“The ‘cost-based approach’ minimizes the risk of mixing technology value with standard value. to calculate.”
Standards-essential patents are surrounded by controversy, controversy, and lawsuits. The primary focus of this activity is how to determine fair, reasonable, non-discriminatory (FRAND) rates for using standard essential patents (SEPs) and how many can be accepted by both licensors and licensees. to reach In other words, you need a “road to success”. To achieve this, I think the first thing we need is a good method or approach to doing the rate calculations that both parties can agree on. Once both parties agree on a calculation method, it can streamline license negotiations and pave an easier and faster path to success.
In this context, there exist methods that can be used to find fair rates even before the standard’s licensing and implementation starts: top-down, bottom-up, and empirical (or just “seems right”). matter”). Unfortunately, attempts to use these methods in negotiations often lead to disputes. Top-down means starting with a target overall price or rate for all patents that are integral to the standard (“stack”), which both sides may disagree with. We also need information about the entire patent landscape to be distributed or “shared” among the various patent owners. Many patent holders often overestimate their respective shares. A bottom-up approach means analyzing the value of an individual patent relative to several alternatives, and many widely used criteria evaluate portfolios containing hundreds or thousands of patents. is impractical if export Instead, the standard value itself from before For example, pricing based on the value of ‘connectivity’ to a product fails to meet the European FRAND guidelines for setting prices based on the value of patented technology. Patented.
The ideal method or approach is analytical, uses available information, and clearly separates the overall value of the standard from the value of the patented technology itself. I suggest using a “cost-based approach”. This minimizes the risk of mixing technology value with standard value. Instead, it uses market forces to calculate rates based on your investment in the SEP portfolio.
In a nutshell, the cost-based approach says that healthy companies with broad and long-term portfolios of SEPs will invest to a level that will provide a high return on investment over many years. Expressed mathematically, given the average amount invested over a period of time and the number of potential licensees, we can calculate the payout per licensee. This ensures a good, predictable return on investment and fair fees for licensees.
This approach may not be optimal for individual patents, or less suitable for small one-off portfolios. On the other hand, for portfolios with hundreds of patents, a stable size over years or decades, and a pre-estimable number of users, the law of large numbers works well.
The Problem of Finding a Fair Rate
Standard setting requires cooperation and agreement among competitors. Cooperation and agreements between competitors are permitted by antitrust law under the restriction that the patents of a participant are licensed at her FRAND rate to standard users seeking a license. This restriction is necessary to prevent cooperation from becoming collusion. The European Commission has issued a statement on this intersection of competition law and patent law – similar involvement exists around the world – which quotes from the applicability guidelines of Article 101 TFEU.
The FRAND commitment is designed to ensure that critical IPR-protected technology embedded in a standard is accessible to users of that standard on fair, reasonable, and non-discriminatory terms. In particular, FRAND commitments can result in IPR owners denying licenses or charging unreasonable or unreasonable fees (i.e., excessive fees) after the industry has been locked-in to standards or by charging discriminatory fees. You can avoid making the standard implementation difficult by requiring it. royalty fee.
The next question, of course, is what is a fair and reasonable rate? One definition by IEEE SA, perhaps the world’s leading standards organization, is:
“Reasonable rate” shall mean adequate compensation to the patent owner for implementation of the essential patent claims exclusive of the value arising from inclusion of the technology of the essential patent claims in the IEEE standard.
So far, the idea is clear. Competitors can cooperate, but not collude. This is because there is no reasonable percentage of people who make their patents part of the standard for improper financial gain. The last step is the hardest. How is the appropriate reward calculated? Disagreement is common between patent owners and standard users.
Objective and mathematical calculation method
What is needed is an objective, mathematical method of calculating rates based solely on data and taking into account what good business people and investors see as long-term value. A cost-based approach meets all of these criteria.
The success or failure of the objective analysis provided by the cost-based approach is premised on well-run companies investing wisely. If this is the case, a reasonable rate can be determined mathematically. A healthy company with a broad and long-term portfolio of SEPs invests amounts that provide a good return on investment over many years. This rate of return is also a good return for a company’s practice of essential patent claims. Expressed mathematically, given the average amount invested over a period of time and the number of licensees, we can calculate the per-license payment required to ensure an adequate return on investment.
Here are the steps for the cost-based approach:
- Calculate the total cost per standard essential patent or family in your portfolio.
- Select the appropriate return to help portfolio owners get a risk-adjusted return on their invested capital.
- Estimate the total number of potential licensees.and
- Divide the cost and revenue by the number of users to get the loyalty per user.
As for the first step, calculating the average total cost per patent family, this may be difficult for a single patent, but it works well for portfolios. The larger the portfolio, the more accurate the average cost estimate. The key is to use his 20-year average, which is the maximum patent life, especially for R&D costs related to standard work. The specific cost of obtaining a patent is easy to calculate. Patent Office fees are published, and attorney fees can be determined from research.
To make a simple example to demonstrate the approach, imagine a technology company T with 40 SEPs with a 20-year lifespan that have been filed over 20 years. If Company T invests US$4 million a year in R&D, maintaining a portfolio of 40 patents requires filing two new patents each year, resulting in an average annual R&D investment of US$2 million per patent. Become. As an example, ignore company T’s non-SEP filings and non-SEP R&D to get an instant “snapshot” of costs and revenues. Company T files two new SEPs per year (on average) for criteria related to a total market of 5 million units per year. The annual filing fee (for 2 SEPs) is USD 100,000 and the maintenance fee (for 40 patents) is USD 1.5 million per year. These annual costs associated with SEP, including R&D, would be US$1.12/unit, considering a market of 5 million units per year in this example. Imagine an investor expecting a 25% return on T’s business. Considering the 25% return, a fair and reasonable royalty rate for using T’s SEP portfolio is no more than US$1.40 per unit. This example shows how to calculate her FRAND rate for an individual her SEP portfolio owner. For simplicity, this example considers expenditure rather than invested capital, but the method and results are similar. For a detailed discussion, interested readers are referred to the work of Prof. Friedl and Prof. Ann, specifically “A Cost-Based Approach to Calculating Standard Essential Patent (SEP) Royalty” in the Journal of World Intellectual Property 2018. please. 21(5): 369-384.
Determining the appropriate return on capital and investment is best based on the capital markets. From an investment perspective, investors will fund companies that invest in patentable research and development if they expect returns at least as good as those of alternative investments. The higher the risk, the higher the return or premium must be to compensate for it.
road to success
Armed with the compass of a cost-based approach, standard users and SEP owners can now more easily find their way to success. A cost-based approach provides an objective way to do rate calculations. This method should be agreeable by both parties. Once both parties agree on how the rate will be calculated, licensing negotiations will be streamlined and set the stage for success.
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Author: Robushio
