Apportionment, FRAND Royalties, and Comparable Licenses After Ericsson v. D-Link

Abstract

Standard-setting organizations (SSOs) usually require that their members clarify whether they are willing to provide access to their technology essential to a standard under development on fair, reasonable, and nondiscriminatory (FRAND) terms and conditions — or, in American parlance, reasonable and nondiscriminatory (RAND) terms and conditions. After the patent holder has agreed to license its standard-essential patents (SEPs) on FRAND terms, a licensor and a licensee negotiate the exact licensing terms for the use of the SEP portfolio. In the few cases in which parties cannot agree on the exact terms, they might ask a court or an arbitration tribunal to determine a FRAND royalty. The decision of the U.S. Court of Appeals for the Federal Circuit in Ericsson, Inc. v. D-Link Systems, Inc. identifies important economic principles for determining a FRAND royalty for the use of SEPs. Ericsson is the owner of several patents essential to the 802.11(n) standard — the standard promulgated by the Institute of Electrical and Electronics Engineers (IEEE) that is commonly known as Wi-Fi — and committed to license those patents on RAND terms. When negotiations between Ericsson and several manufacturers of multicomponent devices that incorporated the Wi-Fi standard failed to result in a license, Ericsson sued in the U.S. District Court for the Eastern District of Texas and demanded a jury trial to determine the RAND royalty that the manufacturers should pay to use Ericsson’s SEPs. Relying on evidence from comparable licenses — that is, licenses that Ericsson had signed with third parties similarly situated to the defendants to use Ericsson’s patents essential to the Wi-Fi standard — the jury awarded damages of roughly $10 million to Ericsson. In reviewing the case on appeal, the Federal Circuit confirmed that royalties specified in comparable licenses provide accurate and reliable evidence of the value of a patented technology for calculating a FRAND royalty. The Federal Circuit rejected the defendants’ argument that a chipset (rather than the mobile device) should represent the royalty base to calculate a FRAND royalty. (In simple terms, one typically calculates total damages by multiplying a royalty rate by a royalty base). The Federal Circuit also reiterated the fundamental principle that a party should support allegations about abstract conjectures, such as patent holdup and royalty stacking, with relevant evidence. Unsupported allegations about the SEP holder’s supposedly opportunistic licensing practices should not influence the determination of a FRAND royalty. Finally, the Federal Circuit said that a FRAND royalty should not include the value that a technology acquires by virtue of its inclusion in a standard. Although the Federal Circuit was correct in reiterating that a FRAND royalty, like any other royalty for the use of a patented technology, should compensate the SEP holder for the incremental value of its patented technology, the Federal Circuit’s decision should not be interpreted as excluding any of the standard’s value from a FRAND royalty. To the contrary, when a patented technology creates part of the standard’s value, only a FRAND royalty that includes part of that value will adequately compensate the SEP holder for its contribution.

Keywords: FRAND, reasonable royalty, standard-essential patent, SEP, Ericsson v. D-Link, apportionment, standard-setting organization

JEL Classification: K10, K20, O34