December 9. 2014
On December 4, 2014, in Ericsson, Inc. et al. v. D-LINK Sys., Inc. et al., the Court of Appeals for the Federal Circuit held that the district court had erred in instructing the jury how to determine a reasonable royalty rate for Ericsson’s “standard-essential patents.” Ericsson had obligated itself to grant licenses to these patents on “reasonable and non-discriminatory” (“RAND”) terms. The Federal Circuit observed determination of a reasonable royalty rate under RAND terms was an issue of first impression in that court. In vacating an Eastern District of Texas jury award of $10 million, the court provided guidance that will be useful in future cases.
Standard-essential patents (“SEPs”) are patents that cover technical standards set by standards development organizations. In this case, Ericsson’s patents related to standards for Wi-Fi technology set by the Institute of Electrical and Electronics Engineers, Inc. (IEEE). Creation of a standard is a complicated process that can involve the cooperation and input of many parties holding patent rights. Standards development organizations often condition participation in the standards-setting process on a pledge to grant licenses to standard-essential patents on RAND terms.
In Ericsson, a Texas jury found that the D-Link infringed three of Ericsson’s patents. The district court instructed the jury on 15 common factors for determining reasonable royalty recited in Georgia-Pacific Corp. v. United States Plywood Corp, an often-cited district court case from 1970. In the Ericsson case, the district court judge added a sixteenth factor, telling the jury that it “may consider . . . Ericsson’s obligation to license its technology on RAND terms.” The jury awarded Ericsson $10 million—roughly 15 cents per infringing device—and imposed a commensurate ongoing royalty.
On appeal, D-Link challenged a number of issues, including the district court’s jury instruction on Ericsson’s RAND obligation. D-Link argued on appeal that the district court erred by not providing a more detailed instruction on RAND issues, and asserted that the court should have explained to the jury the dangers of “patent hold-up” and “royalty stacking” in RAND-related cases. “Patent hold-up” is when the owner of an SEP demands excessive royalties after companies are locked into using a standard. “Royalty stacking” is a concern that can arise when a standard implicates numerous patents. If companies are forced to pay royalties on all SEPs, the royalties could “stack” on top of each other and may become collectively excessive. D-Link also argued that the district court erred by instructing the jury on all of the Georgia-Pacific factors, some of which were inapplicable or misleading.
Beginning its analysis with a discussion of the use of the Georgia-Pacific factors, the court observed that “we have never described the Georgia-Pacific factors as a talisman for royalty rate calculations. . . . Indeed, courts often parrot all 15 factors to the jury, even if some of those factors are clearly not relevant to the case at hand.” The court then stated that “[i]n a case involving RAND-encumbered patents, many of the Georgia-Pacific factors simply are not relevant; many are even contrary to RAND principles.” The court then commented on several of the Georgia-Pacific factors that were either not relevant or that needed adjustment in a RAND case, as follows:
Factor 4—The licensors established policy and marketing program to maintain its patent monopoly by not licensing others to use the invention or by granting licenses under special conditions designed to preserve that monopoly.
The court explained that Ericsson could not have a policy of maintaining a patent monopoly because of its commitment to IEEE to license an unlimited number of applicants on RAND terms.
Factor 5—The commercial relationship between the licensor and licensee, such as, whether they are competitors in the same territory in the same line of business; or whether they are inventor and promoter.
This factor was not relevant because Ericsson must offer licenses at a non-discriminatory rate, i.e., Ericsson could not hold a competitor’s feet to the fire and extract a higher royalty rate.
Factor 8—The established profitability of the product made under the patent; its commercial success; and its current popularity.
The court noted that this factor would at least need to be adjusted since the invention’s “current popularity” would likely be inflated because a standard requires the use of the technology.
Factor 9—The utility and advantages of the patent property over the old modes or devices, if any, that had been used for working out similar results.
The court explained that this factor was also skewed for standard-essential patents because the technology is used because it is essential, not necessarily because it is an improvement over what had been used.
Factor 10—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.
Again, because standard-essential patents by definition are necessary to practice the standard, the “character of the commercial embodiment” of the licensor was irrelevant.
The court expressly did not hold that there should be a modified version of the Georgia-Pacific factors that could be used in all RAND cases. Instead, the court held that a district court must instruct the jury only on factors that are relevant to the specific case at issue: “There is no Georgia-Pacific-like list of factors that district courts can parrot for every case involving RAND-encumbered patents.” The court further held that the jury should be instructed on the actual RAND commitment.
As to D-Link’s concerns regarding patent hold-up and royalty stacking, the court held that a defendant seeking an instruction on these issues must provide evidence on the record of patent hold-up and royalty stacking in relation to both the RAND commitment at issue and the specific technology involved. Under this analysis, the Federal Circuit held that the district court erred by instructing the jury on irrelevant Georgia-Pacific factors and by failing to instruct the jury on Ericsson’s actual RAND commitment. But the court found that D-Link had not provided evidence on the record of patent hold-up or royalty stacking, and held that the district court properly excluded such an instruction. After entering a number of other holdings, the court remanded the case for further action.
The Ericsson case is significant for patent lawsuits under standard-essential patents where the patent is encumbered with a commitment to license the patent under RAND terms. For more information, please contact Fitch Even partner Joseph F. Marinelli, the author of this alert.
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