Featured / Panel Activity

Periodically Fed Circuit Blog will provide an update on important cases pending before panels at the Federal Circuit, particularly cases with amicus briefs. Today we highlight TCL Communication Technology Holdings Ltd. v. Telefonaktiebolaget LM Ericsson. At least based on the number of amicus briefs filed in the case, it is one of the most watched cases pending at the court.

The case concerns a commitment Ericsson made to a standard setting organization that Ericsson would license its patented technology, if it were used in any standard, on fair, reasonable, and non-discriminatory (FRAND) terms. The panel will be addressing the meaning of this commitment, and in particular how courts should determine compliance with it.

The district court in this case ordered TCL to pay Ericsson about $16.5 Million as compensation for the release of patent infringement claims with respect to all of the relevant Ericsson standard essential patents (e.g., for the 4G standard between 70 and 112 patent families).

According to Ericsson, the case presents the following issues:

1. “Whether the district court erred in denying Ericsson a jury trial in a declaratory-judgment  suit  that  anticipated,  and  shared  issues  with,  Ericsson’s patent-infringement suit.”

2. “Whether the district court erred in determining the reasonableness of royalty  rates  by  counting  numbers  of  patent  families—using  an  unreliable methodology—instead of examining the value the patents add.”

3. “Whether  the  district  court  failed  to  properly  analyze  comparable licenses by disregarding settled royalty principles and the structure of Ericsson’s licenses and license offers.”

Ericsson argues in its opening brief that the district court “violated the Seventh Amendment by resolving this case in a bench trial.” It also argues that the district court’s “‘simple patent counting system’ under which every [standard essential patent] is treated ‘as possessing identical value’ . . . . violates the ‘essential’ rule that reasonable royalties must reflect ‘the incremental value that the patented invention adds.’” And it argues that “[t]he  district  court’s  treatment  of  comparable  licenses  (to evaluate discrimination  and  confirm  patent-counting  results)  was  fundamentally  flawed.”

In response, TCL argues that “Ericsson had no right to a jury trial.” It argues that the district court’s “analysis was overwhelmingly consistent with Ericsson’s own historical positions, and well supported by the evidence, and thus a reasonable way to determine the royalty rates for TCL’s license—the exact task requested by both parties.” And it argues that the district court’s “comparable license analysis was also consistent with Ericsson’s prior advocacy.”

In reply, Ericsson argues that the district court’s “errors can-not be brushed aside in footnotes, ignored, or disregarded on non-existent waivers.”

Ten amicus briefs have been filed in the case. Five support Ericsson:

  1. Interdigital, Inc. argues that “[i]n general, the district court’s methodology for analyzing FRAND royalty terms would lead to systematic undercompensation of patent owners.” Interdigital claims that the district court’s decision “rested on multiple errors of law and should be reversed.” In support, Interdigital points out the district court’s reliance upon a “‘top down’ analysis that was flawed and unreliable” as opposed to correctly “relying first on market-based evidence of comparable licenses.” Further, Interdigital contends that the district court “erroneously concluded that a dollar-per-unit ‘floor’ applied to a percentage rate license was inappropriate based on the mistaken view that patented technology does not have at least a minimum value that should be reflected in a royalty floor.”
  • Nokia Technologies argues that “the process that the district court adopted and endorsed . . . , if it were to be applied in other situations, would have the likely effect (by its very design) of setting rates that would inadequately reward innovators and create disincentives to future innovation.” In contrast with the district court’s approach, Nokia emphasizes the importance of “strik[ing] the proper balance between making SEPs available to implementers and ensuring that innovators are adequately rewarded for their contributions to the underlying standards.”
  • Kelce Wilson argues that the District Court’s equation (Proportional Share = Number of Unexpired SEPs owned by Licensor / Total Number of SEPs in the Standard) for calculating Ericsson’s royalty rate is “inadequate because it relies on a denominator, ‘Total Number of SEPs in the Standard,’ that very likely overstates the number of true SEPs in the standard.” Wilson claims that the denominator is likewise overstated because “there are significant incentives for companies to over-declare patents as SEPs.”
  • Prof. Peter Georg Picht argues that “there is a cross-jurisdictional need for organizing the licensing of patents included into these standards and much is to be gained if a coherent, appropriate framework evolves that guides the FRAND licensing of SEPs across various jurisdictions.” Further, Prof. Picht contends that “the facts of this case suggest caution regarding Top-Down-results and an important role for Comparables in the overall analysis.”
  • Intellectual Property Damages Experts argue against the districts court’s proposition that “‘there is no support in the record that a package of SEPs has a fixed, determinable value which would justify a fixed dollar-per-unit rate or a percentage rate as modified by floors or caps’” because it is “in conflict with the fact that fixed dollar-per-unit rates (or a percentage rate as modified by floors and caps) often result from real-world licensing negotiations.” Additionally, Intellectual Property Damages Experts dispute the District Court’s conclusion that “‘Ericsson’s use of floors in its rates is itself discriminatory’” by claiming that “[i]f properly apportioned to the value of the technology, the use of per-unit floors can, in many settings, ensure that licensors derive an adequate economic return from the use of its licensed technology while the use of per-unit caps can, in many settings, ensure that licensees do not overpay for the rights to implement the licensed technology.”

