Understanding Damages Calculation in SEP Litigation

Courts around the world have determined appropriate methodologies for calculating damages on standard essential patents (SEPs) for which patent holders have made an assurance to license on fair, reasonable and non-discriminatory (FRAND) terms. Determinations of patent holdup, licensee holdout, use of worldwide portfolio licensing, incremental value rule, etc. are included in these decisions. The court determines damages based on the below-referenced judgments and FRAND terms when reviewing SEP infringements. Under most patent laws, infringement damages are set based on factors including actual loss due to infringement, if the actual loss is difficult to determine, gains of the infringer, and if both actual loss and gains are not available—determination of appropriate multiples of a reasonable royalty fee.

Standard Setting Organizations (SSOs) also play a role in determining damages in SEP litigation and licensing by incorporating an intended means or approach to valuation in FRAND commitment. Even the US. courts are now expressing interest in receiving guidance from the SSOs in order to determine the valuation mechanism of SEPs.

35 U.S. Code § 284 says:

Upon finding for the claimant the court shall award the claimant damages adequate to compensate for the infringement, but in no event less than a reasonable royalty for the use made of the invention by the infringer, together with interest and costs as fixed by the court.

When the damages are not found by a jury, the court shall assess them. In either event the court may increase the damages up to three times the amount found or assessed. Increased damages under this paragraph shall not apply to provisional rights under section 154(d).

The court may receive expert testimony as an aid to the determination of damages or of what royalty would be reasonable under the circumstances.

How are Damages Calculated?

Method 1: Hypothetical Negotiations and the Georgia-Pacific Factors

In the US courts, the Georgia-Pacific Corp. v. The United States Plywood Corp case has provided the most common framework for SEP license assessments for over 40 years. The lower courts have adopted a modified version of the Georgia-Pacific factors, which they consider when determining hypothetical negotiations between the parties.

The 15 Georgia-Pacific factors are:

Factor 1: The royalties received by the patentee for the licensing of the patent-in-suit in other circumstances comparable to FRAND–licensing circumstances.

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

Factor 3: The nature and scope of the license (unchanged).

Factor 4 & 5: These do not apply in the FRAND context at all; both were dropped. (Factor 4 relates to the licensor’s policy and marketing program; Factor 5 relates to the commercial relationship between the licensor and licensee).

Factor 6: The effect of the patented invention in promoting sales of other products of the licensee and the licensor, taking into account only the value of the patented technology and not the value associated with incorporating the patented technology into the standard.

Factor 7: In the FRAND context, the analysis of this factor (related to the duration of the patent and the term of the license) is greatly simplified because the term of the license would be co-extensive with the duration of the patent.

Factor 8: The established profitability of the product made under the patent, its commercial success, and its current popularity, taking into account only the value of the patented technology and not the value associated with incorporating the patented technology into the standard.

Factor 9: The utility and advantages of the patent property over alternatives that could have been written into the standard instead of the patented technology in the period before the standard was adopted.

Factor 10-11: The contribution of the patent to the technical capabilities of the standard and also the contribution of those relevant technical capabilities to the licensee and the licensee’s products, taking into account only the value of the patented technology and not the value associated with incorporating the patented technology into the standard.

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 that are also covered by FRAND–committed patents.

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, significant features or improvements added by the infringer, or the value of the patent’s incorporation into the standard.

Factor 14: The opinion testimony of qualified experts (unchanged).

Factor 15: The amount that a licensor and a licensee would have agreed upon (at the time the infringement began) if both were considering the FRAND commitment and its purposes and had been reasonably and voluntarily trying to reach an agreement.

In In re Innovatio IP Ventures, LLC (Innovatio), Innovatio sued numerous hotels, coffee shops, restaurants, supermarkets, and other commercial users of wireless internet technology located throughout the United States and alleged them for infringing various claims of seventeen patents owned by Innovation. In this case, Judge Robart’s analysis proceeded in three steps, which provide a framework for any court attempting to determine a RAND licensing rate for a given patent portfolio and are as follows.

