Opinion ID: 3159695
Heading Depth: 2
Heading Rank: 2

Heading: Standardization

Text: Cisco also contends that the district court legally erred under Ericsson because it failed to account for any extra value accruing to the ’069 patent from the fact that it is essential to the 802.11 standard. We agree. Ericsson link between the re-bundling licenses and the claimed invention.”); Lucent, 580 F.3d at 1329 (“[A] lump-sum damages award cannot stand solely on evidence which amounts to little more than a recitation of royalty numbers, one of which is arguably in the ballpark of the jury’s award, particularly when it is doubtful that the technology of those license agreements is in any way similar to the technology being litigated here.”). 16 COMMONWEALTH SCIENTIFIC v. CISCO SYSTEMS, INC. identified unique considerations that apply to apportionment in the context of a standard-essential patent (“SEP”): When dealing with SEPs, there are two special apportionment issues that arise. First, the pa- tented feature must be apportioned from all of the unpatented features reflected in the standard. Second, the patentee’s royalty must be premised on the value of the patented feature, not any value added by the standard’s adoption of the patented technology. These steps are necessary to ensure that the royalty award is based on the incremen- tal value that the patented invention adds to the product, not any value added by the standardiza- tion of that technology. 773 F.3d at 1232. Consequently, the idea that “the patent holder should only be compensated for the approximate incremental benefit derived from his invention . . . is particularly true for SEPs.” Id. at 1233. Ericsson explains: When a technology is incorporated into a stand- ard, it is typically chosen from among 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. In other words, widespread adoption of standard essential technology is not entirely indicative of the added usefulness of an innovation over the prior art. This is not meant to imply that SEPs never claim valuable technological contributions. We merely hold that the royalty for SEPs should reflect the approximate value of that technological contribution, not the value of its widespread adoption due to standardization. COMMONWEALTH SCIENTIFIC v. CISCO SYSTEMS, INC. 17 Id. “In other words, a royalty award for a SEP must be apportioned to the value of the patented invention (or at least to the approximate value thereof), not the value of the standard as a whole.” Id. Therefore, damages awards for SEPs must be premised on methodologies that attempt to capture the asserted patent’s value resulting not from the value added by the standard’s widespread adoption, but only from the technology’s superiority. Id. CSIRO argues that Ericsson applies only to SEPs encumbered with an obligation to license on RAND terms. But CSIRO’s perspective is wrong for several reasons. First, the above quotes from Ericsson discuss SEPs, not only RAND-encumbered patents. As Ericsson also grapples separately with issues unique to RAND-encumbered patents, it is clear that Ericsson did not conflate the two terms. Indeed, Ericsson refers separately to RANDencumbered patents and SEPs when explaining the need to adjust the Georgia-Pacific factors, but Ericsson explicitly holds that the adjustments to the Georgia-Pacific factors apply equally to RAND-encumbered patents and SEPs. Ericsson, 773 F.3d at 1231 (“Several other GeorgiaPacific factors would at least need to be adjusted for RAND-encumbered patents—indeed, for SEP patents generally.”). Second, a reasonable royalty calculation under § 284 attempts to measure the value of the patented invention. Id. at 1232. This value—the value of the technology—is distinct from any value that artificially accrues to the patent due to the standard’s adoption. Id. Without this rule, patentees would receive all of the benefit created by standardization—benefit that would otherwise flow to consumers and businesses practicing the standard. We therefore reaffirm that reasonable royalties for SEPs generally—and not only those subject to a RAND commitment—must not include any value flowing to the patent from the standard’s adoption. The district court—which did not have the benefit of the Ericsson opinion at the time of its decision—erred 18 COMMONWEALTH SCIENTIFIC v. CISCO SYSTEMS, INC. because it did not account for standardization. In thoroughly analyzing the Georgia-Pacific factors, the district court increased the royalty award because the ’069 patent is essential to the 802.11 standard. This error impacted the district court’s analysis on all three factors that it weighed in favor of CSIRO. With respect to factor 8—“[t]he established profitability of the product made under the patent; its commercial success; and its current popularity,” Georgia-Pacific, 318 F. Supp. at 1120—the district court found that “[a]t the time of the hypothetical negotiations, the market for wireless products was growing rapidly, indicating increased commercial success.” Commonwealth Sci., 2014 WL 3805817, at . As to factors 9 and 10—which relate to the ad- vantages of the patented invention—the district court concluded that “[a]lternative technologies in the wireless industry, such as PBCC, MBCK, and PPM, failed to achieve commercial success.” Id. However, the district court never considered the standard’s role in causing commercial success. Ericsson calls out factors 8, 9, and 10 as all being irrelevant or misleading in cases involving SEPs. Ericsson, 773 F.3d at 1231. We therefore conclude that the district court erred in failing to account for standardization when it evaluated the Georgia-Pacific factors. 3 3 Furthermore, much of the district court’s reasoning in favor of CSIRO is based on evidence that the ’069 patent is central to the 802.11 standard. But it makes little sense to adjust the starting royalty rate upward for this reason. The argument that the ’069 patent is more valuable than a typical patent essential to the 802.11 standard is only relevant if the court begins with a generic royalty rate for a generic 802.11 patent. But in this case the court began with rates mentioned by the parties in negotiation. Even the lowest of these rates—$0.90—is COMMONWEALTH SCIENTIFIC v. CISCO SYSTEMS, INC. 19 Additionally, the district court failed to account for the possibility that the $0.90 and $1.90 per unit rates that it used as a starting point may themselves be impacted by standardization. 4 The parties do not dispute that CSIRO actively refused to submit a letter of assurance to the standard-setting body for later iterations of the 802.11 standard, after the ’069 patent was locked into the standard. It seems quite possible, then, that CSIRO’s Rate Card rates attempt to capture at least some value resulting from the standard’s adoption. CSIRO’s offer was not accepted by a single entity. On remand, the district court should consider whether the initial rates taken from the parties’ discussions should be adjusted for standardization. In sum, the district court erred in failing to account for value accruing to the ’069 patent from the standard’s adoption. This error manifests in at least two parts of the district court’s analysis: (1) in its discussion of the Georgia-Pacific factors, and (2) in its adoption of the parties’ informally offered royalty rates without accounting for the possibility that CSIRO may have been trying to capture the standard’s value in its licenses. As these are legal errors under Ericsson, we must vacate the district court’s damages award and remand for a new determination of a reasonable royalty. much higher than a rate derived from dividing the value of the standard by the number of patents essential to the standard. The starting rates themselves thus appear to account—at least to some extent—for the centrality of the ’069 patent to the 802.11 standard. 4 Upon remand, the district court may also wish to consider how other factors, such as prospective litigation costs or the falling chip price, may have affected the parties’ suggested royalty rates. 20 COMMONWEALTH SCIENTIFIC v. CISCO SYSTEMS, INC.