Federal Circuit Vacates $10 Million Damages Award Due to Erroneous Damages Instruction in RAND Patent Case | Practical Law

Federal Circuit Vacates $10 Million Damages Award Due to Erroneous Damages Instruction in RAND Patent Case | Practical Law

In Ericsson, Inc. v. D-Link Systems, Inc., the US Court of Appeals for the Federal Circuit vacated the US District Court for the Eastern District of Texas's approximately $10 million damages award and remanded the case to the district court holding that the district court erred in its jury instructions on reasonable royalty damages in a RAND patent case. The Federal Circuit affirmed the district court's infringement and validity findings on two patents and reversed the infringement finding on US Patent No. 6,424,625.

Federal Circuit Vacates $10 Million Damages Award Due to Erroneous Damages Instruction in RAND Patent Case

by Practical Law Intellectual Property & Technology
Published on 08 Dec 2014 • USA (National/Federal)
In Ericsson, Inc. v. D-Link Systems, Inc., the US Court of Appeals for the Federal Circuit vacated the US District Court for the Eastern District of Texas's approximately $10 million damages award and remanded the case to the district court holding that the district court erred in its jury instructions on reasonable royalty damages in a RAND patent case. The Federal Circuit affirmed the district court's infringement and validity findings on two patents and reversed the infringement finding on US Patent No. 6,424,625.
On December 4, 2014, the US Court of Appeals for the Federal Circuit affirmed-in-part, reversed-in-part, vacated-in-part and remanded the US District Court for the Eastern District of Texas's decision in Ericsson, Inc. v. D-Link Systems, Inc. (Nos. 2013-1625, -1631, -1632, 1633, (Fed. Cir. Dec. 4, 2014)). The Federal Circuit affirmed the district court's infringement and validity findings on two patents and reversed its infringement finding on US Patent No. 6,424,625 ('625 patent). But importantly, the Federal Circuit vacated the district court's approximately $10 million damages award against D-Link and held that the district court erred in its jury instruction on damages, in particular by failing to:
  • Instruct the jury on Ericsson's obligation to license the patented technology on "reasonable and non-discriminatory" terms (RAND).
  • Tailor its jury instruction on reasonable royalties under the Georgia-Pacific factors to include only those factors relevant to the case, including any RAND obligations.
  • Instruct the jury to apportion down the royalty rate to reflect only the value of the patented technology, and not the value of the standard technology as a whole.

Background

Technology Standards and Standard Essential Patents

In the interest of compatibility and interoperability, manufacturers of electronic devices often make their devices compliant with certain standards set by Standards Development Organizations (SDO). These standards could require the use of specific, patented technologies in electronic devices. In these cases, devices compliant with the standard will necessarily infringe patents that cover those specific technologies, which are referred to as standard essential patents (SEPs).
The prevalent wireless internet standard in use, and applicable to this case, is the 802.11 standard, commonly known as Wi-Fi. The SDO that publishes the 802.11 standard asks SEP owners to pledge that they will grant patent licenses with RAND terms to applicants seeking to incorporate Wi-Fi technology into their products.

The Litigation

This appeal arose from a patent infringement suit brought by Ericsson against several defendants (including D-Link) involving Ericsson's '625 patent and its US Patent No. 6,466,568 and US Patent No. 6,772,215. The SEPs relate to Wi-Fi technology used by electronic devices to access the internet. The parties did not dispute Ericsson was obligated to license its asserted SEPs on RAND terms. At trial, the jury found that D-Link infringed the asserted claims of the valid patents and awarded approximately $10 million in damages. The district court upheld the jury's findings after post-trial motions and denied a new trial on damages.
Of note on appeal, the Federal Circuit reviewed three issues related to the damages jury instruction:
  • Whether it was a violation of the Entire Market Value Rule (EMVR) to allow Ericsson's expert's testimony and damages calculations to be based on licenses tied to the value of the entire end product (laptop computers), rather than for the Wi-Fi technology component of the product. D-Link argued at trial that admitting testimony concerning end-product licenses was prejudicial and impermissible as a matter of law, even if the expert apportioned down his damages calculation to account only for the value of the patented technology at issue.
  • Whether a jury instruction on damages including all of the customary Georgia-Pacific factors was appropriate, even where certain factors are irrelevant or misleading in a RAND case (Georgia-Pacific Corp. v. U.S. Plywood Corp., 318 F. Supp. 1116, 1120 (S.D.N.Y. 1970)).
  • Whether the district court erred in refusing D-Link's request for a jury instruction on the concepts of patent hold-up and royalty stacking, which may inflate royalty rates when several SEPs apply to a standard technology.

Outcome

The Federal Circuit affirmed the district court's infringement and validity findings on two patents and reversed its infringement finding on the '625 patent. Notably, the court vacated the district court's approximately $10 million damages award against D-Link holding that the district court erred in its jury instruction on damages.
The court also rejected another defendant, Dell's, argument that it has a license to practice the patents under a Master Purchase Agreement with a subsidiary of Ericsson.

Admissibility of License Evidence

The Federal Circuit held that the district court did not commit reversible error by admitting Ericsson's evidence and damages calculations based in part on end-product licenses. The court explained that, under the EMVR, in the case of a multi-component product, the royalty rate calculation should reflect only the value attributable to the patented component. However, the court further stated that if the value of that entire product is not attributable to the patented component, emphasizing the entire market value of the multi-component product may mislead the jury. In those cases, royalty calculations should be based on the smallest salable unit.
Ultimately, the Federal Circuit concluded that the district court properly allowed evidence of the licenses for the end product. The court explained:
  • Since real world licenses are not often perfectly analogous to the damages calculations being made, a rule making these licenses inadmissible would prevent patentees from using license-based evidence.
  • In testifying about the licenses, the expert clearly explained to the jury that apportionment was necessary to account for the value of the patented component.
The Federal Circuit provided guidance on jury instructions in multi-component product cases. Specifically, district courts should:
  • Provide a cautionary instruction explaining the limited purpose of any expert testimony on the value of the entire multi-component product.
  • Use jury instructions that clearly explain the need to apportion the royalty award according to the value of the patented component.

RAND Jury Instruction

The Federal Circuit concluded, however, that the district court committed error in its damages jury instructions by:
  • Failing to instruct the jury on Ericsson's actual RAND commitment. Instead, the district court instructed the jury on the customary 15 Georgia-Pacific factors plus an additional instruction that the jury "may consider" Ericsson's RAND obligations. The court held that trial courts must carefully craft Georgia-Pacific jury instructions to reflect only the relevant factors and exclude irrelevant and misleading factors. The court acknowledged that no one set of factors will be appropriate in every RAND case.
  • Failing to instruct the jury that a royalty for a SEP must be apportioned from the value added by the standardization of the technology as a whole. The court noted that the royalty attributable to the patented feature must be:
    • apportioned from all of the unpatented features reflected in the standard; and
    • premised on the value of the patented feature, and not overall value added by the standard's adoption of the patented technology.
The Federal Circuit held, however, that the district court did not err by refusing to instruct the jury on the general concepts of patent hold-up and royalty stacking because these instructions were only necessary when there was some evidence of one or both. In this case, the court found that D-Link had not put forth any evidence of either practice.

Practical Implications

The Federal's Circuit's holding may help accused infringer's refute or limit damages claims arising from the assertion of SEPs, particularly where the patent owner is subject to RAND obligations. The court's holding that district courts must tailor a Georgia-Pacific jury instruction to the specifics of the case may extend beyond the RAND context and apply more broadly to patent cases in general.