Ericsson Sues Sendo over GSM Cell Phone Patents: Why?

By Guy Kewney  |  Posted 2005-03-23

Ericsson Sues Sendo over GSM Cell Phone Patents: Why?

Heres a mystery: why has Ericsson—which doesnt make phones—sued Sendo, which does, for using Ericssons GSM cell phone patents without payment?

On the face of it, the mystery is no mystery. Sendo, a tiny phone maker from Britains second city, Birmingham, has been using Ericsson patents in its GSM (Global System for Mobile Communications) phones.

Thats not in dispute: Sendo admits as much. "Ericsson is entitled to compensation for its intellectual property," said Hugh Brogan, founder and CEO of Sendo.

So the lawsuit is pretty much what youd expect, right? No: "It was unprovoked, a complete surprise, and somewhat unnecessary," Brogan said.

Yes, he said, he is using Ericsson patents—but thats because he has to. It is a legal requirement for the manufacture of GSM phones; they absolutely must have these features. But hes willing to pay. Negotiations are in progress, and have been for some time.

The dispute, he said, is over the amount Ericsson is asking, which, sources say, involves "double-digit royalties"—10 percent or more—"on sales" for the use of its patents.

Click here to read Carol Ellisons opinion on how GSM cell phones could help Wi-Fi in the United States.

Effectively, if Sendo agreed to those terms, it would be making every phone at a loss. So the company did two things. First, it reminded Ericsson of its duties as a member of the GSM Family. And second, it lodged a complaint with the European Commission, protesting the anti-competitive nature of Ericssons royalties.

The mystery of the lawsuit is easily explained, Brogan said. He said he thinks the complaint with the EC has provoked Ericsson into firing up its lawyers. "We said that from the beginning; were prepared to pay a license, but only on the basis that its fair and reasonable."

Can he do that?

To understand the situation, its no use asking any of the players. All the big GSM players know the score, but they cant tell. Theyve signed agreements in blood (well, nearly) saying they wont tell.

Instead, you have to go to a small seaside town in the United Kingdom and approach a lawyer I know there. I honestly dare not say more about this man, but I can tell you the name of his client: the ITSUG.

ITSUG stands for International Telecommunications Standards User Group—a pretty opaque title, which says nothing about what it does—but its aims are to sort out patent licensing about GSM equipment.

The membership of ITSUG is secret. My sources say it has 40 members. These are generally smallish companies who want to get into this business and need to license the basic GSM patents.

In short, it is a cartel.

Next Page: The history of ITSUG and its ramifications.

Secret History of ITSUG

What ITSUG does is allow those who own GSM patents to share them with each other. And it was created to resolve a fierce dispute which arose when the original GSM design work was done.

In those days, long ago, several large telecommunications companies rebelled against Qualcomm, owner of the CDMA (Code Division Multiple Access) patents, and got together to create TDMA (Time Division Multiple Access), the basis of GSM—and all the other engineering excellence which underpins the global mobile-phone network.

Their achievements cant be doubted—technically. Where it seems they failed was on the diplomatic front, because some of those large companies sent their best engineers to the project, but secretly patented their work behind the backs of their partners.

When the patents were disclosed, there was uproar, as you can imagine; and the ETSI standards body ruled that they could keep the patents—but must agree to license them on a fair and nondiscriminatory basis.

The result is that, for some time, companies have been making phones at zero profit. They do so because the terms of the ITSUG say they cant remain part of the cartel if they arent phone makers.

Technically, Ericsson isnt a phone maker; its given that part of its business to the joint venture with Sony, and Sony Ericsson makes the phones. But Ericsson uses its intellectual property in the infrastructure equipment it makes—exchanges, switches, base stations and so on—all using GSM technology.

Is Ericsson still a member of ITSUG? Impossible to say: Membership of the cartel is confidential, and no member can disclose its membership without the agreement of the other members.

Is Sendo, then, being carved up by the cartel?

It so happens that it isnt. I cant tell you how I know this, although a certain lawyer can probably guess, after a conversation we had a couple of years ago—but I do know that Sendo is an ITSUG member. It has a trivial number of patents compared with what companies like Siemens, Sony, Nokia, Ericsson, Samsung, Motorola and so on—assuming these are members—contribute. But it is a member.

As a member, it is entitled to use Ericsson patents at a "fair and nondiscriminatory" rate.

So why on earth have these two family members fallen out? Why could they not agree inside ITSUG?

Ive spoken to other ITSUG members—not that theyll admit to being members, of course—but they all say that what Ericsson is asking is "totally out of order" and "unfair" and "wrong"—and, frankly, they cant see why this is going on.

In the absence of hard facts, they are indulging in speculation. Here is what they are saying, in their own internal company canteens: "Sendo is for sale."

Is it? Well, its tiny, compared with giants like Nokia or Motorola. But it has broken the mould of phone manufacture. What it does is to produce nonbranded phones for the networks. That was what attracted Microsoft to it in the first place—leading to a lawsuit which was settled (secret terms!) last August. Microsoft wanted a smartphone that wasnt restricted to one manufacturer, and the Sendo design was going to be that, until they fell out.

Click here to read more about the outcome of Sendos 2003 lawsuit against Microsoft.

Who would want to buy Sendo? Well, Nokia, for a start. It has a (secret!) investment in Sendo, and is widely credited with rescuing Sendo when Microsoft pulled the plug on the original smart-phone design and tried to have its partner wound up. Would Nokia be the only one?

Well, say the whispers over the plastic cafeteria trays, no, not the only one. No, Ericsson might like to get back into the phone business. And the price for Sendo, if it were under the cloud of a lawsuit… well, it wouldnt go up, would it?

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