Escaping the Prisoner’s Dilemma: Toward a New Transparency in Patent Licensing

Joseph Siino

I recently had the opportunity to go on the record with Joe Siino, an IP strategist, entrepreneur and attorney with decades of experience both in Silicon Valley. Currently Siino is President of Via Licensing Corporation in San Francisco, California. Siino recently authored an interesting, and in some corners controversial piece on the patent licensing market that was published by IAM magazine. The article titled Escaping the Prisoner’s Dilemma: Towards a New Transparency in Patent Licensing compares the current state of the patent licensing industry to the prisoner’s dilemma.

“The key ingredient needed for the prisoner’s dilemma to work its destructive magic is a lack of transparency between the parties involved,” Siino writes. The article goes on to discuss how the lack of transparency in patent licensing transactions is disrupting the the patent marketplace, and threatens “to break licensing’s virtuous circle of innovation leading to commercialisation, which in turn funds more innovation.”

As I mention at the start of my interview with Siino, I found the article fascinating, which is why I invited him to sit down with me on the record.

Without further ado, here is my interview with Joseph Siino.

QUINN: Joe, first thanks for taking the time to chat with me today. Now I know you’ve written a rather controversial cover story recently for Intellectual Asset Management magazine, entitled Escaping the Prisoner’s Dilemma: Towards a New Transparency in Patent Licensing. Your piece attracted a great deal of attention throughout the industry. I personally found it fascinating and thought it described the patent licensing industry in a very thought provoking way. Why do you suppose it has been considered to be controversial?

SIINO: I think it’s because the article captured the terrible bind that both patent owners and product makers find themselves trapped in. Both sides in a patent dispute truly believe they are caught in a never-ending cycle of unreasonable demands and counter-demands, and feel forced into litigation. Product makers accuse patent owners of making extortionate royalty demands backed by the threat of litigation –effectively, a “hold up”. And for their part, patent owners argue that product makers are guilty of being “hold outs” for refusing to pay any fair price for these patented innovations, even though these are precisely what give those products their value as communication and entertainment devices.

There is actually some truth in both claims. It is a classic prisoner’s dilemma, in which the lack of transparency and fair ground rules in patent licensing leads many companies on each side to adopt extreme positions, thus guaranteeing a negative outcome for both sides. That is, litigation. Not to mention consumers, who are forced to buy products that have hundreds of millions of dollars in litigation expense priced into them. This is especially true in wireless standards-essential patent (SEP) licensing.

QUINN: That sector is supposed to operate under FRAND terms — Fair, Reasonable, And Non-Discriminatory licensing. But what does that really mean? I mean I know what each of the words mean, but string them together and that is where I have problems. What’s reasonable? Who defines what’s fair? It’s so subjective it’s almost nonsensical. That’s why I thought your article was really eye-opening. I think it really hit me for the first time how meaningless FRAND is as a concept in a licensing environment where there is almost no published pricing, no agreed upon negotiating rules, and no transparency.

SIINO: Yeah, well, looked at in the abstract, these terms can seem very subjective and difficult to define. This is especially true because the patent market operates with almost no independent or neutral appraisal of the value of the asset, aside from patent pools, of course. And there’s little if any transparency as to how prices are determined. However, if we can create more transparency so that we have better information on what others have paid for similar assets — in real estate, we call those “comps” — the terms begin to have more meaning. It’s very difficult to take extreme positions when everyone is aware of pricing that’s been determined in a fair and transparent marketplace. For example, in real estate, you’re going to have a really difficult time convincing anyone to pay double the market price for your home when they’re aware of the comparable sales in your neighborhood. And conversely buyers would have a hard time convincing sellers to give their homes away at half the market price. The same thing applies with IP.

QUINN: When you have information about the market that leads to a more efficient market. That’s just basic to market economics. That’s the whole purpose of the rules for public company disclosure and against insider trading — adequate public disclosure leads to more efficient markets. Not having that disclosure wreaks havoc on the patent market. So you think the lynchpin of the friction in patent licensing market is this lack of transparency?

