Tuesday, August 31, 2021

Standard-essential patent royalties set to rise after unanimous Fifth Circuit judgment in Ericsson's favor ($2.50 or 1%/$1-4 per 4G device) against HTC

Hurricane Ida's landfall prevented the Fifth Circuit from holding the Continental v. Avanci et al. appellate hearing scheduled for yesterday (Monday, August 30). But the appeals court is still weathering the storm in other ways, and today put out its HTC v. Ericsson opinion (PDF).

The judgment is unanimous, though Circuit Judge Higginson filed a concurrence to make a point that is, ultimately, not outcome-determinative here.

The case originated from the Eastern District of Texas, where HTC alleged a FRAND breach by Ericsson, lost a jury trial, and the district court additionally entered declaratory judgment holding Ericsson in compliance with its obligations under the ETSI FRAND pledge, which is governed by French law. While the appeals court's affirmance of the district court ruling is based on purely legal questions (partly relating to jury instructions), it's worth noting what royalty demands have been blessed on the bottom line:

  • Ericsson initially (in 2016) wanted $2.50 per 4G device.

  • After HTC brought the complaint in question, "Ericsson proposed a new licensing agreement whereby HTC would pay 1% of each 4G device sold, subject to a $1 floor and a $4 cap."

HTC's response to the original $2.50 rate was a measly $0.10 counterproposal. The reaction to the 1%/$1-4 deal was an amended complaint.

Why such a discrepancy? Primarily it's due to the fact that HTC made a smallest salable patent-practicing unit (SSPPU) argument, claiming that the baseband processor should serve as the royalty base.

Outside of the Northern District of California, SSPPU arguments don't seem to get traction. While I believe no court would ever be inclined to let a WiFi SEP holder collect 1% of the price of an entire airplane with WiFi on board, baseband processors that aren't fully licensed aren't the measure--and if they are fully licensed, than the value of all IP licenses far exceeds that of the raw material.

The district court declined to overinstruct the jury, and its approach has now been affirmed. This is also a post-term achievement for the Antitrust Division of the United States Department of Justice under then-AAG Makan Delrahim. In late 2019, the Trump DOJ had filed an amicus brief formally in support of neither party but practically in Ericsson's favor. Interestingly, Apple's amicus brief in support of automotive supplier Continental's ill-conceived U.S. case against Avanci, Nokia and others--which is pending with the same appeals court--is all about bashing the Trump DOJ.

Let's face it: this victory for Ericsson is of transcendental importance. Whatever HTC will end up paying Ericsson is just a small piece of the puzzle. In the greater scheme of things, this is yet another milestone for cellular SEP holders, some of whom are going to look at Ericsson's win and feel that their rates are too low. And it's going to be harder and harder for car makers to refuse to pay royalties on their products that the U.S. judiciary apparently considers appropriate for phones. Apportionment arguments don't seem to do the trick for implementers--and there are so many license agreements that will have to be renewed in the near future, with SEP holders often demanding substantially higher royalty rates for licenses covering 5G.

Share with other professionals via LinkedIn: