The advent of the COVID-19 Pandemic has further accelerated the adoption of technology standards that support teleworking, cloud networking, and other basic services to be performed digitally. An example of such a standard is the new 5G cellular network standard that modern smartphones now utilize. Technology adoption and innovation, exemplified through technology standards such as 5G, are priorities for both governments and companies as a source of value creation, productivity growth, and standard of living improvements. 5G technology is poised to transform our economy. Our phones, TVs, watches, cars, and even houses will be more connected than ever.
Some of the patents that are necessary to implement a particular standard are referred to as standard-essential patents (SEPs). To avoid unfair, unreasonable, and discriminatory licensing terms that could potentially harm competition, Standard Setting Organizations (SSOs) often require SEP holders to license their respective patents with Fair, Reasonable, and Non-discriminatory (FRAND) terms. The definition of FRAND, however, leaves many to wonder what constitutes fair and reasonable.
One point of contention between SEP holders and licensees lies in the choosing of a royalty base. Should the royalty base be limited to the component that implements the standard’s inventions? Or, because the standard’s value is ultimately realized in an end-use product, should the royalty be based on the value of that end-use product? What is the proper royalty base for a SEP license?
Ocean Tomo investigates this question in anarticle titled “What is the Proper Royalty Base for a SEP License,” published in The Licensing Journal 41.6 (2021). Focusing on two empirical approaches commonly used, the Smallest Salable Patent Practicing Unit (SSPPU) and the End-Use Revenue, the article explores the advantages and disadvantages of each approach.
Despite the preference for the SSPPU approach, which presents a simpler way to reconcile the practical challenges of estimating the fair incremental value of the invention, both approaches, in theory, should converge to the same result. It is nevertheless important to observe the specific circumstances of a particular matter, case-specific facts, availability of evidence, and direct market–based information, to appropriately define the royalty base. Ultimately, the question ought not to be, what is the proper royalty base for a SEP license, but rather, whether proper apportionments and royalty rates correctly value the patented invention’s contribution(s).
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