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)

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.