Flashback: Ericsson v. QUALCOMM (1996)
In 1999, and in response to the December 1998 ITU edict to QUALCOMM and Ericsson to promptly settle their IP differences or have any CDMA implementation excluded from consideration as an IMT-2000 3G radio access technology, litigation was settled. The following timely article (in light of recent events) which was written shortly after, is from the archives of Managing Intellectual Property and is available to its subscribers. It provides a reasonably good summary of the litigation and the settlement.
Winning the IP Standards Game
Ralph Cunningham
July/August 1999 - Cover Story
Managing Intellectual Property
managingip.com
License or be Damned
Patent pooling and licensing are critical to telecom standardization. But companies still fight fiercely to protect their rights. Two of them almost came to blows in court earlier this year. Ralph Cunningham reports.
Consider what you can do with your mobile phone now and then think again. Within a few years mobile communication will be transformed. You will be able to surf the Internet and download data and video files, send and receive e-mails and speak to anyone from anywhere in the world, all from a device which will fit into your pocket. The systems which will help you this are called 3G, or third generation. The technology is so important that Ericsson and Qualcomm, two of telecoms' leaders, were prepared to go to court over it earlier this year.
Handsets which combine voice, data and video functions are available now. However, the market is in its early stages. But think of when such devices gain mass acceptance instead of being tools to keep highflyers in touch with their businesses. For instance, the market in China is expected to grow quickly from 13 million mobile phone users at present to 100 million. That is still less than 10% of the country's population. The potential is obvious. No wonder the leading telecoms companies compete fiercely to hang on to a share of the worldwide mobile communications market.
Two hundred million mobile handsets are in use throughout the world today. In 15 years time that number will have ballooned to 2.4 billion, according to International Telecommunications Union (ITU) figures. The value of the market makes it imperative for telecoms companies to make sure they have the right technology to become part of the market. And because no one company has all the technological answers, telecoms companies have to share their innovations with competitors to get the gadgetry they require. So knowing your way through the licensing jungle is vital.
Pioneers of a New Age
The Ericsson/Qualcomm row came in the middle of the CDMA standardization process. CDMA, or Code Division Multiple Access, technology looks sure to be adopted as the basis for the 3G mobile communications standard when the standard's technical specifications are agreed at a meeting of the ITU's radio experts group in Helsinki in November. But as different groups support variations of CDMA, such as CDMAOne, CDMA2000 and W (wideband)-CDMA, the companies who own the patents which become part of the standard are in the best position to profit.
CDMA technology allows wireless communication systems to handle more capacity with higher sound quality by expanding the number of channels which can be accessed by users. Multiple access technology, of which CDMA is one example, splits the radio spectrum, or the amount of space available, into channels and divides them among the users of the system. But unlike other multiple access technologies, which divide up users by assigning them different channels, CDMA uses unique digital codes to differentiate users. This allows multiple use of the same channels.
The rewards are substantial: in the second quarter of the 1999 financial year Qualcomm, which pioneered CDMA technology, earned $77 million in licensing, royalty and development fees, a 73% increase over the figure from the same period in 1998. Qualcomm has been able to grow rapidly since it was founded in 1985 through its ownership of essential technology for mobile communications. Its activities centre on digital wireless telephony, mobile satellite communications and Internet software.
Suit and Countersuit
Qualcomm owns about 250 US patents related to CDMA and has about twice as many patent applications in associated technologies. As Qualcomm developed the IP associated with CDMA, every significant telecoms company who has wanted to make CDMA-based products has been compelled to license patents from the San Diego company. Every significant telecoms company except Ericsson, that is. Before its dispute with Qualcomm, the Swedish telecoms, defence and Internet group was not among the 55 which licensed Qualcomm's technology. In a patent infringement suit filed in Marshall, eastern Texas, in September 1996, Ericsson claimed Qualcomm was infringing patents essential for CDMA which Ericsson owned. When credible companies claim that they have essential patents you tend to take them at face value, says Dan Bart, vice president of standards and technology at the Telecommunications Industry Association (TIA), the representative body for US telecoms companies.
