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Patent Case: Federal Circuit provides guidance on damages that eschews use of Nash Bargaining Solution (Virnetx v. Cisco)

Posted in Appeals, Litigation, Patent Alerts

Yesterday, in Virnetx, Inc. v. Cisco Systems, No. 2013-1489, the Federal Circuit ruled that an expert’s damages testimony was not admissible.  The court’s ruling provides guidance on underlying circumstances required to establish a royalty base and a royalty rate as well as questions the viability of using the Nash Bargaining Solution’s 50/50 split of profits between the patent owner and infringer  as a starting point to establish a reasonable royalty.

Background.

The patents concern technology for providing security over networks, such as the Internet.  Patent owner VirnetX accused Apple of infringing two patents based on the “FaceTime” feature provided on Apple’s iPhone, iPod, iPad and Mac computers.  VirnetX accused Apple of infringing two other patents based on its “VPN On Demand” feature in the iPhone, iPad and iPod Touch.  A jury returned a verdict that all asserted claims were valid and infringed, and awarded about $368 million reasonable royalty damages.

During the trial, the patent owner’s damages expert presented three reasonable royalty theories.

  1. First Theory.  His first theory applied a 1% royalty to the lowest sale price of each accused device to arrive at $708 million royalty.  The 1% amount was based on the patent owner’s “policy of seeking to license its patents for at least 1-2% of the entire value of products sold” as well as allegedly comparable licenses.
  2. Second Theory.  His second theory was applied to FaceTime products using the Nash Bargaining Solution to start at a 50/50 split of profits between the patent owner and accused infringer and then using factors to modify that approach to give the patent owner 45% of the profit.  This led to a $588 million royalty.
  3. Third Theory.  His third theory also applied the Nash Bargaining Solution against FaceTime products, but claimed that FaceTime “drove sales” of Apple’s iOS products based on a customer survey asserting that 18% of those sales would not have occurred without the addition of FaceTime to the device.  Using the same Nash 50/50 split of profits starting point, the expert attributed 45% of the profits to the patent owner yielding $5.13 per unit royalty that totaled $606 million royalty.

Decision

The Federal Circuit started by explaining that, “[n]o matter what the form of the royalty, a patentee must take care to seek only those damages attributable to the infringing features.”  The court instructed that apportionment generally applied for claims drawn to an individual component of a multi-component product:

Thus, when claims are drawn to an individual component of a multi-component product, it is the exception, not the rule, that damages may be based upon the value of the multi-component product.  Indeed, we recently reaffirmed that “[a] patentee may assess damages based on the entire market value of the accused product only where the patented feature creates the basis for customer demand or substantially creates the value of the component parts.”  In the absence of such a showing, principles of apportionment apply.

These strict requirements limiting the entire market value exception ensure that a reasonably royalty “does not overreach and encompass components not covered by the patent.”  Thus, “[i]t is not enough to merely show that the [patented feature] is viewed as valuable, important, or even essential to the use of the [overall product].”  Instead, this court has consistently held that “a reasonable royalty analysis requires a court to … carefully tie proof of damages to the claimed invention’s footprint in the market place.”  Additionally, we have also cautioned against reliance on the entire market value of the accused products because it “cannot help but skew the damages horizon from the jury, regardless of the contribution of the patented component to this revenue.”

Jury Instructions on Entire Unit as Royalty Base.  In this case, the Federal Circuit took issue with the jury instruction that, “[i]n determining a royalty base, you should not use the value of the entire apparatus or product unless either: … (2) the product in question constitutes the smallest saleable unit containing the patented feature.”  This instruction was wrong because it “mistakenly suggests that when the smallest salable unit is used as the royalty base, there is necessarily no further constraint on the selection of the base.”  The smallest salable patent-practicing unit is a “step toward meeting the requirement of apportionment”, but more apportioning is required if such a unit is a multi-component product:

Where the smallest salable unit is, in fact, a multi-component product containing several non-infringing features with no relation to the patented feature (as [patent owner] VirnetX claims it was here), the patentee must do more to estimate what portion of the value of that product is attributable to the patented technology.

