Wednesday, April 26, 2017

Some Articles on Disgorgement of Profits Under U.S. Law

As I've noted many times by now, like their counterparts in many other countries today, U.S. courts at one time were allowed to award the infringer's profits as a remedy for the infringement of utility patents.  Congress eliminated that remedy in 1946, supposedly due to the time, cost, and complexity that surrounded such awards at that time--but it kept the remedy in place for the infringement of design patents, where the governing statute (35 U.S.C. § 289) states that whoever applies a patented design "to any article of manufacture for the purpose of sale . .  . shall be liable to the owner to the extent of his total profit, but not less than $250 . . . ."  The predecessor version of this statute was enacted in 1887, when Congress sought to overrule two Supreme Court decisions that resulted in awards of only nominal damages for the infringement of a carpet design; but it gained prominence in recent years after the Federal Circuit in Apple v. Samsung  and Nordock v. Systems interpreted it to mean that the defendant could be required to disgorge its total profit from the sale of infringing merchandise, even when the design at issue constitutes only a portion of the entire product.  Last December, however, in Samsung v. Apple the Supreme Court held that "the term 'article of manufacture' is broad enough to encompass both a product sold to a consumer as well as a component of that product."  The case is now pending once again in federal district court, for determination of what the relevant "articles of manufacture" are and of the profit attributable to those articles.  For previous discussion on this blog, see, e.g., here.

Anyway, with that background, Professor Sarah Burstein has authored a paper titled The "Article of Manufacture" in 1887, 32 Berkeley Tech. L.J. __ (forthcoming).  Here is a link to the paper, and here is the abstract:
One of the most important questions in contemporary design patent law is how to interpret the phrase “article of manufacture” in 35 U.S.C. § 289. While there has been much discussion about what Congress intended when it enacted the predecessor to § 289 in 1887, there has been little discussion about what the phrase “article of manufacture” meant in 1887. This Article aims to fill that gap. It examines the relevant statutory text, late nineteenth-century patent treatises, Patent Office decisions, and court cases and concludes that, in 1887, the phrase “article of manufacture” did not mean “product” or any “thing made by hand or machine.” Instead, it was a term of art that referred to a tangible item—other than a machine or composition of matter—with a unitary structure made by humans and complete in itself for use or for sale. This historical evidence undercuts both the Federal Circuit and Supreme Court interpretations of the phrase “article of manufacture.” This evidence also should be considered in evaluating arguments about the statute’s plain meaning and the original congressional intent.
Professor Burstein concludes, among other things, that smartphones (had they existed) and dock levelers (at issue in Nordock) would not have been considered articles of manufacture in 1887.  She also gave a presentation on a follow-up article at PatCon 7 earlier this month, in which she presents her analysis of how courts should proceed in applying the statute today; I'll have more on this follow-up paper when there's a draft up on ssrn. 

