Federal Circuit Nos. 2013-1625, -1631, -1632, -1633

On December 4, 2014, in Ericsson, Inc. v. D-Link Systems, Inc., the U.S. Court of Appeals for the Federal Circuit (“Federal Circuit”) vacated the district court’s royalty awards, holding that the district court erred in including all 15 Georgia-Pacific factors in the jury instruction and in including an additional factor that made consideration of a RAND obligation optional.

Ericsson sued D-Link and other defendants in the Eastern District of Texas for infringing 3 “standard-essential” patents (“SEP”) to the IEEE 802.11 Wi-Fi standard. The jury found that the claims were infringed by D-Link and awarded roughly $10 million in damages, approximately 15 cents per infringing device. At trial, the district court rejected D-Link’s request for a jury instruction addressing Ericsson’s obligation to license the patents on Reasonable and Non-Discriminatory (RAND) terms. That instruction addressed the dangers of “patent hold-up” (a SEP holder’s ability to insist on the additional “ex post” value flowing from the standardization) and “royalty stacking” (a situation in which a single product potentially infringes on numerous patents essential to the standard). Instead of adopting D-Link’s RAND instruction, the district court added a sixteenth factor to the 15 Georgia-Pacific factors, which stated that the jury “may consider Ericsson’s obligation to license its technology on RAND terms.” D-Link challenged on appeal the district court’s jury instructions on damages including its refusal to instruct the jury on patent hold-up and royalty stacking.

The Federal Circuit first acknowledged that this issue was a matter of first impression. After reviewing three district court opinions thus far ruling on how to calculate F/RAND royalty rates, the Federal Circuit held that the district court erred in including all 15 Georgia-Pacific factors in the jury instruction. It reasoned that some of the factors are simply irrelevant in the context of a SEP holder’s obligation to license on “reasonable and non-discriminatory (RAND)” terms.

The Federal Circuit also found that the district court erred in instructing the jury that it may consider Ericsson’s RAND obligation. Given Ericsson’s actual promise to license the patents at RAND rates, the Federal Circuit reasoned, the jury should have been instructed that it is obligated, not just option, to take RAND commitments into account when determining a RAND royalty rate. However, the Federal Circuit declined to endorse any methodology used in the three district court opinions or to create a bright-line rule for all RAND cases.

The Federal Circuit further held that the royalty for SEPs should reflect the approximate value of the technological contribution, not the value of its widespread adoption due to standardization. Emphasizing that a SEP holder should only be compensated for the approximate “incremental value” that its invention adds to the product, the Federal Circuit mandated that the jury must be instructed to consider the difference between the added value of the technological invention and the added value of the invention’s standardization.

However, the Federal Circuit affirmed the district court’s refusal to instruct the jury about patent hold-up and royalty stacking, noting that D-Link failed to produce “actual” evidence to show patent hold-up and royalty stacking. The Federal Circuit stated that “something more than a general argument that these phenomena are possibilities is necessary.”