Case 1:20-cv-00393-LO-TCB Document 1093-12 Filed 02/25/22 Page 1 of 6 PageID# 30039
`Case 1:20-cv-00393-LO-TCB Document 1093-12 Filed 02/25/22 Page 1 of 6 PagelD# 30039
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`EXHIBIT 12
`EXHIBIT 12
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`Case 1:20-cv-00393-LO-TCB Document 1093-12 Filed 02/25/22 Page 2 of 6 PageID# 30040
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`Case 1:20-cv-00393-LO-TCB Document 1093-12 Filed 02/25/22 Page 3 of 6 PageID# 30041
`Case 1:20-cv-00393-LO-TCB Document 1093-12 Filed 02/25/22 Page 3 of 6 PagelD# 30041
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`never defined ‘FRAND’ andthere is no universally accepted definition of the term,it is well accepted that the
`FRAND commitment does not require a licensor to offer the exact same terms and conditions to every licensee. This
`point was recognised bythe International Trade Commission whenit noted that: “The FRAND nondiscrimination
`requirement prohibits ‘unfair discrimination,’ but it does not require uniform treatmentacrosslicensees, nor doesit
`require the same terms for every manufacturer or competitor.” Unsurprisingly, there has been, and continuesto be, a
`great deal of debate over the definition of these terms.
`
`*Ex-standard’ value
`
`Oneof the most controversial current issues with FRANDlicensing is whether the licence price should include the
`value that a patent gains by being adopted into an industry standard. This value is sometimesreferred to as ‘hold-up’
`value, becauseit refers to the ability of an SEP holder to demand muchhigherroyalties after the industry becomes
`‘locked in’ to using a standard than it could have obtained through licensing the patent before the standard’s
`adoption. A number of US court decisions over the past few years have focused on the need to apportion the intrinsic
`value of patented technology from any hold-up value that patented technology derives through its adoption into
`industry technical standards. For example, in CS/RO v Cisco the Federal Circuit stated that there are “unique
`considerations that apply to apportionmentin the context of a standard-essential patent”, and that methodologies
`used to arrive at a reasonable royalty for an SEP must “capture the asserted patent’s value resulting...only from the
`technology’s superiority” and “not from the value added bythe standard’s widespread adoption”.
`
`This apportioned value of patented technologyis at timesreferred to as the ‘ex-ante’ value. The‘ex ante’ conceptis
`temporal and hasbeen historically used in SEP patent damagescases to define an appropriate date for a hypothetical
`negotiation between a patent holder and aninfringerat a historical point in time — specifically, right before a patent
`wasincorporated into an industry standard. However, a pure ex-ante value (before the standard value) does not
`necessarily capture the relevant value for determining FRANDatthe timethe licence offer is extended by the patent
`owner. The FRANDevaluation of an offer should account for facts and circumstances uniqueto the parties, current
`economic data and the value of the technology at the time of the offer, not at the time the patent is incorporated into
`a standard, which in manycases takes place many years before the technology advances to commercial application
`and value. Therefore, to avoid confusion, werefer to the value of essential patented technology, which does not
`include the value resulting from incorporation of the patented technology into the standard at the time an offeris
`madeby the patent owner, as the ‘ex-standard’ value.
`
`‘Ex-standard’ technical analysis
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`Whenevaluating the royalty rates in FRANDoffers, an in-depth ex-standard technical analysis and valuation of an
`SEP can, depending on the facts and circumstancesofthe situation, be a useful tool for licensing professionals to
`measure and understand an SEP’s true inherent value. This analysis is split into two phases. The first begins with a
`rigorous study performedbyorassisted by technical experts and those most familiar with the technology
`surrounding the SEP to isolate specific technical benefits provided by the SEP and determine how thosebenefits are
`different from, and more valuable than, the best available non-infringing alternative technologies that could
`otherwise have been included in the standards. Once technical experts have identified those benefits, licensing
`experts or economists can perform the second phase ofthe process, which is to determine an economic valuethatis
`tied directly or attributable to the technical benefits at or near the time of negotiating an appropriate royalty rate. One
`method to accomplish this is to rely on previous conjoint studies tied directly to the technical benefits or to design
`and perform a study if available studies are not on point. ‘Conjoint studies’ are a statistical survey technique used to
`determine how people value different attributes that make up products or services. Typically, information is
`
`

