Latest Views from the U.S. on FRAND Damages: TCL V. LM Ericsson
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Essential Patents and Licenses FRAND – From Standardization to the Calculation of Royalties Latest Views From the U.S. on FRAND Damages: TCL v. LM Ericsson APEB and LES France Allen & Overy, 52 avenue Hoche, 75008 Paris Kenneth R. Adamo* July 3, 2018 Kirkland & Ellis LLP 300 N. LaSalle Chicago, IL 60654 (312) 862-2671 Email: [email protected] *Member, Illinois, New York, Ohio and Texas Bars. The paper reflects only the present considerations and views of the author, which should not be attributed to Kirkland & Ellis LLP, or to any of his or its former or present clients. © 2018 Kenneth R. Adamo. All Rights Reserved. 54857382v3 Latest Views From the U.S. on SEP’s & FRAND Damages TCL Communications Technology Holdings v. Telefonaktienbolaget LM Ericsson, Civil Action No. SACV14-00341 JVS (ANx) (CD Cal. December 21, 2017) 1. Non-Discrimination KE 54857382v3 1 Latest Views From the U.S. on SEP’s & FRAND Damages TCL Communications Technology Holdings v. Telefonaktienbolaget LM Ericsson, Civil Action No. SACV14-00341 JVS (ANx) (CD Cal. December 21, 2017) Similarly situated licenses -- General consensus that FRAND “non-discrimination” commitment applies to treatment of “similarly situated” licensees -- Who is “similarly situated”? [market-definition] -- not all licensees -- all licensees in same general product category (smartphone vendors)? -- all licensees catering to a particular consumer base (low/medium/high-end)? KE 54857382v3 2 Latest Views From the U.S. on SEP’s & FRAND Damages TCL Communications Technology Holdings v. Telefonaktienbolaget LM Ericsson, Civil Action No. SACV14-00341 JVS (ANx) (CD Cal. December 21, 2017) TCL: Similarly situated analysis -- basis for comparison must be “all firms reasonably well-established in the world market” [for telecommunications products] -- excludes “local kings” — firms that sell most of their products in a single country (e.g., India’s Karbonn and China’s Coolpad) -- Apple, Samsung, Huawei, LG, HTC and ZTE are similar to TCL -- Ericcson claimed that Apple and Samsung are not similar, given greater market share and brand recognition -- Court disagreed: “the prohibition on discrimination would mean very little if the largest, most profitable firms could always be a category unto themselves simply because they were the largest and most profitable firms” KE 54857382v3 3 Latest Views From the U.S. on SEP’s & FRAND Damages TCL Communications Technology Holdings v. Telefonaktienbolaget LM Ericsson, Civil Action No. SACV14-00341 JVS (ANx) (CD Cal. December 21, 2017) Competitive harm In Unwired Planet v. Huawei (UK EWHC (Pat.) 2017), court held that, in order for non-discrimination covenant to be violated, there must be competitive harm, e.g., “impairing the development of standards”. TCL: harm to a competitor (TCL) is sufficient to find a violation of FRAND commitment -- antitrust/competition harm is not required. KE 54857382v3 4 Latest Views From the U.S. on SEP’s & FRAND Damages TCL Communications Technology Holdings v. Telefonaktienbolaget LM Ericsson, Civil Action No. SACV14-00341 JVS (ANx) (CD Cal. December 21, 2017) Comparison of offers Ericsson made two offers to TCL: 1. running royalty on handsets of approximately 1% for 2G, 3G and 4G 2. 