Smartphone 'Cold War' seen in Asian moves on patent licensing

The clampdown on patents has the potential to alter the balance of power in the global mobile-phone industry, which generated $412 billion last year, according to IDC. These new rules may weaken the ability of Apple, Microsoft Corp. and Qualcomm -- typically among the top 15 U.S. patent recipients each year -- to compete in China, the world’s largest mobile- phone market, and other countries that follow.

“We’re going back to the Cold War and the domino theory,” said Bradley Lui, an antitrust lawyer with Morrison & Foerster in Washington. “The authorities in China see the potential use of patents that might affect companies in China, including state-owned enterprises. It might be an impetus for drawing rules more broadly than we would in the U.S.”

Asian regulators were spurred by the smartphone wars, in which tech giants battled over billions of dollars on four continents for more than four years. Foreign governments including Korea and China have been looking more closely at their patent policies, emboldened by debates in Washington over whether patents hinder rather than spur innovation.

“The domestic debate that is supposed to be specific to our country is being latched on to by foreign governments,” said Sean Murphy, Qualcomm’s international government affairs counsel. “It’s giving them justification to take action.”

‘Improve Consistency’

South Korea’s restrictions on patents went into effect in December. It’s home to Samsung, which battled Apple for years over claims it copied the iPhone’s “look and feel.” China’s rules are expected by Aug. 1. Brazil and India are only beginning to develop policies, a National Academies report said.

U.S. trade officials declined to comment for this article.

The Korea Fair Trade Commission said its policy is to “improve consistency” in antitrust law enforcement and block patent-licensing firms, which are often derided as “trolls” for demanding high royalties for incremental features.

The agency said in a Dec. 24 statement that “domestic companies are expected to be protected from the abuse of patents, as the amendment will provide a basis for effectively regulating global companies’ abuse of monopoly with patents.”

China’s proposals, like South Korea’s rules, have two main components. One involves patent values for technology included in industry standards, such as Wi-Fi. The other may require unique features -- like Apple’s slide-to-unlock feature, or Microsoft software that synchronizes calendars -- to be licensed by others if considered “dominant” or “essential.”

‘System Works’

Some companies are already demanding a roll back and want a return to their ability to sue the heck out of each other. They argue that there’s been no evidence that patents are being misused, so there’s no need for regulation.

“The system that is in place is a system which has been going on for many years and it is working,” said Kasim Alfalahi, Ericsson AB’s chief intellectual property officer. “It is built on contribution and global agreements to cover products sold around the world with patents that are being issued all the time to companies like Ericsson.”

Microsoft, Apple and Intel Corp. are among the companies backing rules on standard-essential patents because it would mean lower royalties they pay out for fundamental technology.

Higher Rates

The arguments are different on patents for unique features that command higher rates or aren’t licensed at all. Companies that came up with ideas on their own, without standards-setting boards, should be able to control who can use that propriety technology, Apple has said in U.S. court filings in its dispute with Samsung.

In the U.S., a judge said Apple couldn’t force Samsung to remove features from its phones but Apple may seek additional damages. In China and Korea, it would be the government making the decision that Apple must license the patented feature to any handset manufacturer.

“If somebody builds a product and that product becomes widely deployed, it’s reasonable to say ‘We build that product, we innovated and we should be able to control our intellectual property,’” Lui said. “Most people in the U.S. would view it that way.”

Tricky Balance

The Chinese and Korean officials are just formalizing what 100 years of legal precedent has done in the U.S. and Europe, and a lot will depend on how the governments implement the rules, antitrust lawyers said.

“They’re new to this area and they take it very seriously,” said Jim O’Connell, of Covington & Burling in Washington. “When you do too much, you end up ultimately hurting yourself because you diminish incentives to innovate. That’s a balance that can be tricky to strike. The Chinese agencies are wrestling with it, too.”

In the U.S and Europe, regulators say “they’re not there to fine tune commercial disputes, they’re there to make sure competition is preserved,” Lui said. “The governments in Korea and China may take a different view based on their own economic interest.”

Officials with Apple, Cisco Systems Inc., Intel, Microsoft, ZTE Corp., LG Electronics Inc. and Samsung all declined to comment on the policy changes in Asia.

Qualcomm, Microsoft

Qualcomm, which got 63 percent of profit from patents last year, has been investigated on three continents for its licensing practices. It struck a deal with China in February that gives domestic Chinese manufacturers a discount on the royalty charges while fining the company $975 million.

Microsoft’s purchase of Nokia Oyj’s handset business has been approved by every country except Korea, which is looking for concessions on some of Nokia patents.

In China, Microsoft had to accept lower royalties for patents that read on Google Inc.’s Android operating system, which runs most of the world’s phones including those made by Chinese manufacturer ZTE. The Redmond, Washington-based company simply excluded Korean assets -- where it didn’t have many sales anyway -- from the Nokia deal.

Regulators haven’t yet tried out the new guidelines, so companies have no idea how they will work or how stringently they will be applied.