Second US judge sets RAND royalty rate

A US judge has become only the second to calculate a royalty rate for licensing standard-essential patents (SEPs) on reasonable and non-discriminatory (RAND) terms.

Judge Holderman at the US District Court for the Northern District of Illinois was ruling on a dispute between Innovatio IP Ventures and several electronics companies.

Innovatio had sued numerous businesses for providing access to wireless Internet services that read on some of its patents.

The patents are essential to the 802.11 wireless standard, managed by the Institute of Electrical and Electronics Engineers.

Companies including Motorola Solutions and Hewlett Packard, which provided devices (such as laptops) used to transmit the wireless services, claimed the devices and services did not infringe Innovatio’s patents. They also claimed the patents were invalid.

The parties agreed damages should be set before resolving infringement and validity, with the hope that a settlement could be reached sooner.

Holderman found on September 27 that companies licensing Innovatio's portfolio of 19 802.11 SEPs should pay 9.56 cents for each wi-fi chip used or sold by the manufacturers in the US, “subject to the terms of the patents, the applicable statute of limitations, and a finding of infringement”.

This is only the second time a US judge has set a rate for licensing SEPs, following Judge Robart’s ruling in Microsoft v Motorola earlier this year. In that case, Microsoft was told to pay Motorola $1.8 million for using its SEPs.

Robart had calculated the rate using a hypothetical bilateral negotiation between the parties in the context of a RAND obligation, considering a range of factors including the nature and the scope of the licence and expert witness testimony.

Holderman modified this approach slightly in the Innovatio case, to take into account differences in the circumstances.

He set the date for the negotiation at 1997, when the 802.11 standard was initially adopted.

To determine the royalty rate, both Innovatio and the manufacturers had different views on its calculation. Innovatio said the royalty should be a percentage of the selling price of the products using wireless functionality, such as laptops and access points. The manufacturers, however, said it should be a percentage of the price the manufacturers paid for each wireless chip inserted into the products.

According to the court, “Innovatio's application of its approach did not credibly apportion the value of the end-products down to the patented features.

“In light of that failure of proof, the court has no choice based on the record but to calculate a royalty based on the wi-fi chip.”

The judge opted for a “top down” calculation approach, starting with the average price of a wi-fi chip from 1997 to 2013. Based on that average price, the average profit a chip maker earns on the sale of each chip was calculated. That profit was then multiplied by a fraction calculated as the number of Innovatio's 802.11 standard-essential patents divided by the total number of 802.11 standard-essential patents.

After conducting further analysis, the court agreed that the RAND rate is 9.56 cents per wi-fi chip, which is “comfortably within Judge Robart's reasonable range for a RAND rate for Motorola's eleven standard-essential patents”, Holderman said.

In the Motorola case, there were patents covering two standards, the H.264 and 802.11. For the first standard, the royalty rate was set at 0.555 cents per unit and for the second it was 3.471.

Jay Jurata,partner at Orrick, Herrington & Sutcliffe LLP, said the Innovatio ruling was the latest in a continuing trend of courts recognising that the value of SEPs needs to be calculated separately from the value of the standard as a whole.

“There was a framework set in the Robart case, and this case endorses that framework. The Robart decision provided a very good roadmap of how to adjust traditional damages analyses to take into account some of the unique aspects of SEPs.”

“What is particularly noteworthy here is the recognition that when you determine RAND royalties your base rate needs to be the smallest priceable component that implements that technology (in this case the chips, not the end product).”

He added: “When you determine RAND, you can’t do it in a vacuum – you must consider other patents that are relevant to the standard.”