0.8% - 1.0% for 2G, 1.2% for 3G and 1.5% for 4G with a $2.00 per unit floor and a $4.50 per unit cap Ericsson’s offers to TCL “are radically divergent from the rates which Ericsson agreed to accept from licensees similarly situated to TCL” -- proposed royalty “floor” called out as discriminatory KE 54857382v3 5 Latest Views From the U.S. on SEP’s & FRAND Damages TCL Communications Technology Holdings v. Telefonaktienbolaget LM Ericsson, Civil Action No. SACV14-00341 JVS (ANx) (CD Cal. December 21, 2017) 2. Royalty Determination KE 54857382v3 6 Latest Views From the U.S. on SEP’s & FRAND Damages TCL Communications Technology Holdings v. Telefonaktienbolaget LM Ericsson, Civil Action No. SACV14-00341 JVS (ANx) (CD Cal. December 21, 2017) Methods for calculating FRAND royalties • “Bottom-up” • More like a conventional reasonable royalty determination • Modified Georgia-Pacific factors • Value of asserted patents is determined • Value of patents to standard • Value of standard to accused product • Ex ante value of patented technology in comparison with alternatives • Comparables are used as check. KE 54857382v3 7 Latest Views From the U.S. on SEP’s & FRAND Damages TCL Communications Technology Holdings v. Telefonaktienbolaget LM Ericsson, Civil Action No. SACV14-00341 JVS (ANx) (CD Cal. December 21, 2017) Methods for calculating FRAND royalties (cont’d) • “Top-down” • Determine the “pot” from which aggregate royalties are to be drawn. • E.g., what % of what revenue base should go to pay aggregate royalties for use of the standard? • Estimate the number of patents within the pot. • Estimate the proportion of valid, infringed, functionally essential in fact. • Determine the percentage owned by the plaintiff. • Numeric proportionality (patent counting) or weighted value? KE 54857382v3 8 Latest Views From the U.S. on SEP’s & FRAND Damages TCL Communications Technology Holdings v. Telefonaktienbolaget LM Ericsson, Civil Action No. SACV14-00341 JVS (ANx) (CD Cal. December 21, 2017) TCL v. Ericsson • Price of end product = base. • Aggregate royalty burden = based on statements/admissions by industry participants, primarily Ericsson itself. • Expert testimony re number of SEPs, what percentage of them are functionally essential in fact, what percentage of these are owned by Ericsson. • Patent counting, rather than weighting, as per Putnam study. KE 54857382v3 9 Latest Views From the U.S. on SEP’s & FRAND Damages TCL Communications Technology Holdings v. Telefonaktienbolaget LM Ericsson, Civil Action No. SACV14-00341 JVS (ANx) (CD Cal. December 21, 2017) Key differences Unwired Planet TCL Comparable licenses - main basis for FRAND rate Top-down rate — main basis for FRAND, adjustments to reflect Top-down rate used as a check comparable licenses One FRAND rate (in any given set of circumstances No single rate that is necessarily FRAND Two (2) geographic rates based on number of patents held: Rates for three (3) regions: USA, Europe and ROW Major Markets and Other Markets (based on China rate) (based on China rate) ND aspect of FRAND - benchmark approach applied, Discrimination merely requires harm to individual entities, no breach if one licensee receives a lower rate not harm to competition Doesn’t directly deal with the question of value regarding Expired patents included in the total number of SEPs in a expired patents standard, but not in Ericsson’s share Single mode rates treated as applicable to multimode devices Multimode rates calculated (but top-down rates acknowledged to reflect multi- mode royalty burden) FRAND injunction (enforced only if a licence isn’t entered into) Final judgment in form of injunction imposing licence agreement KE 54857382v3 10 Latest Views From the U.S. on SEP’s & FRAND Damages TCL Communications Technology Holdings v. Telefonaktienbolaget LM Ericsson, Civil Action No. SACV14-00341 JVS (ANx) (CD Cal. December 21, 2017) TCL v. Ericsson (cont’d) • Contrary to Unwired Planet, court used comparables as a check. • Final 3G rates were a blend of top-down and comparables. KE 54857382v3 11 Latest Views From the U.S. on SEP’s & FRAND Damages TCL Communications Technology Holdings v. Telefonaktienbolaget LM Ericsson, Civil Action No. SACV14-00341 JVS (ANx) (CD Cal. December 21, 2017) TCL v. Ericsson (cont’d) Court's Final Rates 0.500% 0.450% 0.400% 0.350% 0.300% 0.250% 0.200% 0.150% 0.100% 0.050% 0.000% 2G 3G 4G Court's U.S. Rate 0.164% 0.300% 0.450% Court's Europe Rate 0.118% 0.264% Court's RoW Rate 0.090% 0.224% 0.314% KE 54857382v3 12.