As we noted yesterday, Judge James L. Robart’s groundbreaking opinion in the Microsoft v. Motorola breach of contract case was the first to set RAND licensing terms for a standard-essential patent portfolio.  While much of the focus in the media has been on the amount of RAND royalties determined by the court, it’s the methodology for determining these royalties has the potential to be truly important for future cases

To determine RAND terms in this case, Judge Robart analyzed what would occur in a hypothetical negotiation between Motorola and Microsoft for the 802.11- and H.264-essential portfolios at issue.  As in many patent-related cases, the court here used the factors outlined in Georgia-Pacific Corp. v. U.S. Plywood Corp., 318 F. Supp. 1116 (S.D.N.Y. 1970) formed the basis for this hypothetical negotiation.  But to account for the unique considerations present in the standard-essential patent RAND licensing context, Judge Robart modified the G-P factors somewhat — noting that “the parties in a hypothetical negotiation would set RAND royalty rates by looking at the importance of the SEPs to the standard and the importance of the standard and the SEPs to the products at issue.”  After the jump, we will take a closer look at Judge Robart’s modified Georgia-Pacific approach to determining RAND royalties.

Importantly, Judge Robart found that negotiations in the RAND context should be constrained by the following “economic guideposts”:

  • The level of a RAND royalty should promote adoption of the standard;
  • The methodology for determining RAND terms should recognize and mitigate both the risk of “patent hold-up” and royalty stacking (the total royalties payable if other SEP holders made the same demands);
  •  RAND royalties should guarantee the patent holder a reasonable return on its IP-related investment; and
  • RAND royalties should be interpreted to limit the patent holder to a reasonable royalty on the economic value of the patented technology itself, apart from the value associated with the patent’s incorporation into an industry standard.

Keeping these principles in mind, Judge Robart modified the G-P factors as follows:

G-P Factor Description Judge Robart’s modification (all emphases added)
1 The royalties received by the patentee for the licensing of the patent in suit, proving or tending to prove an established royalty. “In the RAND context, such licensing royalties for a given patent(s) must be comparable to RAND licensing circumstances. In other words, to prove an established royalty rate for an SEP, the past royalty rates for a patent must be negotiated under the RAND obligation or a comparable negotiation. Thus, license agreements where the parties clearly understood the RAND obligation, and as discussed below, patent pools, will be relevant to a hypothetical negotiation for SEPs.”
2 The rates paid by the licensee for the use of other patents comparable to the patent in suit. No modification discussed
3 The nature and scope of the license. No modification discussed
4 The licensor’s established policy and marketing program to maintain his patent monopoly by not licensing others to use the invention or by granting licenses under special conditions designed to preserve that monopoly. “This factor is inapplicable in the RAND context because the licensor has made a commitment to license on RAND terms and may no longer maintain a patent monopoly by not licensing to others. In fact, as the court has found in this case, the RAND commitment requires the SEP owner to grant licenses on RAND terms to all implementers of the standard.”
5 The commercial relationship between the licensor and licensee, such as, whether they are competitors in the same territory in the same line of business; or whether they are inventor and promoter. “Similar to factor 4, this factor does not apply in the RAND context. This is because having committed to license on RAND terms, the patentee no longer may discriminate against its competitors in terms of licensing agreements. Instead, as explained, the patent owner is obligated to license all implementers on reasonable terms.”
6 The effect of selling the patented specialty in promoting sales of other products of the licensee; the existing value of the invention to the licensor as a generator of sales of his non-patented items; and the extent of such derivative or convoyed sales. “Although these factors [6 and 8] are relevant to a reasonable royalty in the RAND context, it is important to focus the analysis of both of these factors on the value of the patented technology apart from the value associated with incorporation of the patented technology into the standard.  With respect to Factors 6 and 8, a reasonable royalty would not take into account the value to the licensee created by the existence of the standard itself, but would instead consider the contribution of the patent to the technical capabilities of the standard and also the contribution of those relevant technological capabilities to the implementer and the implemented products.”
7 The duration of the patent and the term of the license. “The analysis concerning Factor 7 is greatly simplified in the context of a dispute over a reasonable royalty for a RAND-committed patent because the term of the license would equate to the duration of the patent. In many circumstances, this factor will have little influence on what constitutes a reasonable royalty under the RAND commitment.”
8 The established profitability of the product made under the patent; its commercial success; and its current popularity. (See Factor 6, above)
9 The utility and advantages of the patent property over the old modes or devices, if any, that had been used for working out similar results. “Through this factor, the parties to a hypothetical negotiation under a RAND commitment would consider alternatives that could have been written into the standard instead of the patented technology. The focus is on the period before the standard was adopted and implemented (i.e., ex ante). Thus, through factor 9, Microsoft’s incremental approach to determination of a RAND royalty rate is realized, in part.”
10 The nature of the patented invention; the character of the commercial embodiment of it as owned and produced by the licensor; and the benefits to those who have used the invention. “In the RAND context, both of these factors [10 and 11] focus the hypothetical negotiation on the contribution of the patent to the technical capabilities of the standard and also the contribution of those relevant technical capabilities to the implementer and the implementer’s products. Again, in such an analysis, however, it is important to separate the patented technology from the value associated with incorporation of the patented technology into the standard. Nevertheless, evidence of the benefit and value of the patent to the owner and implementer is relevant to the contribution of the patent to the certain capabilities of the standard, as well as the contribution of the standard’s capabilities to the implementer.”
11 The extent to which the infringer has made use of the invention; and any evidence probative of the value of that use. (See Factor 10, above)
12 The portion of the profit or of the selling price that may be customary in the particular business or in comparable businesses to allow for the use of the invention or analogous inventions. “This factor must be viewed through the lens of business practices involving RAND commitments. In other words, licensing fees for non-RAND committed patents customary in a business industry cannot form the basis for comparison. Instead, factor 12 must look to customary practices of businesses licensing RAND-committed patents.”
13 The portion of the realizable profit that should be credited to the invention as distinguished from non-patented elements, the manufacturing process, business risks, or significant features or improvements added by the infringer. “As with many of the other factors, in the RAND context, it is critical to consider the contribution of the patented technology apart from the value of the patent as the result of its incorporation into the standard, the latter of which would improperly reward the SEP owner for the value of the standard itself. Rewarding the SEP owner with any of the value of the standard itself would constitute hold-up value and be contrary to the purpose behind the RAND commitment.”
14 The opinion testimony of qualified experts. No modification discussed
15 The amount that a licensor and a licensee would have agreed upon (at the time the infringement began) if both had been reasonably and voluntarily trying to reach an agreement. “The SEP owner and the implementer would consider the RAND commitment and its purposes in their efforts to reach a license agreement. In trying to reach an agreement, the SEP owner would have been obligated to license its SEPs on RAND terms which necessarily must abide by the purpose of the RAND commitment of widespread adoption of the standard through avoidance of holdup and stacking.” 

“With respect to hold-up, the parties would examine a reasonable royalty rate under the RAND commitment based on the contribution of the patented technology to the capabilities of the standard, and in turn, the contribution of those capabilities of the standard to the implementer and the implementer’s products.”


“With respect to stacking concerns, the parties attempting to reach an agreement would consider the overall licensing landscape in existence vis-a-vis the standard and the implementer’s products. In other words, a RAND negotiation would not be conducted in a vacuum. The parties would instead consider other SEP holders and the royalty rate that each of these patent holders might seek from the implementer based the importance of these other patents to the standard and to the implementer’s products.”

Although the Georgia-Pacific factors have been somewhat maligned of late, they remain the primary approach for determining reasonable royalties in the patent damages context.  And now, future courts making RAND determinations have some precedent to point to for determining RAND royalties in the licensing context.  It will be interesting to see if Judge Robart’s approach is followed by others.  In fact, we could see this happen as early as late next month, when the the U.S. International Trade Commission weighs RAND issues in the Samsung-Apple ITC investigation (337-TA-794).