• First, a court should consider the importance of the patent portfolio to the standard, considering both the proportion of all patents essential to the standard that are in the portfolio and also the technical contribution of the patent portfolio as a whole to the standard.
• Second, a court should consider the importance of the patent portfolio as a whole to the alleged infringer’s accused products.
• Third, a court should examine other licenses for comparable patents to determine a RAND rate to license the patent portfolio, using its conclusions about the importance of the portfolio to the standard and to the alleged infringer’s products to determine whether a given license or set of licenses is comparable.

Method 2: Comparable Licenses

This approach of FRAND damages determination is used in China, the UK, and the United States. It focuses on just factors 1 and 2 of Georgia-Pacific on comparable licenses. This approach was used in Huawei v. InterDigital, in which the Shenzhen Intermediate People’s Court determined that the royalties Huawei should pay for use of InterDigital’s 2G, 3G, and 4G essential Chinese patents should not exceed 0.019% of the actual sales price of each Huawei product. The judges in this case concluded that “one may infer from the statement above that the court used InterDigital’s licenses with Samsung, Apple, and others as comparable licenses to determine whether the royalty rates InterDigital offered to Huawei were discriminatory, and possibly also to calculate the appropriate FRAND royalty rate that should be charged to Huawei, which was determined to be no more than 0.019 percent’’.

Similarly, In the UK, the recent ruling in Unwired Planet confirms that the use of comparable licenses is permissible. The court held that a FRAND rate can be determined by using comparable licenses.

Method 3: The Incremental Value Rule

The U.S. The Federal Trade Commission (FTC) has recommended the use of the “incremental value rule” in determining FRAND value. This refers to incrementally increasing the value of essential patents based on the number of contributions to the standard to which the essential patent belongs. In Microsoft v. Motorola, however, Judge Robart rejected in part an “incremental value” approach on the grounds that it lacks “real-world applicability”. Further, Judge Robart concluded that the incremental value approach is “realized, in part” through Factor 9 of Georgia-Pacific.

Method 4: Bottom Up Approach

The bottom up approach is similar to the incremental value rule, but the bottom up approach suggests determining the costs of implementing reasonable alternatives to the patents at issue that could have been adopted into the standard, and dividing that cost by the total number of infringing units to determine the maximum per-unit royalty. In In re Innovatio IP Ventures, LLC, Judge Holderman rejected the manufacturers’ “Bottom Up” approach for calculating a RAND royalty, a method that shares a number of commonalities with the incremental value rule. Judge Holderman noted that the approach is based on the theory that a hypothetical licensee would not pay more for patents than the amount necessary to adopt an alternative.

Method 5: Top Down Approach

In In re Innovatio IP Ventures, LLC⁴ (Innovatio’), Judge Holderman adopted a “Top Down” approach, in which calculation was started with the average price of the identified royalty base (in Innovatio, a Wi-Fi chip) and then the calculation of the average profit that the product/component maker earns on the sale of each unit, as a means of isolating the portion of the income from the sale of the product/component available to the maker to pay royalties on intellectual property. The available profit is then multiplied by a fraction calculated as a number of the SEPs at issue, divided by the total number of SEPs in the standard.

Method 6: SSPPU Approach

SSPPU, or Smallest Saleable Patent Practicing Unit, includes a theory of determining damages that argues that the damages should be based on the smallest unit, module or component that practices the patented technology. This approach was created by U.S. federal courts for use by juries in patent damages cases and it has been recently used by competition agencies in China (against Qualcomm) and India (against Ericsson) to investigate whether a company’s practice of charging royalties based on the end-user device prices amounts to “excessive” or “unfairly high” pricing.

Base + Calculation

Much attention is to be paid to the appropriate base for FRAND royalty determinations, for example, whether a SEP holder uses the end-user device as the royalty base (which is common industry practice in the telecommunications sector) or uses smaller components, such as a chipset, as the royalty base. Ultimately, damages calculation in SEP infringement cases is dependent on the royalty base and the approach used for calculation.