Opinion ID: 4461580
Heading Depth: 3
Heading Rank: 3

Heading: “Comparable” Licenses

Text: The parties disputed how “comparable” the existing licenses actually were to those that would be offered to TCL in a hypothetical negotiation. The parties agreed that four firms were similarly situated to TCL (Huawei, LG, HTC, 2 Dubbed the “ex-Standard” approach by Ericsson’s experts, this evidence was not comprehensive, because it was limited to estimating the value of Ericsson’s SEPs incorporated into the 4G standard only. We do not discuss this approach in detail, because its analysis was entirely rejected by the court as “lack[ing] fundamental credibility,” J.A. 79, and Ericsson does not dispute that rejection on appeal. 12 TCL COMMC’N TECH. v. TELEFONAKTIEBOLAGET LM ZTE), but they disagreed on whether four others (Apple, Samsung, Coolpad, Karbonn) were similarly situated to TCL. J.A. 83. BENCH TRIAL DECISION Following the bench trial, the court issued a lengthy decision setting forth terms for a binding worldwide license to Ericsson’s 2G, 3G, and 4G SEPs. The court amended this decision in an Amended Memorandum of Findings of Fact and Conclusions of Law on March 9, 2018 (“bench trial decision”), which is the subject of this appeal. J.A. 27–141. Over Ericsson’s repeated assertions of its jury trial right, the court explained in a single sentence that it had decided to proceed with a bench trial after it “ruled that TCL’s remaining claims were equitable.” J.A. 34–35. The court did not address Ericsson’s argument about the legal nature of the release payment remedy. The court articulated a two-step framework agreed upon by the parties for resolving the remaining issues. At the first step, the court determined whether Ericsson’s final offers proposed prior to trial satisfied FRAND. J.A. 28. 3 If the court answered no, it would proceed to the second step, where it would supply the material FRAND terms. J.A. 28–29. A. Step 1: The court concludes that Ericsson’s offers did not satisfy FRAND. To determine whether Ericsson’s offers were FRAND, the court first turned to the different rates produced by the two parties’ methodologies. The court did not accept either 3 As part of this inquiry, the court first determined whether Ericsson complied with its “FRAND obligation” by negotiating with TCL in good faith. The court answered this in the affirmative, J.A. 29, and TCL does not dispute that finding on appeal. TCL COMMC’N TECH. v. TELEFONAKTIEBOLAGET LM 13 party’s proposed rates because it found their methodologies to be flawed. Instead, the court devised its own version of the top-down method to determine a “fair and reasonable” rate under FRAND. It then compared Ericsson’s proposed offers to comparable licenses to determine whether they were “non-discriminatory’ under the third element of FRAND. Based on these two approaches, it concluded that “Ericsson’s offers are not fair and reasonable, and are discriminatory.” J.A. 139. 1. The court uses its own modified version of TCL’s topdown approach to determine whether Ericsson’s offers are “fair and reasonable” under FRAND. First, while the court noted that the top-down method was “not necessarily a substitute for a market-based approach that considers comparable licenses,” J.A. 41, it described the unique benefits of using a top-down approach to mitigate two main risks that arise in the SEP licensing context. One risk is royalty stacking. As the court explained, “[s]tacking occurs when each individual SEP holder demands a royalty which when totaled exceeds the value of all the SEPs in a standard.” J.A. 41. Because the top-down approach computes the FRAND rate for a particular SEP or SEP portfolio by starting with the maximum aggregate royalty burden, reasoned the court, “it avoid[s] the possibility that licensees will be forced to pay an unreasonable amount in total.” Id. Another risk is patent owner hold-up. This occurs when a patent-owner seeks to extract excessive value from its SEPs after the implementer is “locked-in” to using the standard. Regardless of the value contributed to the standard by the SEP, the implementer must practice the SEP in order to practice the whole standard. Because the topdown approach limits the overall size of the royalty pie, the court reasoned that the top-down approach “can also 14 TCL COMMC’N TECH. v. TELEFONAKTIEBOLAGET LM prevent hold-up” because it “prevents SEP owners from charging a premium for the value added by standardization.” Id. Second, while the court found “fatal flaws” with TCL’s analysis of the relative “importance and contribution” of Ericsson’s SEP portfolio compared to that of the other SEPs in the relevant standards, the court still found “some value in the technical analysis, particularly to show that Ericsson’s patent portfolio is certainly not as strong or essential as it has claimed.” J.A. 69. Thus, it “use[d] this finding in part to assist it in determining the final FRAND rate.” Id. Specifically, the court substituted its own values for the importance and contribution values calculated by TCL’s experts, adopting a “simple patent counting system which treats every patent [incorporated in the standard] as possessing identical value, and then applies the numbers that it found reliable from the analyses provided by TCL’s experts.” J.A. 42–43. Though the court admitted that it had “some reservations about the top down analysis,” it determined that there was “no basis to reconcile the results” of its own modified version of the top-down methodology with the substantially higher rates proposed in Option A or Option B. J.A. 72–75. The court therefore concluded that Ericsson’s offers were not fair and reasonable. J.A. 75. 