Ericsson's suit, which was filed by McKool Smith, a specialist litigation firm in Dallas, asserted 11 patents. Three were concerned with soft handoff, which describes technology to stop calls from breaking up when passing through base stations. Three more dealt with authentication and encryption of calls. Others were associated with vocoding, or the compression of voice into data and back again, and with technology which supports vocoding. Though Ericsson did not sue Qualcomm for patent infringement until September 1996, the dispute took root nine months earlier in December 1995, when the Swedish company told the TIA that it owned patents essential to IS-95 the TIA's name for its CDMA standard.
Qualcomm retaliated in December 1996 with a series of counter-claims which went beyond patent infringement to include allegations of violations of the Lanham Act, unfair competition and breach of contract. The company claimed that Ericsson was trying to hinder the acceptance and use by the telecoms industry of Qualcomm's CDMA technology, that Ericsson had published false and disparaging statements about the technology and that the Swedish company had made baseless patent infringement claims against Qualcomm. The California company also claimed that Ericsson couldn't be asserting some of the patents it was without abusing confidential technical information it had received from Qualcomm some years before.
Before the litigation both companies were competitors in the wireless communications market. During the dispute Ericsson began to promote W-CDMA, so both companies were pretty much pitted against each other, says Louis Lupin, vice-president and proprietary rights counsel at Qualcomm. But the relationship was not completely antagonistic. The two companies worked together to promote Globalstar, a satellite communications system. Qualcomm supplied chip sets to EOMC, an Ericsson subsidiary, for use in Globalstar user terminals.
Qualcomm's own lawsuit against Ericsson sprang from statements made in early 1997 by an executive at an Ericsson subsidiary. The manager announced that Ericsson planned to launch products using CDMA technology in the US in 1997. Qualcomm's management determined that Ericsson couldn't do that without infringing its patents or, as US law puts it, making meaningful preparation to infringe. Qualcomm sued Ericsson in San Diego.
Qualcomm's action made Ericsson dive for cover. The company denied the executive had ever made the statements attributed to him, and said Ericsson wouldn't introduce its own CDMA-based products into the US if Qualcomm withdrew its suit which it did. So Qualcomm's suit was short-lived, admits Lupin.
The Teams Come Together
Qualcomm made it clear it was prepared to defend itself in court against Ericsson's suit and chose its outside counsel with that in mind. Alongside the Palo Alto, California office of Cooley Godward, its principal lawyers, where Jeff Randall led the team, Qualcomm used the litigation team in Akin Gump Hauer Strauss & Feld's Dallas office and two local Texan firms the Law Office of Carl Roth in Marshall, where Ericsson filed its lawsuit and Young & Pickett in Texarkana, where the judge trying the case had his chambers. The judge only came to Marshall infrequently, so many pleadings had to be made in Texarkana. We wanted to make sure all our bases were covered by including Texas components, says Lupin, who worked at Cooley Godward during a previous litigation between Qualcomm and Digital.
Ericsson's US headquarters are in Richardson, like Marshall in eastern Texas. For their legal representation they chose to stay Texan and combined the Houston office of Arnold White & Durkee, a specialist IP firm, with McKool Smith from Dallas, whose forte is litigation. Using a litigation firm and specialist IP counsel together turned out to be a canny strategy: Qualcomm's counter-claims extended the scope of the matter from being purely patent infringement to include issues such as contracts and unfair competition. But, says Gordon White, the lawyer which led Arnold White & Durkee's team for Ericsson, IP was the primary, driving issue whether or not Ericsson's patents were essential to the standard and so infringed Qualcomm's. White was a lawyer in demand. He might have defended Qualcomm but the San Diego company called him shortly after he had accepted Ericsson's request to act.
Though the case didn't reach a trial there were a number of court hearings including a five-day Markman hearing¹ in February 1999. The hearing in the district court in Marshall was necessary to interpret the claims of the eight patents still at issue (three months earlier Ericsson had withdrawn three patents from its action). The two sides were heard by judge David Folsom and a special master, Gale Peterson, head of IP at the Cox & Smith firm in San Antonio, Texas. A special master is a specialist in the field appointed by the court to consider the issues. The matter was settled before Peterson could issue his findings. On the day he was to deliver his opinion, Ericsson and Qualcomm asked for a delay to allow them to continue settlement discussions. Both companies were satisfied with Peterson's contribution. The special master was very interactive and displayed a very impressive grasp of the issues, says Lupin of Qualcomm. From the questions he was asking I felt he understood our position, adds Mike McKool.
