Law in the Global Marketplace: Intellectual Property and Related Issues FRAND Commitments and Obligations for Standards-Essential Patents Hosted by:
Methodological Overview of FRAND Rate Determination 2
Goals of FRAND RAND royalt[ies] should be set at a level consistent with the S.S.O.s goal of promoting widespread adoption of their standards The proper methodology address[es] the risk of royalty-stacking by considering the aggregate royalties that would apply if other SEP holders made royalty demands of the implementer. Source: Judge Robart in Microsoft v. Motorola 3
Issues to Consider when Setting a FRAND Rate Hypothetical negotiation approach Date when patents were first incorporated into the standard (innovatio) Avoid hold-up (ex-ante approach) Modified Georgia-Pacific Analysis (per Judge Robart in Microsoft v. Motorola) Base selection and consideration of smallest salable unit (SSU) Royalty Stacking 4
Modified Georgia-Pacific Factors Factor 1/2: Must be rates that are comparable to a RAND licensing situation. Agreements used must be where knowledge of a RAND obligation was understood by both parties. As a general matter these rates will be lower than that achieved through bilateral negotiation. Factors 4 & 5: Do not apply, patent holder cannot maintain a monopoly and cannot consider or discriminate against competition in terms of licensing. Factor 6: [I]t is important to focus the analysis on the value of the patented technology apart from the value associated with incorporation of the patented technology into the standard and the contribution of the patent to the technical capabilities of the standard and also the contribution of those relevant technological capabilities to the implementer Factor 8: Take into account only the value of the patented technology and not the value associated with incorporating the patented technology into the standard. Source: Microsoft v. Motorola 5
Modified Georgia-Pacific Factors (cont d) Factor 9: Consider alternatives that could have been written into the standard instead of the patented technology in the period before the standard was adopted Factors 10 &11: The contribution of the patent to the technical capabilities of the standard and also the contribution of those relevant technical capabilities to the licensee and the licensee's products, taking into account only the value of the patented technology and not the value associated with incorporating the patented technology into the standard. Factor 12: The portion of the profit or of the selling price that may be customary in the particular business or in comparable businesses to allow for the use of the invention or analogous inventions that are also covered by FRAND committed patents Factor 13: The portion of the realizable profit that should be credited to the invention as distinguished from non-patented elements, the manufacturing process, business risks, significant features or improvements added by the infringer, or the value of the patent's incorporation into the standard. Source: Microsoft v. Motorola 6
Microsoft v. Motorola Judge Robart s Six-Step Analysis 1. Introduce parties relationship to each other 2. Understand background on standards, SSOs, and RAND commitment 3. Adopt modified Georgia-Pacific hypothetical negotiation as framework 4. Consider Motorola patent portfolio s relevance to standard and Microsoft products for H.264 5. Consider Motorola patent portfolio s relevance to standard and Microsoft products for 802.11 6. Determine appropriate RAND rate In consideration of the above, the Court set RAND ranges of: H.264: $.0555 per unit 802.11: $.03471 per unit 7
Microsoft v. Motorola (cont d) 9 th Circuit Affirms District Court s Decision Motorola appealed District Court decision on grounds that it: Lacked the legal authority to decide a FRAND rate in a bench trial Inappropriately applied GP Factor 15 (timing of infringement in the hypothetical negotiation) by relying on present-day value of Motorola s SEP portfolio Inappropriately relied on royalty rates charged by patent pools 9 th Circuit rejected these arguments Motorola consented to bench trial for FRAND issues Ok to use present-day value of SEP portfolio in calculating RAND rate Patent pool rates are appropriate Noted that underlying action was for breach of contract, not patent infringement 8
Microsoft v. Motorola (cont d) Impact of 9 th Circuit Decision Gives licensees options in negotiating FRAND licenses Breach of contract action allows FRAND rate to be determined outside context of patent infringement lawsuit Methodology provides a legal framework for determining a FRAND rate in absence of agreement Potentially reduces threat of litigation by SEP owners Reduces incentive to seek injunctive relief (which could constitute a breach of its duty of good faith and fair dealing) 9
In re Innovatio Considerations by Judge Holderman to determine a RAND Rate Importance and technical contribution of patent portfolio to standard Importance of standard to alleged infringer s accused products Comparable license agreements Hypothetical Negotiation Date Patent Holdup Royalty Stacking Royalty Base as the Smallest saleable unit Ex ante alternatives 10
