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Rewind: Federal Circuit Grants En Banc Rehearing Over Royalty Damages

The en banc US Court of Appeals for the Federal Circuit issued a per curiam order vacating its previous panel decision upholding a district court’s denial of the defendant’s motion for a new trial on damages. In that decision, the Federal Circuit found that the plaintiff’s damages expert adequately demonstrated the economic comparability of prior license agreements to a hypothetical negotiation between the parties. Now, the Court has granted the defendant’s petition for rehearing en banc. EcoFactor, Inc. v. Google LLC, Case No. 23-1101 (Fed. Cir. Sept. 25, 2024) (per curiam) (Moore, C.J.; Lourie, Dyk, Prost, Reyna, Taranto, Chen, Hughes, Stoll, Stark, JJ.) Judge Prost dissented in part in the original panel decision.

EcoFactor sued Google over Nest thermostats allegedly infringing EcoFactor’s HVAC patent. The initial appeal revolved around the validity of the patent, the infringement verdict, and the damages awarded. Google argued that the patent was directed to an abstract idea and therefore was patent ineligible under 35 U.S.C. §101. Google also argued that the district court erred in its rulings on noninfringement and damages. The Federal Circuit majority upheld the district court’s decisions, finding genuine issues of material fact on patent validity, substantial evidence of infringement, and admissible expert testimony supporting the damages award. The Court dismissed Google’s challenge to the expert’s use of license agreements for calculating royalties, as the Court found the methodology reasonable. However, Judge Prost’s dissent in the original panel decision criticized the damages calculation, arguing that the expert’s methodology lacked rigor, particularly for failing to apportion the patented technology’s value from other licensed patents.

The en banc Federal Circuit will now reconsider the practice of using a patent owner’s prior license agreements to determine royalty rates, a method that can become complicated when the scope of licenses varies or when lump sums and royalties are not clearly apportioned.

The en banc order directed the parties to file new briefs limited to the issue of whether “the district court[] adhere[d] to Federal Rule of Evidence 702 and Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579 (1993), in its allowance of testimony from EcoFactor’s damages expert assigning a per-unit royalty rate to the three licenses in evidence in this case.”




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The $X Factor: Demystifying Damages Calculations

The US Court of Appeals for the Federal Circuit affirmed a district court’s decision to deny a defendant’s motion for a new trial on damages, finding that the plaintiff’s damages expert sufficiently showed that prior license agreements were economically comparable to a hypothetically negotiated agreement between the parties. EcoFactor, Inc. v. Google LLC, Case No. 23-1101 (Fed. Cir. June 3, 2024) (Reyna, Lourie, JJ.) (Prost, J., dissenting).

EcoFactor owns a patent directed to mitigating strain on the electricity grid by adjusting thermostat settings within HVAC systems. The patent describes a system where thermostats collect internal temperature readings and use them alongside external temperatures to estimate internal temperature change rates, including future predictions. EcoFactor sued Google alleging infringement based on Google’s Nest smart thermostat products.

After discovery, Google sought summary judgment, arguing that claims of EcoFactor’s patent were invalid as abstract ideas under 35 U.S.C. § 101. The district court denied this motion as well as Google’s Daubert motion to exclude the testimony of EcoFactor’s damages expert. At trial the jury found that Google infringed EcoFactor’s patent and awarded damages. The district court denied Google’s subsequent motions for judgment as a matter of law on noninfringement and for a new trial on damages. Google appealed.

Google raised three key issues. First, it argued that the district court erred in denying its motion for summary judgment. Second, Google asserted that the district court erred in denying its motion for judgment as a matter of law concerning the noninfringement of EcoFactor’s patent. Third, Google claimed that the district court wrongly denied its motion for a new trial on damages, arguing that EcoFactor’s damages expert opinion was based on unreliable methodology.