`

`Case 1:20-cv-00393-LO-TCB Document 1093-12 Filed 02/25/22 Page 4 of 6 PageID# 30042
`Case 1:20-cv-00393-LO-TCB Document 1093-12 Filed 02/25/22 Page 4 of 6 PagelD# 30042
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`compiled from consumers through a market survey and then analysed with a variety of different econometric and
`statistical methods. This process yields information such as what a consumeris willing to pay for specific attributes.
`Armed with a ‘consumer’s willingness to pay’ (CWTP),a licensing professional or economist can evaluate whether
`the CWTPisin excessof the royalty rates offered by the patent ownerandasa result truly represents an ex-standard
`value.
`
`Comparable licence agreements
`
`In addition to determining the true ex-standard value, licensing professionals can utilise previously executed licence
`agreements to help determine a FRAND-compliant royalty rate for subsequentlicensees. A bilaterally (or arm’s-
`length) negotiated licence agreement adjusted for comparability is the best indication of the true market value of the
`patented technology. This processis also widely recognised by legal precedent. In D-Link, the Federal Circuit
`affirmed that “licenses may be presented to the jury to help the jury decide an appropriate royalty award”. In CSZRO,
`the Federal Circuit reiterated its “prior approvals of a methodology that values the asserted patent based on
`comparable licenses”, and explainedthat “[s]uch a model begins with rates from comparable licenses and then
`‘account[s] for differences in the technologies and economic circumstancesof the contracting parties.” Where the
`licenses employedare sufficiently comparable, this methodis typically reliable because the parties are constrained
`by the market’s actual valuation of the patent”.
`
`‘Unpacking’ licence agreements to determine true comparability
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`Determining comparability is often a difficult task and requires a significant amountof analysis and financial
`modelling. The structure and termsofa licence, including compensation, can vary significantly. Licences can be
`based on running royalty payments, lump-sum payments, cross-licence value, non-cash consideration or some
`combination of one or more of these and potentially other components. Additionally, running royalties can be
`calculated on a percentage ofsales basis, on a dollar-per-unit basis or as a ‘hybrid’ using percentageofsales
`combined with dollar-per-unit royalty caps and floors. As such, the most important aspect of a licence agreement for
`licensing experts when evaluating the comparability of licence agreementsis to identify what a licensee really paid
`for a licence converted to current dollars for comparison.In orderto dothis, it is often necessary to ‘unpack’ licence
`agreements to determinethe true value andthe effective royalty rate that the parties agreed to. The unpacking
`processis similar to a hypothetical negotiation in IP damages evaluation,in that it involves placing yourself in the
`shoesofthe parties at the time they were originally negotiating the licence to determine the true value that each party
`agreed to. This includes understanding things suchas:
`
`e
`
`e
`
`the sales projections that the parties were expecting;
`
`the strength and make-up of their respective SEP portfolios; and
`
`e
`
`the average selling price (ASP) of their licensed products.
`
`Whenevaluating cross-licences between large SEP portfolio owners,it is often also necessary to consider the
`relative strength of the party’s portfolios and calculate a portfolio strength ratio (PSR), which can be used to
`comparethe value of one portfolio to the other. The most important aspect of the unpacking processis to convert
`royalties expected to be paid over the term of the licence agreementinto a present value and further in to a per-unit
`amount. Simply stated, a lump sum of $1 million paid upfront for an anticipated 1 million royalty-bearing units (or
`$1 per unit) is not the equivalent of a running royalty of $1 per unit. Marketrisk is distributed differently between
`the two agreements. While the formerstructure eliminates paymentrisk for the licensor for | million units, it
`
`

