Why Robust Intellectual Property Rights in Wireless Technologies Are a National Security Imperative

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Introduction

Since its inception in the late 1990s, the mobile communications device industry has revolutionized everyday life and, in the process, generated immense economic value by enabling new business models and industries that would previously have been unimaginable. A handful of innovative companies based in the United States and Europe were responsible for the core innovations behind the 2G, 3G, 4G/LTE, and now 5G wireless generations released since the 1990s through the present. Each wireless technology generation has delivered increasing capacities for the reliable transmittion of rich streams of audio, textual, visual, and video content through communications and computing devices. 

As a result of these advances, 5G wireless technologies now extend beyond communications and computing devices to vehicles, home appliances, medical devices, and other applications in the Internet of Things. Most of the companies that lead in wireless technological innovation are based in the U.S. and Europe and operate under a business model that focuses on research and development, which is monetized through patent-based licensing relationships with branded device producers. Those producers are principally located in the People’s Republic of China or outsource most production to contract manufacturers located in China. 

Since the lead innovators do not occupy the retail end point of the smartphone supply chain, these entities’ foundational and ongoing contribution to technological development in wireless communications and the larger wireless-enabled tech ecosystem is often overlooked. As a result, policy discussions are often dominated by concerns raised about a “patent tax” that purportedly generates onerous licensing costs for device producers and increases prices for consumers. Those concerns support policy initiatives to impose limitations on the enforcement and licensing of standard-essential patents (SEPs) for wireless technologies. This approach has culminated in the European Union’s recent legislative intervention in the SEP licensing market, which, if ultimately enacted and implemented, would impose a cumbersome administrative apparatus to address perceived royalty burdens and transaction and litigation costs attributed to SEP licensing and enforcement activities. 

This simplistic patent tax narrative overlooks two key points. 

First, the standard narrative overlooks the fact that there is no evidence of systematic market failure in the wireless communications market that requires regulatory intervention. To the contrary, this market is a multi-decade technological and economic success story characterized by rapid adoption and continuous innovation. SEP litigations may capture news headlines, but most SEP licensing proceeds without dispute (albeit subject to extensive negotiation like any other significant business endeavor), as illustrated by the fact that, from 2012 to 2021, there were less than 0.05 lawsuits per license involving SEP licensors and patent pools.¹

Second, the standard narrative overlooks the constructive functions played by patents in supporting both the innovation of wireless technologies and the dissemination of those technologies through licensing relationships with producers and other implementers. Any regulatory intervention that impedes the enforcement or licensing of SEP-protected wireless technologies is prone to penalize innovators, which are principally based in the U.S. or in allied democratic countries,² and reward device producers, which are mostly based in, or primarily source production from, China. This in turn is likely to injure the innovative vigor of the global mobile communications ecosystem as a whole. As a matter of both innovation and national security policy, any actions taken by U.S. policymakers to mimic the EU’s misguided legislation would be unwise. 

The Global Division of Labor in the Wireless Technology Ecosystem

The smartphone that is now a ubiquitous feature of everyday life is the product of a complex supply chain that extends across the globe and reflects R&D investments in the billions of dollars annually. At the most general level, the smartphone development process can be divided into three phases: (1) R&D, which yields innovations that advance data-transmission and processing capabilities relative to existing technologies, (2) a standard-development process, through which lead innovators, implementers, and other industry stakeholders work cooperatively to select best-in-class technologies for the next wireless generation, and (3) implementation, through which producers incorporate standardized technologies into new communications, computing, and other wireless-enabled devices and equipment, which are ultimately sold to consumers or business users. If a company’s technological contribution is selected for inclusion in a technology standard, typically the company must make a commitment to the standard-development organization to license the technology on fair, reasonable, and non-discriminatory (FRAND) terms. 

The sequence of investments in this process is important. 

