United States: Score This One In Favor Of Standard-Essential Patent Owners: Recent Decision Makes Satisfying FRAND Obligations Easier

Last Updated: June 11 2019
Article by Michael T. Renaud, James Wodarski, Aarti Shah and Matthew S. Galica

A recent decision in the Eastern District of Texas should provide standard-essential patent ("SEP") owners with more clarity and optimism when negotiating SEP licenses.  Coming on the heels of Judge Koh's decision in the FTC's dispute with Qualcomm, Judge Gilstrap found Ericsson to have satisfied its fair, reasonable and non-discriminatory ("FRAND") obligations when negotiating with HTC due in large part to a finding that it had negotiated in good faith.  The decision, which is based on evidence that more accurately reflects the behavior of SEP licensors in their normal course of business, is beneficial to SEP owners because it expands the scope of what may constitute compliance with FRAND obligations and rejects the notion that the smallest-saleable patent practicing unit ("SSPPU") sets the boundaries for determining a royalty base.  The decision is also notable because what constituted a FRAND license was determined by reference to actual licenses entered into by the parties, rather than more academic theories used in litigation, such as royalty stacking.  As SEP owners continue to consider whether participation in standard setting organizations inhibits their ability to assert intellectual property rights, this decision may dispel that notion as it expands the scope of how one can comply with FRAND obligations in order to receive compensation for contributions to technology standards.

Background

Ericsson, a member of the ETSI standard setting group, owns 2G, 3G, and 4G SEPs.  These assets cover technology that is essential for devices to connect with each other over wireless networks.  Ericsson filed declarations with ETSI that it would license them on FRAND terms.  Ericsson and HTC entered cross-license agreements on their SEPs in 2003, 2008 and 2014.  The last license expired in 2016 and the parties reached an impasse in negotiating a renewed license.  In December 2016, Ericsson offered a license at a rate of $2.50 per 4G device. HTC rejected that offer and counter-offered $0.10 per 4G device.  Ericsson countered with a new license offer at 1% the net price of HTC's end product device with a $1 floor and a $4 cap. 

HTC rejected Ericsson's offers, and filed suit alleging that Ericsson breached its commitment to license its SEPs on FRAND terms. Ericsson counterclaimed for a declaration that Ericsson had complied with its FRAND commitment. A jury trial was held on HTC's claim and the jury determined that HTC had not shown that Ericsson had breached its FRAND commitment. Judge Gilstrap then considered Ericsson's claim seeking a declaration that it complied with its FRAND commitment.

Decision

The Court began its discussion by stating that, to satisfy ETSI's FRAND obligations, a SEP-owner must either (1) offer a FRAND license, or (2) negotiate in good faith towards a FRAND license.  Importantly, this means that, to satisfy its FRAND obligations, a SEP owner does not need to formally offer a FRAND license or justify—with complicated calculations in subsequent litigation—how its previous offers fell within the boundaries of a FRAND rate.  Instead, negotiating a SEP license in good faith, alone, can serve to discharge a FRAND obligation.  Using this as a guide, the Court drew two major conclusions: (1) it dismissed HTC's claims that the royalty base should be determined from the profit margin of a baseband processor, which it argued was the SSPPU, and (2) it found that reviewing comparable licenses with other manufacturers was the best approach to take in determining the value of the company's SEPs. As discussed below, both of these conclusions are beneficial to SEP owners.

SSPPU Analysis

HTC's primary assertion in support of its breach of FRAND claim was that Ericsson should have based its royalty calculation on the profit margin of the SSPPU contained in a cellular device, which HTC submitted was the baseband processor. This SSPPU methodology has been used in other cases to greatly harm patentees.  If followed, the SSPPU method generally states that a hypothetical royalty will not be applied to the actual commercial product sold (e.g., a smartphone priced at $800 - $1,200); rather, it is applied to the smallest saleable patent practicing unit (e.g., a modem chip priced at approximately $20). HTC argued this was necessary to filter out features not related to wireless cellular connection (i.e., 2G, 3G, and 4G). HTC took the analysis one step further and argued that the royalty should be derived from the profit margin—not the price or cost—of the SSPPU.  Ericsson disagreed and presented testimony that the profit margin that a component supplier makes is not necessarily reflective of the value of the intellectual property embodied in that component.  Specifically, Ericsson proved that consumers are willing to pay more than $100 to add cellular functionality to regular Wi-Fi enabled tablets.

