Publication

The Smallest Salable Patent-Practicing Unit (SSPPU): Theory and Evidence

9/6/2016

Jonathan Putnam and Tim Williams’ paper is the first to offer theoretical and empirical evidence for showing that the adoption of the SSPPU rule as a royalty base conflicts with fundamental economic principles and industry practices. Using economic theory, the authors establish that “the SSPPU rule cannot accurately measure an invention’s economic footprint, because it cannot capture the incremental value added by the invention.” Furthermore, the analysis of a representative sample of a large SEP portfolio leads to the conclusion that the final product is the economically appropriate unit for measuring royalties, as the majority of the patents recite multiple components within devices as well as network/infrastructure.

 

Jonathan Putnam and his co-author Tim Williams’ paper “The Smallest Salable Patent-Practicing Unit (SSPPU): Theory and Evidence” establishes how poorly patent law measures the value of litigated patents. Using economic theory and empirical evidence, they show that the economic contribution of patented technology is better measured by the output, such as the final product, rather than the smallest input, or component that embodies the invention.

The paper begins by surveying how the courts have arrived at the current method for determining patent damages, the so-called SSPPU rule. In a nutshell, patent damages are computed by determining a royalty rate and multiplying it by a royalty base. As the name suggests, this rule requires that the base be the value of the smallest salable patent-practicing unit rather than the value of the final product.

By modelling the production function -- the most fundamental economic concept for modeling the process by which a firm transforms inputs into output – Jonathan Putnam and Tim Williams show why the SSPPU rule stands in contrast with basic economic principles. Provided that different components of a product interact to generate the final product’s value, they conclude that properly determining the value added by an invention on a component requires looking at the incremental value added to the final product. In other words, the SSPPU rule cannot account for how the invention may improve the product of the whole beyond just the patent-practicing unit.

Jonathan Putnam and Tim Williams use the example of smartphone battery life to show why the SSPPU rule is not appropriate for the calculation of patent damages. The value of the invention is not just in the battery, but also in how the invention affects other important functions of the phone. The improved battery life may permit a larger screen or result in other changes in smartphone design. Hence, the value of the smartphone—i.e. the final product—is the only royalty base that captures all of the interacting effects that determine the value of the battery improvement invention.

Next, the two authors analyze a representative sample of a large SEP portfolio, revealing that device level licensing is a practical industry equilibrium. The findings indicate that the majority of the patents recite multiple components within devices as well as network/infrastructure. Specifically, 13.8% recite only mobile devices, 23.1% recite only service network/infrastructure, and 59% recite both mobile devices as well as network/infrastructure. This confirms in practice what they showed in theory, that the final product is the economically appropriate unit for measuring royalties.

In view of the above results, Jonathan Putnam and Tim Williams suggest that courts should use economic theory to determine the royalty bases proposed in litigation. For example, it would be useful to allow the patent owner to show the normal practice in the industry or which product in the supply chain captures the incremental value of the patented technology. Based on the authors’ theoretical as well as empirical results, this will typically be the final product.