At the R&D stage, wireless technology innovators make exceptionally large investments over several years with no assurance that this investment will produce viable technologies, that those technologies will be included in a standard, and that the standard will be widely adopted. Each of those steps must be executed to achieve any positive cash flow—which is by no means assured. New technology standards often compete with other new and existing standards for adoption by producers and end-users. Hence, for a considerable period, the innovator is “out of pocket” on billions of dollars in R&D costs until a sufficient level of market adoption has been achieved. This iterative model of technological development and improvement is only sustainable so long as the innovator regularly receives payments for use of its current-generation technology, which it then reinvests in developing next-generation technology. As will be discussed, that payment flow is ultimately anchored in the ability to reliably enforce patents and patent licenses.

The Geographic Division of Labor in the Wireless Ecosystem

There is a clear geographic division across the various stages of the wireless supply chain, which in turn raises important strategic implications for U.S. technological leadership. 

Any technology supply chain generally consists of a mix of innovators, who supply new technologies, and implementers, who embody those technologies in products and services for individual and business users. In the wireless communications supply chain, companies based in the U.S. and U.S.-allied countries (in particular, Arm, Ericsson, Nokia, and Qualcomm) are innovators and hence net technology suppliers. Meanwhile, companies based in China, or that principally operate in China (in particular, Apple), are implementers and hence net technology users. This can be observed in table 1: as a general matter, firms based in the U.S., Europe, and Korea that specialize in innovation invest substantially greater percentages of annual revenues in R&D, as compared to firms based in China that specialize in device production (and as compared to Apple, which does not specialize in wireless innovation and outsources device production principally to China-based contract manufacturers). Huawei, which is a China-based vertically integrated entity that may appear to depart from this trend, is discussed below. 

Table 1. Global Wireless Communications Device Supply Chain

Notes: Certain data is not available for private companies. Asterisk next to Huawei’s R&D intensity figure reflects long-standing concerns about the accuracy of Huawei’s financial information.³ Transsion owns the Tecno, Itel, and Infinix brands. LG had been active as an implementer until 2021, when it exited the handset market. 

Sources: Company annual reports. On production locations, see Karen Hui, Despite De-Risking, China’s Role in Global Smartphone Supply Chains Remains Resilient (Asia Pacific Foundation of Canada, Mar. 14, 2024); and Rajesh Roy and Yang Jie, Apple Aims to Make a Quarter of the World’s iPhones in India, Wall Street Journal (Dec. 8, 2024), https://www.wsj.com/tech/apple-aims-to-make-a-quarter-of-the-worlds-iph…;

All but one of the leading wireless innovators (a partial exception being Huawei, as discussed below) are located in the U.S. or an allied country in Europe or Asia. In contrast, six leading device producers are located in China, while Apple sources the largest portion of its handset production from contract manufacturers (principally, Foxconn and Pegatron) that primarily operate in China.⁴ Since the lead innovator companies based in the U.S. and Europe do not produce devices, they rely on patent licensing revenues, a significant portion of which are from China-based device producers (or Apple, which primarily locates production in China), to sustain continued innovation. Out of all smartphone shipments worldwide as of April 2024, approximately 35% were shipped by China-based vendors, and Apple, which sources the largest portion of its handset production in China, accounted for 28% of total global shipments.⁵ Even when handset production is located outside China, it is often undertaken by China-based contract producers or relies on components manufactured in China.⁶ Hence, it is almost certainly the case that a majority of the world’s smartphones are manufactured in China or by China-based producers,⁷ which in turn yields a substantial portion of the royalty payments that sustain innovation by companies located in the U.S. and Europe (provided China-based producers enter into licenses and pay royalties). 

Does China Have an Interest in Robust SEP Protections?

It is sometimes argued that China in fact has an interest in robust protection for SEPs because Huawei, a China-based company, owns the largest number of (self-declared) SEPs relating to the 5G wireless standard. This assertion suffers from three weaknesses. 

