Commonwealth Scientific & Industrial Research Organisation v. Cisco Systems, Inc. , 809 F.3d 1295 ( 2015 )

United States Court of Appeals
for the Federal Circuit
______________________
COMMONWEALTH SCIENTIFIC AND INDUSTRIAL
RESEARCH ORGANISATION,
Plaintiff-Appellee
v.
CISCO SYSTEMS, INC.,
Defendant-Appellant
______________________
2015-1066
______________________
Appeal from the United States District Court for the
Eastern District of Texas in No. 6:11-cv-00343-LED, Chief
Judge Leonard Davis.
______________________
Decided: December 3, 2015
______________________
MICHAEL NG, Kobre & Kim LLP, San Francisco, CA,
argued for plaintiff-appellee. Also represented by DANIEL
AMON ZAHEER; BENJAMIN JEFFREY AARON SAUTER, New
York, NY; MICHAEL F. HEIM, MIRANDA Y. JONES, Heim,
Payne & Chorush, LLP, Houston, TX; FREDERICK
MICHAUD, Capshaw DeRieux LLP, Washington, DC;
JAMES WAGSTAFFE, MICHAEL JOHN VON LOEWENFELDT,
Kerr & Wagstaffe, LLP, San Francisco, CA.
JOHN C. O’QUINN, Kirkland & Ellis LLP, Washington,
DC, argued for defendant-appellant. Also represented by
2 COMMONWEALTH SCIENTIFIC v. CISCO SYSTEMS, INC.
JASON M. WILCOX; L. NORWOOD JAMESON, JENNIFER H.
FORTE, ALISON HADDOCK HUTTON, MATTHEW YUNGWIRTH,
Duane Morris LLP, Atlanta, GA.
MARK S. DAVIES, Orrick, Herrington & Sutcliffe LLP,
Washington, DC, for amicus curiae Apple Inc. Also repre-
sented by BRIAN PHILIP GOLDMAN, San Francisco, CA.
LAUREN B. FLETCHER, Wilmer Cutler Pickering Hale
and Dorr LLP, Boston, MA, for amici curiae Intel Corpo-
ration, Dell Inc., Hewlett-Packard Company. Also repre-
sented by REBECCA A. BACT, WILLIAM F. LEE, JOSEPH J.
MUELLER; KENNETH HUGH MERBER, Washington, DC.
MIKE MCKOOL, McKool Smith, P.C., Dallas, TX, for
amicus curiae Ericsson Inc. Also represented by
THEODORE STEVENSON III; JOHN BRUCE CAMPBELL, JOEL
LANCE THOLLANDER, Austin, TX.
DEMETRIUS TENNELL LOCKETT, Townsend & Lockett,
LLC, Atlanta, GA, for amici curiae Nokia Corporation,
Nokia USA, Inc.
ROGER BROOKS, Cravath Swaine & Moore LLP, New
York, NY, for amicus curiae Qualcomm Incorporated.
ALEXANDRA MCTAGUE, Winston & Strawn LLP, Menlo
Park, CA, for amicus curiae Aruba Networks, Inc. Also
represented by DAVID SPENCER BLOCH, San Francisco, CA.
______________________
Before PROST, Chief Judge, DYK and HUGHES, Circuit
Judges.
PROST, Chief Judge.
Following a bench trial on damages, the district court
awarded Commonwealth Scientific and Industrial Re-
search Organisation (“CSIRO”) $16,243,067 for Cisco
COMMONWEALTH SCIENTIFIC v. CISCO SYSTEMS, INC. 3
Systems, Inc.’s (“Cisco”) infringement of CSIRO’s U.S.
Patent No. 5,487,069 (“’069 patent”). On appeal, Cisco
challenges the district court’s damages award. We con-
clude that the district court’s methodology in this case—
insofar as it relied on the parties’ actual licensing discus-
sions—is not contrary to damages law. However, we also
hold that the district court erred in not accounting for the
’069 patent’s standard-essential status and in its reasons
for discounting a relevant license agreement. We there-
fore vacate the district court’s judgment and remand for
the district court to revise its damages award.
I. BACKGROUND
CSIRO is the principal research arm of the Australian
federal government and conducts research in countless
scientific fields. One such field is wireless communica-
tions. In the early 1990s, CSIRO, among many other
organizations, set out to devise faster and more reliable
wireless local area network technology. CSIRO’s research
resulted in the ’069 patent, which was filed on November
23, 1993, and issued to CSIRO on January 23, 1996. The
’069 patent discloses techniques directed to solving issues
from wireless signals reflecting off objects and interfering
with each other, commonly referred to as the “multipath
problem.”
