This article was written by guest author Sam Howard, a 3L at Boston University School of Law and the winner of the 2019-2020 Patent Progress Writing Competition. The article is a shortened version of his full contest entry, which will be published in the Boston University Journal of Science and Technology Law in 2021, and which provides an extended discussion of these issues.
When Standard-Setting Organizations (“SSOs”) set various industry standards, they often require the incorporation of certain technologies (and, therefore, their underlying patents) into the standard. Standard-Essential Patents (“SEPs”) generally require that a patent-holder agree to Fair, Reasonable, and Non-Discriminatory (“FRAND”) terms or Reasonable and Non-Discriminatory (“RAND”) terms in the agreements incorporating their patent into a standard. These terms do what their names suggest and oblige the SEP-holder to, generally speaking, not charge unreasonable fees in licensing their SEPs. What is a “fair” rate? What is a “reasonable” rate? What constitutes “non-discriminatory” practices in the licensing of SEPs? SSOs generally decline to answer these questions themselves, further complicating the matter. Instead, courts solve these problems if and when these terms become the subject of litigation, which they indeed have, in cases across the country brought by SEP-holders, would-be SEP-licensees (“standard-implementers”), and even the FTC. The Federal Circuit has not established a clear-cut rule as to how to determine a FRAND or RAND (henceforth referred to collectively as “F/RAND”) royalty rate, and so this remains an area of high uncertainty today, even compared to the already uncertain field of patent litigation.
SSOs’ Potential Role in Determining Reasonableness
While no means of valuation will ever provide a perfect calculus for determining a reasonable royalty, SSOs can increase predictability for SEP litigation and licensing by incorporating an intended means or approach to valuation in the F/RAND commitment itself. Courts have expressed interest in receiving guidance on valuation methodology from SSOs, so incorporation of that guidance could drastically reduce the differences between how courts calculate F/RAND rates.
Neither codified U.S. patent law nor legal precedent require a specific means for valuation of a reasonable royalty, instead merely requiring that a reasonable royalty be calculated. On this basis, guidance from SSOs on the F/RAND terms and on the proper means and/or considerations for determining a F/RAND rate could help judges handling SEP-infringement litigation adopt a context-driven and SSO-chosen regime that increases equity and predictability for all participants in the standards process. However, SSOs generally do not provide such guidance, and some SSOs even take extreme measures to discourage potential rulemaking within the SSO on the subject, such as barring the discussion of royalty rates or other licensing concerns at SSO functions. SSOs generally comprise various participants in the industries that the relevant standard occupies, and corporations understandably make conservative decisions in the face of high uncertainty to prevent risking devaluation of one’s IP or raising costs of licensing others’ IP.
This short-sighted approach increases complexity, and thereby costs, in litigation. That complexity has trended towards hurting, rather than helping, SEP-holders, with major F/RAND cases often deciding royalty rates of well below 1% per unit and of much lesser values than the rates SEP-holders assert are F/RAND. With over a decade of judicial decisions and academic literature on the subject since the first appellate court case to determine a F/RAND royalty rate, judicial history can serve as a guide to both corporations and SSOs as to potential means for valuation of reasonable royalties for SEPs. SSOs ought to learn from this history and adopt guidance in their F/RAND terms to reduce complexity in litigation and to provide a valuation approach that aligns with the context of the standard and SEP in question while fulfilling the goals of SSO-members.
Georgia-Pacific and F/RAND Determinations
Since Georgia-Pacific Corp. v. U.S. Plywood Corp (“Georgia-Pacific”) in 1970, courts frequently employ a “hypothetical negotiation” approach in damages calculation after a finding of patent infringement, wherein the court attempts to ascertain a royalty which the parties would have agreed to had they successfully negotiated an agreement prior to infringement. However, in a F/RAND context, application of this framework can be difficult. Variables such as whether to presume an SEP’s in-fact essentiality to a standard, whether to presume an SEP’s validity at litigation, the date of the hypothetical negotiation, and whether or how a court should consider comparable licenses can result in advantages or disadvantages for SEP-owners or infringers/licensees. Courts have answered these questions differently, increasing uncertainty in infringement damages calculation and further warranting SSO guidance regarding the framework for said calculation. However, reducing uncertainty requires careful consideration of the effects of the aforementioned variables. While blindly making decisions can decrease uncertainty, it can also result in disparate impacts on participants in SEP licenses and litigation.
Georgia-Pacific established 15 factors for courts to consider when calculating damages in patent infringement cases. These factors did not contemplate usage with F/RAND-encumbered patents. As one example, the Georgia-Pacific factors include the availability of alternatives, but in the F/RAND context no alternative to the standard is possible. Because of this and other similar considerations, application of Georgia-Pacific in the F/RAND context has provided further layers of uncertainty. Some district courts have laid out prescriptive analysis of how or whether each factor should be considered when dealing with SEPs. However, the Federal Circuit has largely punted on the matter. In Ericsson, Inc. v. D-Link Systems in 2014, the Federal Circuit called largely for a context-driven approach to applying the factors in this context. Applying many of these factors to SEPs can create problems that range from mild concern to complete inequity. Without a more rigid framework, uncertainty in litigation abounds and a risk of inequity arises.
Alternatives to Georgia-Pacific for F/RAND Calculation
Neither statutory nor common law require usage of the Georgia-Pacific framework, however, and so other alternatives can and have been used in SEP infringement damages calculation. These can range from a focus on the infringer’s projections of profit from the infringing product to valuation by calculation of incremental value over potential alternative patents, but all similarly warrant contextual analysis when applied in an SEP context.
Holistically, numerous concerns plague policy determinations regarding fairly and equitably determining a reasonable royalty rate. SSOs should consider several of the valuation methods employed in contemporary cases and discussed in legal literature, the concerns they implicate, and the contexts of their standards to design royalty-valuation schemes within their F/RAND terms that guide courts in infringement damages valuation. Doing so would simplify litigation, rectify inequitable litigation trends, and increase certainty in the calculus a court may use in determining a F/RAND royalty.