Today, a three-judge Federal Circuit panel (Prost (author),  Dyk and Hughes) issued its awaited decision in CSIRO v. Cisco that agreed-in-part and disagreed-in-part with Judge Davis’ damages award based on patents alleged to be essential to the IEEE 802.11 WiFi standard, but which patents did not have any FRAND or other standard-setting obligation (see our July 28, 2014 post on Judge Davis’ decision).  This is an important decision that provides incremental insight into proving and determining a reasonable royalty for a standard essential patent, which includes further insight into the Federal Circuit’s first decision on this issue a year ago in Ericsson v. D-Link that involved a standard essential patent that did have a FRAND obligation under the IEEE 802.11 WiFi standard (see our Dec. 5, 2014 post on the Ericsson v. D-Link decision).

This is an important decision to read directly to catch all the nuances and import of the decision, and the incremental guidance it provides in determining a royalty rate as a matter of patent damages law for past infringement of a patent that is essential to a standard.  A few particularly important points come from the decision.

First, the Federal Circuit soundly rejected as “untenable” the accused infringer’s argument that there is a “rule” that all patent damages methodologies always must start out using the smallest salable patent-practicing unit.  The smallest salable patent practicing unit is a principle that can aid courts to determine if a damages expert’s methodology reliably apportions to the patent only the value that the patented technology provides to the infringing product and not other unpatented features.  But it is not the only approach that may be considered, and different cases present different factual circumstances that could lend themselves to different reliable methodologies.  For example, damages methodologies properly may rely on real-world comparable licenses to reliably apportion value to the patented technology, whether the royalties are based on end products or components thereof.  This decision may very well put to rest arguments that there is some “rule” requiring use of the smallest salable patent-practicing unit or that there is any problem per se in royalties being based on the end product rather than its components.

Second, the Federal Circuit clarified that the need to apportion the value of the patented technology from the value of standardization applies whether or not a standard essential patent is subject to a FRAND or other standard setting obligation.  This is based on the long-standing, fundamental principal that statutory damages for infringement under 35 U.S.C. § 284 must be based on the value of the patented invention and not other unpatented features, whether that’s other unpatented technology in an infringing  product or the value of the patent being essential to a standard. Continue Reading Federal Circuit provides guidance on royalty determination for standard essential patents (CSIRO v. Cisco)

As we previously reported, Cisco and Ruckus Wireless filed complaints against Innovative Wireless Solutions (IWS) in the Western District of Texas for declarations of non-infringement and invalidity of three of IWS’ patents allegedly covering WiFi technology.  In their claim construction briefing, the parties disputed the meaning of the term “CSMA/CD”, which stands for “Carrier Sense Multiple Access with Collision Detection.”  The court issued a Markman claim construction opinion holding that IWS acted as its own lexicographer in the patents-in-suit by expressly referencing the Institute of Electrical and Electronics Engineers (IEEE) 802.3 Ethernet standard’s definition of the term CSMA/CD.  This term, therefore, was construed to incorporate the IEEE standard’s definition of it.

On Tuesday, the parties stipulated to a final judgment of non-infringement of IWS’ patent claims in light of the court’s claim construction ruling.  The parties stipulated that the accused “communications path” associated with each accused product “complies with the IEEE 802.11 (g), (n) and/or (ac) amendments, (ii) is not wired, and (iii) does not ‘utiliz[e] twisted-pair wiring.’” “In particular, each Accused Product contains one or more radio transceivers (in connection with other circuitry) for communicating wirelessly with devices that are compliant with the IEEE 802.11 (g), (n) and/or (ac) protocols.”  “IWS’s infringement contentions identify those wireless communications as satisfying the ‘bidirectional communications path’ and ‘communications path’ limitations.”

While the parties stipulated that the accused products practiced certain portions of the IEEE 802.11 standards, the parties nonetheless agreed that, in light of the Court’s claim construction ruling, the accused products

have not infringed and currently do not infringe the Asserted Claims of the Patents-in-Suit for at least the reason that the accused communications path associated with each Accused Product is not a ‘bidirectional communications path’ or ‘communications path’ ‘utilizing twisted-pair wiring that is too long to permit conventional 10BASE-T or similar LAN (Local Area Network) interconnections’.

Cisco, Ruckus and IWS, “therefore, stipulate[d] to entry of a final judgment that the Accused Products have not infringed and currently do not infringe the Asserted Claims of the Patents-in-Suit.”

IWS reserved the right to appeal the claim construction ruling.  If IWS chooses to do so and it successfully challenges that ruling, the Federal Circuit may remand the case to the district court for further proceedings on claim construction or to determine whether Cisco or Ruckus’ products infringe IWS’ patents.

On Wednesday, the Court entered the final judgment pursuant to the parties’ stipulation.

This case hihglights a few points that may arise when litigating standard essential patents.  First, court’s may look to see whether disputed claim terms incorporate definitions from standards adopted by standard setting organizations (SSOs).  Second, even in cases where the court finds that a disputed claim term incroporates a standard’s definition, and the alleged infringer agrees that its products practice that standard, there is still a possibility that the accused product does not infringe the patent.

The Western District of Texas recently held that patent holder Innovative Wireless Solutions (IWS) acted as its own lexicographer by expressly referencing the Institute of Electrical and Electronics Engineers (IEEE) 802.3 Ethernet standard’s definition of a disputed claim term in the patents-in-suit.  Therefore, the disputed claim was construed to incorporate the standard’s definition.

Background.  Cisco and Ruckus Wireless both filed complaints against IWS seeking declarations of non-infringement and invalidity of three of IWS’ patents allegedly covering WiFi technology.  Cisco’s complaint alleges that IWS is a “patent assertion entity that, on information and belief, has been set up to monetize patents by filing strike suits against mere end users of 802.11 standard compliant products (also known as Wi-Fi products) for the purpose of obtaining licensing and settlement amounts to which they are not entitled.”  “[R]ather than seek to license its patents to Cisco and other manufactures of Wi-Fi compliant products, IWS instead sent demand letters to end users that have purchased Cisco products that are compliant with the Wi-Fi standards.”  According to Cisco, “[w]ithin one week of sending the letters, IWS filed 41 lawsuits against these end users of Cisco products and other similar parties.”  “In turn, Cisco received indemnity demands from a number of these purchasers.”  “Although the 41 lawsuits were dismissed without prejudice,” Cisco claims that “IWS is intent on re-filing these lawsuits against these retail purchasers after correcting one or more procedural deficiencies.”  Cisco therefore filed suit “to protect the purchasers” of its WiFi compliant products. 

Ruckus’ complaint makes similar allegations and, like Cisco, requests a declaratory judgment of non-infringement and invalidity to protect purchasers of its WiFi compliant products.

IWS filed answers generally denying the substantive allegations of both complaints but admitting that a case or controversy existed for purposes of Cisco and Ruckus’ request for declaratory relief.  IWS also counterclaimed for infringement of the three patents against both Cisco and Ruckus.

