“Why is it reasonable if one company is paying a quarter and another company is paying four dollars for the exact same thing?” – Federal Circuit Judge Raymond Chen
On August 7, the U.S. Court of Appeals for the Federal Circuit heard oral arguments in TCL Communication v. Telefonaktiebolaget LM Ericsson, an appeal stemming from an action for declaratory judgment filed by TCL in the Central District of California. Among the various aspects of the district court proceedings being examined on appeal are the fair, reasonable and non-discriminatory (FRAND) rates set by the court for Ericsson’s standard essential patent (SEP) portfolio for cellular technology as well as whether the court abused Ericsson’s Seventh Amendment rights by entering a release payment based on factual issues that weren’t tried by a jury.
A January 2018 post on the Essential Patent Blog covers a great deal of the underlying case leading up to the December 2017 memo of facts and law issued by U.S. District Judge James Selna in which the district court determined FRAND rates to be paid by TCL Communication for Ericsson’s SEP portfolio covering 2G, 3G and 4G technologies. While Judge Selna determined that Ericsson didn’t breach its FRAND obligations under the European Telecommunications Standards Institute (ETSI) standard, he said that its proposed licensing terms weren’t FRAND. The court dismissed proposed licensing terms from either side in the case and developed a FRAND licensing framework that primarily followed a “top-down” approach providing an SEP holder like Ericsson with a portion of a determined aggregate royalty burden for the entire standard based upon the portion of the standard covered by Ericsson’s patents.
Ericsson Argues Seventh Amendment Violation, Failure to Reach Burden of Proof
Ericsson was represented at oral argument last week by Jeffrey Lamken, Founder of MoloLamken LLP, and TCL Communication was represented by Stephen Korniczky, Partner at Sheppard Mullin. By resolving the issue of whether Ericsson’s licensing offer met the firm’s FRAND obligations under ETSI without a bench trial, Lamken argued that the company was denied its rights to a jury trial guaranteed by the Seventh Amendment. While Ericsson had entered into a joint agreement with TCL Communication in 2015 which contemplated the district court calculating the FRAND rate and release payment for past unlicensed sales, Lamken said that the court was only within its power to do so if a jury first determined that the offers violated FRAND obligations. Lamken cited to U.S. Supreme Court precedent requiring juries to try issues of fact as laid out in Beacon Theatre v. Westover (1958) and Dairy Queen v. Wood (1962).
Instead of calculating a FRAND rate that fell halfway between the proposed rates from either Ericsson or TCL Communication, Lamken argued that the district court should have entered judgment in favor of Ericsson because TCL Communication didn’t meet its burden of proof. This case arose out of a complaint for declaratory judgment (DJ) filed by TCL Communication and, while patent owners have the burden of proving infringement claims in DJ suits, the burden of proving that the licensing proposal didn’t meet FRAND obligations rests with the prospective licensee.
Finding the Balance
“This is the first time I think a court has looked at how you set up a license for an entire portfolio of patents,” Korniczky said at the top of his arguments. After Korniczky argued against the royalty floor per unit being sought by Ericsson, Judge Chen zeroed in on his question regarding how to value the SEP patents at issue:
We have pretty well developed…law on patent damages and what we tend to focus on is, what is the incremental value of the technical contribution of this patented technology? And we try to hit some kind of economic valuation of that technical contribution, and so that does seem like some kind of fixed value. If you had some patented technology on a muffler, then whether you’re Porsche or you’re Kia, you’re probably going to pay the same amount for that patented technology on that muffler. It’s not going to fluctuate based on the price of the car, and so that’s one thing that makes me wonder about a pure percentage assessment of what the royalty is going to be when you have great disparity in the different kinds of phones here. So why is it reasonable if one company is paying a quarter and another company is paying four dollars for the exact same thing?
Judge Chen further pressed Korniczky on the argument that Ericsson’s patents had intrinsic value, which would support the idea of a fixed fee instead of a percentage royalty rate. Korniczky countered by contending that it would then be discriminatory for Ericsson to offer certain licenses without a floor when other licensees were required to pay at least that flat rate per unit sold.
Korniczky also argued that the release payment to Ericsson for past unlicensed sales was an equitable remedy for breach of contract and not a legal remedy for patent infringement damages that required a jury trial. Rather than determine past damages, Korniczky asserted that the court, rather than assessing damages, determined the FRAND rate including the forward-looking royalty to license the portfolio and then applied that royalty backwards for the past unlicensed sales. The fact that the release payment was included in TCL Communication and Ericsson’s agreement as to what the court would determine further solidified it as equitable relief. Although Ericsson did bring patent infringement claims in a lawsuit filed in the Eastern District of Texas, that case was transferred to Central California and the infringement claims were stayed while the DJ claims were tried.
The Federal Circuit also heard oral argument last week in a separate case between the two companies, Ericsson Inc. v. TCL Communication Technology, which involves an appeal from the Eastern District of Texas in which Ericsson was awarded $75 million for the infringement of a non-standard essential patent.