Calculating Damages During SEP Litigation
Various courts around the world have determined appropriate methodologies for calculating damages on SEP’s (Standard Essential Patents) whereupon patent holders have made an assurance to license to fair, reasonable and non-discriminatory (FRAND) terms. Determination of patent holdup, licensee holdout, use of worldwide portfolio licensing, incremental value rule, etc. is included in these decisions. The court determines damages based on the reference judgments and FRAND terms in the SEPs infringements. Under patent law, infringement damages are set based on the factors like actual loss due to patent infringement, if the actual loss is difficult to determine, then gains of the infringer are determined, and if both actual loss and gains are not available then appropriate multiples of a reasonable royalty fee is determined.
Standard Setting Organizations (SSOs) also play a role in determining damages in the SEPs litigation and licensing by incorporating an intended means or approach to valuation in FRAND commitment. Even the US courts are now expressing interest in receiving guidance from the SSOs in order to determine the valuation mechanism of the SEPs.
35 U.S. Code § 284 -
“Upon finding for the claimant the court shall award the claimant damages adequate to compensate for the infringement, but in no event less than a reasonable royalty for the use made of the invention by the infringer, together with interest and costs as fixed by the court.
When the damages are not found by a jury, the court shall assess them. In either event the court may increase the damages up to three times the amount found or assessed. Increased damages under this paragraph shall not apply to provisional rights under section 154(d).
The court may receive expert testimony as an aid to the determination of damages or of what royalty would be reasonable under the circumstances.”
Calculation of Damages
Method 1: Hypothetical negotiations & the Georgia-Pacific factors
In the US courts, the Georgia-Pacific case provides the most common framework for SEP license assessments over 40 years. Whereas the lower courts have a modified version of the Georgia-Pacific factors which they consider while determining the hypothetical negotiation between the parties.
The 15 Georgia-Pacific factors are:
Factor 1: The royalties received by the patentee for the licensing of the patent-in-suit in other circumstances comparable to FRAND–licensing circumstances.
Factor 2: The rates paid by the licensee for the use of other patents comparable to the patent-in-suit (unchanged).
Factor 3: The nature and scope of the license (unchanged).
Factor 4 & 5: Do not apply in the FRAND context at all; both were dropped. (Factor 4 relates to the licensor’s policy and marketing program; Factor 5 relates to the commercial relationship between the licensor and licensee).
Factor 6: The effect of the patented invention in promoting sales of other products of the licensee and the licensor, taking into account only the value of the patented technology and not the value associated with incorporating the patented technology into the standard.
Factor 7: In the FRAND context, the analysis of this factor (related to the duration of the patent and the term of the license) is greatly simplified because the term of the license would be co-extensive with the duration of the patent.
Factor 8: The established profitability of the product made under the patent, its commercial success, and its current popularity, taking into account only the value of the patented technology and not the value associated with incorporating the patented technology into the standard.
Factor 9: The utility and advantages of the patent property over alternatives that could have been written into the standard instead of the patented technology in the period before the standard was adopted.
Factor 10-11: The contribution of the patent to the technical capabilities of the standard and also the contribution of those relevant technical capabilities to the licensee and the licensee’s products, taking into account only the value of the patented technology and not the value associated with incorporating the patented technology into the standard.
Factor 12: The portion of the profit or of the selling price that may be customary in the particular business or in comparable businesses to allow for the use of the invention or analogous inventions that are also covered by FRAND–committed patents.
Factor 13: The portion of the realizable profit that should be credited to the invention as distinguished from non-patented elements, the manufacturing process, business risks, significant features or improvements added by the infringer, or the value of the patent’s incorporation into the standard.
Factor 14: The opinion testimony of qualified experts (unchanged).
Factor 15: The amount that a licensor and a licensee would have agreed upon (at the time the infringement began) if both were considering the FRAND commitment and its purposes, and had been reasonably and voluntarily trying to reach an agreement.