First, as discussed below, this assertion ignores China’s consistent efforts to weaken protections for SEPs through antitrust and patent law. Given China’s use of its legal system to advance industrial policy and geopolitical objectives in technology markets (which in turn reflects the absence of rule-of-law and separation-of-powers constraints), it would therefore be curious that China’s leadership would permit (and, as I have documented, encourage) its court system and antitrust regulators to deploy policies that consistently limit enforcement and licensing of SEPs.⁹

Second, this assertion overlooks the fact that Huawei is a vertically integrated company that monetizes R&D through devices and equipment, and therefore does not rely on licensing revenues (which, as of 2022, represented approximately 6% of total revenues⁹) to sustain its R&D investments. As a vertically integrated entity, Huawei primarily sources revenue by embodying internal R&D investments, or technologies developed by other companies (whether licensed or unlicensed), in mobile communications devices and telecommunications equipment. On this point, it should be noted that Huawei arguably exhibits the highest degree of vertical integration in the global wireless industry since it is not only a major producer of smartphones and other mobile communications devices but is also the world’s largest telecommunications equipment vendor.¹⁰ There is probably no other company that can provide such a complete end-to-end suite of products in the wireless communications industry. 

Third, this assertion overstates Huawei’s technological contribution to the wireless ecosystem. While Huawei has a large 5G SEP portfolio and makes significant R&D investments, treating Huawei as a lead wireless innovator solely based on the size of its SEP portfolio assumes that patent quality tracks patent quantity—an assumption that is rejected by industry practitioners and academic researchers. As found in a report issued by the U.S. Patent & Trademark Office (USPTO) in 2021, Huawei’s lead in 5G SEPs (as a percentage of SEPs self-declared as essential to the 5G standard) disappears if one only considers “triadic” patent families (patents issued by the U.S., EU, and Japan patent offices), which encompass the highest-quality patents. Additionally, based on other quality measures, the USPTO found that Huawei’s SEP portfolio underperforms the SEP portfolios held by lead wireless innovators based in the U.S., EU, and Korea.¹¹

Why Secure Intellectual Property Rights Support U.S. Technology Leadership

This clear division of labor between the U.S. and its allies on the one hand and China on the other means that, from a geopolitical perspective, the U.S. is a net technology supplier that has an economic and national security interest in maintaining a legal infrastructure that enables upstream innovators to source revenues through downstream licensing transactions. Critically, the technological leadership enjoyed by the U.S. and its liberal-democratic allies rests on the fact that a handful of companies based in those countries have consistently led in developing the communications and computing technologies on which the rest of the wireless supply chain depends. Without diminishing the important roles played in the information technology ecosystem by U.S.-based technology platforms, device producers, and cloud-computing providers, these entities have not been the primary source of innovation in the data-processing and transmission technologies that drive forward the wireless communications ecosystem and preserve U.S. technology leadership in wireless-enabled industries, extending from communications to automotive and beyond. 

Lead wireless innovators in the U.S. and U.S.-allied countries rely on two key legal inputs: the patent system and a judicial apparatus for enforcement of patent license agreements. Without a robust commitment to the reliable enforcement of intellectual property rights and licenses, the R&D-intensive structure that has supported several decades of successful development and deployment of wireless technologies would not be sustainable. In that case, the licensing-based business model employed by wireless innovators located in the U.S. and Europe would no longer be feasible, and technological innovation would falter or be confined to large vertically integrated companies such as Samsung in Korea or Huawei in China. The result would be adverse for the competitive health of the global wireless ecosystem (since new wireless technologies would no longer be distributed widely through licensing relationships between innovators and producers) and may pose a material threat to U.S. and Western technological leadership in that ecosystem. 

China’s Mercantilist Distortion of Licensing Markets for Wireless Technology

Since the enactment of the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) in 1995, all members of the World Trade Organization (WTO) have been obligated to provide a certain baseline level of patent protection.¹² Historically, the Office of the U.S. Trade Representative (USTR) and other federal agencies have taken a lead in promoting international compliance with the TRIPS baseline, which provides the basis for a well-functioning global market in IP-protected technologies. In contrast, China (which became a WTO member in 2021) has consistently taken steps to deploy its patent and competition laws to place limits on SEP enforcement in an effort to reduce the royalties owed by local device manufacturers to foreign SEP owners. 

