January 7, 2015
By: Clifford S. Chang
Patents claiming inventions which must be used to comply with certain technical standards (for example, the Wi-Fi standard or standards for 3G) are referred to as standards-essential patents or “SEPs”. There has, historically, been little judicial guidance concerning damages in cases where SEPs are implicated. The recent Federal Circuit ruling in Ericsson, Inc. v. D-Link Sys., Inc., finally provides some guidance on the issue of determining damages in such cases. No. 2013-1625, 2014 WL 6804864 (Fed. Cir. Dec. 4, 2014). In addition to providing insight on several apportionment issues specific to SEPs, the court also held that simply reciting all Georgia-Pacific factors to a jury is unacceptable and that jury instructions must only include the specific factors relevant to the evidence presented.
Due to the nature of creating certain standards by large standards development organizations, the technology that is incorporated into such standards is often developed by numerous different parties. As a condition for their participation in the creation and development of the industry standard, the contributing companies are typically required to license any of their patents essential to practicing any portion of the standard under “FRAND” (fair, reasonable, and non-discriminatory) terms.
By requiring that parties participating in the creation and development of the industry standard license their patents under FRAND terms, the industry standard can avoid two potential problems: patent hold-up and royalty stacking. Patent hold-up occurs in the context of SEPs where an owner of a SEP demands unreasonable or excessive royalties, usually once a standard has already been widely adopted by the industry. Royalty stacking occurs where companies are forced to separately pay royalties to all SEP holders for a standard, which can often involve hundreds or thousands of patents, causing royalties to “stack up” and become exorbitant and impeding.
In the recent Federal Circuit ruling, Ericsson sued D-Link and others in the Eastern District of Texas for infringing three patents that Ericsson alleged to be essential to the IEEE 802.11(n) standard. Ericsson accused a variety of electronic devices, including laptop computers and routers, which incorporated 802.11(n) wireless chips made by Intel, alleging that because the products incorporated the 802.11(n) compliant Intel chips, they necessarily were capable of the standard's functionalities. The jury found, and the district court upheld, infringement of all three patents and awarded $10 million in damages, which was roughly 15 cents per infringing device. Although, the Federal Circuit panel upheld the district court’s holding that there was substantial evidence to support the jury’s finding of infringement of two of the patents, it vacated the damages award because of erroneous jury instructions. The Federal Circuit’s opinion provides some insight into how damages in SEP cases should be evaluated and presented to a jury.
The broadest application of the Federal Circuit's ruling is that it is legal error to simply recite all 15 Georgia-Pacific factors to the jury. Instead, courts must consider which factors are actually relevant to the specific circumstances and record created at trial. This arguably applies to all patent cases dealing with damages calculations, and extends beyond the FRAND context.
Applying this guideline to the patents in Ericsson, the Federal Circuit found that it can be prejudicial where a court instructs the jury on factors which are not applicable to RAND-encumbered patents. Finding that the district court “included all 15 Georgia-Pacific factors in its damages instruction . . . without considering their relevance to the record created at trial,” the Federal Circuit criticized five of the fifteen Georgia-Pacific factors as being irrelevant or misleading to the record before it, “including, at least, factors 4, 5, 8, 9, and 10.” The Federal Circuit stated that many of the Georgia-Pacific factors were irrelevant or contrary to RAND principles, explaining:
For example, factor 4 is “[t]he licensor's established policy and marketing program to maintain his patent monopoly by not licensing others to use the invention or by granting licenses under special conditions designed to preserve that monopoly. Because of Ericsson's RAND commitment, however, it cannot have that kind of policy for maintaining a patent monopoly. Likewise, factor 5–“[t]he commercial relationship between the licensor and licensee”—is irrelevant because Ericsson must offer licenses at a non-discriminatory rate.
Several other Georgia–Pacific factors would at least need to be adjusted for RAND-encumbered patents—indeed, for SEP patents generally. For example, factor 8 accounts for an invention's “current popularity,” which is likely inflated because a standard requires the use of the technology. Factor 9 — “utility and advantages of the patented invention over the old modes or devices,” – is also skewed for SEPs because the technology is used because it is essential, not necessarily because it is an improvement over the prior art. Factor 10, moreover, considers the commercial embodiment of the licensor, which is also irrelevant as the standard requires the use of the technology. Other factors may also need to be adapted on a case-by-case basis depending on the technology at issue.
Ericsson, 2014 WL 6804864, at *22-23 (emphasis added) (internal citations omitted). Thus, a trial court “must carefully consider the evidence presented in the case when crafting an appropriate jury instruction.” Id. at *23. The Federal Circuit noted that reference to irrelevant Georgia–Pacific factors alone may not be sufficiently prejudicial to warrant reversal, but the combination of errors made by the district court here necessitated remand.
The court also made clear that there was no per se rule for RAND-obligated patents. The court specifically rejected D-Link’s argument that the jury instructions should mirror any of the prior district court cases considering RAND royalty rates. Thus, the Federal Circuit rejects a rote application of a modified Georgia-Pacific analysis to SEPs and, as with other patents, specific jury instructions should be tailored to the specific facts and circumstances of the case.
The panel also found that the district court erred by failing to instruct the jury to consider Ericsson's actual RAND obligations. “RAND terms vary from case to case. A RAND commitment limits the market value to (what the patent owner can reasonably charge for use of) the patented technology.” Ericsson, at *23 (internal quotes omitted). Here, the court found that Ericsson had in fact pledged to the IEEE that it would “grant a license under reasonable rates to an unrestricted number of applicants on a worldwide basis with reasonable terms and conditions that are demonstrably free of unfair discrimination.” Id. Thus, rather than instructing the jury that “it may consider . . . Ericsson's obligation to license its technology on RAND terms,” Id. at *21 (emphasis added), the trial court should have instructed the jury about “what commitments have been made and of its obligation (not just option) to take those commitments into account.” Id. at 23.