The disputed claim term.  The term “CSMA/CD” appears in claims in all three of the IWS patents at issue.  This stands for “Carrier Sense Multiple Access with Collision Detection.”  The parties disputed whether the term needed to be construed at all.  In their claim construction brief, Cisco and Ruckus argued that CSMA/CD is a well-known protocol defined by the IEEE 802.3 Working Group and that IWS’ patents defer to the published IEEE standard.  Therefore, a skilled artisan at the time of the patent would understand the use of the term CSMA/CD and no construction was necessary.

IWS, on the other hand, argued that “CSMA/CD is a term the jury cannot readily understand” and requested that the court construe it to mean:    

Techniques compatible with connecting to networks such as Ethernet networks, where a device that wishes to transmit on the network listens and checks to see if the channel is free for sending data.  If the channel is not free, or if a collision is detected during transmission, the device waits for a small amount of time and tries again.

IWS contended that its proposed construction was “supported by the specification and the IEEE 802.3 standard.” Specifically, IWS cited to one sentence in the specification that states: “The term CSMA/CD is used herein to refer generically to this technology.”  IWS argued that “this sentence indicates that CSMA/CD is used throughout the patents-in-suit to describe any network technology that employs a contention scheme similar to the 802.3 scheme.”  IWS asserted further that “the contention scheme contained in its proposed construction is consistent with the contention scheme overview in the 802.3 standard.”  Finally, IWS contended that the “MA” in CSMA/CD “shows that CSMA/CD is a technology that relates to connecting to a network” and that “multiple access” shows “that the technology relates to connecting to networks in addition to facilitating communications.”

The court’s ruling.  The court rejected IWS’ proposed construction as well as Cisco and Ruckus’ position that the term required no construction.  “In light of the clear language contained in the patents’ specification, the court concludes that the patentee acted as his own lexicographer and specifically defined the term’s use in the context of the patents.”  The court relied on the specification, which defines CSMA/CD as follows:

Different technologies can be used to facilitate communications on any LAN [Local Area Network] and throughout the Network, the most common being . . . (CSMA/CD) technology.  This is documented in IEEE Standard 802.3 . . .   The 802.3 Standard is based on the 1985 Version 2 Standard for Ethernet and, although there are some differences  . . . the two Standards are largely interchangeable and can be considered equivalent as far as this invention is concerned.  The term ‘CSMA/CD’ is used herein to refer generically to this technology.  Using CSMA/CD, packets of data are communicated in frames that are generally referred to as Ethernet frames.  This term is also used herein, regardless of whether the frames comply with the 802.3 Standard or Ethernet Standard . . .

In other words, “CSMA/CD is a technology, documented in the IEEE 802.3 standard, used to facilitate network communications” and “[t]he 802.3 standard is based on the 1985 Version 2 Standard for Ethernet (‘Ethernet 2 Standard’).”  The court held that “[a]s far as this invention is concerned, the two standards are equivalent.”  “In the patents-in-suit, CSMA/CD is used to generically refer to the technology as defined in either standard.”  “Moreover, the specification references the documented IEEE standard when describing a network technology that uses CSMA/CD.”  “The specification further references the IEEE standard when describing the contention scheme employed in CSMA/CD.”

According to the court, “Cisco’s argument that the term should be given its ordinary and customary meaning fails.”  While there “is a heavy presumption that the term carries its ordinary and customary meaning,” the “presumption is overcome when the patentee acted as his own lexicographer and clearly set forth a definition of the disputed claim term.”  

The court also rejected IWS’ proposed construction.  IWS’ “relies on the use of ‘generically’ in the specification to argue for a particularly broad interpretation.”  “However, within the context of the paragraph, the word generically refers to CSMA/CD as defined in either the 802.3 Standard or the Ethernet 2 Standard.”  “As the patents-in-suit explain, the two standards are interchangeable and equivalent as far as this invention is concerned.”

The court therefore construed the term CSMA/CD to incorporate the definition in the standard:  “CSMA/CD (Carrier Sense Multiple Access with Collision Detection) as defined in either the IEEE 802.3 Standard or the 1985 Version 2 Standard for Ethernet.”

Thus, litigants should also be mindful that the definition of patent claim terms may be impacted by a patent’s reference to definitions of claim terms in industry standards.

Yesterday the Federal Circuit issued its long-awaited Ericsson v. D-Link decision that reviewed the Judge Davis jury verdict award for RAND-obligated 802.11 standard essential patents (see our Aug. 7, 2013 post).   The Federal Circuit eschews any per se rules for RAND-obligated patents–e.g., no set modified Georgia-Pacific analysis–and instructs the court to fashion damages instructions to the specific circumstances and evidence presented in a particular case.  The Federal Circuit summarized its decision as follows, and remanded the case for further consideration consistent with its decision:

In sum, we hold that, in all cases, a district court must instruct the jury only on factors that are relevant to the specific case at issue.  There is no Georgia-Pacific-like list of factors that district courts can parrot for every case involving RAND-encumbered patents.  The court should instruct the jury on the actual RAND commitment at issue and must be cautious not to instruct the jury on any factors that are not relevant to the record developed at trial.  We further hold that district courts must make clear to the jury that any royalty award must be based on the incremental value of the invention, not the value of the standard as a whole or any increased value the patented feature gains from its inclusion in the standard.  We also conclude that, if an accused infringer wants an instruction on patent hold-up and royalty stacking, it must provide evidence on the record of patent hold-up and royalty stacking in relation to both the RAND commitment at issue and the specific technology referenced therein.

Note that the court’s reference to “the incremental value of the invention” refers to apportioning the value of the invention to the accused product from other non-patented features and was not referring to the different  concept of the incremental value of the invention over a non-infringing alternative, which was not raised in this case.

This is a significant decision worth reading given its impact on  patent damages generally–e.g., clarifying the entire market value rule and applicability of Georgia-Pacific factors–as well as the specific impact in litigating royalties for RAND-encumbered patents.  A summary of the decision is provided below with generous excerpts from the decision itself given the importance thereof.

This is generally a patent friendly ruling that may increase the value of standard essential patents given the court’s rejection of some bright line rules that had been propounded that may have generally lowered the value of such patents — e.g., arguments to apply a one-size fits all RAND analysis to the smallest salable patent practicing unit based on public policy concerns beyond the actual circumstances of the case and RAND commitment that the patent owner made to the standard setting body.

Background

Ericsson sued D-Link and others in E.D. Texas for infringing patents alleged to be essential to the IEEE 802.11(n) WiFi standard.  The case ultimately was tried to a jury that found three patents infringed and awarded $10 million in damages, which was roughly 15 cents per infringing device.  Judge Davis sustained the jury verdict, from which this appeal followed.