Expert’s First Approach.  The Federal Circuit agreed that the patent owner’s expert’s testimony should have been excluded because it “relied on the entire market value of Apple’s products without demonstrating that the patented features drove the demand for those products.”  In this case, the expert “did not even attempt to substract any other unpatented elements from the base, which therefore included various features indisputably not claimed by VirnetX, e.g., touchscreen, camera, processor, speaker, and microphone, to name but a few.”  Where the patented feature does not drive demand for the product, apportionment is required regardless whether the patented feature is “viewed as valuable, important, or even essential,” the Federal Circuit stating:

[A] patentee must be reasonable (though may be approximate) when seeking to identify a patent-practicing unit, tangible or intangible, with a close relation to the patented feature.  In the end, [patent owner] VirnetX should have identified a patent-practicing feature with a sufficiently close relation to the claimed functionality.  The law requires patentees to apportion the royalty down to a reasonable estimate of the value of its claimed technology, or else establish that its patented technology drove demand for the entire product.  VirnetX did neither.

The expert’s testimony should have been excluded here, because he “did not even try to link demand for the accused device to the patented feature, and failed to apportion value between the patented features and the vast number of non-patented features contained in the accused products.”

The Federal Circuit, however, did not find error in admitting the 1% royalty rate portion of the expert’s testimony based on comparable licenses.  In this case, four of the alleged comparable licenses related to the actual patents-in-suit, the others were drawn to related technology and “all of the other differences that Apple complains of were presented to the jury”:

[T]hough there were undoubtedly differences between the licenses at issue and the circumstances of the hypothetical negotiation, “[t]he jury was entitled to hear the expert testimony and decide for itself what to accept or reject.”

Expert’s Nash Bargaining Solution Theories.  The Federal Circuit agreed that the expert’s using the Nash Bargaining Solution 50/50 split as a starting point was akin to the rejected “25 percent rule of thumb” and could not be relied upon “without sufficiently establishing that the premises of the theorem actually apply to the facts of the case at hand”:

The Nash theorem arrives at a result that follows from a certain set of premises.  It itself asserts nothing about what situations in the real world fit those premises.  Anyone seeking to invoke the theorem as applicable to a particular situation must establish that fit, because the 50/50 profit-split result is proven by the theorem only on those premises.  [Patent owner's expert] did not do so.

The key problem here was starting with the 50/50 split with no basis to do so in this case and then trying to adjust it based on the circumstances of the case, which high starting point could skew a jury’s verdict:

[E]ven if an expert could identify all of the factors that would cause negotiating parties to deviate from the 50/50 baseline in a particular case, the use of this methodology would nevertheless run the significant risk of inappropriately skewing the jury’s verdict.  This same concern underlies our rule that a patentee may not balance out an unreasonably high royalty base simply by asserting a low enough royalty rate. … [H]ere, the use of a 50/50 starting point–itself unjustified by evidence about the particular facts–provides a baseline from which juries might hesitate to stray, even if the evidence supported a radically different split.

In sum, the expert’s failure to first establish the required premises of the Nash Bargaining Solution are met in this case to justify starting with a 50/50 split rendered that testimony inadmissible even though the expert attempted to adjust that 50/50 split it started with based on the circumstances of the case.

LSI ordered to produce RAND licensing documents from Realtek trial in CSIRO case

Posted in Court Orders, District Courts
Last week, Magistrate Judge Grewal granted a motion to compel certain RAND licensing documents from LSI, who was objecting to a third-party subpoena issued by Realtek in an ongoing patent infringement action filed by CSIRO. Ruling against LSI, the court found that documents used in the Realtek–LSI litigation are relevant to Realtek’s defense that CSIRO failed to comply with its obligation to license the patent on reasonable and non-discriminatory terms. By way of background, CSIRO filed the instant action in the Eastern District of Texas in August 2012, alleging Realtek — along with Barnes & Noble, Nokia, Samsung,  Texas Instruments, and a number of other defendants — infringed a patent relating to the IEEE 802.11 wireless local area network standard. Realtek issued a third-party subpoena to LSI in April 2014, requiring LSI to produce all documents related to its 802.11 RAND patent licensing obligations and the calculation of a RAND patent royalty that were relied on or referenced in its own patent dispute with Realtek (as discussed in our prior posts, LSI was found to have breached its contract with the IEEE to license two 802.11 standard essential patents to Realtek). LSI opposed Realtek’s request, arguing that the documents were not relevant to the determination of a reasonable royalty rate because the patent royalties discussed in the Realtek–LSI dispute were directed to a different portion of the 802.11 standard and involved a different set of patents than was at issue in the CSIRO case. Considering whether the LSI documents sought by Realtek were relevant to the determination of a royalty rate,  Magistrate Judge Grewal ruled that the requests were reasonably calculated to lead to the discovery of admissible evidence under Federal Rule 26(b):
Two houses on the same block may have very different features, and yet a real estate appraiser’s report will usually consider both. The patents at issue here were all asserted against Realtek and were all declared essential to the 802.11 standard. In addition, the patents are all claimed to be subject to an identical RAND commitment. In short, while the factual differences between the LSI and CSIRO cases may dampen the probative value of the evidence, the discoverability of the evidence cannot be disputed.

