ETSI/SMG#27 SMG Tdoc 98/608Prague, 12-16/10/98

Title: Interim Report of the UMTS IPR Working Group (September 1998)

Source: UMTS IPR Working Group

Following the ETSI SMG#24bis meeting a group of concerned players have worked together in a bodynamed the “UMTS IPR Working Group”, chaired by B. KEARSEY (Alcatel).

The interim report of this group, along with an associated executive summary, have now been releasedand are attached as a pair of annexes to this document.

The UMTS IPR WG has identified and substantially defined three approaches for handling the IPRissues for third generation mobile systems :• Option 1 : ETSI IPR Policy (maintaining the status quo)• Option 2 : Patent Pool (based on the structure of MPEG2 pool)• Option 3 : Patent Forum (new concept) As a next step the UMTS IPR WG will catalyse an Industry Reflection Period (October – December1998) during which time :• The potential approaches can be further promoted and reviewed with the objective of identifying a

preferred industry choice; and• The outstanding commercial/business related and economic aspects can be addressed at the most

senior industry levels; and• Actions will be taken to catalyse involvement of Senior Executives in all concerned companies.

It is noted that as from mid-October 1998, the UMTS IPR Working Group will operate within thestructure of a French registered Non-Profit Association and that Alcatel will continue to provide theSecretariat (contact Serge RAES at serge.raes@alcatel.fr or +33-1-4076-1109).

Annexes :1. Executive Summary of the Interim Report of the UMTS IPR WG2. Interim Report of the UMTS IPR WG (not printed)

T h i rd Generation Mobile Communications:

The Way Forw a rd for IP R

Executive Summary of the Interim Report of the UMTS IPR Working Group (September 1998)

IPRsept98FLASH 06/10/1998 14:07 Page 3

2

“There is nothing more difficult to take at hand, more perilousto conduct, or more uncertain in its success, than to take a leadin the introduction of a new order of things”.

The Prince, Niccolo Machiavelli (1469-1527)

The patent concerns associated with third generation mobilecommunications have not gone unnoticed in recent months. TheUMTS IPR (Intellectual Property Rights) Working Group, anindependent “grouping” of thirty three of the world's leadingwireless companies actively contributing in globalstandardization under the auspices of ETSI (Europe), ARIB(Japan), TIA (U.S.A.) and ITU, is proposing a novel way forwardfor IPR. A unique opportunity exists to minimise patentuncertainties within the framework of an industry wideagreement. In order to produce the positive result, it is necessarythat Senior Executives seize this opportunity.

The interim report of the UMTS IPR WG provides a positive andoptimistic view as to how best the global telecommunicationindustry could handle the IPR concerns. The title of the report“Third Generation Mobile Communications: The way forward forIPR” was not chosen by accident; it reflects a realistic assessmentthat an innovative but realistic approach could be implementedimmediately, if there is a strong commitment and will on the partof industry Senior Executives to compromise on a generallysupportable agreement.

The UMTS IPR WG challenges the industry to act now since theIPR concerns, unfortunately, will not go away ! With a bit ofpragmatism and realism, this goal is attainable.

What are the IPR concerns ? How can they be handled ? Do youreally understand the current situation ? Is your businessexposed ? Many questions which can only be answered once thereis an understanding as to what the IPR concerns are. There is agrowing uncertainty as to whether :

•the potential essential patent owners will in actual fact grantlicenses on the “standardised” technology, and whether

•the cumulative maximum license costs (royalties) are consistentwith the commercial viability of service provision, and whether

•the industry will establish timely a collective arrangement forthe cost effective management and administration of all theconcerned essential patents.

Introduction

IPR Concerns

Third Generation Mobile Communications: The Way Forward For IPR

IPRsept98FLASH 06/10/1998 14:07 Page 4

Third generation mobile systems are currently under definitionglobally based on the usage of state-of-the-art technologies. It istherefore not surprising that IPR considerations are ofparamount importance. Using patentable technology, of course,demands a price; an equitable balance must be obtained inrewarding the patent holders whilst, at the same time, preservingthe commercial viability of their usage.

The UMTS IPR Working Group was created arising fromidentified IPR concerns in the ETSI UMTS Terrestrial RadioAccess (UTRA) agreement of January 1998. An importantelement of this agreement was an undertaking to work togetherto provide guidelines for handling essential IPR. The total cost ofthe IPR needed for the UMTS standard(s) is key for catalysingrapid growth and achieving a cost effective solution for thirdgeneration mobile systems. Building on the foundation of the IPRpolicies of ETSI and other standards bodies, an approach isneeded to obtain clarity that IPR essential to the third generationmobile systems will be licensed to anyone wishing to obtain alicense and that the cumulative cost will be fair and reasonable.

This has been, and remains, the mission of the UMTS IPR WG.

There was a very strong commitment from all member companiesto find a commonly agreed approach which addressed not only theradio access interface but also the network aspects. Moreover,the defined approach, being of a generic nature, could naturallybe applied to other third generation mobile systems with suchfurther adaptation as may be then found necessary. The fact thatthe work is carried out in relation to a specific standard enablesparticipants to evaluate their position in concrete terms and notjust on basis of policy preferences, producing a constructive andpragmatic atmosphere.

What the UMTS IPR WG is not able to accomplish directly is theresolution of a situation in which a potential essential patentholder refuses to grant licenses on an implicated technology. AnIPR owner's basic right is to prevent usage of its patents on onehand and the framework of addressing any such issues in theoryor in actual fact is the domain of IPR policies of standard bodies,competition rules and Justice courts. UMTS IPR WG has notattempted to solve this intellectual and legal conundrum butrather to pave the way for a pragmatic approach for managingthe IPR dimension of a specific standard from the early stage ofits definition.

When parties consider the proposals and recommendations of theUMTS IPR WG, they need to ask themselves the question: howimportant is public standardization ? In today's world, standardsare only possible to achieve if the multiple players holdingintellectual property rights over solutions covered by thestandard play along. And effective, fair and neutral licensing ofthose IPR can only be achieved if the industry concerned workstogether to make that happen and forms a view on the economicsof patent licensing in the context of the promoted standard.

3

Goal of UMTS IPR WG

Scope

IPRsept98FLASH 06/10/1998 14:07 Page 5

The UMTS IPR WG has identified and substantially definedthree approaches for handling the IPR issues for third generationmobile systems:

•Option 1: ETSI IPR Policy (maintaining the status quo);

•Option 2: Patent Pool (based on the structure of MPEG 2 Pool);

•Option 3: Patent Forum (new Concept).

Both Patent Pool and Patent Forum (options 2 and 3) arecompatible with ETSI IPR Policy; effectively, they represent“ETSI +” approaches. The vast majority of members are seekingan “ETSI +” approach.

The Patent Pool is a joint licensing programme of essentialpatents - a so called one-stop-shopping clearing house with a capon the maximum royalties.

The Patent Forum is a framework within which bilateralagreements are negotiated in accordance with established fairand reasonable benchmarks and with a broad agreement on aroyalty structure compatible with a consensus view on thelicensing economics for licensees and licensors alike.

Both the Patent Pool and Patent Forum are supported by aunique scheme certifying essential patents, i.e. a PatentEvaluation Entity (PEE). A common PEE has been definedrepresenting a substantial step forward. Regardless of whichapproach is finally chosen, a PEE is essential.

Further work is underway to explore the possibility of creating acommon solution combining the best features of Patent Pool andPatent Forum (options 2 and 3). Such an approach would surelyattract a critical mass of participating companies.

The objective of arriving at a solution fu lly acceptable b yeverybody involved should not be primordial.

Outcome: Phase 1 (February - September 1998)

4

Patent Evaluation Entity

Patent PoolOption 2 Option 3

Common

Option 1

Standards making

“added value”

Patent Forum

ETSI IPR Policy (ETSI/ARIB)

STANDARDS BODY(IES)

IPRsept98FLASH 06/10/1998 14:08 Page 6

The UMTS IPR WG resolves to catalyse an Industry ReflectionPeriod (October - December 1998) during which time:

•The potential approaches can be further promoted and reviewedwith the objective of identifying a preferred industry choice; and

•The outstanding commercial/business related and economicaspects can be addressed at the most senior industry levels; and

•Actions will be taken to catalyse involvement of SeniorExecutives in all concerned companies.

As the result of this stage, consensus guidelines would beprepared permitting the UMTS IPR WG to fully define andimplement a working approach during the 1999 timeframe.

Before a workable industry-wide approach can be fully defined,an industry dialogue is required on the following key issues:

•What is judged to be a fair and reasonable maximumcumulative royalty rate ?

•There is a concern that past royalty rate practices fortelecommunications may not be appropriate anymore due to thesignificant increase in both the number of concerned essentialpatents and essential patents holders necessary to realise asystem. Are the traditional licensing notions still valid ?

•What is the permissible flexibility [desired by many parties,particularly those with a wide range of manufacturing interests]for a licensor to seek compensation in the form best matchinghis priorities, within the same field of technology or inneighboring or remote fields of application, in forms not relatedto intellectual property, while still satisfying antitrust andcompetition laws ?

•What factors are important and necessary, as judged by SeniorExecutives, to achieve a critical mass buy-in of companies.

The resolution of the IPR concerns is a shared responsibilitybetween the UMTS IPR Working Group and the industry SeniorExecutives. In the absence of consensus industry guidelinesaddressing some of the issues above, the UMTS IPR Wo r k i n gGroup cannot proceed any further.

The UMTS IPR Working Group has proposed the way forward foraddressing the IPR concerns in the context of third generationmobile systems. However, other distinct advantages arise if thisnew innovative approach could be agreed. A common workableindustry-wide approach would represent a generic regime formanaging complex multi-ownership essential patent portfoliosnecessary for realising global telecommunication networks.

5

Next step: Industry Reflection Period

Issues

Final remarks

IPRsept98FLASH 06/10/1998 14:07 Page 1

6

The positive outcome of the UMTS IPR WG activities, ascontained in the Interim UMTS IPR Working Group Reportpublished in September 1998, would not have been possiblewithout the cooperative support of all the member organisationrepresentatives. This report represents a pure product of pro-competitive teamwork.

The Chairman, Brian N. Kearsey, Alcatel, would like to expresshis gratitude to the three Rapporteurs (Shiho Igarashi [Sony],Dieter Reinhardt [Siemens], and Harry Ibbotson [Motorola]) andtheir active support « Associates » (Timo Ruikka [Nokia], HisashiKato [Mitsubishi], Hiroaki Horai [Matsushita], Bertram Huber[Bosch], Hidehiko Katayama, [Mitsubishi], Göran Nordlundh[Ericsson]) for advancing the work in a friendly and cooperativeambiance.

The Chairman also extends his thanks to his colleagues JohnBerres and Serge Raes for their various contributions andcomments throughout the period of our work: these were his «sounding post » for ideas and inspiration for moving the workforward together.

Finally, the Chairman would like to thank the behind the scenestaff: Bénédicte Bonnet, responsible for the operational logistics,and Charlette Perrin, who had the task of typing the final reportin association with Serge Raes.

The UMTS IPR WG is an independent grouping of the worldleading wireless companies.

The contents of this brochure is based on the Executive Summaryof the Interim UMTS IPR Working Group Report, published inSeptember 1998. Copies of the Interim Report may be requestedfrom the Secretariat. As from mid-October 1998, the UMTS IPRWorking Group will operate within the structure of a Frenchregistered Non-Profit Association. Alcatel will continue to providethe Secretariat at the following location:

Acknowledgement

About the UMTS IPR Working Group

Serge RAESUMTS IPR Working Group Secretary

c/o Alcatel

54, Rue La Boétie F-75008 PARIS - FRANCE

Tel: +33 (0)1 40 76 11 09Fax: +33 (0)1 40 76 59 12E-Mail: serge.raes@alcatel.fr

IPRsept98FLASH 06/10/1998 14:07 Page 2

T h i rd Generation Mobile Communications:

The Way Forw a rd for IP R

Interim Report of the UMTS IPR Working Group

September 1998

Couv. UMTS 06/10/1998 14:18 Page 2

An opportunity exists to do something innovative and positivefor the benefit of the global telecommunication industry. TheUMTS IPR Working Group is proposing a way forward foraddressing the “patent concerns” associated with thirdgeneration mobile communications. All that is required is a bitof old fashioned pragmatism and realism on the part of seniorindustry executives to collectively set the industry on a pathtowards the definition of a fully fledged operational approach.This goal is attainable: the fact that we made a significantbreakthrough in defining a single Patent Evaluation Entity (anEssential Patent Certifying scheme) and that two new innovativeapproaches are being proposed is a very good example of"when there is a will there is a way".

