(Igor Stevanovic)

A new front in the smartphone wars formally opened Tuesday as TCL Communication Technology Holdings Ltd. and Ericsson Inc. kicked off a bench trial over fair, reasonable and nondiscriminatory (FRAND) licensing for 4G LTE technology.

Shenzhen, China-based TCL is asking U.S. District Judge James Selna of Santa Ana, California, to set a FRAND rate and award damages for Ericsson’s alleged breach of FRAND commitments. TCL, which markets Alcatel- and BlackBerry-branded phones in the United States, argues that Ericsson is discriminating among licensees by offering TCL less favorable terms than it extends to the likes of Apple Inc. and Samsung Electronics Co.

Stockholm-based Ericsson said in court Tuesday that TCL markets millions of cheap phones that sell for as little as $10, so its license with TCL must include either a lump-sum payment or a minimum dollar amount per unit sold. “The crux issue in the case is the royalty floor,” McKool Smith partner Theodore Stevenson said in his opening statement. Even if that could be construed as asking more of TCL, that doesn’t make it discriminatory, Stevenson said, because the concept of FRAND encompasses a range of royalty rates. “Nondiscrimination does not require most-favored license treatment” for every licensee, he argued.

Selna has called the TCL-Ericsson dispute a “cutting-edge case” for what it means to license standard-essential patents on a nondiscriminatory basis. Speaking to The Recorder last year about the case, IP lawyer and consultant James Brelsford, then a partner at Skadden, Arps, Slate, Meagher & Flom, said the stakes are high not just for the two companies but for parties on both sides of 3G and 4G licensing deals. “I call it Smartphone Wars II,” Brelsford said at the time.

There were plenty of lawyers in the courtroom Tuesday monitoring the proceedings on behalf of smartphone clients, and standing by to protect any confidential licensing information from slipping out: Wilmer Cutler Pickering Hale and Dorr for Apple; Kirkland & Ellis for Samsung; and Wilson Sonsini Goodrich & Rosati for HTC Corp.

It was hard to suss out the details of TCL’s claims. Selna ordered the trial closed throughout Sheppard Mullin Richter & Hampton partner Stephen Korniczky’s opening statement after Korniczky said that much of it would involve other companies’ confidential licenses. Both parties’ trial briefs have been entirely sealed as well.

Partners from Wilmer, Kirkland, and Wilson Sonsini had to shuttle in and out of the courtroom along with many others as licensing evidence came up throughout the day.

At issue is Ericsson’s portfolio of 2G, 3G and 4G patents that are essential to practicing mobile networking standards established by the European Telecommunications Standards Institute. In exchange for participating in the standard, Ericsson committed to license its patents on a FRAND basis. TCL argues that Ericsson is using its patents to “hold up” TCL with inflated rates. Before trial, two of Ericsson’s expert witnesses valued 4G connectivity at $251 per headset, double the average selling price of an entire TCL phone. Selna excluded that model as “implausible and inherently unreliable.”

But it appears Ericsson wasn’t asking nearly that much in its negotiations with TCL. One slide shown during open court indicated an offer of a 1.5 percent royalty with a $2 per unit floor and a $4.50 cap. Given that TCL sells about 50 million phones a year, that would jibe with Selna’s statement at a hearing last year that the case could be worth $10 million.

TCL hasn’t paid Ericsson anything the last few years. “TCL has remained largely unlicensed,” Stevenson said. That works another form of discrimination: “It’s unfair to the other handset makers” who compete against TCL while paying tens or sometimes hundreds of millions to license Ericsson’s IP, he said.

TCL’s strategy began taking shape as its first two witnesses testified. Executive Director George Guo and U.S. chief Steve Cistulli described TCL as the No. 4 smartphone maker on a mission to “step up” from inexpensive feature phones to middle- and high-end smartphones. Its Alcatel and BlackBerry phones are similarly situated to the iPhone and the Samsung Galaxy, they insisted. That presumably would support a case for a royalty percentage comparable to Apple’s and Samsung’s, which is probably lower because of their high volume of sales.