Technical Standards Background.  The Federal Circuit explained the general background for industry technical standards based on an example user in a coffee shop being able to plug her laptop into the wall using a standard plug shape with standard voltage and being able to connect to the Internet through the coffee shop’s wireless network using standard protocols for wireless signal frequency, message formats, etc.  The standards are needed to ensure compatibility given the many different devices and device manufacturers.  Thus standard development organizations (“SDOs”) publish technical standards to ensure compatibility if the standard is adopted by “a critical mass of device developers.”  The standard at issue here is the Institute of Electrical and Electronics Engineers, Inc. (“IEEE”) 802.11(n) “Wi-Fi” wireless standard.

Developing the standard is a collaborative process of many different entities that may include technology covered by different patents.  The Federal Circuit defines such “standard essential patents” as follows:

Because the standard requires that devices utilize specific technology, compliant devices necessarily infringe certain claims in patents that cover technology incorporated into the standard.  These patents are called “standard essential patents” (“SEPs”). [citing IEEE Amicus Br. 13-14]

The Federal Circuit also described two  “potential concerns” of patent hold-up and royalty stacking that the RAND-obligation seeks to address, stating:

SEPs pose two potential problems that could inhibit widespread adoption of the standard: patent hold-up and royalty stacking.  Patent hold-up exists when the holder of a SEP demands excessive royalties after companies are locked into using a standard.  Royalty stacking can arise when a standard implicates numerous patents, perhaps hundreds, if not thousands.  If companies are forced to pay royalties to all SEP holders, the royalties will “stack” on top of each other and may become excessive in the aggregate.  To help alleviate these potential concerns, SDOs often seek assurances from patent owners before publishing the standard.  IEEE, for example, asks SEP owners to pledge that they will grant licenses to an unrestricted number of applicants on “reasonable, and non-discriminatory” (“RAND”) terms. [emphasis added; citing IEEE Amicus Br. at 16-18].

In this case, patent owner Ericsson submitted letters of assurance to the IEEE that promised to offer licenses for all of its 802.11(n) SEPs on reasonable and non-discriminatory terms (“RAND”).  Specifically, Ericsson pledged to “grant a license under reasonable rates to an unrestricted number of applicants on a worldwide basis with reasonable terms and conditions that are demonstrably free of unfair discrimination.”  The parties agreed that Ericsson was bound by this commitment for the three asserted SEPs.

The ‘568 Patent.  The asserted ‘568 Patent is directed to having a data packet header field that identifies what type of data is in the data packet–e.g., voice, video or data.  This allows packets to be prioritized for when to transmit them over limited bandwidth, such as giving a higher priority to real-time voice or video data that suffer from transmission delay more than other types of data, such as downloading a file.  This patent was alleged to cover the 802.11(n) traffic identifier (“TID”) field used in a data packet header to indicate the priority level of the data in the packet.

The ‘215 Patent.  The asserted ‘215 Patent concerns a particular way of sending an “Automatic Repeat Request” (“ARQ”) to indicate what packets were not received so that the sending device will resend them.  In the ‘215 Patent, a new “type identifier field” (“TIF”) is provided to indicate what format the ARQ field is in–e.g., is the ARQ simply the identification number of a missing packet or is it special coded bit-sequence denoting several missed packets.  This patent was asserted to cover the 802.11(n) “Multi-TID subfield” of the packet header that indicates what type of feedback response is in the “BlockAck” field of the header.

The ‘625 Patent.  The asserted ‘625 Patent concerns a way for the transmitting device to tell the receiving device that it does not need to wait for specific packets it may have missed during a data reception window (which would cause the receiving device to reject all other incoming packets), but to keep moving forward its data reception window to accept all transmitted packets.  This is helpful for certain types of data, such as real-time voice or video data, where it may be better to keep the conversation going rather than get stalled waiting for missed packets.  In contrast, for other types of data it may be important to receive all sent packets, such as in downloading a file so that you ultimately receive an exact copy of that file.  This patent was asserted against the 802.11(n) requirement that all packets should be received without using a reception window.

Accused Products.  The accused products include laptop computers and routers (“the end products”) that used 802.11(n)-compliant wireless chips made by Intel.

District Court Proceedings.  In 2010, Ericsson brought suit in E.D. Texas asserting nine patents alleged to be essential to 802.11(n).  Intel, who supplied the WiFi chip for the products, intervened.  At trial, Ericsson asserted five patents.  The jury found that the three patents above were infringed and awarded $10 million in past damages–about 15 cents per infringing device.  Judge Davis then had a bench trial on some RAND issues and ruled on JMOL motions that ultimately sustained the jury verdict (see our Aug. 7, 2013 post).

Federal Circuit Decision

Judge O’Malley authored the opinion, joined by Judge Taranto (except for a non-RAND issue) and Judge Hughes.

Infringement/Validity.  The Federal Circuit first went through challenges that the patents were not infringed or were invalid.  The Federal Circuit ruled substantial evidence supported the jury finding that the ‘568 and ‘215 Patents were infringed, but reversed the finding of infringement of the ‘625 patent.  This included an interesting issue for the ‘568 Patent concerning the Fantasy Sports line of cases dealing with whether there is infringement by a device simply because it is capable of performing a function even if there is little evidence that the claimed function is actually used, stating:

In sum, when the asserted claims recite capability, our case law supports finding infringement by a “reasonably capable” accused device on a case-by-case basis particularly where, as here, there is evidence that the accused device is actually used in an infringing manner and can be so used without significant alterations.

This may be a common issue for standard essential patents, because standards often have optional features that end products ultimately may not use, but must have the capability if they are to be deemed standard compliant–e.g., must be compliant to put the WiFi logo on the box.

The Federal Circuit also ruled that substantial evidence supported the jury’s verdict that the ‘625 Patent was not invalid, which appears to be the only invalidity challenge on appeal.

Entire Market Value Rule (“EMVR”).  With respect to damages, the Federal Circuit first considered D-Link’s challenge to Ericsson’s damages expert relying on licenses tied to the entire value of the licensed product, rather than the smallest salable patent practicing unit within the licensed product, where Ericsson did not dispute that the patent claims are practiced entirely within the Wi-Fi chips that are components within the end products.  The Federal Circuit described the EMVR as having two separate parts: (1) a “substantive legal rule” that the “ultimate reasonable royalty”–i.e., combination royalty rate and royalty base–“must be based on the incremental value that the patented invention adds to the end products”; and (2) an “evidentiary principle”  applied to the choice of the royalty base that is intended “to help our jury system reliably implement” the substantive legal rule of apportionment.  The Federal Circuit explained this latter evidentiary principle as follows:

The principle, as applicable specifically to the choice of a royalty base, is that, where a multi-component product is at issue and the patented feature is not the item which imbues the combination of the other features with value, care must be taken to avoid misleading the jury by placing undue emphasis on the value of the entire product.  It is not that an appropriately apportioned royalty award could never be fashioned by starting with the entire market value of a multi-component product–by, for instance, dramatically reducing the royalty rate to be applied in those cases–it is that reliance on the entire market value might mislead the jury, who may be less equipped to understand the extent to which the royalty rate would need to do the work in such instances.  Thus, where the entire value of a machine as a marketable article is “properly and legally attributable to the patented feature,” the damages owed to the patentee may be calculated by reference to that value.  Where it is not, however, courts must insist on a more realistic starting point for the royalty calculations by juries–often, the smallest salable unit and, at times, even less.

