20131028 - economic principles behind innovatio approach to rand rate

8/13/2019 20131028 - Economic Principles Behind Innovatio Approach to RAND Rate

1/5

News, cases, companies, firmsAdvanced Search

Share us on:0 Comments

Mario A. Lopez

Printable Version Share Article Rights/Reprints Ed ito rial Contacts

Economic Principles Behind Innovatio Approach To RAND

Rate

Law360, New York (October 25, 2013, 2:16 PM ET) -- On Sept. 27, U.S.

District Judge James Holderman determined a reasonable and

nondiscriminatory rate for patents owned by Innovatio IPVentures LLC that

were essential to the 802.11 Wi-Fi standard. Innovatio had asserted these

standard-essential patents against Wi-Fi end products manufactured by

Cisco Systems Inc., Hewlett-Packard Co., NETGEAR Inc., Motorola Solutions

Inc. and SonicWALL Inc.

Judge Holderman adopted a top-down approach to calculating a RAND royalty. Thiscalculation began by assessing the maximum royalty burden that could be supported for all

Wi-Fi SEPs. Then, taking into account the thousands of SEPsrelevant to the Wi-Fi standard,

but also recognizing that patent values vary widely, the maximum overall royalty burden was

apportioned down to Innovatios SEPs. Based on this top-down approach, Judge Holderman

arrived at a RAND royalty rate of 9.56 cent per unit.

Apportioning the Value of the Accused Products

A key aspect of Judge Holdermans opinion leading up to his adoption of a top-down

approach centered on the issue of apportionment. Although Judge Holderman concluded that

Innovatios SEPswere of moderate to moderate-high importance to the Wi-Fi standard,thousands of other SEPs also relate to the standard. Moreover, the accused products,

ranging from Wi-Fi access points to laptops to specialized bar code scanners, incorporate

valuable technologies beyond those of the Wi-Fi standard.

A threshold economic issue therefore was how the overall value of these complex products

could be apportioned down to Innovatios SEPs. Although in principle a patented technology

that resides in a component can create value for downstream products containing the

component, Innovatio did not attempt to demonstrate that its specific patented technologies,

as opposed to the Wi-Fi standard as a whole, actually did so.

Instead, Innovatios proposed approach began by applying a Wi-Fi feature factor to the priceof an accused product. Innovatio claimed this factor represented the portion of the price of

end-products that was attributable to the inclusion of Wi-Fi. For wireless access points, for

example, Innovatio claimed that the Wi-Fi feature factor should be 95 percent. Under

Innovatios approach, a RAND royalty could be calculated by multiplying this value by a

royalty rate from comparable licenses.

Judge Holderman firmly rejected Innovatios feature factor approach to apportionment, at

least in part because it was not based on a rigorous and accepted methodology that could

accurately identify the value of the Wi-Fi features in the accused products. As a result, Judge

Holderman found that Innovatio had not presented a credible means to apportion the price of

the accused products down to the value of the 802.11 standard. (pp. 32-33.)

Intellectual Property

Technology

Cisco Systems, Inc.

Edgeworth Economics LLC

Motorola Solutions Inc.

NETGEAR, Inc.

SonicWALL, Inc.