Before a workable industry-wide approach can be fully defined,an industry dialogue is required on several taboos issues whichare precisely articulated. A three month Industry ReflectionPeriod (October-December 1998) provides an industrymechanism for understanding the issues and the choicesavailable. In the absence of pro-active involvement of industrySenior Executives, the UMTS IPR WG cannot fruitfully progressbeyond the current stage. The resolution of the IPR concerns is ashared responsibility between the UMTS IPR WG and industrysenior executives. Therefore the industry deciders are invited toparticipate in the Industry Reflection Period.

The UMTS IPR WG has proposed a way forward for addressingthe IPR concerns in the context of third generation mobilesystems. However, what is so attractive in the current proposedscenario for resolving the UMTS “patent concerns” is that theapproach represents a generic regime for managing andadministrating very complex multi-ownership essential patentportfolios for global standardised communication solutions. Athird generation IPR solution.

This is too good an opportunity to miss - let’s go for it !

Brian N. KearseyChairman

UMTS IPR Working Group

1

Forward

UMTSsept98 06/10/1998 14:20 Page 1

2

UMTSsept98 06/10/1998 14:20 Page 2

3

ContentsPage

Forward 1

Executive Summary 5

1. Purpose of UMTS IPR WG 9

2. What are the IPR concerns 9

3. Membership: Openness and transparency 10

4. Scope, Work Programme and Modus Operandi 10

4.1. Scope 10

4.2. Work Programme: Objectives and Strategy 10

4.3. Modus Operandi 12

5. Disclosure of UMTS Essential IPR 14

6. Exploration of IPR Handling Solutions (Options): Background Considerations 14

6.1. Building on the Past: Guidelines 14

6.2. Three Potential Solutions 15

6.3. A Common Patent Evaluation Entity 16

7. ETSI IPR Policy - Essential Elements (Option 1) 17

7.1. ETSI IPR Policy - History 17

7.2. ETSI IPR Policy - Successes 17

7.3. ETSI IPR Policy - Why it works 18

7.4. Patent Pool/Forum: Observations 19

7.5. Conclusion 20

UMTSsept98 06/10/1998 14:20 Page 3

8. UMTS Pool (Option 2) 21

8.1. Pool key features: Summary 21

8.2. Pool Mission 21

8.3. Pool Form 22

8.4. Pool Contractual Arrangements 23

8.5. Pool Essential IPR Certification 23

8.6. Pool Licensing Principles and Royalty Rate 23

8.7. Pool Pros and Cons 24

9. UMTS Forum (Option 3) 26

9.1. Forum Key Features: Summary 26

9.2. Patent Forum Mission 27

9.3. Patent Forum Form 30

9.4. Patent Forum Legally Binding Multilateral Agreement 30

9.5. Patent Forum Agreed Licensing Principles 32

9.6. Patent Forum Essential IPR Certification 34

9.7. Patent Forum Pros and Cons 34

10. Patent Evaluation Entity Common to the Patent Pool and Forum 35

10.1 Objective 35

10.2 Structure 35

10.3 Patents and Standards 36

10.4 Evaluation Criteria 36

10.5 Procedure 36

10.6 Cost 38

11. Issues and Concluding Remarks 38

Acknowledgement 40

Annex 1: Membership of the UMTS IPR WG 41

Annex 2: Meeting Programme for Phase 1 44

Annex 3: IPR Disclosures 45

Annex 4: Antitrust/Competition Law Guidelines 46

Annex 5: Pool Adjustment Method (PAM) 50

Annex 6: Formation Procedure for Pool 52

Annex 7: Comparison of Patent Pool and Forum Features 53

4

UMTSsept98 06/10/1998 14:20 Page 4

5

Executive Summary

“There is nothing more difficult to take at hand, more perilousto conduct, or more uncertain in its success, than to take a leadin the introduction of a new order of things”.

The Prince, Niccolo Machiavelli (1469-1527)

The patent concerns associated with third generation mobilecommunications have not gone unnoticed in recent months. TheUMTS IPR (Intellectual Property Rights) Working Group, anindependent “grouping” of thirty three of the world's leadingwireless companies actively contributing in globalstandardization under the auspices of ETSI (Europe), ARIB(Japan), TIA (U.S.A.) and ITU, is proposing a novel way forwardfor IPR. A unique opportunity exists to minimise patentuncertainties within the framework of an industry wideagreement. In order to produce the positive result, it is necessarythat Senior Executives seize this opportunity.

The interim report of the UMTS IPR WG provides a positive andoptimistic view as to how best the global telecommunicationindustry could handle the IPR concerns. The title of the report“Third Generation Mobile Communications: The way forward forIPR” was not chosen by accident; it reflects a realistic assessmentthat an innovative but realistic approach could be implementedimmediately, if there is a strong commitment and will on the partof industry Senior Executives to compromise on a generallysupportable agreement.

The UMTS IPR WG challenges the industry to act now since theIPR concerns, unfortunately, will not go away ! With a bit ofpragmatism and realism, this goal is attainable.

What are the IPR concerns ? How can they be handled ? Do youreally understand the current situation ? Is your businessexposed ? Many questions which can only be answered once thereis an understanding as to what the IPR concerns are. There is agrowing uncertainty as to whether :

•the potential essential patent owners will in actual fact grantlicenses on the “standardised” technology, and whether

•the cumulative maximum license costs (royalties) are consistentwith the commercial viability of service provision, and whether

•the industry will establish timely a collective arrangement forthe cost effective management and administration of all theconcerned essential patents.

Introduction

IPR Concerns

Third Generation Mobile Communications: The Way Forward For IPR

UMTSsept98 06/10/1998 14:20 Page 5

Third generation mobile systems are currently under definitionglobally based on the usage of state-of-the-art technologies. It istherefore not surprising that IPR considerations are ofparamount importance. Using patentable technology, of course,demands a price; an equitable balance must be obtained inrewarding the patent holders whilst, at the same time, preservingthe commercial viability of their usage.

The UMTS IPR Working Group was created arising fromidentified IPR concerns in the ETSI UMTS Terrestrial RadioAccess (UTRA) agreement of January 1998. An importantelement of this agreement was an undertaking to work togetherto provide guidelines for handling essential IPR. The total cost ofthe IPR needed for the UMTS standard(s) is key for catalysingrapid growth and achieving a cost effective solution for thirdgeneration mobile systems. Building on the foundation of the IPRpolicies of ETSI and other standards bodies, an approach isneeded to obtain clarity that IPR essential to the third generationmobile systems will be licensed to anyone wishing to obtain alicense and that the cumulative cost will be fair and reasonable.

This has been, and remains, the mission of the UMTS IPR WG.

There was a very strong commitment from all member companiesto find a commonly agreed approach which addressed not only theradio access interface but also the network aspects. Moreover,the defined approach, being of a generic nature, could naturallybe applied to other third generation mobile systems with suchfurther adaptation as may be then found necessary. The fact thatthe work is carried out in relation to a specific standard enablesparticipants to evaluate their position in concrete terms and notjust on basis of policy preferences, producing a constructive andpragmatic atmosphere.

What the UMTS IPR WG is not able to accomplish directly is theresolution of a situation in which a potential essential patentholder refuses to grant licenses on an implicated technology. AnIPR owner's basic right is to prevent usage of its patents on onehand and the framework of addressing any such issues in theoryor in actual fact is the domain of IPR policies of standard bodies,competition rules and Justice courts. UMTS IPR WG has notattempted to solve this intellectual and legal conundrum butrather to pave the way for a pragmatic approach for managingthe IPR dimension of a specific standard from the early stage ofits definition.

When parties consider the proposals and recommendations of theUMTS IPR WG, they need to ask themselves the question: howimportant is public standardization ? In today's world, standardsare only possible to achieve if the multiple players holdingintellectual property rights over solutions covered by thestandard play along. And effective, fair and neutral licensing ofthose IPR can only be achieved if the industry concerned workstogether to make that happen and forms a view on the economicsof patent licensing in the context of the promoted standard.

6

Goal of UMTS IPR WG

Scope

UMTSsept98 06/10/1998 14:20 Page 6

The UMTS IPR WG has identified and substantially definedthree approaches for handling the IPR issues for third generationmobile systems:

•Option 1: ETSI IPR Policy (maintaining the status quo);

•Option 2: Patent Pool (based on the structure of MPEG 2 Pool);

•Option 3: Patent Forum (new Concept).

Both Patent Pool and Patent Forum (options 2 and 3) arecompatible with ETSI IPR Policy; effectively, they represent“ETSI +” approaches. The vast majority of members are seekingan “ETSI +” approach.

The Patent Pool is a joint licensing programme of essentialpatents - a so called one-stop-shopping clearing house with a capon the maximum royalties.

The Patent Forum is a framework within which bilateralagreements are negotiated in accordance with established fairand reasonable benchmarks and with a broad agreement on aroyalty structure compatible with a consensus view on thelicensing economics for licensees and licensors alike.

Both the Patent Pool and Patent Forum are supported by aunique scheme certifying essential patents, i.e. a PatentEvaluation Entity (PEE). A common PEE has been definedrepresenting a substantial step forward. Regardless of whichapproach is finally chosen, a PEE is essential.

Further work is underway to explore the possibility of creating acommon solution combining the best features of Patent Pool andPatent Forum (options 2 and 3). Such an approach would surelyattract a critical mass of participating companies.

The objective of arriving at a solution fu lly acceptable b yeverybody involved should not be primordial.

The UMTS IPR WG resolves to catalyse an Industry ReflectionPeriod (October - December 1998) during which time:

•The potential approaches can be further promoted and reviewedwith the objective of identifying a preferred industry choice; and

•The outstanding commercial/business related and economicaspects can be addressed at the most senior industry levels; and

•Actions will be taken to catalyse involvement of SeniorExecutives in all concerned companies.

As the result of this stage, consensus guidelines would beprepared permitting the UMTS IPR WG to fully define andimplement a working approach during the 1999 timeframe.

Outcome: Phase 1 (February - September 1998)

7

Next step: Industry Reflection Period

UMTSsept98 06/10/1998 14:20 Page 7

Before a workable industry-wide approach can be fully defined,an industry dialogue is required on the following key issues:

•What is judged to be a fair and reasonable maximum cumu-lative royalty rate ?

•There is a concern that past royalty rate practices for tele-communications may not be appropriate anymore due to thesignificant increase in both the number of concerned essentialpatents and essential patents holders necessary to realise asystem. Are the traditional licensing notions still valid ?

•What is the permissible flexibility [desired by many parties,particularly those with a wide range of manufacturing interests]for a licensor to seek compensation in the form best matchinghis priorities, within the same field of technology or inneighboring or remote fields of application, in forms not relatedto intellectual property, while still satisfying antitrust andcompetition laws ?

•What factors are important and necessary, as judged by SeniorExecutives, to achieve a critical mass buy-in of companies.

The resolution of the IPR concerns is a shared responsibilitybetween the UMTS IPR Working Group and the industry SeniorExecutives. In the absence of consensus industry guidelinesaddressing some of the issues above, the UMTS IPR Wo r k i n gGroup cannot proceed any further.

The UMTS IPR Working Group has proposed the way forward foraddressing the IPR concerns in the context of third generationmobile systems. However, other distinct advantages arise if thisnew innovative approach could be agreed. A common workableindustry-wide approach would represent a generic regime formanaging complex multi-ownership essential patent portfoliosnecessary for realising global telecommunication networks.

.

