Guidelines for Determining RAND Royalty Rates for Standard Essential Patents
In Microsoft v. Motorola, the U.S. District Court for the Western District of Washington became the first US court to set fair, reasonable and non-discriminatory (FRAND or RAND) licencing terms for standard-essential patents (SEPs). The 207 page opinion[i] attempts to establish guidelines for the interpretation of RAND licencing of SEPs.
Judge Robart's opinion is important to the standards world because it sets out, for the first time, a logical and consistent methodology for determining a RAND royalty. The opinion will be useful to arbitrators, mediators and private parties seeking to adjudicate RAND disputes before litigation commences.
In determining the RAND terms in this case, Judge Robart analysed what would happen in a hypothetical negotiation between Motorola and Microsoft for licencing of the SEPs at issue. In many previous non-standard-essential patent cases, factors in the Georgia-Pacific Corp. v. U.S. Plywood Corp[ii] case formed the basis for a hypothetical negotiation. In the context of SEPs and determining RAND royalties, Judge Robart found that the following “economic guideposts” should be considered in the negotiation:
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The level of a RAND royalty should promote adoption of the standard "because the interoperability benefits of standards depend on broad implementation". There is a public benefit to standards and a public interest in ensuring that royalty rates for standardised technology enable broad implementation. Thus, unlike normal patent licensing negotiations, the licensing of standards-essential patents takes on a public character and is not merely a closed-door negotiation between two private parties. The RAND royalty negotiation must be conducted, and reviewed, with these public benefits in mind.
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The methodology for determining RAND terms should recognize and mitigate the risk of royalty stacking. Any RAND royalty payable to the SEP holder must take into account royalties payable to other holders of patents covering the standards in question. Thus the RAND royalties cannot be determined on the basis of isolated negotiations between the licensor and the licensee, without regard to the broader industry context in which such negotiations take place.
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RAND royalties should guarantee the patent holder a reasonable return on its IP-related investment.
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The RAND commitment should be interpreted to limit a patent holder to a reasonable royalty on the economic value of its patented technology itself, apart from the value associated with the incorporation of the patented technology into the standard.
Applying these principles, Judge Robart provided a modified version of the Georgia-Pacific factors to apply in the context of standard-essential patents and RAND licencing. The table in the following link summarises the Georgia-Pacific factors and the corresponding modifications:
Microsoft v. Motorola is precedential only in the Western District of Washington. However, it provides a valuable roadmap and may influence courts in other U.S. and international jurisdictions that are deciding on RAND royalty rates. Its applicability to standards that are less widely-adopted than the H.264 and 802.11 standards remains to be seen, however, since Judge Robart was able to choose from several different comparables to develop RAND royalty rates and ranges in this case.
[i] http://www.scribd.com/doc/138032128/13-04-25-Microsoft-Motorola-FRAND-Rate-Determination
[ii] http://scholar.google.com/scholar_case?case=11669004218621472059
