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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]
2
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
3
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
4
• 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)
5
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
6
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)
7
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
8
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
8
9
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 for Lighter Front Derailleurs
9
10
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
Price Premium for Lighter Front Derailleurs
10
11
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
11
12
What if There is an Alternative Standard?
Mid - Atlantic Region West Coast Region
Price Differences Among Different Standards
$100
$150
$200
$250
$300
$350
$400
Price Per Crankset
Crankshaft Using Alternative New
Standard
Crankshaft Using Fastspeed Standard
Crankshaft Using Previous Standard
Prices Observed in: North - East Region
12
13
Kimono Claims that the Relevant Difference is with the Next Best Alternative
Mid - Atlantic Region West Coast Region
Price Differences Among Different Standards
$100
$150
$200
$250
$300
$350
$400
Price Per Crankset
Crankshaft Using Alternative New
Standard
Crankshaft Using Fastspeed Standard
Crankshaft Using Previous Standard
Prices Observed in: North - East Region
13
14Mid - Atlantic Region West Coast Region
Price Differences Among Different Standards
$100
$150
$200
$250
$300
$350
$400
Price Per Crankset
Crankshaft Using Alternative New
Standard
Crankshaft Using Fastspeed Standard
Crankshaft Using Previous Standard
Prices Observed in: North - East Region
Price premium over alternatives
considered by SSO
Kimono Claims that the Relevant Difference is with the Next Best Alternative
14
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
17
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.
18
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.
19
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%
19
20
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%
20
21
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
22
1: Royalties paid for licensing of the patent
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
1: Royalties paid for licensing of the patent
22
23
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
23
24
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.
24
25
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?
26
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?