In order to “ensure that the royalty award is based on the incremental value that the patented invention adds to the product, not any value added by the standardization of that technology,” the court set forth two special apportionment considerations for SEP cases. Ericsson, 2014 WL 6804864, at *24 (emphasis in original).
First, a jury must be told to discount the value of other patented or unpatented features incorporated into the standard but not covered by the patent(s)-in-suit. The panel cautioned that a jury must be instructed to consider “the value of the patented invention . . ., not the value of the standard as a whole.” Id. at *24. The court analogized to apportioning damages for a patent that covered only a small part of a device, explaining that SEPs often “claim only limited aspects of the overall standard.” However, the panel noted that a SEP may very well constitute a significant portion of the technology in the standard, and such an apportionment would not be appropriate where the SEP is shown to make up “the entire value of the” standard.
Second, the jury must also be told to discount any value gained by the patented technology by being a part of a widely adopted standard. With respect to the value gained by the adoption of the patented technology, the Federal Circuit concluded that a jury should be instructed to consider the difference between the added value of the benefit of the SEP’s technological invention and the value the innovation gains by becoming essential to the standard. This is because “widespread adoption of standard essential technology is not entirely indicative of the added usefulness of an innovation over the prior art.” Id. at *24. The panel cited Supreme Court precedent regarding improvement patents in which a “patentee must show in what particulars his improvement has added to the usefulness of the machine or contrivance.” Id. at *24 (citing Garretson v. Clark, 111 U.S. 120, 121 (1884)).
Although, the court recognized that the jury’s determination of such apportionment considerations may involve imprecision and uncertainty, it concluded that a jury, nevertheless, must be instructed to determine these values for apportionment.
Finally, the panel affirmed the district court's decision to refuse to instruct the jury on patent hold-up and royalty stacking because D-Link failed to present sufficient evidence of hold-up or stacking to warrant a jury instruction. Just as “a court should not instruct on a proposition of law about which there is no competent evidence,” a “district court need not instruct the jury on hold-up or stacking unless the accused infringer presents actual evidence of hold-up or stacking.” Id. at *25. Thus, alleged infringers will not simply be entitled to jury instructions limiting damages on these grounds without having supporting evidence.
The panel also considered the admissibility of evidence of prior licenses, which D-Link had argued were improper because the testimony allegedly violated the “entire market value rule” (EMVR) by referencing “the entire value of the licensed products, even though the technology being licensed related to only a component of those products.” Ericsson, at *18. The court explained that the legal standard of the entire market value rule has two parts: (1) a “substantive legal rule” that "the ultimate reasonable royalty award must be based on the incremental value that the patented invention adds to the end product,” and (2) an “evidentiary principle” - specifically applicable to the choice of a royalty base - that “where the patented feature is not the item which imbues the combination of other features with value, care must be taken to avoid misleading the jury by placing undue emphasis on the value of the entire product.” Id. at *19.
The court ultimately found that the contested evidence of prior licenses could be presented to the jury because it did not violate the rule regarding apportionment, nor the evidentiary principle demanding an appropriate balance between the probative value and prejudicial impact to the jury. Instead, any concerns about the licenses go to the weight of the evidence, not its admissibility. The court noted that “licenses are generally negotiated without consideration of the EMVR,” and found that an unduly strict rule on admissibility could preclude evidence of real-world licenses, which are often the best indication of reasonable licensing terms.
Although it did not ultimately decide on whether these testimonial issues prejudiced D-Link, the court cautioned that where “licenses based on the value of a multi-component product are admitted” into evidence, courts, when requested, “should give a cautionary instruction regarding the limited purposes for which such testimony is proffered,” and “ensure that the instructions fully explain the need to apportion the ultimate royalty award to the incremental value of the patented feature from the overall product.” Id. at *21.
Where does the Ericsson decision leave current litigants? To start, the specific Georgia Pacific factors relevant to the evidence presented must be sussed out of the overall list before the jury instruction is presented. Second, in a SEP case the commitment to offer licenses in a fair, reasonable and non-discriminatory manner cannot be evaluated in broad strokes and care must be taken to evaluate the exact commitment agreed to by the patent holder. Third, juries cannot elevate the value of a patent merely because it is part of a standard and care must be taken not to increase the value or perceived value of the patent just because it is part of the standard when presenting evidence. Fourth, evidence of prior licenses is indeed admissible, although a special instruction may be requested concerning the need to apportion the royalty award in the context of the incremental value of the patented feature to the product. Although the Ericsson decision may not change the ultimate outcome of a damages evaluation in a case involving a SEP, it is food for thought when litigants are determining how to present the case to a jury and finalizing jury instructions. It may also provide additional basis under which to challenge jury verdicts awarding damages.
 The Ericsson court identified only three other district courts that have considered the issue of appropriate RAND royalty rates. See Realtek Semiconductor, Corp. v. LSI Corp., No. C–12–3451, 2014 WL 2738216, at *5–6 (N.D.Cal. June 16, 2014); In re Innovatio IP Ventures, LLC Patent Litig., No. 11 C 9308, 2013 WL 5593609 (N.D.Ill. Oct.3, 2013); Microsoft Corp. v. Motorola, Inc., No. C10–1823JLR, 2013 WL 2111217 (W.D.Wash. Apr.25, 2013).