InterDigital Update: ITC issues public version of opinion finding no violation in Inv. No. 337-TA-868

Posted in International Trade Commission, Litigation

The International Trade Commission issued the public version of its opinion in Inv. No. 337-868, finding no violation by either Nokia or ZTE and terminating the investigation in its entirety. On review, the Commission neither affirmed nor rejected ALJ Essex’s FRAND analysis, which criticized respondents who had not actively sought a license from InterDigitial yet raised SSO-related affirmative defenses.

As you may recall from our July 2, 2014 post, ALJ Essex issued a Final Initial Determination following a February 2014 evidentiary hearing, finding the accused products did not infringe InterDigital’s asserted patents, the domestic industry requirement had not been met, only one claim (claim 16 of U.S. Patent No. 7,941,151) was invalid as indefinite, and that respondents did not demonstrate InterDigital had violated any FRAND obligation. The Final Initial Determination also included a lengthy FRAND analysis, which was highly critical of respondents that assert FRAND defenses without having first availed themselves of SSO procedures for resolving situations where licenses are not available.

Respondents petitioned the ITC to review, inter alia, ALJ Essex’s FRAND analysis. Respondents argued that under a proper FRAND analysis, the asserted patents should have been found unenforceable under the doctrines of equitable estoppel, unclean hands, and patent misuse. As previewed in the ITC’s August 14 notice, the Commission took no position on the FRAND issues raised by the respondents, finding it more efficient to decide those issues, if at all, following an appeal of a related decision:

Decision as to those issues would require further proceedings, and potentially additional factfinding. The Commission has decided that, on balance, the added delay, burdens, and expenses that would be incurred by the parties and the Commission in resolving these issues are unjustified here given their non-dispositive nature, especially in view of the existence of other pending proceedings regarding the asserted patents and patents closely related to them.  In addition, the Commission finds that it is in the interest of the efficient use of administrative, judicial, and private resources for the domestic industry and FRAND issues to be decided, if at  all, subsequent to final disposition of the pending appeal in InterDigital Communications LLC v. ITC, No. 2014-1176 (Fed. Cir.), which involves many of the same parties and issues with regard to related patents.

Eighth Circuit grants MPHJ’s motion to transfer Nebraska AG appeal to the Federal Circuit

Posted in Appeals, Litigation, Non-Practicing Entities

The Eight Circuit Court of Appeals recently granted MPHJ’s motion to transfer the ongoing appeal involving the cease and desist letters sent by the Nebraska Attorney General to the Farney Daniels firm, directing the appeal to the Federal Circuit, which has exclusive jurisdiction over patent appeals. In the context of the ongoing debate as to whether courts should treat allegedly abusive patent-demand-letter practices as a consumer-protection issue or as a patent issue, the Eighth Circuit’s decision provides an interesting contrast to the Vermont Attorney General’s suit against MPHJ, in which a Vermont District Court Judge held — and was not disrupted on appeal to the Federal Circuit – that the Vermont AG’s unfair competition claims against MPHJ belong in state court (see our April 18, 2014 post).

The present decision arises from Activision TV’s July 2013 patent suit against Pinnacle Bancorp, Inc., a bank with charters in Nebraska, accusing Pinnacle of infringing Activision’s patents for digital signage systems (see our January 22, 2014 post for more background). Several days after the suit was filed, the Nebraska AG sent a cease and desist letter to Activision’s counsel, the Farney Daniels firm, demanding that it refrain from initiating any new patent infringement enforcement efforts within the State of Nebraska, pending investigation into whether the enforcement efforts run afoul of Nebraska’s consumer protection or deceptive trade practice law. In response, Activision added the Nebraska AG to the action and sought a preliminary injunction protecting it from the Nebraska AG’s letter. In January 2014, District of Nebraska Judge Bataillon granted the injunction, enjoining the Nebraska AG from enforcing the cease and desist order and concluding that the AG could not prevent Farney Daniels from representing Activision in connection with its Nebraska-based patent enforcement efforts. The Nebraska AG appealed the Activision preliminary injunction to the Eighth Circuit on the basis that the matter deals with consumer protection issues.