SIINO: Yes, I think that’s at the core of it. This is especially true in the wireless sector, where an unmanageably-large number of patents for 4G (LTE) cellular components in phones have been declared “standards essential.” But declared by whom? It turns out that over 60,000 LTE patents have been self-declared by companies. There is no neutral evaluation of those 60,000-plus patents for essentiality, let alone for their value.

QUINN: Are you suggesting that the multi-billion-dollar wireless patent licensing business is based largely on “he said, she said” ground rules for essentiality, value, and so on?

SIINO: That’s exactly what I’m saying. I mean, look, patents are self-declared to standards bodies. And it is not unheard of for the owner of a wireless LTE patent or two to demand an arbitrary price of several percent of the price of a phone, arguing that without his “ground-breaking” invention, the manufacturer could not offer LTE capability in its devices.

But you know what that product maker thinks when he hears that? He thinks, “Okay, this guy wants 2% of the price of my phone, but what am I going to say to the owners of the other 60,000 LTE SEPS out there?” He doesn’t need a spreadsheet from his CFO to tell him that 2% multiplied by itself 60,000 times is greater than 100%.

Meanwhile, on the other side, you’ve got some handset manufacturers who use patented wireless components in their products without paying fair compensation to any of the inventors of those components. They rebuff all attempts to negotiate in good faith, routinely arguing that the patents asserted against them are worthless . They figure that in today’s environment — with IPRs knocking out thousands of patents, even some already declared valid and infringed by the courts — it makes more sense to simply infringe the patents and suffer the modest risk of a lawsuit down the road than to license them. This practice is called “efficient infringement.”

QUINN: So instead of looking for market solutions, we’ve gone back and forth over the years — with various branches of our government either strengthening or weakening patent rights, putting the thumb on the scale of one side or the other. Today it is hard not to notice that we find a market where the thumb is heavily on the scale opposite inventors and patent owners, which many will tell you is just the natural reaction to the height of the pro-patent days pre-eBay. But all of this back and forth seems like we are just messing with the asset itself rather than creating the conditions under which the asset can be traded more efficiently?

SIINO: Exactly. Neither Congress nor the courts have been treating this as a systems problem, a market failure. The solution is not to take one party’s side or the other’s, but to find a way to help create a more efficient market place. That’s the only way to make real progress.

QUINN: So then I guess the $64,000 question is — how we do escape this prisoner’s dilemma? Nobody wants to unilaterally disarm or give up their business objectives or strategy, so how do you see us moving forward?

SIINO: Let’s focus on the wireless patent wars. One approach supported by a number of people in the industry, including Via, is essentially a three point “Peace Plan” to end the wireless patent wars.

First, we need to reduce this unwieldy mass of 60,000 SEP declarations to a manageable size by eliminating those that are simply not irrelevant to the LTE standard as it exists today. One example of how to whittle this unmanageable LTE stack down is outlined in my article, which people can read here. It’s the product of much discussion among industry leaders on both sides — patent owners and product makers. And it gets us from a bloated 60,000-plus LTE stack to a much more manageable stack of around two thousand LTE patents that we call “TrueLTE.”

QUINN: Then what’s the second prong of the plan?

SIINO:  Second, we need to base royalty prices not on the subjectively-argued value of any individual patent, but on the value of the entire LTE stack in the $324 average selling price of a smartphone.

Many people argue that the royalty rates resulting from litigation or negotiation put the value of the LTE component in modern smartphones at roughly $18 to $19. But regardless of whether you think the value of the TrueLTE stack should be $18, $19 or some other reasonable number, the next step is to calculate any SEP holder’s share of that total LTE stack. That will be roughly their share of any royalties paid by product makers.

QUINN: And the final prong of the wireless “peace plan?”

SIINO: Licensors and licensees must find a way to support more transparency about royalty rates and to support some basic ground rules and quality control, and all of that likely means supporting collective industry solutions such as patent pools.

Look, it is an axiom of economics that markets function better when there is adequate information and impartial ground rules for buyers and sellers. Greater transparency will help the market itself set a rational economic price for the LTE stack that both patent owners and product makers can embrace.

By banding together to support collective solutions like patent pools, companies can support transparency outside the context of bilateral negotiations. Patent pools offer independent neutral evaluation of patents, published pricing, and the cooperative sharing of royalties according to each licensor’s share of patents in the pool. This also allows for collective reduction of risk.

