British Perspectives on the Valuation of Standard Essential Patents

patent valuation

The UK litigation landscape remains dominated by FRAND disputes. Litigations such as Panoptis vs Apple (UK, 2019), Conversant vs Huawei and ZTE (UK, 2017)[1],  IPCom vs Vodafone (UK, 2021) or Mitsubishi & Sisvel v OnePlus, Oppo & Xiaomi (UK, 2021), suggests that the UK is increasingly attracting high value litigation.  

The question hence arises what path British Courts will be pursuing to value the standard essential patents at stake. One valuation rationale that English Courts may rely on going forward could be the UK High Court’s Approach to patent valuation in Unwired Planet vs Huawei (UK, 2017). There the court relied primarily on two key valuation approaches. The Top Down and the Comparable Licenses Approach.

The Unwired Planet vs Huawei’s Court choice for these two methods is commensurate with the valuation approaches adopted in other Courts. In Huawei vs Samsung (China 2018), TCL vs Ericsson (USA, 2017) [2], Samsung vs Apple (Japan, 2014) and In Re Innovatio IP Ventures (2013) the Top Down Approach was also used.

The Comparable licenses Approach has also found recognition in various landmark decisions pertaining to standard essential patents. As a method it was for example applied in Microsoft vs Motorola (USA 2013), SK Hynix v Rambus (USA 2013) or TCL vs Ericsson (USA 2013).

Against this background, this article offers suggestions as to how the valuation of standard essential patents could potentially be addressed in pending and future cases pertaining to standard essential patents.

[1] ZTE recently settled with Conversant

[2] I understand that TCL vs Ericsson was vacated. However, it was not vacated on the grounds of its (F)RAND royalty rate determination. Hence, I consider this case nonetheless to offer insights as to how to approach a (F)RAND royalty rate.

The Top-Down Approach

The Top-Down Approach aims at offering an aggregate rate for a given standard. The method requires two steps. First one needs to identify an estimate for the entire standard, then one needs to split this estimate among the various patents that read on the standard. This analysis allows to understand the value of the standard and the relationship of a set of standard essential patents in relation to the whole.

Courts have accepted different ways to come to grips with this analysis. Commonly, public statements made by major standard essential patent owners have been used to come to grips with the value of the standard as a whole. In TCL vs Ericsson, as well as in Samsung vs Apple or in Huawei vs Samsung for example, the total aggregate rate for the standard was identified with the support of public statements made by major Standard Essential Patent Owners.

In Unwired Planet vs Huawei again, the Court referred back to the findings of the Japanese Courts in Samsung vs Apple and used these as an additional cross check for the royalty rate it identified for setting a global FRAND rate.

To furthermore understand the value of a given standard essential patent portfolio, the counting of patents has also been recognized. The Unwired Planet vs Huawei Court for example argued that the counting of patents is a common market practice and hence used this approach to come to grips with the Top-Down approach.

Yet another approach to assess the value under the Top-Down Approach was applied in the ‘in re Innovatio IP Ventures’ case. There the Court based the licensing rate on the average profit of the Wi-Fi chip. Singling out the average profit served the same purpose as setting a total aggregate royalty burden. The maximum amount available for paying royalties would stay unaffected regardless of the number of entities holding and asserting SEPs.

To complicate things further, it is however also possible to start off with identifying comparable licenses and then establish the Top-Down approach on that basis. This was for example done in Unwired Planet vs Huawei. The Court began with the identification of comparable licensing rates and then went on to run a sensitivity check with the support of the Top-Down approach. This allowed the Court to check the risks associated with a potential cumulative royalty stack; even if it were just hypothetical.

The Comparable Licenses Approach

The Comparable Licenses Approach offers different insights on what the value of standard essential patents could be. Rather than seeking to determine the value of the standard as a whole, the comparable licenses approach can help understand the value of a given set of standard essential patents with reference to licensing contracts deemed to be comparable.  

In comparison to the Top-Down Approach, the underlying reasoning of the Comparable licenses approach is very easy to understand. It seeks to determine value with reference to ‘others.’ While this does not require much more explanation, the art is to figure out if the comparison to ‘others’ is actually justified. Here, both substantial legal considerations and econometric assessments come into play. Just because a licensing deal was a transaction that actually happened, does not make it a (F)RAND offer or pro-competitive for that matter.

Take Away

Which valuation approach will be ultimately accepted in the series of pending FRAND cases in the UK case remains to be seen. Also, the existing cases say nothing about any potential FRAND valuations pertaining to the automotive sector. England and Wales has been the first jurisdiction in Europe to determine a FRAND case on the merits of a valuation of standard essential patents. In doing so, it made use of both the Top Down and the Comparable Licenses approach. It can hence be expected that the determination of the FRAND royalty rate in other cases will in one way or the other make use of some Top Down and Comparable Licenses method

Where other FRAND cases could depart from the Unwired Planet vs Huawei’s Court’s reasoning is that they could for example accept the Top Down Approach as a principal method rather than a cross check. The royalty base could also be subject to further debate. It may also be further discussed why the Unwired Planet vs Huawei Court accepted some licenses as comparable and rejected others.

This suggests that existing valuation approaches can be considered a starting point, but the valuation of standard essential patents may require some further thought. If and to what extent additional guidelines can be expected from current FRAND cases remains to be seen. I personally hope these cases won’t settle, so it will be possible to have further insights on judicially determined valuations of standard essential patents.  

Professor Roya Ghafele is the Director of law and economics consultancy OxFirst and a Visiting Professor in IP Law with Brunel University London.