IP Law Daily In row over communications standards, calculation of royalty rate for unlicensed sales vacated
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Thursday, December 5, 2019

In row over communications standards, calculation of royalty rate for unlicensed sales vacated

By Thomas Long, J.D.

Holding bench trial instead of jury trial deprived SEP owner Ericsson of Seventh Amendment rights because trial was held to determine compensatory relief for mobile device maker TCL’s past infringement.

Swedish telecommunications company Telefonaktiebolaget LM Ericsson and its U.S. subsidiary Ericsson Inc. (together, "Ericsson") should have been given a jury trial instead of a bench trial held to determine a retrospective royalty rate to be applied to a "release payment" for past unlicensed sales of products by mobile device manufacturers TCL Communication Technology Holdings Ltd., TCT Mobile Ltd., and TCT Mobile (US) Inc. ("TCL") that employed Ericsson’s standard-essential patents (SEPs), the U.S. Court of Appeals for the Federal Circuit has held. Ericsson had a Seventh Amendment right to a jury trial on the release payment because the payment was, in substance, compensatory relief for TCL’s past patent infringement. By calculating the rate via a bench trial, the district court deprived Ericsson of that right, the appellate court said. In addition, because the district court’s decisions on equitable matters—including a prospective royalty rate for the SEP portfolio—were based on issues common to the improperly adjudicated release payment, the district court’s decision was overturned in full and remanded for further proceedings, including a jury trial on the release payment rate (TCL Communication Technology Holdings Ltd. v. Telefonaktiebolaget LM Ericsson, December 5, 2019, Chen, R.).

Patent portfolio at issue. Ericsson held a portfolio of SEPs incorporated into 2G, 3G, and 4G mobile communications standards, which enable mobile devices from different manufacturers and different networks to communicate with each other using the same communication protocol. As a member of the European Telecommunications Standards Institute (ETSI)—the international standard-setting organization responsible for developing 2G, 3G, and 4G standards—Ericsson was required by contract with ETSI and other ETSI members to license its patents on "fair, reasonable and non-discriminatory" (FRAND) terms, in order for the patented technology to be incorporated into (that is, to become essential to) ETSI standards. ETSI’s 2G, 3G, and 4G standards incorporated the technologies claimed by thousands of SEPs, including over 100 owned by Ericsson.

FRAND dispute. TCL made mobile devices that implemented the ETSI standards so that they may interoperate in the mobile communications environment. As a member of ETSI, Ericsson was bound by its contractual FRAND obligation to ETSI to be prepared to offer TCL FRAND-complaint terms to license its SEP portfolio. After negotiations between the parties failed to result in an agreement on FRAND terms, the parties agreed to engage in a binding court adjudication of terms for a worldwide portfolio license in the federal district court in Los Angeles.

The litigation involved both equitable and legal issues. The parties agreed that breach of contract claims brought by TCL were legal and would be tried to a jury, whereas TCL’s claim for the court to set a prospective FRAND rate was equitable. Those claims shared a common issue: whether Ericsson’s offer to TCL complied with its FRAND obligations. The parties agreed to a two-step approach: (1) a jury would decide whether Ericsson’s offer complied with its FRAND obligation, and (2) if the jury answered no, a bench trial would be conducted to revise terms in the offer to be compliant with FRAND. Before trial, all of TCL’s claims seeking damages had been dismissed or were no longer viable, but Ericsson’s counterclaims seeking damages for patent infringement remained. Ericsson insisted that a jury trial was needed to determine the terms for a "release payment" for TCL’s past infringement. The district court disagreed and decided to proceed with a bench trial.

Bench trial. On March 9, 2018, the district court issued a decision and order imposing FRAND rates in a binding worldwide license on Ericsson and TCL for Ericsson’s 2G, 3G, and 4G SEPs. The court-ordered license set forth: (1) a prospective FRAND royalty rate for practicing each standard, and (2) a release payment based on a closely related, retrospective FRAND rate for "TCL’s past unlicensed sales." The court conducted a 10-day bench trial to determine these rates, during which the court rejected both parties’ proposed FRAND rates based on different methodologies that the court deemed flawed. The court employed its own modified version of TCL’s proposed "top-down" approach in combination with comparable license evidence to compute both the prospective and retrospective FRAND rates.

TCL’s proposed top-down approach would have begun with an aggregate royalty for all patents encompassed in the relevant standards and then determine Ericsson’s portion of that aggregate. According to TCL, the rates offered by Ericsson in two options were not FRAND-compliant because they substantially exceeded the rates yielded from the proposed top-down approach. Ericsson proposed to show that the rates it offered were FRAND-compliant based on evidence of (1) existing licenses with other implementers and those it had prepared for business cases and (2) rates produced from an alternative methodology that sought to measure in absolute terms the value that Ericsson’s patents added to 4G products. The district court chose to use a modified top-down approach using different "adjustment factors" from those proposed by TCL. Because the rates offered by Ericsson were substantially higher than those arrived by via the court’s approach, the district court determined that they were not fair and reasonable. Then the court used comparable licenses with other mobile device firms to conclude that Ericsson’s offers to TCL were discriminatory. Finally, the district court calculated prospective FRAND terms and a release payment for past sales based on a modification of its prospective FRAND rate. The district court also dismissed Ericsson’s infringement claims as moot. Ericsson appealed.

Right to jury trial. Ericsson argued that the district court’s determinations were erroneous because they at least in part should have been decided by a jury. In the Federal Circuit’s view, the district court’s deprivation of Ericsson’s Seventh Amendment right to a jury trial required all of the district court’s determinations to be overturned. According to the Federal Circuit, the release payment was in substance compensatory relief for TCL’s past wrongs, and therefore was legal relief that should not have been adjudicated in a bench trial. The appellate court rejected TCL’s arguments that the release payment constituted specific performance for a term in a contract, or was equitable because it was ordered as restitution for TCL’s infringing activity. Although the release payment was ordered in the form of an injunction, that did not automatically make it equitable, the appellate court said. Moreover, restitution could be characterized as legal or equitable. The Federal Circuit noted that the district court had defined the function of the release payment as compensation, confirming that the release payment was a substitute for patent infringement damages. TCL’s arguments improperly focused on the form of the relief, rather than its underlying substance, which was compensatory. Ericsson did not waive its right to a jury trial, the court also held.

Conclusion. Accordingly, the Federal Circuit vacated the district court’s determination of the release payment, including the underlying question of whether Ericsson’s offers that included the release payment term were FRAND. The appellate court also vacated the court’s determination that Ericsson’s offers were not FRAND and its determination of prospective FRAND royalty rates because both determinations were predicated on common issues to the improperly decided release payment. Because the release payment will be re-decided by the jury, the Federal Circuit reversed the dismissal of Ericsson’s patent infringement claims and TCL’s related counterclaims of invalidity and non-infringement as no longer moot.

This case is Nos. 18-1363 and 18-1732.

Attorneys: Stephen S. Korniczky (Sheppard, Mullin, Richter & Hampton LLP) for TCL Communication Technology Holdings Ltd., TCT Mobile Ltd. and TCT Mobile [US] Inc. Jeffrey A. Lamken (Mololamken LLP) for Telefonaktiebolaget LM Ericsson and Ericsson Inc.

Companies: TCL Communication Technology Holdings Ltd.; TCT Mobile Ltd.; TCT Mobile [US] Inc.; Telefonaktiebolaget LM Ericsson; Ericsson Inc.

MainStory: TopStory Patent TechnologyInternet FedCirNews

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