December 2015
ISBN: 978-3-945185-05-6
Re-Evaluating Patent Damages in the
Knowledge Economy
The Determination of Royalty Base for Standard Essential
Patents from an Intellectual Value Chain Perspective
Bowman Heiden
Center for Intellectual Property (CIP)
Department of Technology Management and Economics
Chalmers University of Technology
Jens Andreasson
Center for Intellectual Property (CIP)
School of Business, Economics and Law
University of Gothenburg
Re-EvaluatingPatentDamagesintheKnowledgeEconomy
TheDeterminationofRoyaltyBaseforStandardEssentialPatentsfrom
anIntellectualValueChainPerspective
BowmanHeiden
CenterforIntellectualProperty(CIP)
DepartmentofTechnologyManagementandEconomics
ChalmersUniversityofTechnology
JensAndreasson
CenterforIntellectualProperty(CIP)
SchoolofBusiness,EconomicsandLaw
UniversityofGothenburg
1.
Introduction
Patent valuation is a complex and imprecise process exemplified by the long,
contentious history regarding the determination of patent damages in US
jurisprudence. This process is made even more difficult as products increasingly
undergo technology convergence and market actors deploy divergent business
strategies to extract value from their intellectual property. This has led to an
increase in patent litigation and a greater need for courts to more accurately
calculatepatentvalue.Courtshavedeployedseveralproceduralrulesincludingthe
use of the smallest saleable patent practicing unit (SSPPU) and the entire market
value rule (EMVR) as a means to reduce the complexity. However, as these rules
impact the determination of the royalty base, which can differ by orders of
magnitude, the applicability of their use in different market contexts and norms
requires investigation as their use by the courts could have a systemic effect on
industrial dynamics and economic efficiency in specific markets, especially those
reliant on open standards. The goal of this study is to investigate the applicability
andimplicationsofthecurrentlegalnormsforthechoiceofroyaltybaseinrelation
totheprevailingmarketnormsregardingSEPtransactionsinthetelecommunication
industry.Thefullpaperwillbeavailableinanacademicjournalinthenearfuture.
Belowisashortsummaryofthepreliminaryfindings.
2.
ValueCreationintheKnowledgeEconomy
Forthisstudythefocusisonthekeyoperationaldifferencesbetweencompetition
onaproductmarket(i.e.aMVC)versusatechnologymarket(i.e.anIVC),wherethe
formerisprimarilyconcernedwiththeproductionandsaleofphysicalproductsand
thelatterwiththepackagingofknowledgeasintellectualpropertyand
commercializationthroughlicense-basedtransactions.Whilethematerialvalue
chain(MVC)canbeseenasacomponentofamoreholisticintellectualvalue
creationprocess,thispaperwilldefinethetwovaluechainsasseparatebut
complementaryasameanstobetterillustratethedifferentcommerciallogicsand
strategiesdeployedbymarketactors–seefigure1below.Thisisparticularly
relevantconsideringthechangingroleofIPlicensingfrombeingsimplyan
alternativetoin-houseproductiontoaprimarymeansofgeneratingrevenueand
facilitatingaccessinstandards-enabledmarketswithmulti-technologyproducts,
whereIPownershipisoftendistributedamongmanyactors.Astechnology/patent
licensingisoftendirectedatproducersofphysicalproducts,specialinterestwillbe
giventotheintersectionofthetwovaluechains(i.e.thepositioninthematerial
valuechainwherelicensingtakesplace)asthisdirectlyrelatestothedetermination
ofroyaltybase.
Intellectual Value Chain
Knowledge
Creation
Material Value Chain
Figure1.Commercializationofknowledgeonbothamaterialandintellectualvaluechain
3.
PositioningofLicenseAgreementsintheTelecommunication
ValueChain
InthetelecommunicationindustrythemarketnormsforthelocationofSEP
licensingistypicallyatthepositionoftheendproductinthevaluechainasshownin
figure2below.Onthelowerlayer,thefiguredepictsagenerictelecommunication
materialvaluechainconsistingofcomponentmanufacturers(e.g.chipset
producers),endproductsuppliers(e.g.brandownersandOEM/ODM),and
customers(e.g.operatorsand/orendusers).Ontheupperlayerthefigureshows
howtheresultsofR&Dactivities(e.gSEPs)aremanagedasintellectualproperty
transactions(e.g.SEPlicenses)throughtheintellectualvaluechaintowardsend
productsuppliersinthematerialvaluechain.
Figure2.PositionofSEPlicensinginthetelecommunicationvaluechain
ThechoiceofF/RANDlicensingtowardsendproductsuppliershasevolvedasthe
predominantmarketnormbasedonthefollowingreasons:
1. Historicalnorms
Thehistoryofcross-licensingamongintegratedfirmsinthe
telecommunicationindustryhascreatedastrongnormamongactorsto
licenseSEPsattheendproductsupplierpositioninthevaluechain.This
normhaspersistedevenasthevaluechainhastransformedandfragmented
toincludenewdivisionsoflabor.Thisnormcanbeseeninhowfirmsmake
royaltydeclarations,inthespecificationof“fullycompliant”productlicensing
inF/RANDcommitments,inthelicensingunitofpatentpools,inrecentITC
rulings,andintherecentSEPcourtcasesintheUS,wheretheendproduct
supplierhastypicallybeenthedefendant.
