Opinion ID: 2757602
Heading Depth: 3
Heading Rank: 2

Heading: The District Court’s RAND Jury Instruction

Text: Because Ericsson was obligated to license the patents at issue on RAND terms, D-Link asked the district court to instruct the jury on that RAND obligation. Among other things, D-Link requested that the district court instruct the jury regarding the dangers of patent hold-up and royalty stacking in RAND-related contexts. Rather than adopt the language D-Link proposed, the district court granted D-Link’s request only in part. The court added a sixteenth factor to the 15 Georgia-Pacific factors on which it instructed the jury, telling the jury that it “may consider . . . Ericsson’s obligation to license its technology on RAND terms.” J.A. 226. After the jury returned its infringement verdict and assigned damages, the district court denied D-Link’s motions for JMOL and a ERICSSON, INC. v. D-LINK SYSTEMS, INC. 45 new trial based on its failure to provide more detailed instructions on RAND issues. On appeal, D-link argues that enforcing RAND com- mitments is critical to preserving the benefits of standards and must be considered in any damages award. According to D-Link, the district court reversibly erred by giving the jury the customary Georgia-Pacific factors because many of those either are not applicable, or may be misleading, in the RAND context. D-Link further contends that the district court erred by refusing to instruct the jury to consider patent hold-up and royalty stacking. Ericsson responds that the district court did not err in refusing to instruct the jury about patent hold-up and royalty stacking because the Georgia-Pacific factors already encompassed these concerns, and to the extent they did not, the inclusion of a “sixteenth” factor referring to Ericsson’s RAND obligations was sufficient. According to Ericsson, a jury instruction regarding patent hold-up or royalty stacking would have been inappropriate because D-Link failed to present any evidence regarding either patent hold-up or royalty stacking to the jury. We agree with both D-Link and Ericsson, to some extent. This is an issue of first impression for us. To our knowledge, only three other courts have considered the issue of appropriate RAND royalty rates—all district courts. See Realtek Semiconductor, Corp. v. LSI Corp., No. C-12-3451, 2014 WL 2738216, at –6 (N.D. Cal. June 16, 2014); In re Innovatio IP Ventures, LLC Patent Litig., No. 11 C 9308, 2013 WL 5593609 (N.D. Ill. Oct. 3, 2013); Microsoft Corp. v. Motorola, Inc., No. C10-1823JLR, 2013 WL 2111217 (W.D. Wash. Apr. 25, 2013). 6 6 The issue in Microsoft was whether Motorola had breached its contractual obligation to offer a RAND 46 ERICSSON, INC. v. D-LINK SYSTEMS, INC. license to Microsoft. Because the jury needed to determine whether Motorola’s offer letters were in fact RAND offers, the Microsoft court analyzed the facts to find a range of appropriate values. In doing so, the court created a modified set of Georgia-Pacific factors to consider when the patents are encumbered by RAND contracts, noting that a number of the unmodified factors do not adequately address the RAND situation. Microsoft, 2013 WL 2111217, at –20. In Innovatio, the parties asked the district court to calculate the appropriate RAND royalty rate for a group of 802.11 SEPs. The Innovatio court largely adopted the methodology used in Microsoft, but made a few modifications. Innovatio, 2013 WL 5593609, at –7. The Innovatio court presented the concepts relevant to a RAND rate, including patent hold-up, royalty stacking, and incentivizing inventors to participate in the standard-setting process. The court then explained that, based on these considerations, the royalty rate: (1) must distinguish between the intrinsic value of the technology and the value of the standardization of that technology; (2) take into account what part of the standard the patent actually covers; and (3) must be high enough to ensure that innovators have appropriate incentive to invest in future developments and contribute their inventions to the standard-setting process. Id. at –12. In Realtek, the district court upheld the jury’s patent infringement damages award in a RAND patent case, explaining that the jury’s award was supported by substantial evidence. Realtek, 2014 WL 2738216, at –6. The Realtek court’s jury instruction informed the jury it “should not consider LSI’s advantage resulting from the standard’s adoption, if any. However, you may consider any advantage resulting from the technology’s superiority.” Realtek Semiconductor, Corp. v. LSI Corp. (“Realtek Jury Instruction”), No. C-12-3451, ECF No. 267, 21 (N.D. ERICSSON, INC. v. D-LINK SYSTEMS, INC. 47 a. The district court’s use of the Georgia-Pacific factors Although we have never described the Georgia-Pacific factors as a talisman for royalty rate calculations, district courts regularly turn to this 15-factor list when fashioning their jury instructions. Indeed, courts often parrot all 15 factors to the jury, even if some of those factors clearly are not relevant to the case at hand. And, often, damages experts resort to the factors to justify urging an increase or a decrease in a royalty calculation, with little explanation as to why they do so, and little reference to the facts of record. See