THE RIGHT WAY TO PRICE INTELLECTUAL PROPERTY: AT THE END-PRODUCT LEVEL

Rapid advances in telecom, such as fully autonomous vehicles, remote surgery and connected devices are the result of a vibrant ecosystem of standardization organized by private standards development bodies (SDOs) like 3GPP — the organization developing wireless standards 3G onwards. This ecosystem relies on massive private sector investment in research and development (R&D) to produce the groundbreaking technologies that are incorporated into standards. It is no surprise, therefore, that companies protect their innovative technologies with patents.

To allow for a broad dissemination of the standard and at the same time foster investments in the next generation standard (by appropriately rewarding contributors), SDOs typically encourage their members to make their patents essential to a standard (the so-called standard essential patents or SEPs) accessible on fair, reasonable, and non-discriminatory (FRAND) terms.

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In licensing negotiations, FRAND is to be agreed upon by the parties considering the specific circumstances of each individual case. In Europe, parties must follow the guidelines established by the Court of Justice of the European Union in the Huawei vs ZTE in their FRAND negotiations. The steps are meant to provide a balance of interests and is focused on good faith negotiations and commercial practice.

In the US and other jurisdictions, some companies advocate in favor of deviating of the commercial practice of using EMVR (the entire market value rule) as basis to determine FRAND and applying instead the smallest saleable patent practicing unit (SSPPU). For example, in the case of smartphones, the SSPPU would be the baseband processor chip.  This approach to draws on the ‘SSPPU doctrine’ developed by a US court for the peculiar context of US jury trials, where non-experienced jury members may determine a too high rate if using a large royalty as a basis for its calculation.

This principle, however, ignores that the human tendency when applying a low rate as basis is to come out to too-low royalties. This may explain the major differences between an offer made using the SSPPU of $0.10 royalty fee per 4G smartphone; whereas the royalty rate considered FRAND in court was $2.50 or 1% the net price of implementer’s end product device with a $1 floor and a $4 cap, which was made using as basis the entire market value rule (HTC v Ericsson, US District Court).

The SSPPU principle is indeed an inappropriate method for calculating real-world licenses in the FRAND context because of its inherent limitations as well as its running against highly efficient and well-established industry practices in FRAND licensing.

Markets price intellectual property on the basis of their value to users and consequently their willingness to pay. This is not peculiar to IP. For instance, the price of real estate property does not derive from the price of the individual components of a building but from its value to prospective buyers, which would depend on factors totally unrelated to the price of individual components such as where the building is located.

Individual users may value a specific IPR very differently. Manufacturers and users of a connected fridge transmitting information of the scanned food to know when to order to the supermarket would value cellular connectivity lower than in the case of  smartphones,  as these technologies enable the core functionality of the device. Just try spending a day without your smartphone!

Furthermore, it makes little economic sense to derive users’ value and willingness-to-pay from the price of the SSPPU, because the two are unrelated. In CSIRO vs. Cisco, Judge Leonard Davis said the value of a novel is not dependent on the price of ink or paper on which it is physically printed. Similarly, in telecom, the price of SSPPU can tell us very little about the value of technologies residing thereon.

Consumers value the interaction between those components and it is the synergies between individual components and technologies that drive consumer demand for standard-compliant products. Plainly, the value of a multi-component product is not the sum of the value of its parts. For instance, the combination of a camera and a cellular baseband processor produces value to consumers that far exceeds the sum of the value of both components taken separately. Users can use cellular connectivity to share their experiences with their peers and this synergy represents a substantial improvement on a smartphone that consumers are willing to pay for.

Moreover, the application of the SSPPU doctrine in the FRAND domain would disrupt existing industry practices for the licensing of SEPs, which include broad portfolio licenses with rates calculated on the basis of the end-device price. In case SSPPU were to apply in SEP-licensing negotiations, parties would have to bargain over every SEP separately, identify the SSPPU for each SEP separately and then come up with a rate for each SEP, again, separately. The costs of negotiating a licence on the basis of the SSPPU doctrine would be so high as to result in a complete breakdown of the market for SEPs.

Wireless standards bring about massive benefits for individuals and societies. For these benefits to be realized, the standardization ecosystem must be able to rely on a well-functioning market for SEPs that allows for swift licensing at reasonable cost for the parties involved. Application of the SSPPU doctrine in the FRAND domain would threaten to disrupt this highly efficient ecosystem by misrepresenting the value of cellular technologies, undercompensating innovators and increasing the costs of SEP licensing.

The success of standardization is key to boost an ecosystem of innovation. By following the practice of applying EMVR to determine FRAND and establishing a flexible but balanced framework for FRAND negotiations, as in the EU with CJEU ruling Huawei v ZTE, India can successfully implement initiatives like Make in India, Start-up India, Innovate India and Digital India.

‘This is a partnered post written by Dr Sheetal Chopra, General Manager – IPR Advocacy, Ericsson India’