As the connected car market glows, LTE is
becoming the main connectivity technology not only for the V2X
(vehicle-to-vehicle, vehicle-to-person, vehicle-to- roadside unit)
communications but also for providing value added services (e.g.,
infotainment). For example, the 2015
Audi A3 LTE
connectivity service includes
navigation with Google Earth and Street View, weather and event information. Thus, one may expect that the increasing use
of LTE can make the automotive sector a new patent dispute battleground. For potential patent litigation risk regarding
LTE, please see Increasing
Monetization Activities Exploiting LTE Patents.
The
main issue with the LTE patent dispute will be the reasonable royalty of LTE
standard essential patents (SEPs) that can be used for damage evaluation
regarding infringing LTE products. SEPs encompass intellectual property rights
(IPRs) for the standardized technologies.
Usually, all the essential aspects of standardized technologies are
specified in standard specifications. Thus, SEPs can be defined as patents that
include one or more claims that are infringed by the implementation of certain
standard specifications. Consequently, any
LTE standard-compatible products (e.g., LTE connectivity chipsets) may infringe
SEPs.
Standards
are often developed and set-up through the standardization process by the
standard setting organizations (SSOs). If the adopted standards are covered by some
patents owned by the members that proposed the adopted standards, the members
become the patentees of SEPs. The
patentee of SEPs may have market power in the relevant technology market
because the industry may be locked-in to using the standard and the value of
SEPs becomes significantly enhanced. Thus, the patentee can demand and obtain
unreasonably high royalty payments – hold up value - due to very high switching
cost to alternative technology the implementer should pay. Thus, the patent
hold up occurs when a patentee of SEPs demands unreasonably higher license fees
after the standard is widely adopted than could have been obtained before the
standard was implemented.
To
avoid the patent holdup problem, a majority of the SSOs require that the
members participating in the standardization process to agree ex ante to license their SEPs under
fair, reasonable, and nondiscriminatory (FRAND) terms ex post to any implementers of the standard. The members’ agreements to license their SEPs
under FRAND terms are usually called FRAND commitments. In general, FRAND commitments are interpreted
as enforceable contractual obligations between a member and an SSO. An implementer of the standard is a
third-party beneficiary of FRAND commitments and therefore entitled to a
license of SEPs.
Two
important questions about the FRAND commitments are FRAND royalty base and
rate. One may use a royalty base equal
to the entire market value of an infringing product if “the patented feature is
the basis for consumer demand” for the entire product. If the patented feature
is not the basis for consumer demand for the entire product, the royalty base
should reflect only the contribution of the patented feature to consumer
demand. Thus, if a product consists of
many components, the royalty base can be the market value of the relevant
component to consumer demand created by the patented feature.
In LaserDynamics, Inc. v. Quanta Computer, Inc., 694 F.3d 51, 68 (Fed.
Cir. 2012), the court ruled that the royalty base can be the smallest saleable
component that embodies the patented feature.
By this reasoning, the FRAND royalty base may be the smallest saleable
component that embodies the relevant SEPs.
After the FRAND royalty base was determined, a royalty rate for a
specific SEP can be calculated by taking account of the economic contribution
of the specific SEP to the smallest saleable component that is used in
determination of the FRAND royalty base.
In Microsoft v. Motorola and Google, D.C. Nos.2:10-cv-01823-JLR;
2:11-cv-00343-JLR (9th Cir. 2015), the court affirmed the lower court ruling in
determining the FRAND royalty. The district court provided basic guidelines for
assessing FRAND royalty. The district court
devised the guidelines based on the Georgia-Pacific analysis
of the reasonable royalty modified to take into account
SSOs’ primary goals for requiring FRAND
commitments. The court provided five
primary goals for adopting FRAND commitments: 1. Promotion of widespread adoption
of SSOs’ standards; 2. Avoidance of patent hold-up; 3. Avoidance of royalty
stacking; 4. Creation of valuable standards; 5. Exclusion of hold-up value in
the reasonable royalty. The court, then,
modified the Georgia-Pacific factors to account for the five
primary goals for requiring 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. court calculated FRAND royalty
(cap) of WiFi SEPs using the average profit margin of the WiFi chips that cover
all the implemented features of the WiFi standard in the infringing products.
Then, the court calculated FRAND royalty by multiplying the average profit
margin to the contribution of patentee’s SEPs to the profit and pro rata share
of patentee’s SEPs to the total number of WiFi SEPs providing similar
contribution to the profit. Thus, LTE FRAND royalty can be evaluated 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 LTE SEPs
providing similar contribution to the profit). For example evaluation of LTE
royalty for a specific SEPs owner, please see How
much will Apple need to pay to Ericsson for a reasonable licensing royalty of
LTE patents?.
In
response to the courts’ determination of FRAND Royalty, major SEPs owners such
as Qualcomm, Nokia, Ericsson expressed their serious concerns about courts’
ruling to diminish the value of SEPs. Qualcomm insisted that there is nothing
wrong with the licensing practice of using the price of the entire end product
as the appropriate royalty base, because licensing at the end user device level
has been an industry custom in the telecommunications sector. By the telecommunications industry custom,
Qualcomm explained that patentees of SEPs usually did not enforce licensing
obligation to component manufactures. Therefore, FRAND royalty base cannot be
the smallest saleable component that embodies the relevant SEPs.
Additionally,
Qualcomm reasoned that the contribution of the patented feature to consumer
demand should not be limited to components of devices because extended
consumers’ benefits are coming from the services provided by the network
connecting devices. Therefore, the
smallest saleable component that embodies the relevant SEPs is actually the
device itself in the telecommunications sector.
Furthermore, developing standard technology in mobile telecommunications
is a high-risk business. Thus, without
strong patent protection and return for R&D, there will be no encouragement
for further investment in telecommunications standards. Consequently, artificially diminished
royalties on mobile telecommunications standard-compatible products will impede
innovation, and thus, harm to the industry and consumers ultimately.
On the
other hand, Cisco, HP, Microsoft and several other IT companies argued that the
use of the entire market value as a royalty base should not be used unless all
of the profit of the infringing product is attributed to the features of SEPs. Thus, the value of SEPs should be determined
by apportion to the contribution actually the patented features made to the
accused product. They also insisted that
patentees bear the burden of proof for the value of SEPs.
A
method to resolve disagreement about FRAND royalty base may be a hybrid
approach to royalty base that was suggested by the 3G licensing platform. The 3G licensing platform, which is the
licensing organization for 3G mobile SEPs, adopted reference market value of
the entire product as a royalty base, if the product consists of several
functional blocks. For example, if the
product performs 3G mobile communication and other functions that give values
to the users of the product, the royalty base only take into account the value
proportional to the 3G mobile communication function embedded in the entire
product. Thus, if a mobile phone of
price T includes a component of price A for mobile communication function and
other components of price B for other independent functions and multiple
components of price C for common functions supporting both mobile communication
function and other independent functions, FRAND royalty base for mobile
communication is A in the smallest saleable component approach and T in the
entire market approach. In the hybrid approach to FRAND royalty, however, FRAND
royalty base for mobile communication is A + C x [A/(A+B)] taking into account
the net contribution of the multiple components for common functions to mobile
communication. Consequently, FRAND
royalty base is a compromise value between the two extremes such that it is the
entire product value including only the smallest saleable function contributed
by the patented feature of a SEP.
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