Abstract: The Federal Circuit’s decision in the Ericsson v. D-Link, et al. patent infringement matter provides a basis for the use of apportionment in combination with the assessment of comparable license agreements for determining RAND royalties for standard essential patents. In this case, Ericsson’s damages expert John Bone of Stout determined a RAND royalty rate primarily relying on apportionments of royalty rates found in Ericsson license agreements that included the patents-in-suit as part of a larger portfolio of patents that were licensed. In addition, the Federal Circuit upheld Mr. Bone’s contention that royalty stacking was only a theoretical issue in this case as there was little evidence that the Defendants actually had any licensing burden for other standard essential patents. This article provides a summary of these and other important damages issues addressed by the district court and the Federal Circuit in this case.
In September of 2010, Plaintiffs Ericsson Inc. and Telefonaktiebolaget LM Ericsson (collectively “Ericsson”) sued D-Link Systems, Inc., Netgear, Inc., Belkin International, Inc., Acer, Inc. and Acer America Corp., Gateway, Inc., Dell, Inc., and Toshiba, Inc. (collectively “Defendants”) for allegedly infringing U.S. patents 6,772,215, 6,330,435, 6,466,568, 6,424,625, and 6,519,223 (the “asserted patents”) in the Eastern District of Texas (Case No. 6:10-CV-473). Judge Leonard Davis presided over the case. Ericsson claimed that the asserted patents were standard essential to 802.11n standard (i.e., Wi-Fi). The 802.11n standard was created by the Institute of Electrical and Electronics Engineers (“IEEE”) standard setting organization. Specifically, the asserted patents relate to the Quality of Service and Block Acknowledgment features of the 802.11n standard. Intel Corp. (“Intel”) intervened in the case at a later date.
A jury trial was held in June of 2013, in which the Defendants were found to have infringed three of the five asserted patents. The jury awarded Ericsson $10.125 million in reasonable royalty damages, which was consistent with the opinions of Ericsson’s damages expert, Mr. John Bone of Stout. The Defendants filed several motions for judgments as a matter of law and motions for a new trial which were subsequently denied by Judge Davis. Judge Davis issued a Memorandum Opinion and Order (“Order”) on August 6, 2013 affirming the jury’s damage award and granting Ericsson a compulsory future royalty of $0.15 per unit on all products sold by the Defendants that infringed the three Ericsson patents.
In the Order, Judge Davis addressed five key issues raised by the Defendants:
The Defendants contended that damages were based on the application of the EMVR rather than relying on the smallest salable unit. Judge Davis ruled that Ericsson’s damages expert did not apply the EMRV. Instead, Mr. Bone applied a per-unit royalty rate to the market value of the asserted patents’ contributions to the end products, using two levels of apportionment. Related to the first level of apportionment, Mr. Bone limited his analysis to the revenue from the licensing of Ericsson’s 802.11 portfolio using comparable licenses, which “reduced the revenue pool to the value of Ericsson’s 802.11 contributions.” Related to the second level of apportionment, Mr. Bone apportioned the 802.11 licensing revenue to remove the value attributed to non-asserted patents, by reducing his rates “to account for the fact we’re only dealing with five patents in this case” rather than Ericsson’s entire 802.11 portfolio. Combined, the two steps of apportionment created a royalty base comprised only of “money paid by third party licensees for the value of solely the asserted patents’ contributions to the 802.11 standard.” Additionally, by using a per unit royalty rate, rather than a percentage of sales, the royalties would not fluctuate with the price of the end product, further illustrating that the royalty rate was not based on the entire value of the products. For these reasons, Judge Davis found that Mr. Bone’s methodology did not implicate the use of EMVR.
Next, the Defendants argued that the licenses Mr. Bone relied upon were not comparable agreements and did not consider Ericsson’s RAND obligations. As a result, Defendants argued they were inappropriate for determining a royalty rate for the asserted patents. Regarding this issue, the Defendants stated that:
Ericsson responded by arguing that Ericsson’s licensees – including Buffalo Technology, Hewlett Packard, and Research In Motion – were in the best position to determine the value of Ericsson’s 802.11n portfolio, and, therefore, those licenses were highly relevant. Mr. Bone testified that he apportioned each of the third party licenses that he relied upon, such that the concluded rate had been reduced to account for the differences in scope. Mr. Bone also testified that the prior licenses were all negotiated within the framework of Ericsson’s RAND obligations. Judge Davis concluded that the comparability of prior licenses was a matter for the jury to decide and there was no reason to re-open the jury’s factual determination, which did not explicitly reject the use of the comparable agreements used by Mr. Bone. He further concluded that Ericsson presented sufficient evidence that it had considered its RAND obligations when establishing a $0.50 reference royalty rate (i.e., the rate it used in negotiations with licensees) for its entire portfolio of WiFi patents. As Ericsson’s RAND obligations are public knowledge, Judge Davis stated that the previous licensees were sophisticated parties that were likely aware of these obligations during the negotiations and, therefore, there was no reason to conclude that Ericsson had not considered its RAND obligations.
