The document examines the valuation of standard essential patents (SEPs) in light of the Microsoft v. Motorola court decision, which challenges the idea that being a standard essential patent inherently adds to its sales price. The court emphasizes that the determination of a reasonable and non-discriminatory (RAND) royalty must account for the risks of 'patent hold-up' and royalty stacking. Ultimately, the case suggests that both buyers and sellers need to reconsider the value attributed to SEPs beyond their status as essential patents.

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VALUATION OF STANDARD ESSENTIAL PATENTS:
POST MICROSOFT v. MOTOROLA
By Michael A. Shimokaji
The sales price of a patent can be determined on the royalty that a third party
license could bring. Sellers and buyers of standard essential patents have
typically thought that such patents must or should necessarily carry a
significant premium in sales price. In other words, the mere fact of the
patent being standard essential created a significant premium on the sales
price.
The recent decision in Microsoft v. Motorola from the Washington district
court may have changed how parties view the value of standard essential
patents. The breach of contract lawsuit arose from Microsoft’s claims that
Motorola failed to license standard essential patents to Microsoft at a
reasonable and non-discriminatory ("RAND") rate.
The court explained that a patent is “‘essential’ to a standard if use of the
standard requires infringement of the patent, even if acceptable alternatives
of that patent could have been written into the standard.” A patent is also
essential “if the patent only reads onto an optional portion of the standard.”
As it further explained, the “purpose of the RAND commitment is to
encourage widespread adoption of the standard. When the standard becomes
widely used, the holders of SEPs obtain substantial leverage to demand more
than the value of their specific patented technology.” The court also
explained that the “ability of a holder of an SEP [standard essential patent]
to demand more than the value of its patented technology and to attempt to
capture the value of the standard itself is referred to as patent "hold-up."
Thus, according to the court, a “proper methodology used to determine a
RAND royalty should therefore recognize and seek to mitigate the risk of
patent hold-up that RAND commitments are intended to avoid. . . . A proper
methodology for determining a RAND royalty should address the risk of
royalty stacking by considering the aggregate royalties that would apply if
other SEP holders made royalty demands of the implementer.”

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To court used the well-known Georgia-Pacific factors (to determine patent
infringement damages) to determine a RAND rate, but modified to address
peculiarities of a standard essential patent setting. These factors include:
 the royalty received by the patentee for the licensing of the
patent in other RAND licensing circumstances.
 the licensor’s commitment to license on RAND terms and that
it may no longer maintain a monopoly by not licensing to
others.
 the licensor may not discriminate against its competitors in
terms of licensing agreements and is obligated to license all
implementers on reasonable terms.
 the contribution of the patent to the technical capabilities of the
standard and to the licensee's products but not the value to the
licensee created by the existence of the standard itself.
As to the last mentioned factor above, the court stated:
“[A] patent that is extremely important and central to the standard
would reasonably command a higher royalty rate than a less important
patent. Importantly, however, because an ‘essential’ patent is one that is
necessary to implement either an optional or mandatory provision of a
standard, a specific SEP may contribute greatly to an optional portion of a
given standard, but if that portion is not used by the implementer, the
specific SEP may have little value to the implementer. . . . Rewarding the
SEP owner with any of the value of the standard itself would constitute hold-
up value and be contrary to the purpose behind the RAND commitment.”
CONCLUSION
What the Microsoft court made clear is that a RAND rate should not
be based simply on the fact that the patent at issue is standard essential.
Given that limitation, buyers and sellers of a patent should consider whether
it can reasonably increase a sales price by the mere fact that the patent is
standard essential. This is particularly so, if the sales price is being
calculated based on an expected RAND royalty rate.

3. MICHAEL A. SHIMOKAJI
Mr. Shimokaji is a shareholder in the law firm of Shimokaji & Associates,
P.C., located in Irvine, California. The firm is engaged in intellectual property
litigation and the procurement of patent rights domestically and abroad.
For more than 25 years, Mr. Shimokaji has supported clients in industries as
diverse as aerospace, apparel, chemicals, computer software, household
products, medical devices, photo imaging, and semiconductors. His expertise
includes infringement litigation, patent and trademark portfolio development,
and intellectual property monetization. He has lectured for local and national
organizations in the US, as well as abroad, on various intellectual property
topics.
He has been a member of the Steering Committee for the California Minority
Counsel Program. He was a founding director of the Orange County
Japanese-American Lawyers Association and has served as an instructor in
the paralegal program at the University of California, Irvine. Mr. Shimokaji is a
past president of the Orange Coast Optimist Club which is part of an
international organization that supports programs for children. He served for
three years on the Executive Committee for the California State Bar
Intellectual Property Section, and another three year term on the California
State Bar Federal Courts Committee. Mr. Shimokaji has been a member of
the editorial board for The Journal of the Association of University Technology
Managers. For the Pro Bono Civil Rights Panels of the US District Courts in
California, Mr. Shimokaji is a volunteer attorney. Mr. Shimokaji has been
formally trained at the Straus Institute for Dispute Resolution and is a
mediator for the Los Angeles County Superior Courts.
He is the author of articles that include “Inducement and Contributory
Infringement Theories to Regulate Pre-Patent Issuance Activity” 37 IDEA 571
(1997); “Type of Use Determines Whether Use of Web Content Will Be
Infringing” L.A. Daily Journal, August 22, 2002; and “Cease and Desist Letters
May Contain Some Hidden Perils” L.A. Daily Journal, February 27, 2003;
“Contingency Defense in Patent Lawsuits” L.A. Daily Journal, August 1, 2006;
“Putting Designs to the Test” L.A. Daily Journal, October 30, 2008; “Mind Over
Matter” Los Angeles Lawyer, April 2009.
Following graduation from the University of California, Irvine with a bachelor’s
degree in chemistry, Mr. Shimokaji received his Juris Doctorate degree from
Southwestern University School of Law. In law school, Mr. Shimokaji was an
executive editor for the school’s law review. He has served as a judicial
extern for the Honorable Robert M. Takasugi, Judge, United States District
Court. Mr. Shimokaji is admitted to the California Bar and the United States
Patent and Trademark Office.