The Value of the Standard

89 Pages Posted: 28 Jul 2015 Last revised: 7 Mar 2017

Norman Siebrasse

University of New Brunswick - Fredericton - Faculty of Law

Thomas F. Cotter

University of Minnesota Law School

Date Written: July 27, 2015

Abstract

Standard-setting organizations (SSOs) often require member firms to license their standard-essential patents (SEPs) on undefined “fair, reasonable, and nondiscriminatory” (FRAND) terms. Courts and commentators in turn have proposed various principles for calculating FRAND royalties, among them that the royalty should not reflect “the value of the standard.” As we show, however, this principle could be understood to mean any or all of three distinct concepts, namely that the royalty should not reflect the implementer’s sunk costs; that the patentee should not be able to extract any of the value resulting from network effects; or that the royalty should be proportionate to the patent’s contribution to the standard.

This Article proposes, as an alternative benchmark, that a FRAND royalty should reflect the incremental contribution of the patent to the value of the standard. This principle combines two related ideas: first, that royalties should reflect the hypothetical bargain the parties would have struck ex ante (prior to standard adoption), in view of the incremental value of the technology over unpatented alternatives as revealed ex post; and second, that multiple patents reading on a standard should be valued in proportion to their marginal contribution (“ex post Shapley pricing”). Our proposal would prevent patentees from extracting sunk costs or a disproportionate share of standard value, but (contrary to some approaches) it would enable them to draw some of the increased value resulting from network effects. We show that our approach is more consistent with sound innovation policy, and suggest some practical applications.

Keywords: Damages, FRAND, Patents, RAND, Remedies, Royalties, Standard-Essential Patents

Suggested Citation

Siebrasse, Norman and Cotter, Thomas F., The Value of the Standard (July 27, 2015). 101 Minnesota Law Review 1159 (2017); Minnesota Legal Studies Research Paper No. 15-21. Available at SSRN: https://ssrn.com/abstract=2636445 or http://dx.doi.org/10.2139/ssrn.2636445

Norman Siebrasse

University of New Brunswick - Fredericton - Faculty of Law ( email )

P.O. Box 4400
Fredericton, New Brunswick E3B 5A3
Canada
506-453-4725 (Phone)
506-453-4548 (Fax)

Thomas F. Cotter (Contact Author)

University of Minnesota Law School ( email )

229 19th Avenue South
Minneapolis, MN 55455
United States
612-624-7527 (Phone)

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