How much will Apple need to pay to Ericsson for a reasonable licensing royalty of 4G LTE patents?

Recently, Ericsson sued Apple for infringement over 41 Ericsson patents including 4G/LTE standard essential patents (SEPs) related to Apple's iPhones and iPads.  Ericsson said Apple owes it patent royalties for using its wireless technologies in the iPhone and iPad, but Apple refused its fair and reasonable licensing offer.

Notwithstanding the recent administrative and judicial blocking against exploiting SEPs for injunction, several courts ruled that SEPs are still eligible for monetary relief for infringement. In Microsoft Co., v. Motorola, Inc., No. 2:10-cv-01823-JLR (W.D. WA), the court provided basic guidelines for assessing FRAND royalty for SEPs. The guidelines are based on the Georgia-Pacific analysis of the reasonable royalty (Georgia-Pacific Corp. v. U.S. Plywood Corp., 318 F. Supp. 1116, 1120 (S.D.N.Y. 1970)) modified for taking into account SSOs’ primary goals for adopting FRAND commitments. The key modification to the Georgia-Pacific factors leads to the reasoning that a royalty in a patent pool for the specific SEPs at issue or comparable licensing transactions as a candidate for the royalty established through negotiation under FRAND commitments. Thus, the royalty rate in the recently formed LTE patent pool may provide expected FRAND licensing revenue.

Another court’s guidelines for assessing FRAND royalty for SEPs can be found in In re INNOVATIO IP VENTURES, LLC, No. 1:11-cv-09308 (N.D. Ill. 2013), Dkt. No. 975. The INNOVATIO IP VENTURES court calculated FRAND royalty (cap) of WiFi SEPs as (average profit margin to the contribution of patentee’s SEPs) x (net profit of relating products) x (pro rata share of patentee’s SEPs to the total number of WiFi SEPs providing similar contribution to the profit). Similar calculation can also lead to the FRAND royalty (cap) for 4G LTE smartphone SEPs.

To evaluate Apple’s 4G LTE smartphone SEPs licensing royalty owed to Ericsson, Ericsson’s IPR share in 4G LTE SEPs is researched. Recent TechIPm, LLC’s research for 4G LTE standard related patent in the US reviles Ericsson’s 4G LTE smartphone SEPs’ IPR share is around 7% (for details about analysis method, please refer to 4G LTE Patents for Standard Innovativeness Ranking: http://techipm-innovationfrontline.blogspot.com/2015/01/4g-lte-patents-for-standard_8.html).

Then, based on various market research data as of 4Q 2014, the net profit of Apple from smartphone sales per year in the US market is calculated as roughly $10 B. Finally, if the average profit margin to the contribution of the 4G LTE SEPs of 3% (smallest scalable product base) is assumed, the licensing royalty of Ericsson that can have from Apple is expected to be around $200 M per year.

For more information, please contact Alex Lee at alexglee@techipm.com .

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