The Federal Circuit upheld the district court’s decision to deny summary judgment because there were genuine issues of material fact warranting a trial. The Court also affirmed the jury’s infringement verdict against Google, finding that it was supported by substantial evidence. Despite Google’s argument that its Nest thermostats did not meet the claims of EcoFactor’s patent, the Court concluded that expert testimony and corroborating documentation demonstrated otherwise.

On the damages issue, Google argued that EcoFactor’s expert testimony was unreliable because there was no evidence that the parties to the three license agreements used by the expert actually applied the royalty rate stated in the agreement. While Google acknowledged that each of the license agreements include a specified royalty rate, Google argued that each also included a “whereas” clause indicating that the licensee would pay EcoFactor a lump sum amount “set forth in this Agreement based on what EcoFactor believes is a reasonable royalty calculation of [$X] per-unit for . . . estimated past and [] projected future sales of products accused of infringement in the Litigation.” Google asserted that while the agreements may have included a stated rate, there was no evidence that the agreements actually applied the rate in calculating the lump sum payment.

The Federal Circuit rejected Google’s argument. The Court explained that the proposed royalty rate was derived from three [...]

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UK High Court Issues Landmark Global FRAND Rate Decision

The UK High Court of Justice issued its long-anticipated decision establishing a global Fair, Reasonable and Non-Discriminatory (FRAND) royalty rate for a patent portfolio essential to 3G, 4G and 5G cellular technologies. InterDigital Tech. Corp. et al. v. Lenovo Group Limited, Case No. HP-2019-000032, [2023] EWHC 529 (Pat) (Mar. 16, 2023) (Mellor, J.)

InterDigital owns a portfolio of standard essential patents (SEPs) that have been declared essential to the European Telecommunications Standard Institute’s (ETSI) 3G, 4G and 5G cellular technology standards. InterDigital sought to license the SEPs to Lenovo, which implements these cellular standards in its mobile phones, tablets and PCs. After the parties could not agree on the terms under which Lenovo should take a license, InterDigital filed a lawsuit. The High Court held several technical trials in which it found that Lenovo infringed certain of the patents.

Based on the result of the technical trials, the High Court determined that InterDigital had established the right to a FRAND determination of its portfolio. The parties presented two issues regarding FRAND. The first issue was whether the InterDigital license offer was FRAND, and if not, what terms would be FRAND for a license to Lenovo of the InterDigital patent portfolio. The second issue was whether InterDigital was entitled to an injunction based on the parties’ negotiation conduct, including whether InterDigital acted as a willing licensor and whether Lenovo acted as a willing licensee.

The High Court concluded that Lenovo should pay InterDigital a FRAND rate of $0.175 per cellular unit for a worldwide license to InterDigital’s portfolio. The $0.175 rate yields a lump sum payment of $138.7 million for sales from 2007 to the end of 2023. The Court’s FRAND rate determination was closer to Lenovo’s offered rate of $0.16/unit than to InterDigital’s demand of $0.498/unit.

In determining the appropriate FRAND rate, the High Court analyzed whether InterDigital’s proposed rate was comparable to the rate in InterDigital’s other license agreements for SEPs. InterDigital argued that its license offer to Lenovo was consistent with “program rates” under which it had already licensed its SEPs to other companies. The Court, however, rejected InterDigital’s program rates as comparable because the other licenses included volume discounts ranging from 60% to 80% of InterDigital’s program rate. InterDigital argued that Lenovo was not entitled to the same type of steep volume discount and, therefore, those licenses with discounts applied were not comparable licenses for Lenovo. The Court disagreed, finding that the volume discounts applied to those licenses “do not have any economic or other justification” and that their primary purpose was to “shore up InterDigital’s chosen program rates.” The Court further observed that the primary effect of the volume discount in the other licenses was to discriminate against smaller licensees, which is exactly what FRAND is supposed to avoid.

InterDigital tried to bolster its argument that its program rate was FRAND by applying a top-down cross-check. The top-down approach starts with the cumulative value of all royalties that should be paid on FRAND [...]

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