In February 2019, an Eastern District of Texas jury became the first in the nation to address whether a standard essential patent (SEP) owner had met its obligation to offer a license on fair, reasonable, and non-discriminatory (FRAND) terms. That verdict, finding that HTC had not shown that Ericsson had breached its FRAND commitment, was followed by a judgment from District Judge Rodney Gilstrap that Ericsson’s license offers actually were FRAND. The Fifth Circuit has now affirmed that judgment on appeal.

The underlying dispute began in 2016, shortly before the expiration of a prior cross-license between the parties, which had included a royalty of about $2.50 per HTC smartphone. But after Ericsson offered that same rate per 4G device, HTC—citing its own evaluation of Ericsson’s portfolio—instead sought to base the royalty rate on the smallest salable patent-practicing unit, which it identified as the baseband processor. In a March 2017 meeting, HTC then made a counteroffer of $0.10 per device on that basis, at which point Ericsson “chilled” the negotiations with the intent to later justify its original offer.

However, the following month, HTC sued Ericsson in the Eastern District of Texas (6:18-cv-00243), alleging that the defendant had breached its commitment to the European Telecommunications Standards Institute (ETSI), the French standard-setting organization (SSO), that it would offer a license to its SEPs on FRAND terms. Ericsson then proposed a 1%-per-4G-device royalty with a $1 floor and a $4 cap, terms that HTC rejected—instead amending its complaint to seek a declaratory judgment that Ericsson had breached its commitment to ETSI by allegedly insisting on non-FRAND terms and refusing to negotiate in good faith. For its part, Ericsson counterclaimed that its offers were FRAND and that it was HTC that had not negotiated in good faith.

Several issues related to the FRAND-ness of Ericsson’s offer remained in dispute by the time the case approached trial in early 2019. These included the proper valuation of Ericsson’s portfolio and whether it was non-FRAND to offer HTC different terms than certain other companies. In particular, HTC contended that the royalty should be based on profit margins on the baseband processor, and that Ericsson had violated the non-discrimination prong of FRAND by offering it less favorable terms than larger phone makers like Apple and Huawei. Ericsson countered that licenses with similarly situated competitors of HTC were more closely comparable, licenses with rates based on the value that Ericsson’s IP contributed to end-user devices and that had similar terms to what it offered HTC. Also at issue were the jury instructions, as District Judge Rodney Gilstrap rejected HTC’s attempt to provide a more detailed set of instructions as to how the jury should determine the FRAND-ness of Ericsson’s license. Rather, the court more generally instructed the jury that it should consider the totality of the facts and circumstances, and that “there is no fixed or required methodology for setting or calculating the terms of a FRAND license rate”.

In February 2019, a jury then returned a verdict finding that HTC had not shown that Ericsson breached its FRAND obligation and that both parties had breached their obligation to negotiate in good faith. Judge Gilstrap granted Ericsson’s request for a declaratory judgment on its counterclaim that same May, ruling that the company had complied with its FRAND obligation to HTC as required by its licensing declarations to ETSI. HTC subsequently appealed, challenging the court’s exclusion of its jury instructions, the above declaratory judgment, and the “exclusion of certain expert testimonial evidence as hearsay” (as summarized by the Fifth Circuit).

The Fifth Circuit’s Decision on Appeal

Ruling on appeal on August 31, the Fifth Circuit began by affirming the court’s rejection of HTC’s proposed jury instructions. The company argued that Judge Gilstrap should have instructed the jury to apportion the value of the accused devices’ patented features from those not patented, and that “the non-discrimination requirement of FRAND ‘serves to level the playing field among competitors’ by requiring a patent holder to provide similar terms to similarly situated licensees’”. However, the court found that HTC had failed to show that the exclusion of these instructions was reversible error, as the company’s proposed instructions were based on inapplicable law—specifically, US patent law, whereas Ericsson’s FRAND commitment to ETSI is governed by French contract law. Although the district court could have issued a general apportionment instruction with guidance from Federal Circuit precedent, the Fifth Circuit held, it was not bound to do so because this is a breach-of-contract suit, not a patent infringement suit.

The Fifth Circuit also rejected HTC’s proposed instruction regarding the non-discrimination prong, which “would do away with any ‘difference in terms’ offered to potential licensees if the difference ‘creates a competitive disadvantage for a prospective licensee’”, thereby “prohibiting preferential treatment that imposes different costs to different competitors”. While the Fifth Circuit noted that “[n]o federal court of appeals has directly considered a FRAND nondiscrimination claim in detail”, it held that the same approach should apply as for other prongs: that a court should look to the patent owner’s actual FRAND commitment in crafting an instruction. Here, the Fifth Circuit found that “HTC’s proposed instruction would transform the non-discrimination element of FRAND into a most-favored-licensee approach, which would require Ericsson to provide identical licensing terms to all prospective licensees”. This approach, the court explained, had been explicitly rejected by ETSI in favor of giving patent owners “some flexibility in coming to reasonable agreements with different potential licensees”.

