FRAND licensing needs a taxonomy: valuation absent context is misvaluation

The World Intellectual Property Organization's recent report on SEP valuation methodologies provides a useful overview of comparable licences, bottom-up valuation and top-down approaches. However, in my view, the most important issue in FRAND valuation remains underexplored: the need to distinguish between fundamentally different categories of licensing and commercial arrangements.

This article argues that much FRAND analysis suffers from false commensurability. Bilateral licences, cross-licences, collective licensing platforms, patent pools, paid-up lump-sum settlements and royalty-free regimes are frequently converted into common metrics such as ad valorem rates or dollar-per-unit royalties and then treated as directly comparable. In the process, critical commercial context can be lost in translation.

Using examples including Nokia's agreements with Apple and Microsoft, Avanci's $32-per-vehicle automotive licensing model, public licensing programmes from Qualcomm and InterDigital, and recent FRAND decisions including Samsung v ZTE, Optis v Apple and InterDigital v Lenovo, I examine how royalty metrics, payment structures, bargaining conditions and strategic objectives can materially affect negotiated outcomes.

I also discuss the risks associated with cross-licence unpacking, portfolio-strength-ratio methodologies, patent counting, manufactured comparables, and the tendency to treat complex licensing agreements as if they can be translated mechanically into equivalent royalty rates.

My central thesis is simple:

The first question in FRAND valuation should not be "Which methodology should we use?" but "What exactly are we trying to value?"

The resulting rates may appear objective and comparable, but instead still reflect the bargaining asymmetries, strategic objectives, risk allocations and other distortions that shaped the original deal.

Download the full article from SSRN, here.

UK intervention on SEPs including rate setting swims against the tide

The UK Intellectual Property Office’s 2025 consultation on standard essential patents proposes measures to improve licensing transparency and efficiency. These include searchable SEP databases, essentiality checking services, and mechanisms for aggregate rate setting to facilitate top-down approach FRAND licensing rate apportionments. While these initiatives aim to support UK innovation – particularly for SMEs – they risk undermining a licensing system that has successfully evolved through decades of commercial practice and judicial developments.

The UK’s Prime Minister and Chancellor have recently pledged to promote economic growth by slashing red tape and taking out regulators. The IPO’s proposals fly in the face of that.

In my response submission to the IPO’s consultation, I focus on interventions that could do more harm than good: essentiality checking and essentiality rate estimating, aggregate royalty setting and top-down rate apportionment. My concerns are similar to those previously raised in response to the EU SEP consultation in 2023 and 2024.

Checking essentiality – along with infringement and validity – are important and are economically achieved on handfuls of patents to reliably establish that licensing is required. Comparable licences are then the generally preferred method of determining FRAND rates. Where these do not yet exist or are unavailable, parties are best placed to determine rates through discussion and negotiation.

Estimating essentiality rates of entire patent portfolios and for all patents reading on a standard is a far more demanding and costly endeavour, even when only random samples of patents are checked. Results are inaccurate and unreliable.

Setting aggregate royalties and then apportioning them based on counts of declared essential or checked essential patents is also very problematic.

My consultation submission can be downloaded here.

European Commission is recklessly replacing established and effective FRAND valuation and licensing practices with dubious top-down rate setting

I have already made various public comments on a draft Proposal for Regulation of the European Parliament and of the Council establishing a framework for transparent licensing of standard essential patents, including the associated draft Impact Assessment report that were leaked ahead of their public launch on 27 April 2023. These comments were first published in IAM (paywalled) and then republished in IP Finance. 

Among numerous legal and other issues in these proposals, I am focusing my feedback to the European Commission, in a new consultation running 27th April 2023 to 9th August  2023, on the anticipated methodologies for setting aggregate and individual SEP royalty charges by the new competence centre at an expanded EUIPO.

My analysis is summarised below and my full submission including detailed analysis and support can be downloaded here.

