SEPs and FRAND: The calculation of RAND royalties in the US – incremental guidance

16.12.2014

The recent Judgment of the US Court of Appeal for the Federal Circuit (‘CAFC’) in Ericsson v DLink addresses an issue of perennial interest to those involved in litigating or licensing standard essential patents (SEPs) – and the competition community that shadows their every move. The topic in question: the issues surrounding FRAND (or RAND) royalties, which is close to the heart of many of those practising on the interface between competition law and IP, not least because the failure to make a FRAND offer (or an offer capable of being FRAND), may mean that a patentee will not be able to obtain an injunction in infringement proceedings to enforce his patent.

This is the first time the CAFC has had a chance to look at the ways in which the various US district courts have approached the establishment of RAND royalties, there have been only a few earlier district court cases (Microsoft v Motorola, In re Innovatio and Realtek v LSI). This Judgment follows an appeal by DLink of a finding of patent infringement and also the subsequent calculation of damages in a suit brought by Ericsson enforcing a number of Standard Essential Patents (SEPs).

The court highlighted a number of key principles to be considered when assessing an appropriate royalty award. While these arise from the specific US context, including the so-called Entire Market Value Rule and the use of the Georgia-Pacific criteria to assess patent damages, we thought that those on this side of the Atlantic who take an interest in SEPs might find the appellate level approach revealing.

The CAFC considered the implications of the US Entire Market Value Rule in the context of SEPs and suggested that the royalties for infringing patented technology that covers only a small part of a standard must be calculated by ascertaining the value of that specific technology rather than looking at the standard as a whole. That being said, the court did recognise that in some cases the value of the infringing patented inventions could make up the entire value of the standard, in those circumstances apportionment would not be appropriate. The court highlighted the importance of differentiating the value of the patented technology under an SEP from the value gained by the incorporation of such patented technology into a standard, the CAFC indicated that a patent holder should only be compensated for the incremental benefit derived from its invention. Indeed, the court went on to say that the widespread adoption of standard essential technology is not necessarily indicative of the added usefulness of the patented technology – given that it may only be used because it is required to comply with the standard.

This case offers some useful guidance on the way in which the calculation of RAND royalties may be approached by US courts. This blog post has given only a very high level overview – not least because we are not US lawyers, so don’t want to go too far in extrapolating, given the US context. With the ongoing international interest in such issues it is certainly worth a read for anyone interested in the area.

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