Today, a three-judge panel of the Fifth Circuit affirmed the judgment that Ericsson’s licensing offers to HTC on 2G, 3G and 4G standard essential patents (SEPs) based on the mobile device price (rather than the price of the baseband processor component inside the mobile device) complied with Ericsson’s ETSI commitment to license SEPs on fair, reasonable and non-discriminatory (FRAND) terms. The decision rejected HTC’s argument that the non-discrimination portion of the FRAND commitment required Ericsson to give HTC the same licensing terms as given larger mobile device manufacturers, because that would convert the ETSI FRAND commitment into a most-favored-licensee approach that ETSI had refused to adopt. The decision also found that HTC’s proposed FRAND jury instructions were not a substantially correct statement of the law, because Ericsson’s ETSI FRAND commitment was governed by French contract law, but HTC’s instructions were based on U.S. law without reference or comparison to French contract law. One of the three judges issuing the decision filed a concurrence (discussed below).
This is an important case to read in understanding SEP law and shows the importance of considering the specific FRAND commitment at issue, rather than arguing some general FRAND concept in the ether. Our prior post reviewed the background of this case and district court’s decision (see May 25, 2019 post), and we also provide a background summary below. As always, we recommend that you review the decision yourself. In doing so, keep in mind the procedural posture and standard of appellate review here that can impact the extent to which the court’s decision may apply to other cases.
Ericsson owns many patents considered essential to 2G, 3G and 4G standards (“standard essential patents” or SEPs). Ericsson made submissions to ETSI committing to grant licenses to patents that cover those standards on fair, reasonable and non-discriminatory terms (FRAND). HTC also owns 2G, 3G and 4G SEPs.
Ericsson and HTC had entered cross-license agreements in 2003, 2008 and 2014. Under the 2014 license agreement, HTC paid Ericsson a lump sum of $75 million regardless of HTC’s phone sales, which effectively was $2.50 per mobile device based on HTC’s actual sales. In 2016, just before the 2014 license expired, HTC and Ericsson began negotiating renewal of the license. Ericsson offered a license at $2.50 per 4G device. HTC declined and counteroffered $0.10 per 4G device based on the price of the baseband processor in the 4G device products–i.e., the smallest salable patent practicing unit or SSPPU.
In April 2017, HTC filed the instant lawsuit alleging that Ericsson breached its FRAND commitment. In June 2017, Ericsson made another offer to license at 1% of the 4G device price, subject to a $1 floor and a $4 cap (i.e., the rate per unit would be between $1 and $4). HTC rejected that offer. Ericsson filed a counterclaim seeking a declaration that (1) Ericsson’s offers were FRAND and (2) HTC failed to negotiate in good faith.
At trial, HTC argued that Ericsson had breached its FRAND commitments in at least two ways. First, the value of Ericsson’s patents must be apportioned from the profit margin of the baseband processor, rather than the net sales prices of the finished mobile device, which results in a substantially lower royalty. Second, under the non-discrimination terms of Ericsson’s FRAND commitment, HTC was entitled to the more favorable licensing terms granted to larger mobile device manufacturers like Apple and Huawei.
Ericsson argued that the best way to determine whether its offers to HTC were fair and reasonable was to look at licenses that Ericsson had negotiated with other, similarly situated companies. All of those licenses were based on the value Ericsson’s patents provided to the end-user product, not just the baseband processor component (SSPPU) of the products. Further, all of the licenses that Ericsson granted to several of HTC’s competitors contained terms similar to those offered to HTC.
Ericsson and HTC proposed different jury instructions on determining a FRAND royalty that supported their respective methodologies. The district court ultimately adopted the following as a jury instruction:
Whether or not a license is FRAND will depend upon the totality of the particular facts and circumstances existing during the negotiations and leading up to the license. Ladies and gentleman, there is no fixed or required methodology for setting or calculating the terms of a FRAND license rate.
HTC did not object to that instruction, but did proffer eleven additional instructions for the jury. The district court declined to give those additional instructions.
The jury verdict form had three questions:
- Whether HTC prove[d] by a preponderance of the evidence that Ericsson breached its contractual obligation to offer HTC a license, on FRAND terms, to Ericsson’s cellular standard-essential patents;
- Whether Ericsson had breached its duty of good faith negotiations;
- Whether HTC had breached its duty to negotiate in good faith.
The jury found that both parties had breached their duties to negotiate in good faith, but Ericsson had not breached its FRAND commitment. Ericsson then filed a motion on its declaratory judgment action, which the district court granted in ruling “that, in its dealings with HTC as presented in this case, Ericsson complied with its FRAND assurance to HTC, as set forth” in Ericsson’s licensing declarations to ETSI.
