Considerations for ascertaining a Reasonable Royalty

This post follows from my previous discussions on SEPs and FRAND here and here. As discussed previously, since the SEP holder has committed to licence its standard-essential patents on FRAND terms, therefore, in a pending suit the Court is burdened with ascertaining a reasonable royalty. In this post, I will be discussing the issues and considerations of setting reasonable royalty.

Issue: If reasonable royalty is not set the right way, it might threaten the widespread adoption of the standards – as manufacturers will choose not to adopt the costly standard. Similarly, if reasonable royalty does not appropriately compensate a SEP holder, the SEP holder might choose not to participate in the standard setting process.

A foremost consideration for a Court is that it has to look into the essentiality of the patents in the standard., that is to say, the importance of the patent for implementation of the standard. Needless to mention that a standard might consist of ‘N’ number of patents. Therefore, it might be the case that the alleged patents in a suit are ex-ante not so important in the implementation of the Standard. So, a key consideration for Courts is to ascertain the level of essentiality of the patents in the suit for the particular standard.

When the SEP is ex-ante Important

There are relatively very less number of patents in the marketplace which contribute largely to the technical standards. Therefore, these less number of patents are the ones which reflect a major proportion of the total royalty for a standard.

For example, sometimes it might be the case that a particular standard is 90% implemented by a single patent and the rest by 100 other patents. In such cases, the value of that one patent should obviously be higher than the value of other cent patents.

For the purpose of this article, the term value is to be construed to be the value that a Court keeps in mind while ascertaining reasonable royalty.

When the SEP is ex-ante Not-so-Important

There may be patents which do not play a major role in the entire standard i.e. that are not so essential (in the above example, the one out of 100 other patents). These patents might be considered to have low value in comparison to patents which are ex-ante important.

It is thus imperative for a Court to prima facie satisfy itself of the importance of a patent in the standard and then proceed to ascertain its value for the purpose of setting a reasonable royalty.

Ascertaining value

According to me, the value of a standard-essential patent should not be high because setting a standard itself means the availability of several alternatives (that is why the standard was actually set, i.e. for overcoming the chaos created by ‘N’ number of alternatives – everyone agreed to streamline the solution in order to achieve interoperability). And, since there were several alternatives available it automatically means that the price should be low (because in a competitive marketplace the prices of goods are always low).

The reason why I am pointing to this fact is because it is an important factor when valuing a SEP. Needless to say, after inclusion of the patent into a standard, the patent holder is at a higher position during licensing negotiations, that is why he offers an exorbitant price for licensing at the outset. However, keeping in mind the above considerations (i.e. the availability and lower prices of several alternatives), the actual value of a SEP must not be too high.

Therefore, the value of a SEP must be determined by the value that the patent had before it became an essential patent. The question that is to be asked in order to ascertain a reasonable royalty is, “At what rate would a patentee had agreed to licence the patent before its inclusion in the standard?” A Court must keep in mind that the SEP in question is not essential for solving the particular technical problem, but only for implementation of the standard.

In the following posts, I will be discussing what Courts in the U.S, UK and China have considered to be a reasonable roalty.

Siddhant Sharma

Siddhant is a Patent and Intellectual Property lawyer. He finds joy in exploring and writing about niche areas of law. He is finding better ways to describe the patent profession to a five-year old and a sixty-five year old.

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