Federal Circuit Tackles RAND Royalty Rates

In 2010, Ericsson sued D-Link Systems and others in the eastern district of Texas and alleged infringement of several patents, which Ericsson claimed were SEPs for the 802.11 standard. Ericsson, at 1. The jury found infringement of three of Ericsson's patents and awarded Ericsson $10 million in damages, a royalty rate of roughly $0.15 per infringing product. Id. D-Link filed a motion for a judgment as a matter of law and a new trial, arguing, inter alia, that the jury instructions concerning Ericsson's RAND obligations were inadequate. Id. at 6. After the trial court denied D-Link's post-trial motions, D-Link appealed the case to the Federal Circuit. Id.

RAND Background

RAND refers to the terms on which certain patent holders agree to license their SEPs. Ericsson, 2014 WL 6804864, at 2. SEPs are patents that claim a method or apparatus necessary to comply with an established industry standard. Id. Often, the only reason certain standards are adopted is because the members of the standard-setting body agree to license their patents on RAND terms. Although SEPs and RAND obligations have existed since before the creation of the Federal Circuit, this is the first time the court has considered the effects of SEPs and RAND-encumbered patents on reasonable royalty rates. Id.

Any company that wishes to comply with a chosen standard must, by definition, infringe an SEP to do so. Ericsson, at 2. One concern with SEPs is that companies hoping to comply with the standard may be forced to pay royalties to hundreds or even thousands of SEP holders. Id . This “royalty stacking” becomes prohibitive when, though each individual royalty rate may seem reasonable, the collective royalty that one must pay to all SEP holders becomes excessive. Id. A second concern is known as “patent hold-up.” It occurs when owners of SEPs exploit their positions by demanding excessive royalties before agreeing to license their patents to companies wishing to comply with the standard, regardless of the actual strength or breadth of their patent. Id.

To avoid the potential problems of patent hold-up and royalty stacking, standards development organizations often elicit RAND assurances from all would-be SEP holders before finalizing a standard. Ericsson, at 2.

Instructing on RAND Royalty Rates

At trial, D-Link requested that the district court instruct the jury on Ericsson's RAND obligation with vrespect to the patents at issue. Ericsson, at 21. D-Link specifically sought instructions regarding the dangers of royalty stacking and patent hold-up. Id. The district court only partially granted D-Link's request. The lower court instructed the jury on the 15 customary Georgia-Pacific factors for reasonable royalty rates, and added a 16th RAND factor informing the jury that it “may consider ' Ericsson's obligation to license its technology on RAND terms.” Id. The district court declined to instruct specifically on royalty stacking and patent hold-up and gave the jury no further detail regarding RAND issues. See, id.

On appeal, D-Link argued that RAND commitments must be considered in any damages award and that the district court reversibly erred by delivering the standard 15 Georgia-Pacific factors to the jury rather than tailoring those instructions to the context of Ericsson's RAND obligations. Ericsson, at 22. Ericsson argued that the Georgia-Pacific factors, on their own, encompass the concerns of royalty stacking and patent hold-up, and even if those factors were insufficient, the inclusion of a sixteenth additional factor was adequate to fulfill the court's duties to instruct regarding Ericsson's RAND commitments. Id.

The Federal Circuit began its RAND-related analysis by ruling that the district court should have tailored its boilerplate Georgia-Pacific instructions to the specific RAND context before the court. See, Ericsson, at 22-23. The court explained that many of the standard Georgia-Pacific factors are irrelevant or even misleading when applied to RAND-encumbered patents. Id. at 22. Rather than instructing the jury using the customary factors, the court stated that each factor should have been adjusted to reflect the particulars of the case at hand. Id. at 23.

The court emphasized that there is no bright-line rule for instructing on RAND-encumbered patent cases and that trial courts must instead tailor the factors for each case based on the exact terms of the patentee's particular RAND commitment. See , Ericsson, at 23. While it declined to enumerate a definitive list, the court did state that “at least[] factors 4, 5, 8, 9, and 10 of the Georgia-Pacific factors” are inapplicable and need to be withheld or adjusted in RAND-encumbered patent cases. Id. Factor 5, for example, which asks juries to consider “[t]he commercial relationship between the licensor and licensee,” is irrelevant in the RAND context because RAND-encumbered patentees are obligated to grant licenses on non-discriminatory terms. Id. at 22. The Federal Circuit also reasoned that Factor 8 is likely to be skewed because a standard may inflate the invention's popularity by mandating the use of the technology, whereas otherwise much of the industry might have adopted a different technology. Id.

The Federal Circuit further held that the royalty rate for SEPs must reflect the approximate value of the patent's actual technological contribution, rather than the value attributable to its wider use due to standardization. Ericsson, at 25. The court indicated that juries must be instructed to consider the difference between the value added from the invention and the value added from becoming standard-essential. Id. The Federal Circuit ruled that courts must apportion the patented feature from all unpatented features reflected in the standard, then premise the royalty on the added value from that feature alone in order to grant damages that properly reflect the approximate value of the SEP's technological contribution. Id. at 24.

