The United States Patent and Trademark Office (USPTO) has recently announced a collaboration with the International Trade Administration (ITA) and the National Institute of Standards and Technology (NIST) on standards in intellectual property (IP) and is requesting comments. It develops on the National Standards Strategy for Critical and Emerging Technologies released in May this year. That strategy called for a strengthening of US engagement in standards for such technologies, which includes communication and networking, semiconductors, artificial intelligence/machine learning, clean energy and quantum technologies.
This request invites respondents to answer 12 questions concerning a range of issues including fair, reasonable and non-discriminatory (FRAND) licensing practices, licensing rates and negotiations of them, the merits of a database of FRAND licensing rates (judicially determined or voluntarily publicised), and dispute resolution processes including alternative dispute resolution. The request is therefore wide-ranging, as expected with such an early stage of policy formation, but must be read in light of – and perhaps as a response to – the recent proposal by the European commission on the regulation of standard essential patents (SEPs) (which I have already covered and you can read about here and here).
The US has developed fairly substantial guidance on methods for FRAND valuation through the Courts, but at present there is no government position. This collaboration could take a number of forms, one of which may be a centrally determined valuation approach for FRAND licensing, similar to that likely under the EC’s SEP proposal. Should this be the direction taken by the ITA-NIST-USPTO, a range of FRAND valuation approaches are open to them.
We profile three of these: the top-down, comparable licenses, and incremental ex-ante approaches, but it is worth noting that many approaches exist. These three have been selected to illustrate the range of factors which may need to be considered when establishing FRAND royalty rates and why economic expertise is vital when establishing the value of SEPs and commensurate FRAND rates.
The top-down approach
The top-down approach determines a FRAND royalty rate for the standard as a whole and then distributes that value among the various patents that read on the standard. The method then seeks to split the cumulative royalty rate among all SEPs deemed essential to the standard. This approach conventionally begins with calculating the total aggregate royalty burden for all patents reading on a particular standard. As such, it caps the total royalty burden a licensee may have to pay. In such a scenario, the number of entities holding and asserting SEPs becomes irrelevant as the maximum royalty burden has been determined in advance.
The comparable licenses approach
The comparable license approach aims to determine a FRAND royalty rate with reference to extant, similarly situated licensing transactions. As a method, its approach to identify the worth of a licensing rate with reference to other known rates is quite intuitive. When identifying comparable licenses, particular attention must be paid to how one establishes comparability and what one qualifies as a comparable licensing rate. The courts are just one repository of the guidance. From an economic perspective, it is important the comparable license is transparent and can be read as a whole; the licensing package needs to be understood as a whole, and not just the licensing rate. Careful econometric analysis is therefore employed to derive a FRAND licensing rate from the licenses deemed comparable.
The incremental ex-ante approach
The incremental ex ante approach is concerned with differentiating the value that the patents bring to the product, as compared to the value that the patents derive from the act of setting a standard, which naturally imparts a value onto the SEP. This approach allows a determination of what a willing licensor and licensee would have paid for the patent(s) before it was recognized as being essential to a standard. Since royalties are often determined after the standard setting process is concluded, the patent holder’s bargaining position at the time of royalty negotiation (ex-post) can be very different from what it would have been before the standard was set and when alternatives were still available (ex-ante). This is what this approach seeks to encapsulate.
It is also worthwhile noting that elements of different approaches may be combined according to the circumstances of each case, and establishing FRAND licensing rates with a high degree of confidence often requires utilisation of more than one approach. For this reason, economic expertise in the valuation of SEPs for FRAND licensing is essential.