Context: Certain patent data and research firms occasionally release rankings of major standard-essential patent (SEP) holders. Different methodologies lead to different results.
What’s new: A couple of weeks ago, GreyB published “Updated Findings” (PDF) relating to its 5G Essentiality Report. The top six 5G SEP holders according to GreyB account for about 60% of all 5G SEPs and are Huawei, ZTE, Samsung, Qualcomm, Ericsson and Nokia. Surprisingly, ZTE is shown to have by far the highest essentiality ratio among the top six: 54% (while all the other five are in the 32%-36% range). In this article, ip fray explains why that ratio is actually plausible, but it may also show that essentiality checks on sample SEPs, regardless of who performs them, are actually of precisely zero value. The inconvenient truth is that there is no way other than infringement litigation to establish whether patents are (a) valid at all and (b) still essential if they survive an invalidation attempt only in an amended form.
Direct impact: ZTE may very well point to that outcome in licensing negotiations as well as in SEP enforcement litigation. For the reasons explained herein, courts should ignore essentiality ratios regardless of the source.
Wider ramifications: As explained above, ip fray does not take any essentiality assessment or study seriously. It is all just “snake oil” (bogus). It has nothing to do with litigation reality. While ip fray steers clear of accusing companies that provide essentiality studies of engaging in scam, the results are meaningless, and the problem is just that patent policy makers in the European Commission and the European Parliament do not understand the reality of patent enforcement well enough, so they attach importance to something that is a pure waste of money and actually even more likely to distort the market than to result in fairer licensing terms.
1. How come ZTE leads the pack?
If you ask ZTE, they’ll probably say they just have the best patents. That claim would be hard to disprove, but two factors can be identified that explain the discrepancy between ZTE’s essentiality ratio and that of the other major SEP holders to a significant (if not to the full) extent:
- GreyB’s update generally explains that younger 5G SEPs have higher essentiality ratios, as applicants filing for those younger patents had the benefit of a much clearer idea of where the standard was going. Those younger patents are then related to new concepts such as Sidelink, but still the “hit rate” of patent filers is higher when there already is a standard in place. Also, there are continuation applications that companies filed particularly in the U.S. to align their patents more closely with the actual standard. ZTE has the highest percentage of new grants among the top six SEP holders: 75% of ZTE’s 5G SEPs are “new” from the perspective of the updated GreyB report.
- GreyB also has a higher percentage of China-only patents than any of the other major SEP holders. Chinese patents are often considered broader, and obviously broader patents are more likely to read on a standard specification than narrower ones.
For those reasons, ZTE’s leadership in the essentiality ratio ranking is definitely plausible. But that takes us to the more important question: can any essentiality ratio, whether determined by companies or by the EUIPO-led process that the European Commission and the European Parliament envision, be taken seriously?
2. Essentiality ratios are a fake answer to a real question: without a serious validity test, it tells you nothing
While ip fray does not doubt GreyB did quality work on those manual essentiality assesments (comparing patent claims to the specifications of the standard), the best that courts, policy makers, licensing negotiators and other stakeholders can do is to simply consider any essentiality ratio report by anyone totally unreliable.
Sure, it would be great if we could know whether company A or company B has a higher essentiality ratio. A smaller portfolio with a higher essentiality ratio may be more valuable than a larger portfolio with a lower essentiality ratio. That’s why there is a desire to know, just like there’s a desire to know who will win the UEFA Champions League final on June 1 or what the weather will be like in New York City in three months from today. Only because it would be nice to know doesn’t mean it is possible to know.
Snake oil was also deemed to meet an important demand. It just didn’t help.
The litigation reality is that most SEPs don’t survive a professional invalidity challenge in the form in which they were granted. Some die in their entirety, and a high percentage of them get amended. To amend a patent means to narrow it. Sometimes it’s possible to narrow a patent by inserting some clarifying claim limitation that sets it apart from the prior art without adversely affecting essentiality. But very often SEPs that are narrowed as the result of a post-grant review cease to be essential.
The patent policy makers in the European Commission and the European Parliament just don’t know how it works. They may never once in their lives even have read and understood a single SEP. They relied on studies by “researchers” that had fundamental flaws, and ip fray just had to explain in the previous article that another paper authored by two of the researchers who worked for the European Commission in connection with the SEP Regulation reached a grossly incorrect (in fact, demonstrably false) conclusion.
The moment of truth is not when you have a consulting firm, a patent analytics firm or some EUIPO-appointed experts (who may or may not be experts; for now, it’s not even known how the selection process will work) look at a patent and give a thumbs up or thumbs down. Forget all of that. It’s worthless.
The actual moment of truth is when you are a, say, Nokia or Ericsson and you go out and sue a major implementer. Not a small or medium-sized enterprise (neither Nokia nor Ericsson are known ever to have sued an SME), but an Apple, a Samsung, a Lenovo or at least a Verifone (a major payment terminal maker). Then you’ll see what happens. Those sophisticated and deep-pocketed defendants will conduct far more extensive and expensive prior art searches (tens of thousands of dollars/euros per patent if you’re lucky, but often requiring hundreds of thousands of dollars/euros) than any patent examiner can do with the very limited time budget they get per patent application.
Only a small minority of SEPs have been affirmed in their granted form when they were challenged in court as a result of infringement litigation. For the majority of SEPs, all those essentiality studies have a significance that is only gradually greater than that of a horoscope, given that it’s not economically feasible to put the same effort into a validity analysis as a well-resourced defendant will make.
And that’s just the single biggest reason, but far from the only one. There are other issues, such as that claim construction itself gives rise to major controversies, which is why a high percentage of claim constructions are overturned on appeal.
The EU institutions are not going to lead Europe out of its “digital winter” (in economic terms) if they mandate the production of snake oil by means of new regulations.