Royalty Rate Research Articles

FRAND in India

Investigations and litigation involving standard-essential patents (SEPs) have been brought around the world. In the last several years, India has drawn attention to itself by raising several novel and controversial concerns regarding SEPs. For example, in 2013 and 2014, the Competition Commission of India (CCI) issued investigation orders against Ericsson, alleging that the company violated its commitments to license on fair, reasonable, and nondiscriminatory (FRAND) terms by imposing discriminatory and “excessive” royalty rates and using Non-Disclosure Agreements (NDAs). In its investigation order, the CCI stated that “forcing” a party to execute [an] NDA” and “imposing excessive and unfair royalty rates” constitutes “prima facie” abuse of dominance and violation of section 4 of the Indian Competition Act, as does “[i]mposing a jurisdiction clause debarring [licensees] from getting disputes adjudicated in the country where both parties were in business.” Most recently, India’s Department of Industrial Policy and Promotion issued a Discussion Paper on SEPs, which among other things, emphasizes concerns about holdup by patent holders, while omitting any concerns about holdup and holdout by implementers. This chapter analyzes that Discussion Paper, providing guidance based on the approach taken by the United States and Europe, and offers several policy recommendations, including on the availability of injunctive relief; the issuance of a one-size-fits all template for standard-development organizations (SDOs); the imposition of royalty caps or competition sanctions for “excessive pricing,” the use of NDAs and the “ND” prong of FRAND; balancing desires for transparency with needs for confidentiality in licensing; and the use of international arbitration on a portfolio basis as likely the most efficient and realistic means of resolving FRAND disputes.

Capturing rents from natural resource abundance: Private royalties from U.S. onshore oil & gas production

We study how much private mineral owners capture geologically-driven advantages in well productivity through a higher royalty rate. Using proprietary data from nearly 1.8 million leases, we estimate that the six major shale plays generated $39 billion in private royalties in 2014. There is limited pass-through of resource abundance into royalty rates. A doubling of the ultimate recovery of the average well in a county increases the average royalty rate by 1–2 percentage points (a 6–11 percent increase). Thus, mineral owners benefit from resource abundance primarily through a quantity effect, not through negotiating better lease terms from extraction firms. The low pass-through likely reflects a combination of firms exercising market power in private leasing markets and uncertainty over the value of resource endowments.

The benefits of the reciprocal grantback clause in patent licensing

ABSTRACTThis paper shows that a reciprocal grantback clause could potentially be a better licensing provision than a one-way type. There are two benefits associated with the use of a reciprocal grantback clause. First, it improves efficiency by reducing the (minimum) contract compatible royalty rate to zero. As a result, the production becomes efficient because both the licensor and the licensee produce at the same marginal cost. Second, a reciprocal grantback clause is a more effective provision than a one-way grantback clause to guarantee the transfer of superior technology, hence it promotes better technology diffusion.

Portfolio Licensing at the End-User Device Level: Analyzing Refusals to License FRAND-Assured Standard-Essential Patents at the Component Level

