Defensive Stance: Korean Industry Demanding Measures against Patent Offensives by Nokia, Microsoft | BusinessKorea

Friday, August 26, 2016

26 August 2014 - 3:13pm

The local electronics industry is demanding stricter conditions for the approval of Microsoft's purchase of Nokia by the Korea Fair Trade Commission (FTC). The demand is attributable to the fact that those conditions will inevitably have a huge influence on the industry.

Since Microsoft has software-related patents, it annually receives royalties worth US$2 billion (around 2 trillion won) from smartphone manufacturers around the world. Nokia reportedly owns 40,000 patents, most of which are original technologies.

When selling its handset unit to the software giant, the Finnish company obtained a non-exclusive license where the company can use its patents over the next 10 years. In short, the M&A deal laid the foundations of its transformation from a smartphone maker to a Non-Practicing Entity (NPE), or a patent troll. Based on this advantage, Nokia demanded that Samsung and LG Electronics pay a large sum of patent royalties, and they are currently negotiating in the U.S.

To add insult to injury, Microsoft recently filed a patent lawsuit against Samsung, because the Korean tech giant allegedly did not pay patent royalties related to Android OS in a timely manner. On top of that, the software company argues that Samsung did not pay interest on the late payments, either. This discord started when Microsoft acquired Nokia's mobile phone business. Microsoft and Samsung signed a broad cross-licensing deal in Sept. 2011, but the Korean firm stopped paying royalties, as the M&A transaction between Microsoft and Nokia was finalized. At that time, Samsung said that the software firm violated the patent licensing deal between the two companies. However, Microsoft brought legal action against Samsung. The Korean firm is currently considering whether or not to file a counter-suit against the Redmond-based software company for patent violations.

An official high in the patent industry remarked, “Royalties demanded by Nokia and Microsoft are estimated at trillions of won for Samsung and LG, respectively.” The official added, “Some in the industry say that the amount is the largest-ever paid by the two handset makers.”

As a result, the local electronics industry has been emphasizing that the FTC should impose stricter conditions when it makes a final decision to approve Microsoft's purchase of Nokia. In particular, the industry is worried about Nokia's offensive. It is mainly attributable to the possibility that the Finnish company will focus on indiscriminate lawsuits to increase royalties and demand a sales ban as an NPE.

First, the industry is keeping a close watch on the limit of royalties set by the country’s anti-trust regulator. The reason lies in the fact that the negotiations between the two Korean Android phone makers and Nokia will be heavily affected by the royalty limit.

For standard-essential patents (SEPs), the Korean regulatory body is expected to demand that the Finnish firm abide by fair, reasonable, and non-discriminatory (FRAND) patent licensing principles. Under those terms, holders of SEPs are required to let rival companies use their patents in a FRAND manner. For Non-SEPs, a provision that prohibits the transfer of patents is expected to be applied in a way that excludes the possibility of shouldering a double burden.

The duration of transfer prohibition for Non-SEPs is expected to be similar to the five years of China. As for Microsoft, the FTC is likely to create a new condition in which the software firm will not ban the sale of local smartphones, even when those handset makers violate Microsoft's SEPs. The regulatory authority is more likely to take a measure to maintain the current level of patent fees or conditions for the approval after the M&A deal. In other words, the FTC is expected to consider the current conditions of the local market, while following the Chinese government's method of approving M&A transactions under certain conditions.

Meanwhile, there was widespread speculation that at first the Korean regulator considered similar conditions imposed by the Chinese government, but it recently changed its mind. The change is largely attributable to rumors that Nokia is demanding a large sum of patent fees, as shown by its request that a smartphone vendor in China pay 20 times as much in patent royalties. Although the FTC drew up an outline for its decision not to ignite controversy surrounding market intervention, but there remains a big burden for the final decision.

The Chinese Ministry of Commerce already approved the merger in a manner that includes FRAND principles and measures to prohibit demanding sales bans or exclusion. It was also decided to outlaw the sale of SEPs and non-SEPs at the same time. Last year, the E.U. and the U.S. approved the deal without conditions. In February, Taiwan created restrictions that ban an increase in fees between Android and Window phone makers in a discriminatory way. Nokia has about 300,000 patents related to cell phones, and 7,000 patents connected with the telecommunications area.

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