Third-party patent holder MPHJ — also a client of Farney Daniels, whose patent enforcement efforts would be affected by the Nebraska AG’s cease and desist order —  moved to intervene in the district court litigation. Like Activision, MPHJ sought and was awarded a preliminary injunction against the Nebraska AG.

MPHJ also intervened in the Nebraska AG’s Eight Circuit appeal and moved to transfer the case to the Federal Circuit, arguing the appeal arises under federal patent laws and, as such, should be heard by the Federal Circuit. In a two-sentence Judgment, the Eight Circuit granted MPHJ’s motion, citing 28 U.S.C. Section 1631, which provides that an appeal filed with a court that lacks jurisdiction over the matter shall be transferred “to any other such court in which the action or appeal could have been brought at the time it was filed or noticed.”

InterDigital Update: ITC issues confidential version of opinion in Inv. No. 337-TA-868

Posted in International Trade Commission, Litigation

Yesterday, the ITC filed a confidential version its opinion in the InterDigital investigation, Inv. No. 337-TA-868, involving Nokia and ZTE. According to a notice issued in the case last week, the Commission has reviewed ALJ Essex’s Final Initial Determination and terminated the investigation with a finding of no violation by either Nokia or ZTE. As discussed in our August 15, 2014 post, the notice indicates that the Commission has taken no position with respect to the FRAND issues raised, instead finding efficiency favors addressing any FRAND issues after final disposition of InterDigital’s co-pending Federal Circuit appeal, which involves several of the patents-at-issue in the 868 investigation. 

We expect a public version of the Commission’s opinion will be available in the coming weeks.

InterDigital Update: On review, ITC finds no violation and terminates Inv. No. 337-Ta-868

Posted in International Trade Commission, Litigation

The ITC has issued a notice in the InterDigital investigation (No. 337-TA-868), indicating that the Commission has reviewed ALJ Essex’s Final Initial Determination reversed certain findings, taken no position on others, and ultimately terminated the investigation with a finding of no violation. ALJ Essex issued his initial ruling on June 13, 2014, finding that neither ZTE nor Nokia infringed InterDigital’s patents, which were alleged to be essential to 3G/4G standards, and that InterDigital had committed no FRAND violation (see our June 19 and July 2 posts for additional background).

According to the notice, the Commission has taken no position with respect to FRAND issues raised by respondents’ affirmative defenses:

The Commission finds that it is in the interest of the efficient use of administrative, judicial, and private resources for the domestic industry and FRAND issues to be decided, if at all, subsequent to final disposition of the pending appeal in InterDigital Communications LLC v. ITC, No. 2014-1176 (Fed. Cir.), which involves many of the same parties and issues with regard to related patents.

In the pending appeal, InterDigital is challenging the ALJ’s claim construction ruling in ITC Inv. No. 337-TA-800 (see our February 24, 2014 post for more information), which involves the two Power Ramp-up Patents (Nos. 7,706,830 and 8,009,636) also at issue in the 868 investigation. On appeal, InterDigital is arguing the ITC’s finding of no violation is based on erroneous claim constructions and should be reversed.

With respect to the present investigation (337-TA-868), you may recall from our July 2, 2014 post that ALJ Essex’s Final Initial Determination included a lengthy FRAND analysis, which was highly critical of respondents that assert FRAND defenses without having first availed themselves of SSO procedures for resolving situations where licenses are not available. After a solicitation for comments on the public interest, the ITC received a number of letters from Ericsson, the Innovation Alliance, Microsoft, Senator Robert P. Casey, Jr. (D-PA), and Senator Patrick J. Toomey (R-PA), generally directed to ALJ Essex’s FRAND analysis and whether SEP owners should be entitled to exclusion orders on FRAND-encumbered patents (see our July 9, 2014 post for a summary of the third party comments).

The notice further indicates that “[t]he reasoning in support of the Commission’s decision will be set forth in fuller detail in a forthcoming opinion.”

