Today, a Northern District of California jury in a trial before Magistrate Judge Nathanael M. Cousins entered a Verdict finding that Apple infringed two patents alleged essential to ETSI and 3GPP cellular standards, that the patents were not invalid and awarding a reasonable royalty in the amount of $3.4 Million and $3.9 Million for each patent, respectively, as single lump sum payments for past and future infringement.  It is not clear from the public record how the jury reached this damages verdict or whether it favors more the patent owner Core Wireless or the adjudged infringer Apple.  We may follow-up this post if more insight is provided by post-trial briefings or the trial transcripts become public.

Below is a discussion of some of the pre-trial rulings and jury instructions that would have shaped the jury’s reasonable royalty determination here.  These rulings touch-on the issues of royalty stacking, the smallest salable patent practicing unit, the form of a reasonable royalty, relevant Georgia-Pacific factors and apportionment to the value of the patented technology. Continue Reading Jury awards Core Wireless $7.3 Million lump sum for Apple’s infringement of two SEPs (Core Wireless v. Apple)

Today the court posted the public version of Judge Holderman’s 89-page ruling on what constitutes RAND for Innovatio’s WiFi patents — posted much sooner than anticipated in our earlier post.  The court applied a modified version of Judge Robart’s methodology to determine the RAND rate to be paid by manufacturers of WiFi equipment for nineteen of Innovatio’s 802.11 standard essential patents to be “9.56 cents for each Wi-Fi chip used or sold by the Manufacturers in the United States” (much lower than the about $4 to $40 royalty Innovatio sought on each end-product using the Wi-Fi chips).  Below is a quick, rough summary of some key portions of Judge Holderman’s opinion, which reflects a fact-sensitive and case-by-case evidentiary-based approach to assessing RAND in litigation.

Recap.  Judge Holderman recapped that the parties agreed to waive their rights to a jury trial on damages in order to have a bench trial on the issue that would allow the parties to assess early settlement without first going through the expense of a liability trial on infringement and validity.  He also had determined that all asserted patent claims were essential to practice the 802.11 WiFi standard.  He then held a six-day bench trial last month to determine RAND as applied to manufacturers of WiFi equipment (did not consider at this time a RAND rate as applied to users of the equipment).

Modified Judge Robart Method.  The parties agreed that Judge Holderman should follow Judge Robart’s methodology in Microsoft v. Motorola in setting a RAND rate, with the court making some modifications based on circumstances of this case.  Judge Holderman summarized Judge Robart’s methodology by identifying the relevant modified-Georgia Pacific factors (see pages 8-10 of the opinion) and a three-step framework to determine RAND:

First, a court should consider the importance of the patent portfolio to the standard, considering both the proportion of all patents essential to the standard that are in the portolio, and also the technical contribution of the patent portfolio as a whole to the standard.  Second, a court should consider the importance of the patent portfolio as a whole to the alleged infringer’s accused products.  Third, the court should examine other licenses for comparable patents to determine a RAND rate to license the patent portfolio, using its conclusions about the importance of the portfolio to the standard and to the alleged infringer’s products to determine whether a given license or set of licenses is comparable. [emphasis added]

 The court then modified Judge Robart’s methodology to fit this case in three ways.  First, Judge Holderman would determine only a single RAND rate (not a reasonable range of RAND rates as Judge Robart did for a jury later to assess breach of the RAND obligation).  Second, the court here already determined the patents were essential (but Judge Robart had considered patents whose essentiallity was disputed, which led to diminished value where essentiality was questionable).  Thus, “unlike Judge Robart, the court will not adjust the RAND rate in light of pre-litigation uncertainty about the essentiality of a given patent.”  Third, because Judge Holderman used the WiFi chip as the royalty base and “the purpose of a Wi-Fi chip is, by definition, to provide 802.11 functionality”, then determining the patents’ importance to the 802.11 WiFi standard “determines the importance of those patents to the Wi-Fi chip” — i.e., merges the first two steps of Judge Robart’s analysis.

Hypothetical Negotiation Date.  The court used 1997 as the date of the hypothetical negotiation because that’s when the 802.11 standard was initially adopted and the approximate time the manufacturers began to sell 802.11 compliant devices.

Patent Holdup.  Judge Holderman considered the parties’ disagreement whether patent holdup was an actual serious issue.  Based on the specific evidence presented, including concerns of the prior patent owner Broadcom, he concluded that “patent hold-up is a substantial problem that RAND is designed to prevent” and the RAND rate must “reflect only the value of the underlying technology and not the hold-up value of standardization.”  But that concern is tempered by evidence of “the difficulty of distinguishing between the intrinsic value of the technology and the value of standardization”–e.g., the ease at which an innovation adopted into a standard can be interfaced with existing technology.  Thus the court will “take into account the ease of [the SEP] patents’ integration into the standard as a whole.”