The comparison to Apple and Samsung faced persistent pushback from Stevenson, who pointed out TCL’s three top-selling phones sell for $45 to $120. “All three of these phones are entry-level, aren’t they?” he asked Cistulli.

“This was true in 2015. It is no longer true,” Cistulli said. TCL phones such as the Alcatel Idol 4S now command $469 and are comparable to an Apple iPhone, which he dismissed as “a smartphone with a very high-end price.”

Stevenson showed Cistulli a picture of an Idol 4S being shopped for $288. “When was the last time you saw an iPhone 7 on sale for 40 percent off?” Stevenson asked.

Cistulli said carrier subsidies often mask the true cost of a phone. He insisted, twice, that the Alcatel brand is preferred over Apple and Samung “for our customer base.”

That prompted Selna to clarify which brand is more popular in the market generally. That would be Apple and Samsung, Cistulli conceded.

Guo sounded resistant to paying any royalties. He said he would pay only if Ericsson can prove that it “truly contributed to the standard.” He acknowledged TCL hasn’t licensed any SEPs from Apple, Samsung, HTC, Huawei, Panasonic, Sony and many other wireless players.

“Do you think it’s possible to evaluate SEPs and determine the value of that, a reasonable royalty?” McKool partner Douglas Cawley asked him.

“Not for normal people,” Guo quipped.

He also conceded that after he told Ericsson that its 1.5 percent offer “looks promising,” the company filed its FRAND suit the same day. “I learned that later,” he said.

Stevenson urged Selna to consider the large licenses negotiated by other companies in arm’s-length transactions when determining the FRAND rate. “Common sense tells you you cannot hold up a multinational, multibillion dollar company without substantial coercion,” Stevenson said. And there’s no coercion when lawyers can refuse to sign on the dotted line and bring a FRAND lawsuit instead.

“But the cost of picking up the pen is patent litigation,” Selna replied. “So there is a cost one way or the other of not signing.”

 

Copyright The Recorder. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.

A new front in the smartphone wars formally opened Tuesday as TCL Communication Technology Holdings Ltd. and Ericsson Inc. kicked off a bench trial over fair, reasonable and nondiscriminatory (FRAND) licensing for 4G LTE technology.

Shenzhen, China-based TCL is asking U.S. District Judge James Selna of Santa Ana, California, to set a FRAND rate and award damages for Ericsson’s alleged breach of FRAND commitments. TCL, which markets Alcatel- and BlackBerry-branded phones in the United States, argues that Ericsson is discriminating among licensees by offering TCL less favorable terms than it extends to the likes of Apple Inc. and Samsung Electronics Co.

Stockholm-based Ericsson said in court Tuesday that TCL markets millions of cheap phones that sell for as little as $10, so its license with TCL must include either a lump-sum payment or a minimum dollar amount per unit sold. “The crux issue in the case is the royalty floor,” McKool Smith partner Theodore Stevenson said in his opening statement. Even if that could be construed as asking more of TCL, that doesn’t make it discriminatory, Stevenson said, because the concept of FRAND encompasses a range of royalty rates. “Nondiscrimination does not require most-favored license treatment” for every licensee, he argued.

Selna has called the TCL-Ericsson dispute a “cutting-edge case” for what it means to license standard-essential patents on a nondiscriminatory basis. Speaking to The Recorder last year about the case, IP lawyer and consultant James Brelsford, then a partner at Skadden, Arps, Slate, Meagher & Flom , said the stakes are high not just for the two companies but for parties on both sides of 3G and 4G licensing deals. “I call it Smartphone Wars II,” Brelsford said at the time.

There were plenty of lawyers in the courtroom Tuesday monitoring the proceedings on behalf of smartphone clients, and standing by to protect any confidential licensing information from slipping out: Wilmer Cutler Pickering Hale and Dorr for Apple ; Kirkland & Ellis for Samsung; and Wilson Sonsini Goodrich & Rosati for HTC Corp.