8

Issues

Final remarks

UMTSsept98 06/10/1998 14:20 Page 8

Third generation mobile systems are currently under definitionglobally based on the usage of state-of-the-art technologies. It istherefore not surprising that intellectual property right (IPR)considerations, primarily patents, are of paramount importanceto all concerned economic parties (particularly manufacturers andoperators). Using patentable technology, of course, demands aprice; an equitable balance must be obtained in rewarding thepatent holders (inventors) whilst, at the same time, preservingthe commercial viability of their usage. No mean feat in thecomplex domain of third generation mobile systems.

The UMTS IPR Working Group, an independent "grouping" of theworlds leading wireless companies (manufacturers andoperators), was created initially arising from identified IPRconcerns in the ETSI SMG consensus agreement in January 1998on the choice of the radio interface for the third generation mobilesystem (UMTS). An important element of the ETSI consensusagreement was an undertaking to work together to provideagreed guidelines for handling IPR essential to the UMTSspecification building on the foundation of the ETSI IPR Policyand that of other standards bodies. The rationale for this proposalis to limit the exposure of the proposed standard(s) to excessiveIPR demands. Moderate IPR conditions with cumulativemaximum costs set at a reasonable level is regarded as anessential ingredient for the commercial viability of the futuremobile services, consistent with the need to reward adequatelyessential patents owners. This has been, and remains, themission of the UMTS IPR WG.

9

1. Purpose of UMTS IPR WG

2. What are the IPR concerns

There is a growing uncertainty within the telecommunicationindustry globally as to whether :

• the potential essential patent owners will grant licenses onthe “standardised” technology,

• the cumulative maximum license costs (royalties) areconsistent with the commercial viability of service provision

• the industry will establish timely a collective arrangementfor the cost effective management and administration of allthe concerned essential patents.

The prime objective for addressing the IPR concerns is to createfavorable market conditions ensuring rapid growth of thirdgeneration mobile systems. Maximising royalty revenue is not agoal per se, neither is the usage of valuable intellectual propertywithout adequate compensation to the owners.

UMTSsept98 06/10/1998 14:20 Page 9

IPR is a shared concern for all concerned economic partiesworldwide. The UMTS IPR Working Group was created by thosecompanies signatories of the original ETSI UMTS consensusagreement Press Release with the explicit intention of providingan open and transparent vehicle for the stated mission. Theconvocation to the inaugural and subsequent meetings (seeAnnex 2) was publicized openly through the channels of severalwell known organizations i.e. ETSI, ETSI SMG, EC DG XIII,ETNO, ECTEL, GSM MoU Association. There was a statedobjective to broaden the membership; this was publicly madeknown via Press Releases. There are no restrictions onmembership.

Annex 1 provides a list of member companies and the names oftheir participating representatives.

10

3. Membership: Openness and transparency

4. Scope, work programme and modus operandi

There was a very strong commitment from all member companiesto find a commonly agreed "solution" or choice of "solutions"(options) timely, which addressed not only the radio accessinterface but also the network aspects. Of course, the relevant"radio" and "network" aspects would need to be precisely definedin relation to the agreed standard(s). Moreover, the definedoptions, being of a generic nature, could naturally be applied toother third generation mobile systems with little, if any, furtheradaptation i.e. solution universality for all IPR problems arisingfrom large and complex communication systems.

What the UMTS IPR WG is not able to accomplish directly is theresolution of a situation in which a potential essential patentholder refuses to grant licenses on an implicated technology(transforming water into wine is not part of our box of partytricks !). This type of situation cannot be regarded as an IPRconcern per se; the real issue is more profound and beyond ourrealm of competence. An IPR owners’ fundamental right is toprevent usage of its patents.

4.1. Scope

4.2. Work programme: Objectives and strategy

The work programme has been portioned into three distinctstages each with a planned deliverable.

❏ Phase 1 (Solutions Definition) : February - September 98 - Understand IPR “concerns”

- Review existing and explore new innovative potential solutions(options) to address “concerns”

- Propose candidate solution(s) (options)

- Identify, as far as possible, potential essential patent owners

- Identify blocking issues

- Propose an approach for a concrete implementation.

UMTSsept98 06/10/1998 14:20 Page 10

During Phase 1 no attempt was made to impose, or force a uniquesolution as this would have been premature and unfruitful.Industry collectively was judged not to be ready to make anoverall agreement.

The planned deliverable is the Interim Report of the UMTS IPRWG to be issued at the end September 1998 (approved by Plenaryon 3 September 1998).

❏ Industry Reflection Period: October - December 1998

This critical stage provides a collective opportunity for industry,not only the IPR experts, to share in the responsibility of creatinga climate of compromise and realism in arriving at a generallysupportable industry-wide solution. What can the business casesupport in terms of royalty rates ?

The plenary of the UMTS IPR WG noting that :

- Manufacturers are increasing, significantly, investment in therealisation of third generation mobile systems;

- Service operators and manufacturers are actively preparing forearly experimental/trial systems, test beds, etc.;

- Regional (ETSI, ARIB, T1, TIA, TTC) and global standar-dization organizations (ITU) are progressing timely thedefinition of a complete range of compatible third generationmobile systems requiring declarations of patent ownership;

- The regulatory framework is taking shape i.e. radio frequencyspectrum and licensing;

- There is increasing uncertainty as to whether

* the potential essential patent owners will indeed grantlicenses on the “standardised” technology; and

* the cumulative maximum cost (royalties) is consistent withthe business case i.e. are the past royalty rates still appro-priate given the large number of essential patent andessential patents holders.

- As service launch dates approach, the third generation mobilesystem “story” will become increasingly a priority political andindustrial issue at a senior level. Pragmatism and compromisewill be more in evidence.

Resolves to:

- Establish a three month so-called “industry reflection period”during which time:

* the potential solution(s)/option(s) can be further promotedand reviewed with the objective of identifying a preferredindustry choice; and

* the outstanding commercial/business related aspects can beaddressed at the most senior industry levels.

The UMTS IPR WG members, under the leadership of the newlyelected independent Chairman (as from 1st October 1998), wouldcatalyse the above process as a prelude to Phase 2 (Implemen-

11

UMTSsept98 06/10/1998 14:20 Page 11

tation). This would be achieved through personal interviews andvisits to key companies. An independent Chairman is able todiscuss, in confidence, with all the concerned parties as to whatthey are willing to accept as part of a compromise, pragmaticagreement.

The planned deliverable would be an “IPR Industry ReflectionPeriod” Report prepared by the Chairman outlining the currentstatus of negotiations, a proposal for a way forward for a practicalimplementation based on consensus guidelines and a phase 2work programme.

❏ Phase 2 (Implementation) : January - May 1999

Assuming the “industry reflection period” is productive andsuccessfully completed (not the exclusive responsibility of IPRexperts) a 5 month period is judged necessary to define a workingconcrete industry-wide solution. Beyond that timeframe, moredetailed drafting would be necessary.

If the outcome of the “industry reflection period” is such thatconsensus industry-wide guidelines are not attainable and/orthere is a “feeling” that a compromise is not in the air then phase2 should not commence.

During Phase 2 the UMTS IPR WG membership should compriseat least two types of representative :

- IPR competent persons

- commercially aware business responsible persons.

Phase 2 should not be the exclusive domain of IPR competentpersons; a partnership between the two types of persons is a prerequisite for success.

The planned Phase 2 deliverable would be a proposal for aconcrete working industry-wide agreement providing an efficientand effective vehicle for handling essential patents for which theowners are willing to grant licenses. The industry-wideagreement may/could be based on a multi-choice compatibleoption concept from which each company makes an appropriatebest choice.

There is no reasons as to why the approach could not be appliedto all third generation mobile systems.

12

4.3. Modus Operandi Phase 1

The Plenary of the UMTS IPR WG has met four times under theChairmanship of Mr. Brian N. Kearsey (Alcatel). The Plenaryestablished three Task Forces lead by Rapporteurs to evaluatefurther three potential options :

- “Patent Pool” : Ms. Shiho Igarashi (Sony)

- “Patent Forum” : Mr. Dieter Reinhardt (Siemens)

- “ETSI Policy” : Mr. Harry Ibbotson (Motorola)

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Several Task Force meetings were convened with an openinvitation.

The Chairman has convened two Rapporteurs meetings.

The overall meeting programme is given in Annex 2.

Press Releases have been made available subsequent to the Inau-gural, second and fourth Plenary meetings of the UMTS IPR WG.

Alcatel provided logistical and secretarial support during Phase 1.

Future operational cost will be met through a membership feelevied on each member company. The agreed provisional sum is7500 USD, covering the anticipated operational cost for theperiod September 1998 - May 1999, i.e. the “industry reflectionperiod” and Phase 2. The anticipated costs will be the fee forindependent Chairman, hosting meetings, secretarial support,expert consultancy services (if required), etc.

The current Chairman, Brian N. Kearsey (Alcatel) wouldrelinquish his position by 30 September 1998 (i.e. end of Phase 1)to make way for the election of a new “independent” Chairman(no affiliation to a manufacturer or operator). A Chairman(designate), John Macnaughton, was elected during the Plenaryof the UMTS IPR WG on 3 September 1998; this function takeseffect as from 1st October 1998.

Industry Reflection Period

During the Industry Reflection Period, a Coordination Team willbe responsible for directing the activities under the leadership ofthe Chairman. The composition of the Coordination Team is asfollows:

- Chairman: John Macnaughton (Consultant);

- Former Chairman: Brian Kearsey (Alcatel);

- Task Force Rapporteurs: Harry Ibbotson (Motorola), HisashiKato (Mitsubishi), Timo Ruikka (Nokia);

- Howard Goldberg (InterDigital);

- Göran Nordlundh (Ericsson);

- Howard Greenberg (Nortel);

- Koichi Yamada (Matsushita);

- Bertram Huber (Bosch);

- Ex Officio: Serge Raes (Secretary).

The Chairman would make personal visits to senior members ofkey companies, organisations, etc. to seek views and opinions.These visits would be substantially completed by the end ofOctober 1998. The Coordination Team members should worktogether on a regional basis to define a series of contiguousregional meetings with Senior Executives (deciders).

Phase 2

An internal structure will be defined by the Plenary reflecting thedefined objectives and tasks.

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UMTSsept98 06/10/1998 14:20 Page 13

The total cost of the IPR needed for the standard is key forcatalysing rapid growth and achieving a cost effective solution forthird generation mobile systems. Building on the foundation ofthe IPR policies of ETSI and other standards bodies, an approachis needed to obtain clarity that IPR which is essential to the thirdgeneration mobile systems will be licensed to anyone wishing toobtain a license and that the cumulative cost will be fair andreasonable.

In defining possible solutions addressing the IPR concerns thePlenary of the UMTS IPR WG established a framework ofguidelines within which a solution should function.

•The ETSI IPR Policy (and equally similar IPR policies of otherrelevant standards organisations) shall remain unchanged.

•Some additional mechanisms and arrangements beyond theETSI IPR Policy should be found and established (supported bythe vast majority of members).

•Such mechanisms and arrangements should be non-compulsory,even though it would be expected, for reasons of efficiency, thatas many parties as possible would participate

•Such arrangements and mechanisms should aim to satisfy, asfar as possible, some or all of the following objectives :

- reduce the uncertainty of the availability of patent licensesso that those who require a license can easily be obtained.

- reduce the royalties that would be payable if each essentialpatent holder licensed its patent(s) on its own.

- reduce the other transaction costs of licensees having tonegotiate and execute multiple licenses.

- reduce for essential patent holders the cost of providinglicensees thereby allowing licenses to be offered at a lowerprice.

- catalyse growth through favorable IPR regime i.e. objectivenot to maximise royalty revenues.

For ETSI members, there is a statutory obligation to declareessential IPR as defined in Articles 4 and 6 of the ETSI IPRPolicy (Annex 3). ETSI Collective Letter 1878 (disclosure ofessential IPR in relation to UMTS), 19 June 1998, specificallyaddresses the development of a global standard for the thirdgeneration mobile communication. Ways to retrieve pertinentinformation are documented in Annex 3.

For third generation mobile systems currently under definition bythe ITU and proposed by ARIB, ways to retrieve pertinentinformation are documented in Annex 3.

