Some comments on the Contreras and Gilbert paper

A couple of weeks ago I mentioned a paper that Jorge Contreras and Richard Gilbert had recently posted on ssrn, titled A Unified Framework for RAND and Other Reasonable Royalties.  I stated that I agreed with the authors' thesis that "the reasonable royalty analysis should be conducted in essentially the same manner for all patents, whether or not they are encumbered by RAND commitments," but that I might have more to say about the paper after I had had a chance to read through all of it.  Having now read the paper and given it some thought, I can say that I recommend the paper quite highly, and I look forward to talking it over with the authors at an upcoming conference in D.C.  For what it's worth, here are a few more brief comments.

First, for reasons I have stated at length elsewhere (see, for example, here), I agree with the authors' statement that courts generally should deny injunctive relief for the infringement of SEPs, whether or not those SEPs are encumbered by a RAND commitment.  If anything, the authors make more of the RAND commitment than they really need to, for example when they state at p.7 that "courts informed by the patent owner's RAND commitment, can . . . apply the eBay factors to determine when an injunction is warranted" (emphasis in original; see also p.31).  But they rectify matters in part when they state at p.8 that, even in the absence of RAND commitment, "if the failure to license a patent that is essential to a standard would allow its owner to hold up firms and consumers that are locked in to the standard with serious negative consequences for economic welfare, it would not require a delicate balancing of equities for a court to conclude that injunctive relief should not be available, regardless of whether the patent is subject to a RAND licensing commitment."  Perhaps also, in countries that generally view injunctive relief not as a discretionary matter, but rather as a right accruing to the victorious patent owner, perhaps a RAND commitment would be necessary for a court to find a reason (grounded in competition law or the abuse of right doctrine) to deny an injunction--though maybe not, since even the German Orange-Book-Standard framework does not require that the SEP be subject to such a commitment.  And in any event, the authors are clear that as far as injunctive relief is concerned their analysis focuses only on U.S. courts (p.9).  

Second, the authors are right in stating that courts setting RAND royalties should apply an ex ante bargaining framework, where "ex ante" means "before the standard has issued and firms and consumers make irreversible commitments" (p.11; see also the discussion at pp. 26-27, 30-31).  As I mentioned last week, Norman Siebrasse and I are working on a paper that recommends the same result, though with the caveat that courts should assume the parties to the ex ante negotiation have access to all relevant ex post information as well.  But I'll hold off on elaborating on that point for the time being, since we're still working on the paper.

Third, I also agree with the authors' statement that "[t]he fact that there is no single best way to apportion the value of a technology to individual patents does not undermine the utility of the incremental value method to assess the total royalty for the technology at issue" (p.13).  It's important to know what the ideal is before you can determine what evidence can serve as an acceptable proxy for that ideal.  That said, and as the authors recognize, it can be fiendishly difficult to figure out how best to apportion value among patents (whether SEPs or not); this may be the single most important topic for which, if some aspiring economists is looking to make his or her mark on the profession, we really could use a breakthrough.

Fourth, on the issue of whether RAND is still relevant if courts are going to calculate reasonable royalties in the same manner regardless of the existence of a RAND commitment, the authors are probably right in noting that a RAND commitment may have other consequences, including other possible claims for relief (e.g., breach of contract); and that "even if the royalty that a patent holder may charge to a licensee under a RAND commitment is the same as the royalty it would have received as damages in an infringement suit absent the RAND commitment, it is more efficient to operate under a system in which there is a presumption that licenses will be granted on reasonable terms compared to a less certain environment in which disputes are more likely to be pursued in litigation" (pp. 31-32).

Fifth, one matter that I think needs to be corrected is the authors' characterization at p. 34 of the holding in the Grain Processing case (185 F.3d 1341 (Fed. Cir. 1999)).  As I recall it, the Federal Circuit on the second appeal affirmed Judge Easterbrook's determination that the plaintiff had not suffered any lost profits.  Maybe I'm misreading what the authors mean to say about this case, however.

Overall, this is a very good paper that deserves to be widely read.