2.  Professor Caprice Roberts previously published a paper titled The case for Restitution and Unjust Enrichment Remedies in Patent Law, 14 Lewis & Clark L. Rev. 653 (2010), in which she argued that "A patent owner should have access to a restitutionary disgorgement remedy. The goals served by the remedy could operate to benefit patent law aims. Depending upon the desired parameters, the remedy could serve to prevent the infringer's unjust enrichment, recapture wrongful gains to the owner who lost an opportunity to gain, deter infringement, and encourage bargaining for licenses."  She has a new essay out in 68 Florida Law Review Forum 1413 (2016), titled Supreme Court Disgorgement, which while not directly relevant to patents may be of interest.  Here is a link to the article, and here is the abstract:
Disgorgement of a defendant’s wrongful gains is an ancient remedy. It applies across a spectrum of contexts—from trademark infringement to fiduciary duties, from common law to statutes, from public to private law. This remedy is not regarded as quintessential in American contract law, but that is changing. My earlier work, as cited by the Supreme Court, predicted this shift based upon a new rule in the Restatement (Third) of Restitution and Unjust Enrichment. The rule operationalizes disgorgement of profits for opportunistic breaches of contract. This new conceptualization of precedent authorizes a gain-based remedy that exceeds the compensation goals of contract law’s preferred, default remedy of expectancy damages.
This remedy is bold and will affect the law of contracts, remedies, and restitution. I show, in a companion article, how state and federal courts resolve novel disgorgement requests for breach of contract claims. This Essay examines an unusual endorsement of disgorgement by the Supreme Court, sitting in original jurisdiction over the breach of a water-rights compact between states. Harnessing broad powers of equity jurisdiction, the Court adopts a $1.8 million disgorgement award exceeding compensation. It strips part of a defendant’s profits and stacks on a compensatory award for losses sustained. Relying on the Restatement (much to Justice Scalia’s chagrin), the Court permits disgorgement to deter a defendant from knowingly exposing a plaintiff to a substantial risk of breach. The Court’s provocative application offers a lens through which to explore broader questions: whether, when, and how the disgorgement remedy should apply to breach of contracts, whether public or private. This Essay concludes that disgorgement is a valuable remedy for breach of contract but that judges must exercise reasoned discretion, by applying disgorgement to proper facts and by using restraint in tying the measurement to causation. The inclusion of disgorgement in the stable of remedies broadens the scope of contract law to include inquiries and features typically associated with tort law. As in all of my remedies work, this Essay argues that remedies shape rights—here, granting the remedy of disgorgement expands the shape of the underlying contract right in both public and private law.
3.  This isn't a new article, but I only recently came across it (hat tip to Professor Pam Samuelson) and commend it to readers interested in disgorgement.  It's Mark Gergen's Causation in Disgorgement, 92 B.U. L. Rev. 827 (2012).  The article discusses, among other things, Judge Learned Hand's analysis of disgorgement in a famous copyright case, Sheldon v. MGM, and concludes as follows:
The major contribution of this Article is the insight that causal analysis can do a great deal of work in determining wealth in a wrongdoer’s hand subject to disgorgement once the appropriate counterfactual is chosen. Non-causal considerations of fairness and policy determine permissible counterfactuals. I used the law of deceit to illustrate the importance of clarity about permissible counterfactuals. A contentious point is my claim that causal analysis is fudged in some cases because it generates a measure of damages that is too low to deter the wrong. Candor on this point would make the law clearer and more coherent while weakening the claim in justice for damage awards that exceed the likely gain causally attributable to the wrong. I think this price is worth paying. Causal clarity makes it possible to identify reasons why causal analysis is inconclusive and it brings into view a normative benchmark to determine disgorgement damages when causal analysis is inconclusive. Causal analysis is inconclusive when the appropriate counterfactual is contestable, when factual analysis yields an uncertain answer, and when factual analysis yields a measure of damages that seems too low or too high. The purpose of disgorgement – to deter but not to punish – supplies a normative benchmark for all of these situations. This benchmark is a reasonable or fair price for the entitlement taken by the wrongdoer. Disgorgement damages should be set at a multiple of this price in an amount that is sufficient to deter persons such as the defendant from taking such an entitlement without bargaining for it.
Here is a link to the article.

Monday, April 24, 2017

Some Upcoming Events on IP Remedies

1. The Licensing Executives Society will be holding its 2017 Spring Meeting in Washington, D.C. on May 9-11.  The schedule for Thursday, May 11 includes a plenary session from 8:45 to 10:00 a.m. titled "How the Judiciary Is Impacting IP Policy-From Setting Policy to Dealing With Policy."  The session will be moderated by Matt Larson, and speakers will include former U.S. District Judge Hochberg, former PTAB Judge Kamholz, and former International Trade Commission Chair Okun.  I'm told the panel will have a strong focus on damages and licensing trends.  There also are sessions on Wednesday, May 10 titled "Legal and Economic Considerations Associated with Litigating at the ITC," and "The Art and Science of IP Valuation:  Methods, Data, and Technology for Market-Based Valution," Here is a link to the event's webpage.