Related

Sections

Companies

INTELLECTUAL PROPERTY

TOP NEWS

Software Patent Ruling A Major JudicialFailure, Rader Says

NFL, AP, Getty Sued By Photographers OverCopyright Abuse

Brand Battles: NFL, Unilever, Coach

ANALYSIS

Split Over New Patent Defense May Get HighCourt Eye

Quinn's Document Flub Shows Risks OfRising Data Demands

PATENTS

AstraZeneca Sues 4 Drugmakers To StopGeneric Vimovo

'Troll' Hit With RICO Suit Asks Court ToSilence Accuser

COPYRIGHTS & TRADEMARKS

Jack Daniel's Accuses Whiskey Rival Of ApingBottle Design

TRADE SECRETS

Equinox Hits Ex-Trainers With $40M TradeSecrets Suit

Tetra Says Execs Stole Secrets To CreatePE-Backed Rival

Insurer Says Ex-Employees Took TradeSecrets To Rival

RIGHTS OF PUBLICITY

Figure Skater's Likeness Suit Built On ThinIce, Producer Says

NCAA Can't Stop Athletes' Antitrust ClassAction

ROYALTIES

Search

research@jer... News Rankings Jobs Platform ToolsCases Tracking
http://www.law360.com/ip/articles/483291?article_sidebar=1http://www.law360.com/ip/articles/483202?article_sidebar=1http://www.law360.com/ip/articles/483506?article_sidebar=1http://www.law360.com/ip/articles/483434?article_sidebar=1http://www.law360.com/companies/motorola-solutions-inchttp://www.law360.com/tracked_entities/create?entity_type=companies&entity_id=4c52dd51cc956f21c4000f24&entity_name=SonicWALL%2C+Inc.&entity_url_name=sonicwall-inc%20&entity_model=Organizationhttp://www.law360.com/companies/sonicwall-inc?article_related_content=1http://www.law360.com/tracked_entities/create?entity_type=companies&entity_id=4c52dd4fcc956f21c4000b21&entity_name=Motorola+Solutions+Inc.&entity_url_name=motorola-solutions-inc%20&entity_model=Organizationhttp://www.law360.com/articles/481414/print?section=iphttp://www.law360.com/articles/481414/share?section=iphttp://www.law360.com/about/rights_and_reprints?article_id=481414http://www.law360.com/about/editorial_contactshttp://-/?-http://www.law360.com/http://www.law360.com/newslettershttp://www.law360.com/http://-/?-http://-/?-http://jobs.law360.com/http://-/?-http://-/?-http://www.law360.com/ip/articles/483621?article_sidebar=1http://www.law360.com/ip/articles/483313?article_sidebar=1http://www.law360.com/ip/articles/483689?article_sidebar=1http://www.law360.com/ip/articles/483291?article_sidebar=1http://www.law360.com/ip/articles/483277?article_sidebar=1http://www.law360.com/ip/articles/483432?article_sidebar=1http://www.law360.com/ip/articles/483452?article_sidebar=1http://www.law360.com/ip/articles/483202?article_sidebar=1http://www.law360.com/ip/articles/483506?article_sidebar=1http://www.law360.com/ip/articles/483434?article_sidebar=1http://www.law360.com/ip/articles/483739?article_sidebar=1http://www.law360.com/ip/articles/483446?article_sidebar=1http://www.law360.com/ip/articles/482264?article_sidebar=1http://www.law360.com/companies/sonicwall-inc?article_related_content=1http://www.law360.com/tracked_entities/create?entity_type=companies&entity_id=4c52dd51cc956f21c4000f24&entity_name=SonicWALL%2C+Inc.&entity_url_name=sonicwall-inc%20&entity_model=Organizationhttp://www.law360.com/companies/netgear-inc?article_related_content=1http://www.law360.com/tracked_entities/create?entity_type=companies&entity_id=4c52dd4fcc956f21c4000b70&entity_name=NETGEAR%2C+Inc.&entity_url_name=netgear-inc%20&entity_model=Organizationhttp://www.law360.com/companies/motorola-solutions-inc?article_related_content=1http://www.law360.com/tracked_entities/create?entity_type=companies&entity_id=4c52dd4fcc956f21c4000b21&entity_name=Motorola+Solutions+Inc.&entity_url_name=motorola-solutions-inc%20&entity_model=Organizationhttp://www.law360.com/companies/edgeworth-economics-llc?article_related_content=1http://www.law360.com/tracked_entities/create?entity_type=companies&entity_id=514334b97126fb37e30005ea&entity_name=Edgeworth+Economics+LLC&entity_url_name=edgeworth-economics-llc%20&entity_model=Organizationhttp://www.law360.com/companies/cisco-systems-inc?article_related_content=1http://www.law360.com/tracked_entities/create?entity_type=companies&entity_id=4c52dd4acc956f21c40003cb&entity_name=Cisco+Systems%2C+Inc.&entity_url_name=cisco-systems-inc%20&entity_model=Organizationhttp://www.law360.com/technology?article_sidebar=1http://www.law360.com/technology/newsletterhttp://www.law360.com/ip?article_sidebar=1http://www.law360.com/ip/newsletterhttp://www.law360.com/companies/sonicwall-inchttp://www.law360.com/companies/motorola-solutions-inchttp://www.law360.com/companies/netgear-inchttp://www.law360.com/companies/cisco-systems-inchttp://www.law360.com/about/editorial_contactshttp://www.law360.com/about/rights_and_reprints?article_id=481414http://www.law360.com/articles/481414/share?section=iphttp://www.law360.com/articles/481414/print?section=iphttp://www.linkedin.com/shareArticle?mini=true&url=http://www.law360.com/ip/articles/481414&summary=In+the+recent+Innovatio+IP+Ventures+LLC+case%2C+U.S.+District+Judge+James+Holderman+adopted+a+%E2%80%9Ctop-down%E2%80%9D+approach+to+calculating+a+reasonable+and+nondiscriminatory+royalty.+This+approach+helps+achieve+the+twin+goals+of+awarding+patent+holders+royalties+commensurate+with+their+technological+contributions+while+still+addressing+the+risk+of+royalty+stacking%2C+says+Mario+Lopez+of+Edgeworth+Economics+LLC.&title=Economic+Principles+Behind+Innovatio+Approach+To+RAND+Rate&source=Law360http://www.facebook.com/share.php?u=http://www.law360.com/ip/articles/481414http://twitter.com/share?text=Economic%20Principles%20Behind%20Innovatio%20Approach%20To%20RAND%20Rate&url=http://www.law360.com/ip/articles/481414http://www.law360.com/http://www.law360.com/newslettershttp://www.law360.com/advanced_search


