Hudson Institute: Why Robust Intellectual Property Rights in Wireless Technologies Are a National Security Imperative
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.