Federal Circuit issues ruling in case over standard essential patents, royalty rates

By Jessica M. Karmasek | Dec 8, 2014

WASHINGTON (Legal Newsline) - The U.S. Court of Appeals for the Federal Circuit last week issued its first decision on the issue of appropriate reasonable and non-discriminatory, or RAND, royalty rates.

The Federal Circuit’s opinion, released Thursday, also is the only court of appeals decision on the matter.


The case involved infringement of standard essential patents, or SEPs.


A SEP is a patent that claims an invention that must be used to comply with a technical standard.

Standards organizations, such as the Institute of Electrical and Electronics Engineers, often require members disclose and grant licenses to their patents and pending patent applications that cover a standard that the organization is developing.


If a standards organization fails to get licenses to all patents that are essential to complying with a standard, owners of the unlicensed patents may demand or sue for royalties from companies that adopt the standard.


In the case before the Federal Circuit, Ericsson claimed infringement by several manufacturers of laptops, routers and other products -- including D-Link and Acer -- that are compliant with the IEEE’s Wi-Fi standard.


A three-judge panel of the court -- judges Kathleen O’Malley, Richard Taranto and Todd Hughes --  reversed a damages award because the jury was not properly instructed in determining the RAND, or FRAND, commitment.


“Many of the Georgia-Pacific factors are simply not relevant; many are even contrary to RAND principles,” O’Malley wrote for the panel.


The panel said any instruction must make clear that the royalty award for infringement of a SEP “must be premised on the value of the patented feature, not any value added by the standard’s adoption of the patented technology.”


The Federal Circuit explained that when a technology is incorporated into a standard, it is typically chosen from different options.


“Once incorporated and widely adopted, that technology is not always used because it is the best or the only option; it is used because its use is necessary to comply with the standard,” O’Malley wrote in the 60-page opinion.


“The jury must be told to differentiate the added benefit from any value the innovation gains because it has become standard essential.”  


In other words, the so-called “hold-up value” of the patent must not be taken into consideration, the panel said.


Patent hold-up exists when the holder of a SEP demands excessive royalties after companies are locked into using a standard.


The Federal Circuit also, notably, declined to require the jury to be specifically instructed on so-called “royalty stacking.”


Royalty stacking can arise when a standard implicates numerous patents, perhaps hundreds, if not thousands.


If companies are forced to pay royalties to all SEP holders, the royalties will “stack” on top of each other and become excessive.


The Federal Circuit concluded that no such instruction was required because the defendants had failed to show what royalties they were actually paying to license other SEPs.


Adam Mossoff, a law professor at George Mason University and senior scholar at the university’s Center for Protection of Intellectual Property, said the court’s opinion is very significant.


“The Federal Circuit addressed numerous issues in Ericsson v. D-Link concerning the proper method for determining damages for an infringement of standard essential patents,” he said. “One of the most important aspects of the opinion is the court’s conclusion that purely speculative assertions of ‘patent holdup’ and ‘royalty stacking’ should be excluded by trial courts.


“This is important, because such assertions to date have been made entirely on the basis of conjecture and without any actual statistically verified evidence, either in actual court cases or more generally.”


Though it’s a complicated issue, Mossoff said he believes the Federal Circuit got it right.


“There’s this tension between overcompensating and saying the patent owner should only get the exact value,” he explained.


“But the Federal Circuit emphasized very heavily in its opinion that it’s not the job of the courts to come up with special tests or blindly apply the Georgia-Pacific factors.”


The factors -- 15 in all -- are used by courts to determine the type of monetary payments that would compensate for a patent infringement.


“In this case, the Federal Circuit went through the Georgia-Pacific factors and determined which are relevant and which aren’t,” Mossoff explained.


Mossoff said the legal community had yet to see a statement from a court of appeals, much less the Federal Circuit, on the use of speculation and theory -- in particular, patent hold-up and royalty stacking -- in patent cases.


“It’s a very compelling story that has been created here,” he said of hold-up and stacking. “But there’s zero evidence this actually exists in the real world.”


From Legal Newsline: Reach Jessica Karmasek by email at patents@legalnewsline.com.

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