The proposed regulation largely ignores and seemingly abandons comparable license valuation of patent portfolios—that predominates in licensing negotiations and court decisions—and implicitly replaces this with the dubious top-down approach[1] that is antithetical to patent law and is repeatedly rejected by the courts worldwide. Comparable licenses provide fair, reasonable, non-discriminatory and effective royalty benchmarks in bilateral and multilateral SEP valuation and license charging. The standing of these—typically global—benchmarks is underpinned by billions of dollars of licensing income over decades in numerous licenses including many licensors and licensees.

If a prospective licensor can demonstrate that it has infringed and valid patents it is entitled to a license. If these are standard-essential patents it is obliged to offer and is entitled to receive FRAND royalties. Where charges and other terms have been established in existing licenses, some of these can often be comparable benchmarks for licensing other implementers.

The proposed legislation makes only one passing mention of comparable licenses when describing difficulties including transparency and complexity in making FRAND determinations. The impact assessment only includes references to comparable licenses to acknowledge that they are used and to indicate that some are dissatisfied with the extent of disclosure of existing licensing terms and licenses. Neither document finds that the established royalty charges in existing licenses are excessive or inapplicable FRAND licensing benchmarks.

Elsewhere in licensing negotiations and in litigation, comparable licenses are generally considered to provide the very best benchmarks in determining royalty charges.

Regulated royalties are unwarranted

Setting aggregate rates and apportioning them among patent owners, centrally by the EUIPO—even on a non-binding basis—will unnecessarily distort the free market processes in standards development and FRAND patent licensing compensation that has been effective in enabling the world’s fastest growing and largest ever technology ecosystem serving more than five billion people and 16 billion connections with cellular worldwide. Parties in licensing disputes will feel obliged in the proposed mandatory conciliation process to give significant weight to the EUIPO’s determinations, as will the courts. However; there is no basis whatsoever, let alone supporting evidence, to infer there is market failure or harm to be fixed, or that established benchmarks for royalty charges need to be replaced.

Despite the existence of well-established licensing benchmarks, there is significant dispute about how else to value SEP portfolios and determine royalty charges for these. According to the impact assessment, “Although an impressive amount of scholarship has analysed or interpreted the FRAND concept, this scholarship is characterized by persistent differences of opinion on key aspects of the FRAND concept such as royalty evaluation methods and obligations to license certain parts of the relevant industry.”

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[1] The Commission is explicit in its intention to determine aggregate royalties for some technology standards. As the impact assessment indicates from the results of its literature analysis: “An aggregate royalty for a standard is the royalty due for all SEPs on the standard. It is the starting point in a top-down determination of the royalty to be paid for a given portfolio.” The Commission’s desire that the essentiality of all patents in standard, or a representative random sample of them, are checked, rather than only small numbers of them per patent owner, stealthily implies that it wants patent counts to be used as measures of patent strength— as required in the top-down approach—even though this widely contested apportionment method is not explicitly identified or advocated in the proposed legislation. The proposed legislation requires that “The checks will be conducted based on methodology that ensures a fair and statistically valid selection capable of producing sufficiently accurate results about the percentage of truly essential patents among each SEP holder's registered SEPs.” The impact assessment also hopes that “if the register will be perceived by SEP holders as a means of indicating portfolio strength (and e.g. used in negotiations to determine the share of aggregate royalty applicable to them), they may increase the number of registered patents.”

Practicalities and Problems in Comparing and Setting FRAND Royalties for SEPs

I was a speaker last week at the Patents in Telecoms & the Internet of Things conference in London. This is an excellent biennial event, organized this year by Professor Sir Robin Jacob of UCL Laws and James Marshall of Taylor Wessing. It focuses on the topic of licensing Standard-essential Patents (SEPs) on Fair, Reasonable and Non-Discriminatory terms. I was on a panel among economists Jorge Padilla, Avantika Chowdbury, Tim Pohlman and Mark Schankerman in one of two sessions on FRAND Determination Methodologies: Principles, procedures and problems. The other session focused on comparable licenses. Our session also considered top-down and value-based methods as well as the economics in bargaining agreements.

I have received some requests from conference attendees asking for my panel session talking points. I am posting these here for access by all. My spoken remarks were slightly different, so as not to duplicate what had been said earlier at the event and to save some time. I have added several hyperlinks —mostly to articles of mine—to provide support to some of my assertions.