The Defendants further argued that the jury’s verdict failed to account for royalty stacking. Ericsson put forth the argument that royalty stacking is actually a hypothetical issue as it related to the technology in question. Judge Davis agreed with Ericsson in his Order, stating that the Defendants’ royalty stacking argument is theoretical, and that the Defendants’ expert failed “to present evidence of an actual stack on the 802.11n essential products.” He further criticized the Defendants’ expert for failing to attempt to determine the actual amount of royalties the Defendants currently pay for 802.11n patents. In fact, the Defendants’ infringement expert admitted, “very little of the standard is patented.”
After the jury trial, the Defendants asked the Court to determine:
Judge Davis concluded that the jury had already determined a reasonable royalty considering Ericsson’s RAND obligations in its verdict and, therefore, there was no reason for the Court to alter the royalty rate. He further pointed out that the Defendants asked the Court to opine on an appropriate RAND royalty rate, but “wavered on whether they would agree to actually pay the RAND rate determined by the Court,” because the Defendants stated they would only be bound by a Court-determined RAND rate limited to the patents and products in the litigation. Judge Davis believed this was tantamount to accepting the jury’s verdict.
On the issue of Ericsson’s alleged breach of its RAND obligations by not granting a license to Intel, Judge Davis disagreed with the Defendants, asserting that Ericsson offered a license to Intel prior to trial. He further emphasized the terms of Ericsson’s letter of assurance to the IEEE, in which it assured that it would offer licenses at RAND rates, were restricted to fully compliant products, thus “isolating a particular level of the supply chain.” Other than Intel, the remaining Defendants were end product manufacturers and, therefore, Ericsson believed Intel was already indirectly receiving a license as a chip manufacturer for the end products. The Judge ruled that the IEEE does not have rules restricting RAND commitments to certain areas of the supply chain, so Ericsson was under no obligation to license its 802.11n technology to Intel. However, when Intel intervened in the litigation, Ericsson offered a license at the same rate as the other Defendants. Judge Davis held that the $0.50 RAND royalty rate was appropriate and complied with Ericsson’s RAND obligations. Judge Davis also held that, since there is no way to determine the exact number of standard-essential patents, Mr. Bone’s analysis based on prior comparable licenses was appropriate. Importantly, Judge Davis noted:
The paradox of RAND licensing is that it requires a patent holder to offer licenses on reasonable terms, but it offers no guidance over what is reasonable…A patent holder does not violate its RAND obligations by seeking a royalty greater than its potential licensee believes is reasonable. Similarly, a potential licensee does not violate its RAND obligations by refusing a royalty the patent holder believes is reasonable. Instead, both sides’ initial offers should be viewed as the starting point in negotiations. Even if a court or jury must ultimately determine an appropriate rate, merely seeking a higher royalty than a potential license believes is reasonable is not a RAND violation.
Ericsson requested an ongoing future royalty of $0.15 per unit for the three patents determined to be infringed by the Defendants, as well as pre-judgment and post-judgment interest, which Judge Davis granted, stating, “[t]he appropriate United States RAND rate is $0.15 per product for the three infringed patents.”
Following the district court’s decision, the Defendants appealed to the U.S. Court of Appeals for the Federal Circuit (“Federal Circuit”). On December 4, 2014, Federal Circuit published a decision on the case, vacating the jury’s damages award and remanding the case for further proceedings. The Federal Circuit’s decision was based upon its finding that
…the district court had committed legal error in its jury instructions by: (1) failing to instruct the jury adequately regarding Ericsson’s actual RAND commitment; (2) failing to instruct the jury that any royalty for the patented technology must be apportioned from the value of the standard as a whole; and (3) failing to instruct the jury that the RAND royalty rate must be based on the value of the invention, not any value added by the standardization of that invention—while instructing the jury consider irrelevant Georgia-Pacific factors.
In its decision, the Federal Circuit addressed several of the damages issues that had previously been considered by Judge Davis:
The Federal Circuit addressed the Defendants’ challenge to Mr. Bone’s expert testimony regarding his use of licenses in which royalties were set by reference to the value of an end product. In its analysis of this issue, the Federal Circuit reasserted a previous opinion of its own that:
Prior licenses…are almost never perfectly analogous to the infringement action…For example, allegedly comparable licenses may cover more patents than are at issue in the action, including cross-licensing terms, cover foreign intellectual property rights, or, as here, be calculated as some percentage of the value of a multi-component product. Testimony relying on licenses must account for such distinguishing facts when invoking them to value the patented invention…
The Federal Circuit further stated that potentially comparable licenses, despite differences from the specific facts of the instant case, are “relevant and reliable” where the damages testimony regarding those licenses takes into account the relevant apportionments to account for such differences. The Federal Circuit’s opinion reinforces that Mr. Bone’s use of apportionments to the royalty rates found in the comparable licenses he relied upon for his RAND royalty determination and damages analysis was consistent with how a damages expert should treat such comparable license data. The Federal Circuit went on to conclude that “…the mere fact that licenses predicated on the value of a multi-component product are referenced in that analysis…is not [a] reversible error.”
