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Fed. Circuit: No “Bright Line Rules” For Determining RAND Royalties; Rejects District Court Method of Computing RAND Royalty Rates

Courts in the last two years have grappled with what methodology to apply to determine a reasonable royalty rate for infringed patents subject to “Reasonable and Non-Discriminatory,” or “RAND,” encumbrances.  On December 4, 2014, the Court of Appeals for the Federal Circuit weighed in on the subject.  Rather than enumerating a list of criteria to consider in all instances, the Federal Circuit held that the inquiry is necessarily case-specific.  The Federal Circuit also gave additional guidance on appropriate jury instructions on RAND royalties. See Ericsson, Inc. v. D-Link Systems, Inc., 2014 U.S. App. LEXIS 22778 (Fed. Cir. 2014).

A jury in the Eastern District of Texas awarded Ericsson, Inc. & Telefonaktiebolaget LM Ericsson (together, “Ericsson”) approximately $10 million, about 15 cents per accused device, in past damages from defendant D-Link Systems, Inc. (“D-Link”) for infringement of patents that were essential to the IEEE 802.11 standard and therefore RAND-encumbered.  Based on this verdict, Judge Davis found that 15 cents per infringing unit was a reasonable running royalty.  D-Link appealed on multiple grounds.

The Federal Circuit held that Judge Davis erred in instructing the jury on all the factors for determining a reasonable royalty rate enumerated in the seminal case Georgia-Pacific Corp. v. United States Plywood Corp., 318 F.Supp. 1116 (S.D.N.Y. 1970). The Federal Circuit stated that some factors, such as factor 4, “'[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,” are simply inapplicable to the computation of a reasonable RAND royalty.  The Court held that which of the Georgia-Pacific factors apply to a given matter, and to what degree said factors should be modified, requires a case-specific analysis.  The Federal Circuit explicitly rejected the notion that the modified Georgia-Pacific analysis employed in Microsoft Corp. v. Motorola, Inc., C.A. No. C10-1823JLR (W.D. Wash. Apr. 25, 2013), should uniformly be applied to determine a reasonable royalty wherever the infringing patents are RAND-encumbered, saying that  “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.”

Addressing the concern that owners of standard-essential patents may, notwithstanding RAND encumbrances, exact additional royalties as a result of the patents’ incorporation into a standard (as opposed to the value of the patented inventions themselves), the Federal Circuit held that judges must instruct juries determining a reasonable RAND royalty “to differentiate the added benefit from any value the innovation gains because it has become standard essential.”

The Federal Circuit also addressed the necessity of jury instructions on “patent holdup” and “royalty stacking.”  “Patent holdup” is often described as the practice of extracting excessive royalties for patents as a result of their incorporation into a standard.  “Royalty stacking” allegedly occurs where royalties for patents essential to support a standard, in the aggregate, are high enough to deter use of the standard.  To instruct the jury to consider either, the Federal Circuit held, the record must contain evidence that would warrant such a charge.  Regarding stacking, e.g., the Federal Circuit states that “[t]he 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.”

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Robert Moore