In Commonwealth Scientific and Industrial Research Organisation v. Cisco Systems, Inc., Slip Op. 2015-1066 (Fed. Cir. Dec. 3, 2015), a Federal Circuit panel rejected the argument of the accused infringer, Cisco, that the smallest saleable patent practicing unit (“SSPPU”) must be the starting point in a damages analysis, but vacated the damages award against Cisco due to the district court’s failure to consider the standard-essential nature of the patent-in-suit in light of the Court’s 2014 decision in Ericsson v. D-Link,[1] and its failure to give weight to a prior agreement between the parties.

Proceedings Below[2]

Commonwealth Scientific and Industrial Research Organisation (“CSIRO”), which is the national science agency of Australia, owns U.S. Patent No. 5,487,069 (“the ’069 Patent”). The ’069 Patent is directed to products and methods related to WiFi (wireless LAN) technology. In 2011 CSIRO sued Cisco in the Eastern District of Texas for infringement of the ’069 Patent. Cisco stipulated to infringement and a bench trial went forward only on the issue of damages. The parties agreed that the scope of the accused products would be all products made, used, offered for sale, or imported into the United States by Cisco and its subsidiaries (including Linksys) that practice any of the IEEE’s 802.11a, 802.11g, 802.11 draft-n, 802.11n, 802.11 draft-ac, or 802.11ac Wi-Fi standards.

CSIRO argued for a flat fee royalty based on Cisco’s end products (e.g., wireless network interface cards, routers, and wireless access points), and in doing so argued that those end products were the SSPPU, because “the end product is the only marketable unit which includes a baseband, radio chip, and antenna, all of which are required to practice the asserted claims.” Cisco argued that the revenue pool should be based not on revenues for the entire end product, but on revenues of the wireless LAN chip as the SSPPU, with royalty rates capped at the rates included in a 1998 Technology License Agreement between CSIRO and Radiata, a CSIRO spin-off that Cisco acquired in 2000.

The district court rejected the damages analyses of both parties’ experts as flawed, and relied instead on a 2002 offer by Cisco to license the patent-in-suit from CSIRO for $0.90 per unit sold together with a CSIRO 2002 rate sheet that had been provided to Cisco. According to the district court, these were the best available predictors of the outcome of a hypothetical negotiation between the parties just before infringement began. The district court awarded damages to CSIRO in the amount of $16,243,067.

Federal Circuit Opinion

Cisco argued on appeal that the district court erred in not basing its damages calculation on sales of the SSPPU. The Federal Circuit acknowledged that while the SSPPU plays a role in apportioning damages from a royalty base, it disagreed with the premise that the SSPPU must be the proper starting point in all cases. As the Court stated, “there may be more than one reliable method for estimating a reasonable royalty,” including comparable licenses and the “informal negotiations” that had taken place between the parties in the present case. In rejecting Cisco’s argument the Federal Circuit stated that “[t]he rule Cisco advances—which would require all damages models to begin with the smallest salable patent-practicing unit—is untenable.”

Cisco also argued that in view of the Federal Circuit’s decision in Ericsson, the district court did not properly adjust the Georgia-Pacific factors to account for “extra value accruing to the ’069 patent” from the fact that it is a standard-essential patent (“SEP”).[3] Specifically, Cisco contended that the district court legally erred under Ericsson because it failed to account for any extra value accruing to the ’069 Patent from the fact that it is essential to the 802.11 Wi Fi standard. CSIRO argued that Ericsson only applies where an SEP is RAND-encumbered, i.e., where there is a commitment to offer licenses under reasonable and non-discriminatory (“RAND”) terms, which applied to only 0.03% of the accused products.

The Federal Circuit rejected CSIRO’s argument, holding that the necessary adjustments to the Georgia-Pacific factors encompass all SEPs generally, not just those under a RAND commitment. In considering the ’069 Patent’s standard-essential status, the district court erred by giving undue weight to certain Georgia-Pacific factors 8, 9, and 10,[4] whichEricsson specifically noted are “irrelevant or misleading” in cases involving SEPs.

Finally, Cisco argued that the district court erred by not crediting evidence of the 1998 Technology License Agreement (“TLA”) between CSIRO and Radiata. The district court gave four reasons for rejecting the TLA: (1) the close relationship between CSIRO and Radiata, which suggests that negotiations leading to the agreement were not performed at arm’s length, (2) the TLA’s development requirements, including significant obligations of Radiata to CSIRO; (3) the timing of the TLA, which occurred years before a hypothetical negotiation would have taken place, and (4) the TLA’s use of chip prices as a royalty base. The Federal Circuit held that the district court erred in its reasoning as to all but the second reason for rejecting the TLA, stating that “the majority of these findings do not support a wholesale rejection of the TLA.” The Federal Circuit thus directed the district court to reevaluate the relevance of the TLA to its damages analysis on remand.