Early Determinations of Fair, Reasonable, and Non-Discriminatory License Payments Have Been Anything but Consistent
When an invention claimed in a patent is essential to complying with a technical operating standard—say, for a device to connect to Wi-Fi or a 3G wireless network—it is considered a Standard Essential Patent, or SEP.
Under the rules of many standard-setting organizations, the holders of such patents must agree to license them to others at a rate that’s considered FRAND: fair, reasonable, and non-discriminatory.
But when the parties can’t agree on what’s FRAND, the dispute can end up in court.
The past two years have brought the first few FRAND determinations by U.S. courts, and the results have hardly been uniform. Key factors in determining a FRAND royalty are the importance of the patent or patents to the operating standard as well as the standard’s importance to the product at issue. Courts have also taken into account the royalties paid by licensees of patent pools that include comparable essential patents. But judges and juries haven’t been consistent in whether they calculate the royalty as a percentage of the price of the end product (i.e., a smartphone or Xbox) or as the smallest salable unit (i.e., a Wi-Fi chip).
Morrison & Foerster partner Jason Bartlett believes the decisions have important implications for both SEP holders and would-be licensees, which need to think strategically about which forum would be most advantageous for a FRAND determination.
“I think people look at these royalty determinations and think, ‘Well, those all seem pretty small,’ but that’s not really the right way to look at it,” says Bartlett. “It may not sound like much, but even the difference between 3 cents and 15 cents is massive.”