Court Steps Into Patent Debate That Split Technology Companies

The top U.S. patent court, for the first time, is stepping into a debate that has splintered the technology community over how to value patents that cover essential technologies like Wi-Fi.

Ruling on Ericsson AB’s contribution to the industry standard for Wi-Fi, which incorporates more than a thousand patented inventions, the U.S. Court of Appeals for the Federal Circuit in Washington said patent licensing fees should be based on the incremental value of each invention, and not the value of the standard as a whole.

It also limited the ability of defendants to argue that, in some cases, patents are misused to extract higher royalties.

The decision, issued yesterday, is the first by an appeals court and only the fourth by any court in the U.S., Circuit Judge Kathleen O’Malley said in the opinion. The Institute of Electrical and Electronics Engineers, which sets the standard for Wi-Fi, is considering changes that in some ways differ from the court ruling.

“It’s an important decision,” said Gustav Brismark, vice president of patent strategy for Stockholm-based Ericsson, which opposes the changes being considered at the IEEE. “All of these steps taken by the court system will be scrutinized, and when it’s by the Federal Circuit it has a lot of weight.”

The court stepped into a raging debate in the technology community. As devices become ever more complex, the companies that spent billions of dollars for research into wireless technology are butting heads with manufacturers who want to pay a smaller percentage of the cost of a smartphone or tablet computers to license those technologies. It’s led to lawsuits and investigations by regulators in the U.S., Europe and Asia.

Winners, Losers

Patent attorneys varied on which side in the debate the Federal Circuit ruling favored.

“I see this decision as a clear victory for standard essential patent owners on the value of their patents and it gives guidance where was no guidance,” said David Long of Kelley Drye & Warren in Washington, who’s written on the case.

The decision has “something for each party,” said Jorge Contreras, a University of Utah law professor who specializes in antitrust issues related to standards boards such as IEEE.

The court limited patent owners from using the fact that the patents are part of a standard to extract a high royalty, known as “holdup.” At the same time, companies accused of using the technology without paying can’t ask that jurors to be instructed about holdup unless there is evidence it occurred.

‘Stacking’ Royalties

Contreras said he disagreed with the court’s finding that limits the ability to also tell jurors about what’s known as the “stacking” of royalties.

“If you’ve got 1,000 patents that cover a standard, and it’s reasonable for each of those patent owners to charge a dollar, when you add it together it’s not reasonable to pay $1,000 on a $100 router,” Contreras said.

In the opinion yesterday, the Federal Circuit ruled that router manufacturer D-Link Corp. had infringed two Ericsson patents on ways data is transmitted in packets. It threw out the $10 million damage award, which was based on 15 cents per unit, and ordered the trial court to reconsider the issue based on the new guidelines.

Fountain Valley, California-based D-Link had no comment on th decision, said company spokeswoman Ashley Nakano.

Companies that help establish industrywide standards pledge to license any essential patents on “reasonable and non-discriminatory terms.” The boards that establish the standards have purposefully not defined the phrase, letting companies work it out among themselves.

Defining Reasonable

The IEEE proposal would be the first board to try to define “reasonable.” The proposal is being considered by the Standards Association in the IEEE; a separate group within the organization has questioned whether there is need for any change.

While the Federal Circuit is the first appeals court to weigh in, it won’t be the last. The 9th U.S. Circuit Court of Appeals in San Francisco is considering a case won by Microsoft Corp., which claimed Motorola Mobility, formerly owned by Google Inc., had made unreasonable demands for a license on essential video-decoding and wireless technology used in the Xbox gaming system.

Motorola Mobility had demanded 2.25 percent of the retail price of the Xbox, which Microsoft said would come to $4 billion a year. Before a jury could determine whether Motorola Mobility met its licensing obligation, the judge had to decide what was fair. He came up with pennies per unit, which added up to less than $2 million a year.

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