United States: Apportioning For The Standard When Valuing Standards-Essential Patents

Commonwealth Scientific and Industrial Research Organisation (CSIRO), a national research organization of Australia, recently filed a petition for certiorari with the Supreme Court. CSIRO presents the following question: Is the Federal Circuit's promulgation of rigid legal rules to control the weight to be given by the trier of fact to evidence of patent infringement damages proper under 35 U.S.C. § 284?1

HISTORY OF THE CASE

CSIRO owns U.S. Patent No. 5,487,069 (the '069 patent), which covers technology designed to solve the problem of multipath interference in wireless communications.2 The '069 patent was incorporated into several of the 802.11 series of wireless communication standards, including 802.11a and 802.11g.3 CSIRO initially agreed to license the '069 patent on reasonable and nondiscriminatory (RAND) terms during the 802.11a standardization process, but repeatedly refused related requests for future iterations of the standard.4 In the past several years, CSIRO has enforced the '069 patent in litigation, including against Cisco Systems, Inc. (Cisco). Cisco eventually stipulated to validity and infringement, and the court determined a reasonable royalty chart after a bench trial based on sales volume and brand ranging from $0.60 per Wi-Fi product to $1.90 per Wi-Fi product.5

On appeal, the Federal Circuit vacated the district court's damages award for two reasons: basing the royalty rate on the wireless product rather than the smallest salable patent-practicing unit, and failing to adjust the Georgia-Pacific factors to account for the '069 patent's status as essential to several wireless communications standards.6 The Federal Circuit discussed the damages-limiting principle of apportionment to support both reasons.7 CSIRO challenges the Federal Circuit's apportionment-based decision in its petition for certiorari, requesting that the Court recognize wide discretion for the district courts to determine damages.8

LAW INVOLVING STANDARDS-ESSENTIAL PATENTS

Under prevailing law, in the context of multicomponent products, apportionment attempts to value only the patented features of the multicomponent product.9 To this end, courts exercise their gatekeeping function under Daubert to exclude damages theories that fail to pin down "the incremental value that the patented invention adds to the product."10 This is often accomplished by basing a reasonable royalty rate on the smallest salable patent-practicing unit. This model limits both the likelihood that a patentee will be compensated for unpatented features of a product and the risk of misleading the jury by overemphasizing the end product.11 One exception to this principle is the entire market value rule, which allows a court to base a reasonable royalty rate on the end product when the patentee proves that the patented invention drives the demand for the end product.12 The district court awarded CSIRO damages based on Cisco's end Wi-Fi products rather than on the wireless chip included in those products.

Recently, the apportionment principle has taken an evolved meaning in the developing realm of standardized technologies. Complex standards can involve thousands of discrete, patented technologies.13 In the standards-setting context, apportionment requires a court to account for the value of the standard itself to ensure that the value of the standard is not awarded to an inventor of only one part of the standard.14 Here, applying its recent Ericsson decision, the Federal Circuit held that the district court failed to account for the value of the 802.11 series of standards before awarding CSIRO its royalty.15 These two legal errors – using an improper royalty base and failing to account for the value of the standard – warranted vacatur of the damages award.

THE PETITION FOR CERTIORARI

CSIRO's petition argues that this entire regime is flawed under § 284, which, by its terms, sets a royalty floor but not a ceiling.16 CSIRO criticizes the Federal Circuit for fashioning a "rigid legal rule for all cases" based on observations of what may be typical of patents incorporated into standards and the perceived likelihood of granting the patentee a disproportionate damages award.17 CSIRO grounds its petition in the text of § 284, which states that "the court shall award the claimant damages adequate to compensate for the infringement, but in no event less than a reasonable royalty for the use made of the invention by the infringer ... ."18 CSIRO argues that the Federal Circuit imposed a judicial ceiling on damages where the statute creates only a floor and fashioned rules that allow for essentially de novo review of damages.19 Analogizing the case to Octane Fitness, Halo Elecs., and Stryker Corp., CSIRO argues that Congress vested the district courts with wide discretion to determine the amount of damages, and the Federal Circuit improperly stripped the courts of that power.20

CSIRO further asserts that apportionment has no place in modern damages calculations, and that, at least where "real-world licensing evidence" is in the record, the courts should not limit damages because of apportionment.21 CSIRO's biggest criticism, however, focuses on the Federal Circuit's requirement that the courts apportion value due to the fact of standardization, since standardization excludes competing technologies from the standard and, by extension, the market, creating a high risk of artificially driving up the value of the patent.22 CSIRO contends that this apportionment is untethered to the damages statute and inappropriately caps damages against the intent of Congress.

DISCUSSION OF THE PETITION

This was one of only a few existing appellate-level cases involving standards-essential patents, and the Federal Circuit decision below lays an important foundation in this developing body of law. If the Supreme Court grants CSIRO's petition, the case could establish definitive law for standards-essential patents – and, more generally, decide the fate of apportionment in the modern patent damages analysis.

