The U.S. District Court for the Central District of California recently issued its opinion in TCL Communications v. Ericsson (SACV 14-341 JVS(DFMx) and CV 15-2370 JVS (DFMx)) on standard-essential patents and whether a commit to license them was on terms that are fair, reasonable and nondiscriminatory, or FRAND.  The Court determined Ericsson did not offer to license its standard essential patents on reasonable terms, and instead become only the fourth U.S. Court to determine a royalty rate for essential patents.

Patent holders that own patents essential to industry standards often offer (or are required by the standard setting body to offer) to license their patents on FRAND terms when a patent is, or may become, essential to practice a technical standard, such as the wireless communications standards.  A patent becomes standard-essential when a standard-setting organization sets a standard that adopts the patented technology.  The acceptance of a patent holder’s patent into a standard is of great value to the patent holder, and enhances the monopoly which the patent holder has by virtue of the patent.  The accepted patents are often referred to as standard essential patents, or “SEPs.”  Anyone who wishes to manufacture products or provide services in accordance with the standard must now secure a license from the patent holder.  However, in exchange for acceptance of the patent as part of a standard, the patent holder must agree to license that technology on FRAND terms, which is typically a lower license rate than a standard (or non-FRAND) patent license in a comparable setting and with little ability to refuse to license.

Here, this case focused on the licensing of patents in the telecommunications field affecting 2G, 3G, and 4G1 cellular technologies.  Potential licensees TCL Communication Technology Holdings, Ltd. TCT Mobile Limited, and TCT Mobile (US) Inc. ( collectively “TCL”) manufacture and distribute cell phones on a world-wide scale.  Patent holders Telefonaktiebolaget LM Ericsson and Ericsson Inc. ( collectively “Ericsson”) hold an extensive portfolio of telecommunications patents.  TCL sought to license Ericsson’s patents, but the parties could not agree on terms.  The relevant standard setting organization at issue in this dispute is the European Telecommunications Standards Institute, or “ETSI.”

In beginning its analysis, the Court laid out the three tasks it needed to undertake.  The Court had to first “determine whether Ericsson met its FRAND obligation, and then whether Ericsson’s final offers before litigation, Offer A and Offer B, satisfy FRAND.  If they are not, the Court must determine what terms are material to a FRAND license, and then supply the FRAND terms.”

There were two principal schemes presented to the Court to consider in determining the proper FRAND rate, and if Ericcson offered to license at that FRAND rate.  One approach, offered by TCL, is a “top-down” approach which begins with an aggregate royalty for all patents encompassed in a standard, then determines a firm’s portion of that aggregate.  There other, offered by Ericcson, is an “ex ante,” or ex-Standard, approach which seeks to measure in absolute terms the value which Ericsson’s patents add to a product.  However, instead of just using one approach or another, the Court combined the two approaches.  Essentially, the Court undertook a non-discrimination analysis based principally on the review of comparable licenses.

At the end of the day, after conducting its analysis based on the combined hybrid non-discrimination approach, the Court reached the following conclusions:  “Ericsson negotiated in good faith and its conduct during the course of negotiations did not violate its FRAND obligation.  It is unnecessary for the Court to determine whether the failure to arrive at an agreed FRAND rate violated Ericsson’s FRAND obligation. Regardless of the answer to that question, the Court is required to assess whether FRAND rates have been offered in light of the declaratory relief which both sides seek.”

The Court then determined that Ericsson’s Offer A and Offer B were not FRAND rates and proceed to determine its own FRAND rates.  The court prescribed that the parties enter into a 5-year license agreement reflecting the FRAND rates, and TCL must pay Ericsson approximately $16.5 million for past unlicensed sales.  The FRAND rates determined by the Court were as follows:

In sum, if it stands, this case will likely make it easier for lower end product vendors like TCL to negotiate lower FRAND rates, and in turn more competitively offer their products in major markers.  It will also set a precedential approach to be used in future FRAND license negotiations and determinations.  However, Ericcson has already appealed this ruling to the Federal Circuit, so the final outcome is still far from over.