WhitServe, LLC v. Computer Packages, Inc., 694 F.3d 10, 31–32 (Fed. Cir. 2012) (“We do not require that witnesses use any or all of the GeorgiaPacific factors when testifying about damages in patent cases. If they choose to use them, however, reciting each factor and making a conclusory remark about its impact on the damages calculation before moving on does no more than tell the jury what factors a damages analysis could take into consideration.”). In this case, the district court included all 15 Georgia-Pacific factors in its damages instruction—over objection—without considering their relevance to the record created at trial. In a case involving RAND-encumbered patents, many of the Georgia-Pacific factors simply are not relevant; many are even contrary to RAND principles. See Br. of Amici Curiae American Antitrust Institute (“AAI Br.”) 11–20 (arguing that the Georgia-Pacific factors are not Cal. February 10, 2014). The Realtek court further instructed the jury to use a two-step approach to determine the RAND royalty rate: (1) “compar[e] the technical contribution of the two LSI patents to the technical contributions of other patents essential to the standard” and (2) “consider the contribution of the standard as a whole to the market value of Realtek’s products utilizing the standard.” Id. at 23. 48 ERICSSON, INC. v. D-LINK SYSTEMS, INC. appropriate for determining RAND royalties). For example, factor 4 is “[t]he licensor’s established policy and marketing program to maintain his patent monopoly by not licensing others to use the invention or by granting licenses under special conditions designed to preserve that monopoly.” Georgia-Pacific, 318 F. Supp. at 1120. Because of Ericsson’s RAND commitment, however, it cannot have that kind of policy for maintaining a patent monopoly. See Microsoft, 2013 WL 2111217, at . Likewise, factor 5—“[t]he commercial relationship between the licensor and licensee”—is irrelevant because Ericsson must offer licenses at a non-discriminatory rate. Georgia-Pacific, 318 F. Supp. at 1120; see Microsoft, 2013 WL 2111217, at . Several other Georgia-Pacific factors would at least need to be adjusted for RAND-encumbered patents— indeed, for SEP patents generally. For example, factor 8 accounts for an invention’s “current popularity,” which is likely inflated because a standard requires the use of the technology. Georgia-Pacific, 318 F. Supp. at 1120. Factor 9—“utility and advantages of the patented invention over the old modes or devices,” J.A. 225—is also skewed for SEPs because the technology is used because it is essential, not necessarily because it is an improvement over the prior art. Factor 10, moreover, considers the commercial embodiment of the licensor, which is also irrelevant as the standard requires the use of the technology. Other factors may also need to be adapted on a case-by-case basis depending on the technology at issue. Consequently, the trial court must carefully consider the evidence presented in the case when crafting an appropriate jury instruction. In this case, the district court erred by instructing the jury on multiple Georgia-Pacific factors that are not relevant, or are misleading, on the record before it, includERICSSON, INC. v. D-LINK SYSTEMS, INC. 49 ing, at least, factors 4, 5, 8, 9, and 10 of the GeorgiaPacific factors. 7 Trial courts should also consider the patentee’s actual RAND commitment in crafting the jury instruction. Ericsson agrees that it is under a binding obligation to license the patents at issue on the RAND terms it pledged to the IEEE. The district court should have turned to the actual RAND commitment at issue to determine how to instruct the jury. In this case, Ericsson promised that it would “grant a license under reasonable rates to an unrestricted number of applicants on a worldwide basis with reasonable terms and conditions that are demonstrably free of unfair discrimination.” J.A. 17253. Rather than instruct the jury to consider “Ericsson’s obligation to license its technology on RAND terms,” J.A. 226, the trial court should have instructed the jury about Ericsson’s actual RAND promises. “RAND terms” vary from case to case. A RAND commitment limits the market value to (what the patent owner can reasonably charge for use of) the patented technology. The court therefore must inform the jury what commitments have been made and of its obligation (not just option) to take those commitments into account when determining a royalty award. To be clear, we do not hold that there is a modified version of the Georgia-Pacific factors that should be used for all RAND-encumbered patents. Indeed, to the extent D-Link argues that the trial court was required to give instructions that mirrored the analysis in Innovatio or Microsoft, we specifically reject that argument. See Oral Argument at 16:16, Ericsson, Inc. v. D-Link Sys., Inc., 7 Reference to irrelevant Georgia-Pacific factors would not—in most instances—be sufficiently prejudicial to warrant reversal. Here, however, we find the combination of errors in the jury instructions merit the remand we order. 