2.  The Liege Competition and Innovation Institute will be hosting a conference titled "Innovation, Research and Competition in the EU:  The Future of Open and Collaborative Standard Setting" in Brussels on May 29-30.  Here is a link to the conference program, and here is a link for anyone interested in registering.  There will be sessions on FRAND, SEP licensing, patent litigation, holdup, holdout, etc.  Should be an interesting event.

3.  On Wednesday, June 7, I will be one of several speakers, along with Niklas Östman and Professor Martin Senftleben,  at the IPR Summer School in Helsinki, Finland, for an afternoon session titled "Compensation for IP Infringements."  I'll be speaking on "IP Remedies and Compensation-Recent Developments in the U.S."  Here is a link to the IPR Summer School's webpage, and here is a link to the page devoted to our session.  

Thursday, April 20, 2017

IP Chat Channel Webinar on Settlements as Comparables

Sorry for the short notice, since this event takes place later today, but the IPO IP Chat Channel will be presenting a webinar titled Settlement Agreements as Comparables:  New Comprehensive Analysis from the Federal Circuit, today at 2 pm Eastern time.  Here is a link, for those who might be interested in registering, and here is a description: 
Last month, Federal Circuit Judge Taranto, writing for a unanimous panel, laid out a complete road map to the admissibility of settlements in patent infringement litigation. That detailed opinion, Prism v. Sprint, is likely to put an end to the seven-year unsettled period that has followed the Federal Circuit decision in ResONet v.  Lansa. That 2010 opinion upset case law reaching back to 1889 that rarely deemed settlement agreements admissible in patent infringement litigation. ResONet asserted, to the contrary, that “the most reliable license in this record arose out of litigation.” Since then, district courts have tended to follow their own inclinations on the issue, with some assessing the admissibility of settlements in a fact-dependent case-by-case analysis, and others remaining more inclined to exclude settlements.  
In Prism, the Federal Circuit lays out a detailed scheme for the balancing act required under Rule 403, whereby a district court “may exclude relevant evidence if its probative value is substantially outweighed” by such dangers as unfair prejudice and misleading the jury. The opinion addresses such issues as:
What evidence is needed to show value of the asserted patents when the old settlement covers more than the patents in the present controversy;
How the timing of the settlement of an earlier dispute affects its probative value for a settlement late in trial, meaning the record was more fully developed; and
How settlements are not that different from licenses, because “the potential for litigation…must loom over patent licenses generally, including those signed without any suit ever being filed.”
Our panel, which includes two litigators and a damages expert, will discuss how to best leverage Prism to keep settlements both in and out of evidence. They will also analyze Sprint’s recent filing of a petition for rehearing or rehearing en banc and discuss possible outcomes.
Speakers:
  • Stephen Holzen, Stout Risius Ross 
  • Samuel Walling, Robins Kaplan LLP
  • Karen Weil, Knobbe, Martens, Olson & Bear LLP