Three amicus briefs support TCL:

  1. High Tech Inventors Alliance, Alliance Of Automobile Manufacturers, Inc., Google LLC, Hewlett Packard Enterprise Company, and HP Inc. argue that “courts should have flexibility to use [top-down analysis] when it is helpful and consistent with the evidence, as the district court concluded it was in this case.”
  • HTC Corporation and HTC America, Inc. argue that “the district court reached the right result—Ericsson’s licensing offers to TCL were discriminatory.” In doing so, however, they argue that “the court erred in its underlying analysis by taking too narrow a view of which parties are ‘similarly situated’ for purposes of evaluating whether a FRAND licensor has unlawfully discriminated within the relevant market.” HTC believes that the district court’s analysis would “authorize a two-tiered FRAND licensing regime: one price for larger, entrenched firms with the resources to extract better rates, and another for their newer and smaller competitors with less strength at the bargaining table.” They consider this tiered approach to be “the antithesis of FRAND” and urged the Federal Circuit to “not adopt or approve of that discriminatory approach to evaluating non-discrimination.”
  • Fair Standards Alliance argues that “a top-down approach beginning with an aggregate royalty rate can be a reliable, useful methodology for evaluating FRAND royalties.” Further, Fair Standard Alliance points out that “[t]he risk of excessive aggregate royalty burdens created by royalty stacking (i.e. the accumulation of royalties necessary to implement all essential patents needed to comply with one or more standards used in a device) is significant and must be considered in determining FRAND rates.”

Two amicus briefs support neither party:

  1. Uber Technologies Inc. argues that the Federal Circuit should adopt an “approach to FRAND licensing that recognizes the following fundamental principles: First, there should be no horizontal royalty discrimination based on device characteristics . . .. Second, the SEP holder should not discriminate vertically with a licensing model intended to avoid the patent exhaustion doctrine.”
  • Panasonic Corporation argues that the district court’s valuation of the SEPs was “was insufficiently rigorous,” because “[i]n the face of complexity, it took the kinds of shortcuts to assessing ‘fair and reasonable’ royalty rates that are likely to lead to inaccurate valuations that could undercut an industry’s incentives to develop and adopt innovative standardized technology.”

The volume of amicus briefs marks this case as potentially having broad ramifications for other companies—both companies that submit technology disclosures to standard setting organizations and companies that adopt standards. Indeed, if the Federal Circuit blesses the district court’s analysis, it might provide a roadmap—it would at least provide a marker–for other courts to use to analyze compliance with FRAND commitments.

Oral argument was held on Wednesday, August 7. Ericsson and TCL drew Judges Newman, Chen, and Hughes.

Notably, two days prior to the oral argument in this case, the two parties squared off in another oral argument in a case in which TCL is appealing a $75 million judgment for infringement of a single patent. The stark difference in the damages figures—$75 Million as compensation for infringement of one patent in the first case versus $16.5 Million as compensation for a release of patent infringement claims for a large number of patents in the second case—represents another signal of the importance of the second case. In the first case the parties drew a panel including Judges Prost, Newman, and Chen, so two of the judges (Newman and Chen) are handling both cases. It will be interesting to compare and contrast the resolutions of both cases.