Ways To Calculate Damages In SEP Litigation

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Patents grant exclusive usage rights to their proprietors thereby prohibiting others from accessing the invention. Any infringement of patent rights attracts heavy damages from the court of law. When it comes to SEPs or Standard Essential Patents, the rules of infringement are more complex. Since SEPs form the core of any technology and are standards that must be implemented in all products employing the technology, they are required to be shared in the industry. Below we elaborate on the complicated concept of SEP litigation and the ways to calculate damages. 

Table of Contents

Understanding the SEP Litigation Scenario

As SEPs are on the rise, so are the number of litigation cases put forth in courts. Unlike regular patents, SEPs are declared by companies and the SEP status is awarded by the SSOs or Standard Setting Organisations. These are powerful patents that are difficult to avoid by businesses operating in the market. To avoid conflicts, these licenses are subject to special licensing rules called FRAND rules. FRAND stands for Fair, Reasonable and Non-discriminatory licensing and subjects the owner to grant the SEP licenses to other businesses on fair terms.  

The FRAND terms however are neither mandatory nor defined concretely, thus leading to the need for litigation. The disputes arise mainly on 2 accounts, i.e., if the patents are truly ‘essential’ and on the subject of the license fee quoted by the patent owner. Both courts and SSOs play a significant role in assessing whether or not to award damages.  

Methods of Calculating Damages

The Georgia-Pacific Corp. v. United States Plywood Corp. case underlines 5 factors for determining reasonable royalty. These are: 

Factor 1: The royalties received by the patentee for the licensing of the patent in suit, proving or tending to prove an established royalty. 

Factor 2: The rates paid by the licensee for the use of other patents comparable to the patent in suit. 

Factor 3: The nature and scope of the license, as exclusive or non-exclusive; or as restricted or non-restricted in terms of territory or with respect to whom the manufactured product may be sold. 

Factor 4: The licensor’s established policy and marketing program to maintain his patent monopoly by not licensing others to use the invention or by granting licenses under special conditions designed to preserve that monopoly. 

Factor 5: The commercial relationship between the licensor and licensee, such as, whether they are competitors in the same territory in the same line of business; or whether they are inventor and promoter. 

Factor 6: The effect of selling the patented specialty in promoting sales of other products of the licensee; that existing value of the invention to the licensor as a generator of sales of his non-patented items; and the extent of such derivative or convoyed sales. 

Factor 7: The duration of the patent and the term of the license. 

Factor 8: The established profitability of the product made under the patent; its commercial success; and its current popularity. 

Factor 9: The utility and advantages of the patent property over the old modes or devices, if any, that had been used for working out similar results. 

Factor 10: The nature of the patented invention; the character of the commercial embodiment of it as owned and produced by the licensor; and the benefits to those who have used the invention. 

Factor 11: The extent to which the infringer has made use of the invention; and any evidence probative of the value of that use. 

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. 

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, or significant features or improvements added by the infringer. 

Factor 14: The opinion testimony of qualified experts. 

Factor 15: The amount that a licensor (such as the patentee) and a licensee (such as the infringer) would have agreed upon (at the time the infringement began) if both had been reasonably and voluntarily trying to reach an agreement; that is, the amount which a prudent licensee—who desired, as a business proposition, to obtain a license to manufacture and sell a particular article embodying the patented invention—would have been willing to pay as a royalty and yet be able to make a reasonable profit and which amount would have been acceptable by a prudent patentee who was willing to grant a license. 

Source: https://www.analysisgroup.com/globalassets/content/insights/publishing/stlr_hypothetical_negotiation_royalty_damages_jarosz_chapman.pdf 

When determining the appropriate license fee to be paid, comparable license is an aspect to consider. It simply means referring to any similar license fees decided in the past to arrive at a reasonable royalty fee. For comparison purposes, various similar agreements must be studied before deciding on a suitable fee. 

Using the incremental value rule to determine the FRAND value has been recommended by the U.S FTC. It implies an incremental increase in the value of the SEP basis the number of contributions made by it to the standard to which the standard belongs. This approach was rejected by Judge Robart in the Microsoft v/s Motorola case as it lacked “real-world applicability”. Besides, he pointed out that it exists partly in Factor 9 of Georgia-Pacific. 

This approach involves defining the costs of implementing reasonable alternatives to an issued patent that could be adopted into the standard. Thereafter, this cost is to be divided by the number of infringing units to derive the maximum per unit royalty. This is based on the hypothesis that it does not make business sense for a licensee to pay an amount for a patent license that exceeds the expense required to adopt an alternative.  

Adopted in the Innovatio IP Ventures case by Judge Holderman, the top-down approach starts by calculating the average price of the identified royalty base and then computes the average profit earned by the maker on selling each unit. By doing so one can arrive at the part of the income the maker will have at their disposal to pay the royalty fee. This profit is then multiplied by the number of SEPs at issue and divided by the total number of SEPs in the standard.  

This traditional approach to calculating damages has largely been favoured by the federal circuits as the most suitable method to ensure that royalties are reasonable and non-discriminatory. Coined by Judge Randall Rader in the context of an evidentiary ruling, SSPPU stands for “smallest saleable patent-practicing unit”. Per this approach, the compensations should be based on the smallest unit or component that applies the patented technology. It was recently used by agencies in India (Ericsson) and China (Qualcomm) to decide whether the practice of charging royalties based on the profits earned from end products leads to unfair pricing.  

Conclusion

With the patent landscape being studded by SEPs and an increasing number of court cases on the matter, SEP damages calculation is becoming a raging issue. The need of the hour is flexibility in the licensing mechanisms to be able to navigate across multiple unrelated industries. Besides litigation, companies are now switching to international arbitration as an alternative to long court battles.    

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