Microsoft - Nokia deal: A paradigm shift in the standard essential patent licensing business model

This post discusses the recent divestment of Nokia's businesses to Microsoft and argues that this deal may change the way entities deal with standard essential patent (SEP) licensing on Fair, Reasonable, and Non-Discriminatory (FRAND) terms - and hence is a paradigm shift in the mobile phone industry.  Because of the obligation to a Standard Setting Organization (SSO), and because Microsoft has taken the position (Microsoft v. Motorola) that the SEP licensing be based on chipset value rather than end-product value, Nokia may be stuck with licensing SEP portfolio on a chipset basis. Current practice is to license the portfolio on an end-product (a handset, or a complete device).

Early Tuesday morning (03/09, India time), twitter was ablaze with the news that Microsoft would acquire the handset and services business of Nokia for about $7 Billion.  Notable is the fact that Nokia only divested it's businesses and transferred it's employees to Microsoft, but retained its patent portfolio.  Nokia in it's press release announced: As part of the transaction, Nokia will grant Microsoft a 10 year non-exclusive license to its patents as of the time of the closing..In addition, Nokia will grant Microsoft an option to extend this mutual patent agreement to perpetuity.  Of the total purchase price EUR 1.65 billion relates to the mutual patent agreement and future option. 

The retention of the patent portfolio raises significant issues: Microsoft is a mere non-exclusive licensee, and Nokia is free to license to others.  By divesting the hardware and transferring people, Nokia cannot be sued for products, yet can launch patent licensing and related actions including litigation.  In the SEP licensing field - this model is much closer to that of InterDigital, and Ericsson: both used to make handsets / devices, but shifted to a pure licensing model.

Since the deal was announced, one area that has received little attention is the future course of action vis-a-vis the licensing of the SEPs and what what end of the supply chain a patent holder should license the SEPs. In Microsoft v. Motorola case (underway at the Western District of Washington, Seattle), Microsoft made an argument that Motorola breached its [F]RAND obligations by failing to offer a [F]RAND license to Microsoft’s 802.11 chipset supplier, Marvell.  

In another instance of the same argument (chipset manufacturer), Intel in it's amicus brief supporting Apple involving a dispute between Apple and Motorola, argued that a FRAND commitment requires a SEP holder to license all comers, including component makers (or chipset makers). 

This obligation-offering a license to all prospective licensees, including chipset manufacturers stems from the IPR policy of the standard setting organization.  Under the terms on which a SEP holder (such as Nokia) signs the obligation to declare SEPs to an SSO such as ETSI, the SEP holder must grant a reasonable license to all comers—both sellers of completed products to consumers, such as handset manufacturers, and manufacturers of the components that go into those products. 

Clause § 6.1 (ETSI IPR Policy), requires owners of essential IPR to undertake to grant licenses “to at least” “MANUFACTURE”; “sell, lease, or otherwise dispose of EQUIPMENT so MANUFACTURED”; “use” “EQUIPMENT”; “and” “use METHODS.” 

Hence, it can be argued that a chipset manufacturer is entitled to a FRAND license from the SEP holder. Microsoft arguing that the license should be made applicable to Marvell,  the chipset manufacturer, and Intel (Intel supplies chipsets to integrated device manufacturers / mobile handset manufacturers) arguing that component manufacturers be licensed by a SEP holder further underscore the point.

Accordingly, even though Nokia has retained ownership of the patent portfolio, and Microsoft is a non-exclusive licensee of the Nokia's portfolio, Nokia may have to be content with the valuation of an SEP license on a chipset basis.  Additionally, as Nokia is one of the largest (if not the largest) holders of SEPs, others may have to follow suit in SEP portfolio licensing.