In 1997, the Institute of Electrical and Electronics
Engineers (“IEEE”) released the original 802.11 wireless
standard, which provides the specifications for products
using the Wi-Fi brand. The first revision of 802.11, called
802.11a, was ratified in 1999, and it included the ’069
patent’s technology. In connection with 802.11a, CSIRO
submitted a letter of assurance to the IEEE pledging to
license the ’069 patent on reasonable and non-
discriminatory (“RAND”) terms. The ’069 patent is also
essential to various later iterations of 802.11 (802.11g, n,
and ac). However, despite the IEEE’s repeated requests
to CSIRO that it submit a letter of assurance for the ’069
4 COMMONWEALTH SCIENTIFIC v. CISCO SYSTEMS, INC.
patent for these revisions of 802.11, CSIRO refused to
encumber the ’069 patent with a RAND commitment for
these revisions.
When the ’069 patent issued in 1996—the early days
of 802.11—a group of individuals involved in the ’069
patent’s research attempted to commercialize the technol-
ogy. Along with David Skellern and Neil Weste, both
professors at Macquarie University in Australia, Terry
Percival, a CSIRO scientist and named inventor on the
’069 patent, founded a company called Radiata, Inc. to sell
wireless chips in at least the United States. Consequent-
ly, Radiata and CSIRO entered into a license agreement—
the Technology License Agreement (“TLA”)—for the ’069
patent. Under the TLA, Radiata agreed to pay CSIRO
tiered royalties for each chip sold according to the follow-
ing table:
Sales Volume Standard Derivative
Chip Royalty Chip Royalty
1–100,000 5.0% 5.0%
100,001–400,000 4.0% 4.0%
400,001–1,000,000 3.0% 3.0%
1,000,001–3,000,000 2.0% 2.0%
> 3,000,001 1.0% 0.5%
In November 2000, Cisco publicly announced its plans
to acquire Radiata. The acquisition was completed in
early 2001. As part of the acquisition, Cisco, Radiata, and
CSIRO amended the TLA in February 2001, largely to
allow Cisco to take Radiata’s place in the TLA. Cisco and
CSIRO amended the TLA again in September 2003. Cisco
paid royalties to CSIRO under the TLA until 2007, when
COMMONWEALTH SCIENTIFIC v. CISCO SYSTEMS, INC. 5
Cisco ceased using Radiata-based chips in its products.
Over the course of the TLA, Cisco paid CSIRO over
$900,000 in royalties.
Around 2003, CSIRO decided to offer a license to the
’069 patent to other Wi-Fi industry participants. Eventu-
ally, it developed a form license offer, called the “Rate
Card,” which it began offering to potential licensees in
2004. The Rate Card was structured as follows:
Royalty per product sold
Days from < 90 < 120 < 150 < 180 > 180
offer to ac-
ceptance:
Sales Volume
0–1 million $1.90 $2.38 $2.85 $3.33 $3.80
1–2 million $1.80 $2.25 $2.70 $3.15 $3.60
2–5 million $1.70 $2.13 $2.55 $2.98 $3.40
5–10 million $1.60 $2.00 $2.40 $2.80 $3.20
10–20 million $1.50 $1.88 $2.25 $2.63 $3.00
> 20 million $1.40 $1.75 $2.10 $2.45 $2.80
The lowest Rate Card rates, corresponding to acceptance
of CSIRO’s offer within ninety days, were $1.40–$1.90 per
unit. CSIRO did not execute any licenses under the Rate
Card terms.
In 2004, CSIRO approached Cisco and offered Cisco a
license to the ’069 patent on the Rate Card rates. Cisco
did not accept CSIRO’s offer. However, the district court
found that in subsequent discussions in 2005, Dan Lang,
6 COMMONWEALTH SCIENTIFIC v. CISCO SYSTEMS, INC.
Cisco’s Vice President of Intellectual Property, informally
suggested to CSIRO that a $0.90 per unit rate may be
more appropriate. Commonwealth Sci. & Indus. Research
Org. v. Cisco Sys., Inc., No. 6:11-CV-343, 2014 WL
3805817, at *12 (E.D. Tex. July 23, 2014). This rate was
not much lower than what Cisco was already paying
CSIRO under the TLA, though over time the TLA rates
declined dramatically due to rapidly decreasing chip
prices. Despite both parties’ apparent willingness to
negotiate a license, CSIRO and Cisco failed to agree on
terms.
On July 1, 2011, CSIRO filed the instant suit for in-
fringement of the ’069 patent against Cisco. Nearly two
years later, the district court accepted a joint stipulation
that Cisco would not contest infringement or validity, so
the only issue left for trial was damages. The district
court conducted a four-day bench trial commencing on
February 3, 2014.
