Smallest Salable Patent Practicing Unit and Component Licensing - Why 1$ is Not 1$

Abstract

The Smallest Salable Patent Pricing Unit (SSPPU) is a valuation method used by courts and some Standard Setting Organizations (SSOs) as a preliminary step towards the calculation of fair, reasonable and non-discriminatory (FRAND) royalties for licenses over Standard-Essential Patents (SEPs). Under SSPPU, royalties should reflect the value added to the smallest salable component implementing the patented invention. In this paper, we discuss plans to convert SSPPU into a pricing rule that not only assists the assessment of SEPs added-value, but also forces the specification of royalties terms as a share of component costs in SEP licensing negotiations (I). We call this rule SSPPU , and show that it distorts the distribution of surplus between SEP owners and implementers by laying down a hidden revenue-cap on standardized technologies (II). We then predict that the distributional effect of SSPPU may be accompanied by adverse efficiency effects when SEPs cover General Purpose Technologies (“GPT”) (III). This pleads against a generalization of SSPPU at early standardization and negotiation stages.