August 11, 2020

Volume X, Number 224

August 11, 2020

Subscribe to Latest Legal News and Analysis

August 10, 2020

Subscribe to Latest Legal News and Analysis

Patent Damages: How Many Essential Features in a Smart Phone?

On March 20, 2018, the public version of Eastern District of Texas Magistrate Judge Roy Payne’s March 7, 2018 order tossing a $75 million jury verdict obtained by Ericsson against TCL Communication was released.  Ericsson Inc., et al, v. TCL Communication Technology Holdings, Ltd., et al, Case No. 2:15-cv-00011-RSP, Doc. No. 460 (redacted memorandum opinion and order) (E.D. Tex. March 7, 2018) (“Order”).  Judge Payne’s order sheds important light on the damages analysis for infringement of patents covering features of smartphone technology and potentially provides lessons to future litigants seeking damages for smartphone innovations.

After a jury verdict finding infringement, Ericsson also won a damages verdict of $75M due to TCL’s ongoing and willful infringement of U.S. Patent No. 7,149,510 (“the ’510 patent”).  Ericsson contended that the ’510 patent covers smartphone functionality that allows a user to grant or deny access to native phone functionality to a third-party application, which is a standard feature in all Android smartphones.  After trial, TCL moved for judgment as a matter of law on infringement and damages, or in the alternative new trials.  Judge Payne indicated that he was going to uphold the infringement verdict, but ordered a new trial on damages.  Order at 1.

Ericsson’s damages case relied on two experts: Dr. Wecker and Mr. Mills.  Dr. Wecker analyzed a consumer survey that attempted to approximate the apportioned value of the patented feature in the accused products.  Mr. Mills determined a royalty rate based both on that apportionment and on a hypothetical negotiation between Ericsson and TCL.  Dr. Wecker determined that 28% of TCL customers would not have purchased a TCL smartphone if the smartphone did not have the patented feature in the ’510 patent.  This would have resulted in a loss of 28% of TCL’s sales and profits.  From this, Mr. Mills determined that the at-risk profit for TCL was $3.42 per device sold by TCL, which is the average profit per device for all accused devices, after a 28% loss rate discount.  Mr. Mills determined that during the hypothetical negotiation Ericsson would have recovered nearly all of the at-risk profit, likely obtaining a rate of $3.41 per device, but in any event would have secured no less than half of the at-risk profits, or $1.72 per product.  These rates would have justified a damages award ranging from $123.6M to $245M for damages across the life of the ’510 patent.  Mr. Mills further determined that the parties would have negotiated a lump sum payment discount for both pre-trial and post-trial infringement rather than a running royalty. Based on this expert testimony, the jury awarded Ericsson a $75M lump sum.

Judge Payne threw out the jury’s award for two reasons.  First, Judge Payne found error in Ericsson’s argument that TCL would have settled up front with a lump sum covering the entire royalty for the projected future sales of 111 million smartphones during the remaining life of the ’510 patent.  According to Judge Payne these products could not be part of the infringement base because they did not exist at the time of trial and could not have been adjudicated to infringe.  These future products could not be part of a damages order.  See Order at 12-14.

But the real meat of Judge Payne’s order is in his other justification for throwing out the damages verdict.  Judge Payne faulted Ericsson for painting the consumers’ choice of whether to buy a TCL phone as a binary decision based on the presence of the accused feature.  Judge Payne noted that the case originally had five patents and consumer surveys were done which noted that if each feature of three of the asserted patents was missing from TCL products, TCL would have lost 64% of its profits due to sales lost due to the absence of those features.  Judge Payne concluded that each of these features individually could not be responsible for a quarter of TCL’s profits per phone, and noted the following:

It is not difficult to see how this lost profit number quickly becomes unrealistic. Subtracting just three features covered by a mere three implementation patents would have allegedly cut TCL’s profit by more than half. The evidence from both sides suggested that there were at least a thousand implementation patents that might cover a TCL phone.  Regardless of the number, there is no dispute that a phone with an Android-operating system has many patented features, and that, according to Dr. Wecker’s survey results, consumers would likely find numerous features essential. According to Mr. Mills, any one of these allegedly essential features could independently be worth more than a quarter of TCL’s profit on the phone. By removing even three additional features covered by an implementation patent, on top of the features allegedly covered by the ’510, ’931, and ’310 patents, TCL would have lost all its profit (conservatively), according to Mr. Mills’ theory.