At trial, the parties’ experts presented competing
damages models. CSIRO contended that the benefits of
802.11 products that practice the ’069 patent over 802.11
products that do not practice the ’069 patent “are primari-
ly attributable to the technology of the ’069 Patent.” Id.
at *5. “Based on this claim, CSIRO contend[ed] that the
difference in profit Cisco captured between accused
802.11a and 802.11g products and unaccused 802.11b
products largely represents the value attributable to the
’069 Patent.” Id. Therefore, James Malackowski,
CSIRO’s damages expert, compared the market prices at
the time of the hypothetical negotiation of 802.11 prod-
ucts that practice the ’069 patent and 802.11 products
that do not practice the ’069 patent. Mr. Malackowski
then attributed Cisco’s profit premiums on those products
to the ’069 patent. These ranges were $6.12–$89.93 for
Linksys-branded products, and $14.00–$224.00 for Cisco-
branded products. After making various adjustments
under Georgia-Pacific Corp. v. U.S. Plywood Corp., 318 F.
COMMONWEALTH SCIENTIFIC v. CISCO SYSTEMS, INC. 7
Supp. 1116 (S.D.N.Y. 1970), Mr. Malackowski concluded
that the outcome of the hypothetical negotiation would be
a volume-tiered rate table ranging from a $1.35 to $2.25
royalty per end unit sold. Mr. Malackowski then opined
that total damages were $30,182,922.
Cisco based its damages model on the TLA. Under
the TLA rates, the per chip royalty ranged from $0.04–
$0.37 for Linksys products and $0.03–$0.33 for Cisco
products over the damages period. Cisco’s damages
expert, Christopher Bakewell, opined that, using this
method, Cisco owed CSIRO just over $1,050,000.
The district court issued its findings of fact and con-
clusions of law on July 23, 2014. In its order, the district
court rejected both parties’ proffered damages models.
The district court faulted CSIRO’s model for, among other
reasons, performing “arbitrary” final apportionment and
having broad profit premium ranges. As to Cisco’s model,
the district court found that the TLA was not comparable
to the license Cisco and CSIRO would negotiate in a
hypothetical negotiation. Significantly, the district court
determined that “the primary problem with Cisco’s dam-
ages model is the fact that it bases royalties on chip
prices.” Commonwealth Sci., 2014 WL 3805817, at *11.
According to the district court, “[t]he benefit of the patent
lies in the idea, not in the small amount of silicon that
happens to be where that idea is physically implemented.”
Id. The district court reasoned that “[b]asing a royalty
solely on chip price is like valuing a copyrighted book
based only on the costs of the binding, paper, and ink
needed to actually produce the physical product. While
such a calculation captures the cost of the physical prod-
uct, it provides no indication of its actual value.” Id.
Rather than adopt one of the parties’ damages meth-
odologies, the district court created its own based on
CSIRO’s 2004 Rate Card offer and the informal rate
suggestion made in October 2005 by Cisco’s Mr. Lang.
8 COMMONWEALTH SCIENTIFIC v. CISCO SYSTEMS, INC.
The district court noted that both data points were near
the hypothetical negotiation dates of May 2002 for
Linksys-branded products and October 2003 for Cisco
products. “Based on these data points,” the district court
found, “a range of $0.90 to $1.90 is a reasonable starting
point for negotiations between the parties in 2002 and
2003.” Id. at *12.
The district court then proceeded with an analysis of
the Georgia-Pacific factors. As an initial matter, the
district court held that “[a]lthough other courts have
made specific adjustments to the Georgia–Pacific factors
to take a RAND commitment into account, specific ad-
justments to the overall framework are not necessary
here” because CSIRO was obligated to license on RAND
terms for only 0.03% of the accused products. Id. The
district court next considered all Georgia-Pacific factors.
Id. at *12–13. To summarize the district court’s Georgia-
Pacific analysis, the district court found that factors 3, 4,
and 5 favored a downward adjustment; factors 8, 9, and
10 favored an upward adjustment; and all other factors
were neutral. The district court concluded that, “[w]ith
the sum of the factors essentially in equipoise, CSIRO and
Cisco would have been in substantially equal bargaining
positions at the hypothetical negotiations.” Id. at *13.
“Accordingly, no overall adjustment [was] needed to the
baseline rates and a range of $0.90 to $1.90 [was] the
appropriate outcome of the hypothetical negotiation here.”
Id.
Finally, the district court adjusted the royalty rate
range downward for Linksys-branded products, as the
parties agreed that the Lang offer only pertained to Cisco
products, and Linksys products had a lower profit margin.
The district court found that the royalty rate range for
Linksys was $0.65–$1.38.
