The Federal and 9 th Circuits Have Spoken: How (or How Not) to Calculate RAND Royalties for Standard- Essential Patents David Killough Microsoft Corporation December 11, 2015 1
Interoperability Standards 2
Companies Compete/Consumers Pick Winners VS. 3
Companies (Standard Setting Organization) Collaborate and Pick Winners You Trust Us Right? 4
You Trust Us Right? 5
RAND Licensing Is (Hopefully) The Safeguard In exchange for a seat at the standard-setting table, participants in SSOs promise Reasonable And Non-Discriminatory ( RAND ) patent royalties for all. 6
The Appellate Cases on RAND Royalties Ericsson, Inc. v. D-Link Systems, Inc., et al., 773 F.3d 1201 (Fed. Cir. 12/4/14) Microsoft Corporation v. Motorola, Inc., et al., 795 F.3d 1024 (9 th Cir. 7/30/15) Commonwealth Scientific and Industrial Research Organisation v. Cisco Systems, Inc., F.3d ; #2015-1066 (Fed. Cir. 12/3/15) 7
Ericsson v. D-Link Background Ericsson sued D-Link for infringement of three patents Ericsson alleged are RAND-pledged WiFi SEPs. A jury awarded Ericsson about $10 million 15 cents/unit for each accused end product (router, laptop, etc.) containing WiFi-standardcompliant, and so infringing, chips. On appeal, D-Link argued that the district court erred by: admission, in violation of the entire market value rule, of licenses based on end product (not chip) price, and not adequately adapting the jury instructions (largely based on Georgia-Pacific) to account for the RAND-licensing obligation. 8
Ericsson CAFC on Entire Market Value Rule EMVR has two parts as applied to multi-featured products where the patented feature is not the basis for customer demand: Rule of Law the royalty must reflect the value attributable to the infringing feature of the product, and no more Rule of Evidence unless the entire value of the product is in the patented feature, courts must insist on a more realistic starting point [royalty base] for the royalty calculations by juries often, the [the value of the] smallest saleable unit [component of the product] and, at times, even less. 9
Ericsson CAFC s Application of the EMVR Neither part of the EMVR was violated by evidence about historical licenses using end product price as the royalty base: where expert testimony explains to the jury the need to discount reliance on a given license to account only for the value attributed to the licensed technology the mere fact that licenses predicated on the value of a multi-component product are referenced in that analysis and the district court exercised its discretion not to exclude such evidence is not reversible error in each case, the district court must assess the extent to which the proffered testimony, evidence, and arguments would skew unfairly the jury s ability to apportion the damages to account only for the value attributable to the infringing features. 10
Ericsson CAFC s Application of the EMVR We do conclude, however, that, when licenses based on the value of a multi-component product are admitted, or even referenced in expert testimony, the court should give a cautionary instruction regarding the limited purposes for which such testimony is proffered if the accused infringer requests the instruction. The court should also insure 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. 11
Ericsson CAFC on RAND Jury Instructions the Georgia-Pacific factors are not a talisman for royalty rate calculation the district court erred by instructing the jury on multiple Georgia-Pacific factors that are not relevant, or are misleading, on the record before it, including at least factors 4, 5, 8, 9, and 10 A RAND commitment limits the market value to (what the patent owner can reasonably charge for use of) the patented technology. The court therefore must inform the jury what commitments have been made and of its [the jury s] obligation (not just option) to take those commitments into account when determining a royalty award. [D]istrict courts must make clear to the jury that any royalty award must be based on the incremental value of the invention, not the value of the standard as a whole or any increased value the patented feature gains from its inclusion in the standard. 12
Microsoft v. Motorola 9 th Circuit Contract Case Motorola sent letters to Microsoft offering to license Motorola s RANDpledged WiFi and H.264 (video codec) worldwide SEP portfolios for 2.25% of end product (e.g., Xbox or laptop running Windows) price and set a 20- day deadline for Microsoft to accept. Microsoft sued for breach the RAND-licensing contract and, with the consent of the parties, the district court held a bench trial and set RAND royalties for Motorola s SEPs (3.71 and.555 cents/unit). On appeal, the 9 th Circuit rejected Motorola s argument that the district court s RAND analysis violated Federal Circuit patent damages law. Although Motorola criticizes the district court s approach, it provides no alternative other than strict adherence to the Georgia-Pacific factors, without accounting for the particulars of RAND agreements a rigid approach disapproved of by the Federal Circuit in Ericsson. 13
CSIRO v. Cisco Background CSIRO sued Cisco on a SEP CSIRO had RAND-pledged to an early version of the WiFi standard, but had refused to pledge to later standard iterations. Cisco had inherited a license when it acquired chip-maker Radiata, renewed it twice, but then CSIRO and Cisco couldn t reach new terms. When CSIRO sued, Cisco stipulated to infringement and the parties agreed to a bench trial to determine damages. Cisco s damages model was based on the expired chip-based license, with rates ranging (depending on volume) from 3 to 37 cents/unit. CSIRO s damages model was based on a percentage of the profit differential between end products with and without the patented feature, with rates ranging (depending on volume) from $1.35 to $2.25/unit. 14
CSIRO v. Cisco District Court Ruling The district court rejected both parties damages models: The district court faulted CSIRO s model for, among other reasons, performing arbitrary final apportionment and having broad profit premium ranges. As to Cisco s model, the district court found that the [prior chip-based license] was not comparable to the license Cisco and CSIRO would negotiate in a hypothetical negotiation [because] the benefit of the patent lies in the idea, not in the small amount of silicon that happens to be where the idea is physically implemented. Instead, the district court based its decision ($0.65-$1.90/unit) on a Rate Card CSIRO offered to Cisco and others and a rate/unit informally suggested by Cisco s VP of IP during negotiations. 15
CSIRO v. Cisco CAFC s RAND Royalty Review Because the district court s methodology was premised on the parties negotiations (which were based on per-end-unit prices), the district court was not obliged by the EMVR to apportion beginning from a chip (smallest saleable unit) royalty base. Put differently, the parties negotiated over the value of the asserted patent, and no more. Even though the SEP was not RAND-pledged, the district court erred by not apportioning out the value added by standardization: the value of the technology is distinct from any value that artificially accrues to the patent due to the standard s adoption. The district court also erred by not considering whether CSIRO s Rate Card (which was never accepted by any entity) and Cisco s VP s suggested rate should be adjusted to apportion out the value of standardization. The district court erred in assessing the comparability of the expired chipbased license between CSIRO and Cisco. 16
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