The Next FRAND Battle: Why the Royalty Base Matters

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Joseph Kattan, Mar 16, 2015

The first round of the FRAND wars was fought over injunctions. It produced a broad consensus among competition enforcement agencies that holders of FRAND-encumbered standard-essential patents may seek injunctive relief only in extraordinary circumstances. The consensus is encapsulated in the European Commission’s determination that seeking or enforcing injunctive relief with respect to FRAND-encumbered SEPs is permissible only where the alleged infringer (1) is insolvent, (2) has no assets in jurisdictions that can enforce damages awards, or (3) is unwilling to enter into a license agreement on FRAND terms and conditions.

The new FRAND battleground is the royalty base that may be used for calculating SEP royalties….The revealed preferences of market participants suggest that the royalty base does matter. SEP holders with patent monetization businesses consistently seek to base royalties (and justify royalty levels) for SEPs that read at the component level on the price of the complete systems that incorporate those components. By contrast, standard implementers consistently advocate the use of component prices as the royalty base. Moreover, many monetizing SEP holders avoid licensing component manufacturers at all, even when the standard-compliant component manufacturers are far fewer than the final product manufacturers that use their components, such that licensing compo…

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