¹ Markman Hearings: In a 1995 case, Markman v Westview, the Court of Appeal for the Third Circuit decided that the proper construction or interpretation of a US patent claim was a question of law to be decided by the court, not by the jury. The Supreme Court ruled on the question in 1996 in a judgment that has become known as Markman II, declaring that there was no constitutional right to a jury trial on patent claim interpretation. Following that decision, Markman hearings where the parties sit before a judge who rules on the claim construction have become commonplace. A successful Markman hearing can help avoid a trial, says Gordon White, of Arnold, White & Durkee.
The Markman hearing clearly had a bearing on the circumstances which led to the settlement of the litigation. But Toni Whittier, a partner in Akin Gump's Dallas office, who represented Qualcomm along with colleague Scott Jacobs, is unwilling to be drawn: The crucial nature or not of the Markman hearing impinges on the settlement negotiations and I am reluctant to talk about that, she says.
While the Judge gave his views on the claim construction, Whittier and the others on Akin Gump's team were concentrating on preparing for the full trial. There was substantial completion of discovery. Our clients were prepared to go to court and we were prepared to go the distance as well so we weren't looking for a turning point, says Whittier. But a Markman hearing is more often than not decisive. In Markman somebody's going to get hurt unless the interpretations of the claims are right down the middle, but they rarely are, says McKool.
While Qualcomm and its advisers may have been steaming on towards the trial, the good feeling Arnold White & Durkee and McKool Smith for Ericsson took from the Markman hearing is obvious. Ericsson told us from the beginning that they were prepared to go all the way to trial and most of us thought that would happen until the Markman hearing, says McKool. We were extremely optimistic after the hearing, he adds. We thought it went very well for Ericsson.
The two litigants gathered an impressive range of academics to interpret the patent claims, including professors of electrical engineering from Stanford, Cornell and Princeton Universities [see box]. They brought to the courtroom vast experience in areas such as error control coding; communications systems modelling and simulation; signal processing and statistical communication theory.
Towards a Deal
During the litigation Qualcomm and Ericsson continued to talk about how they might cooperate in the CDMA market, so it became inevitable that a deal would be struck. There were significant synergies and complementary technologies there, says Lupin. Ake Persson, one of the Ericsson executives who negotiated the deal, agrees: The two companies had complementary assets. Ericsson has a worldwide presence that no one else can match. Qualcomm had a product that Ericsson didn't have the perfect match.
The trial was scheduled to begin in early June of this year. But the two sides reached a settlement in March. Lupin has a theory as to why Ericsson settled when it did: It's my sense that Ericsson took a business decision to get involved in the CDMAOne and CDMA2000 markets and the settlement allowed the company to agree on the patents and to accelerate its entry into the market.
Settlement talks began as early as July 1998 and became a business transaction, covering many more issues than those in question in the litigation, including the possible sale of Qualcomm's mobile communications infrastructure and subscriber businesses. Negotiations took place over 10 months in San Diego, home of Qualcomm, and New York, where the finishing touches were applied. After carrying out its own examination Ericsson decided that it wasn't interested in the handset business but might be in the infrastructure part. Ericsson went ahead with the purchase. We are big-time in CDMA now, says Persson, head of Ericsson Wireless Communications and Ericsson's CDMA systems business unit. It became apparent to us that as a leader in the wireless systems market we ought to have all the standards available to us. So when the offer to acquire Qualcomm's infrastructure came up we took it.
Richard Sulpizio, Qualcomm's president and chief operating officer, and Steve Altman, the company's general counsel, joined Louis Lupin as Qualcomm's principal negotiators. Irwin Jacobs, the company's chairman and CEO, took part at different stages. Ake Persson, Goran Nordlundh, Ericsson's general counsel and Jan Anders-Dalenstam, in charge of business development and strategic marketing at the CDMA systems business unit, represented the Swedish side.
Though both sides may have wanted a deal, that didn't make the talks any easier. These negotiations stood out because of the added feature of the acquisition by Ericsson of Qualcomm's infrastructure business. That made the talks all the more complex, says Lupin. Persson believes that the possibility of a deal over the infrastructure business made both companies look at their IP differences: We realized we couldn't make a deal on the infrastructure without a deal on the IPR. The possible infrastructure deal forced the two parties to focus on the IPR.