The Federal Circuit ruled there was no error in allowing expert testimony on the challenged licenses at issue here.  Following its rationale in VirnetX (see our Sep. 17, 2014 post) that concerned comparable licenses in general, the Federal Circuit ruled that any concerns about the licenses proffered here go to the weight, and not admissibility, of those licenses:

This court has recognized that licenses may be presented to the jury to help the jury decide an appropriate royalty award.  Prior licenses, however, 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.  Recognizing that constraint, however, the fact that a license is not perfectly analogous generally goes to the weight of the evidence, not its admissibility.  In each case, district courts must assess the extent to which the proffered testimony, evidence, and arguments would skew unfairly the jury’s ability to apportion the damages to account only for the value attributable to the infringing features.

The Federal Circuit also noted the practical issue that licenses generally are negotiated without considering the EMVR (e.g., smallest salable patent practicing unit), so too strict a rule on admissibility could preclude reliance on any actual real-world licenses, often deemed the best indication of what are reasonable licensing terms:

As the testimony at trial established, licenses are generally negotiated without consideration of the EMVR, and this was specifically true with respect to the Ericsson licenses relating to the technology at issue.  Makring real world, relevant licenses inadmissible on the grounds D-Link urges would often make it impossible for a patentee to resort to license-based evidence.  Such evidence is relevant and reliable, however, where the damages testimony regarding those license takes into account the very types of apportionment principles contemplated by Garretson [v. Clark, 111 U.S. 120, 121 (1884)).  In short, where expert testimony explains to the jury the need to discount reliance on a given license to account only for the value attributed to the licensed technology, as it did here, the mere fact that licenses predicated on the value of a multi-component product are referenced in that analysis–and the district court exercises its discretion not to exclude the evidence–is not reversible error.

The Federal Circuit, however, did counsel district courts to give cautionary instructions if requested and explain the importance of apportionment:

We do conclude, however, that, when licenses based on the value of a multi-component product are admitted, or even referenced in expert testimony, the court should give a cautionary instruction regarding the limited purposes for which such testimony is proffered if the accused infringer requests the instruction.  The court should also ensure that the instructions fully explain the need to apportion the ultimate royalty award to the incremental value of the patented feature from the overall product.

The Federal Circuit noted that simply relying on Georgia-Pacific factors–e.g., factors 9 and 13 that allude to apportionment–is not enough, but a separate instruction should be used in future cases.

The Federal Circuit also ruled that D-Link had waived its challenge to Ericsson’s counsel having referred to the total cost of the laptop when discussing the royalty rate.  D-Link had only objected to the licenses (not the counsel statement), referred to its end product value itself during cross-examination and did not raise the issue in post-trial motions.

The Federal Circuit’s ruling here on the entire market value rule should provide significant guidance on the “smallest salable patent practicing unit” debate for patents in general, as well as for standard essential patents.  Recall that in other SEP litigations involving the 802.11 WiFi standard, a dispute has been whether the royalty base should be the end product or the WiFi chip component within that end product.  For example, in Innovatio, Judge Holderman used the WiFi chip as the royalty base given a failure of proof by the patent holder to apportion value of the invention to the end product.  In CSIRO, Judge Davis used the end product as the royalty base because limiting the base to the cost of the WiFi chip would not capture the value of the patented technology.

The Federal Circuit’s emphasis on the Rule 403 jury prejudice “evidentiary principle” also may provide guidance on application of the entire market value rule.  For example, both the Innovatio and CSIRO cases were bench trials in which Rule 403 prejudice concerns are less prevalent and, thus, might tend to allow more flexibility in referring to the end product as the royalty base, rather than the smallest salable patent practicing unit.  Further, the Rule 403 evidentiary principle is not an issue in actual, arms-length licensing negotiations between sophisticated market participants.  So actual negotiated licenses for RAND-encumbered patents may properly refer to the end product as the royalty base even though that might be precluded under a Rule 403 evidentiary basis in litigating the RAND rate before a jury on those same patents.  Such a disconnect between reasonable real-world practices and packaging a case for the jury may be problematic where the jury is asked to consider whether a RAND commitment was breached based on the license terms offered in actual negotiations (where the Rule 403 evidentiary principle is not applied) and the litigated RAND rate (where the Rule 403 evidentiary principle may be applied).

No Per Se RAND-Specific Modified Georgia-Pacific Analysis.  The Federal Circuit considered the issue of an appropriate RAND royalty rate “an issue of first impression”, stating knowledge of only three other district court decisions on the issue: Judge Robart’s Microsoft v. Motorola decision (on appeal to the Ninth Circuit), Judge Holderman’s Innovatio decision (settled) and Judge Whyte’s Realtek v. LSI jury decision (on appeal to the Ninth Circuit).  If you follow our blog, you know there is also a Judge Davis bench trial decision in CSIRO v. Cisco (see our July 28, 2014 post).

At the outset, the Federal Circuit cautioned about over-reliance on all factors enumerated in Georgia-Pacific, even when not all factors are relevant:

Although we have never described the Georgia-Pacific factors as a talisman for royalty rate calculations, district courts regularly turn to this 15-factor list when fashioning their jury instructions.  Indeed, courts often parrot all 15 factors to the jury, even if some of those factors clearly are not relevant to the case at hand.  And, often, damages experts resort to the factors to justify urging an increase or a decrease in a royalty calculation, with little explanation as to why they do so, and little reference to the facts of record.

The Federal Circuit explained that many Georgia-Pacific factors are not applicable to RAND-encumbered patents, stating:

For example, factor 4 is “[t]he licensor’s established policy and marketing program to maintain his patent monopoly by not licensing others to use the invention or by granting licenses under special conditions designed to preserve that monopoly.”  Because of Ericsson’s RAND commitment, however, it cannot have that kind of policy for maintaining a patent monopoly.  Likewise, factor 5–“[t]he commercial relationship between the licensor and licensee”–is irrelevant because Ericsson must offer licenses at a non-discriminatory rate.

