Misconceptions Concerning the Use of Hedonic Prices to Determine FRAND or RAND Royalties for Standard-Essential Patents

Two months after I published Hedonic Prices and Patent Royalties in August 2017, Dr. Allan Shampine of the CompassLexecon economic consultancy published a review of that article arguing that the hedonic price model for LRDIMMs does not comply with the Federal Circuit’s decision in Ericsson Inc. v. D-Link Systems, Inc. Shampine’s criticisms of the hedonic price model rest on incorrect premises of law and economics. He criticizes the model for failing to apply the ex ante incremental value approach — a theory that contends that a FRAND or RAND royalty should not exceed the incremental value of the patented technology over the next-best alternative available at the time of standard adoption. Yet, like many economists, Shampine erroneously assumes that the ex ante incremental value approach is a positive principle of law, rather than merely a normative prescription that he happens to favor. He fails to recognize that the hedonic price model separates the value of the patented technology from the value of standardization, such that the model faithfully complies with the Federal Circuit’s apportionment requirement reiterated in Ericsson v. D-Link. Shampine also criticizes the hedonic price model for relying on data that became available after the moment of standard adoption. He then proposes — as an alternative to the hedonic price model — reliance on hypothetical data concerning consumer demand that typically would not exist at the time of standard adoption. His suggested approach would fail Daubert because it is manifestly unreliable and unscientific. In contrast, the econometric methodology that the hedonic price model employs has passed muster under Daubert in at least one publicly reported federal district court case concerning SEPs. In sum, Shampine’s criticisms do not detract from the reliability and usefulness of hedonic price analysis in calculating a FRAND or RAND royalty for a given SEP or portfolio of SEPs. To the contrary, if embraced, Shampine’s suggestions would reduce the intellectual rigor, replicability, and reliability of expert economic testimony concerning the calculation of a FRAND or RAND royalty