The Return of the Top-Down Approach: Judicial Estimates and the Economic Reality of SEPs
A Critical Review of LG München I, Case No. 7 O 5007/25
The landscape of Standard Essential Patent (SEP) litigation in Germany is currently witnessing a significant shift in how courts approach the elusive "FRAND" (Fair, Reasonable, and Non-Discriminatory) rate. The recent judgment by Munich I Regional Court (Landgericht München I), Case No. 7 O 5007/25, serves as a landmark opening for our new blog series ("The New Munich FRAND Standard: Decoding the New Era of SEP Litigation") on recent German patent case law related to FRAND.
In its decision in the dispute between the South Korean R&D firm Wilus and the Taiwanese hardware giant ASUS, the court confirmed the infringement of EP 3 512 289 regarding the Wi-Fi 6 standard and dismissed the FRAND defence due to a lack of "licensing willingness" on the part of the defendant. In this first instalment in our blog series, we examine what is probably the most significant aspect for practitioners: the court’s detailed "control calculation" of a FRAND rate via a top-down approach.
The Renaissance of the Top-Down Analysis
For years, the industry has been debating whether FRAND rates should be determined primarily through "comparable licences" or a "top-down" approach. In this ruling, the Munich court positioned the top-down analysis as a vital check. This method starts by determining the appropriate aggregate royalty burden (ARB) for an entire standard (or group of standards) and then allocates a portion to the specific patent holder based on their share of the standard. This embracing of the top-down method is a welcome development for legal predictability, providing a structured framework that can prevent "royalty stacking". However, the specific figures used by the court in this particular case raise fundamental economic questions.
The 10–18% Burden and the "Generic ASP" Paradox
In its analysis, the court referenced an Aggregate Royalty Burden for mobile communications (including 4G/5G) of approximately 4% to 8%. When adding other essential standards such as Wi-Fi and streaming, the court estimated the total burden for a connected device to be between 10% and 18% of the sales price.
A crucial element of the court's reasoning is the application of these percentages to a generic Average Selling Price (ASP) for a product of "middle kind and quality". The court argued that high-end price differences are often driven by brand value, high-quality cameras, or functional software rather than standard functionality. To avoid taxing these non-standard features, the court used generic average prices (e.g. USD 150–200 for mobile phones and USD 500–550 for laptops).
While this provides a sensible limit for premium providers, it creates a dangerous "floor" for providers in the low-to-mid price sector. For companies whose actual ASP is near or below these "average" figures, the burden remains unmitigated and becomes a significant fixed cost that eats into thin margins.
Royalties vs. Profitability: The Margin Squeeze
To understand the impact of an 18% total royalty burden, it has to be compared to the Gross Profit Margin. The Gross Profit Margin is the percentage of revenue exceeding the direct manufacturing costs (Cost of Goods Sold). Gross margin must cover all other expenses, including R&D, marketing, and administration, before reaching net profit.
Current public market data for major players highlights a stark contrast between judicial estimates and industrial reality:
The cost of goods sold (COGS) considered for calculating these gross profit margins may include also running licensing fees, however, if a total royalty burden of 10% to 18% is considered "FRAND," and added up, manufacturers like Lenovo, ASUS, or TCL would have to hand over nearly their entire gross profit to patent holders. This leaves zero room for the manufacturer’s own R&D or operational costs. For companies in the low-margin hardware sector, such a judicial ARB is not just a burden; it threatens their very existence.
A New Basis: The ROI Model and SEPs as Market Entry Barriers
This brings us to a fundamental question: Is the end-device price the correct basis for SEPs? In other regulated sectors with monopoly structures, such as energy or telecommunications infrastructure, the focus is often on a Return on Investment (ROI) model. Rather than allowing SEP holders to participate in the "brand value" or "camera quality" of a device, perhaps the law should limit compensation to a reasonable return on the actual R&D costs incurred to generate the standard and related SEP.
SEPs indeed function as "essential facilities." Because compliance with a standard is mandatory for market participation, the licensing terms act as a structural toll. An ROI-based model would transform SEPs from an uncapped revenue share into a predictable fee for market access. Just as a power company is allowed a capped profit margin on the capital invested in its grid, SEP holders would be compensated based on a fair return on their R&D expenditure rather than on a percentage of the manufacturer’s sales. This would decouple standard functionality from premium features and lower the tollgate effect for new market entrants.
SEP Proliferation: Quality vs. Quantity
In this context, we must address the explosion of SEP declarations. Older standards, such as 2G (GSM), featured far fewer patents while still being state-of-the-art at their inception. Today, standards allegedly involve over 10,000 or even 100,000 patent families. Does this truly reflect a tenfold increase in value? The current "arms race" incentivises companies to declare thousands of patents to secure a higher percentage in "top-down" allocations, regardless of technological improvement.
The rivalry between HEVC (H.265) and VP9 is illustrative. Both offer approximately the same coding results (at least from a consumer perspective), yet VP9 was developed as a royalty-free, probably not completely SEP-free, alternative. This suggests that massive patent proliferation is not a prerequisite for state-of-the-art technological performance, and the "essentiality inflation" may be more of a licensing strategy than an engineering necessity.
Conclusion and Outlook
The Munich judgment in Wilus v ASUS provides a fascinating roadmap for future FRAND determinations. While the court’s move toward top-down transparency is laudable, the resulting percentage estimates risk disconnecting judicial reality from the economic margins of the hardware industry.
This post marks the beginning of our new series analysing the latest developments in German patent law. In our next instalment, we will contrast these findings with the upcoming analysis of the Nokia v Asus proceedings. Stay tuned.