Value of SEPs in a large ecosystem downstream

Patented intellectual property in products and services such as cellular is clearly very valuable. In an ecosystem that is only 40 years old for voice services, 30 years old for text messaging and just 25 years old for Internet services, more than 6 billion of the world’s 8 billion population have a mobile phone. There are now more cellular connections than there are people on the planet. For most of these people their mobile phone is their primary or only means of calling or accessing the Internet for communications, information, entertainment and commerce.

According to a new report prepared by Kearney for the GSM Association of mobile operators, the Internet value chain was worth $ 6.7 trillion in 2020, with 28% of that value through connectivity services and devices and the vast majority of that in cellular.

Notwithstanding all that, a big question for us here today is what proportion of that value is attributable to cellular SEPs, as distinct from other SEPs and other forms of intellectual property. What are fair shares of value vertically down the supply chain from SEP owners to implementers in device manufacturing and further downstream. And, in the case of SEPs, what are fair and non-discriminatory charges horizontally among different patent owners and licensees?

Patent policies and business models

SEP licensing occurs with different patent policies among different standards setting organizations, and with differing business models among patent owners and voluntary licensing groups.

Some technology standards such as Bluetooth, USB and DOCSIS for cable modems are largely licensed royalty-free by mutual consent among most patent owners. With no patent fees, the only opportunity to monetize intellectual property  is downstream, for example, by implementation along with others’ IP in products.  

In the case of video standards such as AVC/H.264 the vast majority of SEPs are monetized through patent pooling. This voluntary private solution with licensing costing no more than around 20 cents per device divides royalties among patent owners, most of whom are also implementers.

Monetizing SEPs in cellular

In the special case of cellular, SEP owners justifiably seek rather higher royalties, in partial compensation for multi-billion dollar annual R&D investments for innovation and standards development, for example, by the likes of Ericsson, Nokia and Qualcomm at around $5 billion apiece annually. These fees are charged at the handset level at an average aggregate of approximately $10, which is 4% of the $250 average wholesale selling price for mobile phones.

In my previous presentation at this conference series— in Tokyo at the end of 2019— I showed that the economic value added of cellular connectivity, after incremental product costs, in a 4G smartphone was more than 20 times higher than that aggregate royalty rate percentage of 4%. I showed the example of an iPhone model that was priced by Apple at an additional $250 over that for a $200 iPod Touch with near identical functionality apart from the cellular capability costing $32 in manufacture. I also emphasized the significance of this beyond price setting by Apple in what economists call consumers’ “revealed preferences” with 12 times the volume and 46 times the value in sales of iPhones over all iPods.

While there is no cellular SEP licensing further downstream, SEP technologies also generate value in the extended ecosystem of Internet services and beyond including externalities (e.g. human health and safety).

Cellular SEP licensing in mobile phones is almost entirely bilateral among parties with various business models in developing standard-essential technologies and implementing them in devices.  Companies like Qualcomm and InterDigital are more dependent on out-licensing to generate revenue than are vertically-integrated SEP owners like Samsung that is more interested in protecting its downstream handset business with cross-licensing, and in minimizing licensing out-payments for its leading market share of handset sales.

Licensing frameworks

Licensing cellular SEPs is a complex matter given all the above and with FRAND commitments.

So now to the heart of the matter: including practicalities and problems with techniques employed in comparing and setting royalties.

There are various ways of: 1. Defining royalty prices and 2. Determining levels for these.

1.Price definitions

Pricing royalties can be ad valorem – i.e. a percentage of the device cost, or in dollars-per-unit charges, or with a hybrid of the two including dollar floors and caps. Lump sum prepayments are also common. Making comparisons among all these can be tricky and can be presented to give various impressions.

We tend to refer to percentage rates when, for example, talking about aggregate royalties.

Effective royalty rates paid (what I call royalty yields) including aggregate figures have fallen as royalty caps have been exceeded with increasing handset average selling prices as smartphone sales have surged since the mid-2000s.

