Analysis

Regaining control of intellectual property

15th September 2020
Alex Lynn

The past few weeks have seen the judiciary hand down a number of interesting legal rulings that will have an impact on the use of Intellectual Property (IP) in the global electronics industry. Much of underlying current in the ongoing trade war between the US and China is related to IP, as are the concerns surrounding the potential acquisition of ARM by Nvidia.

In this article Adam Fletcher, Chairman of the International Distributors of Electronics Association (IDEA) and the UK’s Electronic Components Supply Network provides an overview of the latest changes.

Business success factors

Ownership, control and licencing of Intellectual Property is vital to the current and future financial performance of many technology organisations. In his 1967 book, "Scanning the Business Environment”, Harvard Professor Francis Aguilar defined the need for organisations to use what he called PEST (Political, Economic, Social and Technical) analysis to help them manage organisations within the markets in which they operate. 

Later economists like Harvard Professor Michael Porter developed Aguilar’s theorem further by adding Legislation and Environmental analysis to the mix, thereby creating PESTLE.  PEST and PESTLE are simple but very powerful analytical tools, particularly so now that they reflect the impact and therefore the importance of the ‘Legislation’ factor in the analysis.

US Export Controls Reform Act 2018

Two years ago, the US Commerce Department was mandated to investigate how a broader set of rules may be constructed that would better protect emerging technologies. In September ’20 it announced a 60-day consultation period during which submissions are invited concerning “fundamental technologies”. The invitation makes specific reference to ‘semiconductor capital equipment’, which it identifies as an area that may require additional oversight or export restrictions.

The US Commerce Department is the body that grants or denies access to US technology to specific organisations. The so called ‘Entity List’ has effectively forced the licencing and thereby the control of US semiconductors supplied to Chinese organisations, who are now totally reliant on their US suppliers successfully obtaining the export licences necessary to enable them to supply their goods to China. The latest actions off the Commerce Department suggest that the scope of any new rules may affect all organisations using US technology rather than only those on an ‘Entity List’.

It’s likely that it will take a couple of years for any changes to become law but it clearly defines the direction in which the US government is going in order to protect the IP of its domestic organisations. Governments and business organisations on this side of the ‘Pond’ will need to carefully consider how their use of US IP will be impacted and what actions they need to take to protect their domestic IP in a similar way.

In the short-term companies operating in the electronic components supply network are very likely to see an increase in their administrative costs as they increase their monitoring of sales to end customers, and will also have to accept the possibility of disruptions to supply if export controls compliance procedures are not met.

UK supreme court ruling on IP licensing

It has taken over of six years of legal argument before the UK Supreme Court was able to reach its unanimous conclusion on IP Licensing in August ’20. It is a complex judgement that runs to over 600 pages and now provides a strong legal basis for improving wider IP licensing and control. It also sets a precedent that most international legal systems will respect and abide by.

Currently many IP licensees have their technology ‘rolled up’ into Standard Essential Patents (SEP, in which ‘implementers’ (manufacturers of end products) are issued licenses on Fair Reasonable and Non-Discriminatory Terms (FRAND). The Supreme Court upheld the ruling of a lower court that a FRAND license with a large multi-national corporation is by default a worldwide license and any license fees due should be paid accordingly and not be subject to a country by country negotiation process. The court also confirmed that the terms of the FRAND license can vary between different ‘implementers’ without necessarily being unfair.

SEP legislation simplifies the process for all parties especially small IP holders because only a single set of negotiations are required for ‘implementors’ to have access to a wide range of the IP from many different providers (some of which they may not use). Only one organisation - generally a  standards body – is tasked with monitoring the ‘implementer’ use of the IP and receiving the agreed license fee, which it then distributes to the multiple IP providers.

Some legal firms have described the UK Supreme Court ruling as a ‘breakthrough’ for small IP holders in their negotiations with large multinational ‘implementers’. Whilst this may be true it assumes the IP holder has the substantial financial ‘muscle’ necessary to gain geographically wide strong patents on their idea, product or software that cannot be easily circumnavigated. But for many small organisations this is just not financially viable.

A careful review of this case reveals that whilst the Plaintiff In the action was a relatively small organisation compared to the Defendant it had acquired the vast majority of its patents from a multinational organisation, in fact some earlier commentators likened the Plaintiff to a Patent Troll. It is however a strong judgement in favour of IP protection and should be welcomed by all.

Another mega acquisition

Nvidia has announced that it has agreed to acquire ARM from Softbank for $40B, subject of course to all the usual regulatory approvals. A wonderful UK success story ARM derives almost its entire revenue from IP licensing and the considerable value the proposed transaction places on the company reflects the importance of good IP and how essential it is to protect it.

Nvidia is a US based organisation so ARM’s IP will be secured into the future and both organisations will be able to leverage their commercial power to ensure licensees fully meet their obligations. That said regulatory approvals are likely to take 18 months or so, plenty of time yet for other organisations to step forward with a counteroffer. 

Concluding thoughts

There is rarely a dull moment in the dynamics of the electronic components supply network, Covid-19 pandemic notwithstanding. Once again, I urge all organisations in our industry to engage effectively with their supply network partners. Sharing business intelligence is a simple and effective way to help to improve the performance of your organisation and its partners.

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