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’s Priscilla Medeiros and Joseph Sobczak investigate this question in their article 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, Priscilla and Joseph discuss the advantages and disadvantages of each approach.
They conclude that 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).
Priscilla Y. Medeiros, Ph.D. is a Manager in the Intellectual Property Disputes Financial Expert Testimony practice at Ocean Tomo in the San Francisco office. Dr. Medeiros’ seven-plus years of consulting experience includes the analysis and quantification of economic damages on the subject of intellectual property value in industries including biotechnology, pharmaceuticals, medical devices and consumer products. Dr. Medeiros worked as an associate professor of quantitative marketing in IBMEC, a leading business school in Brazil. She published many papers in academic journals and presented her research in a variety of international conferences and universities. She holds B.A. and M.S. in Economics from Pontifical Catholic University of Rio de Janeiro, Brazil and a Ph.D. in Managerial Economics and Strategy from Kellogg School of Management, Northwestern University.
Joseph Sobczak works as an Analyst for Ocean Tomo’s Intellectual Property Disputes Financial Expert Testimony practice out of the firm’s San Francisco office. Additionally, Mr. Sobczak is one of Ocean Tomo’s Cybersecurity Industry Analysts. Prior to joining Ocean Tomo, Mr. Sobczak interned with a buy-side private equity advisor helping to qualify prospective deals. Mr. Sobczak also worked as a software developer in a chemical engineering lab responsible for producing an enterprise application used by clients such as DuPont and Dow Chemical. Mr. Sobczak is a member of Intellectual Property Owners (IPO) and Illinois Technology Association (ITA). Mr. Sobczak graduated summa cum laude from the Marriott School of Business at Brigham Young University with a Bachelor of Science in Strategic Management.
To explore this topic and how it could influence your case, please contact: Priscilla Medeiros, PhD, BA, MS at [email protected] or +1 (415) 946-2590; Joseph Sobczak at [email protected] or +1 (415) 946-2585.