How Courts Calculate Fair Royalty Rates For Essential Patents

When your company implements a technical standard that incorporates someone else’s patented technology, you’ll eventually need to figure out what’s fair to pay. And honestly, it’s not as simple as it sounds.

Courts have to walk this tightrope. They need to compensate patent holders for their innovations while making sure licensing fees don’t get so expensive that nobody can afford to use the technology. If you’re holding standard essential patents or licensing them for your products, you need to understand how judges actually arrive at these numbers.

The Foundation: Georgia-Pacific Factors

Most courts start with something called the Georgia-Pacific framework. It’s fifteen factors that were originally developed for regular patent cases back in the 1970s.

Not every factor makes sense for standard essential patents, but judges still pull from this list:

• How important is the patent to the standard, and were there alternatives?
• What are other people paying for similar patents?
• Do the parties have any existing business relationship?
• Has the patent holder been consistent with their licensing practices?
• How much patent term is left, and how profitable is this technology anyway?

An SEP lawyer will tell you that you can’t just apply these factors straight across. Standard essential patents are different because the technology became essential through the standards process itself, not just because it was technically superior.

The Hypothetical Negotiation Approach

Courts will often construct what they call a “hypothetical negotiation.” It’s basically a legal fiction. They imagine what you and the patent holder would’ve agreed to pay before the standard was actually adopted.

Timing matters here. A lot.

Once a standard gets widely implemented, the patent holder suddenly has way more leverage than they did before. You can’t exactly rip out all your infrastructure and start over with something else. The hypothetical negotiation is designed to figure out what the value was before the patent holder had you over a barrel.

Judges try to put themselves back in time. What did the parties know then? Were there other technologies that could’ve worked? Was it even clear that this standard would take off?

FRAND Commitments Change Everything

When patent holders make FRAND commitments to standards development organizations, they’re promising to license on fair, reasonable, and non-discriminatory terms. But what does that actually mean in dollar amounts? That’s what courts have to figure out.

These commitments exist specifically to prevent patent holders from charging whatever they want after everyone’s already invested in the standard. Courts look at whether the proposed rates actually align with FRAND by examining:

• What similarly situated companies are paying
• What incremental value does this specific patent add
• What’s normal in the industry for this type of technology

At COFFYLAW, we spend a lot of time analyzing FRAND commitments because they’re rarely black and white. There’s always interpretation involved.

The Smallest Saleable Patent-Practicing Unit

This one sounds technical, but it’s actually pretty straightforward. Courts increasingly calculate royalties based on the smallest component that actually uses the patent, not the price of your entire product.

Think about a smartphone. It might have hundreds of patented technologies inside. If we calculated royalties based on the $1,000 retail price for every single patent, the math stops working pretty quickly. Instead, courts focus on the specific chip or component that practices the patented standard.

This prevents what we call royalty stacking. That’s when every patent holder wants their cut based on the full product price, and suddenly, you’re looking at paying out more than the product is even worth.

Comparable License Agreements As Benchmarks

Judges love looking at actual license agreements. Real-world transactions between real parties show what the market actually values this technology at.

But they’ll scrutinize these agreements. Did this deal actually reflect FRAND terms, or did someone agree to it because they were already being sued? Was there some other business relationship that affected the price? Not every comparable license is actually comparable.

An SEP lawyer will gather these licenses strategically. We’ll highlight the ones that support your position and explain why the unfavorable ones don’t really apply to your situation.

Technical And Economic Expert Testimony

Courts rarely figure out royalty rates on their own. They bring in experts because frankly, they have to. This stuff is specialized.

You’ll typically see two types. Technical experts explain what the patent actually contributes to the standard and whether there were viable alternatives. Economic experts run the numbers, analyze market data, and give their opinion on what constitutes a reasonable royalty range based on how the industry actually operates.

Your experts can make or break your case. I’ve seen strong patent positions fall apart because of weak expert testimony, and I’ve seen questionable claims succeed because someone brought in really credible experts who explained things clearly.

Moving Forward With Your SEP Matters

Calculating fair royalty rates for standard essential patents requires legal knowledge, economic analysis, and technical understanding. Courts are still refining how they handle these cases as new standards develop and disputes evolve.

Whether you’re trying to negotiate licenses or you’re already facing litigation over royalty terms, you need someone who understands both the law and the business realities. We work with clients to protect their interests and find outcomes that actually make sense for their business, not just in theory but in practice. If you’re dealing with standard essential patent issues, let’s talk about what’s happening in your situation and how we can help you move forward.