In these type of situations RAND can be a good guide:
A second court provided much-needed guidance on a long-simmering issue of major importance to patent owners, manufacturers, and users of patented technologies that are essential to implementing technical standards—how to determine reasonable and nondiscriminatory, or RAND, royalty rates for those standard-essential patents, or SEPs. The court in the Innovatio1 litigation largely followed the approach in the Microsoft2 litigation on this key issue.
Both cases involved patents covering aspects of the IEEE 802.11 standard, commonly known as Wi-Fi technology. And in both cases, the patent owners sought RAND royalties from potential licensees. But, with different sets of patents and facts involved in each case, the two courts found different RAND rates. Both were pennies per unit instead of the many dollars per unit the patent owners sought.
How the courts made their decisions provides helpful insight into issues that matter most when considering RAND royalties. This article compares the two courts' approaches and identifies the factors that they found most significant in arriving at their RAND rates.
Microsoft
In response to Microsoft's alleged infringement of Motorola's patents on standards for Wi-Fi and video coding technologies in Xbox 360 and other products, Motorola sent Microsoft letters offering to license Motorola's patents at a royalty rate of 2.25% of the end product price. Microsoft responded by suing Motorola for breach of contract. Microsoft alleged that the offers at that rate breached Motorola's RAND commitments to standard-setting organizations (SSOs), and breached Motorola's duty of good faith and fair dealing regarding those commitments, for which Microsoft was a third-party beneficiary. To give the jury guidance on the RAND royalty rate and range so it could decide whether a breach occurred, the court (Judge Robart, W.D. Wa.) held an initial trial on the RAND issues. In its April 2013 written decision explaining and implementing its approach, the court resolved what the RAND rate and range would be for Motorola's patents. Instead of the 2.25% royalty per end product Motorola requested, the court found the RAND royalty rate of 3.471 cents per unit for the Wi-Fi patents for Xbox products, and 0.555 cents per unit for other Wi-Fi enabled products and for the video coding patents for all products. In total, instead of the estimated $4 billion annually Motorola requested, the court-decided rate would amount to about $1.8 million annually.
Innovatio
Innovatio asserted against both users and manufacturers of Wi-Fi equipment its patents on the Wi-Fi standard, which prior owners of the patents had committed to the SSO to license on RAND terms. The court (Judge Holderman, N.D. Ill.) previously held that the asserted patents covered technology essential to implement the Wi-Fi standard, and that the prior owner's commitments were binding on Innovatio and enforceable by Wi-Fi equipment users and manufacturers.3 It then held an initial trial to determine the RAND rate for the manufacturers for the patents in issue, to allow the parties to evaluate the potential damages and possible settlement early in the litigation. Rather than the multiple dollars per end product rate (e.g., $16.17 per tablet device) Innovatio sought, the court's September 2013 written decision found a RAND rate of 9.56 cents per Wi-Fi chip.
Similarities in Approaches
Innovatio employed an analysis similar to Microsoft's. Both attempted to recreate a hypothetical negotiation between a willing licensor and willing licensee in the RAND context to determine the royalty they would have agreed upon before the standard was adopted. Innovatio followed Microsoft's modification of the 15 Georgia-Pacific4 factors that courts have long used to determine reasonable royalty damages for patent infringement, omitting some and modifying others. (Microsoft at *17; Innovatio at *5-6.) Microsoft explained that the hypothetical negotiation with a RAND commitment would differ from the traditional damages analysis, because of the licensor's commitment to license the patents on RAND terms and not withhold licensing, and the implementer's need to take a license from many SEP owners rather than just one. (Microsoft at *16.)
Both courts excluded from the RAND royalty the value to the licensee created by the standard itself or by incorporating the patented technology into the standard. (Microsoft at *12; Innovatio at *5.) Summarizing Microsoft's approach, Innovatio outlined a three-step framework analyzing:
"the importance of the patent portfolio to the standard, considering both the proportion of all patents essential to the standard that are in the portfolio, and also the technical contribution of the patent portfolio as a whole to the standard;"
"the importance of the patent portfolio as a whole to the alleged infringer's accused products;" and
"other licenses for comparable patents."
