New Research Proposes a Groundbreaking Framework for Determining Aggregate Royalties for Standard Essential Patents
Alex Moss | November 7, 2023
As both U.S. and European government agencies heighten their focus on standard-essential patents (SEP), grasping the economic stakes of SEP licensing is increasingly critical. A new study from Professor John L. Turner (supported by the Public Interest Patent Law Institute) offers a promising new approach to SEP royalty setting that is designed to align with the goals of both standardization and patent protection.
Professor Turner’s paper, “Welfare-Optimal Rewards and Royalties for a Full Stack of Standard-Essential Patents,” introduces an economic model tailored for the SEP licensing landscape that can help practitioners, courts, policymakers, and the public better understand how license rates and structures affect markets for standard-compliant products. Central to Turner's work is its focus on facilitating development of a reliable model for determining transparent aggregate royalties for a full stack of SEPs—i.e., all SEPs required to implement a given standard. While patent pools and courts have used aggregate pricing to an extent, there is no generally accepted methodology for determining royalties. The goal of identifying such a methodology is greater clarity, predictability, and lower transaction costs for all involved, thus freeing up more resources for implementation and innovation of standards.
Importantly, Professor Turner’s approach puts economic welfare front and center in SEP royalty determinations. By analyzing the repercussions of varied licensing rates and structures on the price, volume, and diversity of standard-compliant products, his model makes it possible to strike a balance where SEP licensors receive appropriate compensation, product manufacturers pay reasonable fees, and the intended goals of standardization—widespread adoption by a diverse range of product makers and users—can come to fruition. His analysis shows how aggregate royalties for a full-stack of SEPs affect the performance of entire industries. Exorbitant or poorly-structured royalties can suppress consumer welfare by elevating prices or limiting implementation of standards while excessively low royalties can erode licensor profits, potentially jeopardizing socially desirable innovation.
The study underscores the need for further research into aggregate royalty calculations and the acquisition of comprehensive data to fully align licensing models with the economic nuances of the real world. While leveraging the full potential of Turner's framework demands additional research and data, this paper signifies a pivotal move towards an SEP licensing paradigm that advances the goals of standardization and patent protection, facilitates more fair and efficient transactions between SEP stakeholders, and ensures consideration of the welfare of people whose lives and livelihoods depend on standard-compliant products.