Aggregated Royalties for Top-Down FRAND Determinations

DOI10.1177/0003603X17733347
Date01 December 2017
Published date01 December 2017
Article
Aggregated Royalties for Top-
Down FRAND Determinations:
Revisiting “Joint Negotiation”
Jorge L. Contreras*
Abstract
In an environment in which widely adopted technical standards may each be covered by large numbers
of patents, there have been increasing calls for courts to determine “fair, reasonable, and non-
discriminatory” (FRAND) royalties payable to holders of standards-essential patents (SEPs) using “top-
down” methodologies. Top-down royalty approaches begin with the aggregate royalty that should be
payable with respect to all SEPs covering a particular standard, and then allocate a portion of the total
to individual SEPs. Top-down approaches avoid many drawbacks associated with bottom-up
approaches in which royalties for individual SEPs are assessed, often in an inconsistent and piece-
meal manner, without regard for the other SEPs that cover the standard. Yet despite the potential
benefits of top-down methodologies, one of the most promising means for determining aggregate
royalty levels—joint agreement by the members of the relevant standards-development organization
(SDO)—has gained little traction. The idea of SDO participants jointly negotiating FRAND royalties
attracted the attention of commentators and antitrust agencies about a decade ago, when a handful of
SDOs began to explore mandatory ex ante rate disclosure requirements. But few SDOs adopted such
policies, and joint negotiations were never incorporated into the mainstream standardization process.
One reason that SDOs have been hesitant to endorse joint royalty negotiations is the perceived risk of
antitrust liability arising from concerted action among competitors. But as numerous commentators
and antitrust officials have reiterated, this fear is largely misplaced in the context of industry standard-
setting. Thus, SDOs should follow the lead of patent pools and begin more actively to determine
aggregate patent royalty burdens for standards that they develop. In addition, antitrust and compe-
tition authorities should assure the market that collective agreement on aggregate royalty rates alone
should not give rise to antitrust liability.
Keywords
FRAND, standards, SEP, patent, joint negotiation, oligopsony
*Professor of Law, University of Utah S.J. Quinney College of Law, Salt Lake City, UT, USA
Corresponding Author:
Jorge L. Contreras, Professor of Law, University of Utah S.J. Quinney College of Law, South, 383 University St E, Salt Lake City,
UT 84112, USA.
Email: jorge.contreras@law.utah.edu
The Antitrust Bulletin
2017, Vol. 62(4) 690-709
ªThe Author(s) 2017
Reprints and permission:
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DOI: 10.1177/0003603X17733347
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I. The Case for Aggregated Standards Royalties
A. Many Patents, Many Royalties?
Many standards-development organizations (SDOs) require that their participants license patents that
are essential to standardized products (standards-essential patents or SEPs) to product manufacturers
on terms that are fair, reasonable,and nondiscriminatory (FRAND). An extensiveliterature and growing
body of case law exists regarding the determination of FRAND royalties.
1
But even if ind ividual royalty
rates can be considered “fair” and “reasonable,” when large numbers of patents are involved, there is a
risk that the total royalty burden on a standardized product can become excessive. This is the familiar
issue of royaltystacking. As has been discussedextensively in the literature, royalty stacking isa variant
of the well-knownCournot complements problemin which different firms each control necessary inputs
to production and act in an uncoordinated manner when charging a manufacturer for the use of those
inputs.
2
As the U.S. Court of Appeals for the Federal Circuit has explained,
Royalty stacking can arise when a standard implicates numerous patents, perhaps hundreds, if not thou-
sands. If companies are forced to pay royalties to all [patent] holders, the royalties will “stack” on top of
each other and may become excessive in the aggregate.
3
Under most current SEP licensing frameworks, the negotiation of FRAND license agreements is left
to bilateral interactions between SEP holders and manufacturers of standardized products. In these
cases, SEP holders have little incentive to consider royalty rates charged by anyone other than
themselves. Yet some broadly adopted standards are covered by patents held by dozens of different
firms.
4
Thus, if each of these SEP holders independently sought to maximize its royalty revenue, patent
royalties could far exceed sustainable product prices.
5
Commentators disagree whether royalty stacking is currently having a significant impact on prices
or innovation in industries such as wireless telecommunications that are heavily dependent on stan-
dardized technologies. Some researchers claim that there is no empirical evidence that royalty stacking
is a significant issue in practice.
6
Estimates of the actual royalty stack for mobile telephone products
1. See, generally, Chryssoula Pentheroudakis & Justus A. Baron, Licensing Terms of Standard Essential Patents: A
Comprehensive Analysis of Cases, JRC SCI.FOR POLYREP. EUR 28302 at 95–96 (2017) (collecting and summarizing
cases); Jorge L. Contreras, Patents, Technical Standards and Standards-Setting Organizations: A Survey of the Empirical,
Legal and Economics Literature,in 2RESEARCH HANDBOOK ON THE ECONOMICS OF INTELLECTUAL PROPERTY LAW:ANALYTICAL
METHODS (Peter Menell et al. eds., 2017) (collecting literature).
2. See, e.g., Pierre Re´gibeau, Raphae¨l De Coninck, and Hans Zenger, Transparency, Predictability, and Efficiency of SSO-
based Standardization and SEP Licensing: A Report for the European Commission 15–17 (2016) (discussing relevance of
Cournot complements problem in standard-setting); Mark A. Lemley & Carl Shapiro, Patent Holdup and Royalty Stacking,
85 TEX.L.REV. 1991, 2013–15 (2007) (describing the problems of Cournot complements and double marginalization and
their potential to lead to holdup in SEP markets); Joseph Farrell, John Hayes, Carl Shapiro, & Theresa Sullivan, Standard
Setting, Patents, and Hold-Up,74A
NTITRUST L.J. 603, 642 (2007) (“the sum of the incremental values of [multiple] patents
exceeds their value in combination”).
3. Ericsson, Inc. v. D-Link Sys., 773 F.3d 1201, 1209 (Fed. Cir. 2015). See also In re. Innovatio IP Ventures, LLC Patent Litig.,
U.S. Dist. LEXIS 144061 at *62 (N.D. Ill. 2013) (“the determination of a RAND royalty must address the risk of royalty
stacking”).
4. See Microsoft Corp. v. Motorola, Inc., Findings of Fact and Conclusions of Law, 2013 U.S. Dist. LEXIS 60233 at *213
(W.D. Wash., Apr. 25, 2013) (“[t]here are atleast 92 entities that own 802.11 [standard-essential patents]”); Rudi Bekkers &
Joel West, The Limits to IPR Standardization Policies as Evidenced by Strategic Patenting in UMTS,33
TELECOMMUNICATIONS POLY80 (2009) (72 holders of SEPs covering ETSI’s 3G UMTS standard).
5. See Microsoft, supra note 4, at *213.
6. See, e.g., J. Gregory Sidak,The Antitrust Division’s Devaluationof Standard-Essential Patents,104G
EO.L.J.ONLINE 48, 61
(2015) (“Byearly 2015, more than two dozen economistsand lawyers had disapprovedor disputed the numerous assumptions
and predictions of the patent-holdup and royalty-stacking conjectures.”); Anne Layne-Farrar, Patent Holdup and Royalty
Contreras 691

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