A Standard Essential Patent Valuation Perspective on Ericsson v. Samsung

By Roya Ghafele
April 23, 2021

“Which valuation methods the Ericsson v. Samsung court will use remains to be seen. That it will be possible to determine the value of SEPs is, however, not debatable…. With a wealth of experience in court-determined (F)RAND royalty rates, the U.S. court is certainly equipped to perform this assessment.”

Financial valuation button with business hand on blurred backgroundAs the battle over the adequate forum for Ericsson v. Samsung continues, the question arises as to how the court will eventually deal with the valuation of the standard essential patents (SEPs) at stake. Here, the U.S. courts are at an advantage. After all, the United States has from the outset illustrated global thought leadership on the valuation of SEPs.

Historically, courts have accepted two principal methods to determine the value of SEPs: the Comparable Licenses Approach and the Top Down Approach. These methods have come to be seen as compatible with the Georgia Pacific Criteria, which set out the core valuation principles in the United States and, increasingly so, even beyond U.S. borders.

Because both valuation methods are still a black box for many IP professionals, I briefly discuss these and conclude that the United States has one of the world’s most stringent transparency requirements for licensing transactions. However, there is still more that could be done to foster transparency in licensing markets. This would benefit the United States and the international economy.

The Comparable Licenses Approach

The comparable licenses approach is very easy to understand. It aims at establishing a licensing rate via comparability with reference to other licensing transactions that have occurred in the market.

The approach has also been termed the ‘market approach’. This is because it is rooted in real market transactions that have actually occurred. This is at once the advantage and the drawback of the method. The fact that the licensing transaction actually happened suggests that the approach can follow a certain market practice. However, this does not mean that the licensing rate was actually (F)RAND (fair, reasonable and non-discriminatory) and that the market practice did not run afoul of competition law. Further investigations are therefore often necessary to assess the (F)RANDness of a comparable licenses approach.

This valuation method gives insight into the value of a licensing rate in comparison to other licensing rates. At instances where no market practice exists, which is, for example, the case in emerging technology spaces, the application of this valuation method may be a challenge.

The Top Down Approach

The Top Down Approach conceptualizes the value of SEPs by aiming at establishing the value of a standard as a whole. As such, it is not based on the identification of licensing rates which may or may not be comparable, but on an estimate of the value of a given standard.

The two-step approach consists of first identifying an estimate of the value of the standard and then of establishing a relationship between the value of a given set of SEPs in relation to the standard.

There are different ways to use the Top Down Approach. Like the Comparable Licenses Approach, one can use it as a main or sole method or as a secondary method. This decision determines from where to draw data. If the Top Down Approach is used as a primary method, courts have recognized the use of public statements as a means to value the standard. If the method is applied as a cross-check, then one can start off, for example, with a comparable licensing rate and work one’s way up to value the standard as a whole. To follow market practice, the practice of counting patents has been recognized. Equally, this approach is a judicially-recognized valuation approach.

The Top Down Approach lends itself to determining the potential risk stemming from royalty stacking. Royalty stacking describes the risk, even if hypothetical, associated with a cumulative royalty request for all the patents that read on a given standard.

Takeaway

Which valuation methods the Ericsson v. Samsung court will use remains to be seen. That it will be possible to determine the value of SEPs is, however, not debatable. Rather, it will be interesting to see which path the court will take. With a wealth of experience in court-determined (F)RAND royalty rates, the U.S. court is certainly equipped to perform this assessment.

That being said, things can always get better. The U.S. financial authorities request the disclosure of licensing transactions of significant size, a regulatory framework that is absent in many other parts of the world. This is a helpful starting point.

However, more can be done to enhance transparency in licensing markets. Markets for patent licensing are still opaque and overshadowed by non-disclosure requirements. More should be done to shed further light on licensing deals. This could act to the benefit of the U.S. economy and beyond, because it will help to further establish a business rationale for the patent system.

Image rights acquired by AdobeStock 

The Author

Roya Ghafele

Roya Ghafele is the Managing Director of Oxfirst Ltd, a law and economics consultancy. She has held lectureships (called ‘Assistant Professor’ in the US Academy) in law and international political economy with Oxford and Edinburgh University and served as an economist to the United Nation’s World Intellectual Property Organization, the OECD and McKinsey.

Warning & Disclaimer: The pages, articles and comments on IPWatchdog.com do not constitute legal advice, nor do they create any attorney-client relationship. The articles published express the personal opinion and views of the author as of the time of publication and should not be attributed to the author’s employer, clients or the sponsors of IPWatchdog.com. Read more.

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