With standard-essential-patent (SEP) damages discussions frequently focused on how to calculate a RAND rate, one can sometimes forget that not all SEPs are subject to [F]RAND obligations, which raises the issue whether and to what extent a reasonable royalty rate would be different between RAND and non-RAND encumbered patents. Last week, N.D. Cal. Judge Lucy Koh issued a Daubert ruling in an interesting case where the damages model from a non-practicing patent monetization entity attempted to affirmatively factor-in a higher royalty rate beyond the technical value of the patent based on the “hold-up” value the patent obtained by allegedly covering a cellular standard without the patent being subject to any standard setting RAND or other licensing obligation. The court, however, excluded such testimony from plaintiff’s damages expert.

Other SEP cases have theorized that patent hold-up may occur with an SEP, but there was no evidence that patent hold-up actually occurred.  This case, GPNE Corp. v. Apple, Inc. (Case No. 12-CV-02885-LHK), serves as the only litigated instance we are aware of in which actual hold-up was shown to occur based on the SEP patent owner affirmatively trying to use the value of patented technology being in a standard to demand a rate higher than the particular patented technology itself warranted.  As this is only a single data point, we cannot extrapolate too far, but the case indicates that, in a rare instance so far where actual SEP hold-up is shown to occur, a court may reject an attempt to seek a royalty beyond the value of the patented invention itself based on a patent covering a standard regardless whether that patent is or is not subject to RAND or other standard setting obligation.

Here is how the ruling came about. GPNE filed an infringement suit against Apple on May 10, 2012, asserting three patents that are alleged to be essential to 3G and 4G cellular standards. Both parties submitted expert reports and testimony on damages, each of which performed a reasonable royalty damages analysis using the Georgia Pacific factors. After expert discovery closed, both parties sought to exclude one another’s damages expert testimony from trial.  In a hypothetical negotiation for a reasonable royalty, GPNE’s damages expert relied upon a number of qualitative factors indicating the importance of 3G and 4G cellular technology as a whole to the accused infringing devices–rather than just the importance of the patented technology to those devices– to arrive at a royalty rate of $1 per device.

GPNE’s expert assumed that the patents covered cellular connectivity standards such that Apple could not design around the patents and still sell products that could work on GPRS, EDGE, and LTE networks without a license to GPNE’s patents. In other words, GPNE’s expert asserted that the hypothetical negotiation could factor-in patent “hold-up” value in which the patent owner would capture the value of the patent covering a standard–and hence the value of complying with the standard– regardless of the patent’s particular technical contribution/value to the standard or the accused product:

GPNE had the power to “hold up” Apple, giving it considerable negotiating leverage based on the scope of its intellectual property rights. GPNE had no obligations to use an ex ante framework to license its [standard-essential patents] – the ex ante evaluation would be irrelevant as would be the consideration of rates for patent pools in determining an appropriate royalty rate in this matter.

The expert apparently based the $1/unit figure on the value of cellular technology in general to the Apple products, rather than the value of the specific patents themselves. The damages expert further indicated that the $1/unit royalty amount was determined generally based on his “30 years of experience in the licensing world” and that “there is no mathematical calculation… to derive the one dollar”.

Reviewing GPNE’s proffered expert opinions, the Court granted Apple’s motion to exclude the damages testimony on the grounds that GPNE’s expert provided no methodology to derive the $1/unit royalty from the average net incremental profit ($86), performed no analysis to apportion value to the specific patent’s technological contribution, and cited various licenses that did not support the $1/unit rate. The court reasoned that GPNE’s expert analysis “is a black box that provides no basis for the $1 per unit royalty figure, cloaking this arbitrary choice in broad statements about the general value of cellular connectivity.”

The court further criticized the lack of apportionment analysis in GPNE’s expert opinion on damages, indicating GPNE’s expert presented no evidence of the value of the specific patented technologies. Citing Georgia Pacific factor  13, “[t]he portion of the realizable profit that should be credited to the invention as distinguished from non-patented elements, the manufacturing process, business risks, or significant features or improvements added by the infringer”, the court found that no such apportionment was taken into consideration. The court stated that, while the expert report relies on generic statements regarding the importance of 3G and 4G LTE connectivity technology to Apple generally, the report made no attempt to distinguish technologies covered by the patents-at-issue, which the court’s claim construction found are related primarily to pager technology, from the non-infringing features of 3G and 4G LTE technology standards. The failure to distinguish between the two proved fatal to the damages opinion, with the court ruling “GPNE must make some attempt to distinguish the allegedly infringing features of 3G and 4G LTE from the non-infringing features, so that [GPNE's expert] may apportion value between them.”

This case indicates that a proper analysis for determining either a reasonable royalty or RAND-encumbered royalty for a patent that covers an industry standard may account for patent hold-up concerns by providing a reasoned apportionment between the value of the patented features and the unpatented technical value of the affected standard.  That rationale is supported by Factor 13 of a typical Georgia-Pacific analysis that seeks to apportion value to the specific patented technology apart from other non-patented features.