A patent holder that prevails in a patent infringement suit is entitled to either lost profits or a reasonable royalty. A reasonable royalty calculation often implicates the infringing product's revenues (the "royalty base").1 The smallest saleable patent-practicing unit ("SSPPU") is a legal doctrine that restricts the royalty base that a patent holder can use in its reasonable royalty calculation. Two recent cases may shape the application of this doctrine in the patent infringement context and the SEP licensing context. Both patent holders and patent-practicing organizations should take note of and monitor developments.
Federal courts have recognized that patent holders are usually not entitled to the total revenues associated with a patent-practicing end product.2 By extension, they are wary of patent holders' attempts to use total revenues as the royalty base, even if the patent holder applies a discount (or "royalty rate") to adjust for the value of the patent. Such an approach can confuse juries and lead to outsized royalty awards.3 Therefore, in many instances, courts require patent holders to prove reasonable royalties using the revenue associated with a patent-practicing sub-component of the end product—e.g., the SSPPU or an even smaller sub-component.
The Federal Circuit's approach to SSPPU appears to have shifted in the last few years. In VirnetX, Inc. v. Cisco Sys., the Federal Circuit found that where the SSPPU is itself a multi-component product, the patent holder must reduce the royalty base beyond the SSPPU.4 However, in Exmark Mfg. Co. v. Briggs & Stratton Power Prods. Grp, LLC, the Federal Circuit allowed the patent holder to use an infringing lawnmower's total revenues as the royalty base.5 The Exmark court explained that the total revenue approach was appropriate because the lawnmower had no unpatented or non-fringing feature.6
MLC Intellectual Property, LLC v. Micron Technology, Inc.
MLC Intellectual Property is now before the Federal Circuit. It raises whether a patent holder must use a royalty base smaller than the SSPPU when the SSPPU in question contains features that do not infringe the patent. The case centers on MLC's patent related to a "multi-level memory device," allowing memory cells to store information permanently in a format other than the traditional 0 or 1 binary.7 The parties agreed that a "bare die" within the infringing end product served as the SSPPU.8 However, before the district court, Micron moved to exclude MLC's expert witness report because it used the bare die as the royalty base.9 Micron argued that although thebare die included a multi-level memory feature, it also included "numerous non-infringing features" that improved the multi-level memory's functionality and value.10 MLC's expert was therefore required to use a royalty base smaller than the bare die SSPPU.11 The district court accepted this argument.12
On appeal, MLC argued that its expert was not required to reduce further or apportion the royalty base because 1) apportionment beyond the SSPPU is only required where the SSPPU has identifiable sub-components (citing VirnetX); and 2) the bare die SSPPU had "no non-infringing uses" since the non-patented features had to be used in conjunction with the patented multi-level memory feature (citing Exmark).13 Micron has reiterated its position that a patent holder must apportion the royalty base whenever the SSPPU has non-infringing features (also citing VirnetX).14 The Federal Circuit has scheduled oral argument for December 10, 2020.
The Federal Circuit's decision in the case may have far-reaching implications for how royalties are calculated in the technology sector. As noted in an amicus brief filed by a number of technology giants, previously independent components are increasingly incorporated into a single end product.15 A rule requiring apportionment of the royalty base beyond the SSPPU acknowledges this trend and protects end product manufacturers from large royalty awards. However, an onerous apportionment requirement may effectively prevent patent holders from proving any royalties at all.