Wednesday, April 19, 2017

Federal Circuit Remands Damages Award to Consider Patent Marking Issue

The opinion, Rembrandt Wireless Technologies, LP v. Samsung Electronics Co., was handed down on Monday of this week and is available here.  The two patents in suit "relate to 'a system and method of communication in which multiple modulation methods are used to facilitate communication among a plurality of modems in a network, which have heretofore been incompatible'" (p.3).  A jury found both patents valid and infringed, and on these issues the Federal Circuit affirms.  As for damages, the court also rejects Samsung's challenges to Rembrandt's expert's methodology, stating as follows:
. . . In an effort to determine the incremental value associated with implementing the infringing EDR [Bluetooth enhanced data rate] functionality, Mr. Weinstein compared the prices of two Bluetooth chips Samsung purchased from Texas Instruments—one with EDR functionality and the other without. After calculating the price premium Samsung had paid to procure the EDR chips as compared to the non-EDR chips, Mr. Weinstein concluded that the reasonable royalty rate would be between 5 and 11 cents per infringing unit, resulting in a total damages range of $14.5–$31.9 million.
We see no reversible error in the district court’s denial of Samsung’s motion to exclude Mr. Weinstein’s testimony. Samsung complains that the time periods that Mr. Weinstein chose to compare the two sets of chips were ones where Samsung purchased many more non-EDR chips than EDR chips, making the relative cost of EDR chips artificially high due to mismatched economies of scale. Rembrandt responds that Mr. Weinstein testified in his deposition that the seller of the chips, Texas Instruments, suggested to him that the data from these time periods were most suitable for his purposes. Rembrandt also explains that Mr. Weinstein aptly focused on the earliest periods where significant sales of infringing chips were made because the added value of technology fades with time. We find these explanations plausible, as they show that Mr. Weinstein’s royalty calculations were properly “based on the incremental value that the patented invention adds to the end product.” Ericsson, Inc. v. DLink Sys., Inc., 773 F.3d 1201, 1226 (Fed. Cir. 2014). We also note that while Mr. Weinstein compared the chips for a time period when the non-EDR and EDR chip price differential was on the high end of the spectrum, Samsung was free to cross-examine Mr. Weinstein on this issue and the jury’s award of $15.7 million fell within the low end of Mr. Weinstein’s $14.5–$31.9 million suggested damages range.
Samsung also takes issue with Mr. Weinstein’s attribution of the chips’ cost differential solely to the addition of the EDR functionality, which it asserts was not the only technological difference between the two sets of chips. Rembrandt responds that all of the technical expert testimony in the case shows that the major difference between the chips was the incorporation of EDR and that Samsung could have cross-examined Rembrandt’s damages expert on this point, but did not. Regardless, Samsung’s criticism of Mr. Weinstein’s selected benchmark “goes to evidentiary weight, not [its] admissibility.” . . (pp. 15-16).
The court also rejects Samsung's challenge to Mr. Weinstein's use, in forming his opinion as to the appropriate royalty rate, of two licenses that Rembrandt entered into in settlement of litigation, noting that "our cases allow relevant settlement agreements to be considered in determining a reasonable royalty rate" (pp. 16-17).

Nevertheless, the court remands for a recalculation of the damages award due to possibility that some of the award may be precluded under U.S. Patent Act section 287(a), the patent marking statute.  The statute reads as follows:
Patentees, and persons making, offering for sale, or selling within the United States any patented article for or under them, or importing any patented article into the United States, may give notice to the public that the same is patented, either by fixing thereon the word “patent” or the abbreviation “pat.”, together with the number of the patent, or by fixing thereon the word “patent” or the abbreviation “pat.” together with an address of a posting on the Internet, accessible to the public without charge for accessing the address, that associates the patented article with the number of the patent, or when, from the character of the article, this cannot be done, by fixing to it, or to the package wherein one or more of them is contained, a label containing a like notice.In the event of failure so to mark, no damages shall be recovered by the patentee in any action for infringement, except on proof that the infringer was notified of the infringement and continued to infringe thereafter, in which event damages may be recovered only for infringement occurring after such notice. Filing of an action for infringement shall constitute such notice.
Generally speaking, then, a patent owner can recover damages for patent infringement that occurs only after the owner has put the defendant on either actual notice (e.g., by sending an appropriately worded cease-and-desist letter, or serving a complaint for infringement) or constructive notice (by complying with the patent marking statute). By encouraging patent owners to provide public notice of the patent-protected status of their products, the statute is said to help both implementers and the general public to identify which products are subject to patent protection. The rule has many complications and exceptions, however, and for what it's worth my view is that we'd be better off if we didn't condition the availability of damages on marking.  (For previous discussion on this blog, see, e.g., here, which also links to some slides I've used in my Advanced Patents class to work through the various complexities that can arise in specific cases.)  

