Friday, 15 November 2013

Absurd (F)RAND licensing-rate determinations for SEPs

I have submitted many articles to IP Finance over the last couple of years as a "guest" contributor. I would like to thank Jeremy Phillips for inviting me to do so, and posting my articles for me with all the editing and production work entailed. This is my first IP Finance posting as a "resident" contributor.

Absurd (F)RAND licensing-rate determinations for SEPs

Judge James L. Robart's findings in the case between Microsoft and Motorola, which issued in April 2013, represent the first U.S. judicial attempt to determine reasonable and non-discriminatory licensing fees. Most recently, Judge James F. Holderman has also had a go in his royalty rate opinion in the Innovatio case. The judges’ rate setting applies only to standard-essential patent technologies in H.264 video and 802.11 WiFi. In my opinion, the rates set in both cases are defectively based and unreasonably low.

Rate-setting in SEP licensing
The judges’ decisions are both based on the faulty dictum that patentees are entitled only to a small proportion of standard-essential patent value. Valuation methods selected unsurprisingly reflect that predisposition. The judgements significantly rely on the defective notion that SEP-owners’ rewards should only reflect “intrinsic value” of technologies, and that they should be deprived a proportion of the value that comes through standardisation including “network effects.” Core technology developers deserve to share in the economic benefits of standardisation because of the significant costs and risks in developing, proposing and integrating their technologies. That has been the basis for investment and market success so far.

Patent pools and chipset profits used by Judges Robart and Holderman respectively provide biased and misleading benchmarks for (F)RAND royalties. The judges identify some major limitations in using patent pools while seeming oblivious to other pitfalls. Judge Robart ill-advisedly uses pools because participants are mainly implementers who tend to be most interested in keeping their royalty costs low. Those with the most valuable patents tend to steer clear. Judge Holderman latches onto an alternative approach, based on silicon chip component manufacturer profits, that is also deeply flawed, while taking comfort from choosing a reasonable royalty rate that falls within the range established for the same standard by Judge Robart. Licensing rates on ICT products commonly apply across the entire product because value is delivered and enjoyed on that basis. They have little to do with and should not be limited to profits on chips.

My full analysis is a rather lengthier 24 pages. Those with the interest and stomach for it can find it in full here as a PDF document.

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