Methodologies for Calculating FRAND Royalty Rates and Damages: An Analysis of Existing Case Law

Several federal district courts, as well as the Federal Trade Commission (FTC), have weighed in on the appropriate methodology for calculating either a reasonable royalty rate or reasonable royalty damages on a standard-essential patent (SEP) encumbered by a commitment to license on fair, reasonable and non-discriminatory (FRAND) terms. Included in these decisions are determinations about hold-up, royalty stacking, the incremental value rule, the use of comparable licenses, and the appropriate base for royalty calculations. These issues have received a lot of attention not just in the patent law community, but also by foreign antitrust regulators in China and India, which have been pursing theories based on alleged “excessive” or “unreasonable” prices based on a patent holder’s practice of charging royalties as a percentage of the end-user product as opposed to a component product such as the chipset. While the additional clarity on the appropriate method for calculating FRAND royalties that decisions like these can provide is welcome, likely to benefit industry stakeholders and consumers alike, we are still it the early days and the decisions are far from providing a consensus on FRAND licensing. Decisions to date include: Judge Posner in Apple v. Motorola; Judge Robart in Microsoft v. Motorola; Judge Holderman in In re Innovatio IP Ventures; Judge Davis in Ericsson v. D-Link, Wi-Lan v. Alcatel-Lucent, and CSIRO v. Cisco; Judge Whyte in Realtek v. LSI; Judge Koh in GPNE Corp. v. Apple, Inc.; and Magistrate Judge Grewal in Golden Bridge Techn. v. Apple Inc. These rulings exhibit a number of differences, as we discuss, but some common principles have emerged as well:• FRAND royalties must provide the patent holder with reasonable compensation; • FRAND royalties should limit the patent holder to a reasonable royalty on the economic value of the patented technology itself, apart from the value associated with the patent’s incorporation into an industry standard; and• In determining a FRAND royalty rate, courts should consider comparable licenses.The primary disputed and open issues include questions regarding: • Whether methodologies for determining FRAND royalty rates or damages must take into account concerns about patent hold-up and royalty stacking or whether implementers must provide proof of actual hold-up or royalty stacking;• Whether courts should apply the incremental value rule in determining FRAND rates and damages;• What constitutes a “comparable license” for benchmarking purposes; and• Whether the appropriate royalty base is limited to the “smallest salable patent practicing unit,” and what that actually means (i.e., whether a patent is fully implemented by the end-user device such as the handset or a component part, such as the chipset). In this three-part series, we focus on these issues of FRAND royalty rates and damages in the context of patent infringement or contract litigation within the United States. We review the case law to date and discuss its implications. In this first installment, we focus on two of the most prominent debates over FRAND: the potential for market power abuses that lead to hold-up and royalty stacking. In part two, we turn to appropriate benchmarks and methods for determining FRAND terms. Finally, in part three, we analyze an issue that permeates the spectrum of FRAND issues: the appropriate base for royalty calculations.