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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 component makers offers very substantial transaction cost efficiencies. This suggests that SEP holders expect to earn greater net revenues by basing royalties on final products’ prices, even though it is virtually certain that they will collect royalties on fewer products because of the transaction costs of reaching the larger universe of device manufacturers.
This article surveys U.S. law on the royalty base issue and then discusses the economic evidence regarding the relevance of the royalty base to the magnitude of the final royalty. Based on this evidence, it concludes that the choice of the royalty base affects the royalty size.