The Value of a Standard Versus the Value of Standardization

68 Baylor Law Review 59 (2016).

The Federal Circuit said in Ericsson, Inc. v. D-Link Systems, Inc. that a jury instructed to determine a fair, reasonable, and nondiscriminatory (FRAND) royalty for standard-essential patents (SEPs) “must be told to consider the difference between the added value of the technological invention and the added value of that invention’s standardization.” The court emphasized that a FRAND royalty “must be premised on the value of the patented feature, not any value added by the standard’s adoption of the patented technology.” The Federal Circuit reasoned that “those steps are necessary to ensure that the royalty award is based on the incremental value that the patented invention adds to the product” and is not based on any value that the standardization of that technology adds to the product. 

The Federal Circuit’s phrase “the value of standardization” is abstract and ambiguous. Restated in more direct and more intuitive terms, the phrase appears to denote the value from making a collective decision to conform to a standard—that is, the value that arises when inventors and potential implementers agree that they will comply with a standard to solve a particular technological challenge. That agreement to create a standard does not imply that a feasible technology already exists to become the standard, nor does it indicate that the required technology (if it does not yet exist) will be straightforward to develop. The standard-setting organization (SSO) cannot simply hypothesize that an available and acceptable technology exists for the standard because the SSO would like to have a standard. 

Consequently, in patent litigation after Ericsson v. D-Link it is essential to disaggregate “the value of standardization” from the value of the technologies incorporated into the standard. “The value of standardization”—that is, the value of the agreement to implement a unified standard—can arise from (1) a reduction in transactions costs for implementers of the standard and for SEP holders and (2) the network effects generated by interoperability between standard-compliant products. The value of the technologies incorporated into the standard comprises the rest of the total value of the standard.

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