Anyway, in this case,  Samsung alleges that, prior to the initiation of litigation  Rembrandt's licensee Zhone sold products embodying claim 40 of one of the patents in suit, and Rembrandt's complaint  initially accused Samsung of infringing that claim.  Eight days later, however, Rembrandt withdrew that specific allegation and filed a disclaimer of claim 40 with the USPTO; the matter eventually proceeded to trial on other claims.  As the Federal Circuit explains:    
The district court denied Samsung’s motion to bar Rembrandt’s recovery of pre-notice damages based on Rembrandt’s disclaimer of claim 40. The court accepted Rembrandt’s argument that any prior obligation to mark products embodying claim 40 vanished once it disclaimed claim 40. . . .
In denying Samsung’s motion, the district court relied on the proposition that a disclaimed patent claim is treated as if it “had never existed in the patent,” Guinn v. Kopf, 96 F.3d 1419, 1422 (Fed. Cir. 1996) (citing Altoona Publix Theatres, Inc. v. Am. Tri–Ergon Corp., 294 U.S. 477, 492 (1935)), and allowed Rembrandt’s disclaimer to retroactively excuse its failure to mark. But while we have held that a disclaimer relinquishes the rights of the patent owner, we have never held that the patent owner’s disclaimer relinquishes the rights of the public. Indeed, our precedent and that of other courts have not readily extended the effects of disclaimer to situations where others besides the patentee have an interest that relates to the relinquished claims. . . . As our marking cases make clear, the marking statute’s focus is not only the rights of the patentee, but the rights of the public. . . . Considering these rights held by the public, we hold that disclaimer cannot serve to retroactively dissolve the § 287(a) marking requirement for a patentee to collect pre-notice damages. . . 
Separate from its disclaimer argument, Rembrandt also argued to the district court that the marking statute should attach on a claim-by-claim, rather than on a patent-by-patent, basis. Applying Rembrandt’s claim-by-claim approach in this case, for example, would permit Rembrandt to recover pre-notice damages for Samsung’s infringement of claims other than claim 40, which is the only claim that Samsung alleges the unmarked Zhone product embodied. . . .
The patent-by-patent versus claim-by-claim marking dispute between the parties raises a novel legal issue not squarely addressed by our past decisions. . . . We therefore remand to the district court to address in the first instance whether the patent marking statute should attach on a patent-by-patent or claim-by-claim basis (pp. 18-23).
I'm inclined to think that, on the authority of Crown Packaging Tech., Inc. v. Rexam Beverage Can Co., 559 F.3d 1308,1316-17 (Fed. Cir. 2009), Rembrandt should be able to recover damages for infringing conduct preceding the filing of the complaint.  According to Crown Packaging, if I sue for the infringement of only the process claims in a patent that contains both process and product claims, my failure to mark doesn't affect my ability to recover damages for all infringing acts within the statute of limitations (because the marking statute doesn't apply to process claims).  At the same time, however, there are district court decisions holding that if I asserted both the process and product claims, my failure to mark would mean that I couldn't get damages for any infringing conduct occurring prior to having put the patent owner on notice--even if I lost in the product claims!  (See my slides, referenced above, for citations.)  All in all, though, to my mind this demonstrates the formalism that pervades this body of law, and in my view provides yet further support for my view that marking rules should be abolished.

Further discussion of this case may be found on Patently-O. 

Monday, April 17, 2017

Some Thoughts on Unwired Planet v. Huawei



A few commentators have already published their thoughts on Unwired Planet v. Huawei, some of which I mentioned in previous blog posts (here and here).  (Jorge Contreras's is the most thorough I've seen so far.)  Another recent commentary, available on the Kluwer Patent Blog, is available here.  And there's sure to be a ton of additional commentary on this case in the months to come.  What follows are some of my initial thoughts on the case.  This is not intended to be comprehensive, though; and given the complexity and length of the of the opinion, it's possible I've erred somewhere in describing it, so if anyone finds any errors, please let me know.

