What the Administration is Missing About Huawei and 5G

Huawei LogoA few weeks ago it seemed likely that the US Department of Commerce, Bureau of Industry and Security (“BIS”), would issue new guidance that might free standards setting organizations (SSOs) from the difficult position they have found themselves in for almost a year. But that didn’t happen. Instead, most SSOs have concluded that they still cannot allow Huawei and its affiliated companies to return to the working groups that are creating the essential standards that will make the roll-out of 5G networks become possible.

How much does that matter in the context of the overall U.S.-Chinese confrontation? The answer is a great deal, as continuing to bar Huawei and other Chinese telecom giants from standards development may weaponize the patent portfolios of those companies in a way that could prove disastrous for the U.S. and other Western nations.

First, some background for those that have not been monitoring this story. On May 16, 2019, BIS added Huawei, the dominant 5G telecommunications company, and scores of its affiliated companies to its “Entity List.” The purpose of that list is to place US companies on notice of companies that the government has determined might use such technology to the competitive disadvantage of US industry. The Trump (and prior U.S. administrations) have for years asserted that China has pressured U.S. companies to share their most valuable technologies in order to gain access to Chinese markets, and also that Chinese companies (and perhaps government agents) have repeatedly hacked into the servers of U.S. companies to steal valuable trade secrets, including the complete designs of stealth aircraft).

The addition of Huawei to the BIS list was therefore not a surprise (and, in fact, ZTE, another Chinese telecommunications firm had previously been added to the list), in particular due to a separate but unrelated concern: that Huawei might embed “back doors” or other vulnerabilities into its 5G networks. Once so embedded, the Chinese government might force Huawei to provide the digital keys, as it were, to those backdoors, thereby enabling the Chinese government to monitor the voice and data communications of the world.

The concern is not theoretical, although Huawei has consistently claimed that it would neither embed such vulnerabilities, nor share them with the government if it did. That has provided insufficient assurance to the U.S. and some other governments, however, perhaps in part because the U.S. government itself has pressured (without success) Apple and Google to embed such vulnerabilities in their own operating systems for purposes of government access, and also because under the Chinese policy of “Civil-Military Fusion,” private sector companies must share their technologies with the Chinese military.

In any event, the impact of adding Huawei to the BIS list was to prohibit U.S. companies from sharing sensitive technologies with the Chinese companies. By way of collateral damage, it also placed SSOs in the position of either barring Huawei from participating in their activities – since the disclosure of technology is sometimes necessary to standards development – or radically changing their processes and rules in order to fit within either of two existing exemptions, neither of which (publishing and conferences) were very direct or useful fits. SSOs have been struggling ever since with how to adapt, especially since interim guidance provided by BIS some months later proved not to be very useful.

To date, Huawei’s public response to being denied the ability to participate in scores of SSOs has been to protest its exclusion and seek to have that situation reversed. But what are its options if it wants to – or the Chinese government orders it to – take it up a notch?

The answer could be very unpleasant, particularly if trade negotiations between the U.S. and China falter or are abandoned, and Beijing leans on Huawei to play hardball.

The first and most obvious possibility is a standards war reminiscent of the VHS-Betamax wars that bedeviled the video player marketplace in the 1970s, but on a vastly more disruptive basis, given the vast size and importance of telecommunications. Under this scenario, Huawei and allied companies could create their own standards and refuse to implement those developed by the standards working groups from which Huawei has been excluded. Customers would need to decide whether to buy products that comply with one standard over the other. If they like Huawei’s technology better, this would drive the marketplace away from western technology and towards Chinese products.

This scenario would not be unprecedented. Indeed, back in the mid-2000s China developed its own 3G standard, called TD-SCDMA, based on a portfolio of Chinese patents. That standard, like most telecommunications standards, was based on patented technology, with the result that anyone building a product to the TD-SCDMA standard would need a license to the underlying “standards essential patents,” or SEPs. China signaled that it would only allow TD-SCDMA-compliant telecommunications equipment to be connected to the Chinese telecommunications networks – and also that it would only allow Chinese vendors to build those products.

Armed with the ability to bar foreign technology vendors from accessing the vast Chinese marketplace, the Chinese government was able to gain valuable concessions from foreign vendors before allowing them to sell their wares. Since then, China has become a much more adept participant in standards development, including by securing the top spots in some of the most important global SSOs.

But China could go farther than simply drive hard bargains with foreign competitors. If it wanted to really play tough, it could go further and force Huawei to demand extortionate license fees from 5G vendors for infringement of Chinese companies’ “standards essential patents” (SEPs). That is, patents that would be necessarily infringed by the implementation of 5G standards created without their involvement. Huawei has filed more 5G patent applications than any other company in the world (3,147 to date; ZTE comes in third, with 2, 561). Each company would almost certainly own tens, if not hundreds of SEPs. If the 5G vendors refused to pay up, they could be sued, and, if the patents were found to be validly issued and indeed infringing, they would lose in court.

Ironically, allowing Huawei to freely participate in SSOs would provide a simple and effective way to avoid not only the first risk – a standards war – but the second as well. The reason has to do with the terms of the intellectual property rights (IPR) policies that almost all SSOs adopt.

Under those terms, companies that wish to help develop a standard must agree to either license their SEPs on “reasonable and non-discriminatory” (RAND) terms to implementers of the standard, or disclose them, and the portion of a draft standard that would result in infringement, so that the working group doing the development can seek to re-craft the draft standard to avoid infringement.

SSOs – and even more so their members – are therefore in a double bind. Not only is the company with the best technology and the biggest market footprint barred from helping create the standards that are essential to make 5G networks effective, but the U.S. administration is giving the Chinese government and Huawei every incentive to weaponize the SEPs that Huawei will inevitably end up owning.

If that happens, everyone ends up as a loser.

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