Related to exhaustion, the “traditional” interpretation used by patent holders is that royalties are paid for by the end product – typically the handset manufacturer “at the factory gate”. This leads to the basis for royalty been the entire product, or Average Selling Price (ASP) for portfolios.
The arguments supporting this approach include:
- It is a defined product with maximum ASP
- The end product represents a single identifiable point of collection
- Such an approach allows for the inclusion of IPR that may be contained in software that would otherwise be given away with the baseband chip
The Entire Market Value (EMV) which considers the total value of the entire product historically worked for comms products that were “pure” implementations of the standards – 2G and early 3G handsets. Since the introduction of smartphones this model has been challenged. Critics point to the fact that cellular products are (no longer) only an implementation of cellular standards but include significant costs (BoM) in screens, batteries and cameras that are valued by consumers but not driven by connectivity standards.
Recent arguments have been proposed that use the Smallest Saleable Patent Practicing Entity (SSPPU) as the point in the supply chain where royalties should be calculated.
The Smallest Saleable Patent Practicing Unit (SSPPU) is a theory for determining damages (and hence is proposed for royalty rates) that argues the damages should be based on the smallest unit – module, unit or component – that practices the patented technology.
Critics of SSPPU would argue that the large screens and cameras alone would not be sufficient to attract consumers to devices and it is the enabling of mobile internet that is the key features of smart phones – in contrast to MP3 players that shared the screen, camera and battery components but lack the connectivity and are generally considered a dead product.
IEEE has adopted SSPPU in its IPR Policy – which has caused considerable upset with some parties such as Qualcomm.
A middle ground of a basket of components sufficient to practice the standard has been proposed, but has (to our knowledge) not yet been tested in court.
SSPPU is effectively based on capability rather than use. A baseband chip alone cannot practice any patents, but it is capable of doing so when integrated into a wider system. The baseband chip is likely to include a superset of features, a subset of which are used in any one end device.