As a net technology user in the smartphone supply chain, China has an economic interest in devaluing SEPs and other patents in the wireless technology sector. Unconstrained by the rule of law, separation of powers principles, or treaty obligations, China’s political leadership (including President Xi Jinping) has called on agencies and courts to advance China’s geopolitical objectives in applying patent and antitrust law to favor domestic economic interests. In a 2020 speech to Chinese Community Party leaders, President Xi Jinping stated, “Intellectual property is a core factor for competitiveness on the international stage, as well as a focal point of international dispute. We need to have the courage and the capacity to stand up for ourselves.”¹³

Consistent with this mandate from Chinese government leaders, Chinese agencies and courts have repeatedly deployed competition and patent law to reduce SEP royalty rates and, as a result, distort the SEP licensing marketplace in favor of domestic implementers over foreign innovators. These actions include:

1. In 1995, a Chinese competition agency opened an investigation of Qualcomm for purported violations of competition law due to so-called excessive royalties and certain licensing practices. The investigation concluded with payment of a $975 million penalty and a settlement that required Qualcomm to reduce the “royalty base” over which it assessed royalties for its China-based licensees. This action was followed by imitative interventions against Qualcomm by competition regulators in Korea, Japan, and Taiwan.¹⁴
2. In patent infringement litigation (which typically involves a China-based producer as the defendant and a U.S. or other foreign SEP owner as the plaintiff), Chinese courts typically deny injunctions to SEP owners. The only known exceptions are two cases where the SEP owner was a China-based entity.¹⁵ Additionally, Chinese courts tend to adopt a top-down methodology that depresses FRAND rate determinations below the rates determined by U.S. and European courts, which tend to favor a “comparable licenses” methodology based on previously negotiated licenses.¹⁶
3. In 2020–21, Chinese courts issued multiple “anti-suit” injunctions that prevented foreign SEP owners from pursuing infringement litigation in courts outside China. In those cases, the domestic implementer typically petitioned the Chinese court for an anti-suit injunction to suspend the foreign infringement litigation against it and then to determine a FRAND royalty rate that would purport to apply globally.¹⁷This practice led the EU to initiate a proceeding in 2022 against China in the WTO for violation of its obligations under the TRIPS agreement.¹⁸ (Curiously, USTR has made a filing that is largely aligned with China’s position.¹⁹)

Why the EU Legislation Endangers the West’s Technological Leadership in the Wireless Ecosystem

In February 2024, the European Parliament enacted legislation²⁰ to address purported deficiencies in the market for licensing SEPs, which encompass the wireless ecosystem and other SEP-dependent markets in computing, communications, and other industries. 

There are two principal areas of concern that motivate the legislation. First, the legislation reflects concerns over the perceived risk that an SEP owner could engage in “holdup” tactics that extract an excessive royalty from device manufacturers that require access to a technology standard. Relatedly, the legislation reflects concerns that royalty demands from multiple SEP owners will create a “royalty stack” that burdens device producers and increases prices for consumers. Second, the legislation reflects the perceived risk that small and medium-sized enterprises (SMEs) would have difficulty licensing the SEPs required to implement a particular standard as wireless technologies are deployed in the Internet of Things beyond large handset and automotive producers. 

EU Legislation: Key Elements

The legislation, which must still be approved by the EU Council to take effect, sets forth a complex administrative mechanism that is designed to address three perceived risks. 

1. To address perceived hold-up risk, the legislation requires that owners of EU-issued SEPs that wish to file an infringement suit must first enter into a government-administered “conciliation” mechanism to agree on or, in the absence of agreement, to have an expert panel determine a FRAND royalty rate. The rate determined through this process is non-binding, and an SEP owner can still elect to file suit for infringement and restart the FRAND determination process in court. 
2. To address perceived stacking risk, the legislation provides that all or a certain portion of SEP licensors can collectively agree upon a global aggregate royalty rate, which would then be communicated to the administrative entity. Alternatively, SEP owners or implementers can request a non-binding expert determination of a global aggregate royalty rate. 
3. To address perceived licensing obstacles faced by SMEs and other implementers, the legislation requires that SEP owners register their SEPs with a government-administered registry as a condition for bringing an infringement action. The legislation also provides that the administrator conducts an annual “essentiality check” of a selected sample of an SEP owner’s registered SEPs (subject to a fee payable by the owner).