The result of the district court’s calculus was the fol-
lowing volume-tiered rate table:
COMMONWEALTH SCIENTIFIC v. CISCO SYSTEMS, INC. 9
Royalty per unit sold
Sales Volume Linksys Cisco
0–1 million $1.38 $1.90
1–2 million $1.23 $1.70
2–5 million $1.09 $1.50
5–10 million $0.94 $1.30
10–20 million $0.80 $1.10
> 20 million $0.65 $0.90
After some further calculations, the district court entered
judgment for CSIRO in the amount of $16,243,067. Cisco
appeals. This court has jurisdiction under 28 U.S.C.
§ 1295(a)(1).
II. DISCUSSION
“This court reviews a district court’s judgment follow-
ing a bench trial for errors of law and clearly erroneous
findings of fact.” Allen Eng’g Corp. v. Bartell Indus., Inc.,
299 F.3d 1336, 1343–44 (Fed. Cir. 2002).
Cisco alleges two separate legal bases for reversal: (1)
the district court erred in not beginning its damages
analysis with the wireless chip, which it found to be the
smallest salable patent-practicing unit; (2) the district
court did not adjust the Georgia-Pacific factors to account
for the asserted patent being essential to the 802.11
standard. Cisco also argues that the district court clearly
erred in not crediting the TLA evidence. We address each
issue in turn.
10 COMMONWEALTH SCIENTIFIC v. CISCO SYSTEMS, INC.
A. Smallest Salable Patent-Practicing Unit
Title 35, section 284 of the United States Code pro-
vides that “[u]pon finding for the claimant the court shall
award the claimant damages adequate to compensate for
the infringement, but in no event less than a reasonable
royalty for the use made of the invention by the infringer
. . . .” Under § 284, damages awarded for patent in-
fringement “must reflect the value attributable to the
infringing features of the product, and no more.” Erics-
son, Inc. v. D-Link Sys., Inc., 773 F.3d 1201, 1226 (Fed.
Cir. 2014). This principle—apportionment—is “the gov-
erning rule” “where multi-component products are in-
volved.” Id. Consequently, to be admissible, all expert
damages opinions must separate the value of the alleged-
ly infringing features from the value of all other features.
VirnetX, Inc. v. Cisco Sys., Inc., 767 F.3d 1308, 1329 (Fed.
Cir. 2014).
Apportionment is not a new rule. Indeed, it dates at
least to Garretson v. Clark, 111 U.S. 120, 121 (1884)
(quotation marks omitted), where the Supreme Court
explained:
The patentee . . . must in every case give evidence
tending to separate or apportion the defendant’s
profits and the patentee’s damages between the
patented feature and the unpatented features,
and such evidence must be reliable and tangible,
and not conjectural or speculative; or he must
show, by equally reliable and satisfactory evi-
dence, that the profits and damages are to be cal-
culated on the whole machine, for the reason that
the entire value of the whole machine, as a mar-
ketable article, is properly and legally attributable
to the patented feature.
In Garretson, the Supreme Court affirmed a special
master’s report that the patentee had submitted no proof
of its damages because it failed to apportion to the value
COMMONWEALTH SCIENTIFIC v. CISCO SYSTEMS, INC. 11
of the patented feature. Id. at 121–22. Likewise today,
given the great financial incentive parties have to exploit
the inherent imprecision in patent valuation, courts must
be proactive to ensure that the testimony presented—
using whatever methodology—is sufficiently reliable to
support a damages award. See Summit 6, LLC v. Sam-
sung Elecs. Co., 802 F.3d 1283, 1296 (Fed. Cir. 2015)
(“[E]stimating a reasonable royalty is not an exact sci-
ence.”); VirnetX, 767 F.3d at 1328 (explaining that a
district court must exercise “its gatekeeping authority to
ensure that only theories comporting with settled princi-
ples of apportionment were allowed to reach the jury”).
And as we have repeatedly held, “[t]he essential require-
ment” for reliability under Daubert “is that the ultimate
reasonable royalty award must be based on the incremen-
tal value that the patented invention adds to the end
product.” Ericsson, 773 F.3d at 1226. In short, appor-
tionment.
Our law also recognizes that, under this apportion-
ment principle, “there may be more than one reliable
method for estimating a reasonable royalty.” See Apple
Inc. v. Motorola, Inc., 757 F.3d 1286, 1315 (Fed. Cir.