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5. Disclosure of UMTS essential IPR

6. Exploration of IPR handling solutions (options): Background Considerations

6.1. Building on the past: Guidelines

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Based on these considerations three potential solutions areproposed as a way to efficiently (in varying degrees) disseminatethe essential intellectual property rights to users of the thirdgeneration mobile systems technology.

Option 1: ETSI IPR Policy (maintaining the status quo)

Option 2: Patent Pool (based on the structure of MPEG 2 Pool)

Option 3: Patent Forum (new concept)

For the so-called “Patent Pool” and “ Patent Forum” solutions, thelicensing programme is defined to capture all the efficiencies thatcan come from joint licensing of complementary technologies,while incorporating many facets that should minimise thepossibility of competitive harm.

Of the three proposed solutions, one exist today (classical ETSIIPR Policy) while, the other two are new innovative approaches(“Patent Pool” and “ Patent Forum”) being both compatible andadding significant value to that of the ETSI IPR Policy.

The “ Patent Pool” and “ Patent Forum” are concrete innovativeimplementations totally consistent with ETSI IPR Policy (andthat of other major global and regional standards bodies). Options2 and 3 should be considered as « ETSI + » approaches, asillustrated in figure 1.

- introduce an independent-expert mechanism to ensure theportfolio contains only patents that are truly essential tothe standard(s) weeding out patents that are competitivealternatives to each other.

•Due care should be taken that relevant antitrust/competitionlaw constraints are not contravened (Note : The ETSI IPRdiscussion of 1986 - 94 is pertinent). The solution must be pro-competitive (Guiding notes in Annex 4).

•The proposed solutions should handle mandatory essentialpatents (but, of course, non-essential patents could be handledwithin the context of a voluntary extended mechanism).

•The objective of arriving at a solution fully acceptable byeverybody involved should not be primordial (hopefully,however, a significant number of concerned parties would “sign-up”).

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6.2. Three potential solutions

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In spite of the final approach chosen, there is a basic need toevaluate and certify those patents which are considered essential.A single entity has been defined to fulfill this function, i.e. aPatent Evaluation Entity (PEE). The PEE has been so defined tosupport both the Patent Pool and Patent Forum approaches.

F i g u re 1: The added value of the « ETSI + » appro a c h e s

At this juncture, the Plenary of the UMTS IPR WG hasintentionally given no indication concerning the most favoredsolution although it should be observed that the vast majority ofmembers require a solution which offers much more than theclassical ETSI IPR Policy. For each proposed solution there iseffectively a definition statement (what is the animal ?) alongwith associated remarks indicating some of the merits anddisadvantages. None of the proposals quantify royalty rate levels.

During the Industry Reflection Period (October - December 1998),all concerned companies should consider what is the bestoptimised industry-wide solution in the full knowledge of the prosand cons of each solution.

Which arrangement willoblige members to license

and control the costs overall

to have real direct impactand credible benchmarkre the inevitable outsider

Which solution will include major contributors to the standard ?

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6.3. A common Patent Evaluation Entity

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To date a significant number of standards have been completed byETSI under the provisions of the IPR Policy. Without doubt themost successful of these is GSM. It is true that the technicalfeatures of GSM were substantially established before the ETSIIPR Policy came into effect.

It is certainly true that the implementation and substantialproliferation of GSM took place when the ETSI IPR Policy was inplace.

IPR holders have complied with the provisions for the disclosureof their rights and of undertakings to license as required by thepolicy.

IPR holders have entered into license agreements consistent withthe Policy.

GSM has become effectively a de-facto world wide standard withmany participating in the market. On the contrary there issignificant evidence of companies entering the market unlicensed

The ETSI IPR Policy has the objectives of achieving the besttechnical solutions, reducing risks that investment in standardsis wasted and in achieving these objectives seeks to strike abalance between the needs of standardisation and the rights ofIPR owners.

The Policy acknowledges that IPR owners should be fairlyrewarded for the use of their IPR in ETSI standards.

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7. ETSI IPR Policy - Essential Elements (Option 1)

7.1. ETSI IPR Policy - History

The ETSI IPR Policy, initially implemented as an Interim Policyand last year confirmed as a Final Policy is the result of a verysignificant effort on the part of the members of ETSI,commencing in 1986 with the formation of the ETSI IPRCommittee and essentially concluding in November 1994 with thepassing by the General Assembly of the final version of theinterim policy.

The achievement of the Final Policy was not a simple exercise,nor was the path to its realisation smooth. While ETSI spentseveral years trying to put in place a more far reaching process,the current IPR Policy is substantially similar to that of otherstandardization bodies (e.g. ISO, ITU, ARIB).

During the negotiation of the policy, claims were made thatwithout provisions requiring the disclosure by IPR holders of amaximum royalty to be charged and without a provision tocontrol the maximum cumulative royalties to be set, it would notbe possible to determine beforehand whether a particulartechnical solution for a standard would be viable.

7.2. ETSI IPR Policy - Successes

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and either then seeking to negotiate licenses, or merely waitingfor an IPR holder to approach them.

Thus, in spite of the proclamations of the prophets of doom thatGSM could not succeed without an ETSI IPR policy being first inplace and without provisions to reduce the overall cost ofparticipation by controlling maximum and cumulative royalties,GSM has succeeded beyond initial imagination.

The biggest threat to GSM proved not to be IPR holders amongETSI members, who participate in the market, but from thirdparties and particularly those with no market presence. Suchcompanies would have no interest in joining any third generationmobile system (e.g. UMTS) royalty controlling scheme. Providedthey sign the current ETSI undertaking to license, there isnothing that could be done to prevent them licensing their rightsoutside any forum or pool arrangement at higher rates than poolor forum members receive, thereby placing the members of thearrangement at a disadvantage.

In the case of all other ETSI standards, it is believed that thelevel of success is purely a factor of the market and is uncon-nected with IPR.

7.3. ETSI IPR Policy - Why it works

The ETSI IPR Policy works because it provides a flexibleframework which allows fair and reasonable compensation to beobtained by an IPR holder for the use of that IPR in an ETSIstandard, while providing leverage against the rogue patentholder.

The value of the ETSI IPR Policy as the sole vehicle for thehandling of IPR issues relating to standards lies in its simplicity,its flexibility, its universal application to all ETSI members andstandards, its freedom from any objections under competition lawand the fact that the complex commercial issues of the details oflicenses and of compensation therefore, are placed where theybelong, at the center of bilateral negotiations between licensorand licensee.

A further substantial benefit of the ETSI IPR Policy is that iteffectively removes IPR issues from the center of focus in thepreparation of standards, such as UMTS. This was a central goalof the negotiations to establish the Policy.

Under the Policy, when an IPR is identified, which might beessential to a standard, an undertaking is sought to the effectthat licenses will be granted under fair, reasonable non-discriminatory terms. This undertaking is made to the ETSIDirector General.

Once the undertaking is provided, issues relating to those rightsare closed from ETSI point of view and the technical committeesengaged in drafting the standards are freed from furtherconsideration of those IPR rights. IPR considerations are

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UMTSsept98 06/10/1998 14:20 Page 18

The supporters of the ETSI IPR Policy believe that proposals toimplement a royalty controlling regime for UMTS, either in theform of a patent pool or a forum is not in the interests of rightholders or of ETSI members and will prove to be unworkable inpractice.

Where patent pools or other similar arrangements exist, it issometimes for specific technical solutions generated by a smallspecific grouping of participants, outside the remit and structureof a standards body and being all inclusive of holders of essentialIPR. However, exceptions do exist e.g. MPEG and DVB preparedwithin ISO and DVB Forum respectively.

From a right holder point of view, a UMTS right holder who joinsa forum or pool, would expect to get less for his rights than if hewere to hold rights covering another ETSI standard not subject tosuch an arrangement. The reasonableness of such a situation isopen to serious questions in the light of the overall objectives ofthe ETSI IPR Policy.

From the perspective of a user of the rights, a user utilising astandard in which IPR licensing is controlled by a pool or forum,might expect to pay less than a user of another standard havingno such arrangement, once again creating the possibility fordissent and division.

If any proposed arrangement is to be voluntary, what is theincentive to join? There might be a temptation within a technicalcommittee considering technical proposals, to consider whether ornot the submitting party is a member of the arrangement.

This would be a serious retrograde step, because IPR issueswould now be placed right at the heart of the work of technicalcommittees, in direct opposition to the intentions of the ETSI IPRP o l i c y. Furthermore, such action could itself be in directcontravention of ETSI own Policy and of competition law.

From a practical point of view, in order to make any such regimeviable, it is essential that all right holders participate. It isalready clear that this is unlikely to be achieved voluntarily andcould not be mandated. This would place participants at asignificant disadvantage with respect to IPR holders who chosenot to join.

In addition there are the practical considerations of makingdecisions as to the essentiality of an IPR. The use of independentoutside agencies would be costly. Who would cover these costs?Can a suitable independent agency be found? Many private firmshave clients who are interested ETSI members, thereby creatinga conflict of interest.

effectively removed from the technical committees and technicalproposals can be considered solely from a technical perspectiveand not based upon the cost of IPR.

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7.4. Patent Pool/Forum: Observations

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If the initial members of the pool or forum make the decisions,then this is also problematical. Who decides in respect of therights of initial members ? Having an interested group ofpotential competitors making such decisions, is fraught withdifficulty from both commercial and competition law points ofview.

If these arrangements are to be voluntary, then nothing preventsa party from joining the arrangement until such time asessentiality is established and then withdrawing to pursue anindependent licensing policy. Apparently this has happened in anexisting pool.

In addition to ETSI, a number of other standards bodies exist. InEurope there are CEN, CENELEC and ISO, while other countriessuch as the United States and Japan have there own standardssetting bodies. On a world level there is the ITU.

None of these bodies has provisions in its IPR rules for theestablishment of patent pools or of any other mechanism for thecontrol or apportionment of royalties. The only requirement is tocommit to license on fair, reasonable and non-discriminatoryterms.

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7.5. Conclusion

It is the conclusion of the ETSI IPR Policy supporters, that whileit is now, as it was at the time of the negotiation of the ETSI IPRPolicy, very easy and very tempting to make arguments, such asthose set out above, in favour of additional controls on royaltiesfor standards, there has never been produced any evidence thatany standard has not been successful, nor that any potentialparticipant has been prevented from participating in a market fora standard, because of the overall cost of obtaining the necessarylicenses under essential IPR.

The ETSI IPR Policy works because it provides a flexibleframework which allows fair and reasonable compensation to beobtained by an IPR holder for the use of that IPR in an ETSIstandard, while providing reasonable certainty of modest costs forimplementing a standard, together with leverage against therogue patent holder.

It is therefore submitted that the only satisfactory approach toIPR issues for the UMTS standard, is the existing and provenETSI IPR Policy. It is believed that the good faith application ofthis Policy meets all the criteria of the goals set out as theobjectives of the signatories to the amalgamation proposalapproved at the SMG Plenary Meeting in Paris on the 28th/29thJanuary 1998. Any other solution is believed to be fraught withinsurmountable practical and legal problems.

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The UMTS Pool approach provides a joint licensing programme ofessential patents - a so called one-stop-shopping clearing house forresolving the minimum necessary IPR issues through a voluntarycoordinated approach. The Pool exhibits the following features :

•owned by those who wish to participate i.e. voluntary

•certifies essential IPR by independent experts

•licenses issued under fair and reasonable standards terms in anopen and transparent way

•to any party on a non discriminatory basis

Confers the following benefits :

•effective and efficient arrangement for commercialisation ofstandard when the number of essential patents and marketparticipants are significant, and yet, the IPR cost is presumed toimpede market take-off and growth

•provides certainty of IPR costs through a standard joint packetlicense (royalty rate reviewed periodically).

