Federal Circuit Follows AAI Recommendation on RAND Royalty Jury Instructions (Ericsson v. D-Link)

In a case involving infringement of standard essential patents (SEPs) that the patent holder has committed to license on reasonable and non-discriminatory (RAND) terms, a panel of the Federal Circuit Court of Appeals reversed a damages award because the jury had not been properly instructed in determining the RAND royalty.

The American Antitrust Institute (AAI) had filed an amicus brief arguing the lower court had erred by instructing the jury with the fifteen Georgia-Pacific factors used in traditional reasonable royalty determinations.  The AAI argued that those factors are inadequate for determining RAND royalties, and must be significantly modified to take into account the patent holder’s RAND commitment.  The Federal Circuit agreed.

Citing the AAI’s brief, the Federal Circuit explained that “many of the Georgia-Pacific factors are simply not relevant; many are even contrary to RAND principles.”

Without delimiting an instruction appropriate for all RAND-encumbered patents, the court established that any instruction must make clear that the royalty award for infringement of a SEP “must be premised on the value of the patented feature, not any value added by the standard’s adoption of the patented technology.”

The court explained that when “a technology is incorporated into a standard, it is typically chosen from different options.  Once incorporated and widely adopted, that technology is not always used because it is the best or the only option; it is used because its use is necessary to comply with the standard.”

“Because SEP holders should only be compensated for the added benefit of their inventions [over the prior art],” the court held that “the jury must be told to differentiate the added benefit from any value the innovation gains because it has become standard essential.”  In other words, as the AAI had urged, the “holdup value” of the patent must be excluded from consideration.

At the same time, while acknowledging AAI’s recommendation that the jury always be instructed that the hypothetical royalty negotiation occurs before the adoption of the standard, so as to discount any value added by the standardization, the court expressly declined to address the point.

The court also declined to require the jury to be specifically instructed on “royalty stacking,” i.e., that in a hypothetical royalty negotiation, the parties would take into account the royalties that an implementer would have to pay to license potentially thousands of other patents essential to the same standard.  The court concluded that no such instruction was required because the defendants had failed to show what royalties they were actually paying to license other SEPs.  Nonetheless, the court recognized that a royalty award for a SEP must be apportioned to the value of the patented invention, not the value of the standard as a whole.

The case involves infringement claims by Ericsson against several manufacturers of laptops, routers and other products that are compliant with the IEEE’s Wi-Fi standard.  The ruling is significant because it is the Federal Circuit’s first (and the only court of appeals)  decision on the issue of appropriate RAND royalty rates.

A copy of the decision is available here.  The AAI’s amicus brief is available here.

For more information, contact Richard Brunell at 202-600-9640 or rbrunell@antitrustinstitute.org.