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.