When Is A RAND License Not Enough? Federal Circuit Vacates $10 Million Damages Award On Standard Essential Patents

In Ericsson, Inc. v. D-Link Systems, Inc. (Fed. Cir. 2014), the Court rejected a jury damages award of $10 million on 802.11(n) standard essential patents found to be infringed by D-Link. The decision is an important one when it comes to litigating the royalty rate for standard essential patents (SEPs) and setting RAND terms that will hold up in litigation.

Standard essential patents, such as the Ericsson ones at issue in this case, cover the Wi-Fi standard, 802.11(n). Thus, all 802.11(n) compliant devices infringe the patents. In 2010, Ericsson filed an infringement suit in the Eastern District of Texas against D-Link, accusing it of infringing a set of its 802.11(n) SEPs. Ericsson prevailed at trial with a jury finding infringement of three patents, and awarding Ericsson $10 million in damages (at royalty rate of $0.15 per product). Based on the jury award, the judge found $0.15 per product to be an appropriate running royalty. On appeal, the Federal Circuit affirmed the majority of the findings on liability, but vacated the District Court's damages award for failure to apportion damages in view of its recent holding in VirnetX, Inc. v. Cisco Systems, Inc., 767 F.3d 1308 (Fed. Cir. 2014). (For a full discussion of this decision, see Arent Fox's recent alert on the VirnetX decision.)

Patent Hold-Up and Royalty Stacking Issues with SEPs

The Court discussed two problems that are well recognized with licensing standard essential patents: patent hold-up and royalty stacking. "Patent hold-up exists when the holder of a SEP demands excessive royalties after companies are locked into using a standard. Royalty stacking can arise when numerous patents cover a particular technological standard, perhaps hundreds, if not thousands of patents may be implicated by a particular standard. If companies are forced to pay royalties to all SEP holders, the royalties will 'stack' on top of each other and may become excessive in the aggregate." Slip Op. at 7-8. Organizations that develop standards, such as IEEE, typically address these potential problems by seeking commitments from their members "that they will grant licenses to an unrestricted number of applicants on 'reasonable, and nondiscriminatory' ('RAND') terms." Id. at 8. Ericsson promised to offer such licenses for its 802.11(n) SEPs.

RAND Licenses Are Subject to a Rigorous Apportionment Analysis

At trial, Ericsson attempted to rely on comparable license agreements with a royalty rate of 15 cents per...