On December 4, a much anticipated opinion was delivered by the US Court of Appeals for the Federal Circuit ("Federal Circuit") in the Ericsson vs. D-Link et. al. case, concerning a WiFi (IEEE 802.11) SEP portfolio license. I'm pleased to note that the Federal Circuit in several aspects aligned itself with what I've myself been expressing in recent posts under this blog.
Firstly, on the issue of "royalty stacking", the Federal Circuit rejected jury instructions on royalty stacking because the defendants failed to present evidence that there was a royalty stacking problem: “A jury, moreover, need not be instructed regarding royalty stacking unless there is actual evidence of stacking. The 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. In this case, D-Link’s expert "never even attempted to determine the actual amount of royalties Defendants are currently paying for 802.11 patents."” This is what I opined in my earlier post on royalty stacking, i.e. damaging royalty stacking shouldn't be assumed to exist per se, but instead clear evidence to that effect needs to be presented in each case. Once again we need to remember that royalty stacking occurs per definition in wireless SEP portfolio licensing. That doesn't mean that it's automatically harmful to the market nor to any given OEM.
Secondly, on "Patent hold-up", again no evidence of such was presented: “Absent evidence that Ericsson used its SEPs to demand higher royalties from standard-compliant companies, we see no error in the district court’s refusal to instruct the jury on patent hold-up or to adjust the instructions expressly to take patent hold-up into account.” As I wrote in my post on portfolio licensing and patent hold-out, evidence of "patent hold-up" is hard to find in reality. But the key point from the Federal Circuit again being that clear evidence must be presented in each case, it should not simply be presumed to exist just because it's a theoretical possibility.
Thirdly, on the topic of "Royalty base", which I touched upon in my post on cellular FRAND royalty levels, the Federal Circuit made another good clarification. On apportionment and the "Entire Market Value Rule", it stated that according to the “substantive legal rule”, the “ultimate reasonable royalty award” – that is, the result of e.g. multiplying a royalty rate with a royalty base – ”must be based on the incremental value that the patented invention adds to the end product”. The Federal Circuit confirmed that to determine a (F)RAND royalty in the wireless industry, you are definitely not mandated to use the smallest salable component such as a chipset as a royalty base. There's nothing wrong with using the entire end-user product as royalty base, as long as reasonable apportionment of value of the patented invention to the end-user product is done.
The Federal Circuit's practical approach to SEP licensing and damages is encouraging. Hopefully other courts and agencies, including those in other jurisdictions, will follow suit and move away from theoretical calculations towards a focus on real world practices and evidence.