2/5

Determination of the Maximum Royalty Burden for All Wi-Fi SEPs

In this context, the starting point for the top-down approach adopted by Judge Holderman

considers the maximum royalty burden for the standard as a whole. In this case, Judge

Holderman determined the maximum overall royalty burden to be the operating profit margin

on Wi-Fi chips. There are several reasons why this makes economic sense.

First, Judge Holderman had found that the Wi-Fi chip was the smallest salable unit, i.e., the

smallest product priced in the marketplace that contained the substantive aspects of the

invention. Second, basing the royalty on the Wi-Fi chip, as opposed to an end product, is

consistent with Judge Holdermans finding that a RAND obligation does not allow a patent

holder to discriminate between licensees on the basis of their position in the market. (p.

74.) Third, a chip manufacturer would have taken into account expected future royalties when

setting prices. Expected profits from selling Wi-Fi chips therefore represents an upper bound

on the total royalty burden.

One question surrounding the maximum royalty burden is whether it could exceed actual

operating profits if chip manufacturers were able to pass through additional royalties to

customers. Here, three economic considerations arise.

First, as discussed above, Wi-Fi chip suppliers would have already built expected royalties

into their pricing structures, so that there was no need for pass-through.

Second, with regard to the Innovatio patents in particular, Judge Holderman noted that other

major Wi-Fi chip manufacturers already were licensed under the Innovatio SEPs prior to

Innovatios purchase of them. In competitive markets, an increase in costs is more likely to

be passed through to customers if all firms in the industry face the same increase in costs.

The existence of licensed chip manufacturers not only would have made pass-through more

difficult, but would have also raised issues regarding the nondiscriminatory prong of the

RAND obligation attached to the Innovatio patents.

Third, even if such pass-through were possible, it would have resulted in a significant

increase in Wi-Fi chip prices. Innovatio claimed a royalty for its SEPs in the range of $3.39 to

$36.90 depending on accused products. Such royalties would have represented a significant

increase in the $14.85 average selling price of a Wi-Fi chip adopted by Judge Holderman and

far in excess of current Wi-Fi chip prices, which are in the $1 to $3 range. By itself, such a

substantial increase in the price of Wi-Fi chips would have threatened widespread adoption

of the Wi-Fi standard, a factor that Judge Holderman found relevant to the determination of a

RAND royalty. Although Judge Holderman found that Innovatios patents were of moderate to

moderate-high importance to the Wi-Fi standard, many other technologies covered by SEPs

were still necessary to implement the standard. Even a small number of SEP holders with

similar demands would have resulted in substantially higher Wi-Fi chip prices, further

threatening the adoption of the standard.

Accounting for the Thousands of Standard-Essential Patents in the Wi-Fi

Standard

A long-running concern in the high-tech industry is that products that incorporate hundreds if

not thousands of patented technologies face risks associated with royalty stacking. Both the

defendants and Innovatio agreed that potentially thousands of patented technologies were

necessary to implement the Wi-Fi standard. Judge Holderman recognized the concerns over

royalty stacking, noting that it requires that the court, to the extent possible, evaluate a

proposed RAND rate in light of the total royalties an implementer would have to pay to

practice the standard. (p. 19.)