50 ERICSSON, INC. v. D-LINK SYSTEMS, INC. 2013-1625, available at http://oralarguments.cafc. uscourts.gov/default.aspx?fl=2013-1625.mp3 (“Our argument was the following on RAND and it doesn’t rely upon any of the evidence that went in during the two hour jury wave portion. It relies upon the request for instructions, basically building on the Innovatio decision by Judge Holderman and the Microsoft decision by Judge Robart . . . .”). 8 We believe it unwise to create a new set of GeorgiaPacific-like factors for all cases involving RANDencumbered patents. Although we recognize the desire for bright line rules and the need for district courts to start somewhere, courts must consider the facts of record when instructing the jury and should avoid rote reference to any particular damages formula. b. Apportionment analysis for SEPs As with all patents, the royalty rate for SEPs must be apportioned to the value of the patented invention. Garretson, 111 U.S. at 121; see also Westinghouse Elec. & Mfg. Co. v. Wagner Elec. & Mfg. Co., 225 U.S. 604, 617 (1912) (“[Plaintiff] was only entitled to recover such part of the commingled profits as was attributable to the use of its invention.”). When dealing with SEPs, there are two special apportionment issues that arise. First, the patented 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 8 We express no opinion on the methodologies em- ployed in these district court cases—which may yet come before this court—or on their applications to the facts at issue there. The facts in those cases, and the decisionmakers involved, differ from those at issue here. We address only the record before us and what a jury must be instructed when RAND-encumbered patents are at issue and the jury is asked to set a RAND royalty rate. ERICSSON, INC. v. D-LINK SYSTEMS, INC. 51 adoption of the patented technology. These steps are necessary to ensure that the royalty award is based on the incremental value that the patented invention adds to the product, not any value added by the standardization of that technology. 9 Just like modern electronic devices, technological standards include multiple technologies. We know that patents often claim only small portions of multi- component products and we have precedent which covers apportionment of damages in those situations. See, e.g., Garretson, 111 U.S. at 121; Uniloc, 632 F.3d at 1318; Lucent, 580 F.3d at 1336. Similarly, SEPs can, and, often do, claim only limited aspects of the overall standard. For example, the 802.11 standard encompasses nu- merous technologies to enable devices to communicate with each other via wireless network connection. This includes, among many other things, technologies on link establishment, security protocols, error control, and flow control. By way of example, the ’568 patent, at best, only covers the ability of the system to prioritize time-sensitive payloads by informing the system what type of data is in each transmission. This is only a small aspect of the 802.11(n) standard. Indeed, based on the record in this case, it is undisputed that some programs do not even take advantage of this 802.11(n) standard capability. The ’215 patent, moreover, at best covers the ability to send different feedback response types. Again, based on the 9 As we recognized in VirnetX, these tasks are not always easy and would be difficult to do with precision. We accept the fact that the jury should be told of its obligation to approximate the value added by the patented invention and that a degree of uncertainty in setting that value is permissible. VirnetX, 767 F.3d at 1328 (citing Unisplay, S.A. v. Am. Elec. Sign Co., 69 F.3d 512, 517 (Fed. Cir. 1995)). 52 ERICSSON, INC. v. D-LINK SYSTEMS, INC. undisputed record, some 802.11(n) standard products do not use more than one type of feedback message. Just as we apportion damages for a patent that covers a small part of a device, we must also apportion damages for SEPs that cover only a small part of a standard. 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. A jury must be instructed accordingly. Our decision does not suggest that all SEPs make up only a small part of the technology in the standard. Indeed, if a patentee can show that his invention makes up “the entire value of the” standard, an apportionment instruction probably would not be appropriate. Garretson, 111 U.S. at 121. Turning to the value of a patent’s standardization, we conclude that Supreme Court precedent also requires apportionment of the value of the patented technology from the value of its standardization. In Garretson, the Supreme Court made clear that, “[w]hen a patent is for an improvement, and not for an entirely new machine or contrivance, the patentee must show in what particulars his improvement has added to the usefulness of the machine or contrivance. He must separate its results distinctly from those of the other parts, so that the benefits derived from it may be distinctly seen and appreciated.” Garretson, 111 U.S. at 121 (emphases added). In other words, the patent holder should only be compensated for the approximate incremental benefit derived from his invention. This is particularly true for SEPs. When a technology is incorporated into a standard, 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, ERICSSON, INC. v. D-LINK SYSTEMS, INC. 53 widespread adoption of standard essential technology is not entirely indicative of the added usefulness of an innovation over the prior art. Id. 