Wednesday, May 3, 2017

Is a FRAND Royalty the Same as a Reasonable Royalty?

My opinion, as I've stated before, is yes:  that courts, when called upon to award or determine the amount of a FRAND royalty (as in the Microsoft and Innovatio cases in the U.S., the Apple v. Samsung  case in Japan, or the recent Unwired Planet case in England) they should employ the same standards they would use when awarding a "reasonable" royalty as damages for patent infringement.  (Of course, FRAND cases are much more complex than other, more run-of-the-mill cases, and therefore might require more innovative approaches to coming up with a number, as we've seen in these cases.  All I mean is that, as Mr. Justice Birss states in Unwired Planet, is that ". . . arriving at a FRAND royalty rate is not different conceptually from assessing what a reasonable royalty would be in a patent damages enquiry albeit the particular factors applicable in setting a FRAND royalty for a licence to be FRAND and their application may differ from assessing damages" (para. 169).  This is consistent with the view expressed by Professors Contreras and Gilbert as well in their article Jorge L. Contreras & Richard J. Gilbert, A Unified Framework for RAND and Other Reasonable Royalties, 30 Berkeley Tech. L.J. 1451, 1487 (2015), and Norman Siebrasse and I express agreement with it on a policy basis in our paper The Value of the Standard, 101 Minn. L. Rev. 1159, 1204 (2017).  On this view, the principal significance of a FRAND commitment is that the patent owner who violates it may be liable for breach of contract or promissory estoppel or under some other body of law, and would have a weaker argument than might otherwise be the case in support of obtaining injunctive relief.  By contrast, the alternative view, that a FRAND royalty is less than a reasonable royalty, would seem to me to require courts to figure out exactly how much less it should be and why, and I don't see any principled basis for making such a determination.  (Of course, some SSOs require members to license their patents royalty-free, but that's not what we're talking about here.)

Nevertheless, I wonder whether other courts will necessarily adopt the view that a FRAND royalty and a reasonable royalty are the same thing.  For example, as Professor Peter Picht has pointed out to me, last year in Unwired Planet v. Huawei, Case No. 4b O 120/14 (19 Jan. 2016), the Düsseldorf District Court stated that, although a SEP owner is entitled only to a FRAND royalty for the period of time following its refusal to make a FRAND offer, it could recover its full damages for any period prior to that.  Here is my translation of the relevant language (paras. 413, 414,a nd 416) from the opinion:
. . . The refusal of the patent owner, to accede to the lawful demand of the patent infringer to conclude a license contract, can be a competition law violation and can give rise to the infringer's own damages claims against the patent owner.  Subsequent to its unlawful refusal, the patent owner cannot demand its entire damages; rather, the amount thereafter is limited to the value of a reasonable royalty.
. . . Moreover, the FRAND declaration does not have the effect of constraining the amount of the damages at the outset to the amount of a FRAND royalty.  Otherwise, this would mean that the effect of a FRAND declaration would be to confer upon any market participant a claim for the conclusion of a license on FRAND terms.  The court does not accept this reasoning.  Moreover, a claim for the full amount of any subsisting damages can be limited only by a counterclaim on the part of the infringer.  The conditions for such a counterclaim must be presented and proven by the infringer. . . .
Further . . . the infirnger of a SEP, like any other patent infringer, is obligated to inform itself prior to use of any existing patents and to seek a license.  If it does not do so, it must then pay the (full) damages claim.  Only if the patent owner refuses to grant a license on FRAND terms is it in violation of TFEU article 102, and the infringer is thereafter obligated only in the amount of a reasonable royalty.
I have to admit, I found this language a bit confusing the first time through.  The court seems to be saying that the patent owner is entitled to its full damages for the period of time preceding its refusal to grant a FRAND license, but only a reasonable royalty thereafter.  (I'm fairly certain that my translation is reasonably accurate.)  But then if a FRAND and a reasonable royalty are synonymous, what are the "full damages" the court is distinguishing them from?  Maybe the court has in mind a situation in which the patent owner would be entitled to lost profits or the disgorgement of the defendant's profits for the period of time preceding the owner's refusal; that might make sense, if the facts were such that an award of lost profits otherwise would be available, or if one believes that disgorgement can be an appropriate remedy in this sort of case (see post here).  Still, some further clarification would be helpful.

On the other hand, maybe there are some ways in which a FRAND and a reasonable royalty could be different in practice.  First, if a court-awarded reasonable royalty is supposed to reflect the ex ante bargain the parties would have struck knowing the patent to be valid and infringed, a court-ordered reasonable royalty might exceed what an ex ante FRAND royalty (which would have reflected a discount for the probability of noninfringement and invalidity) would have been.  This could lead to an anomaly, whereby the failure to make a FRAND offer initially might mean that, under Huawei v. ZTE, the patent owner loses the right to an injunction, but then is awarded a royalty that exceeds the amount of the (excessive) ex ante FRAND royalty.  Second, maybe a FRAND royalty could exceed a reasonable royalty if the former incorporates a meaningful "nondiscrimination" component and the latter does not.  Third, as in Unwired Planet v. Huawei, a FRAND license might be for a (global) portfolio of patents, whereas a reasonable royalty in a normal patent infringement case would typically just be for the national component of one or a handful of patents.  But this wouldn't necessarily suggest any difference in the basic methodology of calculation, I don't think.

I would welcome further thoughts on these issues.

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