In its decision, the Federal Circuit upheld Judge Davis’ determination, and Ericsson’s/Mr. Bone’s opinions, regarding the issue of royalty stacking. The Federal Circuit specifically stated:
In deciding whether to instruct the jury on patent hold-up and royalty stacking, again, emphasize that the district court must consider the evidence on the record before it. The district court need not instruct the jury on hold-up or stacking unless the accused infringer presents actual evidence of hold-up or stacking.
…Certainly something more than a general argument that these phenomena are possibilities is necessary…In this case, we agree with the district court that D-Link failed to provide evidence of patent hold-up and royalty stacking sufficient to warrant a jury instruction
…The mere fact that thousands of patents are declared to be essential to a standard to a standard does not mean that a standard-compliant company will necessarily have to pay a royalty to each SEP holder.
In addition to the issues of (1) EMVR and apportionment in the context of potentially comparable royalty rates; and (2) royalty stacking, the Federal Circuit provided guidance and opinions on several other damages issues.
As it relates to the issue of EMVR, the Federal Circuit reiterated the principle that reasonable royalties in the form of a combination of a royalty base and royalty rate “…must reflect the value attributable to the infringing features of the product, and no more” and “[t]he essential requirement is that the ultimate reasonable royalty award must be based on the incremental value that the patented invention adds to the end product.” The Federal Circuit also indicated that while the EMVR of a multi-component end product may be an acceptable royalty base, there is a risk that such a base could mislead the jury and, therefore, typically the royalty base must be apportioned to “the smallest salable unit and, at times, even less.”
The issue of hold-up (or “lock-in”) in the context of determining RAND rates for SEPs relates to the idea that a SEP holder can potentially demand royalties higher than the incremental value of the patented technology after standard users are locked into using the standard in their products. In its decision in this case, the Federal Circuit stated: “the patentee’s royalty must be premised on the value of the patented feature, not any value added by the standard’s adoption of the patented technology…” in an effort to “…ensure that the royalty award is based on the incremental value that the patented invention adds to the product, not any value added by the standardization of that technology.” The Federal Circuit concluded that it agreed with the district court on the issue of hold-up noting that Defendants “…failed to provide evidence of patent hold-up and royalty stacking sufficient to warrant a jury instruction.” This perspective is consistent with Mr. Bone’s observation that there was no evidence in the record of this case that indicated the comparable license agreements on which his analysis relied were affected by hold-up.
As it relates to the use of the Georgia-Pacific factors for determining a royalty subject to a RAND commitment, the Federal Circuit stated “[i]n a case involving RAND-encumbered patents, many of the Georgia-Pacific factors simply are not relevant; many are even contrary to RAND principles.” However, the Federal Circuit went on to state that “…we do not hold that there is a modified version of the Georgia-Pacific factors that should be used for all RAND-encumbered patents” and “[t]here is no Georgia Pacific-like list of factors that district courts can parrot for every case involving RAND-encumbered patents.” Most relevant to this particular case, the Federal Circuit concluded that a jury must not be instructed “on any factors that are not relevant to the record developed at trial.”
In conclusion, the Ericsson, et al. v. D-Link, et al. case provides important guidance for SEP owners, their counsel, damages experts, and district courts regarding a variety of issues that affect damages for RAND-encumbered patents and the determination of a RAND royalty rate. Despite several challenges by Defendants to Mr. Bone’s damages testimony and his methodology for calculating a RAND royalty rate for the asserted patents, neither the district court, nor the Federal Circuit, expressly rejected any of Mr. Bone’s calculations, opinions, or conclusions. Importantly, Mr. Bone’s reliance on appropriately apportioned royalty rates from comparable agreements that included the licensing of the asserted patents may provide a blueprint for future RAND royalty determinations where such comparable agreements exist. In addition, Mr. Bone’s contention that royalty stacking was a theoretical issue in this case – without any actual evidence of royalty stacking existing – was accepted by the district court and Federal Circuit. This appears to be in stark contrast to methodologies relied up by other courts to determine RAND royalty rate for SEPs; methodologies that relied on an assumption that all SEPs in an particular standard deserved some share of an aggregate royalty rate, whether those SEPs were actually licensed or not.
The results of this case support the availability of innovative approaches for determining RAND royalty rates for SEPs. Ultimately, this case supports the idea that damages experts, while heeding precedent from past patent-related cases, have the ability to craft new damages methodologies based on the unique facts and circumstances of each particular case.