Discovering or Setting Aggregate Royalties and FRAND Rates for SEP Portfolios?

Abstract

This article compares US and European approaches to determining Fair Reasonable and Non-Discriminatory (FRAND) rates for Standard-Essential Patents (SEPs) when parties are in dispute. It also critically examines the mechanics of the “top-down approach” in royalty rate setting.

The US and Europe are heading in different directions on how to determine FRAND charges and other licensing terms for SEPs. While the US has shunned rate-setting regulation by withdrawing guidance from government agencies including the USPTO, NIST and DoJ and is diminishing proposed law-making, the European Commission’s advocated legislation requires mandatory — albeit non-binding — patent registration, essentiality checking, aggregate royalty setting and rate apportionment among licensors. The Commission prescribes a valuation methodology which a Chinese court has recently used to drastically and defectively undercut established rates.

Standard-essential technologies are extensively employed in modern information and communications technology services and products such as smartphones. These enable interoperability across networks and devices and among different suppliers. They also provide very widespread and cost-efficient access to the most innovative and valuable new capabilities. These technologies connect billions of people with voice, messaging, Internet access, streaming and navigation services. In most cases and for decades, standard-essential technologies in cellular, Wi-Fi, video and audio compression have been efficiently licensed bilaterally, and multilaterally by patent pools, without dispute.

There are various ways in which royalties rates can be determined in negotiations, and by the courts and others in disputes. While courts have usually relied on established licenses as comparable licensing benchmarks, in some instances they have considered a top-down approach in royalty rate setting. This typically requires an aggregate royalty to be apportioned based on patent counting. However, courts have usually rejected this method as anything other than a cross-check. This is a crucial difference because it does not require the highly subjective and contentious setting of aggregate royalties. Nevertheless, the top-down approach is self-servingly welcomed by implementers that would like to minimize their royalty payments and is being implicitly endorsed in currently proposed EU legislation.

This article explains how various widely differing aggregate royalty figures vary in derivation and meaning. It also considers characteristics and limitations in royalty rate apportionment based on the counting of patents that are declared essential and are checked for that exhaustively or with random sampling. While I disdain this approach, I indicate how the best can be made of this bad job.

In accordance with the European Commission’s stated aim of increasing transparency and predictability, I recommend it would be better to find ways of increasing disclosure on existing licensing rather than reinventing the wheel by making up royalty allocation methods and figures. Existing royalty rates are largely market-based. In absence of any indication of market failure and with abundant evidence of a flourishing and competitive market, there is no justification to regulate royalty rates merely because administrative rate setting makes rates more transparent.

Keywords: FRAND, SEP, SERA, DACA, USPTO, NIST, DoJ, European Commission, ETSI, 3GPP, aggregate royalties, top-down