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SERA Smiles on Users, Frowns on Innovators

A fiendish scheme to advantage implementers over innovators is floating on K Street. The “Standard Essential Royalty Act” would give a facade of fairness and an illusion of impeccability to standard-essential patent royalty-setting.

SERA proposes a novel way of determining the royalty rates implementers pay inventors for use of their high-value SEPs. The gist of SERA is creation of a Standards Royalty Court. This court would be “the exclusive means for determining a royalty rate for” SEPs (subsection 336(a)).

That is, the Standards Royalty Court would be a compulsory licensing regime in the federal judiciary.

If you’re in the business of inventing cutting-edge technologies and participating in standards-development bodies—both activities requiring healthy investments of financial and human resources—then SERA compels you into a deal you cannot refuse. Your only option, if you want to get paid by those whose products need your standard-essential patented invention, is the SERA court.

You’d be compelled to accept the court-dictated royalty rate, no matter how much it undervalues your SEP below what market-based negotiations would value your invention.

SERA contains a couple of other gifts to denizens of the Infringers Lobby. The court would set an overall “reasonable royalty rate or rates” of a standard (subsection 334(b)(1)), then decide the proportion of that capped rate assigned to each SEP owner (subsection 334(b)(2)).

And within three years, the court would repeat the exercise and “adjust”—i.e., reduce—the initially determined royalty rates and allocations (section 335).

SERA falls far short of fair and is so peccable because it’s built on the same foundation of sand as the Infringers Lobby’s bogeyman the “patent troll,” its mythological “patent hold-up” and hypothetical royalty stacking.

Implementers and their minions have long touted evidence-free aspersions toward SEP innovators’ royalties and licensing practices. Analysts have subjected those fictitious claims to scrutiny.

“Vested interests . . . promote the notion that patent licensing fee rates are ‘perceived’ to be too high in mobile technologies; but without substantiation for such claims. Speculation that patent fees, largely for mobile SEPs, may total 30 percent of smartphone costs[, a] . . . grossly inflated figure[,] is based on theories of hold-up and royalty stacking that lack empirical support and it ignores marketplace realities including cross licensing and discounting rates for other reasons in patent-licensing agreement negotiations . . . .”

This expert observed that “aggregating figures in this way is seemingly precise but misleading and defective because it produces severely and nonsensically inflated totals that do not reflect the major factors which substantially reduce rates actually paid, if paid at all. . . .

“On the basis of economic and accounting principles, it is only net royalty payments actually paid, after cross licensing and other reductions, which should be included in cumulative royalty totals. [This more accurate approach shows] a cumulative royalty yield for licensors of around five percent on mobile handset revenues.” This out of $410 billion in 2014 total cellphone revenues.

In another published report, this expert noted how implementer “interested parties who would like to reduce their licensing costs advocate taking away much of the freedom that parties have to bilaterally negotiate the value of IP and applicable royalties.” This is precisely SERA’s goal.

He added, “Patent licensing agreement negotiations with terms determined bilaterally in a free market have provided widespread access to patented technology for manufacturers while fostering large and increasing R&D investments. Intervention to change the basis for charging royalties with the overt objective of reducing them will be a disincentive to ongoing investment, risk-taking, and SSO participation by technology developers (emphasis added).” Again, such interruption of private negotiation within SDO-contractual terms is SERA’s aim.

Granted, innovators involved in SDOs voluntarily yield some of full free-market dealings with potential patent licensees. They commit up front to license their SEPs on fair, reasonable and nondiscriminatory terms. But that’s not a pledge to license SEPs to all comers.

As the Ninth Circuit ruled in overturning the district court’s opinion if FTC v. Qualcomm, a FRAND commitment doesn’t create a duty to deal, a requirement to license one’s SEPs to any and all competitors. Nor is FRAND a promise to bargain-basement pricing of high-value patents.

Innovators’ competitors are trying yet again to saddle innovators, who took the greatest risks and are most directly responsible for creating foundational technology, to a raw deal. That’s exactly what SERA is and would guarantee.

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