Patent Pools: Setting Pricing for SEP and Other Pools

Setting the royalty is one critical and obviously necessary issue addressed during the patent pool formation process is. Since this is one of the most fiercely contested issues during the licensing phase, we’ll address it in this separate article both when standard-essential patents are involved, and when they are not.

One critical and obviously necessary issue addressed during the patent pool formation process is setting the royalty. Since this is one of the most fiercely contested issues during the licensing phase, we’ll address it in this separate article.

Note that there are two forks in this discussion, one for setting royalties when standard-essential patents are involved, and the other when they are not. We’ll deal with each in turn.

Royalty setting for Standard Essential Patents

Patents related to formal technology standards are typically referred to as Standard Essential Patents or SEPs. In an effort to encourage transparency to future implementers and identify those standard specifications that may be covered by patents, many Standard Development Organizations, or SDOs, require those participating in standards development to disclose any SEPs they may own.

Patent pools are an effective tool to enhance efficiency for SEP licensing. As explained here, a “patent pool” is a portfolio of patents generally owned by different parties covering the same technology domain. Patent pools containing patents relating to a specific standard facilitate licensing of SEPs by creating a “one-stop-shop” where implementors can acquire all rights needed to create a product that uses the covered standard.

Most SDOs, when inquiring about SEPs owned by participating companies, also ask whether those companies are willing to grant non-exclusive licenses under fair, reasonable, and non-discriminatory (FRAND) terms. FRAND is a “two-way street” where patent owners commit to granting FRAND (sometimes called RAND) licenses and implementers are willing to take such FRAND licenses in order to implement the standardized technologies covered by SEPs. However, an important question that arises is how to determine what FRAND is from the perspective of royalty setting.

Finding FRAND

There is no single methodology to determine what constitutes a FRAND royalty, and rules for determining a reasonable royalty in litigation materially differ from determining a FRAND royalty between a willing licensor and a willing licensee. As noted in the European Commission’s JRC report on Licensing Terms of SEPs (JRC Report), the determination of FRAND royalties has become increasingly technical and fact-intensive.

Even during litigation, the US Court of Appeals for the Federal Circuit has, for instance, stated that: “We believe it unwise to create a new set of Georgia-Pacific-like factors for all cases involving RAND-encumbered patents. Although we recognize the desire for bright-line rules and the need for district courts to start somewhere, courts must consider the facts of record when instructing the jury and should avoid rote reference to any particular damages formula.”

The European Commission has also identified a number of factors that should be considered in assessing licensing agreements including effects to dynamic competition and the incentive to innovate as well as sunk investments. The key concerns are that the innovator should be sufficiently remunerated to maintain investment incentives while adoption of the standardized technology is not hopelessly impeded by high costs (see paragraph 8).

Comparable Licenses are Compelling Evidence of FRAND

Despite the absence of mechanical rules for determining FRAND royalties, there appears to be a global consensus that FRAND royalties need to reasonably compensate the patent holder and that comparable licenses should be taken into consideration when determining a FRAND royalty rate. As noted in the JRC Report, comparable licenses are a reliable method of estimating the value of a patent because they inherently account for market conditions.

The United States Department of Justice and the U.S. Patent Office, in a recent amicus brief filed in the United States Court of Appeals for the Fifth Circuit, concluded that widespread adoption of a license in the marketplace was powerful evidence that that license was FRAND.

Various courts in Europe have also highlighted the importance of comparable licenses in relation to FRAND royalty setting.

The District Court of Düsseldorf has for instance noted that the more licensing agreements already concluded by the SEP owner incorporating comparable terms, the stronger the presumption that these terms are FRAND unless there are factual reasons—to be demonstrated by the patent user—that justify modified terms. The District Court of Mannheim has similarly held that information on comparable licenses is necessary to assess the non-discriminatory character of a SEP owner’s offer.

In the UK, the High Court and the Court of Appeals also highlight the vital role played by comparable licenses. The UK High Court notes that the evidence of the parties, including evidence of how negotiations actually work in the industry, is relevant in determining FRAND. In this regard, other freely negotiated license agreements may be deployed as comparables. The UK Court of Appeals has likewise noted that prior licenses granted by the SEP owner will likely form the best comparables for purposes of determining a benchmark royalty rate.

The US Court of Appeals has also approved a methodology of valuing asserted patents based on comparable licenses. [1]

Royalty setting for Non-Standard-Essential Patents

When standards aren’t involved, the potential for abuse relating to standards isn’t present which lowers the risk of claims that a license should be subject to antitrust scrutiny. That’s because, as the Department of Justice states, “there will often be sufficient actual or potential close substitutes for such product, process, or work to prevent the exercise of market power.” So, patent owners or patent pools containing non-standard-related patents are not requested to make FRAND commitments.

This doesn’t mean that licensing practices for these technologies are free from anti-trust scrutiny. As the same document states, “certain types of conduct with respect to intellectual property may have anticompetitive effects against which the antitrust laws can and do protect.” However, unlike with standard-essential patents (SEPs), there is no inherent fair and reasonable component. Still, as with SEPs, there is a range of common techniques used to value patent rights; many are referenced and discussed in this white paper entitled, An Overview of Commonly Used Royalty Rate Methodologies.