Assigning value to individual essential patents.
How would you split the royalty income between the owners of patents that are essential for using a standard?
Let’s assume for the moment that the patent owners and the users of the standard have agreed on a combined RAND royalty rate for the use of all essential patents. What is a reasonable royalty rate for 10% of these essential patents, or for a single essential patent?
You could simply charge 10% of the RAND rate for all essential patents, but that assumes all essential patents are equal. There are, however, good reasons to differentiate between the value of individual essential patents:
- An essential patent may be found invalid when challenged.
- Some products may not infringe all essential patents.
- Detection of infringement may not be feasible in practice for all essential patents.
Only patents that are valid and infringed will generate sustainable license income. The other essential patents play a marginal role. Manufacturers of products will want a license to reduce the risk of future claims, but they will pay far more for patents that have survived a validity challenge and are obviously infringed by the manufacturer’s products.
In an article on IPWatchdog.com, I compare different methods that have been tried to determine the RAND royalty rate for a subset of all essential patents, and suggest a method that is based on each patent’s contribution to generating license income.
For a discussion on the RAND royalty rate for the use of all essential patents see: “A micro-economic estimate of the reasonable royalty rate for standard essential patents.“