1 Getting to “Reasonable” Law Seminars International Standards Bodies and Patent Pools...

1

Getting to “Reasonable”

Law Seminars InternationalStandards Bodies and Patent Pools

Conference

Arlington, Virginia October 2007

Alan CoxSenior Vice PresidentNERA Economic ConsultingSan Francisco, [email protected]

Gil OhanaCounselWilmerHale LLPPalo Alto, [email protected]

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Framing the Issue• First:

– Standards developers require or encourage FRAND or RAND licensing commitments

• Then:– Standard is adopted and enjoys success

• And:– Disputes emerge between owners of

essential patents and implementers of standard as what “reasonable” means

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Smoothwheels v. Kimono Cycles (1)

• Smoothwheels contributes patented technology to FastRide standard.– Standard is successful, and market for

bicycle components grows quickly

• After standard is finalized, and patents issue, Smoothwheels negotiates licenses with two implementers– 5 percent royalty, with cross-license and

grantback to improvements

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• Smoothwheels’ negotiation with Kimono:– Smoothwheels seeks same terms it has received

from other licensees– Kimono agrees to royalty terms and cross

license to related patents, but refuses grantback– Smoothwheels counters:

• 10 percent royalty• One-year grantback

– Negotiations are unsuccessful and Smoothwheels sues Kimono

Smoothwheels v. Kimono Cycles (2)

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Issues:• “Lost Profits” vs. “Reasonable

Royalty”• Economic approaches to “reasonable” • Applying Georgia-Pacific?

– Temporal element– Factor analysis

• Other evidence:– “Shared Understanding” of participants

in FastRide SSO

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Lost Profits vs. Reasonable Royalty• The case for lost profits:

– Where contributor of essential patents competes with infringer, it loses sales and profits to infringer

• The case against lost profits:– Panduit itself rejects limiting damages to

reasonable royalty because to do so subjects patentee to “compulsory license”.1/

– But, where patent that is infringed is one patentee committed to license on reasonable terms, license is not compulsory

1/ Panduit Corp. v. Stahlin Bros. Fibre Works, 575 F.2d 1152, 1158 (6th Cir. 1978)

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1. Market Based

2. Use of Comparables

3. Industry Rules of Thumb

4. 25% Rule/ Standard Profit Split

Ways in Which Analysts Try To Model The Royalty Bargain:

Unreasonable (Will Only Be Reasonable With

Luck)

Reasonable

Can Be ReasonableIf Done Well (and they exist)

Unreasonable

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Price of Kimono’s Fastwheel Compliant Front Derailleurs

Observed Prices of Fastwheel-Compliant Front Deraillerus Made

0 20 40 60 80 100 120 140 160 180 200

Weight

Price Premium for Lighter Front Derailleurs

$20

$22

$24

$26

$28

$30

$32

Price Per Part

Observed Prices Front Derailleurs Made to the Old Standard

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Price of Kimono’s Fastwheel Compliant Front Deraileurs

0 20 40 60 80 100 120 140 160 180 200

Weight

$20

$22

$24

$26

$28

$30

$32

Price Per Part

Price Kimono would have charged for Front Deraileurs of the same weight compliant with the old standard


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Price of Kimono’s Fastwheel Compliant Front Deraileurs

0 20 40 60 80 100 120 140 160 180 200

Weight

$20

$22

$24

$26

$28

$30

$32

Price Per Part

Price Kimono would have charged for Front Deraileurs of the same weight compliant with the old standard

Price Premium Claimed by Smoothwheels as Due to its

Patents


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Smoothwheels Claims that the Value of Patent Is Difference in Amount Market Would Pay for the Attribute

Mid - Atlantic Region West Coast Region

Price Differences Among Different Standards

$100

$150

$200

$250

$300

$350

$400

Price Per Crankset

Crankshaft Using Fastspeed Standard

Crankshaft Using Previous Standard

Prices Observed in: North - East Region

Price Premium Claimed by Smoothwheels as Due

to its Patents

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What if There is an Alternative Standard?



$100

$150

$200

$250

$300

$350

$400

Price Per Crankset

Crankshaft Using Alternative New

Standard




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Kimono Claims that the Relevant Difference is with the Next Best Alternative



$100

$150

$200

$250

$300

$350

$400

Price Per Crankset


Standard




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14Mid - Atlantic Region West Coast Region


$100

$150

$200

$250

$300

$350

$400

Price Per Crankset


Standard




Price premium over alternatives

considered by SSO

Kimono Claims that the Relevant Difference is with the Next Best Alternative

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Differences in Prices and Market Advantages Converts to Increases in Profits

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16

Infringer’s Maximum Willingness to Pay

Profit from Using the

Patent

Profit from Using the Next-Best Alternative

Extra Profit from Using the Patent

$

16

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Applying Georgia-Pacific: Temporal Element• Georgia-Pacific hypothetical negotiation takes

place at time infringement begins.1/

– Infringement typically does not begin until after standard has been approved.

