Approaches To Pricing Standard Essential Patents

Standard essential patents (SEP) claim an invention that must be used to conform to an accepted technical standard in the industry. These standards are generally created by companies that are part of Standard Setting Organizations or SSOs. The company holding a SEP is obligated to comply with FRAND terms (Fair, Reasonable, and Non-discriminatory) when licensing SEPs to other businesses that seek to implement the standard.

Bottom-Up vs Top-Down Approach 

Both approaches have their share of laurels and criticisms. Some of the pros and cons of each are: 

• The Bottom-Up approach is seen as instrumental in preventing the accumulation of monopolistic powers in the hands of the SEP holders and encouraging a competitive market. It thus helps mitigate patent hold-ups and royalty stacking. But this approach suffers from some serious flaws. It is often difficult to determine comparable licenses, as each company strives to make distinctive products with both legacy and new features. For the licenses to be truly comparable, the conditions like bargaining powers of the parties, terms, and conditions of the comparable license, etc., must be considered. It is also difficult to separate the value of a technology and the value of the standard in which it operates.  
• The top-down methodology has enjoyed popularity in SEP royalty calculation. Since the total aggregate royalty is explicitly determined, the top-down method averts the royalty stacking problem. This approach was used for calculating the FRAND royalty rate in TCL v. Ericsson but was later reversed by the Federal Circuit. While this approach may yield consistent results, it is subject to the inputs being accurate. That is where the foremost problem arises. There is no way for researchers to accurately determine the aggregate, one-way royalty rates for all SEPs reading on any given standard since this information is mostly confidential. Similarly, there can be variations in the royalty base and total number of actual essential SEPs.