1.  Early in the opinion, Mr. Justice Birss describes the overall purpose of a FRAND commitment as “to secure a proper reward for innovation whilst avoiding 'hold up', i.e. the ability of the owner of a SEP to hold implementers to ransom by reason of the incorporation of the invention into the standard by declining to grant them a licence at all or only granting one on unfair, unreasonable or discriminatory terms.  The idea is to strike a fair balance” (para. 92).  In addition, Mr. Justice Birss devotes a fair amount of attention to “holdout” or “reverse holdup,” and states that “[i]n order to arrive at fair, reasonable and non-discriminatory licence terms the patentee must not engage in hold up nor must the licensee engage in hold out” (para. 96).  He then goes on to say:

97.  When talking about FRAND economists refer to the idea that the FRAND rate represents the rate which would be agreed “ex ante”, in other words before the patented invention is adopted into the standard.  This is another way of saying that the rate seeks to eliminate hold up and to that extent is uncontroversial.  In the concurrent evidence session Prof Neven explained that he did not regard FRAND as a scheme which meant the patentee could not appropriate some of the value that is associated with the inclusion of his technology into the standard and the value of the products that are using those standards.  Dr Niels agreed with that.  Neither side disputed this and to the extent it is a matter for the economists, I accept their evidence.  The economists’ opinions show that it is not necessary to deprive the patentee of its fair share of those two sources of value in order to eliminate hold up and fulfil the purpose of FRAND.  To that extent I may be differing from certain parts of the decisions in Innovatio IP Ventures and Ericsson v D-Link in the US but it is not necessary to look into that any further since neither side before me took the point.

This is interesting, in that Norman Siebrasse and I also have argued that the SEP owner should recover some portion of the value of standardization, insofar as standardization is part of what benefits the user of the patented invention.  (See our paper The Value of the Standard, here.)  As Mr. Justice Birss also notes, however, this position at present seems contrary to the views of the U.S. courts that have weighed in on the matter.  Nevertheless, the resolution of these theoretical issues ultimately don’t appear to be all that relevant to Mr. Justice Birss’s methodology, as described below. 
     
2.  At some point during the proceedings Mr. Justice Birss employed a concurrent evidence or “hot-tubbing” procedure to “address certain general questions which I would otherwise have asked the experts during their oral evidence” (para. 58).  I’ve mentioned the hot-tubbing procedure, which judges in Australia, the U.K., and Canada sometimes use to evaluate expert testimony, here and here.  I’d like to see more experimentation with this procedure generally, though it might be difficult to integrate it into traditional U.S. practice.

3.  Mr. Justice Birss discusses at length the evidence on whether FRAND commitments constitute contracts for the benefit of third parties under French law, before concluding:

146.     Standing back I recognise that the enforceability of the FRAND undertaking in French law is not a clear cut question.  Prof Libchaber stated that there remains widespread uncertainty about the issue of whether the doctrine of “stipulation pour autrui” can be applied to ETSI.  In my judgment it can be applied in that way and should be.  The reason it should be applied is because the FRAND undertaking is an important aspect of technology standardisation.  Holders of essential IPR are not compelled to give a FRAND undertaking but it serves the public interest that they make it clear whether or not they are doing so, and it serves the public interest that if they do, the undertaking is public, irrevocable and enforceable.  To avoid hold up, implementers need to know that they can hold SEP owners to a FRAND obligation.

As Jorge Contreras notes in his paper, in the U.S. decisions to date we haven’t seen this sort of thoroughness in trying to understand non-U.S. law on this issue.

4.  Mr. Justice Birss also considers whether there is one set of terms that are FRAND, or whether FRAND is a range, before concluding that (at least for purposes of litigation) only one set of terms ultimately can be considered FRAND (paras. 148, 156).  I’m less sure about this myself—and some of the European commentators, if I’m remembering what I’ve read correctly, seem to take precisely the opposite view, namely that FRAND is a range—though I recognize that if and when courts have to award a FRAND or reasonable royalty, they have to give a number, not just a range; and that this can give rise to complications, if both parties have made FRAND offers/ counteroffers but the judge ultimately has to make an award (paras. 149, 150, 158-61).  As a result, Mr. Justice Birss concludes:

166.     A patentee who refuses to accept those terms would be in breach of its FRAND undertaking.  Even if a court cannot go as far as directly enforcing the FRAND undertaking by compelling a patentee to make an offer in those terms (see the section on French law), I think an English court would at least refuse to grant a patentee an injunction if it refused to accept FRAND terms.  That would be a proper exercise of the court’s equitable jurisdiction to grant or refuse an injunction.

