Federal Circuit Provides RAND Damages Framework
By Michael Bonella // December 28, 2014
In Ericcson, Inc. D-Link Sys., Inc., the Federal Circuit vacated a jury’s damages award of about $0.15/infringing device amounting to about $10 million in total damages for infringement of Ericcson patents that covered 802.11 standards and were subject to a RAND obligation. The overall message from the Court is that there must be an “apportionment” to ensure that the damages are based on the incremental value of the invention, not the value of the standard as a whole, or any increased value the patented feature gains from inclusion in the standard.
Entire-Market Value Rule
The Court began its analysis by addressing damages in situations where the infringing product has both patented and nonpatented features. According to the Court, the Entire Market Value Rule (EMR), which has traditionally be used to analyze damages in this scenario has a substantive legal rule and an evidentiary rule. The substantive legal rule is that the “ultimate combination of royalty base and royalty rate must reflect the value attributable to the infringing features of the product, and no more.” There must be an “apportionment” and a determination of the “value added” by the patented features, so that the ultimate royalty award “is based on the incremental value that the patented invention adds to the end product.”
The evidentiary rule incorporated in the EMR is also one of “apportionment.” In selecting the royalty base for multicomponent products where the patentee feature “is not the item which imbues the combination of the other features with value” care must be taken to avoid misleading the jury by placing undue emphasis on the value of the entire product. According to the Court, “where the entire value of a machine as a marketable article “is ‘properly and legally attributable to the patented feature,’” the damages may be calculated by reference to the entire value. When it is not, courts must insist on a “more realistic starting point” which the Court stated is “often, the smallest salable unit and, at time, even less.”
Reliance on Licenses
The Federal Circuit held that the patentee’s expert did not improperly rely on industry licenses in determining damages in the EMR framework, rejecting D-Link’s argument that since licenses are not negotiated based on the EMR, they are irrelevant. The Federal Circuit held that where an expert relies on licenses in the EMR context, the expert must explain the need to “discount reliance on a given license to account only for the value attributed to the licensed technology.” The Federal Circuit further held that a cautionary jury instruction should be provided “regarding the limited purposes for which the” license testimony is offered and that fully explains the need to apportion the ultimate royalty award to the incremental value of patented feature. The Federal Circuit also declined to address the issue of whether reference to the total cost of the infringing device is unduly prejudicial under F.R.E. 403 because the issue was waived at the District Court.
RAND Jury Instructions
For the first time, the Federal Circuit set forth specific requirements for jury instructions in RAND cases. The Federal Circuit held that the District Court’s jury instructions based on the traditional Georgia-Pacific factors and having a separate instruction telling the jury that it may consider Ericcson’s RAND obligations was error when awarding damages in a RAND context. Rather, the jury instructions must be tailored to the actual RAND obligation.
1. Use of Georgia-Pacific Factors in the RAND Context
The Federal Circuit held that where there is a RAND obligation, it is error to instruct the jury based on just the Georgia-Pacific factor instructions without instructions tailored to the facts of the actual RAND obligation. Rather, a jury should be instructed to award damages based on the facts of the “actual RAND obligation.” In doing so, the Federal Circuit held that several of the Georgia-Pacific factors are irrelevant and misleading in the RAND Context because the value of the technology is inflated by adopting it in the standard. Thus, the actual RAND obligation should be used to craft the jury instructions. Instructions based on the Georgia-Pacific factors may be used, but they should be crafted for the facts of the particular case, and the jury should not be instructed based on irrelevant factors.
2. Apportionment For Standard Essential Patents
For standard essential patents (SEPs), the “royalty rate” must be apportioned to the patented invention’s value. This requires that (i) the patented feature is “apportioned from all of the unpatented features reflected in the standard” and (ii) the royalty rate “must be premised on the value of the patented feature, not any value added by the standard’s adoption of the patented technology.” The Court expressly recognized that that since there is a degree of uncertainty in setting the value of the patented technology, it is acceptable to approximate the value. However, the Court cautioned that the royalty award for a SEP must be apportioned to the value of the patented invention, not the value of the standard as a whole.
3. “Patent Hold Up” and “Stacking” Instructions
“Patent hold up” is where the owner of a SEP demands excessive royalties after companies are locked into using a standard and often occurs where a patentee owns many SEPs. “Stacking” is the concept that if companies are forced to pay royalties on all SEPs, the royalties will stack on top of each other and may become excessive in the aggregate. The Federal Circuit held that a “patent hold-up” instruction is only required where the infringer presents actual, competent evidence of hold-up or stacking. A general argument about these concepts does not trigger the need for a jury instruction. In this specific case, the evidence showed that Ericcson complied with its RAND obligations and did not demand an unreasonable royalty, so there was no need for a patent hold up instruction. The evidence also failed to show any evidence of other licenses that the Defendant had taken on 802.11 SEPs, so there was no need for a stacking instruction. The Court noted that a stacking instruction is not triggered by the mere fact that thousands of patents are declared SEP. Rather, there must be evidence of what is actually being paid for SEP.