The royalty base is an important factor in the negotiation of a royalty rate. There are two widely accepted methods for the determination of the FRAND royalty base: the Entire Market Value rule (EMV) and the Smallest Saleable Patent-Practicing Unit base (SSPPU).
What is the Entire Market Value royalty determination method?
The Entire Market Value rule apportions the royalty rate according to the market value of the infringing product, infringing and non-infringing features alike, provided that the patent-related feature is the basis for customer demand.
Therefore, where the patented feature drives customer demand for the entire product, the entire revenue from the infringing product becomes the appropriate royalty base.
What is the Smallest Saleable Patent-Practicing Unit royalty determination method?
The Smallest Saleable Patent-Practicing Unit is a royalty base which has been apportioned to the smallest saleable patent practicing unit tied to the patent-at-issue. It restricts the economic base from which the royalty is calculated to the smallest unit embodying the claims of the patent. The economic assumption underlying the SSPPU royalty base is that the financial worth of the invention is fully captured by the price of the component that embodies it.
The SSPPU doctrine was introduced by the US Federal Circuit Court in Cornell University v Hewlett-Packard Co1, and developed notably in LaserDynamics v Quanta 2and In re Innovatio3.
How come there are different methods to determine the royalty base?
Since the late 90s the mobile telecommunications market has drastically changed. Indeed, while the companies that contributed to the development of the first generations of the standards were also those producing telecommunication equipment, the new players who entered the booming mobile phone market had a different business model. At the same time, large portfolios of SEP were assigned to non-practising entities.
This led to a shift in the SEP licensing market and in the royalty determination methods.
What factors can be used in a negotiation about the royalty base?
The scope of the licensed claims is a key element that the parties must take into account when they negotiate a FRAND agreement. The extent to which a given portfolio covers specific use cases depends upon the scope of protection of the inventions claimed by the licensed patents in that portfolio. This is a key negotiation point when discussing the royalty base because the latter very much depends upon what is the claimed in the patent. Some patents are drafted in such a way that the use case is covered, thus potentially allowing an EMV discussion, while others will be limited to a narrower embodiment, for which the SSPPU method may seem more accurate. This is why the parties need to understand how the portfolio at stake ‘reads’ on the standard and at which technical level it is or may be implemented by the licensed products. Check the implementation analysis tools on www.frandavenue.com