2014), overruled on other grounds by Williamson v. Citrix
Online, LLC, 792 F.3d 1339 (Fed. Cir. 2015). This adapt-
ability is necessary because different cases present differ-
ent facts. And as damages models are fact-dependent, “[a]
distinct but integral part of [the admissibility] inquiry is
whether the data utilized in the methodology is sufficient-
ly tied to the facts of the case.” Summit 6, 802 F.3d at
1296. In practice, this means that abstract recitations of
royalty stacking theory, and qualitative testimony that an
invention is valuable—without being anchored to a quan-
titative market valuation—are insufficiently reliable. See
Ericsson, 773 F.3d at 1234 (“The district court need not
instruct the jury on hold-up or stacking unless the ac-
cused infringer presents actual evidence of hold-up or
stacking.”); LaserDynamics, Inc. v. Quanta Comput., Inc.,
12 COMMONWEALTH SCIENTIFIC v. CISCO SYSTEMS, INC.
694 F.3d 51, 68 (Fed. Cir. 2012) (“It is not enough to
merely show that the disc discrimination method is
viewed as valuable, important, or even essential to the
use of the laptop computer.”). “[W]here the data used is
not sufficiently tied to the facts of the case,” Summit 6,
802 F.3d at 1296, a damages model cannot meet “the
substantive statutory requirement of apportionment of
royalty damages to the invention’s value,” Ericsson, 773
F.3d at 1226.
Recognizing that each case presents unique facts, we
have developed certain principles to aid courts in deter-
mining when an expert’s apportionment model is reliable.
For example, the smallest salable patent-practicing unit
principle provides that, where a damages model appor-
tions from a royalty base, the model should use the small-
est salable patent-practicing unit as the base. See
LaserDynamics, 694 F.3d at 67 (“[I]t is generally required
that royalties be based not on the entire product, but
instead on the “‘smallest salable patent-practicing unit.’”).
Our cases provide two justifications for this principle.
First, “[w]here small elements of multi-component prod-
ucts are accused of infringement, calculating a royalty on
the entire product carries a considerable risk that the
patentee will be improperly compensated for non-
infringing components of that product.” Id.; see also
Garretson, 111 U.S. at 121 (“[The patentee] must separate
[the patented improvement’s] results distinctly from those
of the other parts, so that the benefits derived from it may
be distinctly seen and appreciated.”). Second is the “im-
portant evidentiary principle” that “care must be taken to
avoid misleading the jury by placing undue emphasis on
the value of the entire product.” Ericsson, 773 F.3d at
1226. As we stated in Uniloc USA, Inc. v. Microsoft Corp.,
disclosure of the end product’s total revenue “cannot help
but skew the damages horizon for the jury, regardless of
the contribution of the patented component to this reve-
nue.” 632 F.3d 1292, 1320 (Fed. Cir. 2011).
COMMONWEALTH SCIENTIFIC v. CISCO SYSTEMS, INC. 13
In addition to the smallest salable patent-practicing
unit principle, we have also explained that “[t]he entire
market value rule is a narrow exception to this general
rule” “derived from Supreme Court precedent” in Garret-
son. LaserDynamics, 694 F.3d at 67. Under the entire
market value rule, if a party can prove that the patented
invention drives demand for the accused end product, it
can rely on the end product’s entire market value as the
royalty base. Id.
Fundamentally, the smallest salable patent-practicing
unit principle states that a damages model cannot relia-
bly apportion from a royalty base without that base being
the smallest salable patent-practicing unit. That princi-
ple is inapplicable here, however, as the district court did
not apportion from a royalty base at all. Instead, the
district court began with the parties’ negotiations. At
trial, the district court heard evidence that, around the
time of the hypothetical negotiations, the parties them-
selves had brief discussions regarding Cisco taking a
license to the ’069 patent. According to the district court’s
factual finding—which is supported by the testimony at
trial—Cisco informally suggested $0.90 per unit as a
possible royalty for the ’069 patent. The district court
used this rate as a lower bound on a reasonable royalty.
For the upper bound, the district court looked to the $1.90
per unit rate requested by CSIRO in its public Rate Card
license offer. Because the parties’ discussions centered on
a license rate for the ’069 patent, this starting point for
the district court’s analysis already built in apportion-
ment. Put differently, the parties negotiated over the
value of the asserted patent, “and no more.” Ericsson, 773
F.3d at 1226. The district court still may need to adjust
the negotiated royalty rates to account for other factors
(see infra Section II.B), but the district court did not err
14 COMMONWEALTH SCIENTIFIC v. CISCO SYSTEMS, INC.
in valuing the asserted patent with reference to end
product licensing negotiations. 1
The rule Cisco advances—which would require all
damages models to begin with the smallest salable pa-
tent-practicing unit—is untenable. It conflicts with our
prior approvals of a methodology that values the asserted
patent based on comparable licenses. See VirnetX, 767
F.3d at 1331; ActiveVideo Networks, Inc. v. Verizon
Commc’ns, Inc., 694 F.3d 1312, 1333 (Fed. Cir. 2012);
Finjan, Inc. v. Secure Computing Corp., 626 F.3d 1197,
1211–12 (Fed. Cir. 2010). Such a model begins with rates
from comparable licenses and then “account[s] for differ-
ences in the technologies and economic circumstances of
the contracting parties.” Finjan, 626 F.3d at 1211.