In this sense, a pool is kind of Swiss-neutral clearing house. For product makers, it offers a one-stop shopping solution at an enormous cost saving compared to having to negotiate the license of each patent from each individual owner. For example, in Via’s AAC Audio patent pool, patents have been licensed over the years from roughly a dozen licensors like Dolby, AT&T, and the Fraunhofer Institute. And patents in the pool have been licensed to over 900 companies worldwide based on transparent, published royalty rates. A study done last year by Professor Robert Merges at Berkeley estimated that our AAC pool saved those 900 licensees over $600 million compared to what it would have cost them to bilaterally license those same patents from their owners. That’s huge!

As for patent owners, a pool offers them fair compensation for their innovations without having to engage in lengthy high-cost negotiations with multiple product makers, at least some of whom are going to stonewall until the patent owner files an even costlier lawsuit that demonstrates his seriousness. In today’s rather unfriendly legal environment for patent owners, getting compensation without having to risk litigation is a major plus.

What’s more, the sheer volume of transactions in this pool — something like 10,000 collective transactions between 900 licensees and a dozen licensors — tends to rationalize the price for these patents. With 10,000 transactions by multiple parties, people can have greater confidence that the price is truly market-based.

This helps to normalize the marketplace, in the same way that a large number of real estate comps helps normalize the home buying market. No one is going to greatly overpay or underpay because the sheer volume of comps establishes pricing norms and stabilizes the market. That’s the benefit of transparency and adequate information.

And that’s what you get with collective structures like patent pools — more transparency in published pricing, in the neutral evaluation of patents, and in collective negotiations and risk reduction. It sure beats the Prisoner’s Dilemma cut-throat world we’ve got now.

QUINN: Has there been any progress made in the implementation of the wireless peace plan you just described?

SIINO: Well, the approach has been publicly endorsed by two of the most influential leaders in the IP world — people who are often viewed as coming from opposing sides of the patent owner-product maker divide. Boris Teskler of Conversant Intellectual Property Management issued a public statement in which he said that the approach would bring about increased market efficiency and reduce the volume of litigation in the industry.

And Allen Lo, the long-time IP chief at Google who just moved over to become Facebook’s head of IP, also said the industry needed a rational mechanism to first determine what patents are truly essential and then value the stack and charge royalties based on each SEP owner’s share of the total LTE stack.

QUINN: [Laughter] Isn’t it pretty unusual to see these two guys on the same side of a patent issue?

SIINO: Maybe in the past. I believe their support for the approach is a sign of just how much people see the need to reduce the dysfunction in the wireless licensing sector.

In fact, it’s my hope that we are beginning to see a new realignment in the industry — one in which the conflict is no longer between product maker and patent owner, but between those who transact IP on a fair and transparent basis, and those who don’t.

QUINN: So what’s the next step?

SIINO: Via’s LTE pool is now gaining new members — licensors and licensees both — at a rapid pace. In the next week or two, you are going to see some very big names joining the pool. This will add even more momentum to the wireless peace plan.

[Editor’s note: as this interview goes to press, Chinese giant Lenovo and U.S. telecommunications leader Verizon both announced they had joined Via’s LTE pool, as did the patent licensing company Conversant. This suggests that Via’s LTE pool is becoming a center of gravity in LTE licensing. Other signatories are reportedly about to be announced as well.]

Beyond that, we are also going to be rolling out a major new initiative in the wireless connected car and autonomous vehicle sectors. We feel this is very significant not just for Via but for the whole industry. Because as an industry we must NOT repeat the patent wars and litigiousness that we saw in the smartphone sector in years past.

With more transparency and some fair ground rules for both patent owners and product makers, we can have a much smoother and more efficient rollout of wireless connectivity in the auto industry. We owe it to ourselves as an industry, and we certainly owe it to consumers who, thanks to the smartphone wars, now tend to associate patents with litigation rather than innovation. That’s a situation we have to change, not repeat.

So keep an eye out for some non-litigious breakthrough deals in the connected car space.

QUINN: I will. Thank you for a fascinating discussion.

SIINO: Likewise. Thanks for speaking with me.