•provides licensees with a single agreement instead of several i.e.avoid numerous bilateral negotiations and licenses

•saves significant effort for essential IPR holders in negotiatingand concluding licenses with third parties

•assist in process of moderating downwards the cumulativepercentage/amount of license fees while still leaving theessential IPR holder with a fair and reasonable reward

•exclusive control over essential IPR is not exercised i.e. IPRholders remain free to conclude agreements also on a bilateralbasis with third parties of their choice

•although certain parties may not wish to join the pool the neteffect of its existence, however, will reduce the number ofindividual IPR problems for any license seeking party

Being similar in structure to the operative pro-competitive MPEG2 Pool, the UMTS Pool is believed to satisfy antitrust/competitionlaw in the US, Europe and Japan. (NOTE: MPEG 2 is awaitingnegative clearance from EC).

❏ Promotion of the UMTS Standard :

The Pool licensing terms should be determined by the essentialpatent holders; however, for the commercial success of the UMTSstandard the Pool’s objective is to provide the most reasonableterms for suppliers. Thus :

•there should be an understanding amongst the Pool licensorparticipants that the primordial objectives is to catalyse UMTSmarket growth rather than maximise royalty revenue (but, ofcourse, essential patent owners should be adequately rewarded).

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8. UMTS Pool (Option 2)

8.1. Pool Key features: Summary

8.2. Pool Mission

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The pool constitutes the following features :

•Evaluation Organization (EO) : An organization able to evaluateessentiality of a patent (independent from licensors andlicensees).

•Licensor Companies (LC) : A licensor company is an individualand/or any entity owner of essential patent(s) wishing to jointhe Pool. Any party can become a LC, at any point in time,under the same terms and conditions applied to other LC if theyown essential patent(s).

- The LC grants to the Licensing Agent (LA) a right to non-exclusively sublicense LC essential patents under termspre-determined by all the LC.

- The LC is free to joint or leave the pool at any time but thelicense to the pool remains.

•Licensing Agent (LA) : An entity which sublicenses the pooledpatents (independent from LC and Licensees). The LAoperational costs are financed through a small commission onthe collected royalties.

- The LA collects royalties for redistribution to the LC andperforms all the administrative work (including tax mana-gement issues) on behalf of the LC.

- The LA makes any necessary royalty adjustments inrelation to cross license arrangements external to the pool.Annex 5 defines Pool Adjustment Method (PAM).

The procedure for the formation of the Pool is outlined in Annex 6.

•the Pool membership should attain a critical mass of, at least 50 %, preferably 80% of the essential patent holders

❏ Establishing of l icensing arrangement (in accordance with ETSI Policy and competition law):

The pool is an arrangement designed to implement explicitlylicensing under fair and reasonable terms in accordance with theETSI IPR Policy. By ensuring that the Pool acts in a transparent,reasonable and non-discriminatory manner anti-trust andcompetition law issues can be satisfied. Moreover, the pool leavesthe discretion exclusively to the essential patent holders whetherto joint the pool and to decide what license terms should beadopted.

❏ Provision of credible license programme :

By only licensing certified essential patents with defined openand transparent standard terms significantly reduces time andefforts in negotiating licensing agreements for all actors.

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8.3. Pool form

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The Pool Agreement Structure comprises three distinct elements.

❏ LC Agreement :

Defines rules amongst LC (e.g. royalty distribution, pool modusoperandi, procedure to add a new LC, etc.).

❏ LC-LA agreement :

Defines rules whereby LC grant right to LA to sublicense theiressential patents.

❏ LA-Licensee Agreement :

Defines rules whereby LA grants sublicenses of LC essentialpatents.

8.4. Pool Contractual arrangements

8.5. Pool Essential IPR Certification

The key features of an evaluation and certification mechanismare given below :

•Only potential Pool and Forum members have the right tosubmit patents and get the benefit of certification.

•Only Pool or Forum certified IPR taken into account in Pool orForum royalty structure.

•Priority evaluation given to patents issued in followingcountries (European countries, US and Japan).

•Two stage evaluation of essentiality to reinforce certainty.

•Evaluation cost is borne by patent owner (evaluatee).

•Right of applicant or any other Pool or Forum member to appealexpert decision.

The following benefits accrue:

•The IPR holders position is strengthened by positive certifi-cation.

•« Others » by excluding non-essential IPR.

Section 10 provides a definition of a “Patent Evaluation Entity”(PEE) supporting the Pool and the Forum.

8.6. Pool Licensing principles and Royalty rate

The responsibility to determine license terms remains with theessential patent owners. Nevertheless, some initial ideas aregiven below as being fair and reasonable.

❏ Structure/terms•Applies to Technically Essential Patents (TEP) as defined in the

ETSI IPR Policy.

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❏ Pool versus bilateral solution

➪ Pros- reduction of total license cost, shorter time to obtain license

and, potentially, a reduction in cumulative royalties.

- facilitates extension of UMTS standard both geographicallyand technically.

- most of the administrative burden done by Licensing Agent.

- favorable benchmark impact even for non-members.

- easy access makes pool attractive for licensees; therefore,anticipated increase in number of licensees who would nototherwise license.

•License permits the right to make, have made, sell, dispose, useproducts and practice methods.

•License conditions apply for five years but renewal is possiblefor a further five years.

•License requested to commit to license essential patents underf a i r, reasonable and non-discriminatory terms in accordancewith pool terms (Grant back).

•LC may withdraw their own patents from the Pool, specificallyagainst any party which declines to license its patents related toUMTS products (assertion of patent rights).

•Licensee has an option to request bilateral negotiations with LCoutside of the Pool.

❏ Licensed products and royalties•Terminals : fixed or percentage rate per unit.

•Base station : fixed or percentage rate per channel.

•Intermediate products (e.g. IC chips, board): royalty free ifincorporated in a licensed product.

•Testing Equipment : fixed or percentage rate per unit royalty.

The LC in establishing an equitable royalty rate should considerthe following factors :

•Establish an economically viable role to encourage manyparticipants in the UMTS market.

•Adopt a simple royalty scheme incorporating a volume discountarrangement.

•Maintain same royalty rate for the initial term of the licenseagreement regardless of both the number of LC and pooledpatents.

•Guarantee the maximum royalty rate increase for the renewedterm of the license agreement (e.g. not more than 25%).

For discussion purposes only, a proposal is made that thecumulative maximum royalty rate is not more than 50% abovethe « Standard and Acceptable » rate for a single licensor.

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8.7. Pool Pros and Cons

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- protects licensees confidential sales information.

- bilateral agreements are not excluded (pool provides aplus).

- guarantees of fairness.

➪ Cons- cost for the Evaluation Organization (EO) and the Licen-

sing Agent. In a bilateral negotiation, however, much timeand effort are required to conclude one agreement; theaggregated time and cost devoted to a single negotiation ina Pool puts the LA operating cost into perspectives.

- accepting a « cap » will reduce inevitably the royalty inco-me for patents holders.

- membership of the Pool effectively removes the right ofessential patent holders to leverage their portfolio forcompetitive advantage (e.g. blocking of certain marketplayers, advantageous unilateral considerations). Basically,essential patent holders are being requested to give priorityto the creation of a growth UMTS market.

❏ Pool versus Forum

➪ Pros- most of the pros of 8.7a apply since Forum is a type of

bilateral agreement approach. Annex 7 contains a moredetailed comparison of the features.

- the Pool can be designed to satisfy anti trust and compe-tition law in major countries/regions (based on MPEG 2Pool) whereas, for the Forum, the situation is less clear.

- the Pool royalty rate is proposed to be constant regardlessof the number of licensors or pooled patents whereas, theForum sets a maximum royalty rate for each licensor butthe cumulative royalty rate is open.

- the simplified Pool structure facilities coordinated changeswhen unforeseen situations arise (e.g. technical evolution ofUMTS necessitating a review of the licensing terms).

➪ Cons- the Pool is less flexible and does not accommodate non-

essential patents.

- the pool requires a minimum critical mass of essentialpatent holders (i.e. greater than 50%).

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No UMTS Market

No Business

No Royalty Revenue

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The UMTS Forum approach provides a multilateral IPR solution.M o r e o v e r, the Forum approach is based on c e rtain fundamentalc o m m i t m e n t s reflecting the commitment to an open worldwidestandard and its successful adoption and deployment. Thesecommitments include:

•Parties joining the Forum agree to license their Essential IPR toall comers. This reduces the uncertainty - related to potentialunavailability of licenses - that remains under all majorstandards bodies' IPR policies.

•Parties joining the Forum agree to a certain benchmark forlicensing terms and royalty rates. This significantly improves thevisibility of potential cost of licenses to Essential IPR for anygiven manufacturer. It also provides useful information and apoint of comparison for licensing discussions vis-à-vis any 3rdparties licensing their IPR outside the Forum. For licensors andlicensees, this is expected to greatly reduce the need forextended negotiation.

•A party receiving the benefit of the Forum licensing approach asa licensee also becomes a member of the Forum thus providing fulland contractually committed reciprocity regarding availabilityof licenses and licensing terms.

•The Forum approach provides both (1) for certain flexibility formembers to tailor their licensing to the bilateral situations athand, and (2) for p rocedural safeguard s to ensure that thisflexibility is not abused either against a prospective licensee oragainst a prospective licensor.

•In common with the IPR Pool approach, the Forum wouldsupport an Essential IPR certification system for members. Thissystem provides - for licensees - significantly increased visibilityof the issue of which patents in fact are truly Essential forUMTS. For licensors it provides an authoritative (although notlegally conclusive) endorsement of the strength of eachEssential IPR holder's portfolio. In this manner, inflated claimsof Essential IPR portfolios can be sized up and parties withEssential IPR can concentrate upon carrying out their licensingprogram, without a repetitive need for establishing thecredentials of their patents offered for licensing.

The inherent flexibility of the IPR Forum approach sets it apart froma patent pool. This flexibility will significantly broaden them e m b e r s h i p of the arrangement, enabling the Forum to reach acritical mass that actually brings about a satisfactory clarity andpredictability of licensing for UMTS. This, in turn, will encouragea large number of players to invest in product and servicedevelopment and thus provide a favorable growth andcompetitive development cycle for the entire industry.

This broadening of the membership is achieved by theintroduction of the ability to tailor a given licensing proposal tothe actual bilateral relationship of the parties concerned, asopposed to a fully fixed set of terms and conditions stringentlyrestricted to UMTS-Essential IPR and nothing else. In today's

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9. UMTS Forum (Option 3)

9.1. Forum Key features: Summary

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❏ Reduce uncertainty:

The Forum is designed to reduce uncertainty among the industry,operators and users about

- availability of licenses i.e. to minimize the blocking threat (see subsection 9.4)

- the total IPR cost (see subsection 9.6)

in relation to the standard.

The uncertainty can not be totally removed, as it is impossible toguarantee participation of, for example, patent holders whose soleinterest is to maximize their licensing revenue. However,establishing a Forum as described here also influences themarket activities of third parties as the Forum licensingarrangement would establish a credible benchmark effect of whatis considered an appropriate level of royalty and other terms inthe particular industry.

complex global marketplace, companies – particularly system,equipment and semiconductor manufacturers – are reluctant to losethe control of their own destiny that necessarily is involved in a morecentral ized licensing appro a c h . At the same t ime, majormanufacturers are prepared to support the standard by grantingthe commitments described above. Such commitments should beharnessed for the benefit of the entire industry.

The proposed approach is a novel and a flexible one. Therefore wehope and believe that it can be further developed to give a fairbalance between the many interests and to foster the success ofthe next generation mobile communications standard. But wedare hope that the concept, as herein presented is sufficientlywell articulated now to assist the parties concerned to evaluatethe alternatives in front of them.

Further work is required to bring this novel approach to anoperative agreement. Further analysis and collaborative effort isrequired for:

•licensing safeguards

•resolution of a fairness-of-licensing question

An initial view is that a fallback solution should be provided for,to encourage members to present eminently acceptable licensingproposals and not to frivolously contest proposals received, that iswithout good justification. But clearly the matter requires in-depth discussion and possibly some yardsticks of “fairness” inorder to give members the comfort that they may need.

The Forum is concessionary and pro-competitive to fosterstandards success.

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9.2. Patent Forum Mission

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The reduction in uncertainty is a factor of two aspects:

- the predictability of the outcome as regards availability andterms of licenses under Essential IPR; and

- the ability of the arrangement of attracting a maximum numberof holders of Essential IPR.