4.
2. RiskManagement
ForintegratedfirmsthatmaintainbothstrongSEPportfoliosandproduce
physicalproducts,thepositionofSEPlicensingisimportantformanaging
theirexposuretotheSEPportfoliosofotherintegratedfirms.
3. Valuecapture
SEPholdingfirmsareprofitmaximizers,thesameasallcommercialfirms.
Giventheopportunitytochoosethepositionofthevaluechaininwhichto
licenseSEPportfolios,arationalfirmwouldchooseapositionthatbest
reflectedthevalueofthecontributionoftheirtechnology.
Casestudies
Inordertobetterunderstandknowledge-basedbusinessmodelsinthecontextof
thetelecommunicationvaluechain,boththeMVCandIVC,twoshortcasesare
examinedindividuallyfirstandthencollectivelytoillustratetheirinteraction.The
firstcaseisQualcomm,exemplifyingaleadingcompanyoriginatingfromthe
telecommunicationsectorthatoperatesinboththeMVCandIVCsellingboth
componentsandlicensingSEPsasseparatebutinterrelatedbusinessmodels
towardsOEM/ODMs.ThesecondcaseisARM,exemplifyingaleadingcompany
originatingfromthesemiconductor/computerindustrythatoperatesexclusivelyin
theIVCthroughapureIP-basedbusinessmodeltowardssemiconductor/chip
providers1.
WhilethisstudydescribeshowdifferentbusinessmodelsintheMVCandIVC
operateandinteract,itisalsohelpfultoillustratehowdifferentknowledge-based
businessmodelsinteractinthetelecommunicationvaluechain.Figure3below
showshowtheARMandQualcommIP-basedbusinessmodelsinterfaceintheIVC,
whereARMprocessorIPcoresarelicensedtoQualcomm,whointegratesthem
togetherwithothertechnologyblockstoprovidefullsystem-on-a-chip(SoC)
solutionsformobiledevices.QualcommsubsequentlylicensesitsSEPportfolioto
OEM/ODMsmanufacturingendproducts.
1ThoughARMdoesnotlicenseSEPs,itdoeslicenseIPandhasbecomeamajoractorinthe
telecommunicationvaluechainthroughconvergenceofthemobilecomputingsegment.Itisused
heretoillustratedifferencesinIPlicensingnormsinrelationtoQualcommandotherSEPlicensing
telecommunicationfirms.ItisaparticularlyrelevantexamplegiventhatARM’slicensingpracticewas
usedasacomparableindustrylicenseindeterminingtheF/RANDroyaltyrangeandrateinthe
landmarkMicrosoftrulingrecentlyupheldonappealbytheUS9thCircuitCourtofAppeals.
Figure3.InterrelationshipofARMandQualcommIP-BasedBusinessModels
Thelocationoflicensinginthetelecommunicationvaluechain(i.e.royaltybase)of
boththeARMandQualcommlicensingmodelsrepresentstheinfluenceofhistorical
normswhereARMhasitsrootsasasemiconductorcompanyinthecomputer
industryandQualcommhasitsrootsasfullyintegratedtelecommunication
company.Thesedifferenthistoriesalsomanifestthemselvesinrelationtothenature
ofthescopeoftheirdifferentIPportfolios.WhileARM’sIPrelatesprimarilytothe
functionandimplementationofprocessor-basedchips,Qualcomm’sstandard
essentialIPrelatestotheentiretelecommunicationsystem(e.g.the3GorWiFi
communicationsystem)withsomefunctionalityimplementedonthechipleveland
othersonthedeviceandsystemlevel.Thushistoricalindustrynormsandthescope
oftherelevanttechnicalsystemtogetherwithstrategicbusinessconsiderations
basedonbargainingpowerinthevaluechainhaveallimpactedthecurrent
configurationandrolesplayedbyARMandQualcomminthetelecommunication
valuechain.
5.
AnalysisofIVC-basedprinciplesandmarketnormsinrelationto
currentlegalnormsfordeterminationofroyaltybase
ThissectionanalyzestheimpactofIVCprinciplesandprevailingmarketnormson
theinterpretationoflegalnormsregardingapportionmentandroyaltybase
determinationsintheadjudicationofpatentdamagesforstandard-essentialpatents
(SEPs).Fiverelevantareasofconsiderationhavebeenhighlightedtoadvisecourts,
regulators,SSOs,andotherpolicy-makerswheninterpretingandsettingnorms
relatedtoSEPs,F/RAND,andstandard-enabledmarkets.Inparticular,thesefive
areasaremeanttogenerateabetterunderstandingofhowthenatureofthevalue
ofknowledgeandtheevolutionofmarketnormsinthetelecommunicationvalue
chainshouldnormativelyinfluencetheinterpretationoflegalnormstoprovide
greaterequityandeconomicefficiency.
