 2G GSM which has >6 billion users) Dynamic standard with smooth evolution from 3G to 4G - continues technical improvements From 1999 to 2010, we analyzed 77 meetings of the '3GPP RAN1' group, with 939 individual participants at these meetings, affiliated with 53 firms, owning 14,000 patents in relevant technology area, and 988 patents claimed as essential (Claimed) essentiality data from OEIDD Additional metadata of patents from PATSTAT (especially relating to priority date, citations, etc.) Data cleaning and harmonization on assignee, inventor names, etc. Additional data collection on business models, geography, etc. Data and findings PAGE 11

13. Data and findings H1: There is an increased intensity in essential patent filing just before and during a standardization meeting Figure 1: Schematic presentation of the occurrence of 3GPP RAN1 meetings PAGE 12

14. Data and findings H1: There is an increased intensity in essential patent filing just before and during a standardization meeting PAGE 13

15. Data and findings H1: There is an increased intensity in essential patent filing just before and during a standardization meeting PAGE 13

16. Data and findings H1: There is an increased intensity in essential patent filing just before and during a standardization meeting PAGE 13

17. Data and findings H1: There is an increased intensity in essential patent filing just before and during a standardization meeting -> The results suggest that we can accept the hypothesis -> Additional finding: participating firms peak the week before a meeting, while non-participating firms peak during the meeting PAGE 13

18. Data and findings H2. Patents applied for just before or during a standardization meeting have an increased likelihood to become essential patents PAGE 14

19. Data and findings H2. Patents applied for just before or during a standardization meeting have an increased likelihood to become essential patents PAGE 14

20. Data and findings H2. Patents applied for just before or during a standardization meeting have an increased likelihood to become essential patents PAGE 14

21. Data and findings H2. Patents applied for just before or during a standardization meeting have an increased likelihood to become essential patents -> Patents applied just before: hypothesis accepted, robust after adding controls -> Patents during meeting: hypothesis rejected PAGE 14

22. Data and findings H3. Standard essential patents applied for just before or during a standardization meeting have a lower technical quality than comparable patents Forward citations are often used as a proxy for patent value (Carpenter et al., 1981; Trajtenberg, 1990; Karki, 1997) but are by no means perfect (e.g. Gambardella, 2008) Likely better as indicator for technical merit (as value is related to more non-observed dimensions) SEPs are already known to have longer citations tails, so we truncated at 2005 (minimal 7 years to collect) We removed patents <1999 to prevent bias We applied year correction (Trajtenberg, 2002) All types of SEP have higher scores than non-SEP reference (=1), magnitude irrelevant for our purposes SEPs applied for during pre-meeting or meeting have much lower citation score than those applied during 'idle' H3 firmly accepted Figure 2: Citation performance of claimed essential patents for three different periods. PAGE 15

23. Data and findings • [H4]: Engagement in just-in-time strategies depends on a result of a firm’s different positioning • Explorative approach • Variables: • Nine business models distinguished (reduced to upstream vs. downstream) • World region • Incumbent suppliers (major market share during previous technology generation) • Patent stock (total) • Patent stock (in specific technology field) • Inevitable that above variables are related, so due respect required for interpretation PAGE 16

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32. Data and findings [H4]: Engagement in just-in-time strategies depends on a result of a firm’s different positioning We found that a strategy of applying for patents in the 7 days preceding a standardization meeting is employed by: Vertically integrated firms (hence less by US firms, which are mostly upstream firms) Incumbent champions of the previous technology standard (hence more by European firms, where these champions are found) Smaller companies that nevertheless have large SEP portfolios for the standard (i.e. very dedicated companies) Companies that are very actively participating in 3GPP meetings PAGE 19

33. Discussion and limitations • Our interpretation: Just-in-time patenting consists of two different strategies. • Anticipatory patent filing strategy, • Combinatory patent filing strategy • (Note that, up to recently, sharing information in an SSO setting was NOT considered prior are when determining patentability) • Implications: Potential effects relevant to policy makers, competition authorities and end users: • Higher barriers to entry of potential implementers • Lower level of competition in the market • Reduced incentive for 'real' inventors to invest in R&D • Higher prices (when passed on along the business chain, and as effect of lower competition) • Recommendations: SSO to take critical look at inclusion processes, and patent offices to consider SSO prior art (increasingly happening) PAGE 20

34. Discussion and limitations • Limitations: • We investigated just one standardization process (albeit a quite significant one). Other processes and SSOs may have different rules, different culture, and companies with different conduct. • Our analysis is based on self-disclosure of essential patents (as there exists no reliable source of actual essentiality). • Our determination of all relevant patents for this field (based on the IPC codes of the SEPs) might be imperfect. PAGE 21