In Commonwealth Scientific and Industrial Research Organisation v Cisco Systems, Inc (Slip Op 2015-1066, Fed Cir, December 3 2015), a Federal Circuit panel rejected the argument of the accused infringer, Cisco, that the smallest saleable patent practising 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.
Commonwealth Scientific and Industrial Research Organisation (CSIRO), which is the national science agency of Australia, owns US Patent 5,487,069 (the '069 patent), which is directed to products and methods relating to WiFi (wireless LAN) technology. In 2011 CSIRO sued Cisco in the Eastern District of Texas for infringing the '069 patent. Cisco stipulated to infringement and a bench trial went forward on the issue of damages only.(2) 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 practised any of the Institute of Electrical and Electronics Engineers 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 (eg, 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 licence 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 which 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 had 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 licences and the informal negotiations which 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 applies only where an SEP is RAND encumbered (ie, where there is a commitment to offer licences 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 Georgia-Pacific Factors 8, 9 and 10,(4) which Ericsson specifically noted are "irrelevant or misleading" in cases involving SEPs.
Finally, Cisco argued that the district court had erred by not crediting evidence of the 1998 technology licence agreement between CSIRO and Radiata. The district court gave four reasons for rejecting the agreement:
- the close relationship between CSIRO and Radiata, which suggests that negotiations leading to the agreement were not performed at arm's length;
- the agreement's development requirements, including Radiata's significant obligations to CSIRO;
- the timing of the agreement, which occurred years before a hypothetical negotiation would have taken place; and
- the agreement'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 agreement, stating that "the majority of these findings do not support a wholesale rejection" of the technology licence agreement. The Federal Circuit thus directed the district court to re-evaluate the relevance of the agreement to its damages analysis on remand.
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(1) Ericsson, Inc v D-Link Sys, Inc 773 F 3d 1201, (Fed Cir 2014).
(2) Commonwealth Scientific and Industrial Research Organisation v Cisco Systems, Inc, Case 6:11-cv-343, 2014 WL 3805817 (ED Tex, July 23 2014).
(3) In Ericsson (which issued after the district court's decision), the Federal Circuit held that "widespread adoption of standard essential technology is not entirely indicative of the added usefulness of an innovation over the prior art", and therefore "the royalty for SEPs should reflect the approximate value of that technological contribution, not the value of its widespread adoption due to standardization".
(4) Factor 8 is "the established profitability of the product made under the patent; its commercial success; and its current popularity". Factor 9 is "the utility and advantages of the patent property over the old modes or devices, if any, that had been used for working out similar results". Factor 10 is "the nature of the patented invention; the character of the commercial embodiment of it as owned and produced by the licensor; and the benefits to those who have used the invention".
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