The main significance of the Forum approach is in its ability toattract a broader group of Essential IPR holders as severalmanufacturers holding Essential IPR may be reluctant to joint apatent pool which does not offer the flexibility that the Forumpermits.

❏ Implement licensing:

The Forum creates licensing obligations on its members(signatories), ensuring that licenses are indeed available fromthose parties within a known framework of licensing conditions.This is achieved through contractual agreement to license andcontractual agreement to adhere to the licensing principles of theForum. In the case of simple licensing situations of no coun-tervailing licensing interest (grantback or other compensationsought in the bilateral relationship), much of Forum licensingwould occur under a known framework, even utilizing a modellicense agreement recommended by the Forum towards itsmembers.

The evaluation and certification of Essential IPR – andpublication of lists of parties whose patents are certified asEssential – would enable parties to identify each other andproceed to licensing.

❏ Predictability and acceptable level of total cost of licenses:

The Forum would include an agreed structure of royalties, basedon the number of certified Essential patents that a given holderhas. The royalty structure would be based on e.g. followingelements:

- number of holders of Essential patents

- sizes of Essential IPR portfolios

- the total cumulative cost that is considered acceptable in theindustry

❏ Procedure for evaluation and certification of Essential IPR:

The Forum includes a system that permits a party havingpotentially Essential IPR to have them examined by competenttechnical and patent expert in order to determine whether it is infact Essential (see Section 10). There is an appeal procedure tosafeguard the interests of both the IPR holder (against a ruling of"nonessential") and others (against a ruling of Essential) in casethe ruling is in dispute.

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This procedure eliminates non-Essential patents from the processand thus offers a benefit to licensees who know which patentsthey actually need licenses to. It offers a benefit to licensorswhose certified Essential patents are thereby strengthened andlicensing effort is consequently more successful. For that reason,certification should be only available to parties who accept thelicensing obligations of the Forum framework.

❏ Flexibility:

Forum would permit a licensor to offer either a straight royalty-bearing license under the Forum royalty structure or,alternatively, a fair and reasonable offer for a license which maythen include some elements of compensation other than theForum royalty structure, as may be warranted by the particularrelationship and circumstances in the bilateral relationshipbetween that particular licensor and that particular licensee.This flexibility is absent from the patent pool and is perceived tobe a significant deterrent for manufacturers to join a patent poolarrangement. Thus the flexibility aspect of the Forum is the mostimportant item (in comparison to a patent pool) to attract a largernumber of Essential IPR holders than a patent pool would.

❏ Procedure for determining fairness of non-monetary terms proposed:

If licensors would have unlimited flexibility, that would pose aconcern for potential licensees regarding fairness of thealternative terms requested. To address that concern, the Forumhas an appeal procedure (for instance in international neutralarbitration), enabling a licensee to contest the offer of thelicensor. Therefore, licensees would be protected against excessivenon monetary compensation requests.

❏ Relative cost of the arrangement:

A Forum arrangement would involve a minimum amount ofcentralized administration, limited to certain secretarial andrecordkeeping tasks and administration of the evaluation expertsand permitting members to make use of the appeal procedures forpatent certification and for licensing. This administration isenvisaged to be significantly less than in a patent pool.

The licensing burden on parties is reduced by the clarity providedby the licensing framework. The economy of licensing is notachieved at the same level as in a centralized "one-stop-shop" of apatent pool, which however is only relevant if the patent pools isable to attract an equal number of Essential IPR holders as aForum would.

❏ Timing:

Achieving an operative Forum arrangement is not a simple task.The documentation will be challenging as will be achieving

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sufficient consensus on some of the substantive issues. A keyissue of substance is the overall total cost of royalty as theexercise is at risk of becoming academic if there is no consensuson the royalty rates that the Forum arrangement should aim at.

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9.3. Patent Forum form

The Forum constitutes the following core facilities:

•Legally binding multilateral agreement

•IPR evaluation and certification procedure

•Agreed licensing principles

•Agreed maximum royalty system

•Appeal and mediation mechanisms for evaluation and licensing disputes

•Adaptation and coordination

The core facilities are described in further detail hereafter.

9.4. Patent Forum legally binding multilateral agreement

❏ Legally binding agreement:

The major reduction of uncertainty (regarding potential blockingthreat) is achieved by obtaining an irrevocable undertaking tolicense, as under standards bodies' rules IPR holders, evenmembers of standards bodies do not have an obligation to licensetheir Essential IPR.

A d d i t i o n a l l y, obtaining a contractual agreement to the royaltystructure and other aspects of the licensing framework of theForum reduces the uncertainty about cost.

Potential licensees get significant comfort from the existence of aForum arrangement. A signatory to the Forum can be required togrant licenses on terms agreed to by that party and in case of abreach of such licensing obligations, patent enforcement (e.g.injunctions) are unlikely to be available against a licenseeinvoking the Forum conditions.

❏ F o rum fosters standard adoption and has impacts outside theForum as well:

In comparison to no comparable multilateral agreement onEssential IPR licensing, the Forum provides a concessionary setof terms and conditions to parties accepting similar obligations.The Forum thus is pro-competitive and increases acceptance andusage of the standard.

Additionally, to establish that by agreeing to certain burdens andrestrictions on licensing one can achieve significant benefitspermits members to justify a different approach vis-à-vis partieswho would not wish to accept Forum obligations, thus inducingfurther parties to join. Also, this would remove the concern

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sometimes expressed by parties regarding a scenario whereanother party would accept an advantageous licensing offer aslicensee but seek to receive a much higher level of compensationin the reverse direction.

❏ Irrevocable undertaking to license:

Under Forum rules any IPR found to be Essential and controlledby the party while a member of Forum is subject to the licensingobligations. This ensures that once a party signs the Forumagreement and is able to receive the benefits of Essential IPRcertification and of the Forum licensing undertakings, that partymust accept that all Essential IPR of that party are licensable toother Forum members under the same framework.

❏ Reciprocity:

Forum obligations and rights are applicable only in respect of aparty, which has signed the Forum agreement. Thus members arenot obliged to offer the same terms of licenses to parties whodecline to become members of the Forum. As membership of theForum involves significant concessions in favor of other members,the licensing to non members may be different without thatamounting to unjustified discrimination. Also, only a member ofthe Forum can obtain the certification of that party's patents asEssential.

❏ Global Affiliates covered:

A party is only accepted as a member if it can ensure thatmembership covers all of its global Affiliates. Affiliates areentities under common control with a Forum signatory. "Control"means over 50 % of share voting or equivalent power overmanagement. All Affiliates become members of the Forum bothas licensees and as licensors and all their Essential IPR becomesubject to the Forum obligations.

❏ Definitions necessary:

The standard is defined by specific reference to a document.Essential IPR are defined by reference to the standard. LicensedProducts also shall be determined by reference to the standard.

❏ Voluntary, nonexclusive nature of Forum:

No party is compelled to become a member of the Forum and thearrangement is nonexclusive: nothing in the arrangement willprevent any party to grant or to obtain licenses outside theForum.

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❏ IPR licensed:

All Essential IPR controlled by party and its Affiliates are subjectto the licensing obligations.

❏ Rights:

The license rights shall include the right to make, sell/disposeand use products and practice methods as set forth in theStandard.

❏ Worldwide scope:

The definition of a party (global Affiliates), the IPR included inthe arrangement and rights granted are worldwide in scope.Where all of the licensed activities of a party occur in territorieswith no Essential IPR of Licensor in force, such activity is exemptfrom the royalty.

❏ Grantback:

As each member is required to license its Essential IPR, anylicense under the Forum rules will involve a grantback of the

❏ Resignation:

A member may resign from the Forum at any time. Resignationdoes not however affect licensing obligations existing at time oftermination of membership and therefore all Essential IPR thatthe party had already while a member of the Forum continue tobe subject to the licensing obligations of that member.

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9.5. Patent Forum agreed licensing principles

~ Each member gives up any right to withhold licenses~ Each member commits to the maximum royalty structure in effect agreeing

to observe the total picture of other known Essential IPR rather than that party’s IPR in isolation

+ Each member gains rigth to have his Essential IPR certified by respectedexperts

+ Each member gains rigth to challenge a certification of Essential IPR+ Each member gains rigth to have licensing proposal reviewed for balance

(and rigth to straight Forum royalty-level license if appeal granted)= By joining the Forum, a licensee is entitled to demand a license from Forum

members having Essential IPR on terms not guaranteed to nonmembers= By joining the Forum, every licensee commits to grant licenses of Forum

terms and at Forum royalty rates as a potential licensor

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Essential IPR of the other party. The Forum royalty structurewould apply in both directions of a bilateral license includingEssential IPR on both sides.

❏ Royalty structure:

Any Forum license would adhere to either:

•Forum royalty structure (based on certified Essential IPR); or

•Fair and reasonable other compensation

The possibility of requesting other compensation than the Forumrate of royalty provides the flexibility that will enable manymanufacturers to join the Forum and thus will achieve a signifi-cantly wider membership than a patent pool would have.

❏ Other compensation between the licensor and licensee :

Forum principles affirm right of licensor to request non-monetaryconsideration as significant in value as the grant of the EssentialIPR licenses to licensee.

As the nature of such other compensation will inevitably bedependent on the specific circumstances and bilateralrelationship of the particular licensor and licensee, it is notpossible to classify what forms of non-monetary compensation ispermissible and in what circumstances. Such compensation mustbe fair and reasonable and must reflect a balance between theparties, so that what is requested from the licensee is of similarvalue to the licensor as is the value of the license offered to thelicensee.

❏ Right to appeal:

In order to protect the licensee and to provide a certainty ofgetting licenses without undue delay and complication, a licenseethat is offered a license with "other" forms of compensation hasthe right to have the reasonableness and balance of that proposalreviewed by a panel of licensing experts. If the experts concludethat the offer of the licensor did not meet the criteria ofreasonableness and balance, the licensor then has an obligationto grant a license under the Forum royalty structure and withoutrequiring any other forms of compensation.

This is a significant incentive for licensors not to presentexcessive requests for other compensation. If, on the other hand,the experts conclude that the offer is a reasonable and a balancedone and the licensor is adhering to the Forum principles, thelicensor is entitled to pursue that licensing approach with thatlicensee.

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The key features of an evaluation and certification mechanismare given below:

•Only potential Pool or Forum members have right to submitpatents and get the benefit of certification.

•Only Pool or Forum certified IPR taken into account in Pool orForum royalty structure.

•Priority evaluation given to patents issued in followingcountries (European countries, US and Japan).

•Two stage evaluation of essentiality to reinforce certainty.

•Evaluation cost is borne by patent owner (evaluatee).

•Right of applicant on any other Pool or Forum member to appealexpert decision.

The following benefits accrue:

•The IPR holders position is strengthened by positivecertification.

•« Others » by excluding non-essential IPR.

Section 10 provides a definition of a “Patent Evaluation Entity”(PEE) supporting the Pool and the Forum.

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9.6. Patent Forum Essential IPR Certification

9.7. Patent Forum Pros and Cons

❏ Forum versus no multilateral solution

➪ Pros- much reduced blocking risk

- control of total cost, terms within range

- benchmark impact even for non-members

- removal of dubious “essentiality claims”

- certified IPR stronger

- safeguards for licensees

- promotion of global solution

➪ Cons- some administration effort required

- concessions by licensors & licensees

- accepting a « cap » will reduce inevitably royalty income forpatent holders.

❏ Patent Forum versus Pool

Annex 7 contains a more detailed comparison of the features.

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➪ Pros- flexibility - no “loss of control of own destiny”

- no conflict with existing licenses

- much more attractive to manufacturer-licensors

- light administration, minimal shared costs

- licensees become members, bound to conditions

➪ Cons- no “one stop shop” for licensors, licensees

- cumulative royalty outcome not as clear as pool

- some appeals, some loss of time in licensing

The Patent Evaluation Entity (PEE) performs the Evaluation andCertification1 of Essential Patents.