The confidentiality surrounding the agreement prevents those closest to it from spelling out the deal's terms. The sale of Qualcomm's infrastructure business, the settlement of the patent position to take in an extensive cross-licensing deal and the two companies' agreement to support a standard for 3G mobile communication based on CDMA are the most important details. Lupin is happy that both sides got what they wanted: It was a true win-win situation. Qualcomm is very, very happy that what had at times been a bitter dispute ended like this. We are looking forward to working closely with Ericsson in CDMA technology. Persson, for Ericsson, is equally satisfied: The agreement was pretty comprehensive. It made a lot of sense to both parties.
Management at the highest level of both companies participated in the litigation. Irwin Jacobs, Qualcomm's chairman and CEO, took part at different stages in the settlement negotiations. Sven Christer Nilsson, Ericsson's then CEO and President, gave evidence by video link from Sweden to the Markman hearing. In July this year, Nilsson resigned from Ericsson, but the company denies his departure had anything to do with the dispute with Qualcomm or with the company's CDMA activities.
The sale of the infrastructure business included the transfer of a lot of talented staff from Qualcomm to Ericsson and the enhancement of Ericsson's product range, according to Persson. He makes out Ericsson to be the all-singing, all-dancing telecoms company: Now Ericsson has the complete product portfolio. We can now support our customers whichever technology they choose, wherever they choose to go, he says.
Lupin disagrees with those who believe that Ericsson got the better of the settlement: I can only say that the equity markets do not agree all one need do is look at the five-fold increase in Qualcomm's share price since the Ericsson deal was first rumoured and then announced.
The Foundations of a Standard
Other significant telecom industry players are pleased the row is over. The dispute was a problem in that it created uncertainty, says Brian Kearsey, director of technology strategy and standardization at Alcatel, the French telecoms group. The settlement of the dispute is a very positive development, says Paul Rubin, a spokesperson for Nortel Networks, the Canadian maker of a range of telecoms products, including telephones and telephone systems for business and residential customers. It allows the industry to move forward towards standardization. It's obvious that Ericsson felt settlement was the best way to go rather than fight the case out in court. Rubin's company worked closely with Qualcomm when the infrastructure for CDMA was first being developed. The Qualcomm/Ericsson dispute involved IPR which were included in the 3G standard proposals so this dispute had to be resolved first, adds Francine Lambert, an ITU spokesperson.
Part of the settlement included an agreement between Ericsson and Qualcomm to support a CDMA-based standard for 3G services. They agreed to support the standardization efforts of the various standards bodies worldwide. Both sides hailed the ending of the dispute as opening the way to the expansion of CDMA-based wireless communications.
Qualcomm and Ericsson are members of the CDMA development group of 44 telecoms companies, which is pressing to have CDMA as an integral part of a 3G standard. Ericsson joined the group at the World CDMA Congress in Hong Kong in June this year. We are now developing CDMA technology, says Persson. We had no reason to be in the CDG development group before.
The agreement with Ericsson to support a CDMA standard contributed partly to Qualcomm granting licences for some essential patents for a W-CDMA standard. Previously the company had refused to do this because of business and technical objections. Qualcomm believed the W-CDMA proposals did not meet its policy of licensing its IP so long as the proposals met a set of technical criteria based on three fairness principles.
(1) A single, converged worldwide CDMA standard should be selected for 3G.
(2) A The converged CDMA standard must accommodate equally the two dominant network standards in use today (IS-41 and GSM-MAP).
(3) a Disputes on specific technological points should be resolved by selecting the proposal that either is demonstrably superior in terms of performance, features or cost, or, in the case of alternatives with no demonstrable material difference, the choice that is most compatible with existing technology.
Now that the mobile telecoms industry is united in working towards an ITU-approved CDMA standard, Qualcomm finally feels able to license its patents.
Finalizing the Details
The end of this year is the deadline for the industry to agree a CDMA standard for 3G services. The resolution of the Qualcomm/Ericsson dispute enables a group of manufacturers to harmonize the differences in the proposals, says Francine Lambert, a spokeswoman for ITU, the UN agency which coordinates standard-setting in the telecoms industry.
