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Call it the decline of a cell phone empire. The patents that have controlled three-quarters of the world’s mobile phones for the past decade — lumped under the 400-patent GSM standard — are getting old. And as the GSM standard approaches the end of its reign, a nasty lawsuit over those patents has started. The Global System for Mobile Communication, GSM, was developed in the late 1980s by a group of mostly European companies — including Alcatel, Lucent Technologies, Motorola Inc., Nokia Corp., Royal Philips Electronics N.V., Siemens AG and Telefonaktiebolaget LM Ericsson — and first rolled out in 1992. Since then the 15 companies that hold the key patents to the GSM standard have pulled in huge royalties. Exact figures are hard to come by, but over the next 12 years, the cellular industry is expected to generate $80�100 billion in royalties, according to an April 2005 report by London-based market research firm T&F Informa. The problem is, GSM can’t handle today’s high-end handsets (which will undoubtedly become tomorrow’s standard phone). These phones send e-mail, connect to the Internet, and play music and videos. A newer standard called WCDMA (Wideband Code Division Multiple Access) can handle these features, and is expected to eventually replace GSM. Enter Sendo Holding PLC, a six-year-old Birmingham, England�based mobile phone maker. Last year Sendo filed a confidential complaint with the competition arm of the European Commission, alleging that Ericsson and its fellow GSM patent holders are running an illegal cartel aimed at maintaining their dominance and keeping competition at bay. Sendo argues that the total amount of royalties the company would have to shell out to all 15 GSM patent holders — allegedly more than $18 per phone — make entering the GSM cell phone market prohibitively expensive for the 360-employee company, and violates licensing rules set by the European Telecommunications Standards Institute, or ETSI, a self-regulatory agency that governs GSM licensing. Under ETSI rules, GSM patents must be licensed on reasonable and nondiscriminatory terms. Sendo alleges that GSM licensing has been anything but fair. In a press release describing the confidential EC complaint, Sendo implies that GSM patent holders are taking unfair advantage of their monopoly, swapping IP rights with one another for free or at a discount while demanding excessive royalties from outsiders. Sendo says this unequal treatment amounts to an illegal “cartel … whose object is to limit third-party competition, and generally control and manipulate technical and commercial progress,” to the advantage of Ericsson and unnamed “others.” According to Mark Paxman, a wireless technology consultant at PA Consulting Group in Cambridge, England, it’s “fairly well-known” in the industry that the GSM patent holders swap licenses for free. Meanwhile, he says, companies like Sendo, which hold no GSM patents, can expect to pay 10 percent to 13 percent of the average selling price of a phone in GSM royalties. Such a large percentage of revenue can wipe out the already slim profit margins of these companies, making it impossible for them to survive, Paxman says. The problem is ETSI. Unlike some other standard-setting bodies, ETSI has left it up to the market to define fair, reasonable and nondiscriminatory terms. “It’s a free-for-all,” Paxman says. “There are no rules, no procedures. It’s all about how smart [the] lawyers who negotiate your license are.” ETSI did not return an e-mail seeking comment. Sendo is one of the few startup companies that has managed to break into the European cell phone market. The company earned $420 million on sales of about 5 million handsets in 2004. But Sendo’s success is based partly on the fact that it has yet to pay any royalties on GSM technology. (According to Paxman, it’s standard practice for cell phones to hit the market before licensing arrangements are worked out.) By itself, Sendo’s allegation isn’t big news. Charges of anticompetitive behavior in the EU mobile telecom arena happen all the time, according to Jonathan Retsky, a partner at Brinks Hofer Gilson & Lione in Chicago. “The little guys have always alleged that the big guys are discriminating against them,” says Retsky, who served as chief patent counsel at Motorola for four years. But according to Retsky and others, Sendo went a step further in taking its grievance to the EC. Sendo has taken on Goliaths before. In December 2002 the company accused Microsoft Corp. of passing on Sendo’s hardware designs to a Far Eastern manufacturer, after the two companies collaborated on a handset. Last September they settled the dispute for an undisclosed amount, and Microsoft let go of its 4 percent stake in Sendo. Retsky, for one, doesn’t think Sendo will fare as well against Ericsson. In its latest battle, he says, Sendo has taken a “very avant-garde legal position.” It’s unclear whether the EC will deal with Sendo’s complaint. Paxman says that about two years ago, he discussed the issue of GSM royalties with a group of EC competition officials, who indicated that they were “sensitive to the problem,” but had their hands full with the antitrust investigation of Microsoft Corporation. The EC’s competition arm did not return e-mails seeking comment. Ericsson escalated the fight in March, suing Sendo in Germany, the Netherlands, and the United Kingdom, alleging patent infringement. London-based Bird & Bird partner Lorna Brazell is handling Ericsson’s case in the U.K.; other Bird & Bird offices are handling the suits in The Hague and Germany. Sendo has hired Simon Levine of DLA Piper Rudnick Gray Cary in London. If the cases go to trial, Ericsson shouldn’t have a problem getting a finding of patent infringement: Sendo publicly admits that it’s been using Ericsson’s patents in its phones, which range from the no-frills Sendo 300 to the Sendo X, featuring a built-in camera, camcorder and MP3 player. Since its phones use GSM technology, Sendo has no choice but to seek licenses from Ericsson and the other GSM patent holders, under ETSI rules. Ericsson’s suit came as a shock, says Sendo group general counsel Robert Pocknell. He says that the two companies had been negotiating a license agreement ever since Sendo filed its EC complaint. Kasim Alfalahi, Ericsson’s vice president of patent licensing, counters that all Ericsson wants is for the companies that use its technology to compensate it “in the same way we are prepared to compensate others for our use of their technology.” Sendo’s unlicensed use of its patented technology leaves Ericsson with “no choice but to take Sendo to court.” Ericsson and the GSM contingent might be getting desperate in GSM’s old age. Along with GSM patent holders Nokia, Motorola, and Siemens, Ericsson has dominated the mobile phone market for years. But these companies have recently been losing ground to Asian competitors. Together Samsung and LG Electronics now hold 19 percent of the worldwide mobile phone market, up from 10 percent in 2001, according to Gartner Dataquest, a technology market research firm in Stamford, Conn. That’s still less than Nokia at 31 percent, but considerably more than Ericsson and Siemens’s combined share of 13 percent. GSM patent holders have no similar monopoly on the next generation of technology, WCDMA. Paxman estimates that more than 30 companies have announced patents in WCDMA technology, and another 10 are in “stealth mode.” A number of these companies, he says, are not ETSI members, and some don’t even manufacture phones, so they have no need to swap licenses on the cheap. “It’s going to be a licensing nightmare,” Paxman says.

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