Reevaluating Patent Damages in the Knowledge Economy : The Determination of Royalty Base for Standard Essential Patents From an Intellectual Value Chain Perspective

This paper explores the issue of apportionment through the determination of the appropriate royalty base in the adjudication of patent damages, or more precisely, FRAND royalties for standard essential patents (SEPs). Through the use of an intellectual value chain (IVC) framework, this paper illustrates the market norms of actors in standards-enabled telecommunication markets and analyzes the alignment of these market norms with legal norms in the US courts. In particular, case studies of Qualcomm and ARM are used to exemplify different market and industry norms regarding patent licensing. The main findings suggest that rote use of procedural rules such as the smallest saleable patent practicing unit (SSPPU) and entire market value rule (EMVR) are not well-adjusted for use in markets characterized by an IVC logic and could lead to a reduction in dynamic efficiency in certain markets in the telecommunication industry. However, other US legal norms such as the use of the Georgia-Pacific Factors (GPFs) provide courts with the ability to effectively incorporate market norms in the determination of the SEP royalty base. Recent SEP court cases showed a mixed application of royalty bases, though the courts did demonstrate an openness to a variety of apportionment theories, basing their decisions primarily on the credibility of the testimony and market context as opposed to rote application of legal norms. This indicates that the US legal system possesses the requisite normative space to effectively account for the value of SEPs applied through different market structures and competitive business models. Finally, the method of this paper suggests the usefulness of an epistemological approach to law that combines market norms (i.e. Market’s Law) with doctrinal legal norms (i.e. State’s Law) particularly in technology markets operating at the interface of law and innovation