Thoughts on the TCL v. Ericsson FRAND Decision

As noted last week, just before Christmas U.S. District Judge James Selna released the public redacted version of his memorandum of findings of fact and conclusions of law in TCL Communication Technology Holdings, Ltd. v. Telefonaktiebolaget LM Ericsson, Case No. SACV 14-341 JVS (DFMx) (available in three parts:  part 1, part 2, and part 3).  Professor Jorge Contreras has already published a thorough post on the decision on Patently-O, and Richard Vary of Bird & Bird recently published an analysis as well (here).  I don't see much point in my repeating what they've already said, but I will note a few things that made a particular impression on me.

First, this particular matter was litigated as a declaratory judgment/breach of contract matter brought by the implementer, TCL, so in that sense it's a little like Microsoft v. Motorola.  Presumably the procedural posture of the case means that the royalty awarded implicitly includes a discount based on the probability of invalidity--unlike in a patent infringement case litigated to judgment, where the damages are supposed to be based on the bargain the parties would have agreed to knowing the patents in suit to be valid and infringed (for discussion, see, e.g., here).

Second, as Professor Contreras notes, consistent with statements the Federal Circuit has made in other cases Judge Selna attempted to determine a royalty that does not reflect any of the value of standardization itself (p.108).  This is contrary to the view expressed by Mr. Justice Birss in the English Unwired Planet case (and to some arguments that Norman Siebrasse and I have made elsewhere), though perhaps as a practical matter it's a distinction without much of a difference in cases like these.  Also contrary to Mr. Justice Birss, Judge Selna concludes that there is no one, single FRAND rate (though he does so in the context of his discussion of nondiscrimination, discussed below), which I think probably is the more sensible view.  Mr. Justice Birss's views on the latter matter have been critiqued, see, e.g., sources noted here. 

Third, in applying a top-down methodology, Judge Selna uses the price of the end product as the appropriate base, which I think is probably sensible here as well--though, as Professor Contreras notes, this choice might have been problematic had TCL not agreed to it, given the Federal Circuit's preference in some though not all cases for using the "smallest saleable patent practicing unit" or (SSPPU) as the royalty base.  (In any event, this is in my view an improvement over Judge Holderman's use of the profit margin on the sales of WiFi chips as the appropriate base in Innovatio IP Licensing, for reasons discussed here.)  As for determining the aggregate royalty burden, Judge Selna uses statements by industry participants, including Ericsson itself; relies on expert testimony to determine the number of SEPs relevant to the standards at issue (and tries to approximate which ones really are essential), as well as Ericsson's share of them; and then uses patent counting (numeric proportionality) to determine an appropriate rate for Ericsson's patents.  This last step means that, as in Unwired Planet, the same rate applies to all of the SEPs, rather than (as in Microsoft and Innovatio) having the judge try to calibrate the rates depending on their relative importance.  I have mixed feelings about this.  On the one hand, not all standard-essential patents are of equal importance, since (as Judge Selna himself notes at p.38) you could have a popular standard that omits certain features that consumers care less about.  Moreover, perhaps one could try to game the system by filing for multiple patents on variations on the same invention for no reason other than simply to increase one's share.  On the other hand, applying such a finely-grained methodology requires evidence of how skewed the distribution of value is and some basis for determining whether the patent owner's SEPs are of greater than average value.  That introduces an additional complication, if nothing else, and as Judge Selna notes early in the opinion "The search for precision and absolute certainty is a doomed undertaking" (p.14)--something I've referred to elsewhere as a tradeoff between accuracy and administrability.  (Judge Selna also rejects Ericsson's argument that the FRAND rate should reflect its contribution of ideas to the standard, see pp. 74-75, a concept I think Greg Sidak had floated in one of his early papers on FRAND.)

Fourth, as in Unwired Planet, Judge Selna calculates a set of global FRAND rates (here, breaking matters down into three regions, the U.S., Europe, and the rest of the world).  Ultimately he derives a blended rate based on the top-down methodology and comparables--though Judge Selna appears to view the top-down methodology as primary and comparables as the "check," which is the reverse of how Mr. Justice Birss applied the two methodologies in Unwired Planet.  Overall, I think that in complex products cases like these the use of a top-down approach has a lot going for it, at least when the evidence necessary for applying this methodology is available; though one can say the same about comparables, which (despite various theoretical pitfalls) at least are based on market evidence.  Using both, one as a check against the other, arguably is warranted when doing so is feasible and when the amount in question is substantial enough, as will often be true on FRAND cases.  It may be significant as well, however, that the two U.S. cases to date in which courts have applied a top-down methodology were both nonjury trials.  I'm inclined to think that it might be more difficult to get some of the relevant evidence in, if the case is tried before a jury, though I'm not sure I'm right about that; and of course that's not a consideration at all anywhere outside the U.S.   

Fifth, as Professor Contreras notes, Judge Selna concludes that the "nondiscrimination" aspect of a FRAND commitment means that a SEP owner must charge the same rate to all similarly situated parties, even if the failure to charge such a rate would harm only the other party to the lawsuit and not (as antitrust law would require) competition in the market as a whole.  This too is contrary to Mr. Justice Birss's views as expressed in Unwired Planet.  Purely as a matter of economics, I'm more inclined to agree with Mr. Justice Birss, on the ground that forbidding price discrimination might make consumers worse off by inducing the SEP owner to charge a single monopoly price that is higher than what some licensees (here, the bigger players like Apple and Samsung) otherwise would pay.  I realize, though, that there are economic arguments to the contrary as well, see, e.g., here.  And if we view FRAND as a contractual commitment of some sort, I suppose the answer ultimately comes down to how applicable contract law would view the nondiscrimination commitment; and in that light perhaps interpreting the nondiscrimination prong as requiring the SEP owner to charge similarly situated parties the same rate is the correct one.

Update:  Here is a post on the case by Rajiv Kr. Choudhry on SpicyIP.

Further Update:  David Long has published a thorough analysis of the case on the Essential Patents Blog.