Hype may initially overvalue 5G standard essential patents

The anticipation over 5G -- the fifth generation mobile networking standard -- cannot be understated. Many see its roll-out not only as a faster, more powerful, and expansive telecommunication network, but expect it to usher in revolutionary "smart" technologies, such as autonomous vehicles, artificial intelligence, smart power grids, and sensor-equipped products. Indeed, experts expect the 5G network to support 50 billion connected devices by 2020 with data rates 100 times faster than 4G -- an expansion allowing heterogeneous businesses and new types of Internet of Things (IoT) devices to integrate. Media outlets have already declared that 5G is "revolutionary" technology that will fundamentally change the world.

Finally, the wait is nearly over. On June 13, the 3rd Generation Partnership Project officially approved the 5G standalone specifications in Release 15 5G specifications. This standalone specification will allow 5G to be implemented independently of existing LTE and other previous-generation networks, signaling companies to prepare business cases to commercialize a wide range of 5G-connected devices -- not just smartphones.

But as companies develop plans to deploy and commercialize this new technology, it would behoove them to consider the legal opportunities and encumbrances that come with new technology. In particular, what happens when the Internet of Things meets 5G technology meets standard essential patents, and their owners, within this environment of unbridled optimism surrounding this technology?

There is no stopping the hype of "smart" devices, and as the Internet of Things increases demand for interconnectivity -- and 5G enabling it -- so will demand for seamless communications among these devices. To enable such seamless interaction in a 5G-enabled world, standardized technology is critical. And what the 3rd Generation Partnership Project approved were specifications describing the technologies required to build the 5G network, base stations, and consequently, the technology any 5G device would need to implement.

As the U.S. Court of Appeals for the Federal Circuit explained in Ericsson, Inc. v. D-Link Systems, Inc., 773 F.3d 1201 (2014), "[w]hen a technology is incorporated into a standard, it is typically chosen from among different options" automatically enhancing the value of the patents that cover the technology incorporated into that standard. Such patents are called "standard essential patents" because they are necessarily infringed in standards-compliant devices. In exchange for a patent holder's technology to be accepted into a standard, the patent holder must typically agree to license that technology on fair reasonable and non-discriminatory terms, or "FRAND" terms.

A FRAND rate can be determined using a variety of methodologies approved by the Federal Circuit. For example, the Ericsson court affirmed the use of comparable licenses to decide an appropriate royalty award. Similarly, in CSIRO v. Cisco, 809 F.3d 1295 (2015) the Federal Circuit noted that when relying on comparable licenses to determine the appropriate royalty rate for a standard essential patent, the method must also "account [] for differences in the technologies and economic circumstances of the contracting parties" as they are "constrained by the market's actual valuation of the patent." In other words, courts have looked to real-world market-based evidence to determine the value of a standard essential patent -- evidence unavailable for the highly anticipated yet still developing 5G standard. This creates the potential for vastly overvaluing 5G technology, based on its promise rather than a proven track record in the market.

Early implementers of the 5G standard and companies looking to deploy 5G-compliant products should account for possibly higher than expected royalties they may be required to pay to 5G patent owners in the future without the benefit of real-world market-based evidence involving this new, revolutionary technology. Indeed, this presents a significant risk for smaller startups seeking to capitalize in a nascent market, who cannot afford to over-pay for essential patents.

Indeed, standard essential patent owners may proactively even set the stage for determining the value of the 5G-standardized technologies in the future. For example, industry players, including standard essential patent owners, could issue public statements regarding their expectations for 5G royalties or highly publicize selected early sales data to create the impression of great value.

Early implementers who are seeking licenses, on the other hand, are likely to argue that the specific benefits of 5G can be isolated and then compared against the corresponding benefit conferred by prior standards, which arguably sets the minimum value for that specific benefit. This becomes even more complicated when forced to consider the relative value of each 5G benefits as implemented in different types of "smart" products, beyond mobile communications devices like smartphones.

Uncertainty over the value of 5G-standard technology creates risk for both standard essential patent owners and early implementers. Already, experts are attempting to determine a fair and reasonable royalty for such technology. The current hype surrounding this "revolutionary" technology, and the lack of historical market data, may momentarily create a market that favors the owners and overvalues this technology.