• Debate over whether in cases involving infringement of essential patents, “hypothetical negotiation” should instead be seen to occur at time of decision to include patented technology in standard– In Rambus remedies opinion, FTC favors determining

reasonable royalty from ex ante perspective..2/

1/ Wang Lab Inc. v. Toshiba Corp., 993 F.2d 858, 869-70 (Fed. Cir. 1993)2/ Matter of Rambus, Inc., No. 9302 (FTC, Feb. 5, 2007) at 16-17.

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Applying Georgia-Pacific: Relevant Factors• Because patentee has committed to license,

Georgia-Pacific factor 1 (royalties received for licensing same patent) likely to be important– “ND” element of RAND: should it limit ability of

patentee to distinguish other licenses it has given?– How to value non-economic components of

license?• E.g., cross-licenses, grantbacks, defensive suspension

provisions

• Georgia-Pacific factor 4 (patentee’s policy of refusing to license) drops out.

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Modeling the Hypothetical Negotiation

Extra Profit from Using the Patent

Maximum Royalty =

Lifetime Expected Extra Profit

Lifetime Expected Total Revenue

Lifetime Expected Total Revenue

= 6%

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Determining the Bargaining Range in a Hypothetical Negotiation in a Patent Case

0%

Based on: Added ProfitsDue to Being Able to Sell

Product at Higher Price

Potential Licensee’s Maximum Willingness to Pay:

6%

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Hypothetical Negotiation Analyzed in Light of Georgia-Pacific Factors

14: Testimony of experts

13: Portion of profit credited to alleged infringer

12: Customary portion of profit

11: Extent of alleged infringer’s use of invention

10: Nature/benefits of the patented invention

9: Utility/advantages of invention

8: Profitability of the patented product

7: Duration of the patent and term of license

6: Convoyed sales

5: Commercial relationship

4: Licensor’s licensing policy

3: Nature and scope of license

2: Rates paid for other comparable patents

1: Royalties paid for licensing of the patent

15: Hypothetical negotiation21

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9: Utility/advantages of invention

15: Hypothetical negotiation

Hypothetical Negotiation Analyzed in Light of Georgia-Pacific Factors

14: Testimony of experts

13: Portion of profit credited to alleged infringer

12: Customary portion of profit

11: Extent of alleged infringer’s use of invention

10: Nature/benefits of the patented invention

8: Profitability of the patented product

7: Duration of the patent and term of license

6: Convoyed sales

5: Commercial relationship

4: Licensor’s licensing policy

3: Nature and scope of license

2: Rates paid for other comparable patents

15: Hypothetical negotiation15: Hypothetical negotiation

1: Royalties paid for licensing of the patent 1: Royalties paid for licensing of the patent

15: Hypothetical negotiation


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Determining the Bargaining Range in a Hypothetical Negotiation in aPatent Case

Minimum Patent Owner Would Accept:

0%

Based on: Added ProfitsDue to Being Able to Sell

Product at Higher Price

Based on: Lost ProfitsDue to Increased Competition and Lost Licensing Opportunities

Potential Licensee’s Maximum Willingness to Pay:

1% 6%

Bargaining Range

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Agreed-Upon Rate Within Bargaining Range

1% 6%

If firms have equal bargaining power, bargain might split the difference.

Other factors, including Georgia-Pacific Factors, influence the final rate above or below mid-point.

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A royalty tends to be is unreasonable if:

• There is no link between the royalty and the value of the patent (or standard)

• There is no consideration of non-infringing alternatives

• There is no consideration of work-around alternatives

A royalty tends to be reasonable if:

• It applies market-based economic analysis in the Georgia-Pacific framework

• It considers the value of the patent to both parties to the negotiation

• It takes into account the availability of non-infringing alternatives

Economically: What Tends to Make a Royalty Reasonable?

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Shared Expectations of Participants• If views of participants in standards development

is informative as to meaning of rules of SDO (Rambus), should they be similarly informative as to meaning of RAND?– Where views of participants are based on past licensing

practices for similar technologies, may be probative under Georgia-Pacific factor 2, royalty rates for comparable technologies

– What if views are specific to particular standards development effort?

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