Several other Georgia-Pacific factors would at least need to be adjusted for RAND-encumbered patents–indeed, for SEP patents generally.  For example, factor 8 accounts for an invention’s “current popularity,” which is likely inflated because a standard requires the use of the technology.  Factor 9–“utility and advantages of the patented invention over the old modes or devices”–is also skewed for SEPs because the technology is used because it is essential, not necessarily because it is an improvement over the prior art.  Factor 10, moreover, considers the commercial embodiment of the licensor, which is also irrelevant as the standard requires the use of the technology. [emphasis added]

Thus the district court erred by giving the jury instructions on Georgia-Pacific factors that were not relevant, “including, at least, factors 4, 5, 8, 9 and 10.”  The Federal Circuit noted that referencing irrelevant factors alone may not be reversible error, but remand in this case will be necessary anyway given other errors.  Further, the Federal Circuit explained that the specific jury instructions should be tailored to the specific facts and circumstances of the case, finding it “unwise” to have a single modified Georgia-Pacific rule specific to all RAND-encumbered patents:

To be clear, we do not hold that there is a modified version of the Georgia-Pacific factors that should be used for all RAND-encumbered patents.  Indeed, to the extent D-Link argues that the trial court was required to give instructions that mirrored the analysis in Innovatio or Microsoft, we specifically reject that argument.  We believe it is unwise to create a new set of Georgia-Pacific-like factors for all cases involving RAND-encumbered patents.  Although we recognize the desire for bright line rules and the need for district courts to start somewhere, courts must consider the facts of record when instructing the jury and should avoid rote reference to any particular damages formula.

The Federal Circuit’s ruling here, thus, gives significance guidance in all cases on use of the Georgia-Pacific factors in general and the need to tailor jury instructions to the specific circumstances and evidence presented.  And it plainly rejects rote application of a modified Georgia-Pacific analysis to SEPs.  Rather, as with other patents, determining a RAND royalty rate will depend on the specific evidence presented in that particular case.

Consider Actual RAND Commitment.  Consistent with the focus on the actual facts and circumstances presented by the particular case, the Federal Circuit explained that the district court erred by generally instructing the jury to consider Ericsson’s RAND obligations, rather than instructing the jury about what those specific RAND obligations were, stating:

Trial court’s should also consider the patentee’s actual RAND commitment in crafting the jury instructions. … The district court should have turned to the actual RAND commitment at issue to determine how to instruct the jury.  In this case, Ericsson promised that it would “grant a license under reasonable rates to an unrestricted number of applicants on a worldwide basis with reasonable terms and conditions that are demonstrably free of unfair discrimination.”  Rather than instruct the jury to consider “Ericsson’s obligation to license its technology on RAND terms,” the trial court should have instructed the jury about Ericsson’s actual RAND promises.  “RAND terms” vary from case to case.  A RAND commitment limits the market value to (what the patent owner can reasonably charge for use of) the patented technology.  The court therefore must inform the jury what commitments have been made and of its obligation (not just option) to take those commitments into account when determining a royalty award. [emphasis in original]

The Federal Circuit’s decision here thus brings the focus more on what the patent owner actually committed to do, rather than on some general public policy of what a RAND commitment should be.

Apportionment.  The Federal Circuit considered two special apportionment issues for SEPs:

First, the patented feature must be apportioned from all of the unpatented features reflected in the standard.  Second, 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.  These steps are necessary 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. [emphasis in original]

The Federal Circuit noted that this may not be a precise science and “the jury should be told of its obligation to approximate the value added by the patented invention and that a degree of uncertainty in setting that value is permissible.”  Also worth noting is that the Federal Circuit’s reference to “the incremental value that the patented invention adds to the product” should not be confused with the “incremental value” the patented invention has over non-infringing alternatives, which is a totally different issue not discussed in this opinion.

The Federal Circuit noted that, in this case, the patented functionality of the two infringed patents were directed to only a small portion of the 802.11(n) standard and that some 802.11(n)-compliant end products do not use that functionality.  This is similar to computing damages for patents that cover only a small part of a device, and the jury should be instructed accordingly:

Just as we apportion damages for a patent that covers a small part of a device, we must also apportion damages for SEPs that cover only a small part of a standard.  In other words, a royalty award for a SEP must be apportioned to the value of the patented invention (or at least to the approximate value thereof), not the value of the standard as a whole.  A jury must be instructed accordingly.  … [I]f a patentee can show that his invention makes up “the entire value of the” standard, an apportionment instruction probably would not be appropriate.

***

Because SEP holders should only be compensated for the added benefit of their inventions, the jury must be told to differentiate the added benefit from any value the innovation gains because it has become standard essential.

The Federal Circuit used the Realtek court’s jury instruction as illustrative of this point, where the jury was instructed it “should not consider LSI’s advantage resulting from the standard’s adoption, if any.  However, you may consider any advantage resulting from the technology’s superiority.”

The Federal Circuit’s ruling here leaves some ambiguity in how to apply it.  The general purpose in apportioning the value of the patent to the standard appears to be a check that patented technology making only a nominal contribution to the standard does not improperly capture the value of the entire standard simply because the technology is in the standard.  But, of course, the ultimate issue to a licensee is the value of the patented technology to the licensed product, which product may not use or need all functionality provided by the standard.  For example, encryption of the WiFi signal may be important to some products that may be used in public places to protect the transmitted information, but may not be important to other products that use their own encryption scheme.  That was the case  in the Microsoft v. Motorola case that led Judge Robart to attribute little value to encryption patents for the Xbox products that did their own encryption for transmissions from the Xbox all the way through the WiFi connection and Internet to a remote server.  Judge Robart also had weighed the value of those patents to the standard itself, but it was not clear how that actually was applied in the case and the more controlling determination appeared to be the value to the licensed product, as is typically the case for all patents.  So it is not clear how a jury is to apply apportioning the value of the patent to the standard itself–in conjunction with apportioning the value of the patent to the accused product–beyond a rough check  that value is not being attributed to the mere fact that the patented technology is in the standard.

Need Evidence of Patent Hold-Up/Royalty Stacking.  The Federal Circuit agreed with the district court’s decision not to instruct the jury on patent hold-up or royalty stacking because there was no evidence of either.  Absent such evidence, an instruction would not be “necessary nor appropriate”:

In deciding whether to instruct the jury on patent hold-up and royalty stacking, again, we 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.  Indeed, “a court should not instruct on a proposition of law about which there is no competent evidence.”  Depending on the record, reference to such potential dangers may be neither necessary nor appropriate.

The Federal Circuit ruled there was no evidence of patent hold-up here, such as a showing that the patent holder started seeking higher royalty rates after the 802.11(n) standard was adopted.  Further, there was no evidence of royalty-stacking here, where D-Link did not present any evidence of other licenses it had taken under 802.11 patents: “The mere fact that thousands of patents are declared to be essential to a standard does not mean that a standard-compliant company will necessarily have to pay a royalty to each SEP holder.”

On this latter point, its worth noting that patent owners typically do not declare patents “to be essential to a standard”; rather, they typically submit letters of assurances or declarations that they will license the patent on RAND or other terms if the patent ends up being essential to the standard.  This is a practical issue, such as letters of assurance often are submitted before the standard is finalized so one may not know what the adopted standard will cover or there may be disagreements or uncertainty as to what a particular patent actually may cover (some patents alleged to be essential to a standard often are found not to be in litigation).