FTC “Patent Assertion Entity Study” approved

Posted in Federal Trade Commission

The Office of Management and Budget Action has approved the FTC’s request to conduct its proposed “Patent Assertion Entity Study” directed to analyzing ongoing PAE activity (see our May 21, 2014 and Sep. 27, 2013 posts for more information on the study and questions related to SSOs and SEPs). According to the Federal Register notice published in May 2014, the study is designed to “collect information about Patent Assertion Entity (“PAE”) organization, structure, economic relationships, and activity, including acquisition, assertion, litigation, and licensing practices” in order to analyze any competitive effects of PAE activity in the market:

PAEs are firms with a business model based primarily on purchasing patents and then attempting to generate revenue by litigating against, or licensing to, persons who are already practicing the patented technology. Currently, the public record of PAE activity focuses on publicly-available litigation data. Litigation, however, is only part of the picture. PAE activity encompasses a wide range of non-public behavior related to acquisition and licensing practices, together with structural issues related to organization and economic relationships. Data analyzing this behavior is not available through the public record and it is not available from a single private source.

It has been reported that the FTC expects to begin sending queries to both PAEs and manufacturing companies very soon and that the PAE study is expected to be completed next year, though OMB has approved the study through August 31, 2017.

 

 

Federal Circuit dismisses MPHJ’s writ of mandamus, appeal for lack of jurisdiction

Posted in Appeals, Litigation, Non-Practicing Entities

Back in April, we reported on the Vermont Attorney General’s suit against non-practicing-entity MPHJ being remanded to state court. Dissatisfied with the district court’s decision, MPHJ appealed the remand and filed a petition for a writ of mandamus with the Federal Circuit, arguing that the decision was an abuse of the district court’s discretion. Today, the Federal Circuit issued an order dismissing MPHJ’s writ of mandamus and appeal, holding that it lacked appellate jurisdiction over the district court’s remand order. The order is particularly interesting in view of the ongoing debates over patent reform, providing one example of how problematic behaviors of certain non-practicing, non-innovating, patent monetization entities are being addressed via existing consumer protection laws that on their face are unrelated to patent-specific practices.

As discussed in our April 18, 2014 post, Vermont’s Attorney General previously challenged MPHJ’s practice of sending patent infringement demand letters to Vermont entities as constituting unfair and deceptive trade practices under the Vermont Consumer Protection Act. The AG filed the case in Vermont state court. MPHJ removed the case to the U.S. District Court for the District of Vermont in June 2013, asserting federal question and diversity jurisdiction. Vermont’s AG moved to remand back to state court for lack of subject matter jurisdiction, arguing that the complaint was directed to state-consumer-protection violations and not questions of federal patent law. The district court agreed and remanded the case to state court.

On appeal, the Federal Circuit noted that ”in the district court’s view the complaint did not raise a claim or question of federal law to give rise to federal jurisdiction.” The Federal Circuit ruled that it lacked jurisdiction over MPHJ’s writ and appeal as “the District Court relied upon a ground that is colorably characterized as subject-matter jurisdiction” and “an order remanding a case to the State court from which it was removed is not reviewable on appeal.” For the time being, it appears that Vermont’s battle against MPHJ will be confined to state court.

Apple, Samsung agree to drop all non-U.S. litigation

Posted in Litigation, Uncategorized

A significant portion of the international patent wars between Apple and Samsung have been brought to a close, according to a joint statement issued by the parties:

Apple and Samsung have agreed to drop all litigation between the two companies outside the United States. This agreement does not involve any licensing arrangements, and the companies are continuing to pursue the existing cases in U.S. courts.

We note that the statement is similar to the one that issued following resolution of the disputes between Apple and Google this May.

Since 2011, Apple and Samsung have been involved in cross-infringement actions in Australia, France, Germany, Italy, Netherlands, South Korea, and the U.K. Many of these non-U.S. cases involved significant SEP-related rulings. You may recall that earlier this year, the Japanese High Court denied Samsung injunctive relief against Apple while allowing FRAND-based damages on the asserted SEPs (see our May 21, 2014 post). In a separate proceeding related to the European Commission’s investigation of Samsung’s SEP enforcement against Apple, Samsung committed to not pursue any injunctions in the European Economic Area for a period of five years based on any SEPs related to smartphone/tablet technologies against companies that agree to a predetermined licensing framework, as discussed in our April 30, 2014 post.

Although litigation abroad has been brought to a close, the U.S. dispute between the companies moves forward — albeit without any notable SEP issues for the time being. In March, Judge Koh granted Apple and Samsung’s request to dismiss without prejudice Samsung’s SEP infringement claims and Apple’s related FRAND defenses and counterclaims (see our March 12, 2014 post).

