January 2015

Royalty for a Standard Essential Patent Should Be Based on Added Value of the Patented Invention to the Standard
Ming W. Choy

In Ericsson, Inc. v. D-Link Systems, Inc., Nos. 13-1625, -1631, -1632, -1633 (Fed. Cir. Dec. 4, 2014), the Federal Circuit affirmed-in-part and reversed-in-part the district court’s finding of infringement with respect to three patents, affirmed the jury’s finding of validity of one of the three patents, and vacated the jury’s damages award and ongoing royalty award.  The Federal Circuit also affirmed the district court’s grant of SJ against the license defense of one of the alleged infringers.

Ericsson, Inc. and Telefonaktiebolaget LM Ericsson (“LM Ericsson”) (collectively “Ericsson”) own U.S. Patent Nos. 6,424,625 (“the ’625 patent”); 6,466,568 (“the ’568 patent”); and 6,772,215 (“the ’215 patent”) (collectively “the patents-in-suit”), all of which are directed to Wi-Fi technologies.
Ericsson brought suit for infringement of, inter alia, certain claims of the patents-in-suit against D-Link Systems, Inc., Dell, Inc. (“Dell”), and six other defendants, with Intel Corp. (“Intel”) intervening (collectively “D-Link”).   Ericsson asserted that the three patents were standard essential patents (“SEPs”) for the Institute of Electrical and Electronics Engineers, Inc.’s (“IEEE”) 802.11(n) standard, and that the accused infringers produced products incorporating 802.11(n) wireless chips made by Intel.

Among the alleged infringers, Dell asserted an affirmative defense, arguing that it had a license to practice the patents-in-suit under a Master Purchase Agreement (“MPA”) with Ericsson AB, a subsidiary of LM Ericsson.  Prior to the trial, the district court denied D-Link’s motion to exclude the testimony of Ericsson’s damages expert, who relied on licenses based on the value of the end products, over D-Link’s argument that the expert violated the “entire market value rule” (“EMVR”).  The district court also granted SJ against Dell and rejected Dell’s assertion that it had a license to practice the patents-in-suit under the MPA.  After trial, the jury found that D-Link infringed the patents-in-suit.  The jury also found that the ’625 patent was valid over a prior art publication (“the Petras reference”).  The jury also awarded Ericsson approximately $10 million for past damages.  Following the trial, D-Link filed a motion for JMOL and a new trial, arguing that the jury’s verdicts were not supported by substantial evidence, that Ericsson’s expert violated the EMVR, and that the jury was inadequately instructed regarding Ericsson’s “reasonable[] and nondiscriminatory” (“RAND”) obligation.  The district court denied D-Link’s post-trial motions.  D-Link appealed.

“It is not that an appropriately apportioned royalty award could never be fashioned by starting with the entire market value of a multi-component product . . . —it is that reliance on the entire market value might mislead the jury, who may be less equipped to understand the extent to which the royalty rate would need to do the work in such instances.”  Slip op. at 40.

On appeal, the Federal Circuit found that substantial evidence supported the jury’s finding that D-Link infringed the ’568 patent, which is directed to a processor capable of arranging information for transmission that identifies a type of payload information.  The Court noted that the asserted claims of the ’568 patent are drawn to capability, and the traffic identifier (“TID”) field of an 802.11(n)-compliant packet can be used to assign values to payloads of a particular type.  Therefore, the Court found that because the TID field has the capability to be used to identify the payload type, it satisfied the ’568 patent’s claim language and is reasonably capable of being used to infringe the ’568 patent.  The Court also noted that Ericsson provided evidence showing that Intel instructed developers to use the TID field in an infringing manner.  Accordingly, the Court held that substantial evidence supported the jury’s finding of infringement of the ’568 patent.

The Federal Circuit also held that D-Link infringed the ’215 patent, which is directed to a method of minimizing feedback responses in an Automatic Repeat Request protocol, by including a “type identifier field” (“TIF”) in a feedback response message to received packets.  The Court first affirmed the district court’s construction of the asserted claims of the ’215 patent and held that the district court properly refused to read limitations from the specification into the “type identifier field” term of the ’215 patent.  The Court also disagreed with D-Link that the preamble of the asserted claims should be used for construing the claims, as the preamble’s statement of intended use was not raised during the prosecution of the ’215 patent to distinguish the prior art.  Accordingly, the Court affirmed the district court’s construction of the asserted claims.

The Court then reversed the district court’s finding that D-Link directly infringed the ’215 patent, but affirmed the district court’s finding that D-Link induced infringement of the ’215 patent.  The Court noted that the asserted claims of the ’215 patent are method claims, and that D-Link’s accused products must actually perform, under D-Link’s control, the methods recited in the method claims for direct infringement.  The Court held that D-Link’s sale of end-user products that are capable of performing the methods when under the end user’s control does not constitute direct infringement.  The Court then held that the jury had substantial evidence to find that D-Link induced infringement of the ’215 patent.  Particularly, the Court found persuasive the evidence provided by Ericsson showing that D-Link knew about the patents-in-suit and that the patents-in-suit potentially are essential to the 802.11(n) standard, and that D-Link intentionally complied with that standard in making the accused products.  

