Determination of FRAND royalty – TCL v. Ericsson LM

In my first posts in 2017, I had discussed various FRAND / SEP issues that were raised in the Qualcomm matters in Korea, and the US.  I end the year with a similar post on FRAND issues.  Together these decisions bring clarity to what is FRAND and hopefully will help the Indian brands as well in their litigation against SEP owners.  This post arises from the determination of FRAND rates in TCL Mobile Limited, and TCT Mobile v. Telefonaktiebolaget LM Ericsson, Case No. 8:14-CV-00341-JVS-DFM (C.D. Cal.). The decision can be downloaded from here.  I am particularly happy about the decision as it endorses the views of Indian brands in their litigation against LM Ericsson at the Delhi High Court.  See our posts on these litigations here, here and here.  I had briefly discussed the TCL matter when it was filed in 2014 here and here.

Ericsson is most likely to appeal this decision but I guess that the decision will be upheld.  This decision is extremely logical and thoughtful.  And is a much clearer FRAND royalty analysis than the Unwired Planet decision.   This is one of the few cases where a court has valued an entire portfolio of patents and also a first where a court deals with the non discriminatory prong of FRAND.  Both sides used multiple economic and technical experts and different studies done by Ernst & Young India and Concur IP Consulting.  Needless to state, the decision is very solid and leaves little ground on which anything significant might turn.  Judge Selna uses Ericsson’s own statements given over a period of years to come to a determination on certain aspects.  It will therefore be very hard for Ericsson to argue that the decision is wrong given that the decision is based on its own statements.

Before I summarize, I must state that there is nothing in the decision that negates the smallest saleable patent practicing unit (SSPPU) analysis / bottom up analysis.  This could be because both parties agreed to use total sales on which royalty could be paid out.

Procedural History

In March 2014, TCL sued LM Ericsson in California alleging Ericsson had breached its obligation to license patents essential to the 2G/3G/4G cellular standards on terms that are FRAND.  TCL was willing to take a license, but only on FRAND terms.

While the parties were negotiating a license (2011 – 2014), Ericsson sued TCL in multiple jurisdictions for patent infringement to force TCL to take a license on Ericsson’s terms.  Once TCL initiated the lawsuit in California, it filed a motion for antisuit injunction in 2015 and enjoined Ericsson from prosecuting its foreign lawsuits until after the FRAND issues were resolved in the California case.

In a decision on  the bench trial (held in February – March 2017), Judge Selna ruled that Ericsson’s offers to TCL were not FRAND.   These rates were unfair and unreasonable when compared to the number and value of Ericsson’s patents.  Further, the rates were discriminatory vis-a-vis TCL’s competitors.

During the litigation, Ericsson made two offers to TCL that Ericsson contended were both FRAND.  These offers are referred to as Option A and Option B in the decision.  Option A entailed, an annual payment of $30 Million for $3 Billion in sales with additional percentages to be paid if the sales exceeded $3B and a running royalty of :

2G/GSM/GPRS 0.8% of net selling value;
2G / EDGE 1.5% of net selling value;
3G 1.5% of net selling value;
4G 2% (50% discount for sales in China)

Option B entailed, an annual payment of $30 Million for $3 Billion in sales with additional percentages to be paid if the sales exceeded $3B and a running royalty of :

2G/GSM/GPRS 0.8% of net selling value;
2G / EDGE 1.0% of net selling value;
3G 1.2% of net selling value;
4G 1.5% of net selling value, with a $2.00 Floor and $4.50 ceiling

Judge Selna determined both Options were not FRAND.

Summary / Specific Findings on Rates and Ericsson’s Patents / The Top Down Approach

A.  Aggregate royalty rates:

Judge Selna uses Ericsson’s own statements about its royalty plans to rule that there is:                    Aggregate royalty rate for LTE/4G:  6%                                                                                                  Aggregate royalty rate for 3G:    5%                                                                                                        Aggregate royalty rate for 2G:     5%

These rates are not additive.  For example, if a 4G device is multimode – i.e. 4G+3G+2G, then the aggregate rate remains the same as 6%. See, Final Judgement at pages 23-25.

B.  Determination of total number of SEP families applicable to each standard:
4G: 1481 families
3G: 953 families
2G: 265 families

Of those families, Ericsson owns the following number of essential patents

4G: 70-111 families (4.7%-7.5%)
3G: 19-25 families (2%-2.5%)
2G: 12 families (3.3%)

C.  Rate for Ericsson’s proportional share of SEPs for 2G/3G/4G

Judge Selna recognizes that the portfolio value changes according to jurisdiction and factors it in the analysis for value of the portfolio.  Ericsson’s own statements that it held more patents in the United States than in any other jurisdiction also helped. See, Final Judgement at page 28.

4G: 0.45% for the US; 0.31% for rest of world;
3G: 0.3% for the US; 0.26% for Europe; 0.22% for rest of world; and
2G: 0.16% for US; 0.12% for.Europe; 0.09% for rest of world.

Note that these rates are much below the rate that Ericsson was asking for (1-1.5%).   Also, Ericsson was asking 4- 12 times the amounts that it ultimately got in the final decision.

Compare these rates to what the Indian brands are depositing in court under the various interim orders.  I will be posting on these separately.

Some statements from the judgement are extracted that have major ramifications on FRAND:

  • The acceptance of a patent into a standard is of great value to the patent holder, and enhances the monopoly which the patent holder has by virtue of his patent (Page 2).
  • Non-FRAND offers: None of Ericsson’s offers to TCL (over many years during negotiation and during trial) were FRAND (pages 4 / 3).
  • Stacking occurs when each individual SEP holder demands a royalty which when totaled exceeds the value of all the SEPs in the standard. Because the top down method starts with the maximum aggregate royalty burden and words down to a fair and reasonable rate, it avoids the possibility that licensees will be force[d] to pay an unreasonable amount in total. If the total aggregate rate is properly based upon the total value of the patents in the standard, it can also prevent hold-up because it prevents SEP owners from charging a premium for the value added by standardization (page 15).
  • Ericsson’s patent portfolio is certainly not as strong or as essential as it has claimed (page 43).
  • Qualcomm chips have “pass through rights” to Ericsson’s 3G patents (page 60).
  • Permitting Ericsson to define similarly situated very narrowly by picking and choosing criteria with no relation to its SEPs or the FRAND commitment would effectively allow Ericsson to read the non-discrimination prong out of the FRAND commitment (Page 56-57).
  • In formulating its IPR Policy ETSI was concerned, among other things, with addressing the problem of ‘hold up’. Hold up occurs when a patent holder seeks to extract more for the use of a standard than the value which his patent adds to the standard.  (Page 11).
  • Contribution Counting: The Court is skeptical that Ericsson actually averages different levels of patent protection to create a global blended rate for global firms. First, there is no evidence that Ericsson actually does this in its business cases. Second, Ericsson’s preferred metric for determining its portfolio strength is contribution counting. Contribution counts, discussed more below are a single number independent of geography or intellectual property rights, and thus cannot be used to reflect or average geographic distinctions in patent portfolios (page 59).
  • Inflated contribution:  Ericsson’s internal documents show that it has inflated its contribution counts by ‘hijacking’ the contributions of other companies as well as requiring its subsidiaries to vote for Ericsson’s proposals.  (Page 37).
  • Option A and Option B are radically divergent from the rates which Ericsson agreed to accept from licensees similarly situated to TCL. TCL has carried its burden and demonstrated that Option A and Option B are discriminatory and do not meet FRAND terms.” (Page 93).
  •  Ericsson’s use of floors in its rates is itself discriminatory (page 113).

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