More on Establishing the Value of a FRAND Royalty

Professor Siebrasse poses some interesting questions in his comments on my post of May 8 (“Remedies for the Infringement of Standard Essential Patents Subject to a FRAND Commitment.”)  Since they touch on some matters I was thinking of addressing in a separate post, I will provide my (tentative) responses here.

First, Professor Siebrasse’s comments:

“Re the argument that ‘a RAND royalty calculated in a breach of contract action ought to be lower than a RAND royalty awarded for the very same patent or patents at the conclusion of an infringement action,’ what if the patentee seeks to establish validity of the patents as part of the contract action. Should it be allowed to do so? If it can establish validity, should the contract measure of damages be the same as the infringement measure? Addressing validity for multiple patents that may be at issue in SEP litigation may be very resource intensive.

“A similar problem arises in establishing the importance of the patent to the standard. In this case, it seems that no evidence was led on this issue, and Robart J in effect put the burden on the patentee, Motorola, to establish the importance of the patents:

“373. Because of the limited evidence showing the importance of the '724 and '730 Patents to the 802.11 Standard, parties in a hypothetical negotiation would view both patents as providing very minimal technical contribution to data modulation or OFDM.

“See similarly, with other patents, 379, 390, 400. This is notwithstanding that Microsoft is the plaintiff, not Motorola. Do you think this is the right approach?”

These are tough questions, and I’m not 100% sure of my own views on them yet, but here’s what I think for now.  First, a RAND royalty that is calculated on the premise that the patent is valid and infringed should be higher than a RAND royalty that is calculated on the premise that validity and infringement are uncertain—or so I think, as I indicated in one of my previous posts (while recognizing that Carlton & Shampine’s disagreement on this point).  But if I’m right, then the value of the RAND royalty should be higher if the patentee establishes patent validity in the breach of contract action.  Second, however, having some sort of trial-within-a-trial on this issue would be a nightmare (or at least “very resource intensive,” as Professor Siebrasse more politely puts it).  To be sure, in a breach of contract trial such as Microsoft v. Motorola that is litigated separately from any patent infringement action the patent owner may have, we’re only trying to figure out the royalty that reasonable parties would have agreed to given their best estimates of infringement and validity—not whether the patent really is valid and infringed—but I’m not sure how we distinguish evidence that is relevant to those best estimates from evidence that actually goes to validity and infringement.  Nevertheless, at least in principle I think the better practice would be to preclude Motorola from attempting to prove validity (and/or infringement) as such, and only to admit evidence that goes to the issue of establishing reasonable probabilities of validity and infringement (through expert testimony and such).  Probably easier said than done, though.

To switch jurisdictions for a moment, courts in Germany in applying the Orange-Book-Standard framework have required the infringer, as part of its offer to the patent owner, to agree not to seek a nullification of the patent in suit (a matter that is addressed in a separate proceeding in Germany).  (Christof Karl has a nice discussion of this issue, among others, in a presentation he gave before the Munich I.P. Law Center, accessible here.  Whether this requirement is consistent with E.U. competition law is one of the questions the Duesseldorf court referred to the CJEU in March.)  This approach would seem to eliminate any need to address the issues raised above, albeit at the cost of immunizing some potentially invalid patents from challenge.  (My understanding also is that in Germany the FRAND commitment is not viewed as giving rise to an enforceable third-party beneficiary contract, contrary to the position under U.S. law as decided in Microsoft.)

On the second set of issues, I think that Microsoft, as the breach of contract plaintiff, bears the burden of proof.  Thus on one view it may be problematic when Judge Robart states in paragraph 370 that he finds “Microsoft’s explanation as to why these patents are not essential . . . unsatisfactory” and that he has “insufficient evidence to determine essentiality”, and yet concludes in paragraph 373 that the patents provides only “very minimal technical contribution to data modulation or OFDM.”  Again, though, the probabilistic nature of the inquiry complicates things.  The judge is not necessarily determining that certain patents are standard essential—or more important that other standard essential patents--but rather is trying to evaluate how reasonable parties would have viewed those patents' essentiality and importance.  This inquiry certainly raises practical problems in its application, though.