Quincy Jones Wants $10M For Use Of SongsIn Jackson Film

EXPERT ANALYSIS

Economic Principles Behind InnovatioApproach To RAND Rate

LEGAL INDUSTRY

An Orrick-Pillsbury Tie-Up Could SpurPartnership Changes

Patton Boggs, Akin Gump Top Lobbying

Firms In 3rd Quarter

In Case You Missed It: Hottest Firms AndStories On Law360

UK Law Firm Osborne Clarke Opens NYCBranch
http://www.law360.com/ip/articles/483425?article_sidebar=1http://www.law360.com/ip/articles/483564?article_sidebar=1http://www.law360.com/ip/articles/482296?article_sidebar=1http://www.law360.com/ip/articles/483541?article_sidebar=1http://www.law360.com/ip/articles/481414?article_sidebar=1http://www.law360.com/ip/articles/483765?article_sidebar=1


3/5

In economic terms, the value of the standard is derived from the synergies that are

generated by bringing together different technologies to implement the standard. Indeed,

simply the act of standardizing can create substantial value due to interoperability, regardless

of which specific technologies are adopted. This is true both for the value of the standard as

a whole and for the value of sub-features of the standard. Judge Holderman, for example,

noted that while Innovatios sleep patents were of moderate importance to the standard, they

[were] not sufficient in themselves to cover all of the features of 802.11 sleep mode. (p. 58.)

In principle, a RAND rate for a portfolio of SEPs should not misappropriate the contributions

of the other technologies that were included in the standard, nor the value created by the act

of standardization itself. Moreover, a RAND rate for a portfolio of SEPs for a given standard

should not misappropriate value created by other standards with which an end product is

compliant, the value created by nonstandardized technologies used in the end product,

efforts of the manufacturer, etc.

The top-down approach factors the other SEPs that may be necessary to implement the

standard into the RAND calculation. Based on a research report that indicated that there are

potentially 3,106 patents that are essential to the Wi-Fi standard (a figure consistent with

other industry estimates), Judge Holderman adopted a figure of 3,000 SEPs to the Wi-Fi

standard. Thus, in comparison to the total number of SEPs, Innovatio held a very small

percentage (it asserted 19 SEPs) of the total number of Wi-Fi SEPs necessary to implement

the standard.

Accounting for the Variation in SEP Values

The large number of patents required to implement the Wi-Fi standard necessarily means

that the average SEP would only receive a tiny fraction of the total royalty burden. In

principle, however, a RAND royalty rate could be above the value of an average SEP if such

a patents contributions were above-average (relative to other SEPs in the standard). The

converse is also true: a patent that was less important than the average SEP would receive

a lower-than-average royalty.

Judge Holderman assessed the importance of Innovatios SEPs to the Wi-Fi standard by

analyzing the noninfringing alternatives to Innovatios SEPs. By comparing Innovatios SEPs

to the noninfringing alternatives that were available and considered during the standard

setting process, he found Innovatios SEPs were of moderate to moderate-high importance

to the Wi-Fi standard. It is important to note, however, that this noninfringing alternative

analysis was primarily an analysis of the technological benefits, not the economic benefits.

Studies of patent values in the economic literature show that the value of patents varies

widely and that the distribution of patent values is highly skewed. The vast majority of patents

are worth little or even nothing, while a relatively small proportion of patents are considered

valuable.

One frequently cited economic study by Mark Schankerman found that, given the distribution

of patent values, the top 10 percent of patents account for 84 percent of the aggregate value

of all patents, while the next 10 percent of patents make up 8 percent of the aggregate value,

and each successive grouping of patents makes up a smaller and smaller portion of the

value of the standard as a whole. Under this distribution of values, the average patent in the

top 10 percent of patents would be assigned a much greater share of the aggregate value of

the standard than the average patent in a lower tier.

Judge Holdermans ruling noted that accounting for the differential value of the thousands of

SEPs was a key factor in adopting the top-down approach, since the approach does not


4/5

apportion to the value of Innovatios patented features based solely on the numerical

proportionality but provides a means by which the court can account for its conclusion that

Innovatios patents are of moderate to moderate-high importance to the standard. (p. 77.)