Where the licenses employed are sufficiently comparable, 2
1 The choice of royalty base—which is often the fo-
cus of the apportionment analysis—is irrelevant to the
district court’s analysis. The particular rates relied on by
the district court were contemplated as cents per end unit
sold by Cisco, but they could equally have represented
cents per wireless chip without affecting the damages
calculation.
2 Note, of course, that this court has often excluded
proffered licenses as insufficiently comparable. See, e.g.,
LaserDynamics, 694 F.3d at 77–78; ResQNet.com, Inc. v.
Lansa, Inc., 594 F.3d 860, 870–71 (Fed. Cir. 2010); Lucent
Techs., Inc. v. Gateway, Inc., 580 F.3d 1301, 1327–28
(Fed. Cir. 2009). Grounds for exclusion in our past cases
have included, but are not limited to: the license being a
litigation settlement agreement, LaserDynamics, 694 F.3d
at 77 (“The propriety of using prior settlement agree-
ments to prove the amount of a reasonable royalty is
questionable.”); and the patented technology’s lack of a
relationship to the licensed technology, ResQNet.com, 594
F.3d at 871 (“Dr. David offers little or no evidence of a
COMMONWEALTH SCIENTIFIC v. CISCO SYSTEMS, INC. 15
this method is typically reliable because the parties are
constrained by the market’s actual valuation of the pa-
tent. See Georgia-Pacific, 318 F. Supp. at 1120 (declaring
the first factor relevant to damages calculations to be
“[t]he royalties received by the patentee for the licensing
of the patent in suit, proving or tending to prove an
established royalty”). Moreover, we held in Ericsson that
otherwise comparable licenses are not inadmissible solely
because they express the royalty rate as a percentage of
total revenues, rather than in terms of the smallest
salable unit. Ericsson, 773 F.3d at 1228. Therefore,
adopting Cisco’s position would necessitate exclusion of
comparable license valuations that—at least in some
cases—may be the most effective method of estimating
the asserted patent’s value. Such a holding “would often
make it impossible for a patentee to resort to license-
based evidence.” Id.
Accordingly, we conclude that the district court did
not violate apportionment principles in employing a
damages model that took account of the parties’ informal
negotiations with respect to the end product.
B. Standardization
Cisco also contends that the district court legally
erred under Ericsson because it failed to account for any
extra value accruing to the ’069 patent from the fact that
it is essential to the 802.11 standard. We agree. Ericsson
link between the re-bundling licenses and the claimed
invention.”); Lucent, 580 F.3d at 1329 (“[A] lump-sum
damages award cannot stand solely on evidence which
amounts to little more than a recitation of royalty num-
bers, one of which is arguably in the ballpark of the jury’s
award, particularly when it is doubtful that the technolo-
gy of those license agreements is in any way similar to the
technology being litigated here.”).
16 COMMONWEALTH SCIENTIFIC v. CISCO SYSTEMS, INC.
identified unique considerations that apply to apportion-
ment in the context of a standard-essential patent
(“SEP”):
When dealing with SEPs, there are two special
apportionment issues that arise. First, the pa-
tented feature must be apportioned from all of the
unpatented features reflected in the standard.
Second, the patentee’s royalty must be premised
on the value of the patented feature, not any value
added by the standard’s adoption of the patented
technology. These steps are necessary to ensure
that the royalty award is based on the incremen-
tal value that the patented invention adds to the
product, not any value added by the standardiza-
tion of that technology.
773 F.3d at 1232. Consequently, the idea that “the patent
holder should only be compensated for the approximate
incremental benefit derived from his invention . . . is
particularly true for SEPs.” Id. at 1233. Ericsson ex-
plains:
When a technology is incorporated into a stand-
ard, it is typically chosen from among different op-
tions. Once incorporated and widely adopted, that
technology is not always used because it is the
best or the only option; it is used because its use is
necessary to comply with the standard. In other
words, widespread adoption of standard essential
technology is not entirely indicative of the added
usefulness of an innovation over the prior art.
This is not meant to imply that SEPs never claim
valuable technological contributions. We merely
hold that the royalty for SEPs should reflect the
approximate value of that technological contribu-
tion, not the value of its widespread adoption due
to standardization.