167.     A defendant who had already been found to infringe a valid patent cannot be compelled to accept an offer of a licence but a defendant with no licence, who had refused to accept terms on offer which had been found to be FRAND, would not be entitled to the protection from injunctions provided for by the patentee’s FRAND undertaking.  An injunction would follow and to grant it would be a proper exercise of the court’s equitable jurisdiction.  The only coercion in that case would be to enter into a licence on FRAND terms.  It would apply to both sides with equal force.

Following this conclusion, Mr. Justice Birss reasons that an English court can set a FRAND royalty, which is “not different conceptually from assessing what a reasonable royalty would be in a patent damages inquiry albeit the particular factors applicable in setting a FRAND royalty for a licence to be FRAND and their application may differ from assessing damages” (para. 169).  Thus, “[a]sking what a willing licensor and a willing licensee in the relevant circumstances acting without holding out or holding up would agree upon is likely to help decide” what a fair, reasonable, and nondiscriminatory royalty would be (para. 170).  This is an interesting development as well; some of the German case law, if I understand correctly, appears to take the position that a FRAND royalty is less than a reasonable royalty that would be awarded for the infringement of a patent.  I hope to return to this particular issue in a future post.  

4.  To aid in this inquiry, Mr. Justice Birss’s principal source consists of comparables comprising other licenses that Ericsson (the original owner of these patents) had granted.  To summarize, using the comparable licenses Mr. Justice Birss determines the rate E for the Ericsson portfolio, and then he estimates the relative value R of Unwired Planet’s portfolio to Ericsson's.  “R” is determined based on the number of “Relevant SEPs” (defined below) belonging to Unwired Planet, which involves patent counting.  Then, as a check, Mr. Justice Birss uses a “top-down” approach that requires an estimate of the implementer’s aggregate royalty burden (T), and the portion of that burden that is due to Unwired Planet (S).  (For what it’s worth, in my view Mr. Justice Birss’s top-down methodology is an improvement over Judge Holderman’s in Innovatio, because unlike Judge Holderman Mr. Justice Birss uses the revenue (not the profit margin) from the royalty base as his starting point.  For critique of some aspects of Judge Holderman’s approach, see The Value of the Standard, noted above.)  I’ll let Mr. Justice Birss explain the details below, but let me say here that I’m inclined to think that his methodology makes sense as a practical matter.  To be sure, I've argued before that, from a purely economic perspective, a FRAND or reasonable royalty ideally would be the share, as it would have been negotiated by the parties ex ante, of the incremental benefit of the invention to the user (that is, the benefit the user derived from the use of the invention over the next-best available noninfringing alternative).  If we have no idea what share they would have negotiated, I'd award 50%; and given the theoretical problems with the use of comparables as flagged by Masur and Hovenkamp, like Durie & Lemley I'd resort to comparables as more of a check than as a primary source.  All of that very logical (to me, at least) analysis nevertheless may have to go by the wayside when we're dealing with complex products such as smartphones which may incorporate thousands of patents, because it's just not possible or practical to isolate the value of a single patent or handful of patents in the manner described above.  In such cases, therefore, judges likely have no choice but to rely on comparables, if they are available, or on some sort of "top-down" approach.  Anyway, here are some of the relevant passages where Mr. Justice Birss explains his approach:   

182. There was ample evidence before me that . . . parties negotiating SEP licences in fact use methods which are based on patent counting.  That is evidence which supports a finding that a FRAND approach to assessing a royalty rate is to engage in some kind of patent counting.  Indeed when one thinks about it some sort of patent counting is the only practical approach at least for a portfolio of any size.  Trying to evaluate the importance of individual inventions becomes disproportionate very quickly.  

183.  It may be that other technology standards are different but I am not surprised that patent counting is the approach taken for GSM, UMTS and LTE telecommunications standards.  Each standard defines a system with a large number of different parts all of which have to interact with each other.  The interactions and interdependencies are complicated.  To make a coherent system which works at all, let alone one which delivers the performance demanded of these systems, is difficult and demands insight and creativity on the part of the engineers involved.  It is unsurprising that many inventions (and therefore many patents and SEPs) will be involved.  Short of the disproportionate task of evaluating every single patent thoroughly in order to compare each one with all the others, one can only ever hope to analyse SEPs in broad categories and it is not meaningful to attempt to weigh the value of individual patents within these categories against one another.  