Competition agencies around the globe, including in India, Korea, and Taiwan, have recently initiated investigations involving a standard-essential patent (SEP) holder’s refusal to license patents at the component level. Other competition agencies, including in China and Japan, have recently issued revised final or draft guidelines that seem to increase scrutiny of such conduct. SEP holders usually commit to license on fair, reasonable, and nondiscriminatory (FRAND) terms. While much has been written about FRAND-assured SEPs, the literature to date focuses largely on the appropriateness of seeking and obtaining injunctive relief on such patents or on the appropriate royalty rate and the meaning of “fair and reasonable” (FR), and has largely ignored the “nondiscriminatory” (ND) prong of FRAND. This paper analyzes the common-industry practice of licensing on a portfolio basis at the end-user device level and whether a refusal to license at all levels of the production chain may constitute an antitrust violation, concluding that: (1) whether the “ND” prong of FRAND requires licensing at the component level is a fact-specific inquiry that depends upon the specific standard-development organization’s (SDO’s) Intellectual Property Rights (IPR) Policy at issue; and (2) regardless, even if there is potential a failure to comply with a FRAND assurance, that alone does not constitute an antitrust violation. In addition, while U.S. antitrust agency practice and law highly disfavor imposing antitrust liability for refusals to license, such liability (including in Europe and elsewhere) would at the very least require a showing of anticompetitive harm such as foreclosure. Through a simple model, we show that due to the FRAND commitment and because most FRAND-assured SEP holders do not assert their patents at the component level, there is likely no foreclosure or exclusionary conduct or otherwise harm to competition. Our model features two SEP holders, one of which is vertically integrated with a component manufacturer, and a competing non-integrated component manufacturer. Some have alleged that, by refusing to license at the component level, the vertically integrated SEP holder allegedly bundles its component (the bundled product) with its SEP portfolio (the bundling product). While we disagree with this alleged theory of harm and characterization, we show that, even if the offer of the vertically integrated SEP holder could de facto be characterized as a bundle, its conduct will not lead to the foreclosure of the component market if (i) the vertically integrated SEP holder does not assert its patents at the component level, and (ii) it licenses its SEP portfolio to end-devise manufacturers on FRAND terms irrespective of whether they source components from its own subsidiary or from the non-integrated rival. Intuitively, when (i) and (ii) hold, the bundle offered by the vertically integrated SEP holder can be replicated competitively by end-device manufacturers by mixing and matching the component sold by the non-integrated component supplier and the patent portfolio of the integrated SEP holder. Finally, we note that there are a number of legitimate business reasons for the common industry practice of licensing at the end-user device level. One of the primary reasons is the nature of the technology, for e.g., many SEPs related to 2G, 3G, and 4G wireless cellular standards do not relate to components, but to the systems and networks whose functions and efficiencies these inventions are designed to optimize. Other reasons include avoiding patent exhaustion, reducing administrative costs, and ease of monitoring or verifying the number of units sold. These efficiency reasons motivate the decision of both vertically integrated and, tellingly, non-integrated SEP holders to license at the end-user device level only.

FRAND Royalties and Injunctions for Standard Essential Patents

I develop a stylized model of court procedures that resolve disputes concerning FRAND-encumbered standard essential patents (SEPs). I analyze the effects of injunctions and potential court-imposed FRAND rates on negotiated royalty rates. The SEP holders’ ability to hold-up is constrained by the prospect of the court-imposed license terms in case of disputes, but is not completely eliminated. Possible mechanisms to address the residual hold-up power of the SEP holders are discussed.

Challenges and Opportunity of in vitro Propagation of Paulownia tomentosa Steud for Commercial Production in Nepal

Paulownia tomentosa Steud is a fast growing multipurpose tree. In vitro propagation using nodal explants of Paulownia tomentosa was performed by manipulating amount of cytokinin and auxin in culture media. Shoot bud proliferation from explants were assessed in Murashige and Skoog (MS) medium supplemented with various amounts of hormones such as a) 0.5-2.5 mg/l benzylaminopurine (BAP) and 0.1 mg/l naphthalene acetic acid (NAA), b) 0.5-2.5 mg/l BAP and 0.5-2.5 mg/l kinetin (KN) and c) 0.5- 2.5 mg/l BAP and 0.1 mg/l indole-3-acetic acid (IAA). In the present study, we found that hormone combination of BAP and NAA gave optimum growth results. MS medium enriched with 2.0 mg/l BAP and 0.1 mg/l IAA resulted a similar outcome but took 3-4 weeks with respect to the same medium enriched with 1.0 mg/ml BAP and 0.1 mg/ml NAA, which showed response within 2-3 weeks. Shoot length of 2.5-3.5 cm with 3-4 nodes and 8-12 leaves were obtained on MS medium supplemented with 1.0 mg/l BAP and 0.1 mg/l NAA. The acclimatization of explants was done in a polyhouse at 20±5oC for 2-6 weeks. Rooting has been induced in nonsterile sand. Rooted plants were transferred to plastic bags containing mixture of soil, sand and compost in the ratio of 1:1:1.Besides aforementioned issues, there are several other challenges associated with in vitro propagation of P. tomentosa. The plants were established (90%) on MS medium enriched with BAP and NAA and adapted ex vitro with surviving up to 80%. People received an opportunity with this plant because it grows fast and can generate income in 10 years in comparison with others, but at the same time people also have been facing the challenges for plantation of P. tomentosa as government of Nepal does not formulate necessary national policies, legislations and regulatory frameworks in its favor. Thus, system should be developed to set royalty rate of P. tomentosa recognizing its lifetime value.Int J Appl Sci Biotechnol, Vol 4(2): 155-160

