Smallest salable patent practicing unit (SSPPU)
and component licensing: Why $1 is not $1?
Axel Gautier & Nicolas Petit
Liège Université
Introduction




Courts use SSPPU and EMV in patent damages litigation
Provides base for assessing ex post the appropriate royalty
revenue for technologies protected by patents in case of
litigation
Policy question: extend SSPPU and component licensing in ex
ante royalty negotiations?
 SSPPU+
What would be the impact of this move?
 Topic of this paper
 Focus on royalty negotiations
www.lcii.eu
Related literature


Comparison between ad-valorem and per unit royalties
 Llobet and Padilla(2016)
 Llobet, Layne Farrar and Padilla (2014)
 Kamien and Tauman (1986)
Impact of SSPPU
 Teece (2015)
 Putnam and William (2016)
 Starck (2015)
www.lcii.eu
Why $1 is not $1 ?
Mathematician
Behavioral
economist
www.lcii.eu
Judge
The neutrality of multiplication

Consider the following example
 Handset with retail value $1,000
 Firm A has a patented technology included in the handset

Value of the technology = $50 (supposed to be known)
•


Embedded in a chipset, produced at cost = $10
EMV


but common knowledge is an issue
Firm A will set a licensing rate of max 5% giving a payment of
0.05 x $1,000 =$50
SSPPU


The licensing rate should be made by reference to smallest component, the
chipset
Licensing fee of max 500% giving a payment of
5 x $10= $50
www.lcii.eu
The neutrality of multiplication

For a mathematician $1 = $1
Royalty revenue = royalty base x royalty rate

A change in the royalty base can be compensated by a
inversely proportional change in the royalty rate
www.lcii.eu
Behavioral economics


Behavioral economics: decisions are based on heuristics
Anchoring effect
 Agents make estimates by starting from an initial value and
then make adjustments
 Adjustments are systematically insufficient
Estimate biased to the initial value
‘The anchor’
 Strongest heuristic in behavioral economy


www.lcii.eu
Behavioral economics

Example (ctd’)
 The reference is the end market value ($1,000)
 Valuation estimate is likely to be high



The reference is the component value ($10)
Valuation estimate is likely to be low
For both the buyer and the seller
www.lcii.eu
SEP bargaining (based on Sidak, 2013)
SEP holder
WTS
=Surplus
Licensee
WTB
Bargaining range
Royalty
payment
 The bargaining range is the difference
between the WTB and the WTS
 The bargaining range is non-empty if
WTB > WTS
www.lcii.eu
SEP bargaining
Royalty
payment
Royalty point
SEP holder
WTS
=Surplus
Licensee
WTB
Bargaining range
Buyer’s surplus
Seller’s surplus
 Bargaining range = Surplus
www.lcii.eu
Anchoring effect: application to SEP bargaining
$30
Royalty
point
=Surplus
Licensee
WTB
Seller
WTS
Bargaining range
$40
Royalty
point
=Surplus
$50
Licensee
WTB
Bargaining range
$60
Seller
WTS
$20
SSPPU
EMV
www.lcii.eu
Apportionment method
Anchoring effect




The anchoring effect is likely to change the royalty point in
negotiation
But not :
 The total surplus
 The sharing of the surplus
Surplus of the parties remain constant
In addition:
 Cognitive skills decrease the anchoring effects
 Anchoring effects can be –partially– corrected in business
negotiations
www.lcii.eu
Judges and courts


Negotiation takes place in the shadow of litigation
Behavioral economics in courts
500% is ‘high’, 5% is ‘low’ (unit effect)
500% is digits-away from industry practice
 Courts do not believe in the neutrality of multiplication



Cornell vs HP : jury agreed on a royalty rate (0.8%) then the judge
proceeds to determine the SSPPU
•
Changed the definition from CPU Brick to processor without changing the
royalty basis.
www.lcii.eu
Judges and courts

Antitrust constraints
 Excessive pricing (EU, China, Korea)


Essential facilities rules



Prices which exceeds cost by 100% of value are unfair
Obligation to license
Likely to monitor licensing terms and conditions
FRAND

Reference to « commercial practices in the field » which is a
concern if the courts do not believe in the neutrality of
multiplication
www.lcii.eu
Price cap & revenue cap




Three-digit royalty rates will be considered to be problematic
by judicial authorities
De facto price-cap on the royalty rate (r<rmax)
The combination of
 A price cap on the nominal royalty
 Component licensing
Leads to an implicit revenue cap on licensing
Rmax = rmax x Component value
www.lcii.eu
Consequences for SEP bargaining
Licensee
WTB
Revenue
cap Rmax
Bargaining range
Surplus
Royalty
payment
License
point
SEP holder
WTS
www.lcii.eu
 With a revenue cap, the
bargaining range and the
surplus no longer coincide
 Transfer of surplus to
implementers
 Unlike the anchoring effect,
it goes in one direction
Consequences for SEP bargaining



Technologies embodied in low cost components are more
constrained than those embodied in high cost components
 Redistribution between SEP owners
Impossibility of trade
max < WTS
 If R
max < WTS < WTB
 Even if trade is profitable R
Incentives to invest, to participate in a standard, to vertically
integrate,…
www.lcii.eu
Uniform pricing accross industries

What is the value of the 5G technology?
www.lcii.eu
Uniform pricing accross industries




Different values accross industries

Different royalty revenues
 Might be impossible if the revenue cap applies
Revenue cap = uniform pricing accross industries
Revenue is disconnected from value !
Concern in General Purpose Technologies (GPT)?
www.lcii.eu
Conclusions



SSPPU+
 Price cap on nominal royalty rate
 Which combined with component licensing creates a
revenue cap
 Uniform pricing across industries
Consequences
 Redistribution issues
 Incentives to invest
 Market structure
Will SSPPU+ become a standard?
www.lcii.eu
Comments welcome
Paper available on SSRN
https://papers.ssrn.com/sol3/papers.cfm?
abstract_id=2954592
Liege Competition and Innovation Institute (LCII)
Law School - University of Liege (ULg)
Quartier Agora | Place des Orateurs, 1, Bât. B 33, 4000 Liege, BELGIUM