The Court flatly rejected HTC's assertion that the royalty calculation should be based on the profit margin of the SSPPU, or that such a calculation is required by ETSI in the first place.  Instead, the Court agreed with Ericsson, finding that the market-based evidence shows that customers value cellular technology more highly than HTC suggested. This conclusion is beneficial to SEP owners because it expands the potential royalty base for standard-essential technology beyond the profit margin of a SSPPU to a market-based valuation of the standard-essential technology. Put another way, SEP owners can seek higher licensing rates—if consumer data supports it—for their contribution to customer-valued technology, while still complying with FRAND obligations.

Comparable License Analysis

In addition to the SSPPU analysis, the parties presented evidence related to Ericsson's comparable licenses. Ericsson argued that comparable licenses offered the best evidence of the value of its cellular SEPs.  This competes with previous court decisions, such as Microsoft Corp. v. Motorola, Inc., that bounded royalties by the profit margin of commercial products implementing the SEP technology and further reducing that value through royalty stacking. The Court, however, agreed with Ericsson, finding that the comparable licenses provide the best market-based evidence of the value of Ericsson's SEPs and that Ericsson's reliance on comparable licenses is a reliable method of establishing fair and reasonable royalty rates consistent with FRAND commitments. This conclusion is helpful to SEP owners as it allows them to rely on their good-faith negotiations, alone, to demonstrate they have complied with FRAND obligations.

Despite the finding, Ericsson and HTC presented competing interpretations of Ericsson's various licenses. This is because many of comparable licenses included terms, such as cross-license provisions and lump sum payments, which required economic analysis for conversion into a resultant, effective, one-way royalty rate.  Ultimately, the Court found the terms resulted in royalty rates ranging from 1-3% of the net selling price of 4G handsets with payment caps of $1.00 - $5.00 per device.  The conclusion that the varying ranges comply with FRAND negotiating requirements is logical because not every cross-license encompasses patents having identical value.  Instead, for a potential cross-licensing agreement with no other benefits being contemplated, determining the appropriate rate for Ericsson to offer would require some valuation of the patents to which Ericsson was receiving a cross-license.  Conceptually, the more valuable the patents to which Ericsson received a cross-license, the lower the rate Ericsson would offer for a license to its SEPs.  Based on this notion, the Court found that Ericsson complied with its FRAND commitment.  This permits Ericsson (or SEP owners, generally) to offer different rates to different companies while still complying with FRAND obligations.  The conclusion is another win for SEP owners because it gives them latitude to negotiate cross-license agreements—resulting in different royalty rates—based on the unique patents at issue instead of trying to fit every licensing agreement into a rigidly prescribed range of FRAND rates.

Conclusion

As 5G mobile technology rolls out and its inevitable licensing looms on the horizon, SEP owners should continue to monitor the evolving procedures for licensing in compliance with FRAND obligations.  This decision, if affirmed, would provide SEP owners with clarity and optimism when negotiating SEP licenses.  First, the decision rejected the SSPPU rule, finding that ETSI does not even require it to satisfy FRAND obligations.  Second, the decision determined that negotiating in good faith (proven by review of comparable licenses), rather than proving—through complicated analysis during litigation—satisfies FRAND obligations.  The cumulative effect of these conclusions allows SEP owners to (1) seek higher licensing rates—if market data supports such a demand—for their contribution to customer-valued technology, and (2) offer different rates for a license to their SEPs based on the value they may receive from cross-licensing another companies' patents.  In further benefit to SEP owners, the decision is underpinned by the practical behavior of sophisticated SEP licensors, instead of deferring to complicated litigation-based theories for valuing SEPs as has become customary.  If other courts follow this decision, SEP owners should have an easier and more flexible time when negotiating SEP licenses without having to diverge from their customary licensing practices.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions