Published: 1/1/13
This decision established a FRAND royalty rate for Innovatio’s portfolio of 802.11 SEPs. The court made this determination based on a hypothetical negotiation occurring “at the time of the initial adoption of the 802.11 standard,” and thus before implementers were locked into using patents that are essential under that standard. The court held that three considerations were relevant to the FRAND determination. The first was avoiding “patent hold-up, which occurs when the holder of a standard-essential patent demands excess royalties after standard implementers are already locked into using the standard.” The second was avoiding royalty stacking, a concern “because most standards implicate hundreds, if not thousands of patents, and the cumulative royalty payments to all standard-essential patent holders can quickly become excessive and discourage adoption of the standard.” The third consideration was “ensur[ing] that innovators in the future have an appropriate incentive to invest in future developments and to contribute their inventions to the standard-setting process.”
In reaching its decision, the court addressed the question of the appropriate royalty base on which the royalty should be imposed. The SEP holder argued that the royalty should be determined “as a percentage of the selling price of end-products with wireless functionality, including laptops, tablet computers, printers, access points, and the like.” Under this proposed methodology, the royalty on a tablet computer for Innovatio’s nineteen 802.11 SEPs (out of a universe of 3,000 potential SEPs) would have been $16.17—even though the allegedly infringing Wi-Fi chipset in the tablet computer sells for as little as $2 each. The court rejected this methodology, relying on an appellate court holding applicable to all patent cases that “[w]here small elements of multi-component products are accused of infringement, calculating a royalty on the entire product carries a considerable risk that the patentee will be improperly compensated for non-infringing components of that product.” In accordance with that holding, the court held that royalties should be levied “not on the entire product, but instead on the ‘smallest salable patent-practicing unit.’”
After finding that Innovatio’s patents were “of moderate to moderate-high importance to the standard,” the court calculated a FRAND royalty of $0.0956 for Innovatio’s portfolio of nineteen 802.11 SEPs. This rate is more than two orders of magnitude lower than the royalty demanded by the SEP holder, but according to the court, in line with other FRAND rates determined in litigation.