HTC, Corp. v. Telefonaktiebolaget LM Ericsson
HTC, Corp. addresses the intersection of SEP FRAND requirements and SSPPU. Ericsson is the holder of certain SEPs declared essential to 2G, 3G, and 4G standards.16 Under its agreement with the standard-setting organization, Ericsson must license these SEPs on FRAND terms.17 After licensing negotiations between HTC and Ericsson broke down, HTC claimed that Ericsson breached its FRAND obligation by demanding excessive royalties.18
At trial, Ericsson argued that its royalty demands were not excessive and offered expert testimony on the proper royalty that used cell phone (end product) revenue as the royalty base.19 By contrast, HTC used a royalty base tied to a baseband processor (the claimed SSPPU) to argue that Ericsson'sroyalty demands were too high.20 The jury ultimately found that Ericsson's royalty demands had not breached its FRAND obligation.21
Taking into account that some of the appellate briefs are confidential, it is apparent that the ultimate issue is whether a jury should receive instructions on SSPPU when it considers the parties' compliance with FRAND obligations. The U.S. Patent and Trademark Office filed an amicus brief in support of Ericsson and advocated for flexibility regarding how parties may prove compliance with FRAND.22 The Fifth Court held an oral argument on May 6, 2020. The arguments from Ericsson emphasized that the SSPPU doctrine comes from the patent damages context. It would be highly novel to give SSPPU instructions in what is essentially a contract dispute.23
The intersection between SEP FRAND requirements and SSPPU has become particularly contentious in the last few years. Like HTC, other SEP licensees have complained that patent holders are calculating royalties based on end product revenues—and demanding large royalties for SEP licenses—instead of using an approach like SSPPU that uses the revenue of patent-practicing sub-components as the starting point. Disputes between SEP patent holders and licensees have resulted in several recent antitrust suits.24 A decision by the Fifth Circuit may shed light on what constitutes a FRAND compliant royalty rate and whether parties should calculate FRAND rates using SSPPU.
1 See 35 U.S.C. § 284; Asetek Danmark A/S v. CMI USA Inc., 852 F.3d 1352, 1362 (Fed. Cir. 2017).
2 See, e.g., Lucent Techs., Inc. v. Gateway, Inc., 580 F.3d 1301, 1336 (Fed. Cir. 2009).
3 See LaserDynamics, Inc. v. Quanta Comput., Inc., 694 F.3d 51, 68 (Fed. Cir. 2012).
4 VirnetX, Inc. v. Cisco Sys., 767 F.3d 1308, 1327 (Fed. Cir. 2014).
5 Exmark Mfg. Co. v. Briggs & Stratton Power Prods. Grp, LLC, 879 F.3d 1332, 1347–49 (Fed. Cir. 2018).
6 Id. at 1349.
7 MLC Intellectual Prop., LLC v. Micron Tech., Inc., No. 14-cv-03657-SI, 2016 U.S. Dist. LEXIS 153587, at *2-3 (N.D. Cal. Nov. 4, 2016).
8 MLC Intellectual Prop., LLC v. Micron Tech., Inc., No. 14-cv-03657-SI, 2019 U.S. Dist. LEXIS 116634, at *3 n.1 (N.D. Cal. Jul. 12, 2019).
9 Id. at *3-5.
10 Id. at *5.
12 Id. at *11-12.
13 Appellant Opening Brief at 48-52, 57, MLC Intellectual Prop., LLC v. Micron Tech., Inc., No. 2020-1424 (Fed. Cir. Mar. 10, 2020).
14 Appellee Responsive Brief at 25-26, MLC Intellectual Prop., LLC v. Micron Tech., Inc., No. 2020-1424 (Fed. Cir. May 26, 2020).
15 Brief for Amici Curiae Intel Corporation et al. at 23, MLC Intellectual Prop., LLC v. Micron Tech., Inc., No. 2020-1424 (Fed. Cir. June 2, 2020).
16 HTC Corp. v. Telefonaktiebolaget LM Ericsson, 407 F. Supp. 3d 631, 634 (E.D. Tex. 2019).
17 Id. at 636.
18 Id. at 635, 637.
19 Id. at 637.
22 Brief of the United States of America as Amicus Curiae at 17-23, HTC Corp. v. Telefonaktiebolaget LM Ericsson, No. 19-40566 (5th Cir. Oct. 30, 2019.).
23Oral Argument at 38:08-40:45, HTC Corp. v. Telefonaktiebolaget LM Ericsson, No. 19-40566 (5th Cir. May 6, 2020).
24 See, e.g., FTC v. Qualcomm Inc., 969 F.3d 974 (9th Cir. 2020); Cont'l Auto. Sys. v. Avanci, Civil Action No. 3:19-cv-02933-M, 2020 U.S. Dist. LEXIS 173799 (N.D. Tex. Sept. 10, 2020).
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