' FRAND Royalties will Impact the Cost of Your Next Smart Phone | MTTLR

FRAND Royalties will Impact the Cost of Your Next Smart Phone

The 5th generation of cellular networks, commonly referred to as 5G, is expected to be released in 2020. 5G will use a higher frequency band that will allow peak speeds twenty times faster than today’s 4G network and that will be able to support more devices at a time. With these advances, there will be a new series of legal issues. Specifically, there will be another round of litigation surrounding standard essential patents (“SEPs”) and licenses on fair, reasonable and non-discriminatory (“FRAND”) royalty rates.

Technology standards like 5G or Wi-Fi are created by organizations like the Institute of Electrical and Electronic Engineers, the International Telecommunication Union and the European Telecommunications Standard Institute, commonly referred to as standard-setting organizations (“SSOs”). Before an SSO adopts a standard, it requires the members of the organization, typically technology companies, to license any SEPs on FRAND terms. Any patent that is required for the standard to work is an SEP.

Determining FRAND terms has been a major and much-litigated issue. Huawei v. InterDigital (China, 2013), Unwired Planet v. Huawei (UK, 2017), and TCL v. Ericsson (U.S., 2017) all determined FRAND rates for 2G, 3G, and 4G cellular SEPs. FRAND rates have been determined by two approaches: bottom-up and top down.

In a bottom-up approach, courts try to determine the reasonable royalty of the SEP based on the value of patented technology and by looking at comparable licenses. The bottom-up approach was used by Judge Robart in deciding one of the first FRAND cases, Microsoft v. Motorola. He used modified Georgia-Pacific factors to determine a reasonable royalty bases on compatible licenses.

The top-down approach requires taking the value of the standard and determining the percentage of the value that comes from the SEP. The courts in both TCL v. Ericsson and Unwired Planet v. Huawei used this approach, though in different ways.  The court in TCL v. Ericsson calculated the total value of all SEPs in the standard, then apportioned the royalty to Ericsson based on the percentage of SEPs in the standard that it owned. The Huawei court did not do a full top-down analysis but used it to cross-check its analysis.

Both approaches have been criticized. Bottom-up allows for royalty stacking, which occurs when the individual SEP holders demand royalties that in the aggregate are more than the value of all the SEPs in the standard. Royalty stacking leads to higher costs for licensing the technology, which in turn leads to higher prices for consumers. The top-down approach is typically implemented by using the count of SEPs to calculate the percentage of the standard value that a SEP holder is entitled to. This approach leads to all SEPs being valued the same even when one SEP could be easily replaced by an alternative technology. All SEPs do not have equal value, but courts have treated them this way when using the top-down approach.

Courts may be the wrong group to decide the values of SEPs. SSOs are in a far better position to determine the value of each SEP. SSO members typically include major players in the technology market. When members submit proposals to SSOs, they agree to license on FRAND terms but do not specify terms. If they were to include their desired licensing terms when making a proposal, the SSOs could determine if that amount is fair, reasonable and non-discriminatory and lock in the terms to license the technology.

No matter who determines the FRAND rate or how it is calculated, it is likely to have a significant effect on the cost of your next smartphone. For 4G LTE, it was estimated that the royalties for a $400 smartphone would be $54, or 13.5% of the phone’s cost. Ericsson has already announced a $5 royalty rate per 5G multimodal device. Qualcomm announced a royalty of 3.25% of the selling price (capped at $400) for its 5G multimodal devices. These royalties will add up for consumers.*

*Ryan Rypka is an associate editor on the Michigan Technology Law Review.

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