COMMONWEALTH SCIENTIFIC v. CISCO SYSTEMS, INC. 17
Id. “In other words, a royalty award for a SEP must be
apportioned to the value of the patented invention (or at
least to the approximate value thereof), not the value of
the standard as a whole.” Id. Therefore, damages awards
for SEPs must be premised on methodologies that attempt
to capture the asserted patent’s value resulting not from
the value added by the standard’s widespread adoption,
but only from the technology’s superiority. Id.
CSIRO argues that Ericsson applies only to SEPs en-
cumbered with an obligation to license on RAND terms.
But CSIRO’s perspective is wrong for several reasons.
First, the above quotes from Ericsson discuss SEPs, not
only RAND-encumbered patents. As Ericsson also grap-
ples separately with issues unique to RAND-encumbered
patents, it is clear that Ericsson did not conflate the two
terms. Indeed, Ericsson refers separately to RAND-
encumbered patents and SEPs when explaining the need
to adjust the Georgia-Pacific factors, but Ericsson explicit-
ly holds that the adjustments to the Georgia-Pacific
factors apply equally to RAND-encumbered patents and
SEPs. Ericsson, 773 F.3d at 1231 (“Several other Georgia-
Pacific factors would at least need to be adjusted for
RAND-encumbered patents—indeed, for SEP patents
generally.”). Second, a reasonable royalty calculation
under § 284 attempts to measure the value of the patent-
ed invention. Id. at 1232. This value—the value of the
technology—is distinct from any value that artificially
accrues to the patent due to the standard’s adoption. Id.
Without this rule, patentees would receive all of the
benefit created by standardization—benefit that would
otherwise flow to consumers and businesses practicing the
standard. We therefore reaffirm that reasonable royalties
for SEPs generally—and not only those subject to a RAND
commitment—must not include any value flowing to the
patent from the standard’s adoption.
The district court—which did not have the benefit of
the Ericsson opinion at the time of its decision—erred
18 COMMONWEALTH SCIENTIFIC v. CISCO SYSTEMS, INC.
because it did not account for standardization. In thor-
oughly analyzing the Georgia-Pacific factors, the district
court increased the royalty award because the ’069 patent
is essential to the 802.11 standard.
This error impacted the district court’s analysis on all
three factors that it weighed in favor of CSIRO. With
respect to factor 8—“[t]he established profitability of the
product made under the patent; its commercial success;
and its current popularity,” Georgia-Pacific, 318 F. Supp.
at 1120—the district court found that “[a]t the time of the
hypothetical negotiations, the market for wireless prod-
ucts was growing rapidly, indicating increased commer-
cial success.” Commonwealth Sci., 2014 WL 3805817, at
*13. As to factors 9 and 10—which relate to the ad-
vantages of the patented invention—the district court
concluded that “[a]lternative technologies in the wireless
industry, such as PBCC, MBCK, and PPM, failed to
achieve commercial success.” Id. However, the district
court never considered the standard’s role in causing
commercial success. Ericsson calls out factors 8, 9, and 10
as all being irrelevant or misleading in cases involving
SEPs. Ericsson, 773 F.3d at 1231. We therefore conclude
that the district court erred in failing to account for
standardization when it evaluated the Georgia-Pacific
factors. 3
3 Furthermore, much of the district court’s reason-
ing in favor of CSIRO is based on evidence that the ’069
patent is central to the 802.11 standard. But it makes
little sense to adjust the starting royalty rate upward for
this reason. The argument that the ’069 patent is more
valuable than a typical patent essential to the 802.11
standard is only relevant if the court begins with a gener-
ic royalty rate for a generic 802.11 patent. But in this
case the court began with rates mentioned by the parties
in negotiation. Even the lowest of these rates—$0.90—is
COMMONWEALTH SCIENTIFIC v. CISCO SYSTEMS, INC. 19
Additionally, the district court failed to account for
the possibility that the $0.90 and $1.90 per unit rates that
it used as a starting point may themselves be impacted by
standardization. 4 The parties do not dispute that CSIRO
actively refused to submit a letter of assurance to the
standard-setting body for later iterations of the 802.11
standard, after the ’069 patent was locked into the stand-
ard. It seems quite possible, then, that CSIRO’s Rate
Card rates attempt to capture at least some value result-
ing from the standard’s adoption. CSIRO’s offer was not
accepted by a single entity. On remand, the district court
should consider whether the initial rates taken from the
parties’ discussions should be adjusted for standardiza-
tion.
In sum, the district court erred in failing to account
for value accruing to the ’069 patent from the standard’s
adoption. This error manifests in at least two parts of the
district court’s analysis: (1) in its discussion of the Geor-
gia-Pacific factors, and (2) in its adoption of the parties’
informally offered royalty rates without accounting for the
possibility that CSIRO may have been trying to capture
the standard’s value in its licenses. As these are legal
errors under Ericsson, we must vacate the district court’s
damages award and remand for a new determination of a
reasonable royalty.
much higher than a rate derived from dividing the value
of the standard by the number of patents essential to the
standard. The starting rates themselves thus appear to
account—at least to some extent—for the centrality of the
’069 patent to the 802.11 standard.