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10. Patent Evaluation Entity common to the Patent Pool and Forum

10.1. Objective

The purpose of the evaluation procedure is to select patentswhich are technically essential for the UMTS standard(s). Byendorsing the essentiality of each patent, the Pool/Forummembers (licensors and licensees) receive the full benefits of thePool/Forum arrangements. On this basis the evaluationprocedure is considered to provide a legitimate, fair andtransparent mechanism.

1 While this appears to be a lawful obligation for a patent Pool, no such requirement exist on the Patent Forum, despite the fact that such aPatent Evaluation Entity would be highly desirable.

10.2. Structure

❏ Evaluation Organisation (EO)

The Evaluation Organisation (EO) is the supreme organestablished by the Pool/Forum members.

❏ Evaluation Counsel Body (ECB)

The EO establishes an Evaluation Counsel Body (ECB) for eachcountry and/or region in which the potentially essential patentsare registered. The ECB comprises an odd number of Evaluators(minimum three), one of whom is nominated as the speaker.

These Evaluators should be neutral and independent (as far aspossible) by the Pool/Forum members.

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F i g u re 2: Stru c t u re of the common Patent Evaluation Entity

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10.3 . Patents and Standards

The patents submitted by the Pool/Forum members must begranted patents which have been issued by a patent authoritywith substantive examination. Patent applications aredisregarded.

The subject(s) of the standard(s) specification must be preciselyidentified by EO as standard work progresses.

10.4. Evaluation Criteria

The evaluation criteria is the technical essentiality. However, ifprior art is known to the ECB which highly likely anticipates thepatent, the issuance of a Certificate should be refused.

10.5. Procedure

The evaluation procedure provides two distinct steps:

•Evaluation of essentiality (Evaluation procedure)

•Re-evaluation of the outcome of the Evaluation procedure (Re-evaluation procedure)

The two step procedure provides a more accurate endorsement ofpatent essentiality.

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F i g u re 3: Patent Evaluation Pro c e d u re

❏ Evaluation Procedure

The Evaluatee (person or entity submitting a potentially essentialpatent) compiles the following material for presentation to theEO:

•The Evaluatee admits in writing that the submission does notconstitute a notice of infringement and agrees to waive its rightto request remedy based on any acts related to this evaluation.

•Patent specification and file wrapper.

•Documents designating the related part of the standardspecification.

Product categories need to be defined (e.g. mobile station, basestation, measuring equipment, etc.).

•Claim chart comparing potentially essential patent with thestandard specification and any supporting explanatorydocuments.

The respective ECB makes the following assessments:

•whether submitted patent is essential to the standard(s) asdefined in subsection 10.3 (if patent is highly likely to be valid)

•to which product categories the patent applies

The ECB reports findings to the EO. If the result is positive, theEvaluatee and the Pool/Forum members are informed and thePool/Forum members get access to the files and results.

If Re-evaluation procedure is not invoked, the EO issues aCertificate endorsing essentiality of patent together with anidentification of the applicable product categories.

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The resolution of the IPR concerns is a shared responsibilitybetween the UMTS IPR Working Group and the industry SeniorExecutives. In the absence of consensus industry guidelinesaddressing some of the issues below, the UMTS IPR Wo r k i n gGroup cannot proceed any further. The UMTS IPR Wo r k i n gGroup is therefore proposing that an industry dialogue takesplace in respect to the following key issues:

➪ What is judged to be a fair and reasonable maximum cumu-lative royalty rate ? Can Senior Executives establish a viewbased on the economics of a business case ?

➪ There is a concern that past royalty rate practices for tele-communications may not be appropriate anymore due tothe significant increase in the number of both concernedessential patents and essential patent holders necessary torealise a global network or system.

For example, in the case of GSM, there were about 16essential patent holders, whereas, for UMTS, this is esti-

❏ Re-evaluation Procedure

The Re-evaluation Procedure may be invoked either by theEvaluatee or any Pool/Forum member. The Pool/Forum membershave the opportunity to oppose the evaluation result and tosubmit documents and reasonings showing that the subjectmatter of the evaluated patent does not seem to be essential ornovel.

The result of the re-evaluation shall be final and conclusivewithin the Pool/Forum with respect to the evaluated patent andstandard(s) as defined in subsection 10.3. However, anyEvaluatee or any Pool/Forum member who is in disfavour of theresult shall not precluded from legal proceedings with respect toessentiality or validity.

The Re-evaluation Body is organised similar to an ECB. Itsmembers are also judged to be neutral and independent (as far aspossible) by the Pool/Forum members.

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10.6. Cost

Each Evaluatee bears the evaluation total costs for the submittedpatent. The costs should cover the real costs of the evaluationprocedure.

The costs for the Re-evaluation procedure are borne by theEvaluatee or the Pool/Forum member requesting the Re-evaluation.

11. Issues and Concluding remarks

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mated to be between 30 and 50, resulting in an anticipatedvast increase in the number of essential patents. For theARIB proposal to the ITU (IMT-2000), at the time ofpublication, 1844 potential essential patents have beendeclared.

Are the traditional licensing notions still valid ?

➪ What other forms of compensation can be considered otherthan monetary reward ? What is the permissible flexibility[desired by many parties, particularly those with a widerange of manufacturing interests] for a licensor to seekcompensation in the form best matching his priorities -within the same field of technology or in neighboring orremote fields of application, in forms not related to intel-lectual property etc., while still satisfying anti-trust andcompetition laws ?

➪ What is the view of Senior Executives concerning how bestwe can achieve a critical mass of participants favouring acommon industry-wide approach ? What factors are impor-tant or necessary to achieve management « buy-in » ?

➪ Recognising the right of patent holders to refuse usage of their patents, the UMTS IPR Working Group did notconcern itself with this type of issue. One UMTS IPRWorking Group member company, claiming to be an essen-tial patent owner, is currently in dialogue with severalstandardization bodies concerning IPR Policy undertakings.

The UMTS IPR Working Group has proposed the way forward foraddressing the IPR concerns in the context of third generationmobile systems. However, other distinct advantages arise if a newinnovative approach could be agreed. A common workableindustry-wide approach would represent a generic regime formanaging complex multi-ownership essential patent portfoliosnecessary for realising global telecommunication networks.

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The positive outcome of the UMTS IPR WG activities, as con-tained in this report, would not have been possible without thecooperative support of all the member organisation represen-tatives. This report represents a pure product of pro-competitiveteamwork.

The Chairman Brian N. Kearsey, Alcatel, would like to expresshis gratitude to the three Rapporteurs (Shiho Igarashi [Sony],Dieter Reinhardt [Siemens], and Harry Ibbotson [Motorola]) andtheir active support « Associates » (Timo Ruikka [Nokia], HisashiKato [Mitsubishi], Hiroaki Horai [Matsushita], Bertram Huber[Bosch], Hidehiko Katayama, [Mitsubishi], Göran Nordlundh[Ericsson]) for "moving mountains" to reach agreements on keyissues in a friendly and cooperative ambiance.

My thanks are also extended to my colleagues John Berres andSerge Raes for their various contributions and commentsthroughout the period of our work: these were my «sounding post»for ideas and inspiration for moving the work forward together.

F i n a l l y, I would like to thank the behind the scene staff:Bénédicte Bonnet, responsible for the operational logistics, andCharlette Perrin, who had the task of typing the final report inassociation with Serge Raes.

Brian N. KearseyChairman

UMTS IPR Working Group

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Acknowledgement

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ANNEX 1Membership of the UMTS IPR WG

1. Companies and organisations based in

America Asia Europe

AirTouch Communications China Academy of AlcatelTelecommunications Technology (CATT)

Analog Devices Fujitsu Bosch

Golden Bridge Technology Matsushita British Telecom

InterDigital Mitsubishi Electric Cegetel

Lucent Technologies NEC CSEM/Pro Telecom

Motorola NTT DoCoMo Ericsson

Nortel Oki Electric Industry France Telecom

Qualcomm Sony Mannesmann

SIPRO Lab telecom Nokia

Texas Instruments PhilipsSiemensSonera Corp.T-MobilTelecom ItaliaTelital

Organisations

ETNO

ETSI

GSM MoU Association

The European Commission, DG XIII, has been kept informed of the activities taking place in theUMTS IPR Working Group since the beginning.

Secretariat provided by Alcatel during Phase 1.

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2. Participants (Phase 1)

John BERRES Alcatel

Wolf HEROLD Alcatel

Hermann KUGLER Alcatel

Chris CAVIGIOLI Analog Devices

Dr Bertram HUBER Bosch

Chang SHENGYI China Academy of Telecommunications Technology

Göran NORDLUNDH Ericsson

Martin HALLERDT Ericsson

Eisuke FUKUDA Fujitsu

Kyoichi HOSOYA Fujitsu

Sue EVERSON Fujitsu

Nino GIORDANO Golden Bridge Technology

Joseph GIFFORD InterDigital

Howard GOLDBERG InterDigital

Hans BUCHNER Lucent

Peter CREFELD Lucent

James J. FINNEGAN Lucent

James E. LAMAR Lucent

Eshwar PITTAMPALLI Lucent

Brian PRATHER Lucent

Atsuchi TERAGUCHI Matshushita

Hiroaki HORAI Matshushita

Hiroshi WAKEBE Matshushita

Koichi YAMADA Matshushita

Hisashi KATO Mitsubishi Electric

Hidehiko KATAYAMA Mitsubishi Electric

Harry IBBOTSON Motorola

Kirk DAILEY Motorola

Hideyuki OGATA Nec

Timo RUIKKA Nokia

Heikki HUTTUNEN Nokia

Isabelle ROBINET-MUGUET Nortel

Thierry LUCIDARME Nortel

Howard GREENBERG Nortel

William BIRD Nortel (c/o Bird Boën & Co)

Hiroaki KOJIMA OKI Electric Industry

François CHARPAIL PHILIPS

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Huub BECKERS PHILIPS

Wiel DEGUELLE PHILIPS

Louis LUPIN Qualcomm

Sean ENGLISH Qualcomm

Gerwin ZOTT Siemens

Dieter REINHARDT Siemens

Gottfried WEIDEL Siemens

Helene JAY-LAFFERRE SIPRO Lab telecom

Takishi SHIKA Sony

Shiho IGARASHI Sony

Nathalie GOUJON Telital

Guido TOGNIETTI Telital

Catarina MASSA Telital

Edgar AUSLANDER Texas Instruments

Pierre FRANDON Texas Instruments

Paola TONELLI AirTouch Communication

Martin READ British Telecom

Jean-Gabriel REMY Cegetel

Dr Jonathan CASTRO CSEM/Pro Telecom

Janine MATTEI France Telecom

Ralf SCHOBER Mannesmann

Ulrich SCHWAMBORN Mannesmann

Kenji IMAMURA NTT DoCoMo

Noriyoshi TERADA NTT DoCoMo

Heikki LAHTI SONERA Corp.

Mika KUIVALAINEN SONERA Corp.

Thomas EICH T-Mobil

Richard SINNING T-Mobil

Cecilia VICEDOMINI Telecom Italia

Milena SIROVICH Telecom Italia

Pedro CABRERA ETNO

Stéphane TRONCHON ETSI

Aoife SEXTON GSM MoU Association

Brian KEARSEY CHAIRMAN (Alcatel)

Serge RAES SECRETARY (Alcatel)

Bénédicte BONNET SECRETARY ASSISTANT (Alcatel)

John MACNAUGHTON CHAIRMAN (DESIGNATE)

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ANNEX 2Meeting Programme for Phase 1

1. Plenary of UMTS IPR WG

Date Location Host

25 February Paris Alcatel

8 April Paris Alcatel

26 May Sophia Antipolis (France) ETSI

3 September Paris Alcatel

2. Chairman’s’ Rapporteurs Meetings

Date Location Host

22 May Basingstoke (UK) Motorola

5 August Tokyo Sony

3. Task Force meetings

Meeting Date Location Host

Forum 18 March Copenhagen Nokia

Pool 19 March Tokyo Sony

Pool 26 March Tokyo Sony

Pool 7 May Tokyo Sony

Pool 20 May Weybridge (UK) Sony

Forum 21 May Camberley (UK) Nokia

Joint Pool/Forum 25 May Sophia Antipolis (France) ETSI

Pool 1 July Tokyo Mitsubishi

Pool (PEE) 2 August Tokyo Sony

Joint Pool/Forum (PEE) 2 September Paris -

NOTE: The work of the Task Force ETSI Policy was conducted primarily during the Plenary since the ETSI Policy is verywell known throughout the industry.