The Court also reversed the district court’s finding that D-Link infringed the ’625 patent, which is directed to a method employed by a transmitting device to command a receiving device to receive out-of-order packets.  The Court held that the jury did not have substantial evidence to find that D-Link’s accused products infringed the ’625 patent because there was no record evidence that the transmitter in the accused device commanded the receiver to do anything as required by the ’625 patent.  The Court affirmed the district court’s finding that the ’625 patent is valid over the Petras reference.  The Federal Circuit explained that both Ericsson and D-Link presented expert testimony regarding whether the Petras reference anticipated the ’625 patent, and the Court saw no reason why the jury was not entitled to credit Ericsson’s evidence over D-Link’s evidence.

The Court also affirmed the district court’s decision allowing Ericsson’s damages expert to testify about damages calculations based on licenses tied to the entire value of the licensed products.  The Court concluded that “the expert testimony about which D-Link complains violated neither the rule from Garretson [v. Clark, 111 U.S. 120 (1884),] regarding apportionment, nor the evidentiary principle demanding an appropriate balance between the probative value of admittedly relevant damages evidence and the prejudicial impact of such evidence caused by the potential to mislead the jury into awarding an unduly high royalty.”  Slip op. at 41.  

The Court then reversed the jury’s award of past damages and ongoing royalty to Ericsson on the ground that the district court committed a number of legal errors in its RAND jury instruction, which it deemed collectively constituted sufficient prejudicial error to warrant a reversal.

First, the Court agreed with D-Link that the district court failed to instruct the jury adequately regarding Ericsson’s actual RAND commitment.  The Court explained that the district court included all fifteen of the factors from Georgia-Pacific Corp. v. U.S. Plywood Corp., 318 F. Supp. 1116 (S.D.N.Y. 1970)
(“Georgia-Pacific factors”), over D-Link’s objection, without consideration for their relevance to the trial record.  Thus, the Court determined that the district court erred by instructing the jury on multiple irrelevant or misleading Georgia-Pacific factors.  The Court, however, clarified that it did not hold that a modified version of the Georgia-Pacific factors should be used for all RAND-encumbered patents.

Moreover, the Court also agreed with D-Link that the district court erred in failing to instruct the jury that the royalty for SEPs should reflect the approximate value of that technological contribution by the SEPs, not the value of its widespread adoption due to standardization.  The Court also noted that such an apportionment is particularly true for SEPs, when the widespread adoption of a standard essential technology is not entirely indicative of the added usefulness of the technology, but can be out of necessity to comply with the standard.  The Court, however, affirmed the district court’s decision not to instruct the jury on patent hold-up and royalty stacking, as the Federal Circuit agreed that D-Link had not presented actual evidence of hold-up or stacking by Ericsson.

Lastly, the Court affirmed the district court’s rejection of Dell’s license defense.  The Court noted that in order for Dell to have a license to practice the patents-in-suit based on the MPA, LM Ericsson, the parent company, must have been acting as an agent of its subsidiary, Ericsson AB, when it filed this lawsuit.  The Court held that Dell had failed to raise genuine issues of material fact regarding whether LM Ericsson was instructed by Ericsson AB to sue for infringement, given that LM Ericsson is the owner of the patents-in-suit and has the authority to sue.  The Court also noted that LM Ericsson is not a signatory to the MPA; therefore, Dell was not excused from any acts of infringement involving the patents-in-suit.

The Court thus affirmed the district court’s infringement findings relating to the ’568 and ’215 patents, but reversed the infringement finding with respect to the ’625 patent.  The Court also affirmed the jury’s finding that the ’625 patent is valid over the Petras reference.  The Court also vacated the jury’s damages award and the ongoing royalty award, and remanded.  The Court also affirmed the district court’s grant of SJ against Dell’s license defense.

Judge Taranto dissented, but only with respect to the Court’s holding of infringement of the ’215 patent.
Judge Taranto noted that the claim language, the abstract, the summary of invention, and Ericsson’s own statements about the invention supported importing the extraneous limitation of requiring the “type identifier field” to be used to select from multiple available feedback responses.  He also noted that the preamble must be limiting in this case, as the preamble is the only place in the claim which recites
“a feedback response,” which gives a meaning to the rest of the claim terms; therefore, the limitation of “minimizing the feedback responses,” recited in the preamble, should also be imported into the construction of the asserted claim of the ’215 patent.  Accordingly, in Judge Taranto’s view, the extraneous limitation should be imported into the asserted claim, according to D-Link’s proposed construction, and D-Link should be found not infringing the ’215 patent.