Numerous meetings of the ITU's radio experts group have been held throughout the world this year, the latest one in Beijing in June. The technical specifications for a CDMA standard are set to be finalized in Helsinki in November.
Qualcomm and Ericsson also take part in the 3G Patent Platform which has come out of the UMTS (Universal Mobile Telecommunications System) IPR working group, which was formed in February 1998 (see box) to handle the IPR concerns highlighted by standards bodies. The Platform establishes a voluntary, low cost but fair arrangement for evaluating, certifying and licensing essential patents for 3G systems. The group has agreed that the maximum cumulative royalty covering 3G essential patents in each of the product categories terminals, infrastructure, test equipment and others should be 5% of ex-works sales. The standard royalty rate for each essential patent licensed should be 0.1% of ex-works sales. The licences are to be global.
3G is no longer a pipedream now that the major technological choices have been made within the framework of ITU IMT-2000, said Brian Kearsey, of Alcatel and president of the UMTS Intellectual Property Association. All that remains is to put in place a low-cost but fair IPR regime. The 3G Patent Platform is a real response to this need.
In spite of Qualcomm and Ericsson's temporary differences, the demands of telecoms standardization force the industry to cooperate. At the same time the companies compete on the quality of their products and on price. And the voluntary nature of the standards process allows companies to opt in or out.
The next age of mobile communications is almost here. By the end of 1999 telecoms companies will have agreed a global standard for 3G services based on CDMA. Then the prospect of the Internet in your pocket, as one telecoms industry observer has put it, will be nearer. And the willingness of the telecoms companies to cross-license will make it happen.
Expert Witnesses - Markman Hearing, February 1999
ERICSSON:
- George Blakley, professor of mathematics, Texas A&M University, College Station, Texas since 1970. Consultant/expert witness to Arnold, White & Durkee since 1997. Previously a consultant/expert witness for Morrison & Foerster's Palo Alto office and for Hewlett-Packard and IBM.
- Jerry Gibson, professor of electrical engineering, Southern Methodist University, Dallas, Texas since 1987. Consultant to industry and government.
- Stephen Wicker, associate professor of electrical engineering, Cornell University, New York. Consultant since 1997 to Motorola and Mitre Corporation, previously to Unisys, Lockheed Sanders and Mobile Telecommunication Technologies.
- Peter Monsen, of PM Associates, a communications consultancy based in Stowe, Vermont. Has consulted for Motorola, AT&T Bell Laboratories and Unisys. A doctor of engineering science from Columbia University, New York.
- Thomas Payne, communications consultant from Union City, California. PhD in electrical engineering from Stanford University, Stanford, California.
- Donald Cox, professor of engineering, Stanford University.
QUALCOMM:
- Toby Berger, professor of engineering, Cornell University, New York. Consultant since 1986 to Bell Telephone Labs; previously to Raytheon, IBM, Eastman Kodak and TCSI.
- John Proakis, professor of electrical and computer engineering, Northeastern University, Boston, Massachusetts.
- Nikil Jayant, professor of electrical and computer engineering and director, wireless institute, Georgia Institute of Technology; previously an executive with Lucent Technologies and AT&T.
- Stuart Schwartz, professor of electrical engineering, Princeton University, New Jersey.
- Solomon Golomb, professor of mathematics and electrical engineering/systems, University of Southern California, between 1964 and 1998. Also director of technology at the Annenberg Centre of Communication at the university between 1995 and 1998.
Industry Unified on Patents - A Timetable of the Development of The 3G Patent Platform
1998
February: UMTS (Universal Mobile Telecommunications System) intellectual property rights working group formed by 33 leading telecom companies
September: The working group published an interim report which identified and substantially defined three approaches for handling the IPR concerns.
(1) ETSI Policy (Maintain status quo).
(2) Patent Pool (similar to the MPEG Pool arrangement): a joint licensing programme of essential patents – a so-called one-stop-shopping clearing house with a cap on maximum royalties.
(3) Patent Forum: a framework within which bilateral agreements are negotiated in accordance with established fair and reasonable benchmarks and a broad agreement on royalty structures based on licensing economics.
