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Huawei may demand more royalties from US firms that rely on its patented tech

Key Points
  • Huawei could demand more royalties from U.S. firms over technology they are using that has been patented by the Chinese telecom giant.
  • Huawei owns the highest number of so-called "standard essential patents" for 5G in the world.
  • CEO Ren Zhengfei says he "may try to get some money" from firms using the company's intellectual property.
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Huawei could use patents to fight back against Washington

Huawei may demand more royalties from U.S. firms for technology they're using that's been patented by the Chinese telecom giant, experts say, as the beleaguered firm looks to fight back against continued pressure from Washington.

It would mark a big shift in strategy for Huawei, which typically is not seen as especially litigious in terms of intellectual property rights (IPR), even though it holds some crucial patents that underpin the world of telecommunication.

Last week, Reuters reported that Huawei had asked Verizon to pay $1 billion in royalties for more than 230 of Huawei's patents. The Wall Street Journal reported that the patents related to Huawei range from core network equipment to so-called internet of things technology — defined as physical devices that are linked to one another over the internet. The Verizon case is not a legal case at the moment.

Verizon might not be the only company in the crosshairs of Huawei when it comes to patent disputes. Ren Zhengfei, the company's CEO and founder, said this week that Huawei could seek royalties from more firms.

"Over the past years, we were not aggressive seeking IPR royalties to companies that use our IPR — that's because we were busy pursuing our business growth. Once we have more time off, we may try to get some money from those companies who use our IPR," Ren said, adding that patents would not be used as a "weapon to hinder the development of human society."

How are firms using Huawei patents?

Huawei has been effectively banned from selling telecommunications equipment in the U.S., but its technology is still being used by American firms via third parties that employ tech patented by Huawei.

A Huawei logo displayed at a retail store in Beijing.
Fred Dufour | AFP | Getty Images

When next-generation mobile networks are created, such as 4G or 5G, global standards need to be agreed upon. These are essentially protocols for how the technology will work globally, so that there's a systemic coherence that allows smartphones to communicate with networks. So-called standards bodies are tasked with doing this.

Companies like Huawei — as well as rivals like Ericsson and Nokia — will contribute to building the architecture of mobile networks through these standards groups.

In doing so, these companies devise technologies which they then patent. The patents, which are critical to the standards of say 4G or 5G, will be deemed a "standard essential patent" or SEP.

Huawei has been granted more than 69,000 patents globally related to everything from data transmission to network traffic management, according to data compiled for CNBC by Relecura, an intellectual property (IP) analytics platform. Another 49,379 patent applications are pending. Of those granted, over 57% are in China, while nearly 18% are in the U.S., Huawei's second-largest market for patents.

While the Chinese firm lagged other firms somewhat in terms of SEPs when it came to 4G, it is the leader in the 5G age. Huawei has the largest portfolio of patents for 5G — about 1,554 SEPs — and is ahead of Nokia, Samsung and LG Electronics, according to IPlytics, a market intelligence firm that tracks patents.

So even though Huawei's networking equipment is not being used by major telecom players in the U.S., other vendors that they buy products from could be using technology which is patented by Huawei. Given that Huawei owns so many key patents, the likelihood is that several other American carriers could also be using technology patented by the Chinese firm.

Why take action now?

Patent disputes are not uncommon in the technology and telecom world, and there have been a number of high-profile ones including between Apple and Qualcomm. Even Huawei's rival Nokia was embroiled in a dispute with Apple in 2016.

Huawei has not been particularly aggressive in bringing legal action against companies with regard to intellectual property. However, the thinking within the company could be changing given the continued political pressure, and the demand that Verizon pay $1 billion in royalties could be the first step.

"There has been consideration about the role of IP and what it mean(s) in terms of the U.S. and Huawei," a source at the company told CNBC.

"Huawei in the near future will be briefing media and stakeholders about its IPR efforts around 5G," added the source, who wished to remain anonymous because he is not authorized to speak publicly.

Huawei declined to comment when contacted by CNBC.

"We have no comment regarding this specific issue because it's a potential legal matter," Verizon spokesperson Richard Young told CNBC in an email. "However, these issues are larger than just Verizon. Given the broader geopolitical context, any issue involving Huawei has implications for our entire industry and also raise(s) national and international concerns."

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Huawei's CEO says company can withstand US. pressure

The U.S. has continued to pile pressure on the Chinese company. Huawei was recently added to a blacklist that restricts American firms from selling products to the company.

Experts say this could threaten Huawei's smartphone business. Huawei was forced to cancel a planned launch for a new laptop in June. The company relies on some key U.S. components for many of its devices.

Huawei has also slashed its revenue forecast for the next two years, with CEO Ren saying that the company could take a $30 billion hit to sales as its troubles with the U.S. continue.

"Huawei definitely knew about it," Nikhil Batra, senior telecom research manager at IDC, told CNBC, suggesting the Chinese company was aware that Verizon was using its patents and could potentially extract royalties from the American telco giant.

"This is going to be a longer battle. We can all go back ... and say it is all coincidental, but there is a reason we haven't seen this happen until now. It's because, maybe, they were waiting for an opportune time to strike back," Batra added.

Tim Pohlmann, CEO of IPlytics, said that Huawei hasn't typically focused on getting royalties, because it was growing very quickly in its smartphone and networking equipment business. But facing a complete ban in the U.S., as well as in some other countries, Huawei could look toward getting more revenue from patent royalties, he said.

"Huawei knows ... enforcing patents and asking for royalties is expensive and also not their main business," Pohlmann told CNBC. "Royalties through patents is a small fraction compared to how much revenue they created through smartphones and base stations. But when the latter revenue stream is taken from them, this is just a logical consequence."

Pohlmann noted that this was similar to what Nokia did when their handset business was sold off in the early 2010s.

What's the US trying to do?

It appears that Senator Marco Rubio has recognized Huawei's potential to use patents against U.S. companies. On Monday, he filed legislation that would block Huawei from fighting patent disputes in U.S. courts, according to Reuters. That proposal is far from becoming a law.

On Twitter earlier this week, Rubio accused Huawei of being a "patent troll."

Huawei CEO told CNBC on Wednesday that if Senator Rubio's law was passed, it would hurt America's image as a lawful place.

"If his recommendation can get past to the Congress, then ... the image of the U.S. as a country ruled by laws, would be damaged," Ren said, according to a CNBC translation of his remarks in Chinese.

Currently, Huawei would be able to fight any patent battles in U.S. courts.

"Without any direct legislation by Congress on the issue, the United States federal court system will continue to be available to Huawei for patent infringement claims, just as it is available to any other company," Robert Mattson, a U.S.-based intellectual property lawyer, told CNBC.

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