The top-down approach helps achieve the twin goals of awarding patent holders royalties

commensurate with their technological contributions while still addressing the risk of royalty

stacking. Based on his determination of the importance of Innovatios SEPs to the standard,

Judge Holderman assigned Innovatios patents to the top 10 percent of SEPs within the Wi-Fi

standard. Even under this assumption, however, Innovatio owned only a fraction of the total

number of SEPs in this tier: Innovatios 19 asserted SEPs represented 6.3 percent of the 300

patents in the 10 percent tier of patents.

Judge Holderman calculated his RAND royalty by multiplying the profit margin associated

with a $14.85 chip ($1.80) by the value associated with the top 10 percent of patents (84

percent). Judge Holderman then multiplied this amount by Innovatios share of patents in the

top tier (6.3 percent), resulting in a RAND royalty of 9.56 cents.

Judge Holderman enumerated a number of advantages of the top-down approach, but in

particular noted that it was based on objective consideration s and sound hypotheses

requiring verifiable data points. The approach, Judge Holderman said, provided some

quantitative and analytical rigor to the RAND analysis.

By Dr. Mario A. Lopez, Edgeworth Economics LLC

Mario Lopez, Ph.D., is a partner in the San Francisco office of Edgeworth Economics. He

was the consulting economist on the Innovatio matter discussed in this article.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of

the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This

article is for general information purposes and is not intended to be and should not be taken

as legal advice.

Related Articles

Judge Sets Low Royalty Rate For Essential Wi-Fi Patents

Innovatio Spars With Cisco, HP At Trial Over Wi-Fi Royalties

FRAND Rulings To Rein In Standard-Essential Patent Demands

Router Makers Blast Innovatio Over Nonessential Claims

Cisco Ruling A Road Map For What Makes A Patent Essential

Latest in Intellectual Property

Quincy Jones Wants $10M For Use Of Songs In Jackson Film

Insurer Says Ex-Employees Took Trade Secrets To Rival

Split Over New Patent Defense May Get High Court Eye

'Troll' Hit With RICO Suit Asks Court To Silence Accuser

Quinn's Document Flub Shows Risks Of Rising Data Demands

0 Comments

Terms of Service

Rich Tao Your name will a ppear next to your comment. Your email address will not be visible to the public.
http://www.law360.com/termshttp://www.law360.com/ip/articles/483506/quinn-s-document-flub-shows-risks-of-rising-data-demands?article_related_content=1http://www.law360.com/ip/articles/483452/-troll-hit-with-rico-suit-asks-court-to-silence-accuser?article_related_content=1http://www.law360.com/ip/articles/483434/split-over-new-patent-defense-may-get-high-court-eye?article_related_content=1http://www.law360.com/ip/articles/483689/insurer-says-ex-employees-took-trade-secrets-to-rival?article_related_content=1http://www.law360.com/ip/articles/483765/quincy-jones-wants-10m-for-use-of-songs-in-jackson-film?article_related_content=1http://www.law360.com/articles/461471/cisco-ruling-a-road-map-for-what-makes-a-patent-essential?article_related_content=1http://www.law360.com/articles/441378/router-makers-blast-innovatio-over-nonessential-claims?article_related_content=1http://www.law360.com/articles/478241/frand-rulings-to-rein-in-standard-essential-patent-demands?article_related_content=1http://www.law360.com/articles/474506/innovatio-spars-with-cisco-hp-at-trial-over-wi-fi-royalties?article_related_content=1http://www.law360.com/articles/478044/judge-sets-low-royalty-rate-for-essential-wi-fi-patents?article_related_content=1http://www.edgewortheconomics.com/experts/expert:mario-a-lopez/http://www.law360.com/companies/edgeworth-economics-llc


5/5

Submit

Enter Comment (1,500 characters max)

Copyright 2013, Portfo lio Media, Inc. | Home | About | Contact Us | Site Map | Site Index | Jobs | Careers at Law 360 | Mobile | Terms

Beta Tools:Track docs | Track attorneys | Track judges
http://www.law360.com/advanced_search/judgeshttp://www.law360.com/advanced_search/attorneyshttp://www.law360.com/advanced_search/docketshttp://www.law360.com/termshttp://www.law360.com/mhttp://careers.law360.com/NA1/ats/careers/jobSearch.jsp?org=PORTFOLIOMEDIA&cws=1&rid=11http://jobs.law360.com/http://www.law360.com/site_indexhttp://www.law360.com/site_maphttp://www.law360.com/about/contacthttp://www.law360.com/abouthttp://www.law360.com/

20131028 - economic principles behind innovatio approach to rand rate

Documents