TIPLJ Session 1: Paula Heyman (Baker & Botts) on “Getting the Facts: Expert Testimony and FRAND”

Begins by explaining basic concept of FRAND:  promise to license on fair, reasonable, and nondiscriminatory terms.  Often required by SSOs for standard essential patents (SEPs).  “Essential” defined by various SSO policies (IEEE, ETSI, etc.).

What happens when an SEP owner is not “reasonable”?  How to define “nondiscriminatory,” “fair and reasonable”?  

Overview of expert testimony rules (Federal Rule of Evidence 702, Daubert).  What is “reliable”?  Relevant factors include whether the theory is refutable, peer-reviewed, generally accepted.  

Expert testimony crucial in Microsoft v. Motorola, In re Innovatio IP Ventures LLC, and Apple v. Motorola.

Microsoft v. Motorola overview.  Motorola offered 2.5% royalty rate on price of end product.  Microsoft sued for breach of contract, alleging the offer was unreasonable.  Judge Robart came up with range of reasonable rates.  Goals for royalty determinations include promotion of widespread adoption of standards, mitigate risks of patent holdup and royalty stacking, and induce creation of valuable standards by guaranteeing reasonable royalties.  Microsoft proposed incremental value of technology compared to alternatives.  Motorola proposed hypothetical bilateral negotiation.  Court went with latter but evidence of former relevant.  Modified version of Georgia-Pacific.  Court concluded that Motorola’s proposed rate would risk royalty stacking.  Method focused on importance of patent to standard, importance of patent to accused products, and other licenses for comparable patents.  Court determined significantly lower rate than Motorola proposed.

Innovatio was an infringement case where damages were tried first.  Innovatio bound by prior patent owners’ RAND commitment.   Court applied “top down” approach:  average profit per WiFi chip as maximum royalty base, multiply by number of asserted SEPs and divide by total number of all patent owners’ SEPs, adjust denominator to reflect relative value of Innovatio’s SEPs to WiFi standard.  Judge believed this would be nondiscriminatory and avoid stacking, apportion value to patents without relying on information about other licenses that may not be available.  End result much lower than  what Innovatio sought.

Heyman asks:  how does this apply to expert reports?  Focus on importance of SEP to standard:  total number of SEPs and SEP holders, level of involvement in standards process, and value of SEP to standard (efficiency gains, improvements over past methods and alternative methods, whether it was an optional or core feature).  Show importance of specific patented feature, not entire standard, to the product.  How many SEPs actually used, core/minor features.  Independent analysis showing patents do in fact cover the products through claim charts, not unsubstantiated expert testimony.

As for comparable licenses, licenses taken as part of settlement not relevant in Microsoft.  Portfolios including unrelated patents:  maybe persuasive if can apportion relative value of each patent to license.  Licenses not negotiated under RAND obligations not persuasive.

Comparable prior licenses:  patent pooling.  Good indicator if comparable and adjusted.  Focus on timing of formation of pool, number and diversity of participants, participation in pool by licensor, and success of the standard.  Adjustment factors:  pool rates tend to be lower, may allocate royalties based on quantity not quality, must account for value of membership in pool aside from royalties.

Another methodology employed in Ericsson v. D-Link?  Jury award, so harder to analyze.