th
9
The Federal and
Circuits
Have Spoken: How (or How
Not) to Calculate RAND
Royalties for StandardEssential 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 (9th 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 – 9th 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 20day 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 9th 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
17