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This is an appeal from a bench trial on the sole issue of damages for a patent covering a standard in the wireless communications field that is practiced on chips that are used in wireless products.  The district court, relying on the parties’ negotiations and on a 2004 Rate Card, and applying the Georgia-Pacific factors, awarded over $16 million in damages.  On appeal, Cisco raises three issues: (1) that the district court erred by not starting with the chip itself, which was the smallest saleable unit; (2) that the district court failed to adjust the Georgia-Pacific factors to account for the patent being essential to the wireless standards; and (3) that the district court did not credit the evidence of royalty rates in a “Technology Licensing Agreement” (“TLA”).

On the first issue regarding the smallest saleable patent-practicing unit, the court stated the legal principle that, to be admissible, all expert damages opinions must separate the value of the allegedly infringing features from the value of all other features and where a damages model apportions from a royalty base, the model should use the smallest salable patent-practicing unit as the base.  Here, however, the district court did not apportion from a royalty base, because it began with the parties’ prior negotiations and this negotiation had “already built in apportionment,” because “the parties negotiated over the value of the asserted patent, ‘and no more.’”  The court held that a rule requiring that all damages models begin with the smallest salable patent-practicing unit is untenable and conflicts with the prior approvals of methodologies that value the asserted patent based on comparable licenses.  Where licenses are sufficiently comparable, they are reliable, because the parties are constrained by the market’s actual valuation of the patent. 

On the second issue regarding the fact that the patent was essential to the wireless standards, the court held that the district court erred by failing to account for any extra value accruing to the patent from the fact that it was essential to the standard, apart from the value of the claimed invention itself.  The court further held that this rule applies even where the patent is not encumbered such that the patent owner was required to license on RAND rates (the patent-at-issue was not encumbered by RAND rates for the majority of potential licensees).  Here, the district court erred by failing to account for the standardization, which impacted the court’s analysis on three of the Georgia-Pacific factors.  Under Ericsson, factors 8, 9, and 10 are irrelevant or misleading in standard essential patent cases.  For example, standardization may play a role in commercial success apart from the benefits of the invention.  The district court’s error manifested itself as well in its adoption of the informally offered rates by the patent owner, which may have been trying to capture the value of standardization in addition to the benefits of the invention. 

Lastly, the district court’s factual finding rejecting the TLA, was clearly erroneous for two reasons, because the TLA was negotiated at a date near the hypothetical negotiation by Cisco and such negotiations no longer involved the inventor’s company and thus were relevant as being arms-length. 

Accordingly, the court vacated the damages award and remanded to the district court for further findings.

Commonwealth Scientific and Industrial Research Organisation v. Cisco Systems, Inc., Case No. 2015-1066 (December 3, 2015); Opinion by: Prost, joined by Dyk and Hughes; Appealed From: United States District Court for the Eastern District of Texas, Davis, J.  Read the full opinion here.

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