This article is the second in a series on a rapidly-evolving area of patent law: determining the “reasonable and non-discriminatory” (RAND) royalty rate for licensing a standard-essential U.S. patent. Part 1 identified the key issues and underlying policy in setting the RAND royalty rate.

The first case in the United States to set the F/RAND patent royalty was Microsoft Corp. v. Motorola, Inc., in the Western District of Washington. There, Microsoft brought an action in 2010 for declaratory judgment that Microsoft was a third-party beneficiary of Motorola’s RAND commitments to the IEEE and ITU for two groups of SEPs, and Motorola breached its contractual obligation to license those patents to Microsoft on RAND terms. The court determined as an initial matter in 2012 that Microsoft was a third-party beneficiary and therefore able to enforce the RAND promises that Motorola made. The parties agreed that the asserted claims were standard-essential, leaving the determination of the RAND royalty rate, and a RAND royalty range, within which RAND offers must lie or be presumptively non-RAND.

After a week-long bench trial with testimony from 18 witnesses, including technical and economic experts, Judge Robart issued a detailed, 207-page order on April 25, 2013, setting the RAND royalty rate for Motorola’s IEEE 802.11 standard-essential patents at 3.471 cents per unit, and 0.555 cents per unit for the patents covering the ITU H.264 video compression standard. Judge Robart broke new legal ground in reaching this result, in which the court modified traditional Georgia-Pacific (GP) factors used for years in patent cases in order to determine the appropriate RAND royalty ranges.

Ultimately, Judge Robart’s modifications attempted to accomplish two primary purposes: ensure the parties to the hypothetical negotiation clearly understood the RAND commitment, and consider the value of the patented technology apart from the value associated with its incorporation to the standard involved (IEEE 802.11 for example) (i.e., excise the hold-up value).

For example, GP factor 1 traditionally examines royalties received by the patentee for licensing the patent-in-suit. However, as modified by Judge Robart, any past royalty rates must have been negotiated under a clearly understood RAND obligation. GP factor 4 traditionally considers the licensor’s established policy and marketing program to maintain its patent monopoly by not licensing to others. As modified by Judge Robart, this factor is inapplicable because a licensor that has made a RAND commitment has an obligation to license on RAND terms and may no longer maintain a patent monopoly. Similarly, GP factor 5, which examines the commercial relationship between the licensor and licensee, is not applicable in a RAND context because a licensor is not allowed to discriminate against competitors once it has made a RAND commitment. GP factors 6, 8, 10, 11 and 13 each traditionally consider, in some form or fashion, the importance and/or benefits of the patented invention. However, under Judge Robart’s modified structure, an effort must be made to separate the patented technology from the value associated with the incorporation of the patented technology into the standard (i.e., excising the hold-up value).

A few months later, Judge Holderman, presiding over In re Innovatio IP Ventures, LLC Patent Litigation in the Northern District of Illinois, set the RAND rate at 9.56 cents per unit for a portfolio of 17 patents that he found were standard-essential for the IEEE 802.11 Wi-Fi standard.

This RAND decision resulted from two bench trials. The first bench trial determined which of the hundreds of asserted patent claims were standard-essential, the first such proceeding in the country. The court determined that all of the asserted claims were standard-essential. The second bench trial determined the RAND royalty rate. Judge Holderman essentially used the same RAND-modified Georgia-Pacific factors used by Judge Robart.

However, the real battle in the Innovatio case was fought on the issue of what the appropriate royalty base should be. Defendants maintained that the appropriate royalty base was the Wi-Fi chip, because all the features of the 802.11 standard are implemented on the Wi-Fi chip, and the law requires apportionment to at least the smallest-saleable patent practicing unit (i.e., the Wi-Fi chip). Not surprisingly, Innovatio argued the appropriate royalty base were the various accused end products (access points, computers, printers, etc.). Innovatio’s argument was that many of the asserted claims read on systems and methods involving apparatuses beyond the Wi-Fi chip, such as access points, antennas, processors, keyboards, etc.

Ultimately, defendants won the day on this issue, which set the stage for the court’s ultimate determination of the RAND rate. Several corroborative approaches were presented by defendants to arrive at the RAND rate, but the court ultimately chose a “top-down approach,” which identified the Wi-Fi chip as the smallest-saleable patent practicing unit, and then attempted to further apportion down to the patented features. Specifically, the top-down approach involved identifying the maximum royalty burden per unit by taking the average price of Wi-Fi chips during the damages period and multiplying that number by the average operating profit. The court also accounted for the value of the patents-in-suit as compared to the 802.11 standard and ultimately found the RAND rate to be 9.56 cents per unit. The exact method of calculation and numbers in support are provided in Judge Holderman’s written opinion. 

Part 3 of this series will evaluate the lessons learned from the Microsoft and Innovatio decisions and provide practical advice should you or your company find yourself in patent litigation with F/RAND damages issues.