HTC appealed three issues that are the subject of the Fifth Circuit decision today:
- The district court’s exclusion of three of HTC’s requested jury instructions;
- The district court’s declaratory judgment that Ericsson had complied with its obligation to provide HTC a license on FRAND terms; and
- The district court’s exclusion of testimony by an expert for Ericsson in another case that HTC wanted to use to impeach Ericsson’s expert in this case.
The Fifth Circuit ruled in Ericsson’s favor for all three issues.
The appeals court reviews the district court’s refusal to provide a jury instructions under an abuse of discretion standard, which is met if the district court refuses to give a jury instruction that:
- was a substantially correct statement of law,
- was not substantially covered in the jury charge as a whole, and
- concerned an important point in the trial such that the failure to instruct the jury on the issue seriously impaired the party’s ability to present a given claim.
HTC argued that the jury should have been instructed (1) to apportion the value of the patents from the non-patented features of HTC’s phones and (2) the non-discrimination requirement of FRAND “serves to level the playing field among competitors” by requiring a patent holder to provide similar terms to similarly situated licensees.
The Fifth Circuit held that HTC’s proposed instructions were not “substantially correct” statements of the law. Rather, “HTC’s proposed instructions miss the mark because they rely on inapplicable law.” HTC relies on U.S. law. But Ericsson’s FRAND commitment made with ETSI is “governed by the laws of France” and is “solely contractual in nature”: i.e., the ETSI FRAND commitment is “a matter of French contract law.” HTC did not support its proposed jury instructions with French law or the specific provisions of Ericsson’s FRAND commitment with ETSI:
In spite of [Ericsson’s FRAND commitment being governed by French contract law], HTC’s proposed jury instructions are based on United States patent law. HTC did not even attempt to justify its proposed instructions under French contract law or to argue that French contract law and United States patent law are equivalent. Nor did it try to support its position by pointing to the specific, governing provisions of Ericsson’s agreement with ETSI. Because HTC relied on inapplicable law to support its proposed instructions, the district court was well within its discretion in refusing to give those instructions.
Even if US law governed the case, HTC’s proposed instruction arising from “patent-damages cases” was not required in this “breach-of-contract” case.
However, as other courts have recognized, a breach-of-contract case involving a breach-of-FRAND claim “is not a patent law action.” The act of determining the value of a standard-essential patent for purposes of calculating damages is distinct from assessing whether a particular offer made during unique licensing negotiations was fair and reasonable. So, while the Federal Circuit’s patent law methodology can serve as guidance in contract cases on questions of patent valuation, it does not explicitly govern the interpretation of contractual terms, even terms that are intertwined with patent law. Thus, although the district court may have been permitted to use United States patent-law principles to guide its instructions (assuming that United States law were to apply), it was not obligated to do so.
The Fifth Circuit also ruled that HTC’s proposed non-discrimination instruction “flatly contradicts the agreement between Ericsson and ETSI.” HTC’s proposal would “transform the non-discrimination element of FRAND into a most-favored licensee approach,” which ETSI already rejected:
HTC’s proposed non-discrimination instruction would do away with any “difference in terms” offered to potential licensees if the difference “creates a competitive disadvantage for a prospective licensee.” The proposed instruction described the non-discrimination prong of FRAND as something designed to “level the playing field among competitors … by prohibiting preferential treatment that imposes different costs to different competitors.”
HTC’s proposed instruction would transform the non-discrimination element of FRAND into a most-favored-licensee approach, which would require Ericsson to provide identical licensing terms to all prospective licensees. But ETSI has already rejected a most-favored-licensee approach and chosen to give patent holders some flexibility in coming to reasonable agreements with different potential licensees. Giving HTC’s proposed instruction to the jury would have caused confusion regarding the scope of the non-discrimination element of the actual FRAND agreement between Ericsson and ETSI. The district court was well within its discretion to refuse to give such an instruction.
Further, even if HTC’s proposed instructions were correct, HTC has not shown that failure to give the instruction “seriously impaired HTC’s ability to present” its case. Both parties agreed that apportionment was required so that the patent’s value is “based on the value of the patent added to the end product and not on any value derived from being a part of the standard.” The dispute concerned not whether apportionment was required, but whether to use the baseband processor (SSPPU) or the end product as the royalty base:
Ericsson agreed that apportionment was necessary; it simply thought that the best way to determine the value that its patents added to the end product was by looking to the negotiated-for prices that others had paid to license the patents. Thus, HTC’s proposed apportionment instructions did not concern an important point at trial because [those apportionment instructions] addressed an undisputed issue [that apportionment was necessary].
