SEP Royalty Rate Calculation on the Basis of the Present Value Added (PVA): A Model and its Application in the German Legal Order

The most common method for standard essential patent (SEP) valuation and to determine a fair, reasonable and non-discriminative (FRAND) royalty rate is based on comparable license agreements. This method is relatively simple to apply, but has several disadvantages. Firstly, license agreements are often not comparable on important points. Secondly, they are usually based on a selection by the submitting party, who has an interest to select only favorable license agreements for comparison. And thirdly, those selected agreements might not result from a fair negotiation, because of possible market power by either of the two sides. In this paper, we therefore suggest how the present value added (PVA) methodology can be used to calculate the FRAND value of specific SEP technologies, avoiding biases that are intrinsically linked to the comparable licensing approach. The PVA approach can also serve as valuation methodology for the whole standard in the context of the Top-Down approach. To illustrate the approach, we present a simple interperiodical valuation model. To derive a FRAND royalty rate, we then suggest how the PVA created can be apportioned between the SEP holders and the implementer. The second contribution of this paper is therefore the normative discussion of the apportionment of the PVA. Finally, we show how the PVA methodology can be practically applied by running a hypothetical example of a full FRAND royalty estimation. The German legal framework has been chosen, since it is the European jurisdiction where an increasingly large number of legal disputes related to SEPs are adjudicated.