Optimal licensing of uncertain patents in a differentiated Stackelberg duopolistic competition market

This study investigates the strategy implications of patent licensing between two firms in a differentiated Stackelberg framework, when the innovator faces an uncertain research and development (R&D) outcome. We establish a three-stage duopoly game (with an R&D stage, a licensing stage and an output stage), in order to analyze the effects of product differentiation and technology spillover on the optimal licensing strategy for a stochastic R&D firm. Our results demonstrate that, in cases where the R&D outcome is uncertain, (i) whether the innovator chooses fixed-fee licensing or royalty licensing depends on the degree of product differentiation and technology spillover; (ii) when the technology spillover is lower than a critical value, regardless of the degree of product differentiation, two-part tariff licensing is superior to fixed-fee licensing and royalty licensing, and (iii) the optimal royalty rate is dependent upon the technology spillover, with the value possibly being higher than the cost reduction.

Relationship between Risk and Incentives in Franchise Contracting

The relationship between risk and incentives in franchise contracting is still an unsolved issue in the literature. According to the standard principal-agent model, a trade-off emerges between the franchisee's protection against risk and incentive motivation. Contrary to this traditional view, we argue that the relationship between risk and incentives can be positive. In franchise contracting, this implies that the royalty rate decreases with risk. Using a unique panel dataset combining French franchise and financial data, we address this issue empirically and analyze the impact of a risk- and incentive-adjusted royalty rate on performance. The data support the hypothesis of a negative relationship between risk and the royalty rate, which contradicts the standard prediction of the agency theory. Furthermore, the estimation of random effect models provides evidence that chain performance increases with a risk- and incentive-adjusted royalty rate.

Injunctions for Standard Essential Patents Under FRAND Commitment: A Balanced, Royalty-Oriented Approach

This article investigates the controversial topic of using injunctive relief as a remedy for infringement of SEPs under FRAND agreements and seeks to contribute to the debate of under what circumstances a holder of an SEP may seek injunctive relief without breaching the agreement with the standard-setting organization. The article seeks to identify a suitable legal framework and legal doctrine for determining whether such a right exists by comparing a number of EU and U.S. approaches and doctrines. The article concludes that seeking injunction to prevent use of an SEP cannot be seen as abusive on a general level. There are several approaches that appear to be capable of balancing the main interests while taking into account the benefits of standards. In the EU competition law, in particular abuse of a dominant position of Art. 102 TFEU, has proven useful – the Court of Justice of the European Union recently handed down its decision in Case C-170/13 Huawei Technologies Co. v. ZTE Corp regarding the terms under which a patent holder may seek injunction for an SEP under FRAND, elaborating on the concept of a “willing licensee”. European case law suffers from the lack of guidance on how to calculate FRAND royalty rates. U.S. case law appears to be better positioned for dealing with these issues from a royalty perspective – in the Ninth Circuit’s decision in Microsoft v. Motorola, the calculation formed an integral part of the question of the right to seek injunctive relief. In common law systems, equity law (applied to patent law) has the potential of providing a balanced view, focusing on the behavior of the parties and a “willing licensee”; whereas, a contractual approach is theoretically questionable and not optimal for solving the issues related to the right to seek injunctive relief for standard essential patents under FRAND. The article also addresses the issue of balancing the interests of the parties under the proposed approaches.

