In Ericsson, Inc. v. D-Link Systems, Inc. (Fed. Cir. 2014), the Court rejected a jury damages award of $10 million on 802.11(n) standard essential patents found to be infringed by D-Link. The decision is an important one when it comes to litigating the royalty rate for standard essential patents (SEPs) and setting RAND terms that will hold up in litigation.

Standard essential patents, such as the Ericsson ones at issue in this case, cover the Wi-Fi standard, 802.11(n). Thus, all 802.11(n) compliant devices infringe the patents. In 2010, Ericsson filed an infringement suit in the Eastern District of Texas against D-Link, accusing it of infringing a set of its 802.11(n) SEPs. Ericsson prevailed at trial with a jury finding infringement of three patents, and awarding Ericsson $10 million in damages (at royalty rate of $0.15 per product). Based on the jury award, the judge found $0.15 per product to be an appropriate running royalty. On appeal, the Federal Circuit affirmed the majority of the findings on liability, but vacated the District Court’s damages award for failure to apportion damages in view of its recent holding in VirnetX, Inc. v. Cisco Systems, Inc., 767 F.3d 1308 (Fed. Cir. 2014). (For a full discussion of this decision, see Arent Fox’s recent alert on the VirnetX decision.)

Patent Hold-Up and Royalty Stacking Issues with SEPs

The Court discussed two problems that are well recognized with licensing standard essential patents: patent hold-up and royalty stacking. “Patent hold-up exists when the holder of a SEP demands excessive royalties after companies are locked into using a standard. Royalty stacking can arise when numerous patents cover a particular technological standard, perhaps hundreds, if not thousands of patents may be implicated by a particular standard. If companies are forced to pay royalties to all SEP holders, the royalties will ‘stack’ on top of each other and may become excessive in the aggregate.” Slip Op. at 7-8. Organizations that develop standards, such as IEEE, typically address these potential problems by seeking commitments from their members “that they will grant licenses to an unrestricted number of applicants on ‘reasonable, and nondiscriminatory’ (‘RAND’) terms.” Id.at 8. Ericsson promised to offer such licenses for its 802.11(n) SEPs.

RAND Licenses Are Subject to a Rigorous Apportionment Analysis

At trial, Ericsson attempted to rely on comparable license agreements with a royalty rate of 15 cents per device. While the district court found that the license agreements met the RAND requirements, the Federal Circuit nevertheless vacated the damages award because the jury instructions risked conflating the value of the standard with the actual value of the patents at issue:

“In sum, we hold that, in all cases, a district court must instruct the jury only on factors that are 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. The court should instruct the jury on the actual RAND commitment at issue and must be cautious not to instruct the jury on any factors that are not relevant to the record developed at trial. We further hold that district 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. We also conclude that, if an accused infringer wants an instruction on patent hold-up and royalty stacking, it must provide evidence on the record of patent hold-up and royalty stacking in relation to both the RAND commitment issue and the specific technology referenced therein.”

In essense, the Court noted that any damages analysis for standard essential patents should take into account its holding from VirnetX, Inc. v. Cisco Systems, Inc., 767 F.3d 1308 (Fed. Cir. 2014):

“…where multicomponent products are involved, the governing rule is that the ultimate combination of royalty base and royalty rate must reflect the value attributable to the infringing features of the product, and no more.”

Conclusion

This decision highlights the importance of applying a rigorous apportionment analysis when litigating standard essential patents. It also emphasizes the importance of accurate expert testimony and jury instructions which take into account strict apportionment requirements tied to the actual value of the patented technology at issue as opposed to the standard as a whole.

Accordingly, parties litigating SEPs must seek particularized jury instructions to educate the fact finder on the incremental value of essential patents as opposed to the standard as a whole. Furthermore, accused infringers of SEPs would be wise to explore evidence of royalty stacking or patent holdup in order to formulate arguments in order to mitigate against inflated royalty demands.