2.Determining charges

Three commonly used methods include top-down, comparable licenses and value-based methods.

Top-down valuation

Use of top-down methods is inevitable, but I do not like them because of the way the aggregate is set and because of the way this is apportioned. Top-down is increasingly popular with the courts because it is simple and easy to apply. Serious shortcomings include:

• If the royalty base is a chip (e.g. in the  Innovatio case with royalties based on manufacturing profits there) it underrepresents where infringement occurs and where value is generated and is ordinarily paid for.
• As an antidote to alleged “royalty-stacking”, top-down is overkill.
• Even where royalty charges are based on handset prices, an aggregate rate cap is misleading.  The figure is commonly defined as the “worst case” maximum aggregate royalty rate that a licensee without anything to cross-license would be charged. But nobody would ever have to pay that much after various adjustments also demanded e.g. in nations with few patents, or in China were rates tend to be lower that the US and Europe.
• Resulting average payments are a small proportion of aggregate caps.
• I have seen no evidence that these caps were ever derived from any estimate of the economic value of the all the SEPs in the standard and how that should be apportioned vertically, versus downstream stakeholders including implementers.
• Caps are typically figures in announcements by a few self-selected industry players, who had self-serving motivations to limit royalties they would pay out as licensees — particularly with competition among different standards. Selected caps bear no relationship to aggregates actually paid.
• The use of top-down encourages what is called over-declaration. Goodhard’s Law effects result— "When a measure becomes a target, it ceases to be a good measure".
• Top-down regards all portfolios as having proportionately the same value. But not all patents are standard-essential, essentiality rates vary among SEP owners with some over-declaring, many patents would be found invalid if challenged, and patent values can vary enormously.
• Essentiality checking is very costly, inconsistent, biased and inaccurate.
• Bias is amplified by the courts’ habit of using more exacting and more accurate measures of essentiality checking in the numerator than in a less accurate and bloated denominator in their top-down calculations.
• The US Department of Justice’s 2019 Policy Statement on Remedies for SEPs subject to FRAND Commitments recognized these kinds of problems and instructed courts to avoid rote reference to any particular damages formula when instructing the jury.

Comparable licenses

These are seemingly ideal if they are well established with years of substantial licensed sales volumes and royalty payments. But we can have a chicken and egg problem with new standards such as 5G and some agreements have too little trading associated with them, or are associated with side deals and other actions that make them of dubious applicability.  In my experience with litigation, parties usually differ on which licenses are suitable comps. Some licensees object to use of agreements that were signed under the threat of alleged "patent hold-up". Comparing percentage rates with capped, dollar-per-unit or lump sum figures in different agreements is tricky.

Cross-licenses need to be unpacked to derive one-way rates, which is also problematic including because unpacking calculations tend to use SEP counts that are subject to similar shortcomings as where patent counts are used in top-down methods.

Implementers with small numbers of SEPs can have disproportionately strong leverage against major vertically integrated players with both large SEP portfolios and large downstream businesses to protect from patent infringement claims. Unpacking these cross-licenses underrates the major party.

Value-based methods

These methods are in accordance with patent law and are commonly used where few patents are involved. They seek to measure and apportion economic value. Techniques can include use of hedonic pricing models and consumer preference measurements with conjoint analysis.  I’ve used such techniques as a testifying expert witness in a non-SEP case and in cartel price-fixing litigation.

But judges seem less inclined to consider such methods in FRAND cases where they have misplaced concerns about alleged and unproven patent hold-up and royalty stacking, because they now have the crutch of top-down valuation methods to use in addition to comparable licenses. For example, in the TCL v. Ericsson Decision (which as unanimously and entirely vacated on appeal), Judge Selna threw out an Ericsson expert’s so called “Ex-Standard” valuation approach for lacking fundamental credibility and because the judge thought it suggestive of royalty stacking, even though the judge agreed that TCL did not challenge the methodology, but rather the inputs to the calculations.

I believe that value-based methods should be increasingly employed — not disregarded.  Imperfect though they all are, various different techniques should be explored to figure out where and how much real economic value is generated, and to set royalties accordingly.