Even if the rejected instruction on apportionment had been based on the correct law, the Fifth Circuit held, the district court was not wrong to exclude them because whether apportionment was necessary was not at issue. Rather, “[o]nly the methodology for determining the patent’s value was disputed” (emphasis in original). Since HTC was still able to present its evidence and substantive arguments at trial (as, for its part, was Ericsson), the court held that “[t]he absence of its requested instructions did not affect its ability to present its case to the jury”—which, under Fifth Circuit law, meant that there had been no reversible error.

The Fifth Circuit turned next to HTC’s challenge of the declaratory judgment that Ericsson’s offers had been FRAND, which HTC argued was incorrect as a matter of law due to the “substantial disparities between license terms offered to HTC and several of its competitors”. However, the Fifth Circuit rejected this contention as “little more than a sufficiency-of-the-evidence challenge to the jury verdict masquerading as a challenge to the declaratory judgment”. Although the court acknowledged that there was a slight difference between the verdict (“finding that Ericsson’s offers were not a breach of FRAND”) and the declaratory judgment (“holding that Ericsson’s offers actually were FRAND”), with a “slightly different” evidentiary threshold as a result, it pointed out that the evidence used for both determinations had been the same. Moreover, the Fifth Circuit found that the declaratory judgment “expressly relied on the facts as found by the jury”, though it was a conclusion of law. For this reason, the court held that “[c]hallenging the evidentiary sufficiency of the declaratory judgment thus also challenges the sufficiency of the evidence supporting the jury’s verdict”. As such, HTC would have needed to file a Rule 50(b) motion to preserve that challenge, ruled the court, and the company had not done so.

Even if HTC had preserved that argument, the Fifth Circuit further explained that it would not have overturned the declaratory judgment, as Ericsson had “presented substantial evidence to support its position that it had offered FRAND terms to HTC”:

Ericsson pointed to licenses with similarly situated companies to HTC that had terms that were remarkably similar to those offered to HTC. This supported both its valuation arguments (suggesting that the value of Ericsson’s patents was best determined by looking to comparable licenses) and its non-discrimination arguments (suggesting that other similarly situated competitors had received similar licenses).

The court also noted HTC’s evidence to the contrary, which addressed the valuation of Ericsson’s portfolio and encompassed its argument that Ericsson’s licenses “with companies like Apple, Samsung, and Huawei were much more favorable”. However, the court observed that “Ericsson presented additional evidence indicating that those companies were not similarly situated to HTC due to a variety of factors”. As such, the Fifth Circuit found that the “jury must have rejected HTC’s evidence and arguments in order to conclude that HTC had not carried its burden of proving that Ericsson’s offers to HTC were not FRAND”. For those reasons, and because it determined that this evidence did not tip the scales so “overwhelmingly in HTC’s favor” that no reasonable jury could have found for Ericsson, the court declined to overturn the declaratory judgment.

Lastly, the Fifth Circuit found no error in the lower court’s exclusion of testimony by an Ericsson damages expert from a prior case, which HTC had attempted to introduce in order to “demonstrate that Ericsson’s experts in [that] previous case had calculated royalty rates in comparable licensing agreements at a lower rate than the one offered to HTC”. The court had rejected this evidence as hearsay when offered on cross-examination, after previously granting Ericsson’s motion in limine. On appeal, HTC argued that the evidence should have been admitted under the hearsay exception covering statements “offered against an opposing party” and “made by a person whom the party authorized to make a statement on the subject” (under Federal Rule of Evidence 801(d)(2)(C)). However, the Federal Circuit disagreed, noting that it has narrowly construed this rule to encompass “circumstances where the expert was an agent of the opposing party or where the expert’s statements or reports were prepared for the very case in which admission was sought”—and finding that the testimony at issue fell into neither category.

Having thus rejected each of HTC’s arguments on appeal, the Fifth Circuit concluded by affirming the lower court’s judgment for Ericsson.

Judge Higginson’s Concurrence

Circuit Judge Stephen A. Higginson concurred with the Fifth Circuit’s judgment but argued that the district court erred by excluding HTC’s jury instruction on apportionment. That decision, argued Judge Higginson, ran counter to the Federal Circuit’s opinion in Ericsson v. D-Link Systems, which established that the “jury must be instructed” to “apportion damages for SEPs that cover only a small part of a standard”. Judge Higginson explained that “D-Link, though decided in the patent infringement context, applies instructively to breach-of-FRAND cases. While a breach-of-FRAND case ‘is not a patent law action,’ the ‘Federal Circuit’s patent law methodology can serve as guidance in contract cases on questions of patent valuation’” (citations omitted). The Fifth Circuit was wrong to uphold the district court’s exclusion both for this reason and because the parties and the US government—acting as an amicus—all supported the inclusion of such an instruction, Judge Higginson asserted.

That said, while Judge Higginson believed that the proposed “apportionment instructions were substantially correct statements of law and were not covered in any other portion of the jury charge”, he found (as did the rest of the Fifth Circuit) that this exclusion had not seriously impacted HTC’s ability to present its case. As a result, he also concluded that the error was not reversible.