Solutions in Search of a Problem

Each component of this cumbersome mechanism unnecessarily increases transaction and dispute-resolution costs in the SEP licensing market by addressing purported deficiencies for which there is little supporting evidence. 

Holdup and Stacking

Concerning holdup and stacking concerns, multiple empirical studies have assessed the extent to which these risks have been realized. Without exception, those studies fail to find supporting evidence; rather, the total royalty burden in SEP-dependent markets has held constant within a modest range of 3% to 5% of the device sale price.²¹ This finding should not be surprising. If holdup and stacking were widespread, then wireless licensing markets would exhibit exorbitant royalties, which would inflate smartphone prices and discourage adoption. Yet precisely the opposite has occurred. Adjusted for quality, mobile communications device prices have fallen during the history of the industry.²² Those findings explain why wireless devices have been adopted broadly across a wide range of income segments and why the bulk of the value generated in the smartphone supply chain flows to branded downstream producers, not upstream innovators.²³

Even if there were concerns that holdup remains a significant risk, any such risk is already mitigated by existing limitations on SEP owners’ ability to secure an injunction against infringers. Reflecting the influence of the U.S. Supreme Court’s decision in eBay Inc. v. MercExchange LLC (which in a concurring opinion suggested limiting the availability of injunction for licensing entities),²⁴no SEP owner has ever secured an injunction in a U.S. court, although the Federal Circuit has recognized that such injunctions should be available when the SEP owner faces a licensee who engages in bad-faith tactics. In the UK and EU, courts have generally held that injunctions are available only when the infringing party is an “unwilling licensee” who acts in a bad-faith manner during license negotiations.²⁵ In Germany, courts have shown a greater willingness to issue injunctions to SEP owners, although this is still predicated on a showing that (among other required items) the alleged infringer has not sufficiently stated its willingness to license on FRAND terms.²⁶

To the extent that SEP owners face significant obstacles in securing an injunction against alleged or adjudicated infringers, hold-up risk diminishes and bargaining leverage shifts to the implementer. This shift is most dramatic in the U.S. litigation context given the near impossibility in securing an injunction for SEP owners in light of the expansive understanding of the eBay decision. This shift in leverage is exacerbated by the sequencing of the wireless innovation and development cycle. Recall that the innovator front ends its R&D expenditures and, if it is not engaged in device production (which is true of each of the three leading innovators), cannot achieve any positive economic return without entering into licenses with implementers. Yet if there is only a limited prospect of an injunction, the implementer can elect to make use of the SEP owner’s technology during a litigation process that typically extends over several years and, even if the SEP owner prevails, can only result in a monetary award equivalent to a court-determined FRAND royalty. A well-resourced implementer that can sustain an extended litigation and settlement process will almost certainly elect this holdout strategy, for which there are ample illustrations.²⁷

The EU legislation exacerbates innovators’ predicament by requiring a FRAND determination process (which can last up to nine months) prior to the filing of an infringement suit. Moreover, it appears to contemplate use of the top-down method for making the FRAND royalty determination for purposes of calculating damages, which is likely to favor implementers over innovators. This method relies on determination of an aggregate royalty for the SEP portfolio and then allocates a pro rata portion of the royalty to each SEP owner based on the number of SEPs that it owns. U.S. and European courts have generally disfavored this method because it fails to reflect differences in patent quality and, as a result, tends to penalize higher-quality innovators (which, as noted above, are located in the U.S., Europe, and Korea) by depressing royalty rates relative to the rates secured through market negotiations that do take patent quality into account.²⁸

