A redacted version of the second U.S. FRAND royalty determination has just been published today. Judge James L. Robart in Seattle (Western District of Washington) pioneered this field with his 207-page rate-setting opinion in Microsoft v. Motorola, awarding the Google subsidiary less than one-twentieth of a percent of what it initially demanded. Now Judge James F. Holderman in Chicago (Northern District of Illinois) has largely adopted Judge Robart's approach, and in at least one respect -- the royalty base -- he actually took a licensee-friendlier approach, focusing completely on the price of WiFi chipsets because the patent holder failed to convince him of a royalty based on the price of an entire end product.
The numerical outcome is that Innovatio IP Ventures, LLC, a patent assertion entity that "has sued numerous coffee shops, hotels, restaurants, supermarkets, large retailers, transportation companies, and other commercial users of wireless internet technology located throughout the United States", is deemed entitled to a per-unit royalty of "9.56 cents for each Wi-Fi chip used or sold by the Manufacturers in the United States, subject to the terms of the patents, the applicable statute of limitations, and a finding of infringement" for a license to its portfolio of 19 patents essential to the IEEE 802.11 (WiFi) standard. This is a win for the manufacturers whose products are actually at issue in this case -- Cisco Systems, Motorola Solutions (not to be confused with Google-owned Motorola Mobility, which was spun off of Motorola, which then called itself Motorola Solutions), SonicWALL, Netgear, and Hewlett-Packard -- against this patent troll: according to the order, "Innovatio's proposed method, for example, [would have] result[ed] in royalties on average of approximately $3.39 per access point, $4.72 per laptop, up to $16.17 per tablet, and up to $36.90 per inventory tracking device (such as a bar code scanners)." Based on the non-weighted average of those four examples of $15.30, this means Innovatio got less than a percent of what it wanted. The experts who defended Innovatio's excessive demand included Berkeley Professor David J. Teece, whom I mentioned earlier today because of his work for Samsung and who (in)famously wrote on Motorola Mobility's behalf that it only takes one bullet to kill someone with a standard-essential patent (SEP).
Toward the end, Judge Holderman's ruling explains why the 9.56 cents per unit Innovatio is (subject to the conditions quoted further above) entitled to "is approximately three times Judge Robart's [F]RAND rate of 3.471 cents per unit". There's a reason for this difference:
"Judge Robart concluded that Motorola's patents were only of minimal value to the standard, [...] whereas the court here has found that Innovatio's patents are of moderate to moderate-high importance to the standard. A multiplier of about three is a reasonable difference between the two royalties to account for the greater importance of lnnovatio's patents to the 802.11 standard."
Judge Holderman also compares the number he arrived at with a jury award in Ericsson v. D-Link in the Eastern District of Texas. After finding three of Ericsson's 802.11n SEPs infringed, the jury awarded damages of $10.1 million. On that basis, the court held that Ericsson was entitled to 15 cents per unit as an ongoing future royalty. While that Texas case is less relevant (also because the jury just rendered a verdict without explaining any particular FRAND rate-setting methodology), the numbers nevertheless show that WiFi patents are worth a whole lot less than what some WiFi SEP holders demand.
There's a clear and strong trend in U.S. courts toward rationality in connection with SEP royalty rates. Conversely, irrational demands fail consistently these days. Last month, Chief Judge Rader of the Federal Circuit told Google's Motorola Mobility that its demand with respect a cellular SEP was "crazy". That was the appellate hearing on Judge Posner's dismissal of a two-way Apple-Motorola lawsuit in -- what a coincidence -- Judge Holderman's district.
Seattle is in the Ninth Circuit, Chicago in the Seventh Circuit, and all patent infringement cases are appealed to the Federal Circuit. From the West Coast to the Midwest to the East Coast, and apparently also including the trolls' favorite district, SEP holders get but tiny fractions of out-of-this world royalty demands. They will all have to become more reasonable now. Will they? Not sure.
It's also clear that Judge Robart's ruling becomes ever more influential. In the Innovatio case, the parties disagreed on a lot of things, but no party proposed a different approach than Judge Robart's -- they just disputed its application to this case. Germany has so far adjudged SEP cases by the Orange Book (the related ruling is called Orange-Book-Standard). In U.S. courts, the 207-page "Robart Book" is now the gold standard for FRAND determinations, which doesn't mean that there can't be further improvements, such as in connection with the appropriate royalty base, which show that Judge Holderman thought these issues through very independently.
Finally, here's the public version of Judge Holderman's FRAND determination:
13-10-03 Innovatio v. Mult. Def. WiFi Patents FRAND Determination by Florian Mueller
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