A Study on Methodology for Calculating the FRAND Royalty (Rate) to Begin with a Starting-Point-Royalty-Rate* ** - by Critical Analysis of the U.S. Methodology for Calculating the Reasonable Royalty (Rate) -

Abstract

Standard-Essential Patent (SEP) holders make certain commitment, which requires that the holders license their SEP on Fair, Reasonable and Non-Discriminatory (FRAND) terms. In case of SEP patent infringement, thus, the issue is marked by determination of royalties for the SEP. In this regard, this article has thoroughly examined the meaning of the FRAND commitment, and has figured out that a core issue would be to calculate a reasonable royalty (rate) in taking a view of the FRAND commitment in terms of royalty. Furthermore, the FRAND royalty, especially the FRAND royalty rate calculation methodology has been derived by using the reasonable royalty calculation methodology in cases of non-SEP infringements as a link based on understanding of the meaning of the FRAND commitment. Recently, the importance of assessing a royalty base has been particularly emphasized due to application of apportionment ratio when a reasonable royalty is calculated for patent infringement damages, but it is because the main issue is generally to calculate a reasonable royalty rate. Specifically, this article asserts that it is necessary to have a specific formula or algorithm in determining the FRAND royalty rate, and emphasizes an importance on seeking a proper starting-point-royalty-rate. In this regard, this article has examined methodologies that the U.S. courts has considered when setting the starting-point-royalty-rate for calculating a reasonable royalty rate in patent infringement litigations. As a result, the U.S. courts tend to narrowly interpret the scope of a comparable license agreement, and therefore it is practically more difficult to find a sufficiently comparable royalty rate. Given that practical difficulty, this article suggests that Korea courts may find the starting-point-royalty-rate by considering either an average industry royalty rate in the comparable businesses technically relevant to the patents-in-suit or (if necessary) 25% rule of thumb, depending on the specific circumstances of the given cases. Similarly, this article asserts that Korea courts can apply the methodology to find the starting-point-royalty-rate for calculating a reasonable royalty rate for non-SEP infringement damages when calculating the FRAND royalty rate. Specifically, Korea courts may derive a comparable royalty rate by putting different weights on evidence for the comparable license agreements in the following order. 1) existence of an established FRAND royalty rate, 2) a rate received by the patentee for license to the SEPs-in-suit, 3) a rate paid by the licensee for the use of other patents comparable to the SEPs-in-suit. Where there is no any comparable license agreement, however, this article suggests that Korea courts may consider a rate in a patent pool related to the SEPs-in-suit, or top-down approach that is added by 25% rule of thumb, depending on the circumstances of the given cases. On the other hand, the importance of measuring an apportionment ratio cannot be disregarded, which is a different issue apart from the matter of royalty stacking. In the U.S., court’s practice has emphasized the requirement that a royalty base be smallest salable patent-practicing unit (SSPPU), but such practice has been subject to strong criticism by legal scholars. Thus, it is needed to conduct an additional study regarding the measurement of the apportionment ratio, and a follow-up research would be prepared for the future.