Texas Court Declares Licensing Offer Based On End Device Is Frand, Diverges From California Court In Qualcomm

Author:Mr Stefan Meisner, Anthony S. Ferrara and Lisa A. Peterson
Profession:McDermott Will & Emery

Standard-essential patent holders and implementers may face uncertainty regarding licensing practices following a May 23 Texas court ruling. In the ruling, a Texas federal judge reached a conclusion different from a recent California court decision—FTC v. Qualcomm—on the question of whether an SEP holder must base its royalty rates on the "smallest salable patent-practicing unit" in order to comply with a fair, reasonable and non-discriminatory royalty commitment.

In Depth

On May 23, a Texas federal judge entered a declaratory judgment that Ericsson, a standard-essential patent (SEP) holder, did not breach its obligation to offer HTC, an end-device manufacturer, a license to its SEPs on fair, reasonable and non-discriminatory (FRAND) terms. The decision follows a jury verdict finding that Ericsson did not breach its FRAND commitment. The judge rejected HTC's argument that Ericsson must base the royalty rate for its SEPs on the value of baseband chips within smartphones rather than on the phones themselves. This ruling stands in tension with the recent decision in FTC v. Qualcomm, where a California court concluded that it was unreasonable for Qualcomm to base the royalty rates for its SEPs on the price of an entire phone rather than on the baseband chip. The contrasting rulings, thus, may create uncertainty regarding licensing practices among SEP holders and implementers until further clarification is provided from courts of appeal.

Ericsson owns patents declared essential to the 2G, 3G and 4G wireless communication standards. Ericsson made a commitment to several standard setting organizations, including the European Telecommunications Standards Institute (ETSI), to license those SEPs on FRAND terms. HTC makes smartphones that implement Ericsson's SEPs and brought suit against Ericsson in April 2017, alleging that Ericsson overcharges for its SEPs. HTC argued that Ericsson's royalty rates are unreasonable on a number of grounds, including because they are based on the value of the smartphones HTC produces rather than on the baseband chips that incorporate Ericsson's SEPs within the phones. In response, Ericsson brought a counterclaim seeking a declaratory judgment that it complied with its FRAND obligation.

Last year, Ericsson moved for a ruling that its FRAND commitment to ETSI does not require it to base its royalty rates on the "smallest salable patent-practicing unit" (SSPPU)the baseband chip. The court held earlier this year that, as...

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