Patent Valuation with Forecasts of Forward Citations

AbstractPatents without established market values (e. g., no negotiated royalty rates) are often valued by comparing the number of citations the patent has received to the numbers received by other patents whose market values are established. For recently-issued patents, which have not had time to accumulate citations, this procedure can be noisy or even inapplicable. The current paper generalizes this valuation method to incorporate patent characteristics that relate to the number of citations the patent is expected to obtain in the future. We estimate statistical models in which the explanatory variables are observable characteristics of the patent at a given time, and the dependent variable is the number of citations that the patent receives after that date. Using several examples, we demonstrate a procedure for patent valuation that incorporates the statistical results, such that the valuation reflects the number of citations the patent has already received as well as the number it is expected, based on its characteristics, to receive in the future.

Licensing a technology standard

I examine the optimal licensing strategy of the owner of a proprietary technology standard in a monopolistically competitive industry. The standard owner can be either an outsider inventor or a joint venture of downstream firms. I find that (1) a simple revenue royalty replicates the integrated monopoly outcome; (2) a patent pool cannot do better than adopting a non-discriminatory licensing policy that offers higher royalty rates to pool members than to nonmembers; (3) if the standard owner also sells a complementary good, then it may choose a decentralized marketplace as a commitment not to maximize licensing revenue. Implications to the use of RAND pricing in standard settings are discussed.

The viability of FRAND: How the seminal landmark Microsoft ruling could impact the value of standard essential patents and the future of telecom standards

Recently, telecommunication standards have become a battleground over the nature of F/RAND commitments that determine the value of standard essential patents. In 2015, the US federal court system reaffirmed the 2013 landmark ruling in Microsoft v. Motorola on the valuation of SEPs through the determination of a F/RAND royalty rate. This study deconstructed the courts valuation method and found that it deployed a comprehensive set of principles for apportionment of SEP value in line with the general economic theory of patent holdup and freeriding, but that the lack of technical strength of the SEP portfolios limited the full understanding of the generalization of the methodology to future contexts. Key implications include a greater capability of the US court system to manage F/RAND disputes, false reification of patent holdup as a systemic problem, and a potentially normative, negative impact on patent value, where the total impact on both static and dynamic efficiency requires further research and potentially new knowledge-based economic theories.

IEEE IP Policy Update Under the Scrutiny of the EC Guidelines on Horizontal Cooperation

In 2015, the Institute of Electrical and Electronics Engineers’ Standardization Association (IEEE-SA) made some controversial changes to its patent policy. The changes include in particular a recommended method of calculation of FRAND royalty rates, and a request to members holding a standard essential patent (SEP) to forego their right to seek an injunction except under limited circumstances. The amended patent policy was adopted by the IEEE Board following favorable business review letter by the US Department of Justice, which found any potential competitive harm from the policy to be outweighed by potential pro-competitive benefits.In this paper, we examine whether these changes might impact the regime of “safe harbor” set up for standardization agreements under EU competition law, in particular the guidelines provided by the European Commission. Given the importance placed by the guidelines on procedural safeguards to prevent SSO activities from resulting in anti-competitive cooperation, we contrast the ad hoc process leading to this policy change with the procedures in place for regular standard-setting activity.

Franchise Contracting: The Effects of The Entrepreneur's Timing Option and Debt Financing

We solve a sequential‐moves game that involves three players: the franchisor, the entrepreneur, and the banks. The franchisor chooses the contract terms (a one‐time franchise fee and a royalty rate for on‐going payments). The entrepreneur dynamically decides when to sign this contract, open a store, and apply for debt financing to cover the initial investment. In response to the entrepreneur's application, banks competitively determine loan rates. We find that the franchisor should use royalty cash flows and not the franchise fee to extract value from the entrepreneur. This is a new explanation of empirical evidence that franchise contracts favor royalties over franchise fees. To account for the possibility of the entrepreneur's bankruptcy and bankruptcy costs, the franchisor should decrease the royalty rate. However, despite a lower rate, the threshold for the entrepreneur to open the store is higher in the model with financing than in the model without financing. This threshold is much higher than it would have been for the integrated system, which in turn is higher than the static break‐even‐NPV threshold. If a franchisor ignores financing considerations, she will suffer from having to wait longer for the store opening and from a higher bankruptcy probability. We predict that the franchisor is the main beneficiary of the entrepreneur's greater initial wealth and that the franchisor will benefit more if she assumes a greater share of the store's operating costs.