 

 

Judge Davis determines reasonable royalty damages for WiFi standard essential patent (CSIRO v. Cisco)

Posted in District Courts, Litigation, Non-Practicing Entities

Last week, following a bench trial in CSIRO v. Cisco,  Judge Davis in E.D. Texas determined a reasonable royalty damages award for a CSIRO patent stipulated to be valid, infringed and essential to several versions of the IEEE 802.11 WiFi standard where a RAND-obligation applied to one version of the standard, but not others.  The patent owner CSIRO sought a per-end product reasonable royalty of about $30 million.  Cisco argued a per WiFi chip reasonable royalty of about $1.1 million.  Judge Davis rejected both damages models, found the patent to play a “significant role” in the success of 802.11 products, and derived his own per-end-product reasonable royalty damages award of about $16 million.

This is the third bench trial decision to determine a royalty rate for a standard essential patent (the other two were Judge Robart’s Microsoft v. Motorola decision and Judge Holderman’s Innovatio decision).  This case differs, because this royalty rate was determined in the context of past infringement damages, rather than setting a RAND-royalty rate per se.  Further, although the patent was essential to the standard, no RAND-obligation applied to almost all of the accused infringement because the patent owner gave the IEEE a letter of assurance RAND-commitment as to only revision “a” of the standard and refused IEEE request to give such a commitment for later versions of the standard.

Background

Patent owner Commonwealth Scientific and Industrial Research Orginasation (“CSIRO”) is the principal scientific research organization for the Austrialian Federal Government.  The patent-in-suit addresses multipath problems in a wireless local area network.  That technology was incorporated into certain versions of the IEEE 802.11 WiFi standard, including revision “a” adopted in 1999 and revision “g” adopted in 2003.  In December 1998, before IEEE adopted revision “a”, CSIRO provided the IEEE with a letter of assurance that it would license the specific patent-in-suit on RAND-terms if the patent were essential to the 802.11a standard.  IEEE sought additional letters of assurance from CSIRO for later revisions of the standard, but CSIRO declined to provide them.

In 2003, CSIRO offered industry participants a license on RAND terms on all versions of the standard (at first indicating that it had agreed with IEEE to do so, but later clarifying there was no RAND obligation).  By June 2004, CSIRO developed a Voluntary Licensing Program offering licenses to the ’069 Patent under “a flat-fee royalty, charged per end product unit sold.”

A company called Radiata Communications (“Radiata”)  was formed by the named inventor, CSIRO and others to commercialize the patented technology.  Radiata employed various CSIRO employees as well as another named inventor.  CSIRO entered a Technology License Agreement (TLA) with Radiata in February 1998 that, among other things, had a per-WiFi chip royalty payment.  In 2001, Cisco acquired Radiata and started paying Radiata’s license fees under the TLA license agreement for Radiata products.  This agreement was renogotiated several times, always keeping the general concept of a per-chip royalty base.

In July 2011, CSIRO sued Cisco for infringing the patent-in-suit.  Both parties stipulated to a bench trial solely on damages and that Cisco would not challenge the patent’s infringement or validity.

Judge Davis’s Ruling

Cisco’s Estoppel Affirmative Defense (Denied).  The court denied Cisco’s affirmative defense that legal and equitable estoppel should limit damages.  The elements of these defenses were summarized as follows:

To establish a defense of equitable estoppel, Cisco must demonstrate that: (1) CSIRO communicated something in a misleading way by words, conduct, or silence; (2) Cisco relied upon that communication; and (3) Cisco would be materially harmed if CSIRO is allowed to assert any claim inconsistent with its earlier communication.  Legal estoppel requires that CSIRO granted Cisco certain rights, received consideration for those rights, and then sought to derogate from the righs granted.

Cisco argued that CSIRO’s RAND commitment precluded CSIRO from seeking damages from Cisco higher than the LTA royalty rate that CSIRO gave to Radiata on the same patent.  The parties agreed that RAND commitment applied to the 802.11a version of the standard.  But CSIRO argued that the revision “a” RAND-commitment does not extend to Cisco because Cisco never made a written request for a license.  Judge Davis agreed with Cisco that this  written requirement was met based on the course of dealings between Cisco and CSIRO.  Thus. a RAND obligation applied to 802.11a products.