1. TheValueofKnowledgeisNotConstrainedbytheMaterialValueChain
Onekeycharacteristicofaknowledgeeconomyistheincreasedvalueofthe
knowledgecomponentofvaluepropositions.WhenwemovefromaMVCto
IVClogic,onekeychallengewillbehowtovaluedifferentknowledge-based
contributionsdeliveredthroughmultipleinterrelatedvaluepropositions,
suchasknowledgeembeddedinphysicalproductsandknowledgepackaged
aslicenseoffers.Inthecontextofpatentdamages,thiswouldfallwithinthe
generalcategoryofthechallengeofapportionmentwherethecourthas
developedseveralproceduralrulestohelpmanagethecomplexity,suchas
SSPPUandEMVR.Therefore,thevalueofIPcannotalwaysbedefinedsimply
bylookingintotheMVC.Forexample,themarketnormsinthe
telecommunicationindustryshowthatfirmslicenseSEPsseparatelyfrom
physicalvaluepropositions(e.g.chipsets)throughtheIVCtowardsend
product,makingthecomponentlevelinappropriateastheroyaltybase
withoutanecessaryadjustmenttoaccountforcustomarybusinesspractice.
2. RoyaltyLacking–ComponentsareNotLicensedintheTelecommunication
ValueChain
Buildingontheprevioussectionabove,theuseoftheSSPPUrulebecomes
increasinglychallengingwhentheIPinquestionhasnotbeenlicensedonthe
componentlevel.Asdiscussedpreviously,thenorminthe
telecommunicationindustryistolicenseSEPsattheendproductpositionin
thevaluechain,whicheffectivelymeansthatthecomponentlevelisleft
unlicensed.Thiscreatesadownwardpressureonthepriceofcomponents
creatingwhatcouldbetermedasareverseroyalty-stackingor“royalty
lacking”problemifacomponentlevelroyaltybaseischoseninanindustry
thatdoesn’tlicenseSEPsatthecomponentlevel.
3. MarketNormsaretoLicenseSEPsonFully-CompliantEndProducts
Basedonhistoricalnormsandstrategicbehavior,SEPholdersinthe
telecommunicationvaluechainprimarilylicenseSEPsonfullycompliant
productssoldbyendproductsuppliers.Thispracticehasexistednowfor
quitesometime,especiallyincellularstandards,thoughincreasinglyinWi-Fi
standards,however,withlessevidenceoftraditionallicensingactivity.While
numerousantitrustinquireshaveexaminedSEPlicensingpractice,todateno
competitionauthorityhasfoundthepracticeofSEPlicensingtotheend
productpositionofthevaluechaintobeanti-competitive.However,itis
possiblethatdifferentindustriesandindustrysegmentsmayhavedifferent
normsastheQualcommandARMcasesinsection4demonstrate.
4. StandardsDriveMarketDemandbyDefinition
Forconsortium-basedtelecommunicationstandards,itisparticularlydifficult
toseparatethestandard-settingprocessfromtheconstructionofthe
market.However,differentactorsviewstandardsindifferentways.For
implementationfirmsthestandardisameanstofacilitatethesaleof
productsandservices,whileforinnovationspecialistsandlargeSEPportfolio
holders,thestandardisviewedasaproductitself.TheuseofSSPPUand
EMVRcanbeseenasameansbythecourttomanagethecomplexityof
determiningpatentdamagesinmulti-technologyproducts,however,the
distinctionistoodigital.TheEMVRrequirementthattheendproductcannot
beusedasthebaseifthepatentsinsuitarenotproventodrivethedemand
fortheproductisnotapplicableforstandardsthatdrivemarketdemandby
definition.
5. MarketNormsareEmbeddedinSEPLicenseAgreements
TheuseoftheGeorgia-PacificFactors(GPFs)provideanopportunityfor
marketnormstobeintegratedintothedeterminationofpatentdamages,in
particular,GPFs1-2.Itisnotacoincidencethatthesearethefirsttwofactors
ascourtshavelongacknowledgedthatthebestmeasureofareasonable
royaltyisanestablishedroyaltyrateintheindustry(i.e.marketnorms).
Existingcomparablelicenseshavemarketnormsrelatedtotheroyaltybase
andapportionmentembeddedintrinsicallywithintheagreements.Existing
licenseseliminatetheneedtodeterminethesefactorshypotheticallyasthey
havebeendeterminedinpracticethroughanactualmarkettransaction.In
newareaswherelittlecaselawexists,existingmarketagreementsare
valuableresourcesinsupplyingcourtswithimportantinformationonmarket
norms.However,itisimportantthatcomparablesareinfactcomparable,so
cautionshouldbeusedwhencomparingtransactionsacrossdifferent
standardizationandmarketcontexts.