The U.S. Court of Appeals for the Federal Circuit addressed a spectrum of issues surrounding industry standards for electronic devices that wirelessly access the internet, explaining how a district court should instruct a jury to award apportioned damages for infringement of standard essential patents (SEPs).  Ericsson, Inc. v. D-Link Sys. Inc., et al., Case. Nos. 13-1625, - 1631, -1632, -1633 (Fed. Cir., Dec. 4, 2014) (O’Malley, J.) (Taranto, J., dissenting in part).

This case arrived at the Federal Circuit following a jury trial.  Plaintiff Ericsson, like other owners of standard essential patents, pledged to the IEEE that it would grant licenses on “reasonable and non-discriminatory” (RAND) terms to its standard essential WiFi patents.  It later asserted three such patents against D-Link and others.  Under Ericsson’s infringement theory, all WiFi-capable devices infringe the asserted patents.  The jury agreed, finding claims of all three patents infringed and awarded Ericsson approximately $10 million in damages, or 15 cents per infringing device.  The district court upheld the award, concluding that Ericsson’s damages testimony was not inconsistent with the entire market value rule and rejecting D-Link’s argument that the jury instruction on damages in the context of RAND licensing obligations was erroneous.  D-Link appealed.

Applying a de novo standard of review, the Federal Circuit assessed whether the jury instruction on damages was legally sufficient.  Turning first to the admissibility of Ericsson’s licensing evidence, the Federal Circuit agreed that the proffered licenses for Wi-Fi technology were admissible even if referring to a different component and/or feature than the asserted patents because the licenses assisted the jury in deciding an appropriate royalty award.  However, as to the appropriate royalty base, the Court explained that according to both Federal Circuit and Supreme Court precedent, where multi-component products are involved, “the ultimate combination of royalty base and royalty rate must reflect the value attributable to the infringing features of the product and no more.”  Here, Ericsson’s expert testimony regarding the licenses sufficiently tied the ultimate reasonable royalty award to the incremental value of the patented invention so as to be admissible.  The Federal Circuit cautioned, however, that when licenses based on the value of a multi-component product are admitted or referenced in expert testimony, the district court should provide a cautionary instruction regarding the limited purposes for which such testimony is proffered (assuming such an instruction is requested).

Focusing next on the district court’s RAND jury instruction, the Federal Circuit considered how Ericsson’s RAND obligations fit within theGeorgia-Pacific factors—an issue of first impression.  The Federal Circuit rejected D-Link’s argument that it was error not to instruct the jury about concepts of patent hold-up and royalty stacking because the George-Pacific factors already encompassed these concerns and, importantly, D-Link had presented no evidence as to actual patent hold-up or royalty stacking that would warrant the requested instructions.  Yet, the Court concluded the jury instructions were not without prejudicial error.  In particular, the Federal Circuit clarified that the Georgia-Pacific factors are not a “talisman for royalty rate calculations,” and a district court should not parrot all 15 factors without first deciding whether a factor applies to the facts of the case.  Where, as here, the case involves RAND-encumbered patents, many of theGeorgia-Pacific factors are not relevant (e.g., an established licensing program, popularity of the invention, advantages of the invention over old modes or devices, and commercial embodiments).  The Federal Circuit declined to outline a list of factors that would apply in all RAND cases, instead articulating that trial courts should adapt any Georgia-Pacific-based instruction on a case-by-case basis.  In this case, the Court explained that the district court should have fashioned its instruction based on Ericsson’s actual binding obligations to license the patents on RAND terms as pledged to the IEEE.

The review of the damages award also delved into special apportionment issues for standard essential patents, including apportionment of the patented feature from the unpatented features and tethering the patent owner’s royalty to the value of the patented feature rather than any value added by the standard’s adoption of the patented technology.  The Federal Circuit explained that in this case the asserted patents encompassed technologies that were only a small aspect of the standard.  Just as controlling precedent requires that damages be apportioned to reflect the value of a small patented feature in a device, so too must damages be apportioned for standard essential patents that cover only a small part of the standard.  At all times, the royalty award must be apportioned to reflect the value of the patented invention.

Practice Note:  This decision discusses, but does not express an opinion as to the approach three other district courts have taken to set a RAND royalty rate.  Although the Federal Circuit is clear that jury instructions or judicial determinations must be premised on the facts of a particular case, practitioners may consult the following three district court decisions as a starting point: Realtek Semiconductor Corp. v. LSI Corp., No. 12-cv-3451, 2014 WL 2738216 (N.D. Cal., June 16, 2014); In re Innovatio IP Ventures, LLC Patent Litig., No. 11-cv-9308, 2013 WL 5593609 (N.D. Ill., Oct. 3, 2013); and Microsoft Corp. v. Motorola, Inc., No. 10-cv-1823, 2013 WL 2111217 (W.D. Wash. Apr. 25, 2013).