Hypothetical Negotiation Date.  The Federal Circuit noted that it was not addressing the date of the hypothetical negotiation–i.e., whether it should be at the time the standard was adopted or the time of infringement–because D-Link did not request such a jury instruction.  This goes to the issue whether non-infringing alternatives may include alternatives available at the time that the standard was adopted, as was considered by Judge Robart in Microsoft v. Motorola and Judge Holderman in Innovatio (modified to consider only alternatives that the SDO actually considered).

Reversed and Remanded.  Given the various errors identified above, the Federal Circuit vacated the RAND determination and remanded the case back to the district court for further proceedings consistent with the decision.

 

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.

Last summer, we reported on a jury verdict and post-trial rulings in favor of SEP patent holder Ericsson in its infringement suit against several manufacturers of WiFi-compliant products.  As we noted, the jury awarded several million dollars for infringement of Ericsson’s 802.11-essential patents.  Thereafter, several defendants took an appeal to the Federal Circuit, which is still pending.

Earlier this week, the district court granted Ericsson and defendant Belkin’s joint motion to dismiss the case with prejudice as to Belkin.  According to the motion, Ericsson and Belkin “settled their claims against one another . . . on the record, and on the eve of the jury returning its verdict in this matter.”  “To comply with that settlement agreement, Ericsson and Belkin [] seek to dismiss their respective claims with prejudice, and to have the final record in this case reflect their settlement and dismissals.”

According to the Order, “[b]ecause the jury was deliberating when Belkin and Ericsson announced their settlement, and because Belkin and Ericsson had yet to present the Court with their now-filed agreed upon dismissal, the Court did not alter the jury verdict form and entered judgment so as to not delay proceedings, including the appeal that the other defendants in the case have now taken.”  The dismissal order “shall in no way affect or alter the judgment as to the other defendants in this action other than Belkin or have any effect on the existing appeal to which Belkin is not a party.”  The Court vacated the final judgment as to Belkin, and ordered  Ericsson and Belkin to cover their own attorneys’ fees, costs of court, and expenses.

Today Judge Whyte issued his awaited post-trial rulings following the jury’s RAND determination on LSI’s IEEE 802.11 WiFi patents in which he (1) denied JMOL motions by  both Realtek and LSI, (2) ruled on Realtek’s injunction and declaratory relief requests by denying Realtek’s request to enjoin LSI from seeking to enforce RAND-obligated patents without first making a RAND offer, but granting modified declaratory judgment relief, and (3) entered final judgment.  The declaratory judgment ruling (discussed below) provides an interesting analysis on declaring patent owner LSI’s RAND obligation as well as equating the contractual RAND determination analysis in this case with a reasonable royalty analysis that a jury would use to assess past damages on the same patents.

Background.  Our prior posts provide background about this case in which Realtek sought declaratory judgment relief for breach of RAND-obligation and declaration of a RAND-royalty rate based on LSI seeking an exclusion order in the U.S. International Trade Commission on RAND-encumbered IEEE 802.11 WiFi patents.  Judge Whyte had preliminarily enjoined LSI from seeking to enforce any exclusion order or other injunctive-type relief before making a RAND-offer to Realtek (see our May 21, 2013 post).  The ITC ultimately ruled that one of the patents was not infringed and the other patent had expired and, thus, dismissed that portion of the case because the ITC can only provide prospective relief (see our Mar. 27, 2014 post). The Ninth Circuit then dismissed LSI’s appeal of the preliminary injunction as having been mooted by the ITC’s dismissal of the investigation (see our Mar. 21, 2014 post). 

In the meantime, Judge Whyte issued evidentiary rulings to frame the RAND issues for the jury trial (see our Jan. 9, 2014 post).  The jury  verdict awarded Realtek over $3.8 million for damages caused to Realtek by LSI’s breach of the RAND obligation (based primarily on attorneys fees Realtek spent in the ITC investigation) and assessed a RAND royalty rate totaling 0.19% of the sales price of Realtek’s WiFi chips — i.e., 0.12% for one patent and 0.07% for the other patent (see our Feb. 27, 2014 post).  The parties then presented post-verdict motions (see our Mar. 13, 2014 post).

Order Denying Permanent Injunction.  Judge Whyte denied Realtek’s permanent injunction motion because irreparable harm was too speculative at this point.  Realtek moved for permanent injunctive relief similar to the preliminary injunction that was granted, asking the court to enjoin LSI from demanding royalties from Realtek on the patents-in-suit that were inconsistent with the jury’s RAND determination and to enjoin LSI from enforcing any alleged standard essential patents without first offering a RAND license.  Judge Whyte denied Realtek’s requested injunction because “the ITC’s Final Determination of no domestic industry, invalidity, and no infringement extinguishes the likelihood of immediate irreparable harm.”  Such harm would be too “speculative” at this point because, even though LSI is appealing the ITC’s ruling, “several events must align in LSI’s favor for the entry of an exclusion order to occur,” including Federal Circuit reversal on three issues, the ITC issuing an exclusion order on remand and the exclusion order surviving a possible presidential veto.  The injunction was denied without prejudice in case later events make an exclusion order threat more immediate.

Order Granting Declaratory Judgment.  In the same order that denied injunctive relief, Judge Whyte granted a modified version of the declaratory judgment relief sought by Realtek.  Realtek sought a declaration that the patents-in-suit would be unenforceable if LSI “fail[s] to offer Realtek an ongoing license on RAND terms and conditions, consistent with the jury’s February 26, 2014 verdict.”  Judge Whyte first ruled that the requested declaration sounded more like injunctive relief–e.g., it “would functionally require LSI to forbear from a specific action: enforcing its patent rights as to Realtek.”  He thus denied that requested declaratory relief for the same reason he denied the permanent injunction.

Nonetheless, the court had discretion “to craft its own appropriate declaratory judgment.”  Judge Whyte contrasted this case with Judge Robart’s decision in Microsoft v. Motorola that had dismissed claims seeking a declaration of RAND rates as being duplicative of Microsoft’s breach of contract claims.  In Judge Robart’s case, the breach claim was premised on Motorola offering licensing terms alleged not to be RAND-compliant that, thus, already  required the court to determine a RAND rate as part of the breach of contract claim.  In this case, however, the breach of contract claim was premised on LSI instituting the ITC suit prior to offering any license (i.e., it was not premised on the patent owner offering a non-RAND license).  Thus, separate declaratory judgment jurisdiction exists over the existing controversy of what constitutes a RAND royalty rate.

