JGoren--Many thanks for providing these convenient links to the patent exhaustion case. On reading the arguments pro and con, I still hold to my earlier, non-lawyer view that the problem can be solved by pro-rating royalty payments in a manner similar to a value added tax. Let me explain, and I welcome any comments either to the effect that my view is wacko or makes at least some sense.
Let's assume a company like QCOM licenses its patents to, say, Samsung. The licensee makes a chip based on QCOM patents and includes the chip in a variety of handsets, which it sells and pays a royalty to QCOM based on, say, 4 percent of the selling price. Then suppose Samsung sells the chip alone to another phone maker, such as Motorola, which then sells its own handset containing the Samsung chip, made under license with QCOM.
In this scenario, if my sense of equity has any legal weight, Samsung pays QCOM a royalty based on the selling price of its chip to Motorola. Motorola then pays QCOM a royalty based on the DIFFERENCE between the value of the chip alone and the value of the handset containing the chip. That is, Motorola, in my scenario, would pay royalties only on the value added to the originally licensed chip.
This is similar to the value added tax, commonly used in many European countries. The end result for the patent holder is that the patent holder receives a royalty based on the selling price of the final product, minus any payments collected during intermediate steps of manufacture.
Such a value added formula for collecting royalties would be justified under the respondent arguments, and in particular, those advanced by QUALCOMM. That is, there should be no rationale for the view that the patent is exhausted once it has been included in a product sold by the licensee, thereby freeing any other producer from having to pay royalties when that licensed product is sold subsequently.
On the other hand, paying the full royalty on the selling price at all stages of manufacture (1) discriminates against smaller players, who often do not have a role in the final product, and (2) results in multiple royalty payments per unit that might be well above the agreed upon rate of, say 4 percent.
To sum up, under the scenario I believe is fair, the patent holder gets a royalty on the full value of whatever product is sold containing that patent. The amount of the royalty accumulates as the product in question goes through the production and sales process, but no more than 4 percent of the final value is paid to the patent holder. The accounting of the royalties is as simple and uncomplicated as in the payment of the value added tax: You substract what has already been paid from what you owe.
Again, this scenario works only if the court views the patent as not exhausted after the initial sale of a product containing that patent – precisely the argument made by QCOM in its amicus brief on behalf of respondent LG.
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