But that was not the case for later revisions of 802.11 (g, n and ac).  IEEE asked CSIRO to provide letters of assurance for these later versions, but CSIRO declined to do so.  Judge Davis found that CSIRO actually made no RAND commitment to IEEE or its members for “g” or later revisions of the standard: “Therefore, while CSIRO was free to offer licenses on RAND terms as to products practicing these revisions, it was not contractually obligated to do so.”  He found no RAND-license was consummated and, “[r]egardless … the parties would have sought a royalty that each believed accurately valued the ’069 Patent”, stating:

Because CSIRO provided no letter of assurance creating a binding RAND obligation, and because any voluntary offer by CSIRO to license the ’069 Patent technology on RAND terms was rejected, was withdrawn, or lapsed, CSIRO has no RAND obligation to Cisco as to 802.11g, 802.11n, or 802.11ac products.  Regardless of CSIRO’s RAND commitment, at the hypothetical negotiations the parties would have sought a royalty that each believed accurately valued the ’069 Patent.

Thus, Cisco’s legal and equitable estoppel defense did not apply except for products practicing revision “a” of the 802.11 standard, which would require RAND licensing terms.

CSIRO’s Damages Model (Rejected).  CSIRO argued that the end product devices (network interface cards, routers, access points) were the smallets saleable patent practicing unit.  CSIRO also argued that its patent provides the only “improved benefits” between revisions of the standard covered by the patent and other revisions; therefore, the difference in profit margins between covered and not-covered products “largely represents the value attributable to the ’069 Patent.”  But, among other things, Judge Davis found a “fundamental problem” in the large disperity in profit margins between covered and non-covered products– over $84 difference for consumer products and over $200 difference for enterprise  products; that disparity made it “impossible to reliably determine where the value of the patented technology lies.”  The expert also had problems in apportioning value to the patented technology distinct from unpatented features.  For example, “802.11g is backwards compatible with 802.11b, a feature not specfically attributable to the ’069 Patent, but which adds value to the consumer” not accounted for in CSIRO’s damages model.  Further, the expert’s resultant oyalty was higher than the royalty CSIRO offered in its Voluntary Licensing Program.  Thus, the court “attributes little weight” to CSIRO’s damages model.

Cisco’s Damages Model (Rejected).  Cisco argued that the royalty should be based on WiFi chip prices capped at the royalty rate that CSIRO gave Radiata under the TLA agreement between them, where the inventive concept resides in the chip.  Judge Davis rejected Cisco’s licensing model because it relied primarily on the TLA agreement, which was a unique agreement given the relationship between CSIRO and its business partner Radiato that was not comparable to the hypothetical negotiation for CSIRO-Cisco license.  Rather, “[t]he connection between CSIRO and Radiata created a special relationship that belies the view that the negotiations leading to the TLA were purely disinterested business negotiations.”  For example, in addition to royalty payments, Radiata agreed to disclose business plans, make best efforts to exploit the technology and grant CSIRO a royalty-free license and assignment of rights to Radiata’s improvements to the technology.  Further, there were rapid improvements between the 1998 date of the TLA and the 2002/2003 hypothetical negotiation date : “Commercial viability of the technology escalated sharply as the 802.11a revision was adopted in September 1999 … and received a greater boost when the 802.11g revision was ratified in June 2003.”  Perhaps concerned that this would improperly capture the value of the standard beyond the patent’s value, Judge Davis states in a footnote:

This is not an indication that the value of the ’069 Patent increased soelely because it was included in the standard.  Rather, the wireless marketplace as a whole benefited from the adoption of the standard.

Judge Davis found Cisco’s “primary problem” is using chip prices as the royalty base, because (1) the patent was not directed solely to a chip and (2) widespread infringement depressed chip prices:

CSIRO did not invent a wireless chip.  Although it is largely undisputed that the inventive aspect of the ’069 Patent is carried out in the PHY layer of the wireless chip, the chip itself is not the invention.  The ’069 Patent is a combination of techniques that largely solved the multipath problem for indoor wireless data communication.  The benefit of the patent lies in the idea, not in the small amount of silicon that happens to be where that idea is physically implemented.  Compounding this problem is the depression of chip prices in the damages period resulting from rampant infringement which occured in the wireless industry.  Prior to 2008, outside of the Radiata TLA, no company in the industry sought a license from CSIRO to the ’069 Patent and CSIRO received no royalties whatsoever for that technology.  It is simply illogical to attempt to value the contributions of the ’069 Patent based on wireless chip prices that were artificially deflated because of pervasive infringement.  Basing a royalty solely on chip price is like valuing a copyrighted book based only on the costs of the binding, paper, and ink needed to actually produce the physical product.  While such a calculation captures the cost of the physical product, it provides no indication of its actual value.

