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Determining Damages for Standard Essential Patents: the
Federal Circuit Provides Some Guidance in CSIRO v. Cisco
12.07.2015
BY SANDRA J. BADIN AND MICHAEL T. RENAUD

Brochures
Late last week, in an opinion authored by Judge Prost, a panel of the Federal Circuit vacated
Navigating Change a $16 million damages award won by Commonwealth Scientific and Industrial Research
Organization (CSIRO) in its patent infringement suit against Cisco Systems, Inc. The
decision provides important guidance for determining damages in cases involving standard
Sandra J. Badin, Special
MINTZ CONNECT essential patents. It reaffirms that the appropriate royalty base for calculating damages need Counsel
Subscribe | RSS not be the smallest saleable patent-practicing unit if the evidence shows that the parties
relied on a different base in their real-world negotiations. It also explains that the valuation of
a patent that is essential to the practice of a standard must not include the value derived from
the patent’s inclusion in the standard—the value of the standardization itself. And it clarifies
the relevance of comparable license agreements even against evidence of the parties’
contemporaneous licensing positions. We discuss each point in turn.

The Appropriate Royalty Base

Quoting its decision last year in Ericsson, Inc. v. D-Link Sys., Inc., the court began its
discussion of the appropriate royalty base by noting that damages awards under 35 U.S.C.
§ 284 “must reflect the value attributable to the infringing features of the product, and no Michael T. Renaud, Member
more.” This is the governing principle of apportionment; it applies whenever multi-
component products are at issue. In such cases, expert damages opinions must reliably
separate the value contributed by the patented technology from the value contributed by non- RELATED PRACTICES
patented technology. Intellectual Property
Patent Appeals
“Apportionment is not a new rule,” the court observed, and it can be met by more than one
methodology as long as the methodology used is grounded in the particular facts of the
case. Because each case presents unique facts, the court has developed certain principles RELATED BLOGS
to guide the determination of whether an expert’s apportionment model is appropriate. One Global IP Matters
such principle is that of the smallest saleable patent-practicing unit, which provides that the
royalty base from which royalties are apportioned is the smallest saleable practicing unit of a
multi-component product and not the product in its entirety. The court explained that this
principle avoids improperly compensating patent owners for non-infringing components of a
product, and prevents juries from being misled by inflated damages horizons that are
unmoored from a patent’s actual contribution to the product’s overall value. There is an
exception to the smallest saleable patent-practicing unit principle—the entire market value
rule. It applies when a party can prove that demand for the entire accused product is driven by
the patented invention. In such cases, the value of the entire product may be used as the
royalty base.
Although the smallest saleable patent-practicing unit principle is well-settled, it is
inapplicable here, the court said. It explained that in arriving at its damages determination,
“the district court did not apportion from a royalty base at all. Instead, the district court began
with the parties’ negotiations,” which were about the patent-in-suit, took place at the time of
the hypothetical negotiation, and involved concrete proposals by each party for a per unit
royalty rate. “Because the parties’ discussions centered on a license rate for the [asserted]
patent, this starting point for the district court’s analysis already built in apportionment,” the
appeals court noted. The parties’ negotiations were already limited just to the patent-in-suit
—and no more—as the apportionment rule requires. Therefore, “the district court did not err
in valuing the asserted patent with reference to end product licensing negotiations.” The
lesson here is that comparable licenses that value the patented technology as a portion of
the value of the end product are not rendered irrelevant or inadmissible just because they
were not negotiated with reference to the smallest saleable patent-practicing unit principle.
Again quoting Ericsson, the court noted that “[s]uch a holding ‘would often make it impossible
for a patentee to resort to license-based evidence.’”

