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Tcl Communication Technology Holdings Limited v. Telefonaktiebolaget Lm Ericsson

United States Court of Appeals, Federal Circuit

December 5, 2019

TCL COMMUNICATION TECHNOLOGY HOLDINGS LIMITED, TCT MOBILE LIMITED, TCT MOBILE (US) INC., Plaintiffs-Appellees
v.
TELEFONAKTIEBOLAGET LM ERICSSON, ERICSSON INC., Defendants-Appellants
v.
TCL COMMUNICATION TECHNOLOGY HOLDINGS LIMITED, TCT MOBILE LIMITED, TCT MOBILE (US) INC., Defendants-Appellees

          Appeals from the United States District Court for the Central District of California in No. 8:14-cv-00341-JVS-DFM, 2:15-cv-02370-JVS-DFM, Judge James V. Selna.

          Jeffrey A. Lamken, MoloLamken LLP, Washington, DC, argued for defendants-appellants and plaintiffs-appellants. Also represented by Emily Damrau, Rayiner Hashem, Michael Gregory Pattillo, Jr.; Sara Margolis, New York, NY; Nicholas M. Mathews, Theodore Stevenson, III, McKool Smith, PC, Dallas, TX; John M. Whealan, Chevy Chase, MD.

          Stephen S. Korniczky, Sheppard, Mullin, Richter & Hampton LLP, San Diego, CA, argued for plaintiffs-appellees and defendants-appellees. Also represented by Martin Bader, Matthew Holder, Ericka Schulz, Karin Dougan Vogel.

          David S. Steuer, Wilson, Sonsini, Goodrich & Rosati, PC, Palo Alto, CA, for amicus curiae InterDigital, Inc. Also represented by Michael Brett Levin, Maura L. Rees.

          John D. Haynes, Alston & Bird LLP, Atlanta, GA, for amicus curiae Nokia Technologies Oy.

          Thomas Andrew Culbert, Perkins Coie, LLP, Seattle, WA, for amicus curiae Uber Technologies, Inc. Also represented by Kevin Andrew Zeck.

          Steven J. Routh, Orrick, Herrington & Sutcliffe LLP, Washington, DC, for amicus curiae Panasonic Corporation. Also represented by Benjamin Paul Chagnon, Hannah Garden-Monheit, John Arpio Jurata, Jr.

          Peter J. Ayers, Law Office of Peter J. Ayers, Austin, TX, for amici curiae John Jarosz, Jeffrey H. Kinrich, Michael Chapman, Michael Wagner, Edward A. Gold, John Bone, David Haas, Scott Weingust.

          Michael A. Bittner, Winston & Strawn LLP, Dallas, TX, for amicus curiae Peter Georg Picht.

          Jacob Kevin Baron, Holland & Knight, LLP, Boston, MA, for amicus curiae Kelce Wilson.

          James R. Barney, Finnegan, Washington, DC, for amici curiae Toyota Motor Corporation, Honda Motor Co., Ltd., Nissan Motor Co. Ltd., Denso Corporation, Hyundai Motor Company. Also represented by David Brian Kacedon, Joseph Preston Long.

          Kevin Hardy, Williams & Connolly LLP, Washington, DC, for amici curiae High Tech Inventors Alliance, Alliance of Automobile Manufacturers, Inc., Google LLC, Hewlett Packard Enterprise Company, HP Inc. Also represented by Samuel Bryant Davidoff.

          David H. Herrington, Cleary, Gottlieb, Steen & Hamilton LLP, New York, NY, for amicus curiae Fair Standards Alliance ASBL. Also represented by Alexandra Theobald; Daniel P. Culley, Washington, DC.

          Jennifer H. Doan, Haltom & Doan, Texarkana, TX, for amici curiae HTC Corporation, HTC America, Inc.

          Before Newman, Chen, and Hughes, Circuit Judges.

          CHEN, CIRCUIT JUDGE.

         This appeal arises from a March 9, 2018 decision and order issued by the United States District Court for the Central District of California (the court) imposing "fair, reasonable and non-discriminatory" (FRAND) rates in a binding worldwide license on Appellants (Ericsson) and Appellees (TCL) for Ericsson's portfolio of standard-essential patents (SEPs) incorporated into 2G, 3G, and 4G mobile communications standards.

         The court-ordered license set forth two terms relevant on appeal: (1) a prospective FRAND royalty rate for practicing each standard, and (2) a "release payment" computed based on a closely related, retrospective FRAND rate for "TCL's past unlicensed sales." To determine these rates, the court conducted a ten-day bench trial, where the two parties proposed different FRAND rates based on different methodologies. Rejecting both parties' proposed methodologies as flawed, the court employed its own modified version of TCL's proposed "top-down" approach in combination with comparable license evidence to compute both the prospective and retrospective FRAND rates.

         The threshold issue on appeal is whether Ericsson had a Seventh Amendment right to a jury trial on the adjudication of the "release payment" term. This inquiry turns on whether the relief sought by the release payment is either legal or equitable in nature. Because we conclude that the release payment is in substance compensatory relief for TCL's past patent infringing activity, we hold that Ericsson was entitled to a jury trial on the calculation of the release payment amount, and that the district court deprived Ericsson of that right by determining that legal relief in a bench trial. For the reasons explained below, we vacate-in-part, reverse-in-part, and remand for further proceedings consistent with this opinion.

         Background

         Standards promote interoperability of different devices through the use of the same protocol. Patents declared to be essential to practicing a standard are often referred to as SEPs. This case involves a portfolio of SEPs owned by Ericsson incorporated into 2G, 3G, and 4G standards that enable mobile devices from different manufacturers and different networks to communicate with each other using the same communication protocol.