184.  I suppose in some cases it may be possible to identify a patent as an exceptional sort of keystone invention underpinning the entire technical approach on which a standard is based but that is not this case.  There was unchallenged evidence that Unwired Planet’s patents made an “average” contribution to the standards.  I am satisfied that none of the Unwired Planet patents are in the exceptional keystone category. . . .

186.     The patent counting approach works in the following way.  Starting from a portfolio of declared SEPs the first task is to derive a number representing the Relevant SEPs.  “Relevant SEPs” is my term, coined after the trial had finished and intended to avoid language used in the case which can be confusing such as “truly essential patents” or “deemed”.  Both sides’ approaches require making an assessment of the Relevant SEPs somehow.  The parties do not agree how it should be done but one way or another a number is produced.  Armed with that information it is possible to scale one company’s rates relative to another to derive the factor R or to find the share of the total and derive S. . . .

197.     In order to determine what the values E, R and S are in this case two tasks need to be performed.  To determine S (Unwired Planet’s share of the total) and R (the relative value of Unwired Planet’s portfolio to Ericsson’s) it is necessary to count Relevant SEPs.   To determine E (the rate for Ericsson’s portfolio) it is necessary to consider the comparable licences.  At the same time the Unwired Planet comparables and other evidence on rates can be addressed.

Mr. Justice Birss then goes through an exhaustive analysis (some of it redacted) of the proposed comparables; the parties’ competing estimates of R, S, and T; and appropriate adjustments for overdeclaration.  (As Jorge Contreras notes, Mr. Justice Birss was fortunate to have the Ericsson licenses to consider, just as Judge Robart was fortunate to have pool rates to consider in Microsoft v. Motorola).  

5.  Mr. Justice Birss also concludes that the “nondiscriminatory” aspect of FRAND doesn’t mean nondiscriminatory in a strict (“hard-edged”) sense—that is, a SEP owner can charge somewhat different rates to different users, as long as in doing so the owner isn’t distorting competition in a way that would run afoul of competition law.  I think this makes sense from an economic perspective, though as Professor Contreras points out whether this is what SSO members expect when they enter into FRAND commitments is another matter (to which I don’t know the answer).

6.  Mr. Justice Birss winds up awarding a worldwide license, on the ground that this is what willing parties generally would do; it would be too burdensome to expect a SEP owner and an implementer to negotiate country-by-country royalties.  (See, e.g., para. 543: “They would regard country by country licensing as madness.”)  He makes adjustments, however, for “major markets” and for “other markets” including China, where the rates would be lower.  The rates he derives are set out in tables found at paras. 586 and 591, and again at paras. 770 and 771.  I’m inclined to think the worldwide approach is a sensible one, though of course it implies that the first court to determine a FRAND rate for a given set of patents gets to call the shots for the rest of the world.

7.  On the competition law issues, Mr. Justice Birss concludes that the five steps set forth in the CJEU’s judgment in Huawei v. ZTE, for evaluating whether a SEP owner’s request for injunctive relief violates competition law, don’t have to be strictly complied with in the sense that the initial offer and the counteroffer don’t necessarily have to be FRAND, the initial offer doesn’t necessarily have to precede the filing of the complaint, and so on (contrary, I think, to the conclusion of some of the German courts).  (See Mr. Justice Birss’s summary of these points at para. 744.)  On the other hand, he finds that each SEP (at least in this case) defines its own market, and that Unwired Planet holds a dominant position in each such market.  Mr. Justice Birss also finds no violation of competition law based on tying or excessive pricing.  Finally, he will award an injunction (terms of which are not yet set) in the event that Huawei doesn’t agree to a license on the terms the judge has concluded are FRAND, which seems reasonable to me (though I wonder if Huawei can agree to this while reserving the right to appeal?).