2. The court uses comparable licenses to determine whether Ericsson’s offers are “non-discriminatory” under FRAND. The court only used licenses of similarly situated licensees to determine whether Ericsson’s offers were non-discriminatory. First, the court determined which licensees were “similarly situated” to TCL such that their licenses would serve as “comparable” points of comparison. J.A. 82. The parties agreed that four firms were similarly situated to TCL: Huawei, LG, HTC, and ZTE. J.A. 83. But they disputed whether four others (Apple, Samsung, Coolpad, TCL COMMC’N TECH. v. TELEFONAKTIEBOLAGET LM 15 Karbonn) were also similarly situated to TCL. Ultimately, the court resolved the dispute based on geographic scope, agreeing with TCL that global firms such as Apple and Samsung were similarly situated to TCL (which is also a global firm) but that “local kings” such as Coolpad (whose market is primarily in China) and Karbonn (whose market is primarily India) were not. J.A. 84–85. Thus, the court concluded that the following six firms were similarly situated: Apple, Samsung, LG, HTC, Huawei, and ZTE. J.A. 84. Second, relying on expert evidence, the court unpacked the six “similarly situated” licenses and Ericsson’s offers to an effective per-unit royalty rate so that they could be compared to each other on a “common basis.” J.A. 80. In determining what form this common basis would take, the court rejected a dollar-per-unit rate in favor of a pure “percentage royalties without caps or floors.” J.A. 94–95. Finally, the court compared the unpacked effective royalty rates from the comparable licenses to those proposed in Ericsson’s offers and concluded that Ericsson’s offers were discriminatory because the unpacked effective royalty rates of Option A and Option B were “radically divergent from rates which Ericsson agreed to accept from licensees similarly situated to TCL.” J.A. 120. Moreover, the court added that “Ericsson’s use of floors in its rates is itself discriminatory.” J.A. 139. “In the absence of a credible showing that Ericsson’s SEPs add a measurable incremental value,” explained the court, “there is no basis for essentially discriminating on the basis of the average selling price where a floor would result in a higher effective rate for lower price phones.” Id. B. Step 2: The court sets prospective and retrospective FRAND rates in the license. At the second step of the two-step framework, the court relied on its FRAND analysis in the first step to supply FRAND terms of the binding license. These terms included 16 TCL COMMC’N TECH. v. TELEFONAKTIEBOLAGET LM (1) a prospective FRAND rate for TCL’s future licensed practice of Ericsson’s SEPs and (2) a cumulative release payment for TCL’s past unlicensed practice of Ericsson’s SEPs. This release payment was calculated based on a retrospective FRAND rate that was closely related to the prospective FRAND rate computed by the court. To compute the ongoing FRAND royalty rate, the court began by “looking at the combination of rates derived from the top down and comparable license analyses.” J.A. 120. The court ultimately set a FRAND royalty rate that generally fell within the range of rates produced by those two approaches where appropriate. 4 J.A. 130. The court used this first FRAND rate to compute the second “release payment” term. Specifically, the court computed the retrospective FRAND rate by discounting the ongoing FRAND royalty for present value and potential royalty stacking to arrive at a cumulative release payment to compensate Ericsson for TCL’s patent infringement. J.A. 130–33. Pursuant to the bench trial decision, the court issued an Amended Final Judgment and Injunction, ordering that Ericsson’s patent infringement claims 5 and TCL’s related counterclaims of invalidity and non-infringement be “dismissed without prejudice because they are moot in light of the equitable relief granted in the release payment.” J.A. 24. Specifically, the court ordered Ericsson to “release TCL and all customers of TCL who have purchased or used 4 Because the court “could not reliably unpack 2G rates from any comparable license,” it adopted the rate produced by the top-down approach. J.A. 129. 5 These refer to the patent infringement claims that Ericsson originally filed in the Texas Action prior to consolidation with the California Action. TCL COMMC’N TECH. v. TELEFONAKTIEBOLAGET LM 17 products herein licensed to TCL from claims for past patent infringement . . . .” J.A. 14. Ericsson filed a timely appeal. Because this appeal involves the dismissal of Ericsson’s patent infringement claims, we have jurisdiction under 28 U.S.C. § 1295(a)(1).