In the litigation of Innovatio IP Ventures, LLC (“Innovatio''), Innovatio sued numerous hotels, coffee shops, restaurants, supermarkets, and other commercial users of wireless internet technology located throughout the United States and alleged them for infringing various claims of seventeen patents owned by Innovatio. In this case, Judge Robart’s analysis proceeded in three steps, which provide a framework for any court attempting to determine a RAND licensing rate for a given patent portfolio and are as follows.
First, a court should consider 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.
Second, a court should consider the importance of the patent portfolio as a whole to the alleged infringer’s accused products.
Third, a court should examine other licenses for comparable patents to determine a RAND rate to license the patent portfolio, using its conclusions about the importance of the portfolio to the standard and to the alleged infringer’s products to determine whether a given license or set of licenses is comparable.
Method 2: Comparable licenses
This approach of FRAND damages determination is used in China, UK, and US. It focuses on just two factors 1 and 2 of Georgia-Pacific on comparable licenses. This approach was used in the case of Huawei v. InterDigital in which the Shenzhen Intermediate People’s Court determined the royalties Huawei should pay for use of InterDigital’s 2G, 3G, and 4G essential Chinese patents should not exceed 0.019 percent of the actual sales price of each Huawei product. As the judges, in this case, concluded that “one may infer from the statement above that the court used InterDigital’s licenses with Samsung, Apple, and others as comparable licenses to determine whether the royalty rates InterDigital offered to Huawei were discriminatory, and possibly also to calculate the appropriate FRAND royalty rate that should be charged to Huawei, which was determined to be no more than 0.019 percent’’.
Similarly, In UK court the recent ruling in “Unwired Planet” confirms that the use of comparable licenses is permissible. The court held that a FRAND rate can be determined by using comparable licenses.
Method 3: The incremental value rule
The U.S. FTC has recommended the use of “incremental value rule” in determining FRAND value. It refers to incrementing the value of essential patents based on the number of contributions to the standard to which the essential patent belongs. While in some cases such as Microsoft v. Motorola, Judge Robart rejected in part an “increment value” approach on the grounds that it lacks “real-world applicability”. Further, Judge Robart concluded that the incremental value approach is “realized, in part” through Factor 9 of Georgia-Pacific.
Method 4: Bottom up approach
The bottom up approach is similar to the incremental value rule, but the bottom up approach suggests determining the costs of implementing reasonable alternatives to the patents at issue that could have been adopted into the standard, and dividing that cost by the total number of infringing units to determine the maximum per-unit royalty. Judge Holderman noted that the approach is based on the theory that a hypothetical licensee would not pay more for patents than the amount necessary to adopt an alternative.
Method 5: Top Down approach
In the case of Innovatio IP Ventures, LLC (“Innovatio''), the judge Holderman adopted a “Top Down” approach, in which calculation was started with the average price of the identified royalty base (in Innovatio, a Wi-Fi chip) and then the calculation of the average profit that the product/component maker earns on the sale of each unit, as a means of isolating the portion of the income from the sale of the product/component available to the maker to pay royalties on intellectual property. The available profit is then multiplied by a fraction calculated as a number of the SEPs at issue, divided by the total number of SEPs in the standard.
Method 6: SSPPU approach
SSPPU referred to as Smallest Saleable Patent Practicing Unit, It includes a theory of determining damages that argues that the damages should be based on the smallest unit, module or component that practices the patented technology. This approach was created by U.S. federal courts for use by juries in patent damages cases, it has been recently used by competition agencies in China (against Qualcomm) and India (against Ericsson) to investigate whether a company’s practice of charging royalties based on the end-user device prices amounts to “excessive” or “unfairly high” pricing.
Much attention is to be paid to the appropriate base for FRAND royalty determinations, for example, whether a SEP holder uses the end-user device as the royalty base (which is common industry practice in the telecommunications sector) or uses smaller components such as a chipset as the royalty base. Hence, damages calculation in the SEPs infringements cases is dependent on the royalty base and the approach used for calculation.