These structures would be supported by a patent evaluation entity for assessing essentiality. The report identified several key issues of a commercial/economic nature requiring inputs from senior company executives, eg maximum royalty rates consistent with the business case, other forms of non-monetary compensation and so on.
October - December: The group established an industry reflection period to:
(1) Review the three options
(2) Confirm the need for the patent evaluation entity and
(3) Consider the economic and commercial issues with senior executives from 18 leading companies.
November: The UMTS IP Association formed 1999
January: The UMTS IP Association published industry reflection period report indicating a compromise solution, Patent Platform, which offered the best features of the Pool (capped royalty) and Forum (flexibility in licensing). The patent evaluation entity confirmed as necessary.
January - June: The 3G Patent Platform fully specified with support commercial and legal documentation.
June 30: Presented formally to the UIPA General Assembly on The overall definition stage involved 41 companies/organisations from the three major regions.
July-August 1999: Consideration period for individual companies to consider the business case for their company whether as patentee or licensee to become members of the 3G patent platform and a voting member of a new company to be established.
Sept 1999 to Feb 2000: Preparations for operational implementation will take place during this period.
On or about March 1 2000: The 3G patent platform will become operational.² A service company, run by a director-general, will be set up to administer the platform.
² EL Edit: The 3G Patent Platform for WCDMA ws approved by the major antitrust regulatory authorities, including the Japanese Fair Trade Commission (June 2002), the European Commission (November 2002) and the U.S. Department of Justice Antitrust Division (November 2002) and was operational by January 2003. Significant WCDMA holders QUALCOMM, Ericsson, Nokia, and Motorola have not joined.
Raising the Standards
Like other industries, the telecoms industry has its own standardization processes. Just as the technology for compact discs, originally patented by Philips, has been universally adopted by CD makers, the telecoms industry comes together to agree on formats for telecoms apparatus around the world.
Telecoms standardization and standards bodies are founded on voluntary agreement. The standards which are adopted by world and regional groups such as the ITU, ANSI (American National Standards Institute) or ETSI (European Telecommunications Standards Institute) come about through industry members putting forward their own proposals on what should be in a standard and then coming to agreement.
The ITU is organized into technical groups which agree on a four-year schedule of work. Each of the technical groups meets and decides on what work needs to be done. But it is the 500 industry members who make the decisions. The work schedule can be added to if the members of the group agree. IMT-2000 is the ITU programme to provide wireless access to global telecommunications infrastructure through satellite and terrestrial systems, serving fixed and mobile users in public and private networks.
Typically the discussions on a standard take about 18 months but that is not always the way. Discussions can take from a few months to a few years depending on their complexity, says Francine Lambert, an ITU spokesperson. Lots of proposals are tabled, she says, but it is not a take or leave it situation but negotiation. In the end you arrive at a standard with various elements of the different proposals that have been put forward.
No one company has all the technology. Even the largest telecoms companies don't own all the patents. This makes compromise inevitable. Companies such as Nokia, the broadly-based Finnish high technology group which makes PC monitors and TV set-top boxes in addition to mobile phones, and Alcatel say the exact number of patents they own in this area is confidential. But, says Arja Suominen, a spokeswoman from Nokia, Between 20 and 30 companies have significant numbers of patents in this technology area and about 100 more have some patents.
A standard will not include intellectual property that isn't pooled voluntarily. Companies make their patents available to all participants in the standardization discussions on a fair, non-discriminatory basis, though patent owners do not have to offer the same terms to each licensee. If companies are unwilling to make their patents available on this basis then their technology is excluded from the standard, says Lambert. No one is forced to agree to a standard. If there is no need for global interconnectivity then there is no need to come to the ITU, she says.
All we ask is for a company to advise us early enough in the process about their willingness to license so we don't spend a lot of time designing a standard which might have to be changed, says Dan Bart, vice president of standards and technology at the Telecommunications Industry Association, the representative body for US telecoms companies.
With patents taking on such a high value in the standardization process, disputes should happen regularly but they are a rarity. Disputes tend to work themselves out, says Bart. Only two allegations have been raised in the last five years to the effect that the patent policy hadn't been followed, says Amy Marasco, ANSI's general counsel. By the time a standard is submitted to ANSI for approval as an American National Standard, issues regarding any known related patents should have been addressed and the patent policy followed. <<
- Eric - |