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. Because SEP holders should only be compensated for the added benefit of their inventions, the jury must be told to differentiate the added benefit from any value the innovation gains because it has become standard essential. Although the jury, as the fact finder, should determine the appropriate value for that added benefit and may do so with some level of imprecision, we conclude that they must be told to consider the difference between the added value of the technological invention and the added value of that invention’s standardization. Indeed, Ericsson admitted at oral argument that the value of standardization should not be incorporated into the royalty award. Oral Argument at 55:25 (“Q: You agree that it is error to allow [the jury] to include the value from the standardization? A: In the rate, not in the base. . . . The rate must be attributable to the value of the invention.”). By way of example, the Realtek court instructed the jury that it “should not consider LSI’s advantage resulting from the standard’s adoption, if any. However, you may consider any advantage resulting from the technology’s superiority.” Realtek Jury Instruction, ECF No. 267, 21. c. Instructions on patent hold-up and royalty stacking D-Link argues that the jury should have been in- structed on the concepts of patent hold-up and royalty stacking because it argues that the jury should know the mischief that can occur if RAND royalty rates are set too high. Many of the amicus briefs echo D-Link’s concerns. 54 ERICSSON, INC. v. D-LINK SYSTEMS, INC. See AAI Br. 4–9; Br. of Amici Curiae Cisco Sys., Inc., et al. (“Cisco Br.”) 14–19; Br. of Amici Curiae Broadcom Corp., et al. (“Broadcom Br.”) 10–14. In deciding whether to instruct the jury on patent hold-up and royalty stacking, again, we emphasize that the district court must consider the evidence on the record before it. The district court need not instruct the jury on hold-up or stacking unless the accused infringer presents actual evidence of hold-up or stacking. Certainly something more than a general argument that these phenomena are possibilities is necessary. Indeed, “a court should not instruct on a proposition of law about which there is no competent evidence.” See Nestier Corp. v. Menasha Corp.-Lewisystems Div., 739 F.2d 1576, 1579–80 (Fed. Cir. 1984); see also Br. of Amici Curiae Nokia Corp., et al. (“Nokia Br.”) 9–12. Depending on the record, reference to such potential dangers may be neither necessary nor appropriate. In this case, we agree with the district court that D- Link failed to provide evidence of patent hold-up and royalty stacking sufficient to warrant a jury instruction. JMOL Order, 2013 WL 4046225, at –26 (“Defendants failed to present any evidence of actual hold-up or royalty stacking.” (emphasis in original)). If D-Link had provided evidence that Ericsson started requesting higher royalty rates after the adoption of the 802.11(n) standard, the court could have addressed it by instructing the jury on patent hold-up or, perhaps, setting the hypothetical negotiation date before the adoption of the standard. 10 D- 10 One amicus suggests that the jury always should be told to place the date of the hypothetical negotiation as of the date of the adoption of the standard (if that date predates the infringement) so as to discount any value added by the standardization. See, e.g., AAI Br. 13–16; see also Microsoft, 2013 WL 2111217, at  (“[T]he ERICSSON, INC. v. D-LINK SYSTEMS, INC. 55 Link, however, failed to provide any such evidence. Absent evidence that Ericsson used its SEPs to demand higher royalties from standard-compliant companies, we see no error in the district court’s refusal to instruct the jury on patent hold-up or to adjust the instructions expressly to take patent hold-up into account. Indeed, as noted above, the court found that Ericsson complied with its RAND obligations and did not demand an unreasonable royalty for use of its technology. A jury, moreover, need not be instructed regarding royalty stacking unless there is actual evidence of stacking. The mere fact that thousands of patents are declared to be essential to a standard does not mean that a standard-compliant company will necessarily have to pay a royalty to each SEP holder. In this case, D-Link’s expert “never even attempted to determine the actual amount of royalties Defendants are currently paying for 802.11 patents.” JMOL Order, 2013 WL 4046225, at . In other words, D-Link failed to come forward with any evidence of other licenses it has taken on Wi-Fi essential patents or royalty demands on its Wi-Fi enabled products. Because D-Link failed to provide any evidence of actual royalty stacking, the district court properly refused to instruct the jury on royalty stacking. We therefore hold that the district court did not err by refusing to instruct the jury on the general concepts of patent hold-up and royalty stacking. parties to a hypothetical negotiation under a RAND commitment would consider alternatives that could have been written into the standard instead of the patented technology.”). D-Link did not request any such instruction, however. Accordingly, we do not address whether shifting the timing of the hypothetical negotiation is either appropriate or necessary. 56 ERICSSON, INC. v. D-LINK SYSTEMS, INC.