The UK Supreme Court’s decision in Tesla v InterDigital brings an important question in standard-essential patent licensing into sharper focus:
How should a court determine whether a rate offered through a licensing platform is actually FRAND?
Tesla challenged the terms available through Avanci’s 5G Vehicle platform. The High Court rejected Tesla’s licensing claims, and the majority of the Court of Appeal reached the same conclusion, with Lord Justice Arnold dissenting. The Supreme Court has now allowed Tesla’s appeal.
Importantly, the Court did not determine that Avanci’s $32-per-vehicle rate is non-FRAND. Nor did it finally decide that Avanci itself is directly bound by the ETSI FRAND undertaking.
Instead, it held that there is a serious issue to be tried as to whether the FRAND obligations of SEP owners remain relevant when their patents are licensed collectively through a platform. That is where the economic analysis becomes particularly interesting.
Platforms and FRAND
Licensing platforms can generate considerable efficiencies. Instead of negotiating separately with numerous patent owners, an implementer can obtain access to a large portfolio through a single transaction. Avanci’s aggregate portfolio covers a substantial proportion of the cellular SEPs relevant to connected vehicles and therefore offers a genuine one-stop licensing solution.
But aggregation does not make the FRAND question disappear. If anything, the greater the proportion of relevant patents brought together within a single licensing mechanism, the more important the aggregate price becomes. The next question is therefore straightforward:
Is $32 per vehicle FRAND?
Answering that question is considerably less straightforward. Several valuation approaches may contribute to the analysis.
Comparable licences
Comparable licence agreements are an obvious starting point. But comparability is rarely simple. Licensing agreements may differ. A platform licence raises an additional issue: part of its value may result from the reduction in transaction costs created by aggregation. There is also a broader economic question about the extent to which negotiated SEP licences can be treated as conventional market prices. SEP licensing does not necessarily take place in a transparent competitive market. An implementer may negotiate against the prospect of an injunction if no agreement is reached, potentially creating significant bargaining pressure. At the same time, many licensing agreements remain confidential, meaning that courts and market participants may have only a partial view of the terms agreed elsewhere. Comparable licences can therefore provide important evidence of negotiated outcomes.
Top-down analysis
A top-down approach provides another potential reference point. It starts by considering an aggregate royalty burden associated with a standard and then examines the share attributable to a particular portfolio.This approach may be particularly relevant where a platform itself aggregates a large proportion of the patents required to implement the technology.
The question is not simply what an individual portfolio is worth in isolation, but whether the overall royalty stack remains economically sustainable for downstream innovators.
Top-down analysis is not free from assumptions either. Much depends on how the appropriate aggregate royalty burden is established and how the relative strength and contribution of individual portfolios are assessed. It may nevertheless provide an important cross-check on other valuation approaches.
Does downstream use matter?
Another possibility is a use-based approach. The same standardised technology may make different economic contributions across different downstream applications. Connectivity in a smartphone is not necessarily economically identical to connectivity in a vehicle or an industrial device.
The argument underlying a use-based approach is that, where a technology is used more intensively or contributes more strongly to the value of a particular application, this may be relevant to the valuation exercise.
This does not mean that royalty rates should automatically differ across industries. It does, however, raise the question of whether the economic context in which a technology is embedded can simply be ignored.
Could hedonic price analysis help?
Econometric techniques such as hedonic price regression may provide another source of evidence. Hedonic analysis seeks to estimate how individual product characteristics contribute to observed market prices while controlling for other features.
Applied carefully, such an approach may provide insights into how consumers value functionality associated with connected technologies.
But econometric analysis also has important limitations. It cannot directly reveal the value of an SEP or mechanically determine a FRAND royalty.
What does FRAND mean?
Ultimately, the choice of methodology depends partly on how FRAND itself is understood. There is no methodology that is free from assumptions or limitations. A robust FRAND analysis may therefore need to draw on several approaches. The Supreme Court has not yet told us whether $32 per vehicle is FRAND. What it has done is open the door to a much deeper examination of how collective SEP licensing should be valued.
That may ultimately prove to be one of the most significant aspects of Tesla v InterDigital.
Watch the OxFirst discussion
OxFirst recently discussed these questions with Tim Powell of Morgan Lewis and Le Chen of Xiaomi in the webinar:
Putting a Price Tag on Global Patents: UK FRAND after Tesla
The discussion examines the implications of the decision for global SEP licensing, platform licensing and the determination of FRAND rates.
Watch the webinar:
https://oxfirst.club/webinar-tesla-frand/
OxFirst and FRAND valuation
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