Even if the the apportionment instructions had been inappropriately excluded, such an error was not sufficient to require reversal. The district court’s “other FRAND instructions were legally accurate,” HTC was allowed to present evidence and argument to the jury that apportionment was required and HTC “explicitly covered the substance of its proposed instructions during its closing arguments.” HTC thus “was fully able to present its case to the jury.”
The Fifth Circuit concludes the jury instruction section with a footnote 4 that makes clear its determination is based on both the first and third prongs of the abuse of discretion standard such that both rationales are binding precedent in the Fifth Circuit (not dicta)–i.e., the decision on the first prong is binding that HTC’s proposed instructions were not a substantially correct statement of the law and the decision on the third prong also is binding that HTC’s proposed instructions did not concern an important issue at trial and its absence did not seriously impair HTC’s ability to present its case to the jury.
Ericsson’s Licensing Offers to HTC Were FRAND
The Fifth Circuit considered HTC’s challenge to the district court’s declaratory judgment that Ericsson’s licensing offers to HTC were FRAND. This is mainly a procedural issue that essential is resolved by the appeals court determining that (1) HTC did not preserve the issue on appeal by filing a Rule 50(b) motion challenging the jury verdict that provides the factual findings underlying the district court’s declaratory judgment ruling and (2) substantial evidence supported Ericsson’s argument that its offer was FRAND even if HTC had evidence to the contrary.
The Fifth Circuit would not reverse the decision even if HTC had filed a Rule 50(b) motion, which would require a showing that all facts and inferences viewed in favor of Ericsson nonetheless “point so strongly and overwhelmingly in favor of [HTC] that the Court believes that reasonable men could not arrived at a contrary verdict.” The Fifth Circuit ruled that Ericsson presented “substantial evidence” supporting the verdict notwithstanding HTC’s counter evidence:
Ericsson presented substantial evidence to support its position that it had offered FRAND terms to HTC. Ericsson pointed to licenses with similarly situated companies to HTC that had terms that were remarkably similar to those offered to HTC. This supported both its valuation arguments (suggesting that the value of Ericsson’s patents was best determined by looking to comparable licenses) and its non-discrimination arguments (suggesting that other similarly situated competitors had received similar licenses).
HTC countered with evidence regarding the value of Ericsson’s patents using its own valuation method based on the smallest salable patent-practicing unit. HTC further argued that Ericsson’s licenses with companies like Apple, Samsung, and Huawei were much more favorable, but Ericsson presented additional evidence indicating that those companies were not similarly situated to HTC due to a variety of factors. The jury was not required to accept HTC’s arguments or evidence regarding valuation or non-discrimination.
Exclusion of Other Expert’s Testimony In Another Case
The Fifth Circuit reviewed under an abuse of discretion standard HTC’s challenge to the district court excluding prior testimony and report by another expert for Ericsson in another case. HTC sought to use testimony from Ericsson’s expert Mr. Kennedy in another case to impeach the testimony of Ericsson’s expert Mr. Mills in this case. But the district court excluded that testimony as hearsay–i.e., a statement made outside of this instant case by someone who is not a party in this case. The Fifth Circuit ruled that the statements by Ericsson’s expert in another case could not be deemed admissions by Ericsson that could be used in this case:
Kennedy’s testimony was prepared and given at a different time for a different case. Although Kennedy’s testimony may touch on the same general topic as Mills’s, Kennedy’s valuation was necessarily given for a different purpose and dealt with a distinct licensing situation. It had nothing to do with the present dispute over the licensing negotiations between Ericsson and HTC. The district court was well within its discretion in excluding Kennedy’s prior opinions.
Judge Higginson Concurrence
Judge Stephen A. Higginson filed a concurring opinion that agreed with the outcome of the majority opinion, but for different reasons. The majority opinion is binding on all cases filed in the U.S. geographic area falling within the Fifth Circuit’s jurisdiction (e.g., the popular Eastern and Western districts of Texas). In contrast, the concurrence is not binding on anyone. Such concurrences, however, can give guidance to future litigants or other appellate courts on what may limit or distinguish the binding majority decision from other cases.
Judge Higginson would rule that the district court erred by “refus[ing] to incorporate a mutually-requested apportionment instruction,” but the error was not sufficient to require reversal because it “did not seriously impair HTC’s ability to present its case.” Judge Higginson viewed HTC’s proposed instruction as being “substantially correct statements of law” based on the Federal Circuit’s Ericsson v. D-Link decision for patent infringement cases, which patent infringement cases can be instructive in FRAND contract cases.