`

`Case 1:20-cv-00393-LO-TCB Document 1093-12 Filed 02/25/22 Page 5 of 6 PageID# 30043
`Case 1:20-cv-00393-LO-TCB Document 1093-12 Filed 02/25/22 Page 5 of 6 PagelD# 30043
`
`incorporates marketrisk for the licensor that the licensee may actually sell 2 million units and thus only collect an
`effective royalty rate of $.50 per unit. Many licensors attempt to hedge the aboverisks by incorporating terms such
`as minimum payments, per-unit maximums(or caps)as a trade for per unit minimums(or floors). There are
`countless variations to the above and,therefore, there is significant need for a rigorous analysis of licences and the
`application of adjustments for comparability.
`
`Table 1.Impact of varying ASPs on dollar-per-unit royalties
`
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`Since in this situation both licensees are paying for rights to the same SEP portfolio, and thus the same technology,it
`is not hard to imagine that Licensee A mightbelieve that the royalty rate it is paying is not fair or reasonable. Some
`difference in ASP maynotrelate to the overall cellular capabilities (assuming that both the $600 phone and the $200
`phone have the sameability to initiate and receive 2G, 3G and 4Gcalls made possible by SEPs); instead, a portion
`of the ASP canrelate to value unrelated to the standards, such as additional features, design value and licensee
`pricing strategies. Further, if Licensee A is competing in the same market as Licensee B, Licensee B could have a
`pricing advantage over Licensee A if the royalty were determined as a percentage of ASP and not adjusted for other
`factors. In these situations one effective way to establish true comparability and the fairness and reasonableness of
`SEPlicence offers related to the foundational technologythatall licensees need to include in their products
`regardless of ASPis also to calculate and considerthe ‘implied’ dollar-per-unit rate for each licensee.
`
`Licensee A
`
`Licensee B
`
`ASP
`
`$600
`
`$200
`
`3% royalty rate
`
`$18.00
`
`$6.00
`
`Dollar-per-unit versus percentage of sales royalty rates
`
`Whena comparison is being madeto licensees with significantly different ASPs, as is often the case in the
`telecommunications industry, determining an SEP royalty rate only as a percentage of sales may notallow for true
`comparability. For instance, two licensees could be paying a 3% royalty to the same licensor for rights to the same
`SEP portfolio; but if Licensee A has an average ASP of $600 and Licensee B has an average ASP of $200, then
`Licensee A is paying three times as many dollars in a royalty than Licensee B.
`
`Figure 1. The ‘race to the bottom’
`
`Click here to view table.
`
`Understanding ‘implied’ dollar-per-unit royalty rates can not only make comparisons betweenlicensees clearer, but
`also help to avoid a potentially dangerous cycle that can be describedasa ‘race to the bottom’, or a downward
`royalty spiral in which royalty rates are continuously driven downthrougha series of alternating negotiations
`
`

`

`Case 1:20-cv-00393-LO-TCB Document 1093-12 Filed 02/25/22 Page 6 of 6 PageID# 30044
`Case 1:20-cv-00393-LO-TCB Document 1093-12 Filed 02/25/22 Page 6 of 6 PagelD# 30044
`
`between FRANDlicensors andlicensees with significantly different ASPs. Manufacturers with a high ASP would
`likely prefer to structure a royalty on a dollar-per-unit basis established by licence agreements with lower-priced
`manufacturers that are actually calculated on a percentage of the sales price; while manufacturers with a low ASP
`would likely prefer to structure a royalty on a comparable percentage-of-revenuebasis established by a calculation
`of what a high ASPlicensee is paying. The problem is that if both high-ASP and low-ASPlicenseestypically
`interchangeably (and perhaps understandably) argue for a beneficial royalty structure based on their own needs, in
`only a few rounds of back-and-forth negotiations and executed licences, both dollar-per-unit and percentage-of-
`revenue rates would be driven down to de minimis rates. An example ofthis using Licensee A and Licensee B from
`the above exampleis set out in Figure 1.
`
`Asillustrated above, after only a few rounds of negotiating and re-negotiating running royalty rate agreements with
`Licensees A and B basedonalternating complaints of discrimination, the FRANDlicensor could be facing almost
`no royalty payment.If left unchecked, this cycle could upset the existing balance between economicreturnsto
`innovators and manufacturers inherent in the standards-setting innovation ecosystem, driving FRANDroyalty rates
`to negligible levels. Judge Holderman highlighted this potential problem in Jn re Innovatio, finding that “it is
`implausible that in the real world, patent holders would accept effectively nothing to license their technology” and
`further noting that “such a low return would discourage future innovators from investing in new technology and
`from contributing their technology to future standards”. Considering the actual dollar-per-unit based royalty rates
`paid by licensees protects SEP licence holders from de minimis returns while providingall potential licensees with a
`fair and reasonable royalty rate structure, regardless of manufacturers’ pricing strategies, premium-priced handsets
`and other non-SEPpatented technologies.
`
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`Conclusion
`
`Royalty rates — whether structured as dollar per unit, percentage of sales or lump sums — cannot be used for
`comparative purposes in a vacuum.It is imperative, however, that the central focus of successful FRAND licence
`negotiations incorporate returns for SEP owners to maintain an economicincentive to continue to innovate while
`allowing new market entrants access to SEPs needed to produce products that comply with industry standards and
`allow a competitive return.
`
`David Kennedy, Larry Tedesco
`
`This articlefirst appeared in IAM. Forfurther information please visit www.iam-media.com.
`
`