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 The Value of Standardization
While the district court did not err with respect to its determination of the royalty base, it did err
with respect to its damages determination in two important respects, the court said. First, the
district court did not take sufficient account of the asserted patent’s status as essential to the
standard at issue (the 802.11 wireless standard). This may have resulted in an overvaluation
of the patented technology. And second, it improperly discounted the relevance of a license
agreement between CSIRO and Cisco that was amended around the time of the hypothetical
negotiation.
Once again relying on Ericsson, the court noted that two special apportionment
considerations arise when dealing with standard essential patents (SEPs); these
considerations ensure that the patentee is not improperly compensated for any value derived
from the standardization of a technology, and is only compensated for the value of the
patented invention itself: “First, the patented feature must be apportioned from all of the
unpatented features reflected in the standard. Second, the patentee’s royalty must be
premised on the value of the patented feature, not any value added by the standard’s
adoption of the patented technology.”
These special considerations apply to all SEPs, the court said, not just to SEPs whose
owners have agreed to license them on reasonable and non-discriminatory (RAND) terms.
Ericsson did not limit these considerations to RAND-encumbered patents, the court noted,
and in any event, whether a patent is RAND-encumbered or not, its value “is distinct from any
value that artificially accrues to the patent due to the standard’s adoption.” A patentee is only
entitled to the former under 35 U.S.C. § 284; it is not entitled to the latter. “Without this rule,”
the court observed, “patentees would receive all of the benefit created by standardization—
benefit that would otherwise flow to consumers and businesses practicing the standard.”
The district court, which did not have the benefit of Ericsson, “erred because it did not account
for standardization,” the appeals court held. Its failure to account for standardization is
reflected in its analysis of three Georgia-Pacific factors that it found favored CSIRO: factor 8,
which relates to the accused product’s commercial success and profitability, and factors 9
and 10, which relate to the advantages of the patented invention over competing products.
Ericsson identified these three factors as irrelevant or misleading in cases involving patented
technology that has been incorporated into a standard—especially one that has been widely
adopted—because products that comply with a standard are much more likely to be
commercially successful than are products that incorporate non-standard technology, all else
being equal. Conversely, competing technology that it is not incorporated into a standard
might be a commercial failure at least in part because it is not incorporated into a standard,
the court noted. Weighing the commercial success of standard-compliant products in favor of
the patentee, as the district court did, without taking into account that the commercial success
may derive entirely from standardization itself, opens the door to compensating SEP owners
for the value derived from standardization over and above the value of their patented
technology.
The district court also erred in not taking proper account of standardization when it used the
parties’ own informally offered royalty rates—the rates they discussed around the time of the
hypothetical negotiation—as a starting point, the appeals court said. It noted that CSIRO’s
offered rate, which was not accepted by a single entity at the time, was offered after the
asserted patent was “locked into the standard,” and after CSIRO had actively refused to agree
to license the patent on RAND terms. “It seems quite possible, then, that CSIRO’s [offered]
rates attempt to capture at least some value resulting from the standard’s adoption,” the court
observed.
The Relevance of an Existing License
The district court erred in another respect: as noted above, it based its damages model on
the parties’ own negotiating positions at the time of the hypothetical negotiation. In so doing, it
rejected as irrelevant a license agreement between CSRIO and Radiata, a chipmaker Cisco
acquired two years before the hypothetical negotiation. The district court provided four
reasons for rejecting the Radiata license agreement as irrelevant; the appeals court found
clear error in three of these reasons, the most important of which relates to the timing of the
agreement. The district court had rejected the license agreement in part because it was
executed several years before the hypothetical negotiation between CSIRO and Cisco would
have taken place. The appeals court held this was error because the agreement was
amended when Cisco acquired Radiata, and again two years later, which was just around
the time the of the hypothetical negotiation. Each time the agreement was amended, CSIRO
could have renegotiated the royalty terms, the appeals court found. The amended agreement
therefore bears consideration, it said.
Also, contrary to the district court’s reasoning, the fact that the Radiata license agreement
references per-component royalty rates—as opposed to the per-product rates the parties
used in their informal negotiations with each other—was not a reason to exclude the
agreement from consideration, the appeals court said. As it had noted at the beginning of the
opinion, a comparable license may not be excluded simply because of its chosen royalty
base. Thus, it directed the district court on remand to reevalutate the relevance to the

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 damages determination of the amended license agreement, which “is the only actual royalty
agreement between Cisco and CSIRO, … is contemporaneous with the hypothetical
negotiation, … was reached before the 802.11g standard was adopted; and focuses on the
chip.”
Implications
The CSIRO decision is another important piece of the Federal Circuit’s evolving damages
jurisprudence. It reiterates that the governing rule in patent damages law is apportionment; it
elucidates the important role comparable licenses play in evaluating the reliability of royalty
determinations; and it provides some guidance for establishing royalties for standard
essential patents and for ensuring that the holders of SEPs are not improperly compensated
for the value of standardization itself, but are only compensated for the value of their patented
invention. As part of this guidance, the court clarifies that what matters for purposes of
determining appropriate damages in cases involving SEPs is a patent’s status as standard
essential, regardless of whether it is subject to any RAND commitment. It remains to be
seen how this decision will be applied in cases in which the asserted patents’ status as
standard essential is contested, and in cases in which there is evidence that the patented
technology was incorporated into the standard at issue because it was superior in some
important respect to competing technology developed contemporaneously—thereby
supporting an argument that the patentee may be entitled to at least some compensation for
the success of the standard. It also remains to be seen whether and to what extent this
decision will impact the willingness of innovators to contribute their patented technology to
the development of standards in the first instance.

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