CSIRO v. CISCO Systems, Inc.

CSIRO v. CISCO Systems, Inc.
809 F.3d 1295 (Fed. Cir. 2015)
Authored by Megan Osborn

Statement of Facts: CSIRO is the principal research arm of the Australian Federal Government. CSIRO obtained a patent for a technique that attempts to solve the “multi-path problem,” in which wireless signals reflect off objects and interfere with each other. CSIRO v. CISCO Systems, Inc., 809 F.3d 1295, 1297 (Fed. Cir. 2015). In 1999, the Institute of Electrical and Electronics Engineers included CSIRO’s patent’s techniques in their revision of the 802.11 wireless standard (802.11a) for specifications of products using the Wi-Fi brand.

CSIRO entered into a Technology Licensing Agreement (“TLA”) with CISCO Systems, Inc. (“Cisco”) in 2001 for use of CSIRO’s patent’s technology in wireless chips. The TLA ended in 2007 when Cisco ceased using chips with the CSIRO patent in their products.

In 2004, CSIRO approached Cisco offering them a license to the patent under new terms used in their “Rate Card” system that they offered to other companies. Cisco did not accept the offer. Cisco’s Vice President Dan Lang, however, suggested a new royalty rate for the patent use at a lower price than what was offered in the “Rate Card” system, which was only slightly lower than the royalties Cisco was then paying to CSIRO under the TLA. Ultimately, CSIRO and Cisco did not come to an agreement on this matter. In 2007, Cisco stopped selling chips using the CSIRO patent’s technology.

Procedural History: Patentee CSIRO sued CISCO Systems, Inc. (“Cisco”) for an infringement of their patent in the United States District Court for the Eastern District of Texas. The district court awarded CSIRO $16,243,067 in damages after a bench trial in which Cisco stipulated to infringement. Cisco appealed to the Federal Circuit Court.

Questions Presented:

(1) Did the district court violate apportionment principles in employing the damages model by taking into account the parties’ informal licensing negotiations with respect to the multi-component end product?

(2) Did the determination of a reasonable royalty have to take into account the accruing value of the adoption of the patent’s standard-essential status?

(3) Did the district court have to consider the TLA in its analysis of damages for infringement?

Holdings: The district court was correct in relying upon the parties’ licensing negotiations when analyzing damages, but erred in not accounting for the patent’s standard-essential status and in its reasons for discounting the TLA. Accordingly, the damages award was vacated and the case was remanded for recalculation of a reasonable royalty in light of the patent’s standard-essential status and a reevaluation of the TLA’s relevance. In answer to the Questions Presented:

(1) No, the district court did not violate apportionment principles in employing a damages model taking into account the parties’ informal licensing negotiations with respect to the multi-component end product;

(2) Yes, determination of a reasonable royalty for a patent infringement damages award has to account for value accruing to adoption of a patent’s standard-essential status;

(3) Yes, the district court did have to take into account the TLA when it analyzed the damages for infringement.

Reasoning: The district court’s analysis of the parties’ damage models was flawed. These flaws led the Federal Circuit to reject the lower court’s analysis in favor of its own hypothetical negotiation damages model using the Georgia-Pacific factors.  The Federal Circuit held that the district court’s consideration of the parties’ informal licensing negotiations by Mr. Lang was appropriate because under the apportionment principle in Apple Inc. v. Motorola, Inc., there may be more than one reliable method for estimating a reasonable royalty. 757 F.3d. 1286, 1315 (Fed. Cir. 2014). Mandated use of the “smallest salable patent-practicing unit” to establish the value of the patent infringement would unnecessarily exclude an effective value estimation method such as evidence of license negotiation for the patent alone. CSIRO v. CISCO Systems, Inc., 809 F.3d 1295, 1301 (Fed. Cir. 2015) In this case, those negotiations were available and the court stated it was appropriate for the district court to utilize them in creating an upper and lower bound for damages in accordance with the Georgia-Pacific factors.  The district court determined that the following factors were relevant to this case: (3) The nature and scope of the license, as exclusive or non-exclusive, or as restricted or non-restricted in terms of territory or with respect to whom the manufactured product may be sold; (4) The licensor’s established policy and marketing program to maintain their patent monopoly by not licensing others to use the invention or by granting licenses under special conditions designated to preserve that monopoly; (5) The commercial relationship between the licensor and licensee, such as, whether they are competitors in the same territory in the same line of business or whether they are inventor and promotor; (8) the established profitability of the product made under the patent, its commercial success, and its current popularity; (9) the utility and advantages of the patent property over the old modes or devices, if any, that had been used for working out similar results; (10) the nature of the patented invention, the character of the commercial embodiment of it as owned and produced by the licensor, and the benefits to those who have used the invention.  According to the court, the negotiations in this case were especially useful in assessing the value of the patent because it valued the use of the patent alone. The court stated that this valuation could, in some cases, be more appropriate and exact than trying to isolate the value of the patent within a larger product.

The district court erred in failing to account for extra value accruing to the patent from standardization under 802.11a. Because the patent was a “standard essential patent” (“SEP”), unique considerations apply: SEPs can only be valued for the value of the patented feature and not for any added value from standardization of such technology.  Ericsson, Inc. v. D-Link Sys., 773 F. 3d 1201, 1232 (Fed. Cir. 2014). The district court, which did not have the benefit of the Ericsson opinion at the time when it decided this case, erred when it increased the royalty award attributable to the patent’s commercial success due to its standardization under 802.11. The court states that some factors shouldn’t be used at all when analyzing SEPs, stating that “Ericsson calls out factors 8, 9 and 10 as all being irrelevant or misleading in cases involved SEPs.” Id. at 1305. Additionally, the court erred by not considering the effect of standardization on the figures suggested in Mr. Lang’s informal negotiations. On remand, the district court should calculate a reasonable royalty in consideration of the monetary effects of standardization on the patent’s value.

Finally, the district court erred in not taking into consideration the TLA when determining the valuation of the patent. The district court improperly rejected the TLA as a determining factor of the patent’s value because it was forged in 1998 and because it was based on chip prices. These reasons are insufficient to discount the TLA from determining the patent’s value. First, the timing of the origination of the TLA is irrelevant as it was renegotiated in 2003, around the time in which the licensing negotiations with Mr. Lang occurred. Second, a license cannot be excluded from value determination of a patent solely because of its royalty base. Ericsson, 773 F.3d at 1228.

In conclusion, the Federal Circuit held that on remand the district court should reconsider the relevance of the as-amended TLA in its damages analysis in light of following: (1) the agreement was between Cisco and the Commonwealth; (2) the agreement was contemporaneous with the hypothetical negotiation; (3) the agreement  was reached before the 802.11(g) standard was adopted; and (4) the agreement  focuses on the chip.

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