Royalty Stacking.  Judge Holderman weighed arguments about royalty-stacking concerns on “aggregate royalties” if all SEP owners made similar royalty demands against the view that royalty-stacking is not a problem if patented technology is accurately valued — “stacking the royalties … merely reflects the value that is created by combining many inventions into a single product.”  He concluded that royalty stacking may be a concern, but “[p]ractically speaking” that means royalty stacking is a rough accuracy check — e.g., if court determines SEPs at issue provide 25% of a standard’s functionality, then the other SEPs for that standard comprise the remaining 75% of the standard’s value.  Further “the court will consider whether the overall royalty of all standard-essential patents would prohibit widespread adoption of the standard.”

Incentivizing Inventors.  Judge Holderman acknowledged the need to incentivize innovators to contribute their inventions to the standard.  One concern here is “reverse hold-up,” but there was no evidence of reverse hold-up in this specific case — e.g., no evidence that the manufacturers were ever offered a license or rejected an offered license.  The court also questioned whether hold-up raised “significant concerns unique to the RAND context” and, therefore he would “not give the ability of alleged infringers to force a lawsuit any special consideration in the RAND analysis beyond what it receives in a typical patent case.”  He would, however, “consider whether the proposed RAND rates provide sufficient returns” to incentive innovators to invest in new technology and make that technology available to standards.

Royalty Base.  The parties disputed what would be the “smallest salable patent-practicing unit” to form the royalty base.  Because many claims went beyond the chip to include antennas and other components as limitations, Innovatio argued that the proper base was the entire end-product as modified by a “Wi-Fi feature factor” to account for Wi-Fi’s value to a particular product–that would result in a royaty from $3.39 to $36.90 depending on the device based on Innovatio’s proposed “6% benchmark royalty rate.” The Manufacturers argued that the WiFi chip implemented all features of the 802.11 standard, so the royalty base should be the WiFi chip, which would result in a royalty from .72 to 3.09 cents per chip.

Judge Holderman ultimately adopted the Manufacturers’ WiFi chip approach based on Innovatio’s “failure of proof” to “credibly apportion the value of the end-products down to the patented features.”  For example, Innovatio had not established that its “Wi-Fi feature factor” was “based on an established method of analysis.”  Further, Innovatio’s proposed “6% benchmark rate” was not based on licenses that the court deemed comparable.

Ex Ante Alternatives.  Judge Holderman considered the presence of alternative technologies at the time the standard was adopted.  The manufacturer’s argued that even other patented alternatives were relevant, because “economic models suggest that if two patented and equally effective alternatives … charge the same royalty, the two patent holders would negotiate the price down to effectively zero.”  Innovatio argued that “no patent holder would accept a royalty that is effectively zero.”  Judge Holderman agreed that “it is implausible that in the real world, patent holders would accept effectively nothing to license their techonlogy” and such an approach “would discourage future innovators” from investing in new technology and contributing it to the standard.  Thus, “the existence of patented alternatives does not provide as much reason to discount the value of Innovatio’s patents as does the existence of alternatives in the public domain.”  Further, “the court will only consider [alternative] technology that was considered by the standard-setting body.”

No Comparable Licenses.  Judge Holderman found that “none of Innovatio’s proposed comparable licenses are appropriate for determining a royalty in the RAND licensing context.”  For example, he “agrees with Judge Robart … that the MMI-Vtech license was merely a small part of a larger licensing agreement that the parties entered into to settle significant litigation” so “the license rate is likely the product of the settlement negotiation … and not an accurate market-determined rate.”  But he also rejected the Manufacturer’s reliance on the Via licensing pool because that licensing pool “did not include high-value patents”, but in this case he determined that the Innovatio “patent portfolio is of moderate to moderate-high importance” to the 802.11 standard.  He ultimately found there were no comparable licenses.

“Top Down” Valuation Method.  Without comparable licenses, the court considered and adopted an alternative valuation method proposed by the Manufacturers’ expert — a “Top Down” approach, described as follows:

 In summary, the Top Down approach starts with the average price of a Wi-Fi chip.  Based on that average price, Dr. Leonard then calculated the average profit that a chipmaker earns on the sale of each chbip, thereby isolating the portion of the income from the sale of the chip available to the chipmaker to pay royalties on intellectual property.  Next, Dr. Leonard multiplied the available profit on a chip by a fraction calculated as the number of Innovatio’s 802.11 standard-essential patents, divided by the total number of 802.11 standard-essential patents.  Dr. Leonard also provided several alternative calculations for this step by varying the denominator of the fraction to account for varying conclusions about the value of Innovatio’s patents to the 802.11 standard.

 RAND Determination.  The court ultimately used a WiFi chip price of $14.85 and a 12.1% profit margin per chip.  The court estimated there were three thousand 802.11 SEPs, but was “cognizant of the fact that many of those 3000 patents are likely less valuable to the standard than Innovatio’s patents because their essentiality has not been judicially confirmed.”  He then plugged that into the “Top Down” model and came to 9.56 cents per WiFi chip (see pages 84-86 of the opinion for details).  He compared that to RAND rates determined in other litigations–e.g., 9.56 cents fell “comfortably within” Judge Robart’s 0.8 cents to 19.5 cents RAND range.