The Matcha Latte Court's Guidelines – No Established, Reliable Economic Underpinnings
Earlier this year, Judge Schoen (in)famously stated publicly that the 7th Civil Chamber of the Munich Court was unable to make FRAND determinations. He said: “we think it is not possible to determine a FRAND rate” (see We are Incapable of Making FRAND Determinations Say More UPC and German Judges). Despite admitting to being unable to make a FRAND determination in any particular case, the Schoen Court recently released SEP guidelines (“guidelines”) that make far reaching decisions about the reasonableness of FRAND rates across multiple standards.
In issuing the guidelines, the Schoen Court did not take input from any economic experts (see Schoen Court's “Guidelines” Get A Chutzpah Award - No Process, No Transparency that discusses the broken process used by the Schoen Court in coming up with its guidelines). Nor did the Schoen Court apply credible, reliable economic principles. Instead, the Schoen Court justified its astronomically high rates based on the price of a Starbucks matcha latte.[1]
Currently, an Iced Matcha Latte at Starbucks in Munich costs 6.90 euros. In other words, the use of mobile communication technology costs less than two cold drinks, and it is difficult to view this as unreasonably high.
This quote, in and of itself, shows how the Matcha Latte Court’s musings on valuation, despite taking up multiple pages of the guidelines, are lacking in any reliable economic underpinnings.
No technology company in its right mind would decide whether or not to develop technology based on the price of a Starbucks matcha latte. No technology company in their right mind would decide whether to use or invest in technology based on the price of a Starbucks matcha latte.
Nor would any rational economic expert value mobile telecommunications technology based on the price of a Starbucks matcha latte. In fact, in any reasonable court, an economic expert that relied upon the price of a Starbucks matcha latte to justify their FRAND valuation would be excluded for failing to base their opinion on established, reliable economic principles.
I never thought I would have to say this because it seems so obvious: the price of a Starbucks matcha latte has nothing to do with the value of mobile telecommunications technology. I will repeat it because I am still flabbergasted by the Match Latte Court’s complete lack of understanding of technology valuation and how to do actual FRAND determinations: the price of a Starbucks matcha latte has nothing to do with the value of mobile telecommunications technology.
It is apparent that the Matcha Latte court does not understand (or care about) actual FRAND determinations that are based on legitimate, accepted economic principles. There is no discussion in the guidelines of the implementer's return on investment (ROI).[2] There is no discussion in the guidelines of generally accepted accounting principles (GAAP). There is no discussion about how to determine how much of the price of an end product is contributed by the standardized technology and how much by non-standardized technology developed by the implementer and its suppliers. There is no discussion about the smallest saleable patent practicing unit and valuations based on the price of that unit (which after all is an arms length negotiation that establishes value in the real world). There is very little recognition that the end product price is not the amount the implementer makes on the end product: there is a single discussion about margin in which the margin is assumed (see parag. 223) but no real application is made of this assumed margin to valuation.
Although the Match Latte Court ignores these baseline economic principles, these principles are the very things on which every technology company bases its technology investment decisions and valuations.
With these guidelines, Judge Schoen and the Matcha Latte Court have indeed demonstrated that they are unable (and unwilling) to make true FRAND determinations using generally accepted economic principles. Instead, the Schoen Court resorted to the Matcha Latte index which is not a generally accepted economic principle for valuing technology. This is one of the reasons why the Matcha Latte Court, and its guidelines, deserve a Razzie/Chutzpah award.
[1] I am using a machine translation of the German original for this series.
[2] There is a great deal of high level discussion about the SEP holder's investment, but no real analysis of the return on the SEP holder's investment in standard development either.