In the final portion of its RAND-related damages analysis, the Federal Circuit held that the district court did not err by failing to instruct the jury on royalty stacking and patent hold-up. Ericsson, at 26. The court's holding did not reflect a position that such instructions are never required when calculating RAND royalty rates. Rather, it indicated that there should be no automatic instruction on stacking and hold-up when dealing with RAND-encumbered patents. See, id. at 25. The court stated that trial courts need not instruct on these issues unless the accused infringer offers actual evidence of stacking or hold-up, a threshold requiring “something more than a general argument that these phenomena are possibilities.” Id.

The Federal Circuit determined that, on the record before the trial court, instructions on royalty stacking and patent hold-up were unnecessary because D-Link had not provided any evidence demonstrating that stacking and hold-up were relevant concerns. Ericsson, at 26.

Conclusion

The Federal Circuit vacated the jury's damages award and ongoing royalty award and remanded the case back to the district court. Ericsson, at 27. The court identified several errors for the district court to remedy on remand, including: 1) failure to instruct on Ericsson's particular RAND commitment rather than referring to RAND obligations generally; 2) failure to instruct the jury that the RAND royalty rate for the patented feature must be apportioned from the value of the entire standard; and 3) failure to instruct the jury that any royalty must be based on the value attributable to the patented technology itself rather than the added value from standardization. Id.

The court further noted that on remand the district court must not give instructions containing irrelevant or misleading generic Georgia-Pacific factors. See, id. The Federal Circuit separately emphasized that the district court should ensure that the jury is properly informed about apportionment principles as laid out in Garretson v. Clark, 111 U.S. 120 (1884) (discussing, in cases involving a patent covering one component of a multi-component invention, the need to apportion damages between the patented features and unpatented features). Id.

Matthew Siegal is a partner and Adam Sapper is a law school graduate awaiting admission in the Intellectual Property department of Stroock & Stroock & Lavan LLP (www.stroock.com). The views expressed are their own, and not necessarily those of the firm or any of its clients.

The Court of Appeals for the Federal Circuit, on Dec. 4, 2014 in a case of first impression, ruled that when the patent at issue is a standard essential patent (SEP) and its owner is subject to an obligation to license that patent on reasonable and non-discriminatory (RAND) terms, the jury instructions must discuss the specific obligations of that patentee and not RAND commitments in general. Ericsson, Inc. v. D-Link Systems, Inc., 2014 WL 6804864, at 26 (Fed. Cir. 2014). Furthermore, the patentee must apportion out the value of the patent attributable to its RAND status from the value of the patented feature itself. Id. As a result, the Federal Circuit affirmed the district court's finding that D-Link Systems, Netgear, Dell and several other companies infringed two of Telefonaktiebolaget LM Ericsson's patents, but vacated the jury's monetary award and remanded because of inadequate instructions on the issue of damages. Id.

Background

Ericsson holds several patents related to Wi-Fi technology. Before the standards development organization IEEE (Institute of Electrical and Electronics Engineers, Inc.) published its 802.11 standards for Wi-Fi, IEEE received assurances from Ericsson to mitigate potential concerns of royalty stacking and patent hold-up. Ericsson, at 2. According to the Federal Circuit, Ericsson made a binding promise to grant licenses “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,” i.e., RAND terms. Id. at 2.

In 2010, Ericsson sued D-Link Systems and others in the eastern district of Texas and alleged infringement of several patents, which Ericsson claimed were SEPs for the 802.11 standard. Ericsson, at 1. The jury found infringement of three of Ericsson's patents and awarded Ericsson $10 million in damages, a royalty rate of roughly $0.15 per infringing product. Id. D-Link filed a motion for a judgment as a matter of law and a new trial, arguing, inter alia, that the jury instructions concerning Ericsson's RAND obligations were inadequate. Id. at 6. After the trial court denied D-Link's post-trial motions, D-Link appealed the case to the Federal Circuit. Id.

RAND Background

RAND refers to the terms on which certain patent holders agree to license their SEPs. Ericsson, 2014 WL 6804864, at 2. SEPs are patents that claim a method or apparatus necessary to comply with an established industry standard. Id. Often, the only reason certain standards are adopted is because the members of the standard-setting body agree to license their patents on RAND terms. Although SEPs and RAND obligations have existed since before the creation of the Federal Circuit, this is the first time the court has considered the effects of SEPs and RAND-encumbered patents on reasonable royalty rates. Id.

Any company that wishes to comply with a chosen standard must, by definition, infringe an SEP to do so. Ericsson, at 2. One concern with SEPs is that companies hoping to comply with the standard may be forced to pay royalties to hundreds or even thousands of SEP holders. Id . This “royalty stacking” becomes prohibitive when, though each individual royalty rate may seem reasonable, the collective royalty that one must pay to all SEP holders becomes excessive. Id. A second concern is known as “patent hold-up.” It occurs when owners of SEPs exploit their positions by demanding excessive royalties before agreeing to license their patents to companies wishing to comply with the standard, regardless of the actual strength or breadth of their patent. Id.

To avoid the potential problems of patent hold-up and royalty stacking, standards development organizations often elicit RAND assurances from all would-be SEP holders before finalizing a standard. Ericsson, at 2.

