December 2015
ISBN: 978-3-945185-06-3
Valuing Standard Essential Patents
in the Knowledge Economy:
A Comparison of F/RAND Royalty Methodologies
in U.S. Courts
Bowman Heiden
Center for Intellectual Property (CIP)
Department of Technology Management and Economics
Chalmers University of Technology
ValuingStandardEssentialPatentsintheKnowledgeEconomy:
AComparisonofF/RANDRoyaltyMethodologiesinU.S.Courts
BowmanHeiden
CenterforIntellectualProperty(CIP)
DepartmentofTechnologyManagementandEconomics
ChalmersUniversityofTechnology
1.
Introduction
Theconvergenceofcomputing,Internet,andtelecommunicationshascreated
intensecompetitionoverintellectualpropertyinrecentyears.Thisisduetothefact
thatmulti-technologyproducts,suchassmartphonesandtablets,includethousands
ofpatentsacrossabroadrangeoftechnicalfunctionsthatareownedbymany
differentactorsfromdisparatesectors,allofwhichcompetingtoreceiveashareof
theexpandingtelecommunicationsmarket.Onemajorareaofcontentionregards
intellectualpropertyandtechnologystandardsintheICTsector,inparticular,the
pricingoflicensesforpatentsessentialtotheimplementationofatechnology
standard(i.e.standardessentialpatents).
In2013-14,theUSfederalcourtsystemissuedseveralrulingsdeterminingthe
royaltyrateofstandardessentialpatents(SEPs)underF/RANDcommitmentto
standardsettingorganizations(SSOs).Whilenotgeneratingasmuchpopularpress
asthesmartphonewarsbetweenAppleandSamsung,thesecasesrepresentthe
culminationofagrowingbattleoverthedistributionofprofitsinthe
telecommunicationvaluechainbetweentechnologyownersandtechnology
implementersfoughtthroughthecontextofstandardessentialpatentsandthe
F/RANDagreementsunderwhichtheyarelicensed.Fromadownstream
manufacturingperspective,SEPsareacosttobeminimized,whileforanupstream
technologyprovider,SEPsrepresenttheoutputofitsR&Dinvestmentsfromwhichit
lookstomaximizeitsreturn.Thisnewmodeofverticalcompetitioninthevalue
chainhasopenedupfornewbusinessmodelsandnewrolesforintellectualproperty
thatchallengethetraditionalindustrialnorms.
ThisstudyfocusesonacomparativeassessmentoftheSEPvaluationmodelsoffour
recentSEPcourtcasesintheUSin2013-14anddiscussestheirsystemicimplications
forindustryandpolicymakers(bothSSOandgovernmental)regardingthepotential
impactoneconomicperformanceandeconomicefficiencyinthecontextoftheshift
from industrial to knowledge-based business models. Specifically, this study
investigates(1)theimpactofevolvingknowledge-basedmarketstructuresandfirm
positioning on SEP value and (2) the operationalization of valuation principles and
normsbasedoncompetingbusinessmodels/valuelogicsandcompetingtheoriesof
patent holdup, royalty stacking, and economic efficiency in the F/RAND context.
These investigations are then formulated into a set of propositions towards an
improvedtheoreticalunderstandingofpatentvalueintheknowledgeeconomy.The
full paper is forthcoming in the International Journal of IT Standards and
StandardizationResearch.Belowisashortsummaryofthefindings.
2.
ComparativeAnalysisofSEPCourtCasesintheUS
ThestudyincludestheanalysisoffourrecentUSSEPcourtcases,includingthe
landmarkSEPrulingbytheWesternDistrictofWashington(Microsoftv.Motorola)
2
andthreesubsequentF/RANDcasesintheEasternDistrictofTexas(Ericsonv.D-Link
etal.andCSIROv.CiscoSystems)andtheNorthernDistrictofIllinois(InnovatioIP
Ventures).Belowtable1providescomparativeinformationacrossthefourdistrict
courtcases.
Table1.ComparativeoverviewofrecentF/RANDcases
Plaintive
Defendants
Trial
Standard
No.of ValueBase*
SEPs
F/RANDRate
Microsoft MotorolaMobility
(Google)
H.264
802.11
16
11
D-Link,Netgear.
Belkin,Dell,HP,Acer,
Toshiba,Intel
Cisco,Motorola
Solutions,
SonicWALL,Netgear,
HP
CiscoSystems
802.11
3
MPEG-LApatent
pool
a
Mixedbase Previousindustry
rd
licenseswith3 parties
$0.00555
$0.03471
Ericsson
Bench
Jury
Bench
802.11
19
Chipsetprofits
$0.0956
Bench
802.11
1
Endproducts
$0.83 1
Innovatio
CSIRO
2
$0.15 3
*ThetermvaluebaseisusedtodenotethesourcefromwhichtheF/RANDroyaltywascalculated
a
rd
BasedonanaverageofViapatentpoolrates,priornon-F/RAND3 -partycomponent-levellicense
agreement,andapriorconsultancyvaluationreport
Source:Officialtrialdocuments
Inaddition,thecourtcaseshavebeenanalyzedacrossthefollowingparameters:
1. Businessmodelsdeployedbythelitigants
2. TranslationofF/RANDvaluationprinciplesintolegalnorms
3. Applicationofexanteevaluationmethods
4. DeterminationofroyaltybaseandF/RANDvaluationlogicsandmethods
3. KeyFindingsandImplicationonEconomicPerformanceand
Efficiency
Belowisadiscussionoffourkeyconceptualareassupportedbytheevidenceofthe
fourrecentcasesthattogetherformaframeworkforfurtherresearchregardingthe
valueofSEPsinparticularandanenhancedtheoryofpatentvalueintheknowledge
economyingeneral.
