Reevaluating Patent Damages in the Knowledge Economy: The Intellectual Value Chain and the Royalty Base for Standard-Essential Patents

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In this article, we examine the issue of apportionment through the determination of the proper royalty base in the adjudication of patent damages, or, more precisely, FRAND royalties for standard-essential patents. Through the use of an intellectual value chain framework, we illustrate the market norms of actors in standards-enabled telecommunications markets and analyze the alignment of those market norms with legal norms in the U.S. courts. In particular, case studies of Qualcomm and ARM exemplify different market and industry norms regarding patent licensing. The main findings suggest that rote use of rules such as the smallest saleable patent-practicing unit and the entire market value rule are not well adjusted for use in markets characterized by an intellectual value chain logic and could lead to a reduction in dynamic efficiency in certain markets in the telecommunications industry. However, other U.S. legal norms, such as the use of the Georgia-Pacific factors, 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 U.S. 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, our methodology suggests the usefulness of an epistemological approach to law that combines market norms (that is, Market Law) with doctrinal legal norms (that is, State Law), particularly in technology markets operating at the interface of law and innovation.

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Bowman Heiden & Jens Andreasson, Reevaluating Patent Damages in the Knowledge Economy: The Intellectual Value Chain and the Royalty Base for Standard-Essential Patents, 1 Criterion J. on Innovation 229 (2016).