4 Upon remand, the district court may also wish to
consider how other factors, such as prospective litigation
costs or the falling chip price, may have affected the
parties’ suggested royalty rates.
20 COMMONWEALTH SCIENTIFIC v. CISCO SYSTEMS, INC.
C. TLA
Finally, Cisco argues that the district court clearly
erred in basing its damages model on the parties’ negoti-
ating positions, rather than on the TLA between CSIRO
and Radiata. As the district court heard competing
testimony regarding the relevance of the TLA, the Rate
Card, and the Lang offer, the district court’s decision
about how to weigh and credit this varying evidence is a
finding of fact entitled to deference. See Santarus, Inc. v.
Par Pharm., Inc., 694 F.3d 1344, 1358 (Fed. Cir. 2012)
(“The district court’s findings of fact are entitled to defer-
ence . . . .”). However, we find clear error in at least three
of the district court’s reasons for rejecting the TLA, and
therefore direct the court on remand to reevaluate the
relevance of the TLA in its damages analysis.
In brief, the district court provided four reasons for re-
jecting the TLA evidence. First, the district court found
that the close relationship between CSIRO and Radiata—
Radiata was founded by three Australian individuals on
CSIRO’s campus—“belies the view that the negotiations
leading to the TLA were purely disinterested business
negotiations.” Commonwealth Sci., 2014 WL 3805817, at
*10. Second, the district court found that the TLA’s
development requirements meant that:
Radiata had significant obligations to CSIRO, in-
cluding disclosing its business plans concerning
the patented technology, a requirement to use its
best efforts to exploit the technology, and mini-
mum performance obligations. CSIRO was also
entitled to a royalty-free license to any improve-
ments Radiata contributed to the technology and
an assignment of all rights in those improvements
upon termination of the TLA.
Id. Third, the district court found that “[a]nother obstacle
to relying on the TLA rates is the timing of the agree-
ment.” Id. The TLA was signed in 1998, four and five
COMMONWEALTH SCIENTIFIC v. CISCO SYSTEMS, INC. 21
years, respectively, before the hypothetical negotiation
dates of 2002 and 2003, during which time the
“[c]ommercial viability of the technology escalated sharply
. . . .” Id. Finally, the district court found that “the pri-
mary problem with Cisco’s damages model is the fact that
it bases royalties on chip prices.” Id.
The majority of these findings do not support a whole-
sale rejection of the TLA. Most importantly, as to reason
three—timing—the district court ignored evidence that
CSIRO and Cisco twice amended the TLA, once in con-
junction with Cisco’s purchase of Radiata in 2001, and
again in September 2003. These amendments occurred at
about the time the hypothetical negotiations would have
taken place, and therefore bear consideration. While
Commonwealth argues that the amendments are irrele-
vant because Commonwealth could not have renegotiated
the royalty rates at the time, that is untrue. At the time
of the 2001 and 2003 amendments, Commonwealth had
the right to terminate the agreement or permit a subli-
cense. Both of these options provided a lever with which
Commonwealth could have renegotiated royalty rates
during the amendment process.
The amendments also refute the district court’s first
reason for discounting the TLA—the close relationship
between Commonwealth and Radiata. By the time of the
amendments, the special relationship between Common-
wealth and Radiata no longer existed, and therefore does
not provide reason to reject the relevance of the as-
amended TLA to the hypothetical negotiation.
Finally, the district court’s fourth reason—that the
TLA uses chip prices as the royalty base—runs afoul of
Ericsson’s holding that a license may not be excluded
solely because of its chosen royalty base. Ericsson, 773
F.3d at 1228.
Because many of the district court’s reasons for dis-
counting the TLA were flawed, we direct the court on
22 COMMONWEALTH SCIENTIFIC v. CISCO SYSTEMS, INC.
remand to reevaluate the relevance of the as-amended
TLA in its damages analysis. This agreement is the only
actual royalty agreement between Cisco and Common-
wealth; it is contemporaneous with the hypothetical
negotiation; it was reached before the 802.11g standard
was adopted; and it focuses on the chip. To be sure, some
other obligations running from Cisco to Commonwealth
survived the amendments, e.g., the licensing of improve-
ments. These factors, among others, should be taken into
account in the district court’s analysis.
III. CONCLUSION
For the foregoing reasons, we vacate the damages
award and remand for further proceedings consistent
with this opinion.
VACATED AND REMANDED