In re Innovatio (cont d) Top Down Valuation Approach WiFi Chip ASP Profit Margin WiFi Chip Profit (portion of income available to pay royalties on) $14.85 12.1% $1.80 Value attributable to the top 10% of 802.11 standard-essential patents 84% Innovatio s share of the top 10% of patents (19 / 300) PER UNIT RAND RATE $.0956 11
Ericsson v. D-Link Background and Defendant Appeal Background Jury awarded $10 million to Ericsson for D-Link s infringement of 3 asserted patents declared essential to 802.11(b) (WiFi), equating to a royalty of $0.15 per product D-Link s Appeal Ericsson s damages theory violated EMVR Relied on licenses tied to entire value of licensed product Jury wasn t properly instructed 12
Ericsson v. D-Link (cont d) Federal Circuit Guidance on Licensing Evidence Federal Circuit concluded no error in allowing Ericsson s expert testimony on disputed licenses, which sufficiently tied reasonable royalty award to incremental value of patented invention Concerns go to weight, not admissibility Entire Market Value Rule is based on two parts: 1. Substantive legal rule Combination of royalty base and royalty rate must be based on incremental value added to end product 2. Evidentiary principle Where a multi-component product is at issue, it might mislead the jury to place undue emphasis on the value of the entire product 13
Ericsson v. D-Link (cont d) Federal Circuit Guidance on Jury Instruction Federal Court concluded prejudicial error in instructing jury No per se rules (i.e., no set modified GP analysis) District Court must instruct jury only on factors 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. As a result, prejudicial error occurred in instructing jury. Damages award and ongoing royalty were vacated 14
FRAND Disputes: Litigation vs. Arbitration 15
FRAND Disputes: Litigate or Arbitrate? Problems with Litigation Can create an incentive for firms to battle to extremes Parties will fight for an extremely high or extremely low rate, knowing the judge will pick something in between High costs and lengthy timelines Decision is made public Not enforceable in other countries 16
FRAND Disputes: Litigate or Arbitrate? Potential Advantages of Arbitration Procedural flexibility Enforceability Sophisticated decision-makers (parties choose their own tribunal) Resolve multi-jurisdictional disputes in one proceeding Potential Disadvantages of Arbitration Limited discovery Depositions are generally not permitted Typically no appellate review of award 17
FRAND Disputes: Litigate or Arbitrate? Other Considerations Baseball arbitration May have limited use in FRAND disputes. Tribunal is forced to pick one or the other with no modifications. Use of Licenses: The unpacking of past SEP licenses must take into account not just the effective royalty rate, but the deal as a whole. 18
Standards Settings Organizations and FRAND 19
SSOs and SEPs Standard setting organizations often mandate FRAND licenses But, they almost never actually define what FRAND means or how to determine it Recent FRAND disputes have increased pressure on SSOs to do more to clarify their rules IEEE is the world s largest technical professional association (>400,000 members) Feb. 8, 2015 IEEE BOD approved amendments to patent policy 20
IEEE Amendments No injunctions unless infringer does not comply with outcome of adjudications FRAND commitment is binding on assignees/transferees Licensor may require a grant back for a licensee s patents essential to the same standard, but Not allowed to require a cross license for other patents Licensor must license its patents for any Compliant Implementation, which means it cannot refuse to license its patents at certain levels of production Trying to curb licensors preference for end user only licensing 21
IEEE Amendments Rate Calculations Reasonable Rate shall mean appropriate compensation to the patent holder for the practice of an Essential Patent Claim excluding the value, if any, resulting from the inclusion of that Essential Patent Claim s technology in the IEEE Standard. In addition, determination of such Reasonable Rates should include, but need not be limited to, the consideration of: The value that the functionality of the claimed invention or inventive feature within the Essential Patent Claim contributes to the value of the relevant functionality of the smallest saleable Compliant Implementation that practices the Essential Patent Claim. The value that the Essential Patent Claim contributes to the smallest saleable Compliant Implementation that practices that claim, in light of the value contributed by all Essential Patent Claims for the same IEEE Standard practiced in that Compliant Implementation. Existing licenses covering use of the Essential Patent Claim, where such licenses were not obtained under the explicit or implicit threat of a Prohibitive Order, and where the circumstances and resulting licenses are otherwise sufficiently comparable to the circumstances of the contemplated license. 22