Instructing on RAND Royalty Rates

At trial, D-Link requested that the district court instruct the jury on Ericsson's RAND obligation with vrespect to the patents at issue. Ericsson, at 21. D-Link specifically sought instructions regarding the dangers of royalty stacking and patent hold-up. Id. The district court only partially granted D-Link's request. The lower court instructed the jury on the 15 customary Georgia-Pacific factors for reasonable royalty rates, and added a 16th RAND factor informing the jury that it “may consider ' Ericsson's obligation to license its technology on RAND terms.” Id. The district court declined to instruct specifically on royalty stacking and patent hold-up and gave the jury no further detail regarding RAND issues. See, id.

On appeal, D-Link argued that RAND commitments must be considered in any damages award and that the district court reversibly erred by delivering the standard 15 Georgia-Pacific factors to the jury rather than tailoring those instructions to the context of Ericsson's RAND obligations. Ericsson, at 22. Ericsson argued that the Georgia-Pacific factors, on their own, encompass the concerns of royalty stacking and patent hold-up, and even if those factors were insufficient, the inclusion of a sixteenth additional factor was adequate to fulfill the court's duties to instruct regarding Ericsson's RAND commitments. Id.

The Federal Circuit began its RAND-related analysis by ruling that the district court should have tailored its boilerplate Georgia-Pacific instructions to the specific RAND context before the court. See, Ericsson, at 22-23. The court explained that many of the standard Georgia-Pacific factors are irrelevant or even misleading when applied to RAND-encumbered patents. Id. at 22. Rather than instructing the jury using the customary factors, the court stated that each factor should have been adjusted to reflect the particulars of the case at hand. Id. at 23.

The court emphasized that there is no bright-line rule for instructing on RAND-encumbered patent cases and that trial courts must instead tailor the factors for each case based on the exact terms of the patentee's particular RAND commitment. See , Ericsson, at 23. While it declined to enumerate a definitive list, the court did state that “at least[] factors 4, 5, 8, 9, and 10 of the Georgia-Pacific factors” are inapplicable and need to be withheld or adjusted in RAND-encumbered patent cases. Id. Factor 5, for example, which asks juries to consider “[t]he commercial relationship between the licensor and licensee,” is irrelevant in the RAND context because RAND-encumbered patentees are obligated to grant licenses on non-discriminatory terms. Id. at 22. The Federal Circuit also reasoned that Factor 8 is likely to be skewed because a standard may inflate the invention's popularity by mandating the use of the technology, whereas otherwise much of the industry might have adopted a different technology. Id.

The Federal Circuit further held that the royalty rate for SEPs must reflect the approximate value of the patent's actual technological contribution, rather than the value attributable to its wider use due to standardization. Ericsson, at 25. The court indicated that juries must be instructed to consider the difference between the value added from the invention and the value added from becoming standard-essential. Id. The Federal Circuit ruled that courts must apportion the patented feature from all unpatented features reflected in the standard, then premise the royalty on the added value from that feature alone in order to grant damages that properly reflect the approximate value of the SEP's technological contribution. Id. at 24.

In the final portion of its RAND-related damages analysis, the Federal Circuit held that the district court did not err by failing to instruct the jury on royalty stacking and patent hold-up. Ericsson, at 26. The court's holding did not reflect a position that such instructions are never required when calculating RAND royalty rates. Rather, it indicated that there should be no automatic instruction on stacking and hold-up when dealing with RAND-encumbered patents. See, id. at 25. The court stated that trial courts need not instruct on these issues unless the accused infringer offers actual evidence of stacking or hold-up, a threshold requiring “something more than a general argument that these phenomena are possibilities.” Id.

The Federal Circuit determined that, on the record before the trial court, instructions on royalty stacking and patent hold-up were unnecessary because D-Link had not provided any evidence demonstrating that stacking and hold-up were relevant concerns. Ericsson, at 26.

Conclusion

The Federal Circuit vacated the jury's damages award and ongoing royalty award and remanded the case back to the district court. Ericsson, at 27. The court identified several errors for the district court to remedy on remand, including: 1) failure to instruct on Ericsson's particular RAND commitment rather than referring to RAND obligations generally; 2) failure to instruct the jury that the RAND royalty rate for the patented feature must be apportioned from the value of the entire standard; and 3) failure to instruct the jury that any royalty must be based on the value attributable to the patented technology itself rather than the added value from standardization. Id.

The court further noted that on remand the district court must not give instructions containing irrelevant or misleading generic Georgia-Pacific factors. See, id. The Federal Circuit separately emphasized that the district court should ensure that the jury is properly informed about apportionment principles as laid out in Garretson v. Clark, 111 U.S. 120 (1884) (discussing, in cases involving a patent covering one component of a multi-component invention, the need to apportion damages between the patented features and unpatented features). Id.

Matthew Siegal is a partner and Adam Sapper is a law school graduate awaiting admission in the Intellectual Property department of Stroock & Stroock & Lavan LLP (www.stroock.com). The views expressed are their own, and not necessarily those of the firm or any of its clients.