Hedonic Prices and Patent Royalties

J. Gregory Sidak & Jeremy O. Skog

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A hedonic model explains a good’s price in terms of its characteristics. In this article, we use hedonic prices to estimate the permissible range for a reasonable royalty for a standard-essential patent (SEP) subject to its owner’s commitment to offer to license the patent on reasonable and nondiscriminatory (RAND) terms. Our methodology is equally applicable to the calculation of fair, reasonable, and nondiscriminatory (FRAND) royalties for SEPs. Hedonic price analysis provides a scientifically rigorous means to satisfy the Federal Circuit’s directive in Ericsson v. D-Link to disaggregate the value of having a standard of any sort from the incremental value of the chosen standard, and then to disaggregate further the incremental contribution that a given SEP or portfolio of SEPs makes to the overall value of the technologies that allow the chosen standard to operate. The common additive form of the hedonic regression model is the most appropriate econometric model to meet that directive. When implemented in an appropriate and thoughtful way, hedonic price analysis provides an expert economic witness—and, ultimately, the finder of fact—with a reliable methodology to determine whether a given license offer satisfies the reasonableness requirement of a RAND or FRAND commitment. If asked or required to set a specific RAND or FRAND rate for a specific portfolio of SEPs, a court or arbitral panel could take our analysis one step further, by determining where within the RAND or FRAND bargaining range a bilaterally negotiated royalty between the parties would most likely fall. Hedonic price estimation can also inform the calculation of a reasonable royalty in conventional patent litigation that does not involve standard-essential patents. Consequently, the use of hedonic price estimation is a conceptual breakthrough in the calculation of reasonable royalties for patent infringement, both for SEPs subject to a RAND or FRAND commitment and for patents that are not declared essential to any standard.

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J. Gregory Sidak & Jeremy O. Skog, Hedonic Prices and Patent Royalties, 2 Criterion J. on Innovation 601 (2017).

J. Gregory Sidak is the chairman of Criterion Economics. He testifies as an expert economic witness in complex business disputes throughout the Americas, Europe, Asia, and the Pacific, and he has twice served as Judge Richard Posner’s court-appointed neutral economic expert on patent damages. Sidak held the Ronald Coase Professorship of Law and Economics at Tilburg University in The Netherlands and the F.K. Weyerhaeuser Fellowship in Law and Economics at the American Enterprise Institute for Public Policy Research. He has also been a senior lecturer at the Yale School of Management and a visiting professor at Georgetown University Law Center. Sidak received A.B. and A.M. degrees in economics and a J.D. from Stanford University. He was Judge Posner’s first law clerk, served on the senior staff of the Council of Economic Advisers in the Executive Office of the President, and was deputy general counsel of the Federal Communications Commission. Sidak has published six books and roughly 200 articles or book chapters. The Supreme Court of the United States, the Supreme Court of Canada, the European Commission, state supreme courts, the U.S. Courts of Appeals, and many other courts and regulatory bodies have cited his writings approvingly.

Jeremy Skog is a Vice President at Criterion Economics. He received his Ph.D. in economics from the Wharton School at the University of Pennsylvania. He also holds an A.B. from Dartmouth College with a double major in physics and economics and an M.A. in economics from Tufts University. He previously worked at the United States Census Bureau as a subject matter expert in assets and retirement saving where he worked with a variety of survey and administrative data, as well as redesigning the pensions and retirement expectations section of the Social Security Administration Supplement to the Survey of Income and Program Participation.