Implications for FRAND royalty rate determination of the Updated IEEE IPR Policy

The Institute of Electrical and Electronic Engineers (IEEE) has announced a change to its IPR policy in relation to standards which will take effect from 1st January 2023.

The changes relate to Standard Essential Patents (SEPs) which patentees agree to license to downstream innovators on a fair, reasonable and non-discriminatory (FRAND) basis. These changes hold relevance to FRAND royalty rate determinations. A press release from IEEE stated these changes “are intended to improve the clarity of IEEE’s standard processes relating to patented technologies, while offering more options for stakeholders”.

IEEE’s changes relate to the Reasonable Rate definition within the Bylaws (accessible here, p.2). They have implications for the choice of the royalty based in a FRAND royalty rate calculation and relate to the bigger picture as to what is FRAND. Regardless of the extent to which IEEE ever recognised the smallest saleable practicing unit (SSPPU), these changes impart a carte blanche for FRAND royalty base determination to be derived from market value at the component level.

The Adequate Royalty Base in the FRAND Royalty rate valuation

The choice of a royalty base is decisive in the calculation of an appropriate FRAND royalty rate. The debate has focused on deciding whether the smallest saleable practicing unit (SSPPU) or the entire market value (EMV) is the most appropriate methodology.

And as in many cases, damages are calculated by factoring a royalty base with a royalty rate; the value of the royalty base is of substantial importance. In the SSPPU approach, the price of the component which houses the SEP technology is used as the calculation base.

On the other hand, if the conditions for EMV is met and the technology is concluded to be the primary driver of demand to the entire end-product and the primary contributor to the functionality, the entire market value approach is used.

The SSPPU methodology originates from a suit between Cornell v. Hewlett Packard Co. where the Plaintiff initially sought damages based on the end-product, but later had to change its claim as the court held the end-product as an inappropriate royalty base, concluding that calculation must be apportioned down to “the smallest saleable infringing unit with close relation to the claimed invention.”

Shortly after, the same reasoning would be echoed in Lucent Technologies, Inc. v. Gateway, Inc where the court concluded that there was no evidence that the infringed feature in question drove the entire demand for the end-product and therefore a calculation with the end-product as the royalty base would be misplaced. In Lucent v. Gateway, as in Cornell v. Hewlett Packard, decisions did however leave the door open for the future usage of the end-product as a royalty rate while calculating damages. More specifically, in Lucent, the court concluded that there was ‘nothing inherently wrong’ with using the end-product given that the proportionate value of the infringed feature or component to the product is taken into account.

What the changes are about and how they affect the valuation of patents

We think it is valuable to show these amendments in full, with the changes italicised. Where eliminations have been made, they are shown with a strikethrough:

““Reasonable Rate” shall mean appropriate compensation to the patent holder for the practice of an Essential Patent Claim excluding the value, if any, resulting from the inclusion of that Essential Patent Claim’s technology in the IEEE Standard. In addition, determination of such Reasonable Rates should include, but need not be limited to, the consideration of:

Some optional considerations for determination of Reasonable Rates are:

• The value that the functionality of the claimed invention or inventive feature within the Essential Patent Claim contributes to the value of the relevant functionality of the smallest saleable Compliant Implementation that practices the Essential Patent Claim or to another appropriate value level of the Compliant Implementation.
• The value that the Essential Patent Claim contributes to the smallest saleable Compliant Implementation or to another appropriate value level of the Compliant Implementation that practices that Essential Patent Claim, in light of the value contributed by all Essential Patent Claims for the same IEEE Standard practiced in that Compliant Implementation.
• Existing licenses covering use of the Essential Patent Claim, where such licenses were not obtained under the explicit or implicit threat of a Prohibitive Order, and where the circumstances and resulting licenses are otherwise sufficiently comparable to the circumstances of the contemplated license.”

The bylaws have also been amended in relation to licence negotiations (p.4). Again, the accepted amendments are shown by italics with eliminations shown with a strikethrough:

“The Submitter and the Applicant should engage in good faith negotiations (if sought by either party) without unreasonable delay or may litigate or, with the parties’ mutual agreement, arbitrate: over patent validity, enforceability, essentiality, or infringement; Reasonable Rates or other reasonable licensing terms and conditions; compensation for unpaid past royalties or a future royalty rate; any defenses or counterclaims; or any other related issues. The Submitter of an Accepted LOA who has committed to make available a license for one or more Essential Patent Claims agrees that it shall neither seek nor seek to enforce a Prohibitive Order based on such Essential Patent Claim(s) in a jurisdiction unless the against an implementer who is willing to negotiate in good faith for a license. Seeking further information upon initial notice of infringement or choosing to litigate or arbitrate over any of the foregoing issues, however, does not by itself mean that a party so choosing is unwilling to negotiate in good faith. fails to participate in, or to comply with the outcome of, an adjudication, including an affirming first-level appellate review, if sought by any party within applicable deadlines, in that jurisdiction by one or more courts that have the authority to: determine Reasonable Rates and other reasonable terms and conditions; adjudicate patent validity, enforceability, essentiality, and infringement; award monetary damages; and resolve any defenses and counterclaims. In jurisdictions where the failure to request a Prohibitive Order in a pleading waives the right to seek a Prohibitive Order at a later time, a Submitter may conditionally plead the right to seek a Prohibitive Order to preserve its right to do so later, if and when this policy’s conditions for seeking, or seeking to enforce, a Prohibitive Order are met.”

There are three documents related to these changes: The IEEE Standards Association Board of Governors (IEEE SA BOG) approved proposed updates to the IEEE SA Standards Board Bylaws, approved proposed updates to the IEEE SA Letter of Assurance (LOA) form, and approved proposed updates to the patent policy FAQs. The changes detailed above appear in the Bylaws, but the changes are also reflected in the other two documents.

Take Away

These changes further illustrate IEEE’s desire to review its position on the bigger questions within the SEPs landscape, particularly ongoing debates relating to holdup v. holdout. For valuation professionals these updates are of importance as any FRAND royalty rate calculation needs to consider the IPR policy of the Standard Setting Organization as they govern the standards with which the patents are associated. In particular the choice of the royalty base is an important decision to make in any FRAND royalty rate calculation. By updating its IPR policy the IEEE appears to offer further choices for the valuation of standard essential patents. How this will affect the practice of FRAND royalty rate calculation and IP valuation remains to be seen.

#intellectualproperty #valuation #FRAND