HTC Corp. v. Telefonaktiebolaget LM Ericsson

• Decision Date: 31 August 2021
• Docket Number: No. 19-40566,C/w No. 19-40643,19-40566
• Citation: 12 F.4th 476
• Parties: HTC CORPORATION; HTC America, Incorporated, Plaintiffs—Appellants, v. TELEFONAKTIEBOLAGET LM ERICSSON; Ericsson, Incorporated, Defendants—Appellees.
• Court: U.S. Court of Appeals — Fifth Circuit

12 F.4th 476

HTC CORPORATION; HTC America, Incorporated, Plaintiffs—Appellants,

v.TELEFONAKTIEBOLAGET LM ERICSSON; Ericsson, Incorporated, Defendants—Appellees.

No. 19-40566

C/w No. 19-40643

United States Court of Appeals, Fifth Circuit.

FILED August 31, 2021

David J. Burman, Kevin A. Zeck, Attorneys, Thomas Andrew Culbert, Perkins Coie, L.L.P., Seattle, WA, Jennifer Haltom Doan, Esq., Haltom & Doan, Texarkana, TX, Andrew Thomas Dufresne, Perkins Coie, L.L.P., Madison, WI, for Plaintiffs-Appellants.

Theodore E. Stevenson, III, Attorney, Alston & Bird, L.L.P., Dallas, TX, Blake Hunter Bailey, McKool Smith, P.C., Houston, TX, Samuel Franklin Baxter, Senior Litigation Counsel, McKool Smith, P.C., Marshall, TX, Charles E. Fowler, Jr., U.S. Attorney's Office, Central District of California, Los Angeles, CA, Rayiner I. Hashem, Jeffrey A. Lamken, MoloLamken, L.L.P., Washington, DC, Nicholas M. Mathews, McKool Smith, P.C., Chelsea Ann Priest, Sidley Austin, L.L.P., Dallas, TX, for Defendants-Appellees.

Thomas W. Krause, U.S. Patent & Trademark Office, Kakoli Caprihan, Associate Solicitor, Meredith Hope Schoenfeld, U.S. Patent & Trademark Office, Office of the Solicitor, Alexandria, VA, Adam Daniel Chandler, U.S. Department of Justice, Antitrust Division, Appellate Section, Washington, DC, for Amicus Curiae United States of America.

Andrew Jacob Tuck, Attorney, Alston & Bird, L.L.P., Atlanta, GA, for Amicus Curiae Nokia Technologies Oy.

Before Jones, Elrod, and Higginson, Circuit Judges.

Jennifer Walker Elrod, Circuit Judge:

After negotiations for a patent licensing agreement soured, the plaintiffs sued the defendants and alleged that they had breached their contractual obligation to offer a license on fair, reasonable, and non-discriminatory terms. The jury found in the defendants’ favor, and the district court entered a separate declaratory judgment holding that the defendants had affirmatively complied with their contractual obligations. Now, the plaintiffs appeal, challenging the district court's declaratory judgment in the defendants’ favor (which relies on the facts found by the jury) and certain of the district court's jury instructions and evidentiary rulings. Finding no error in any of the district court's decisions, we AFFIRM.

I.

With the small cell phones we carry in our pockets, instant access to communication, information, and entertainment are never more than a few simple taps away. Devices communicate seamlessly with one another to bring us the data we need in seconds, regardless of which company developed those devices or what network they are on.

To make all of this possible, industry standard setting organizations have settled on technical standards that permit interoperability between devices. These standards dictate how cell phones and cellular towers communicate with one another, and they promote fast, reliable, and secure connections between devices. This is why a person with an iPhone on AT & T's network can call or text someone with a Samsung phone on Verizon's network without any trouble. Mobile device manufacturers and network providers all use the same set of standards when designing their devices and networks to ensure compatibility between various devices and networks.

Standards may be generally beneficial for both consumers and industry participants. See generally Mark A. Lemley, Intellectual Property Rights and Standard-Setting Organizations , 90 Calif. L. Rev. 1889, 1896–98 (2002). However, industry standards also pose a risk of anticompetitive behavior. See, e.g. , Ericsson, Inc. v. D-Link Sys., Inc. , 773 F.3d 1201, 1209 (Fed. Cir. 2014) (explaining two "potential concerns" with standardization). Standards frequently incorporate patented technology, known as standard-essential patents. See id. When a patent becomes essential to an industry standard, other companies face a choice if they want to have a standard-compliant device: They can either attempt to license the patented technology in order to develop their own product, or they can risk a patent infringement action against them. This puts the holder of a standard-essential patent in a powerful position to extract as much money as they want from potential licensees.