         A. ETSI and the FRAND Obligation

         Ericsson is a member of the European Telecommunications Standards Institute (ETSI), which is the international standard-setting organization responsible for developing 2G, 3G, and 4G standards. For a patent to become essential to an ETSI standard, ETSI members first submit declarations identifying which of their patents or applications may become essential to the standard. ETSI's acceptance of a member's patent as an SEP forms a contract between ETSI and its members. Together, the 2G, 3G, and 4G standards incorporate the technologies claimed by thousands of SEPs, including over one hundred owned by Ericsson.

         Because interoperability requires the practice of these standards, owners of such SEPs wield significant power over implementers during licensing negotiations. To offset this power imbalance and promote interoperability, the contract imposes an obligation to license, referred to here as the "FRAND obligation," on ETSI members. J.A. 35. As defined by § 6.1 of the ETSI Intellectual Property Rights Policy, this obligation requires members to be "prepared to grant irrevocable licenses" to implement their SEPs on FRAND terms and conditions to implementers. J.A. 36. Because this obligation is intended to benefit implementers of ETSI standards, the implementers may assert their rights created by the FRAND obligation as third-party beneficiaries. Id.

         TCL manufactures mobile devices that implement these ETSI standards so that they may interoperate in the mobile communications environment. As a member of ETSI, Ericsson is bound by its contractual FRAND obligation to ETSI to be prepared to offer TCL FRAND-complaint terms to license its SEP portfolio.

         B. Licensing Negotiations

         The parties have been negotiating licensing terms for over a decade. In 2007, TCL and Ericsson entered into 2G licenses with seven-year terms. TCL did not sell a meaningful volume of 3G phones until 2011, when the two parties began to negotiate a 3G license in earnest. In 2012, while the parties were negotiating, Ericsson initiated a series of foreign litigations against TCL for alleged infringement of Ericsson's SEPs in six different jurisdictions (France, United Kingdom, Brazil, Russia, Argentina, and Germany). In 2013, TCL began selling 4G phones, and the parties began negotiating a license covering Ericsson's 4G SEPs. That year, Ericsson offered 4G rates to TCL for the first time. But TCL did not consider any of Ericsson's offers or counteroffers to be on FRAND terms. In a 2014 meeting, Ericsson made a license offer that TCL stated "look[ed] promising." J.A. 31.

         Before the parties reached agreement, TCL filed a declaratory judgment action against Ericsson in the Central District of California. This was filed right before TCL's 2G licenses with Ericsson were set to expire. J.A. 32. When negotiations finally failed, the parties agreed to engage in a binding court adjudication of terms for a worldwide portfolio license. J.A. 32. The adjudication of these terms is the subject of this appeal.

         Procedural History

         The case below is a consolidation of two district court actions. The first action was initiated by TCL in March 2014, when it filed suit against Ericsson in the Central District of California (the California Action). The second action followed in June 2014, when Ericsson filed suit against TCL in the Eastern District of Texas (the Texas Action).

         In the California Action, TCL sought declaratory judgment that Ericsson had failed to offer a FRAND rate to TCL. J.A. 469. In its prayer for relief, TCL requested that the court "[d]etermine the FRAND rates that TCL is entitled to," "[d]ecree that Ericsson has not offered [FRAND] royalties to TCL," and "[d]ecree that TCL is entitled to license from Ericsson any and all [SEPs] under [FRAND] terms and conditions." J.A. 683. TCL also sought damages for infringement of its own patents, as well as various state law claims based on Ericsson's contractual FRAND obligation with ETSI (e.g., breach of contract, promissory estoppel, violation of California Unfair Competition Law). J.A. 641.

         In the Texas Action, Ericsson sought damages for infringement of two individually-asserted SEPs, U.S. Patent No. 6, 301, 556 and U.S. Patent No. 6, 473, 506, for which TCL filed counterclaims of invalidity and non-infringement (collectively, Ericsson's patent infringement claims and TCL's related counterclaims of invalidity and non-infringement). Ericsson further requested that the court declare "that [it] complied with its FRAND commitments . . . or, alternatively, adjudge and declare what steps would be required for Ericsson to achieve such compliance." J.A. 60828.

         The two Actions were consolidated in June 2015 when the Texas Action was transferred to the Central District of California. The same day, the court granted TCL's motion to enjoin Ericsson "from further prosecuting any actions alleging infringement of its 2G, 3G, and 4G patents until the FRAND issues are resolved" in the Central District of California. J.A. 32-33 (referring to J.A. 4687).

         A. Ericsson's Proposed License Offers to TCL

         The court ordered the parties to provide contentions defining the contents of a FRAND license. J.A. 131713. In response, Ericsson proposed two alternative license offers, "Option A" and "Option B," in its contentions. J.A. 2718- 78; J.A. 4795-857. Eventually, the court ruled that the FRAND determination would be made in reference to Ericsson's Option A and B offers. J.A. 38768-70.

         Option A proposed a lump-sum payment with percentage running royalties. Under Option A for mobile phones, TCL would make an annual payment of $30 million for its first $3 billion in sales, with percentage running royalty rates for additional sales. These running royalty rates were 0.8% of the net selling price for phones with 2G GSM/GPRS, 1.1% for phones with 2G EDGE, 1.5% for 3G devices, and 2.0% for 4G devices.

         Option B proposed only running royalties with caps and floors. Under Option B for mobile phones, TCL would pay percentage running rates as follows: 0.8% of the net selling price of 2G/GSM/GPRS, 1.0% for 2G EDGE, ...


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