Published: December 21, 2017
On December 21, 2017, Judge James Selna of the Central District of California issued a highly anticipated decision in the TCL Communications v. Ericsson case, which addresses the ambiguity surrounding the calculation of fair, reasonable, and non-discriminatory (FRAND) royalty rates for standard-essential patents (SEPs). Despite several rulings in international courts and in the Eastern District of Texas, Judge Selna issued a precedent-setting decision that implements a “top-down” approach to calculating royalty rates for SEPs in 2G, 3G, and 4G cellular technologies.
The case was brought after TCL Communications (TCL) sought to license a portfolio of telecommunications SEPs from Ericsson. The parties could not agree on terms beyond the expired 2G license agreement entered in 2007, sparking litigation that lasted from 2012 to 2015. In June 2015, the court granted TCL an anti-suit injunction motion, and TCL agreed to follow the court’s determination of FRAND terms on a global basis and enjoin the foreign litigation. The questions before the court became (1) whether Ericsson met its commitment to act on FRAND terms when negotiating the SEPs at issue; (2) whether Ericsson’s licensing offers were FRAND-compliant; and (3) if the answer to (2) is negative, what should be the FRAND rates for the SEPs at issue.
With regard to question (1), the Central District of California court held that Ericsson’s conduct during licensing negotiations did not violate FRAND obligations to negotiate in good faith. This was evidenced by TCL’s initially favorable reaction to one of Ericsson’s offers. However, the court declined to further decide whether every offer and counteroffer during the course of negotiations had to be FRAND-compliant, because the answer held no bearing on equitable or monetary relief in the case at hand.
To determine question (2), the court first answered question (3) and applied a “top- down” analysis of Ericsson’s final offers before litigation (Offers A and B). The court’s top-down analysis valued Ericsson’s portfolio of SEPs by first determining a fair and reasonable aggregate royalty for all patents essential to the standard. That was then apportioned to the SEPs based on the relative value of their Ericsson portfolio against the value of all patents essential to the respective standard. Essentially, the court measured the number of Ericsson’s unexpired SEPs against the total number of SEPs for the standard in question. That figure was then multiplied by the regional strength ratio based on TCL’s sales in each region. Using the formula below, the court calculated Ericsson’s royalty rates, which varied to some degree due to the different figures reported from each company.
Ericsson’s Royalty Rate =
(Total Aggregate Royalty) (Number of unexpired SEPs owned by Licensor/Total Number of SEPs in the standard) (Regional Strength Ratio)
Despite the court’s favorable finding for question (1), the court used the figures from question (3) to determine that Ericsson’s offers to TCL were discriminatory and inconsistent with its FRAND commitment. Applying an “unpacking formula,” the court identified firms that have similar geographic scope, license requests, and sales volume to TCL: Apple, Samsung, LG, HTC, Huawei, and ZTE. Based on the portions of TCL’s methodology accepted by the court, the rates which Ericsson accepted from these companies were found to be “radically divergent” from Offers A and B. The court reaffirmed that TCL was entitled to a declaration of the FRAND rates set forth in its decision.
The court rejected the approach, advocated for by Ericsson. The ex-Standard approach determines the value of SEPs in isolation from any additional value they may gain from incorporation into a standard. For example, if Offer A and B were less than the ex-Standard figure, then the offers would be “fair and reasonable,” according to Ericsson. Judge Selna expressed disagreement with the ex-Standard’s underlying methodology and subsequent figures, citing conflation and subsequent misrepresentation between the patents Ericsson owned and those actually relevant to the formula.
To read the complete decision from the Central District of California court, please click here.