Another issue is that one of the patents (the ‘867 Patent) recently expired.  But declaratory judgment jurisdiction still exists as long as there is a case or controversy over the RAND royalty rate for the patent.  Such a controversy exists “because Realtek has reasonable apprehension of LSI bringing suit for past infringement of the ‘867 Patent, thereby implicating LSI’s RAND obligations.”  Interestingly, Judge Whyte equated the reasonable royalty methodology for a patent infringement suit on these patents with the contractual RAND determination made in this case, stating:

In the RAND context, determining damages for patent infringement is equivalent to declaring the parties’ rights under the RAND contract.  The court here was tasked with declaring the parties’ rights under the RAND contract, but it drew from case law on patent infringement damages for its methodology.  In its instructions to the jury, the court applied the hypothetical negotiation framework to instruct the jury on arriving at an appropriate RAND royalty rate.  While this court altered some of the details of the Microsoft [Judge Robart decision] and the Innovatio [Judge Holderman decision] framework, it followed the same general approach.  The reasonable royalty methodology in a patent infringement suit between Realtek and LSI would be identical to the methodology given to the jury to declare the parties’ rights under the RAND contract.  Therefore, even though the patent has expired, the RAND commitment would still inform the hypothetical negotiation over a reasonable royalty, so the court retains jurisdiction to declare the parties’ rights under that commitment.

 Judge Whyte thus entered declaratory judgment (but without the “unenforceab[ility]” language that Realtek sought) by declaring that “upon Realtek’s request for a license, to be in compliance with its RAND commitment, LSI must offer Realtek a license to the ‘958 Patent [or ‘867 Patent] on RAND terms, including a royalty rate of 0.12% [or 0.07% for the ‘867 Patent] on the total sales of Realtek’s products.”

Order Denying JMOL Motions.  Judge Whyte also denied motions by both parties seeking judgment as a matter of law notwithstanding the jury verdict. 

First, Judge Whyte declined to overturn the jury verdict damages award to Realtek for LSI’s breach of contract claim, which turned on procedural issues regarding burdens of proof and the such in establishing Realtek’s attorneys fees for defending itself in the ITC investigation.

Second, Judge Whyte declined to overturn the jury’s verdict on the RAND royalty rate.  Among other things, Realtek challenged LSI’s profferd damages rate because LSI’s damages expert’s used an erroneous estimation of the number of SEPs subject to an alleged comparable license as part of her royalty analysis.  The expert had arrived at a per-patent royalty rate from an alleged  comparable license by dividing the comparable license’s royalty rate by an estimated number of standard essential patents licensed therein.  But the expert later admitted in cross-examination that that number may have been off by one, five or so patents and her calculation may need adjustment.  Judge Whyte sustained the jury verdict because, even with that discrepancy, the jury still could have returned a royalty rate higher than they found — and higher than the amount Realtek argued.  Further, Judge Whyte would not exclude the testimony under Daubert because the expert’s calculations were reliable, testable and subject to critique.  This was true even though the expert adjusted her calculations based on cross-examination, because courts should encourage honest adjustments by experts of minor estimation errors.

Yesterday, a Florida jury returned a verdict that BlackBerry did not infringe NXP’s patents alleged to be essential to the IEEE 802.11 WiFi and JEDEC eMMC standards and that the asserted patent claims were invalid.  The role of BlackBerry’s standard essential patent defenses is not clear from the record, though it appears to have been limited to arguments that any damages must be consistent with reasonable and non-discriminatory (RAND) licensing terms (e.g., no apparent allegation or remedy sought for NXP breaching a RAND obligation).

Specifically, a few weeks ago Judge Kane denied NXP’s motion in limine to preclude BlackBerry from offering any affirmative defense based on RAND or FRAND licensing obligations because BlackBerry allegedly did not plead or disclose any such defenses.  Judge Kane held that the RAND defense may be based on pleadings of implied license, patent misuse, or equitable estoppel even though the “better practice is to assert the RAND obligation in conjunction with pleading license, exhaustion, or implied license.”

In its opposition to NXP’s motion in limine and in its trial brief, BlackBerry did not focus on any RAND-based defenses other than arguing that, if NXP’s patents covered the standards (which BlackBerry disputed), then any damages must be based on a RAND royalty rate (though not clear how that was alleged to be different from a reasonable royalty rate).  The jury instructions did not have any RAND-specific instructions or defenses.  The RAND-obligation issue, therefore, appears to have been subsumed in the reasonable royalty damages argument (based on the typical Georgia-Pacific reasonable royalty analysis per Jury Instruction Nos 23-25), which damages issue the jury did not reach because they found that the patent claims were not infringed and were invalid.

Yesterday, the jury in the Realtek v. LSI case before Judge Whyte returned a verdict finding that a RAND royalty for LSI’s two patents alleged essential to IEEE 802.11 WiFi standard would total about 0.19% of the total sales prices of Realtek’s WiFi chips (0.12% for one patent plus 0.07% for the other).  This RAND royalty is reported to be closer to the rate sought by patent owner LSI of 0.29% than the much lower rate sought by putative licensee Realtek of 0.017%.  The Realtek WiFi chip price is not clear from the available filings, but was reported to be $1 to $1.74, which would yield an effective royalty of about 0.19 to 0.33 cents per WiFi chip (the jury had the option to award a royalty per unit or percentage of sales price, and they chose the latter).  The jury also awarded Realtek about $3.8 million for costs in defending against LSI’s attempt to seek an exclusion order in the U.S. International Trade Commission, which Judge Whyte previously held breached LSI’s RAND obligations.

For further background on this jury trial, see our prior posts that outlined key evidentiary rulings by Judge Whyte that framed the issue for the jury (see our Jan. 9, 2014 post and our Nov. 14, 2013 post).

Another Litigated RAND Data Point.  The jury’s verdict in this case provides a fourth data point on a U.S. litigated RAND royalty rate.  To date, we have two judge-determined RAND royalty rates and two jury determined RAND royalty rates, as follows:

  • Judge Robart’s bench trial RAND determination of 3.471 cents per WiFi unit and 0.555 cents per H.264 unit  in Microsoft v. Motorola (W.D. Wash.) (see our Apr. 25, 2013 post and other posts).
  • Jury verdict before Judge Davis determining 15 cents per WiFi chip in Ericsson v. D-Link (E.D. Tex) (see our Aug. 7, 2013 post and other posts)
  • Judge Holderman’s bench trial RAND determination of 9.56 cents per WiFI chip in In re Innovatio Litigation (N.D. Ill.) (see our Oct. 3, 2013 post and other posts).
  • Jury verdict before Judge Whyte determining 0.19% per WiFi chip (about 0.19 to 0.33 cents per chip) in Realtek v. LSI (N.D. Cal.).

Probably too few data points at this point to predict future cases.  The two bench trials (Judge Robart and Judge Holderman) generally have resulted in RAND determinations substantially favoring the putative licensee.  The two jury verdicts (before Judge Davis and Judge Whyte) did not have as adverse results for the patentees, because the determined RAND rates were lower than–but closer to–what the patentees sought at trial.

Jury Instructions.  The jury was instructed to assess the RAND royalty rate by assuming the patents are essential to the standard and without determining whether the patents actually are infringed by Realtek’s WiFi chips: “Whether or not Realtek infringes the two LSI patents is not an issue in this case” and “The determination of a RAND royalty rate also assumes that the two LSI patents are essential to the 802.11 standard.”