Study Proposal - Commercial Patent Licensing Data

The proposed Study aims to provide researchers, litigants, judges, policy makers, regulators and the public with previously unavailable information regarding commercial patent licensing practices, including royalty rates, in a manner that does not compromise firm-level confidential information.

Competition between Vertically Differentiated Platforms

This paper investigates the competition between vertically differentiated platforms in two-sided markets. We assume the presence of two competing platforms producing either higher- or lower-quality devices for consumers. Each platform decides the price of its hardware device for consumers and the royalty rate for software developers. We find that, despite the existence of quality differences, the decisions by the platforms about royalty rates are symmetric and only hardware pricing is asymmetric. We also demonstrate that an equilibrium may exist in which a lower-quality platform can enjoy greater profit than a higher-quality rival when there are higher development costs associated with creating software to meet the needs of higher-quality devices.

Competition between Vertically Differentiated Platforms

This paper investigates the competition between vertically differentiated platforms in two-sided markets. We assume the presence of two competing platforms producing either higher- or lower-quality devices for consumers. Each platform decides the price of its hardware device for consumers and the royalty rate for software developers. We find that, despite the existence of quality differences, the decisions by the platforms about royalty rates are symmetric and only hardware pricing is asymmetric. We also demonstrate that an equilibrium may exist in which a lower-quality platform can enjoy greater profit than a higher-quality rival when there are higher development costs associated with creating software to meet the needs of higher-quality devices.

US private oil and natural gas royalties: estimates and policy relevance

AbstractWidespread ownership of oil and natural gas resources by private individuals is unique to the United States. The owner's share is typically specified as a gross revenue royalty. We develop estimates of income from production of privately owned minerals. Focusing on onshore resources in the continental United States, we determine that the share of total oil and natural gas production attributable to privately owned minerals has been approximately 75 per cent in recent years. We find that average private royalty rates in recent years were 13.5 per cent for oil and 11.8 per cent for natural gas, and that private royalty income from oil and gas production was $21–22 billion in 2011 and 2012. We then briefly discuss four current policy issues upon which our estimates have bearing: exports of liquefied natural gas and crude oil, effects of refinery and pipeline constraints, state and federal tax policy, and regulation of technology.

Concerns and Evidence for Ex-Post Hold-Up with Essential Patents

Patented technologies may add significant value to technical standards. But the owners of patents that are necessary required in order to implement a standard (“essential patents”) obtain a particularly powerful position. One of the widely recognized risks here is patent holdup, where the patent owner demands inflated prices, much beyond the value of their specific patented technology, knowing that implementers are locked in and have no other choice than to obtain a license. Many standard setting organisations have “FRAND” patent policies in place that aim to avoid hold-up, among other things. While it has been argued that hold-up is a theoretical risk only, and does not manifest itself in 'real world' scenarios, this paper discusses a number of recent, seminal court cases in which the judge determined that for essential patents, fees were demanded that wildly exceeded what the court ultimately deemed to be a FRAND royalty rate. In other cases, competition authorities have issued decision in which they ruled that for a patent owner, seeking injunctive relief for essential patents can be an illegal act as such, considering that such conduct further increases the risk for hold-up. The risk for hold-up is recognised by standard setting bodies, witnessed by the many discussions taken place in these organisations, in the past but especially over the last two years. Yet, possible policy changes are often hard to agree upon, given the strongly divergent interests of the members of such organisations. IEEE is the first standard setting body to make significant changes to its policy, aiming to mitigate hold up risks. As pointed out by the US Department of Justice in their review, IEEE’s new policy has some significant potential benefits.

Signaling quality with increased incentives

Previous work on informed-principal problems with moral hazard suggested that the principal should signal project quality by retaining a larger share of the project and hence lowering incentives for the agent. We show that this view is incomplete. If project quality and effort are complements and effort is more valuable for high-quality projects, a principal with a high-quality project may separate from a principal with a low-quality project by increasing incentives for the agent. This holds with a risk-neutral agent who is protected by limited liability as well as with a risk-averse agent and unlimited liability. A dynamic version of our model in which the agent learns project quality in later periods provides an explanation for the use of initially reduced royalty rates in business-format franchising contracts.