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.
Magistrate Judge Cousins entered several pre-trial rulings that helped shape the damages issues presented to the jury.
Core Wireless moved to exclude Apple’s damages expert from providing testimony about royalty stacking, alleging that there was not sufficient evidence that Apple actually pays multiple royalties that would give rise to an actual royalty stacking problem. Judge Cousin issued a Daubert evidentiary ruling that denied Core Wireless’s motion, but noted that the opinion may be excluded at trial if the expert “fails to identify a sufficient factual basis for his assertion that Apple would consider royalty stacking in its hypothetical negotiation,” stating:
In Commonwealth Scientific and Indus. Research Organisation v. Cisco Systems, Inc., 809 F.3d 1295, 1302 (Fed.Cir. 2015) (“CSIRO”), the Federal Circuit cautioned that “abstract recitations of royalty stacking theory, and qualitative testimony that an invention is valuable–without being anchored to a quantitative market valuation–are insufficiently reliable.” Although Apple does not appear to present evidence that it currently has a royalty stacking problem, Apple does present evidence that (1) numerous specific royalty demands have been made that, if paid, would exceed the profit margin of the baseband chip; and (2) Apple considers royalty stacking in real-world licensing negotiations.
Thus, the Court concludes that [Apple’s damages expert’s] analysis does not violate Federal Circuit law on the appropriate methodology. At this time, the Daubert motion is DENIED. However, the Court will exclude this opinion at trial if [Apple’s damages expert] fails to identify a sufficient factual basis for his assertion that Apple would consider royalty stacking in its hypothetical negotiation.
Prior to Apple’s damages expert testifying on December 12, Core Wireless lodged renewed Objections to any testimony on royalty stacking. The trial transcripts are not publicly available so we do not know whether and to what extent Apple’s expert was permitted to testify about royalty stacking.
Smallest Salable Patent Practicing Unit
Apple moved to exclude Core Wireless’s damages expert’s testimony, alleging he had failed to consider the smallest salable patent-practicing unit (“SSPPU”) in violation of the entire market value rule. Magistrate Judge Cousin’s Daubert ruling denied Apple’s motion, because the expert permissibly relied on comparable licenses and negotiating positions that were not limited to, but greater than, the SSPPU:
“[T]he smallest salable patent-practicing unit principle provides that, where a damages model apportions from a royalty base, the model should use the smallest salable patent-practicing unit as the base.” CSIRO, 809 F.3d at 1302. However, the Federal Circuit in CSIRO hold that “The rule Cisco advances–which would require all damages models to begin with the smallest salable patent practicing unit–is untenable. It conflicts with our prior approvals of a methodology that values the asserted patent based on comparable licenses.” Id. at 1303. Thus, if the starting point of the analysis is comparable licenses, an expert may begin the hypothetical negotiation with evidence of comparable licenses and not the smallest salable patent-practicing unit as the base.
After reviewing [Core Wireless’s damages expert’s] report, the Court agrees with Core Wireless that [his] opinion relies on comparable licenses and negotiating positions, which appear to include a value greater than that of the smallest salable patent-practicing unit.
Final Jury Instructions
The Final Jury Instructions on damages also provides insight into what the jury considered in reaching its reasonable royalty verdict.
Form of Reasonable Royalty: Percentage of Base, Fixed-Per-Unit or Lump-Sum
The jury was instructed that a reasonable royalty could be either (1) an ongoing royalty determined by multiplying a royalty base times a percentage royalty rate, (2) a fixed royalty per unit or (3) a single lump-sum amount for past and future infringing products. These instructions–particularly with respect to a percentage royalty or fixed royalty–touch-on, without deciding, issues of whether the royalty base is a component or the entire product as well as apportioning value to the invention and not unpatented features. This portion of the jury instructions states as follows:
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. It is up to you, based on the evidence, to decide what type of royalty is appropriate in this case for the life of the patent.
1. Ongoing Royalty
One way to calculate a royalty is to determine what is called an “ongoing royalty.” To calculate an ongoing royalty, you must first determine the “base,” that is, the product on which the infringer is to pay. You then need to multiply the revenue the defendant obtained from that base by the “rate” or percentage that you find would have resulted from the hypothetical negotiation. For example, if the patent covers a nail, and the nail sells for $1, and the licensee sold 200 nails, the base revenue would be $200. If the rate you find would have resulted from the hypothetical negotiation is 1%, then the royalty would be $2, or the rate of 0.01 times the base revenue of $200. By contrasdt, if you find the rate to be 5%, the royalty would be $10, or the rate of 0.05 times the base revenue of $200. These numbers are only examples, and are not intended to suggest the appropriate royalty rate.
If the patent covers only part of the product that the infringer sells, then the base would normally be only that feature or component. For example, if you find that for a $100 care, the patented feature is the tires which sell for $5, the base revenue would be $5.
2. Fixed Royalty
Instead of a percentage royalty, you may decide that the appropriate royalty that would have resulted from a hypothetical negotiation is a fixed number of dollars per unit sold. If you do, the royalty would be that fixed number of dollars times the number of units sold.