Order at 10-11 (emphasis added) (internal citations omitted).  Judge Payne faulted Ericsson for not considering that a consumer’s decision to purchase or not purchase a phone would be based on whether numerous features were included, not just the ones covered by the asserted patents, and that Ericsson’s theory would erode all of TCL’s profits.  See Order at 11.  The judge further noted that:

To conclude that any one of these features—simply because it is considered essential to a consumer—could account for as much as a quarter of TCL’s total profit is unreliable and does not consider the facts of the case, particularly the nature of smartphones and the number of patents that cover smartphone features.

Order at 11.  Put simply, Judge Payne found that a single feature could not possibly account for $75M in damages for TCL’s smartphones, particularly in view of the many other features that are subject to patent protection.  Judge Payne noted that both sides agreed that Ericsson possessed potentially at least a thousand patents covering features of TCL phones.  Order at 10.  To Judge Payne, it could not possibly be the case that each of these patents accounted for 25% of the profits made by TCL.

This decision underscores the importance of securing a defensible damages analysis, especially in the context of the multifaceted technology embodied in modern smartphones.  Judge Payne’s concerns in his non-precedential opinion seemed to flow largely from unstated anxiety relating to royalty-stacking that made the logical extrapolation of the experts’ rubric unreasonable and erroneous.  In this context, it will be interesting to see how Ericsson recasts its damages theory in the next round of this litigation. We will continue to follow this case to see the approach, as we fully expect a notice of appeal to the Federal Circuit from Ericsson.

©1994-2020 Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. All Rights Reserved.National Law Review, Volume VIII, Number 89


About this Author

Michael Renaud IP Litgation Attorney Mintz Levin
Member / Chair, Intellectual Property Division

Michael is a highly regarded intellectual property litigator and patent strategist who helps clients protect and generate revenue from their patent holdings. Intellectual Asset Magazine has repeatedly recognized him in its select IAM Patent 1000 and IAM Patent Strategy 300 publications. Clients rely on his counsel regarding sensitive licensing agreement negotiations, acquisitions, and other technology transactions. He leads a team known for its ability to translate complex technology and its value to non-technical professionals — in court and business negotiations.

Michael is...

 Andrew H. DeVoogd Member Boston Mintz Patent Litigation Licensing & Technology Transactions International Trade Commission Strategic IP Monetization & Licensing Federal District Court IP Due Diligence

Drew is an experienced patent litigator and trial attorney whose work encompasses a broad range of technologies. He regularly represents clients in high stakes International Trade Commission investigations involving some of the world's largest technology companies. He also litigates patent matters and other business disputes in federal district courts around the country, and advises clients in complex IP licensing and related transactions. Drew excels at helping clients make sense of nuanced legal issues while developing effective strategies to protect and leverage their intellectual property. 

Drew focuses his intellectual property practice in patent litigation, with an emphasis on Section 337 investigations in the International Trade Commission. Drew has participated in all phases of numerous ITC investigations involving some of the largest technology companies in the world. He has first-chair trial and strategy experience during multiple ITC evidentiary hearings, and regularly leads large litigation teams through fast-paced ITC investigations. Drew has also litigated patent infringement and trade secret cases and other complex business disputes in federal district courts across the country.  He has successfully argued on behalf of his clients during multiple Markman claim construction hearings, as well as on all manner of discovery, pretrial, and other motions, before the ITC and federal district courts.

In addition, Drew provides strategic counseling to help clients protect and leverage IP rights to maximize their value. Drew has participated in negotiating and closing numerous complex IP licensing and sale transactions, including elaborate multiparty agreements involving thousands of patents, as well as conducting pre-suit and transactional diligence relating to large portfolios of U.S. and foreign intellectual property assets. He also advises clients on trademark protection and related disputes.

Drew has worked in diverse technology areas such as embedded microprocessors, liquid crystal displays, graphics processors, consumer telecommunications systems, converged devices and related software and operating systems, mobile communications infrastructure, DDR4-compliant memory modules and their components, memory controllers, LED-based lighting systems, thermoplastics, electrical motors, and biochemical assays.

Drew is a member of the firm’s Pro Bono Committee. His own pro bono work includes representing asylum-seekers, as well as clients of the Mintz Domestic Violence Program in obtaining and extending 209A abuse prevention orders on behalf of victims of domestic violence and sexual assault, including on appeal.

Daniel B. Weinger Patent Litigation Attorney Mintz Law Firm

Daniel's practice in intellectual property focuses on patent litigation, both at the International Trade Commission and the Federal District Courts. Daniel has participated in all phases of patent litigation, including active engagement in multiple evidentiary hearings at the International Trade Commission. He has done work in a variety of technology areas, including computer software, software architecture, GPS, network devices, semiconductors, converged devices, and LED lighting.

Prior to joining Mintz Levin, Daniel worked as a database...