SEP Royalties: What Theory of Value and Distribution Should Courts Apply

Abstract

We argue that in adjudicating SEP royalty rates, courts should do what they do in pricing other assets or the flows of income they produce: rely on information from the market about the value of comparable assets or their rental rates. The comparables method is based on price theory, which explains where value comes from and how it is distributed among factors of production, including intellectual property. Courts should not employ the “bottom up” or “top down” techniques of royalty apportionment. Both are based on the theory of patent holdup and royalty stacking, which assumes that any observed royalty is the result of “excessive royalties” wrought by the additional monopoly power conferred by standardization. This theory has been shown to be logically inconsistent and logically incomplete, and its predictions have been rejected by systematic empirical tests. As a practical matter, the bottom up technique cannot actually be operationalized. Top down techniques can be operationalized, but employing them requires a court to reject the implications of price theory.

Keywords: Frand, bottom up, top down, price theory

JEL Classification: D42, D46, D33, L63