What does U.S. case law tell us about standard essential patent licensing?

Transcription

1 What does U.S. case law tell us about standard essential patent licensing? Licensing Executives Society Automotive and Aerospace Subcommittee Mobile & Consumer Electronics Subcommittee David W. Long ESSENTIAL PATENT LLC March 21, Overview 2 1

2 Patents with Claims Essential To Practice an Industry Standard Technical Industry Standard Standards Organization Setting or Developing Standards Intellectual Property Rights (IPR) Policy Essential Patent Claims Specific patent claims that read onto final standard Intellectual Property Rights (IPR) Policy may define essentiality 3 Misnomer: Patent Declared Essential to a Standard SDO s Intellectual Property Rights (IPR) Policy Disclose patents that a participant reasonably believes may be essential to standard Patentee s IPR Commitment IF patent claims are essential, THEN agree to license 4 2

3 What Did Patent Owner Actually Commit To Do? Look at the specific standard setting licensing commitment at issue Sources of licensing commitment Patentee s declaration or letter of assurance (LOA) submitted to SDO SDO s IPR Policy [W]e must look at the patentee s actual FRAND commitment. We need not be stampeded into abandoning the rule of law, or burden of proof simply because the respondents shout FRAND. ALJ Essex (ITC 337 TA 613) 5 You ve Known (Most of) It All Along But Oz never did give nothing to the Tin Man That he didn t, didn t already have America, Tin Man (1974) 6 3

4 Unreasonable Licensing Terms and Exclude Competitors? Generally, can a patent owner insist on unreasonable licensing terms and prevent competitors from using patented technology? Yes Competitor Royalty Payment Unreasonable Reasonable Reasonable & Nondiscriminatory 7 Essentiality If you agreed to license essential patent claims on FRAND terms, must you license a patent claim on FRAND terms if it is not essential to the standard? No FRAND License? 8 4

5 Apportionment Generally, to determine a reasonable royalty on an infringing device, should you consider value attributed to the invention as distinguished from value attributed to non-patented features of the device? Yes Can a patent owner obtain higher royalties because the infringer cannot sell standard-compliant products without the invention i.e., get value derived from being in the standard? No 9 Injunction If you offer the entire industry a patent license, can you easily get an injunction? Probably Not Are you automatically barred from seeking an injunction? No 10 5

6 Determining a Reasonable Royalty Is there a special, modified Georgia-Pacific method that you must use for all FRANDcommitted SEPs to derive a reasonable royalty? No 11 Value to the Licensed Product 12 6

7 Microsoft v. Motorola (W.D. Was.) (Judge Robart) Internet WiFi Encrypted from Xbox to Access Point Xbox Encrypted from Xbox to Server 13 Comparable Licenses 14 7

8 Comparable Licenses RAND Negotiation Comparable Negotiation Existing license is more comparable if negotiated in the context of FRAND or other SDO commitment at issue. Existing license is more comparable license if SEPs were significant part of consideration exchanged in the license. Existing license for a patent pool might have lower value patents. Existing license for unlitigated patent may have uncertainty discount. Consider value of non monetary consideration exchanged. Consider an array of licenses to lower concerns of whether individual licenses complied with FRAND, have asymmetric information or were unduly influenced by threat of litigation. 15 Avoid Derailing Licensing Negotiations 16 8

9 Patent Holdup Holdout Royalty Stacking 17 Apportionment Using Combination of Royalty Base and Royalty Rate [T]he governing rule is that the ultimate combination of royalty base [B] and royalty rate [R] must reflect the value [V] attributable to the infringing features of the product, and no more. Ericsson Inc. v. D-Link Sys., Inc., 773 F.3d 1201, 1226 (Fed. Cir. 2014) V = B x R V 18 9

10 Hypo: Power Saving Patent Non SEP and No Licensing Commitment CHIP Power Saving Patent Patent s Value To Battery-Powered Device Patent s Value To Line-Powered Device Reasonable Royalty = X (Nondiscriminatory) Reasonable Royalty = Y (Nondiscriminatory) 19 Hypo: Power Saving Patent SEP with or without Licensing Commitment CHIP Wireless Standard Power Saving Patent Patent s Value To Battery-Powered Device Patent s Value To Line-Powered Device Patent s Value To Standard Reasonable Royalty = X? (Nondiscriminatory) Reasonable Royalty = Y? (Nondiscriminatory) 20 10

11 TCL v. Ericsson (C.D. Cal. 2017) (Judge Selna) Another step in a continuing journey 21 TCL v. Ericsson: Background Ericsson portfolio of SEPs on ETSI wireless mobile phone standards: 2G (GSM, GPRS and EDGE) 3G (W CDMA) 4G (LTE and LTE advanced) TCL said to be 7 th largest manufacturer of phones and other standard compliant devices Ericsson and TCL Negotiations Existing 2G license entered in 2007 and expired in G negotiations started 2011 (when TCL had meaningful 3G sales) Ericsson filed 11 lawsuits in 6 countries In 2014, TCL files this lawsuit (Ericsson s mirror lawsuit in E.D. Tex. transferred and consolidated with this case)

