Published: 5/20/13
This decision established a FRAND royalty rate for Innovatio’s portfolio of 802.11 (Wi-Fi) SEPs. The court determined the royalty rate 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: (1) avoiding the “substantial problem” of patent hold-up, which can result in excessive royalties due to lock-in effects after a standard is developed; (2) preventing 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”; and (3) ensuring that innovators are incentivized “to invest in future developments and to contribute their inventions to the standard-setting process.”
The court also addressed the question of the appropriate royalty base on which the royalty should be imposed. Innovatio, 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.” Innovation wanted 6% of the price of entire systems that incorporate Wi-Fi chips. Under its proposed methodology, the royalty on a tablet computer for Innovatio’s 19 Wi-Fi SEPs (or just 0.6% of the approximate 3,000 Wi-Fi SEPs) would have been $16.17 — even though the allegedly infringing Wi-Fi chipsets sell for as little as $2 each. The court rejected this methodology, relying on a federal circuit 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 determined 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 19 Wi-Fi 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, well in line with other FRAND rates determined in litigation.