It was hard to suss out the details of TCL’s claims. Selna ordered the trial closed throughout Sheppard Mullin Richter & Hampton partner Stephen Korniczky’s opening statement after Korniczky said that much of it would involve other companies’ confidential licenses. Both parties’ trial briefs have been entirely sealed as well.

Partners from Wilmer, Kirkland, and Wilson Sonsini had to shuttle in and out of the courtroom along with many others as licensing evidence came up throughout the day.

At issue is Ericsson’s portfolio of 2G, 3G and 4G patents that are essential to practicing mobile networking standards established by the European Telecommunications Standards Institute. In exchange for participating in the standard, Ericsson committed to license its patents on a FRAND basis. TCL argues that Ericsson is using its patents to “hold up” TCL with inflated rates. Before trial, two of Ericsson’s expert witnesses valued 4G connectivity at $251 per headset, double the average selling price of an entire TCL phone. Selna excluded that model as “implausible and inherently unreliable.”

But it appears Ericsson wasn’t asking nearly that much in its negotiations with TCL. One slide shown during open court indicated an offer of a 1.5 percent royalty with a $2 per unit floor and a $4.50 cap. Given that TCL sells about 50 million phones a year, that would jibe with Selna’s statement at a hearing last year that the case could be worth $10 million.

TCL hasn’t paid Ericsson anything the last few years. “TCL has remained largely unlicensed,” Stevenson said. That works another form of discrimination: “It’s unfair to the other handset makers” who compete against TCL while paying tens or sometimes hundreds of millions to license Ericsson’s IP, he said.

TCL’s strategy began taking shape as its first two witnesses testified. Executive Director George Guo and U.S. chief Steve Cistulli described TCL as the No. 4 smartphone maker on a mission to “step up” from inexpensive feature phones to middle- and high-end smartphones. Its Alcatel and BlackBerry phones are similarly situated to the iPhone and the Samsung Galaxy, they insisted. That presumably would support a case for a royalty percentage comparable to Apple ‘s and Samsung’s, which is probably lower because of their high volume of sales.

The comparison to Apple and Samsung faced persistent pushback from Stevenson, who pointed out TCL’s three top-selling phones sell for $45 to $120. “All three of these phones are entry-level, aren’t they?” he asked Cistulli.

“This was true in 2015. It is no longer true,” Cistulli said. TCL phones such as the Alcatel Idol 4S now command $469 and are comparable to an Apple iPhone, which he dismissed as “a smartphone with a very high-end price.”

Stevenson showed Cistulli a picture of an Idol 4S being shopped for $288. “When was the last time you saw an iPhone 7 on sale for 40 percent off?” Stevenson asked.

Cistulli said carrier subsidies often mask the true cost of a phone. He insisted, twice, that the Alcatel brand is preferred over Apple and Samung “for our customer base.”

That prompted Selna to clarify which brand is more popular in the market generally. That would be Apple and Samsung, Cistulli conceded.

Guo sounded resistant to paying any royalties. He said he would pay only if Ericsson can prove that it “truly contributed to the standard.” He acknowledged TCL hasn’t licensed any SEPs from Apple , Samsung, HTC, Huawei, Panasonic, Sony and many other wireless players.

“Do you think it’s possible to evaluate SEPs and determine the value of that, a reasonable royalty?” McKool partner Douglas Cawley asked him.

“Not for normal people,” Guo quipped.

He also conceded that after he told Ericsson that its 1.5 percent offer “looks promising,” the company filed its FRAND suit the same day. “I learned that later,” he said.

Stevenson urged Selna to consider the large licenses negotiated by other companies in arm’s-length transactions when determining the FRAND rate. “Common sense tells you you cannot hold up a multinational, multibillion dollar company without substantial coercion,” Stevenson said. And there’s no coercion when lawyers can refuse to sign on the dotted line and bring a FRAND lawsuit instead.

“But the cost of picking up the pen is patent litigation,” Selna replied. “So there is a cost one way or the other of not signing.”

 

Copyright The Recorder. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.