In this case, the parties have introduced evidence of licenses. The royalty rate in one or more of those licenses may be considered if it helps to establish the value that is attributable to the patented invention as distinct from the value of other features of Apple’s product.
The ultimate combination of royalty base and royalty rate must reflect the value attributable to the infringing features of the product, and no more. When the accused infringing products have both patented and unpatented features, measuring this value requires you to identify and award only the value of the patented features.
3. Lump Sum Royalty
Another way to calculate a royalty is to determine a one-time lump sum payment that the infringer would have paid at the time of the hypothetical negotiation for a license covering all sales of the licensed product, both past and future. This differs from payment of an ongoing royalty because, with an ongoing royalty, the licensee pays based on the volume of actual licensed products it sells. When a one-time lump sum is paid, the infringer pays a single price for a license covering both past and future infringing sales.
The jury instructions also include a list of some Georgia-Pacific factors, while not including other factors. Specifically, the instructions did not include some of the traditional Georgia-Pacific Factors:
- Factor 3 on whether license exclusive or restricted as to territory or to whom sold.
- Factor 4 on the patent owner’s policy of whether to license or not license the patent.
- Factor 5 on the commercial relationship between the patent owner and licensee.
- Factor 6 on the effect in promoting sales of other non-patented products
- Factor 7 on the duration of the patent and term of the license
The jury was provided a non-exclusive list of factors to consider, the instructions stating as follows:
C. Reasonable Royalty – Relevant Factors
In determining the reasonable royalty, you should consider all the facts known and available to the parties at the time the infringement began. Some of the kinds of factors that you may consider in making your determination are:
- The royalties received by the patentee for the licensing of the patent-in-suit, proving or tending to prove an established royalty.
- The rates paid by the licensee for the use of other patents comparable to the patent-in-suit.
- The utility and advantages of the patented property over the old modes or devices, if any, that had been used for working out similar results.
- The nature of the patented invention, the character of the commercial embodiment of it as owned and produced by the licensor, and the benefits to those who have used the invention.
- The extent to which the infringer has made use of the invention and any evidence probative of the value of that use.
- The portion of the profit or of the selling price that may be customary in the particular business or in comparable business to allow for the use of the invention or analogous inventions.
- The portion of the realizable profits that should be credited to the invention as distinguished from nonpatented elements, the manufacturing process, business risks, or significant features or improvements added by the infringer.
- The opinion and testimony of qualified experts.
- The amount that a licensor (such as the patentee) and a licensee (such as the infringer) would have agreed upon (at the time the infringement began) if both had been reasonably and voluntarily trying to reach an agreement; that is, the amount which a prudent licensee–who desired, as a business proposition, to obtain a license to manufacture and sell a particular article embodying the patented invention–would have been willing to pay as a royalty and yet be able to make a reasonable profit and which amount would have been acceptable by a prudent patentee who was willing to grant a license.
No one factor is dispositive and you can and should consider the evidence that has been presented to you in this case on each of these factors. You may also consider any other factors which in your mind would have increased or decreased the royalty the infringer would have been willing to pay and the patent holder would have been willing to accept, actin as normally prudent business people. The final factor establishes the framework which you should use in determining a reasonable royalty, that is, the payment that would have resulted from a negotiation between the patent holder and the infringer taking place at a time prior to when the infringement began.
The jury also was provided instructions on how to account for a RAND commitment in determining the reasonable royalty. This was a relatively short instruction that focused on attributing value to the patented invention and not value from standardization, stating:
D. Reasonable Royalty — Commitment to License on Reasonable and Nondiscriminatory Terms
In this case, by participating in a standard-setting organization, both Nokia (the prior owner of the patents) and Core Wireless promised to license its patents to all willing licensees on reasonable and nondiscriminatory terms.
You must take that promise into account in determining the reasonable royalty.
When a technology is incorporated into an industry standard, it is typically chosen from among different options. Once a standard is adopted, the technology is not necessarily used by other companies because it is the best option; the technology is used because its use is necessary to comply with the standard. The royalty you award should reflect the value of Core Wireless’ technological contribution, not the value of its widespread adoption due to standardization.
In addition, the value of the patented feature must be apportioned from the value of any unpatented features included in the standard.
The last part of the instruction seems to simply hang there in want of explanation — i.e., “the value of the patented feature must be apportioned from the value of any unpatented features included in the standard.” What was the jury to do with such apportionment — e.g., raise or lower the royalty rate based on the significance of the patented invention to the standard?
Next Steps — Post-Trial Motions and Equitable Issues
The parties will next consider post-trial briefings and any equitable issues. The parties’ Joint Pretrial Statement indicates that Apple may raise some equitable defenses based on the prior patent owner’s conduct before standards organizations, including allegations that the prior patent owner “Nokia breached its obligation to disclose the patents in suit as relevant intellectual property rights (IPRs) during the standardization of the relevant cellular standards at ETSI and 3GPP.”