Transactional Frictions

Concerning potential transactional obstacles faced by SMEs, there is not yet evidence that these entities constitute a meaningful portion of the 5G-enabled market or are likely to do so in the future as wireless-enabled technologies extend beyond the communications and automotive markets and today’s SMEs grow into larger entities. Given the transactional obstacles of locating, and negotiating, with licensees, it is typically only economically worthwhile for SEP owners to seek to license large entities (and, when necessary, to bring enforcement actions to elicit a license negotiation process). Even if, contrary to business experience, it was anticipated that SMEs would constitute a lasting material portion of wireless-enabled markets (beyond the communications and automotive sectors in which large implementers already predominate) and SEP owners would seek to license SMEs, there is no reason to believe that government intervention is the best solution to any potential transactional frictions that could impede SME licensing agreements. 

U.S. information technology markets have a long record of anticipating transactional frictions in IP licensing and developing effective solutions to mitigate those frictions. This reflects the mutual interests of licensors and licensees in avoiding litigation and entering into efficiently negotiated licensing arrangements. Information technology markets maintain tens of cross-licensing and patent-pooling arrangements that provide “one-stop-shop” licensing solutions for standardized technologies (such as the Bluetooth, Blu-ray, Wi-Fi, USB, LAN, and audio and video codec standards) that are typically administered by a third-party entity.²⁹ Hence, the market has alreadyshown repeatedly that it has the capacity to develop workable solutions to the type of problem the EU legislation assumes is best addressed through government intervention. In the SEP licensing market, this private-ordering pattern has continued with the emergence of the Avanci 4G/5G, Sisvel Wi-Fi 6, and MIOTY licensing platforms in automotive, Wi-Fi, and Internet of Things environments. Market competition to develop efficient collective licensing solutions would almost certainly produce outcomes that outperform an administrative entity protected by government mandate.

Conclusion

In 1982, a U.S. court ordered the breakup of AT&T, then one of the world’s largest telecommunications providers. As a consequence of the breakup, Bell Labs, AT&T’s world-famous research division that employed thousands of scientists and had pioneered some of the fundamentals of wireless communications, became a division of Lucent, the telecommunications equipment maker formed as part of the dissolution process. As Lucent struggled economically (and was ultimately sold to Alcatel, a French company), Bell Labs declined in importance. While various economic and geopolitical factors contributed to this sequence of events, the failure of policymakers to appreciate and address the national security importance of Bell Labs in the context of the AT&T breakup certainly played a role in squandering what had been a cornerstone of U.S. technology leadership. 

The U.S. (and its democratic allies) should not make the same unforced error in the wireless communications industry. Just as the U.S. once relied on Bell Labs to maintain leadership in fixed-line communications and other strategic technologies, today the competitive advantage currently enjoyed by the U.S. and its allies in wireless communications (and the broader wireless-enabled ecosystem encompassing civilian and defense industries) relies substantially on four companies located in the U.S. and Europe. These companies sit at the apex of the smartphone supply chain but, as licensors that focus on R&D, rely on revenues sourced from device producers through contractual relationships anchored in the patent system. Without U.S. thought leadership to emphasize the importance of respecting global norms of baseline IP protections (as contemplated by the TRIPS agreement and historically advocated by USTR), U.S. technological leadership in the wireless ecosystem stands at risk. 

The EU’s legislative intervention in the SEP licensing market is incompatible with the U.S. national interest in preserving its competitive advantage in wireless technologies. Moreover, the legislation’s top-down approach departs from the U.S. market’s historical reliance on voluntary private-ordering solutions to IP licensing frictions. U.S.-based companies pioneered wireless communications technologies, and the U.S. continues to be a net technology innovator in this industry. Given the wireless communications market’s track record of technical and economic success, the EU legislation is unnecessary and costly with little if any redeeming benefit. Moreover, it may tilt the rate determination process in a manner that advantages implementers that are largely based, or maintain most production, in China. Any policy action that limits patent owners’ enforcement and licensing capacities is liable to distort the market pricing of wireless technologies and devalue a “crown jewel” asset that supports U.S. leadership in this mission-critical industry. View PDF