12 TCL v. Ericsson: Initial Rulings FRAND commitment does not require licensing non SEPs even if Ericsson had included them when licensing others Do not need to offer identical terms. Value of non SEP portion license should be considered in determining value of proposed comparable license. Parties agreed to global anti suit injunction Cross license to TCL patents not considered (not timely raised). Jury would have determined non monetary material terms, but party agreement on some terms and resolution of other issues left only equitable issue for the court. Ericsson is appealing its right to jury trial on the FRAND determination. Court would not bind Ericsson to terms from arbitration with other party because, among other things, did not want to discourage use of arbitration. Dismissed competition law claims; cannot be based solely on breach of FRAND or alleged injury from business uncertainty. 23 TCL v. Ericsson: Judge Selna s Three Main Steps The search for precision and absolute certainty is a doomed undertaking. Determine if Ericsson met its FRAND obligation Held: Ericsson met its FRAND obligation with respect to its course of conduct. Did not resolve whether Ericsson was required to make a FRAND offer during the negotiations. Determine if Ericsson s Option A and B offers were FRAND TCL required to accept whichever option were deemed a FRAND offer Held: Neither Option A nor Option B were FRAND offers. If Ericsson s offers were not FRAND, then determine material FRAND terms using either: (a) a top down approach argued by TCL to determine Ericsson s portion of a total aggregate royalty under the standrds or (b) an ex ante approach argued by Ericsson that measures the value Ericsson s patents add to a product. Held: Rejected both parties methodologies. Used modified top down approach of essentially patent counting based on public statements by Ericsson

13 TCL v. Ericsson: TCL s Top Down Approach Royalty = (Aggregate Royalty) x (Ericsson SEP Value/All SEP Value) Nine Step Top Down Approach: 1. Select maximum aggregate royalty for all SEPs 2. Determine total number of SEPs 3. Rank Ericsson SEPs on essentiality scale 1 to 3 4. Evaluate importance of Ericsson SEPs to standard 5. Adjust value of Ericsson SEPs based on their importance 6. Apply forward citation analysis as check against SEP value 7. Adjust overall SEP value based on patents expired or acquired 8. Adjust value based on patent s issuing country 9. Use TCL sales data to weight royalty by country region and blend together for single global royalty rate. 25 TCL v. Ericsson: Ericsson s Ex Standard Method Ericsson sought to determine value on a feature by feature basis E.g., Ericsson s contribution to improved battery life feature Three main steps: 1. Identify specific technical features of standard covered by Ericsson patents 2. Estimate value of each feature over next best non infringing alternative 3. Apportion Ericsson s share of value of feature Judge Selna found flaws with Ericsson s method: Technical contributions considered were not tied to specific patents. Did not account for transferred or expired patents Did not show that Ericsson s patents were responsible for the percentage of value of the standard that were attributed to certain features. Consumer surveys were not reliable 26 13

14 TCL v. Ericsson: Non Discrimination Analysis Compared Ericsson s Option A and B offers to existing licenses to firms which are similarly situated. Similarly situated Relevant factors: Geographic scope ( local king or global market) License required Reasonable sales volume Irrelevant factors: Company s overall financial success or risk Brand recognition Device operating system Existence of retail stores TCL s Argument Ericsson s Argument Judge Selna s Finding Apple, Samsung, Huawei, LG, HTC and ZTE Karbonn, CoolPad, Huawei, LG, HTC and ZTE Apple, Samsung, Huawei, LG, HTC and ZTE 27 TCL v. Ericsson: Unpacking Existing Proposed Comparable Licenses Unpacking a license involves evaluating all of its terms and other consideration so that the Court can calculate the effective one way rate that each licensee pays Ericsson for its handset SEPs. License Value = (One Way Royalty Rate) x (Revenue from Licensed Products) Issues considered in unpacking license: Allocating release payment between past unlicensed sales and future sales Apportioning lump sum payments between multiple standards Dollar per unit rates, caps and floors Dollar per unit at odds with industry and Ericsson s practices Percentage royalty better aligns incentives of SEP holders and licensees Caps and floors were solely the product of negotiations, not any sort of analysis of whether they are fair or reasonable. To be sure, in the course of private negotiations, parties may enter into a variety of licensing schemes that reflect each party s unique assessment of the risk of a particular arrangement. However, the Court prefers to conduct its FRAND analysis on principles of general application which do not require the Court to discern the peculiarities of those risk assessments

15 TCL v. Ericsson: Offers Discriminatory Held: Ericsson Option A and B offers were discriminatory because of the radically divergent rates offered TCL as compared to the unpacked comparable licenses Ericsson entered with others. 29 TCL v. Ericsson: FRAND Royalty Judge Selna determined royalty rates that were under half way between those proposed by TCL and Ericsson 30 15

16 TCL v. Ericsson: Key Take Aways A very fact specific data point; not a water shed moment Decision concerns litigating FRAND and does not necessarily translate to private FRAND licensing negotiations. SEP value can vary significantly depending on which countries the SEP issued. ETSI FRAND commitment does not have a most favored licensee requirement or require renegotiating past licenses if actual sales are different from sales projected at time license was entered. Do not need to offer identical terms to every company under a FRAND license; but consider total value of all consideration exchanged. The place where licensed products are made sets the floor for global royalty rate, because such manufacturing is an infringement. Considering an array of proposed comparable licenses reduces concerns about individual licenses (e.g., negotiated under FRAND, threat of litigation, etc.) 31 Q&A 32 16

17 The End ESSENTIAL PATENT LLC David W. Long