In a useful addition to the pool of incremental guidance on RAND royalties, the US Court of Appeal for the Federal Circuit (“CAFC”) has recently given judgment in CSIRO v Cisco on a damages only trial relating to a patent essential to the IEEE 802.11 WiFi standard.
Whilst the decision is of course US-centric, with the Georgia Pacific criteria featuring heavily, it builds on the previous CAFC decision in Ericsson v DLink (see our blog here) and offers commentary on broad principles that may well be of use this side of the Pond. In particular the judgment focuses on two core issues:
Smallest saleable unit
Cisco (the defendant) argued that damages models must begin with the smallest saleable unit. This is a methodology that can be helpful. If the smallest component in which the patent is implemented can be identified, and royalties charged using that component as a base, it avoids the risk that the patentee will capture some value from elements of the final product that do not depend on the patented technology. This, understandably, is an attractive prospect for any company faced with paying royalties.
However, the CAFC found this argument ‘untenable’; it conflicts with the use of other CAFC approved methodologies, such as the use of comparable licences to determine value (as the District Court had validly done in this case). The CAFC noted that different cases may require different methodologies.
It also reiterated that the entire market value rule exists as a narrow exception to the smallest saleable unit principle; the patentee can rely on the end product’s entire market value as a royalty base where it can prove that the patented invention drives demand for the end product. This is of particular relevance in the US context where, as the CAFC noted in Uniloc v Microsoft, the value of the end product can ‘skew the damages for the jury’.
The CAFC reaffirmed its finding in Ericsson that the patentee should only be compensated for the incremental benefit to the user which arises from the patented invention, and not for the additional value that can be attributed to the patent due to it being essential to a standard. To do otherwise would prevent the benefit created by standardisation from flowing to consumers and businesses practising the standard as intended.
Furthermore, the CAFC found that in this case, the District Court had erred in law by using the parties’ informal negotiations as a basis for valuation without accounting for the possibility that the rates mentioned in negotiation might have been affected by standardisation and might need to be adjusted.
There is an interesting comparison to be drawn between the findings of the CAFC and the principles espoused by the newly established Fair Standards Alliance (“FSA” – see our blog post here), of which Cisco is a member. Whilst the FSA and CAFC are in agreement that any (F)RAND royalty should avoid apportioning any value to the patent that is attributable to its inclusion in the standard alone, the FSA favours the use of the smallest saleable unit in the majority of cases. Whilst there is no obvious tension between this and the CAFC’s ruling that the smallest saleable unit should not always be used as the royalty base; it’s a difference in emphasis that may be drawn out further in the future.
The CAFC judgment is well worth a read. In addition to the above, it also suggests that similar principles should apply to SEPs generally, not just those subject to RAND commitments, and comments on the relevance of comparable licence agreements. It also has the unarguable benefit of being fairly short.