Other CSIRO Licenses.  Judge Davis dismissed other license agreements that CSIRO entered in or after 2008, which both experts agreed were not relevant to a hypothetical negotiation in 2002.  The license came at a later time than the hypothetical negotiation, involved litigation settlements, involved worldwide licenses and varied widely in sales volumes at issue.

Court’s Hypothetical Negotiation Analysis.  Judge Davis assumed a hypothetical negotiation in 2002/2003 with no “discount” for uncertainty as to liability given the assumption that the patents were valid and infringed.  Judge Davis found a base starting royalty rate based on the Voluntary Licensing Program licensing rate and a 90-cents per end-product licensing offer Cisco made during negotiations, the latter being “the best evidence available of how Cisco valued the contribution of the ’069 Patent … and is the best indicator of Cisco’s possible bid price at the time of the hypothetical negotiation.”

Judge Davis then considered various Georgia-Pacific factors for adjusting this starting royalty rate.  Although CSIRO had a RAND-obligation for 802.11 revision “a” products, Judge Davis did not consider a modified Georgia-Pacific analysis for them given the small volume of revision “a” product sales, stating “a modified analysis as to only those products would have a de minimus impact on the overall royalty.”  Judge Davis Davis then considered the several Georgia-Pacific factors, as follows:

  • Factors 1-2, 6-7, 12-13.  Judge Davis agreed with both experts that Georgia-Pacific factors 1, 2, 6, 7, 12, and 13 “are neutral and no adjustment to the base line royalty rate needs to be made in light of these factors.”
  • Factor 3 (nature and scope of license).  Judge Davis gave a downward adjustment because the hypothetical license would be limited to U.S. sales, but Cisco’s negotiation offer and CSIRO’s Voluntary Licensing Program implicitly used to set the hypothetical base royalty rate were for a worldwide license.
  • Factor 4 (licensor’s established program).  This factor warrants a downward adjustment because (1) “CSIRO was very willing to license the patented technology” and (2) CSIRO had a binding RAND obligation for the 802.11a products.
  • Factor 5 (commercial relationship).  This factor warrants a downward adjustment because CSIRO was a government R&D organization that “needed to license the ’069 Patent in order to commercialize and monetize it.”
  • Factor 8 (product profitability/success).  This factor warrants an upward adjustment because the patented technology, “[a]lthough … not the only factor contributing to the growth of 802.11g products, it was an important one.”  Further, IEEE continued to rely on the patented technology even though “CSIRO declined to issue letters of assurance and in the face of ongoing litigation involving the patent.”  Accordingly, the patent “played a significant role in the commercial success of 802.11 products.”
  • Factors 9 and 10 (utility over older modes, benefits, etc.).  These two factors warrant an upward adjustment.  The patented technology’s multipath solution provided significant improvements, including higher speeds, increased capacity, etc., and alternative technology did not have commercial success.  Further, this remained core technology to the standard despite several revisions to the standard spanning over a decade.
  • Factor 11 (extent defendant uses invention).  This factor is neutral here because it already was accounted for in the starting baseline.
  • Factor 13 (profit attributable to invention).  This factor is neutral because, although the patent “played a significant role in the profitability of wireless products, … Cisco’s role in that profitability should not be diminished” such as Cisco “assum[ing] the business risk” in developing and marketing the products as well as many other non-patented features in the products.
  • Factor 14 (expert opinion).  This factor is neutral because the court rejected both experts’ damages models.
  • Factor 15 (outcome of hypothetical negotiation).  The court weighed all the factors and found they gave each party equal bargaining position and, thus, no adjustment was needed to the baseline rate of $0.90 to $1.90 per end-product with tiered values based on volume of sales.

In sum, all factors were neutral except factors 3 and 4 (downward adjustment) that were offset by factors 8-10 (upward adjustment).  Judge Davis, however, did give a downward adjustment to consumer products based on the proportional profit difference between them and the enterprise products.  The court then multiplied these tiered royalty rates by volumes of sales, discarded sales after the patent expired, discarded sales more than six years before the lawsuit was filed and assessed a total royalty damage of about $16.2 million.

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