Fifth Circuit Affirms Texas Court’s Judgment that Ericsson Complied with FRAND Obligations

The U.S. Court of Appeals for the Fifth Circuit today affirmed an Eastern District of Texas court’s judgment for Ericsson, finding no error in the district court’s jury instructions, declaratory judgment or evidentiary rulings, and rejecting HTC Corporation’s allegations that Ericsson had breached its contractual obligation to offer a license on fair, reasonable, and non-discriminatory (FRAND) terms.

The case stems from HTC’s refusal of a 2016 licensing deal in which Ericsson proposed a rate of $2.50 per 4G device to license its standard essential patents for mobile devices. Although HTC had previously paid Ericsson about $2.50 per device for the patents under a 2014 licensing agreement, in 2016 the company independently assessed the value of Ericsson’s patents and ultimately proposed a rate of $0.10 per device in 2017, which was based on the “smallest salable patent-practicing unit.” According to the Fifth Circuit, Ericsson considered this “so far off of the norm” that negotiations stopped, and a few days later, HTC filed suit in the U.S. District Court for the Eastern District of Texas, alleging breach of FRAND terms.

While the lawsuit was pending, Ericsson proposed a new licensing agreement, but HTC also rejected that offer. HTC then filed an amended complaint seeking declaratory relief that Ericsson had breached its contractual obligations to the European Telecommunications Standards Institute (ETSI) by insisting on non-FRAND terms and that Ericsson had failed to negotiate in good faith. Ericsson counterclaimed for a declaration that its offers were FRAND and alleged that HTC had failed to negotiate in good faith. The parties debated how to determine the value of Ericsson’s patents and each proposed jury instructions, but the court ultimately decided on the following instruction to the jury:

Whether or not a license is FRAND will depend upon the totality of the particular facts and circumstances existing during the negotiations and leading up to the license. Ladies and gentlemen, there is no fixed or required methodology for setting or calculating the terms of a FRAND license rate.

HTC did not object to this instruction but proposed that 11 of its jury instructions be added to the final jury instruction, which the court rejected. The jury ultimately found that HTC had not proven that Ericsson had breached its FRAND duties and that both parties had breached their obligations to negotiate in good faith. Ericsson then moved for declaratory judgment on its counterclaim, which the court granted, asserting “that, in its dealings with HTC as presented in this case, Ericsson complied with its FRAND assurance to HTC, as set forth in” its licensing declarations with ETSI. On appeal, HTC challenged: “(1) the district court’s exclusion of three of HTC’s requested jury instructions; (2) the district court’s declaratory judgment that Ericsson had complied with its obligation to provide HTC a license on FRAND terms; and (3) the district court’s exclusion of certain expert testimonial evidence as hearsay.”

Inapplicable Law

The Fifth Circuit determined that the district court did not commit reversible error by excluding the three jury instructions HTC argued should have been included on appeal because all of the instructions relied on “inapplicable law.” Two of the instructions related to apportioning the value of Ericsson’s patents and one instruction dealt with the non-discrimination requirement of FRAND. “Ericsson’s FRAND commitment is part of an agreement that it made with ETSI,” explained the Fifth Circuit. “Accordingly, the district court held, and HTC has not challenged on appeal, that Ericsson’s FRAND commitment ‘is ‘governed by the laws of France,’ and is ‘solely [] contractual [in] nature.’’ Whether Ericsson’s offer complied with the terms of its agreement with ETSI is thus a matter of French contract law.”

The appeals court further held that “[e]ven if United States law were to govern the case, none of HTC’s instructions would have been required,” because HTC relied on patent law cases rather than breach of contract case law. “While ‘the Federal Circuit’s patent law methodology can serve as guidance in contract cases on questions of patent valuation,’ it does not explicitly govern the interpretation of contractual terms, even terms that are intertwined with patent law,” said the court. Even further, if HTC’s proposed jury instructions had been substantially correct statements of law, the Fifth Circuit still would have agreed with the district court because they did not address an “important point at trial” that would have “impaired HTC’s ability to present its claims.”

Should Have Used Rule 50(b)

HTC also challenged the court’s declaratory judgment, arguing that it was legally erroneous since “[g]iven the acknowledged, substantial disparities between license terms offered to HTC and several of its competitors, the district court could not hold those terms nondiscriminatory as a matter of law.” However, the Fifth Circuit said this was just an attempt to challenge the jury verdict, which differed slightly from the declaratory judgment’s holding that Ericsson’s offers were affirmatively FRAND in that the verdict merely said Ericsson did not breach its FRAND obligations. Despite this slight difference the different evidentiary standard on which each holding relied, “the evidence used to establish that Ericsson’s offers did not breach its FRAND obligations is also the same evidence used to establish that Ericsson’s offers affirmatively were FRAND,” said the Fifth Circuit. The court added:

Although the declaratory judgment was a conclusion of law, it expressly relied on the facts as found by the jury. Challenging the evidentiary sufficiency of the declaratory judgment thus also challenges the sufficiency of the evidence supporting the jury’s verdict.

Since HTC did not file a Rule 50(b) motion allowing the court to review the sufficiency of the evidence supporting the jury’s verdict, the Fifth Circuit was “powerless” to do so. However, even if HTC had done this, the court would not have found reversible error because Rule 50(b) motions should be granted “only if ‘the facts and inferences point so strongly and overwhelmingly in favor of one party that the Court believes that reasonable men could not arrive at a contrary verdict.’” In this case, said the Fifth Circuit, “Ericsson presented substantial evidence to support its position that it had offered FRAND terms to HTC.”

Finally, as to the district court’s exclusion as hearsay of expert testimony and a report used by Ericsson in prior litigation, which HTC sought to use in its cross-examination of another of Ericsson’s expert witnesses, the Fifth Circuit rejected this because the expert in question was not an agent of Ericsson and his statements or reports were prepared for a different case.

Concurrence

Judge Stephen Higginson filed a separate, concurring opinion stating that “the district court erred when it refused to incorporate a mutually-requested apportionment instruction,” but “because the district court’s error did not seriously impair HTC’s ability to present its case, I concur in the judgment.” He also in a footnote disagreed with Ericsson’s argument that U.S. case law is inapplicable because the ETSI FRAND Commitment is governed by French law.

Ted Stevenson of Alston & Bird led the team for Ericsson. A firm press release indicated this was the “first-ever breach of FRAND (fair, reasonable, and non-discriminatory) case tried to a jury verdict.”

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