(Innovatio at *6; see Microsoft at *18, *20.) Both courts also considered, in particular, "the purpose of the RAND commitment of widespread adoption of the standard through avoidance of [patent] holdup and [royalty] stacking," and "to induce the creation of valuable standards" by "guarantee[ing] that holders of valuable intellectual property will receive royalties on that property." (Microsoft at *20; see Innovatio at *8-12.)
Both courts also critically evaluated the proffered "comparable" licenses—against competing economic and licensing expert testimony—to determine whether, and in what ways, they were truly comparable to the RAND license that would be under consideration in the hypothetical negotiation. And both courts performed a thorough analysis—against competing technical expert testimony—of the technical evidence, including the patents, standards, and products at issue.
Differences in Approaches
The primary difference between the courts' analyses is Innovatio's reliance upon what it called a "Top Down" approach, which Microsoft did not consider. This approach addressed modified Georgia Pacific factors 12 and 13, which are the portion of the profit customary in the business to allow for royalties and the portion of the profit that should be credited to the patented invention in issue. (Innovatio at *6, *12, *37-38.)
The Top Down approach began with the average price of a Wi-Fi chip, which was used to calculate the average profit per chip earned by a chipmaker, i.e., the portion of income potentially available to pay royalties. That profit was multiplied by a fraction consisting of the number of Innovatio's SEPs covering the standard, divided by the total number of all patent owners' SEPs covering that standard. The fraction's denominator was adjusted to reflect the relative value of Innovatio's SEPs to the Wi-Fi standard. The court explained that this approach accounted for non-discrimination and royalty stacking concerns in the RAND context, for the RAND rate for all licensees would be within the chipmakers' profit margin and would prevent cumulative royalties from exceeding that margin. (Innovatio at *38-39.)
Lesser differences also exist between the courts' approaches. For example, while Microsoft discounted the RAND rate due to prelitigation uncertainty about whether the patents actually were essential to the patent, Innovatio did not because the court had previously found the patents essential. (Microsoft at *53; Innovatio at *7.) Also, while Microsoft considered the importance of the patented technology to the implementers' accused products in the royalty base (e.g., Xbox), Innovatio omitted that step because it concluded that the royalty base products were the Wi-Fi chips and the purpose of those chips was to provide the functionality of the Wi-Fi standard. (Innovatio at *8.)
Evaluating the different patents and evidence in each case, the two courts found different RAND rates. Microsoft concluded that the RAND rate would be 3.471 cents per unit (i.e., per Xbox with Wi-Fi capability), while Innovatio concluded that the RAND rate would be 9.56 cents per unit (i.e., per Wi-Fi chip).5 Innovatio explained that the difference flowed in large part from Microsoft's conclusion that the SEPs there were of minimal value to the standard, while Innovatio concluded that the different SEPs in that case were of moderate to moderate-high importance to the standard. (Innovatio at *44.)
Conclusion
The Microsoft and Innovatio decisions provide meaningful guidance for practitioners, owners of SEPs, and potential licensees of SEPs. Because both courts adopted a modified reasonable royalty approach, including modified Georgia-Pacific factors, stakeholders can draw upon the well-developed reasonable royalty jurisprudence to inform the analysis of RAND royalty rates. For instance, when using comparable license agreements to frame a RAND royalty rate—a methodology used in both Innovatio and Microsoft—practitioners can draw upon the Federal Circuit's recent guidance on the "comparability" question in the reasonable royalty context.6 Similarly in the context of reasonable royalty damages, opinions addressing apportionment of a multi-component product might be useful when considering the relative technical importance or contribution of an SEP to a greater whole (whether that greater whole be the standard or the products at issue).7 Likewise, evaluation of technical alternatives in the RAND context—a centerpiece of the analyses in both Innovatio and Microsoft—parallels the well-developed body of case law addressing alternatives in the context of a reasonable royalty.8
The developed law on reasonable royalties will help practitioners not only in framing issues during negotiations or litigations about RAND royalties, but also with tactical choices—such as whether and when to engage an expert, the types of experts that might be effective (e.g., economic, survey, and technical), the scope of expert opinion, the most persuasive types of factual evidence to support expert analysis, the need for opinions of counsel, and discovery strategy. In sum, now that two courts have embraced a modified reasonable royalty framework, practitioners can draw on their experiences in the reasonable royalty context when tackling the many complex issues involved in determining RAND royalties.
