Another District Court Sets RAND Rates for Standard-Essential Patents

In April 2013, Judge James Robart of the U.S. District Court for the Western District of Washington issued a 200-plus-page opinion determining “reasonable and non-discriminatory” (RAND) royalty rates for standard-essential patents (SEPs) asserted by Motorola against Microsoft—the first such opinion by a district court. (See Microsoft Corp. v. Motorola, Inc., No. C10-1823, 2013 WL 2111217 (W.D. Wash. Apr. 25, 2013).) On Sept. 27, 2013, Judge James Holderman of the Northern District of Illinois issued a lengthy ruling that suggests that Judge Robart’s methodology likely will influence other courts in determining RAND rates. (See In re Innovatio IP Ventures, LLC, MDL No. 2303, Case No. 11 C 9308, Docket No. 975 (N.D. Ill. Oct. 3, 2013) (date of filing public version).) Judge Holderman employed a modified version of Judge Robart’s methodology to determine a RAND rate of 9.56 cents for each WiFi chip sold by several manufacturers. This rate was significantly lower than the royalty Innovatio sought of $4 to $40 dollars based on end products using the chips.

The wide-ranging case involves SEPs asserted by Innovatio, a non-practicing entity, against end-user customers employing WiFi networks—such as coffee shops, hotels, restaurants and transportation companies. Several WiFi equipment manufacturers, including Cisco, Motorola, Netgear, SonicWALL and Hewlett-Packard, sought a declaratory judgment that their products did not infringe Innovatio’s patents, and Innovatio in turn sued them for patent infringement. In July, Judge Holderman ruled that the patents were indeed essential to the WiFi standard and subject to RAND terms based on a commitment to license them on RAND terms made by their previous owner, Broadcom. The parties agreed to a bench trial on the issue of the appropriate RAND rates, and agreed that Judge Robart’s methodology should serve as the model.

Judge Holderman adopted Judge Robart’s modified analysis based on Georgia-Pacific Corp. v. United States Plywood Corp., 318 F. Supp. 1116 (S.D.N.Y. 1970), which included the following considerations:

  • The importance of the SEPs to the standard at issue (separately from the value associated with incorporation of the patented technology into the standard);
  • The importance of the standard and the SEPs to the licensee’s products;
  • Licenses for other RAND-committed patents; and
  • The number of other patents covering the standard and products incorporating it (what is known as “royalty stacking”).

Judge Holderman modified the analysis by determining one RAND rate rather than a range, because the court was determining damages as opposed to providing the jury with a range to determine whether the RAND commitment was breached. Having already ruled on essentiality, the judge ruled out any discount for pre-litigation uncertainty over whether the patents were essential to the standard. Lastly, Judge Holderman merged the first two of Judge Robart’s considerations, because determining the importance of Innovatio’s patents to the standard would simultaneously determine their importance to the WiFi chip.

To arrive at the $.0956 royalty, Judge Holderman first determined that the chips, not the devices in which they are incorporated, should serve as the bases for the royalty. The court then adopted a “top-down” approach: first, calculating the average WiFi chip price to be $14.85 each; second, multiplying that by an average chip-maker’s profit margin of 12.1 percent, to yield an average profit of $1.80 per chip; third, multiplying that number by 84 percent, to account for the value the court apportioned to the top 10 percent of the 3,000 WiFi SEPs; and fourth, multiplying that by a fraction comprised of the number of Innovatio’s WiFi SEPs (19) divided by the 300 top WiFi SEPs.

Given the prominence of the Innovatio litigation (because it targeted end-users, not just manufacturers), Judge Holderman’s decision adds significantly to the case law on how to determine RAND rates and likely will bolster the influence of Judge Robart’s RAND analysis. A copy of the decision is available here.