The Institute of Electrical and Electronic Engineers (IEEE)
has announced a change to its IPR policy in relation to standards which will
take effect from 1st January 2023.
The changes relate to Standard Essential Patents (SEPs)
which patentees agree to license to downstream innovators on a fair, reasonable
and non-discriminatory (FRAND) basis. These changes hold relevance to FRAND
royalty rate determinations. A press release from IEEE stated these changes
“are intended to improve the clarity of IEEE’s standard processes relating to
patented technologies, while offering more options for stakeholders”.
IEEE’s changes relate to the Reasonable Rate definition within
the Bylaws (accessible here,
p.2). They have implications for the choice of the royalty based in a FRAND
royalty rate calculation and relate to the bigger pictures as to what is FRAND.
Regardless of the extent to which IEEE ever recognised the smallest saleable
practicing unit (SSPPU), these changes impart a carte blanche for FRAND royalty
base determination to be derived from market value at the component level.
The Adequate Royalty Base in the FRAND Royalty rate
valuation
The choice of a royalty base is decisive in the calculation
of an appropriate FRAND royalty rate. The debate has focused on deciding
whether the smallest saleable practicing unit (SSPPU) or the entire market
value (EMV) is the most appropriate methodology.
And as in many cases, damages are calculated by factoring a
royalty base with a royalty rate; the value of the royalty base is of
substantial importance. In the SSPPU approach, the price of the component which
houses the SEP technology is used as the calculation base.
On the other hand, if the conditions for EMV is met and the
technology is concluded to be the primary driver of demand to the entire
end-product and the primary contributor to the functionality, the entire market
value approach is used.
The SSPPU methodology originates from a suit between Cornell
v. Hewlett Packard Co. where the Plaintiff initially sought damages based on
the end-product, but later had to change its claim as the court held the
end-product as an inappropriate royalty base, concluding that calculation must
be apportioned down to “the smallest salable infringing unit with close
relation to the claimed invention.”
Shortly after, the same reasoning would be echoed in Lucent
Technologies, Inc. v. Gateway, Inc where the court concluded that there was no
evidence that the infringed feature in question drove the entire demand for the
end-product and therefore a calculation with the end-product as the royalty
base would be misplaced. In Lucent v. Gateway, as in Cornell v. Hewlett
Packard, decisions did however leave the door open for the future usage of the end-product
as a royalty rate while calculating damages. More specifically, in Lucent, the
court concluded that there was ‘nothing inherently wrong’ with using the
end-product given that the proportionate value of the infringed feature or
component to the product is taken into account.
What the Changes are about and how they Affect the
valuation of Patents
We think it is valuable to show these amendments in full,
with the changes italicised. Where eliminations have been made, they are shown
with a strikethrough:
““Reasonable Rate” shall mean appropriate compensation to
the patent holder for the practice of an Essential Patent Claim excluding the
value, if any, resulting from the inclusion of that Essential Patent Claim’s
technology in the IEEE Standard. In addition, determination of such
Reasonable Rates should include, but need not be limited to, the consideration
of:
Some optional considerations for determination of Reasonable
Rates are:
·
The value that the functionality of the claimed
invention or inventive feature within the Essential Patent Claim contributes to
the value of the relevant functionality of the smallest saleable Compliant
Implementation that practices the Essential Patent Claim or to another
appropriate value level of the Compliant Implementation.
·
The value that the Essential Patent Claim
contributes to the smallest saleable Compliant Implementation or to another
appropriate value level of the Compliant Implementation that practices that
Essential Patent Claim, in light of the value contributed by all
Essential Patent
Claims for the same IEEE Standard practiced in that Compliant Implementation.
·
Existing licenses covering use of the Essential Patent
Claim, where such licenses were not obtained under the explicit or implicit
threat of a Prohibitive Order, and where the circumstances and
resulting licenses are otherwise sufficiently comparable to the
circumstances of the contemplated license.”
The bylaws have also been amended in relation to licence
negotiations (p.4). Again, the accepted amendments are shown by italics with
eliminations shown with a strikethrough:
“The Submitter and the Applicant should engage in good faith
negotiations (if sought by either party) without unreasonable delay or may
litigate or, with the parties’ mutual agreement, arbitrate: over patent validity,
enforceability, essentiality, or infringement; Reasonable Rates or other
reasonable licensing terms and conditions; compensation for unpaid past
royalties or a future royalty rate; any defenses or counterclaims; or any other
related issues. The Submitter of an Accepted LOA who has committed to make available
a license for one or more Essential Patent Claims agrees that it shall neither
seek nor seek to
enforce a Prohibitive Order based on such Essential Patent Claim(s) in a
jurisdiction unless the against an implementer who is willing
to negotiate in good faith for a license. Seeking further information upon
initial notice of infringement or choosing to litigate or arbitrate over any of
the foregoing issues, however, does not by itself mean that a party so choosing
is unwilling to negotiate in good faith. fails to participate in, or to
comply with the outcome of, an adjudication, including an affirming first-level
appellate review, if sought by any party within applicable deadlines, in that
jurisdiction by one or more courts that have the authority to: determine
Reasonable Rates and other reasonable terms and conditions; adjudicate patent
validity, enforceability, essentiality, and infringement; award monetary
damages; and resolve any defenses and counterclaims. In jurisdictions
where the failure to request a Prohibitive Order in a pleading waives the right
to seek a Prohibitive Order at a later time, a Submitter may conditionally
plead the right to seek a Prohibitive Order to preserve its right to do so
later, if and when this policy’s conditions for seeking, or seeking to enforce,
a Prohibitive Order are met.”
There are three documents related to these changes: The IEEE
Standards Association Board of Governors (IEEE SA BOG) approved proposed
updates to the IEEE SA Standards Board Bylaws, approved proposed
updates to the IEEE SA Letter of Assurance (LOA) form, and approved proposed
updates to the patent policy FAQs. The changes detailed above appear in the
Bylaws, but the changes are also reflected in the other two documents.
Take Away
These changes further illustrate IEEE’s desire to review its
position on the bigger questions within the SEPs landscape, particularly
ongoing debates relating to holdup vs holdout. For valuation professionals
these updates are of importance as any FRAND royalty rate calculation needs to
consider the IPR policy of the Standard Setting Organization as they govern the
standards with which the patents are associated with. In particular the choice
of the royalty base is an important decision to make in any FRAND royalty rate
calculation. By updating its IPR policy the IEEE appears to offer further
choices for the valuation of standard essential patents. How this will affect
the practice of FRAND royalty rate calculation and IP valuation remains to be
seen.
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