To combat the potential for anticompetitive behavior, standard setting organizations require standard-essential patent holders to commit to licensing their patents on fair, reasonable, and non-discriminatory terms (FRAND terms). See id. Companies seeking to license under these terms become third-party beneficiaries of the contract between the standard-essential patent holder and the standard setting organization. They are thus enabled to enforce the terms of that contract. See Microsoft Corp. v. Motorola, Inc. , 696 F.3d 872, 885 (9th Cir. 2012).

This case involves such an attempt to license a standard-essential patent. The European Telecommunications Standards Institute (ETSI) is a preeminent standard setting organization in the mobile telecommunications field. The France-based organization established many of the global standards for 3G, 4G, and 5G cellular communications technology. ETSI asks its members that own standard-essential patents to provide "an irrevocable undertaking in writing that [they are] prepared to grant irrevocable licences on fair, reasonable and non-discriminatory" terms. If a patent owner is not prepared to grant such licenses, ETSI may exclude the patented technology from the standard.

Telefonaktiebolaget LM Ericsson and Ericsson, Inc. (collectively Ericsson) hold numerous patents that are considered essential to the standards for 2G, 3G, and 4G technology. Ericsson has agreed with ETSI to grant licenses to other companies to use its standard-essential patents on FRAND terms. HTC Corp. and HTC America, Inc. (collectively HTC) produce mobile devices that implement the 2G, 3G, and 4G standards. HTC also owns several standard-essential patents related to 2G, 3G, and 4G technology. But to manufacture standard-compliant mobile devices, HTC has to obtain a license to use Ericsson's patents.

Ericsson and HTC have previously entered into three cross-license agreements for their respective patents—one in 2003, one in 2008, and one in 2014. In the 2014 licensing agreement, HTC agreed to pay Ericsson a lump sum of $75 million to license Ericsson's patents regardless of HTC's phone sales. Based on HTC's sales, the company paid Ericsson approximately $2.50 per mobile device.

In 2016, a short time before the 2014 license was about to expire, HTC and Ericsson began negotiating to renew the license. Ericsson offered a rate of $2.50 per 4G device. HTC did not accept this offer. Instead, it independently examined the value of Ericsson's patents and reasoned that the royalty rate should be based on the smallest salable patent-practicing unit rather than the net sales price of the entire end-user device. HTC concluded that the relevant unit was the baseband processor, the hardware component of a cellular device that allows it to connect to cellular networks. Based on this conclusion, HTC met with Ericsson in late March 2017 and counteroffered a rate of $0.10 per 4G device.

Ericsson considered HTC's offer to be "so far off of the norm" that it "chilled" the negotiations. Ericsson left the meeting intending to justify its initial $2.50 per 4G device offer. A few days after that meeting, on April 6, 2017, HTC filed the present lawsuit, alleging that Ericsson had breached its commitment to provide a license on FRAND terms. In June, while the lawsuit was pending, Ericsson proposed a new licensing agreement whereby HTC would pay 1% of each 4G device sold, subject to a $1 floor and a $4 cap. HTC did not accept this second offer either. Instead, it filed an amended complaint seeking declaratory relief that Ericsson had breached its contractual obligations to ETSI by insisting on non-FRAND terms and had failed to negotiate in good faith.¹ Ericsson counterclaimed for a declaration that its offers were FRAND and alleged that HTC had failed to negotiate in good faith.

At trial, the parties debated how to determine the value of Ericsson's patents, which would affect whether Ericsson had offered FRAND terms to HTC. For its part, HTC sought to prove that Ericsson had not offered FRAND terms. It advocated apportioning the value of Ericsson's patents using the profit margin on the baseband processor, rather than the net sales prices of the finished mobile device, as the royalty base. HTC also pointed to several larger mobile device manufacturers, like Apple and Huawei, who had received significantly more favorable licensing agreements than the one offered to HTC.

Ericsson argued that it had offered FRAND terms to HTC and negotiated in good faith. It contended that the best way to determine whether proposed terms were fair and reasonable was to look at licenses that Ericsson had negotiated with other, similarly situated companies. All of those licenses were based on the value that Ericsson's product provided to the end-user product, not just the smallest salable unit. Ericsson pointed to its licenses with several of HTC's competitors, each of which contained terms similar to those offered to HTC.

Ericsson and HTC both submitted proposed jury instructions. HTC proposed highly detailed instructions to help the jury interpret FRAND, but Ericsson objected to most of these instructions and proposed a more general FRAND instruction. The district court considered the two proposals, but ultimately gave the following instruction to the jury: "Whether or not a license is FRAND will depend upon the totality of the particular facts and circumstances existing during the negotiations and leading up to the license. Ladies and gentlemen, there is no fixed or required methodology for setting or calculating the terms of a FRAND license rate."

Before issuing this charge to the jury, the district court held a formal charge conference with both HTC and Ericsson where it invited "any possible objections" to its...