1NotethatMicrosoftsuedforbreachofcontract,soMotorola/GoogleistheactorseekingF/RAND
royaltiesfortheirSEPportfolio.
2TheF/RANDratehasbeenvacatedandremandedwithinstructionsfromCAFC.
3Theroyaltyrate,forthemostpart,isnotexplicitlybasedonaF/RANDcommitmentduetothe
historicalcircumstancesofCSIROrelationswiththe802.11standardandthewirelessindustry.
3
1. TransitionfromaProductionLogictoaTechnologyLogic
ThefourSEPholdersunderstudyexemplifiedtheincreasinguseofSEPsto
generaterevenue(i.e.technologylogic)beyondthetraditionalproductionof
physicalproducts(i.e.productionlogic)bybothpracticingandnon-practicing
entities.Specifically,thefourcasesillustratedadiversesetofcontextsand
businessmodelsasdescribedinsection2.1,includingamixeduseofvalue
logicsasfollows:
• Practicingentitiesthatdeploythestandardintheirownproductsbut
alsolooktomonetizetheirsuperiorSEPportfoliooverother
producingfirms(e.g.MotorolaandEricsson).
• Non-practicingentitiesthatacquirepatentsfromothermarketactors
(includingpracticingentities)withthesolepurposeofpatent
assertiontomonetizetheassets(e.g.Innovatio).
• Non-practicingentitieswhosemainfunctionisonlytoperformR&D
andrelycompletelyonlicense-basedbusinessmodelstotransfer
theirtechnologytothemarket(e.g.CSIRO)
Furtherempiricalandtheoreticalresearchontheimpactofthenewdivision
ofinnovativelaborontheindustrialvaluechainisrequiredtobetter
ascertainhowdifferentknowledge-basedmodesoffirmactionaffect
economicperformanceandefficiency.
2. TheContextofStandardsasaDeterminantofSEPValue
Inadditiontotheemergenceofnewrolesandvaluelogicsdeployedbyfirms
discussedabove,thereisevidencethatthecontextualnatureofthestandard
itselfmayhavethegreatestimpactonthevalueofSEPs.Thustheprofileof
howastandardwasdeveloped,inparticular,theprimaryvaluelogicofthe
stakeholderfirms,canbeobservedbythelicensingandlitigationhistory
involvingthestandard.Widespreadinfringementwouldsuggestatechnology
logicwhileextensivecross-licensingortheformationofasuccessfulpatent
poolwouldsuggestaproductionlogic.Thereisaneedforfurtherresearchon
thetechno-economictypologyofdifferentstandardstoconfirmthis
proposition,however,thiswouldimplythatone-sizefitsallbusinessnorms,
valuationmethods,andpolicymeasureswilllikelynotbeeconomically
efficient.
3. ConflictingNormsonAppropriateRoyaltyBaseandValuationModels
ThechanginglandscapeofIPstrategiesandbusinessmodelswasalso
apparentinthedifferentvaluelogicsthatunderpinnedthechoiceof
valuationmethodsputforwardbythedifferentactorsacrossthefourcases.
WhiletheUScourtshavealonghistoryofdeterminingreasonableroyalties,
itcouldbearguedthatthesedeterminationshavebeenprimarilymade
withinaproductionlogic.Forinstance,legalnormsforsettingtheroyalty
base,suchastheruleimplicatingthesmallestsaleablepatent-practicingunit
orentiremarketvaluerule(EMVR),aredesignedfromtheperspectiveofan
4
industrialvaluechainandmayrequirefurtheradaptiontothenewrolesofIP
andknowledge-basedbusinessmodelsthatoftenlicensedifferentpartsof
thevaluechain.Therefore,itisnotsurprising,thatinachangingparadigm
fromaproductiontoatechnologylogic,thecurrentlegalnormsare
mismatchedwithtraditionalbusinessnorms,whichleadstoargumentation
alignedtotheexistinglegalnormsinsteadofthecurrentbusinessreality.The
casesshowthatSEPholderswilllikelyneedtoshowevidenceofthemarket
valueoftheirSEPsthrougharms-lengthmarkettransactionstoprovethe
valuethroughatechnologylogic.Moreresearchisneededtoexplainhowthe
currentlegalnormsaddressknowledge-basedbusinessmodelsandits
subsequentimpactoneconomicperformanceandefficiency.
4. RelevanceofPatentHoldupandRoyaltyStacking
Giventhetheoreticalimportanceoftheconceptsofpatentholdupand
royaltystackingtothedeterminationofSEPvalue,thedearthofevidenceput
forwardbythemarketactorsinthefourrecentcasessuggeststhattheyare
notasignificantmarketissueinthecontextoftheH.264and802.11
standards.ThisfurtherimpliesthatF/RANDcontractsintheirincomplete,
historicalinterpretationhavebeensuccessfulinregulatingpatentholdupand
royaltystackingissuesintechnologytransactionsamongmarketactorsat
leastinthesestandards.However,oneimportantinsightstemmingfromthe
lackofevidenceofsystemicpatentholdupandroyaltystackinginthestudied
casesisthatpolicymeasuresdesignedtoeliminatetheseproblemsare
possiblyunnecessaryandcouldpotentiallyalterthebalance,creatingpatent
holdoutthatcouldreducethequalityofstandardsandreduceoverallsocial
welfare.Moreresearchisrequiredthatmodelstheimpactofpolicy
interventionsfrombothadynamicandstaticefficiencyperspective.
5