Essentiality Rate Inflation and Random Variability in SEP Counts with Sampling and Essentiality Checking for Top-Down FRAND Royalty Rate Setting

Abstract

Fair, reasonable and non-discriminatory (FRAND) royalty rates for licensing standard-essential patents (SEPs) are increasingly derived “top-down” by dividing a notional aggregate royalty percentage (e.g., 10% of a smartphone’s selling price for 4G LTE) among patent owners based on the proportions of patents they own that are deemed to be standard essential. Other rate-setting methods include use of comparable licenses and measuring value derived from SEPs. However, as stated by Justice Birss in Unwired Planet: “In assessing a FRAND rate counting patents is inevitable." He used top-down methodology as a cross check. The FRAND rate Decision in TCL v. Ericsson, that was unanimously and entirely vacated on appeal, also relied on a top-down valuation.

Essentiality checking is also proposed by the European Commission and others to improve transparency for prospective licensees. But transparency is only legitimate if what is being revealed and counted is reasonably accurate and does not mislead. Otherwise, it will likely do more harm than good.

Figuring out which patents are true SEPs and then counting them is fundamental to top-down analysis. With hundreds of thousands of patents declared possibly standard essential and the insuperably huge task in checking them all for essentiality, the European Commission and others propose that assessing only samples of patents declared essential to a standard would suffice.

If patent counting with essentiality checking is going to be used in FRAND-rate determinations, then it is vital we understand its dynamics, failings, how to properly interpret its results, and how to design and size essentiality determination studies that are fit for purpose. This research paper contributes to that quest with detailed statistical analysis on essentiality determinations and patent counts.

Keywords: FRAND, SEP, Licensing, Top-down, Aggregate Royalties