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All references pertaining to essential IPR declared to ETSI arepublicly available on the ETSI web site http://www.etsi.fr.

Unless otherwise indicated, the owners of the IPR listed haveundertaken to grant licenses for these IPR on fair, reasonable andnon discriminatory terms as provided by Article 6.1 of the ETSIIPR Policy, Annex 6 of the ETSI Rules of Procedure.

NOTE: The number of references declared by a company is not a sufficientindicator of the diversity of patents owned by these companies. A patent mayhave been registered in various countries resulting in one entry in thedatabase for each country while the entries all refer to the same technology.

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ANNEX 3IPR Disclosures

1. ETSI

2. ITU and ARIBPertinent declaration of potential IPR ownership may be found ath t t p : / / w w w.itu.int/imt (select « Radio » - « IMT-2000 RTTProposals »).

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•May provide p ro c o m p e t i t i v e benefits by integratingcomplementary technologies, reducing transactions costs,clearing blocking positions, and avoiding cost infringementlitigation.

•May be anticompetitive under the following circumstances :

- Collective price or output restraints in pooling arrange-ments, such as the joint marketing of pooled intellectualproperty rights with collective price setting or coordinatedoutput restrictions, may be deemed unlawful if they do notcontribute to an efficiency - enhancing integration ofeconomic activity among the participants.

- When pooling arrangements are mechanisms to accomplishnaked price fixing or market division, they are subject tochallenge under the per se illegality rule.

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ANNEX 4Antitrust/Competition Law guidelines

Part IUS antitrust law

(Source US Department of Justices’ and Federal Trade Commissions’ joint “Antitrust Guidelines for licensing of IPR” (see section 5.5. thereof) April 6, 1995)

1. Patent Pools generally

2. Membership in patent pools

•Pooling arrangement generally need not be open to all whowould like to joint.

•In general, exclusion from a pooling arrangement amongcompeting technologies is unlikely to have anticompetitiveeffects unless

➪ excluded forms cannot effectively compete in the relevantmarket for the good incorporating the licensed technologiesand

➪. the pool participants collectively possess market power inthe relevant market (it is usually presumed that there is nomarket power if the parties combined market share is 20%or less of the relevant market).

If these circumstances exist, the Agencies will evaluatewhether the arrangements limitations on participation arereasonably related to the efficient development and exploi-tation of the pooled technologies and will assess the neteffect of those limitations in the relevant market.

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Companies participating in agreements which are likely to beconsidered as anti-competitive can notify the agreement to theCommission to request for a negative clearance of theiragreement or an exemption under Article 85 (3) of the EU Treaty.The negative clearance will be granted by the Commission if theagreement does not constitute a breach of competition (Article 85(1) is not breached). An exemption can be granted by theCommission if the agreement results in or aims at restrictingcompetition but the restriction of competition is justified in lightof various arguments.

Agreements pertaining to the management of IPR licensestherefore have to fulfill two objectives :

➪ avoid the imposition of restrictions to parties or third par-ties to the agreement as far as possible.

➪ if restrictions are imposed on some parties, to ensure that such restrictions are necessary to foster competition.

Part II European Competition Law

1. Cross-licensing arrangements and patent pools have been prohibited underArticle 85 (1)

Article 85 (1) the EU Treaty prohibits anti-competitiveagreements and the like which have, as their object or effect, thedistortion of the competition within the Common market. Cross-licensing arrangements and agreements to pool intellectualproperty rights have been prohibited by the Commission underthis article for the following reasons :

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2. What are the provisions to be avoided or included in cross-licensing andpatents pools agreements ?

2.1. Restrictions of competition need to be avoided

The following examples of provisions which should be avoidedwithin cross-licensing and patent pools have been identified bythe jurisprudence but are not exhaustive.

• It should be made possible to easily join and leave the agreementwithout imposing unfair restrictions to members (e.g. membersof the agreements terminating the agreement should not beobliged to forfeit their licenses acquired according to theagreement while at the same time remaining parties to theagreement would keep their licenses under the patents of theterminating party2).

2 Re Video Cassette Recorder (1978) CMLR 160.

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The Commission has exempted certain cross licensing and patentpools on the basis that the restrictions of competition so createdby the agreements were necessary to achieve a more generalcompetitive goal and were proportionate to it.

In the field of standardization of telecommunications, thecompetitive objectives have been thoroughly identified anddefined by directives7. If any restriction of competition is includedinto cross-licensing or patent pools agreements, or results fromthem, the members of the agreement should ensure that theserestrictions are strictly necessary to at least achieve theseobjectives of standardization policy. These objectives are asfollows :

➪ to contribute to the integration of the internal Communitymarket in the information technology and telecommu-nications sector;

3 (1991) 4 CMLR 208.4 IGR Stereo Television I, Eleventh report on Compeition Policy, point 94.5 Re Video Cassette Recorder (1978) CMLR 160.6 Concast/Mannesmann, Eleventh Report on Competition Policy, point 93.7 Article 1 (1) of Council Directive 90/387 EEC on the establishment of the internal market for telecommunication services through theimplementation of open network provision, OJ 1990 L 192/1.

•The agreement should not give undue advantage to one part yc o m p a red to the others (e.g. in Alcatel Espace and ANTNachrichtentechnik3 it was found that the allocation of patentsowned by each party to the other on a royalty-free basisaccording to a non-exclusive cross licensing agreementconstituted a restriction of competition in R&D since itintroduced a measure of specialisation in that those devices willbe developed by one partner only, the other being bound not todevelop its own).

•The agreement should not be made to the detriment of third parties.For instance the Commission took actions against the poolingand the joint administration of stereo television patents whichdisadvantaged third parties through collective limitations onthe granting of l icenses and the number of sets to bemanufactured as well as by the joint setting of royalties4.

•The agreements should not have the object or the effect to eliminatepotential competition between the parties as regard to technicalinnovation5.

•Such agreements should not resul ts in the sharing of thegeographical market amongst competitors which is considered tobe a barrier to trade.

•The agreement should not deny customers the opportunity to buyd i ff e rent systems, they should be allowed a fair share of theresulting benefits of the concentration of patents in the hands ofcompanies. Competition should not be made impossible as aresult of such concentration6.

•The agreement should not result in restricting the number of firm sauthorised to exploit the patented process.

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2.2. The restrictions, if any, need to be necessary to achieve the pro-competitive objectives

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➪ to improve the international competitiveness of Commu-nity manufacturers by allowing for greater uptake in theCommunity of equipment manufactured to recognizedEuropean and international standards;

➪ to facilitate the exchange of information throughout the Community, by reducing the obstacles created byincompatibilities arising from the absence of standards oftheir lack of precision.

➪ to ensure that user requirements are taken into account bygiving users greater freedom to assemble their systems in amanner guaranteeing operating compatibility andconsequently, improved performance at a lower cost.

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ANNEX 5Pool Adjustment Method (PAM)

Adjustment of conflict with cross license agreement existing outside of the Pool

The Adjustment Method as defined below is proposed to achieveroyalty adjustment bringing the following effect:

➪ A LC who is also a Licensee, does not have to pay the fullstandard royalty; the LC may deduct respective portion ofroyalty to be paid for its own patent(s) from the standardrate at the time of payment (see CASE 1 below).

➪ A Licensee may deduct respective portion of royalty forpooled patent(s) owned by a LC with which the licensee hasa licensing arrangement outside of the Pool.

If requested by Licensee, LA calculates the adjusted royalty forthe Licensee. The Licensee can remit payment based on theinvoice issued by LA.

A s s u m p t i o n: Licensor Company A, B, C and D pooled theiressential patents; the number of essential patents is, respectively,3, 1, 4 and 2, which makes 10 in total. LC agreed to shareroyalty proportionate to the number of the essential patents theypooled. Pool standard royalty is $5 per each UMTS terminal.

If Licensee X, manufacturer of UMTS terminal, sold 200 units,X’s royalty to the Pool is $1000. The distributed royalty revenuefor Licensor A, B, C and D is $300, $100, $400 and $200.

Adjustment Method 1: Licensee X had a cross license agreementwith LC A. X and A jointly inform LA of the existence of the crosslicense agreement. A expressly confirms in the same notificationthat X does not have to pay a royalty for A’s patents, if there is nocross license. X sold 200 units. This is illustrated in figure 4.

F i g u re 4: Patent Pool adjustment method 1 for royalty re v e n u e

Royalty Payment $5 (Pool standard royalty) X 200 (units sold) = $ 1000$1000 X 3/10 = $ 700. --- X’s payment to the Pool.

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Adjustment Method 2: Licensor Company A obtains license fromthe Pool to manufacture UMTS terminal. A sold 200 units. This isillustrated in figure 5.

F i g u re 5: Patent Pool adjustment method 2 for royalty re v e n u e

Royalty Payment$5 X 200 units = $1000$1000 - $300 = $700 A’s payment to the Pool.

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The candidates whose patents are certified as essential, i.e.Licensor Companies (LC), discuss to determine the Pool terms. Atthe same time, the LC form the Licensing Agent (LA).

The EO evaluates the candidates’ patents and issues a certificateconfirming the essentiality of patents.

The Evaluation Organisation (EO) issues a letter to industryinviting their membership of the Pool; a corresponding PressRelease will ensure an open invitation to all concerned partners.Membership will be open to countries, individuals and otherentities (candidates). Potential candidates should submit thefollowing documents to the EO:

•a list of patents owned or controlled by itself (or its affiliates),which the candidate believe to be essential;

•a letter signed by an authorised person within the candidate’sorganisation to

- commit to license its essential patents on a fair, reasonableand non-discriminatory basis (confirmation of theETSI/ARIB Policy);

- express their interest in joining Pool;

- certify that submission of this letter does not constitute anotice of infringement;

- waive their rights to request treble damage based on thisnotice to the EO. (Editor’s note: the meaning of treble isunclear).

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ANNEX 6Formation procedure for Pool

1. Announcement Letter

2. Evaluation

3. Formation

4. Licensing

LA starts licensing the pooled patents.

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ANNEX 7Comparison of Patent Pool and Forum features

Table 1: Structure and Licensing features of Patent Pool and Forum

Patents

Participants

License

Licensed products/Royalties

Royalty scheme

Licensing Agent (LA)

Adjustment of royalty

Non TEP

Assertion of patents

Patent Pool

essential patent holders (licensors);Manufacturers (licensees)

single agreement through licensingagent (LA)

terminal: percentage; base station: percentage rate per

channel; intermediate products: royalty free;

testing equipment: ? per unit

rate remains constant irrespective ofthe number of TEP;

review royalty every x years

licensing of pooled patents;administration;

costs borne by licensors;

PAM (Payment Adjustment Method)

not be put in same pool;presently: bilateral negotiations

see MPEG 2 arrangement;patent holder may withdraw its

patents

Patent Forum

any potential licensor and licensee

bilateral license agreements

scope of agreement and royalties areup to the parties /

self imposed limitation of royaltyaccording to Patent Forum rules

self imposed limitation of royaltyaccording to Patent Forum rules

no LAbilateral negotiations

self imposed « cap »

bilateral license agreements,combination with TEP permit flexibility

subject to appeal procedure as asafeguard for licensees

bilateral license agreements

Technically Essential Patents (TEP)

NOTE: Both the Pool and Forum may be supported by the same Patent Evaluation Entity.

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About the UMTS IPR Working Group

The UMTS IPR WG is an independent grouping of the world leading wireless companies.

As from mid-October 1998, the UMTS IPR WG will operate within the structure of a Frenchregistered Non-Profit Association. Alcatel will continue to provide the Secretariat at the followinglocation:

Serge RAESUMTS IPR Working Group Secretary

c/o Alcatel

54, Rue La Boétie F-75008 PARIS - FRANCE

Tel: +33 (0)1 40 76 11 09Fax: +33 (0)1 40 76 59 12E-Mail: serge.raes@alcatel.fr

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