Today, Judge Selna issued on Order ruling on Ericsson’s motion to alter or amend his FRAND ruling. (See our Jan. 3, 2018 post summarizing FRAND royalty ruling). Under the procedural posture of the Rule 52(b) motion for seeking modification of a judge’s bench trial findings of fact and law, Ericsson had to show that its proposed changes to that ruling were needed “to correct manifest errors of law or fact or to address newly discovered evidence or controlling law” or were not changes that “would not affect the outcome of the case or are immaterial to the court’s conclusions.” (Order at 2). Given this difficult standard, Judge Selna only agreed to make minor word changes to his decision, which he will soon reissue with other clerical corrections and some corrections to be made based on TCL’s Rule 52(b) motions (which were also apparently minor changes). To be clear: by “minor changes” we mean as far as significance in applying the decision to other cases between other parties; we could be mistaken and, moreover, have no comment on how significant the changes may be to the instant parties in this particular case. The next substantive step in this case will be the Federal Circuit appeal that Ericsson already filed, but that has been stayed pending the outcome of the parties’ Rule 52(b) motions.
Decision on Rule 52(b) Motion
Judge Selna considered eight errors alleged by Ericsson, which alleged errors were:
- The court erred in considering the impact of TCL’s pass-through rights derived from Qualcomm chipsets licensed under Ericsson’s patents;
- The court’s description at page 69 of its Memo erroneously stated that it unpacked the comparable license agreements “like Ericsson has” without using caps or floors and using retail prices in unpacking royalty rates, where Ericsson argued that some of its business cases did rely on caps and used wholesale data.
- The court using the royalty rates unpacked from the Apple and Samsung licenses that erroneously captured brand value (non-infringing feature) that would skew the unpacked royalty rate lower;
- The court’s failure to compute a 2G royalty rate based on comparable licenses that includes Samsung, LG, and ZTE 2G sales;
- The court erroneously using high projected revenue from the Samsung license, rather than mid-level amount of projected revenue, when considering Ericsson’s business case, which error skewed the effective royalty rate lower;
- The court’s statement of the number of standard essential patents (SEPs) that Ericsson argued erroneously failed to include SEPs excluded by the court’s Daubert ruling before trial;
- The court should clarify that the obligations imposed by the non-discrimination prong of the fair, reasonable, and non-discriminatory (“FRAND”) licensing requirement does not require renegotiating past licenses if projected sales differ from actual sales; and
- The court erring by not calculating TCL’s royalty rate for Ericsson’s SEPs for the sale of external modems and personal computers, but considered those devices to be royalty free when royalties are paid on handset devices. (Order at 2).
Much of the court’s ruling on the eight issues above are very case specific and we direct you to the decision itself if interested in that detail. Two issues that stand out are summarized below.
Wholesale versus Retail Price Royalty Base
Ericsson raised a potentially significant issue of whether the court used retail sales prices to unpack royalty rates in some instances when it should have used wholesale prices. This can have a significant impact on computing an effective royalty rate of an existing comparable license. In his original decision, Judge Selna indicates that whether the difference between royalty rates based on wholesale or retail prices could be important:
It is unclear whether the revenue projections in Ericsson’s business cases for Apple, Samsung, HTC and LG are based on the licensee’s wholesale or retail sales. These were all lump sum deals, so Ericsson would not necessarily have had a business reason to prefer one over the other. [A witness] stated only that its business cases “endeavor to use the most reliable sales data available at the time, either from market analysts or from the licensee.” To the extent that the business case data is wholesale data, it would tend to produce higher rates than IDC data [that is based on retail price data]. The Court keeps this problem in mind in ultimately setting a FRAND rate, and uses business case projections as the lower limit of the licensee’s revenue, and ITC data as the upper limit. [Memo. at 72 n.40 (emphasis added)]
Why does it matter whether the effective royalty rate is computed using a product’s wholesale price versus retail price? Its basically application of the substantive apportionment principle articulated by the Federal Circuit in Ericsson v. D-Link, 773 F.3d 1201, 1226 (Fed. Cir. 2014), that it does not matter what royalty rate and royalty base are used, but “the ultimate combination of royalty base and royalty rate must reflect the value attributable to the infringing features of the product.” Expressed mathematically:
V = Rate X Base
- V = Value attributable to the infringing features of the product
- Rate = Royalty Rate
- Base = Royalty Base
If the value attributable to the infringing features of the product (V) must be the same no matter what combination of Royalty Rate and Base are used, then using a higher royalty Base will require a lower royalty Rate and vice versa. Because wholesale prices are lower than retail prices, the royalty Rate applied to a Wholesale Base will be higher than the royalty Rate applied to a Retail Base.
For example, assume that the retail price of a product is two-times the wholesale price. In that case, the Wholesale Rate would be twice the Retail Rate, as shown mathematically below:
V = WholeSale Rate X WholeSale Base = Retail Rate X Retail Base
Substituting Retail Base = 2 X Wholesale Base yields:
V = WholeSale Rate X WholeSale Base = Retail Rate X (2 X Wholesale Base)
Solving for Wholesale Rate = 2 X Retail Rate
Accordingly, the greater the difference between the wholesale and retail price of a product, the the higher the royalty rate applied to a product’s wholesale price will be compared to the royalty rate applied to the retail price.
No Renegotiation If Projected Sales Differ From Actual Sales
Ericsson expressed concern that the court’s decision could be misconstrued as requiring Ericsson “to renegotiate existing licenses if actual sales diverge from its projections.” (Order at 14). Judge Selna dismissed that concern because, among other things, his ruling indicated that ETSI’s IPR Policy did not require renegotiating existing licenses based on subsequent events:
Ericsson expresses a concern that the Court’s holding is susceptible to an interpretation that would require Ericsson to renegotiate existing licenses if actual sales diverge from its projections. However, the Court expressly found that “ETSI’s members ultimately approved an ETSI IPR Policy that did not require such re-opening and re-negotiations of prior licenses.” (Mot. at 13-140). The Court confesses that it is powerless to stop people from making their own interpretations of the Memorandum, whether right or wrong. [Order at 14]