The Court may be hesitant to grant this petition. CSIRO framed its question for review broadly, and a decision on the question presented could impact patent damages law well beyond the facts of this case, in which the standards-essential status of the patent-in-suit is a key component. The Court, particularly with only eight justices, may resist deciding a case with potentially cascading effects unless absolutely necessary. While the case presents interesting policy and legal questions, such as the effect of standardization on a patent and the continued viability of apportionment, necessity may be lacking.

Furthermore, the CSIRO petition appears to conflate the Federal Circuit's holding – that the district court must account for the standards-essential status of the '069 patent – with a firm ceiling on patent damages. The Federal Circuit's rule would appear to be satisfied if the district court analyzed (1) the value of the '069 patent as compared to the 802.11 standards, and (2) whether the damages award was limited to technology actually patented. CSIRO's petition appears to assume that a damages award would automatically be reduced if the district court undertook such an analysis. While a damages reduction is likely in most cases, if the '069 patent is as transformational as CSIRO states, the '069 patent may appropriately comprise a significant portion of the value of the 802.11 standards.

The petition criticizes apportionment as an improper judicial limitation on an intentionally broad statute but fails to discuss the argument that apportionment is entirely consistent with the language of § 284. Section 284 awards damages to a patentee for infringement of a patent, and the claims of a patent typically cover very specific aspects of technology. Apportionment, therefore, may serve as a check to ensure that damages are limited to the specific, incremental development that the patent contributed to the state of the art. Viewed through this lens, apportionment gives meaning to the word "infringement" in § 284 and ensures that damages do not stretch beyond the patent's contribution.

Opposing CSIRO's motion for rehearing en banc at the Federal Circuit, Cisco argued that the Federal Circuit faithfully applied Ericsson.23 Cisco noted that the district court did not have the benefit of Ericsson when it released its decision, justifying remand. Because the district court failed to expressly discuss the impact of standardization on the '069 patent's value, including during the Georgia-Pacific analysis, Cisco contended that remand is appropriate to ensure that the royalty rate accounts for the value of the technology taught by the '069 patent, apart from any value the '069 patent may have accumulated through standardization.

CONCLUSION

Important public policy concerns abound in the developing law surrounding the standards-setting process. Patentees want to maximize royalty revenue. Manufacturers want to implement standards into their products without being subject to unpredictably high royalties. And consumers want to buy products, confident in the inter-compatibility promised by standards-setting organizations, at a relatively affordable price. This case potentially impacts each of these groups. Furthermore, the question presented in CSIRO's petition asks the Court to revisit a foundational analysis in calculating patent damages. Accordingly, the potential impact of a grant of certiorari in this case is enormous.

CSIRO's decision to challenge apportionment generally, instead of simply the application of apportionment to standards (a much more recent development), may lessen the petition's chances of being granted. CSIRO likely made this strategic decision in an attempt to piggyback on Octane Fitness, Halo Elecs., and Stryker Corp. Nonetheless, the Court may resist this petition, as the consequences of a decision on the question presented will likely extend well beyond the facts of the case. Furthermore, the CSIRO petition's failure to squarely address the argument that apportionment is consistent with the text of § 284 presents a one-sided story.

An interesting wrinkle in this case involves issues with RAND royalty rates, a related and rapidly developing area of law intertwined with standards development. CSIRO initially agreed to license the '069 patent under RAND terms for an early iteration of a standard, but refused for later iterations of the same standard. Similar factual scenarios may become increasingly prevalent in the standards setting, and future cases may help clarify whether the RAND encumbrance remains on the patent for later versions of the same standard, or whether refusing to license a patent under RAND terms after causing competing technologies to be excluded from the market by an earlier RAND commitment constitutes some form of patent misuse or antitrust violation.

We will follow this petition and these areas of the law and follow up with additional posts as the issues develop.

Footnotes

1 Petition for Writ of Certiorari, CSIRO v. Cisco Sys., Inc., No. 15-1440, at i (U.S. May 25, 2016).

2 CSIRO v. Cisco Sys., Inc., 809 F.3d 1295, 1297 (Fed. Cir. 2015).

3 Id. at 1298.

4 Id.

5 Id. at 1299-1300.

6 Id. at 1297.

7 See id. at 1301-06.

8 Petition for Writ of Certiorari, supra note 1.

9 See, e.g., Ericsson, Inc. v. D-Link Sys., Inc., 773 F.3d 1201, 1226 (Fed. Cir. 2014).

10 Id.

11 Id. at 1226-27.

12 Id.

13 See, e.g., id. at 1232-33.

14 Id.

15 CSIRO, 809 F.3d at 1305-06.

16 See 35 U.S.C. § 284.

17 Petition for Writ of Certiorari, supra note 1, at 7.

18 35 U.S.C. § 284.

19 Petition for Writ of Certiorari, supra note 1, at 8.

20 See, e.g., id. at 8-10.

21 Id. at 9.

22 Id. at 15.

23 Cisco's Response to CSIRO's Combined Petition for Panel Rehearing and Rehearing En Banc, CSIRO v. Cisco Systems, Inc., No. 15-1066, at 3 (Fed. Cir. Feb. 5, 2016).

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