The crux of the instructions for the jury to determine a RAND royalty rate is found in Instruction Nos. 12 to 15, reproduced below in their entirety given the importance to putting the jury’s decision in context:

INSTRUCTION NO. 12: RAND DETERMINATION – HYPOTHETICAL NEGOTIATION
     As I previously advised you, one of your tasks is to determine, based upon the evidence presented, the appropriate royalty rate for the ‘958 and ‘867 Patents that LSI needs to offer to Realtek to comply with LSI’s RAND obligations.  Whether or not Realtek infringes the two LSI patents is not an issue in this case.
A royalty is a payment made to a patent holder in exchange for the right to make, use, or sell the claimed invention.  This right is called a “license.”  A “RAND” royalty rate is a reasonable and nondiscriminatory royalty rate.
In determining the RAND royalty rate, you should consider a hypothetical negotiation between Realtek and LSI over a royalty rate for LSI’s two patents.  In considering the nature of this negotiation, you must assume that the patent holder and the licensee would have acted reasonably and would have entered into a license agreement.  The determination of a RAND royalty rate also assumes that the two LSI patents are essential to the 802.11 standard.
For the purposes of this hypothetical negotiation, you should consider all the facts known and available to the parties at the time Realtek first made, used, or sold products using the standard, which was November 2002.  You should not consider LSI’s advantage resulting from the standard’s adoption, if any.  However, you may consider any advantage resulting from the technology’s superiority.  Your role is to determine what the result of the hypothetical negotiation between Realtek and LSI would have been.  You must determine what royalty would have resulted from the hypothetical negotiation and not simply what either party would have preferred.

INSTRUCTION NO. 13: RAND DETERMINATION – TYPES OF ROYALTIES
     A royalty can be calculated in several different ways and it is for you to determine which way is the most appropriate based on the evidence you have heard.  One type of royalty is a percentage royalty, in which the licensee pays the patent holder a certain percentage of its revenue.  Another type of royalty is a per unit royalty, in which the licensee pays the patent holder a predetermined amount of money for each unit the licensee sells.
It is up to you, based on the evidence, to decide what type of royalty is appropriate in this case.

INSTRUCTION NO. 14: RAND DETERMINATION – DETERMINING A RAND ROYALTY RATE
     You should follow the two steps below in determining the RAND royalty rate resulting from the hypothetical negotiation:

(1) Consider the importance of the two LSI patents to the standard as a whole, comparing the technical contribution of the two LSI patents to the technical contributions of other patents essential to the standard.
(2) Consider the contribution of the standard as a whole to the market value of Realtek’s products utilizing the standard.

INSTRUCTION NO. 15: RAND DETERMINATION – CONSIDERATION OF LICENSES
     You may consider other licenses for patents comparable to the two LSI patents.  In determining the comparability of other licenses, you may consider, among others, the following factors:

(1) the patents included in the license agreement,
(2) the date of the license,
(3) any limitations on the use of the licensed technology,
(4) the inclusion of other consideration in the agreement,
(5) whether the license was part of a settlement of litigation or arbitration,
(6) whether the royalty was a lump sum or a running royalty rate, and
(7) opinion testimony of qualified experts.

 

Judge Whyte recently issued his final ruling on Daubert and other evidence regarding RAND issues for the upcoming Realtek v. LSI jury trial based on his tentative ruling discussed in our Nov. 14 post.  Judge Whyte basically kept his tentative rulings and bases thereof, as discussed in our prior post.  He did provide additional insight into his statement about Realtek not negotiating for a RAND license from LSI during the time that LSI was seeking an exclusion order from the ITC.

Recall that the particular evidentiary ruling here concerns excluding evidence of whether LSI’s June 20, 2012 license offer– made after LSI filed suit in the ITC seeking an exclusion order–was RAND in order to show that Realtek failed to mitigate damages by not negotiating with LSI for a license — i.e., argument that had Realtek negotiated it could have accepted a RAND offer and avoided litigation or other costs.  The specific state law on duty to mitigate focuses not on what options were available to Realtek, but only the reasonableness of the action Realtek took — i.e., the reasonableness of Realtek not negotiating with LSI while the ITC action was pending:

“[I]t is appropriate for courts to focus ‘not on the failure of the plaintiff to pursue the … alternative courses of action suggested by [the] defendant but upon the reasonableness of the action which [the] plaintiff did in fact take.  The fact that in retrospect a reasonable alternative course of action is shown to have been feasible is not proof of the fact that the course actually pursued by the plaintiff was unreasonable.”

Judge Whyte’s tentative ruling excluded that mitigation evidence, stating that “Realtek’s refusal to negotiate under the threat of an ITC exclusion order was a reasonable course of action” and “Realtek would not be unreasonable in declining to negotiate with LSI under the circumstances.”

In now finalizing his ruling, Judge Whyte provides some additional insight into his ruling based on the distinction between the threat of an injunction that underlies all licensing negotiations (RAND-based or otherwise) and the fact that the patent owner here filed an action actively seeking an injunction:

At the outset, it is worth noting that LSI was correct when it contended at the December 20, 2013 hearing on this court’s tentative order that the threat of an injunction is always present in license negotiations.  The patent holder’s best alternative to a negotiated agreement in patent license negotiations is typically to file suit, which necessarily involves the threat of an injunction.  However, as others have discussed, negotiated patent royalties may often be higher than the true value of the technology because an injunction would impose serious hold-up and switching costs on the accused infringer.  Therefore, a negotiation arriving at a reasonable royalty rate is unlikely to occur when one party is under the threat of an exclusion order.

     Returning to LSI’s best argument, the court recognizes that the threat of an injunction forms the backdrop to many license negotiations.  Still, one fact peculiar to this case distinguishes LSI’s June 20, 2012 proposal from the typical license negotiation:  LSI had already filed an ITC action against Realtek to enforce the patent at the time it offered Realtek a license to the patent.  In a typical license negotiation, the threat of an injunction is not always credible.  The threat’s credibility depends on the litigation, reputational, and other costs faced by the patent holder.  It is still uncertain at what point the patent holder will invoke its best alternative to a negotiated agreement of filing suit.  Here, however, LSI has already filed an ITC action against Realtek, so LSI’s threat of an exclusion order is thus entirely credible.  At this point, LSI possessed especially strong leverage over Realtek, and thus the court cannot call unreasonable Realtek’s refusal to negotiate a supposedly “fair, reasonable, and nondiscriminatory” royalty rate with LSI in this weakened position.

As stated in our prior post on the tentative ruling, it is import to avoid over-reading its import under the circumstances — e.g., not misread this as encouraging parties not to negotiate.  This is an evidentiary ruling on state law duty to mitigate based on whether the decision not to negotiate under these particular circumstances was “reasonable” or at least not “unreasonable” without deciding whether other options — e.g., negotiating — also would be more or less reasonable.