The Federal Circuit provided guidance on determining financial damages in patent litigation. It affirmed that the smallest salable patent-practicing unit should be used as the royalty base when apportioning damages. However, it found this principle did not apply in this case where the district court used license negotiation rates as the starting point rather than apportioning from a royalty base. The Federal Circuit also found the district court erred in its analysis of Georgia-Pacific factors because it failed to isolate the benefits of the patent from those of the standard it practiced. The case was remanded for a new reasonable royalty determination.

1. 12/8/2015 CSIRO v. Cisco­ Federal Circuit Guidance on Smallest Salable Unit and the Application of Georgia­Pacific to Standard Essential Patents
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CSIRO v. Cisco
Federal Circuit Guidance on Smallest Salable Unit and the Application of
Georgia­Pacific to Standard Essential Patents
By Abel Teshome, Ryan Penkowski, Michael Cathcart
In a December 3, 2015 judgment in the matter of Commonwealth Scientific and Industrial Research Organisation v. Cisco Systems, Inc., No. 6:11­cv­
00343, the Federal Circuit provided further guidance on two issues relevant to the determination of financial damages in patent litigation. More specifically,
the Federal Circuit refined the smallest salable patent­practicing unit principle and rejected the district court’s application of the Georgia­Pacific factors for
failing to isolate the benefits of the patent from the benefits of the relevant standard.
In the district court case, CSIRO’s damages expert advanced a reasonable royalty opinion informed by an analytic approach that compared the incremental
profit of Cisco’s 802.11 Wi­Fi end products that practiced the patent­in­suit to those that do not. Cisco’s damages expert advanced an opinion based, in
part, on an executed license agreement that specified royalty rates applied to wireless chip prices. The district court rejected both methodologies and
advanced its own royalty opinion based on the parties’ license negotiations and offers for the patent­in­suit. As noted in the judgment, these offers to
license and related negotiations contemplated a per­unit royalty applied to Cisco’s end products rather than the wireless chips embedded therein. Cisco
appealed on the basis that the district court erred in not using the wireless chip – the smallest salable unit – as its starting point.
In response to Cisco’s appeal, the Federal Circuit affirmed that “the smallest salable patent­practicing unit principle provides that, where a damages model
apportions from a royalty base, the model should use the smallest salable patent­practicing unit as the base.” That affirmation notwithstanding, the Federal
Circuit found that the smallest salable patent­practicing unit principle was not applicable to the district court’s opinion in CSIRO as the district court “did not
apportion from a royalty base…” The Federal Circuit noted that the “starting point” for the district court’s royalty rate analysis “centered on a license rate for
the [patent­in­suit]” and therefore “already built in apportionment.” The Federal Circuit went on to clarify that “the choice of royalty base – which is often the
focus of the apportionment analysis – is irrelevant to the district court’s analysis. The particular rates relied on by the district court were contemplated as
cents per end unit sold by Cisco, but they could equally have represented cents per wireless chip without affecting the damages calculation.” The Federal
Circuit concluded that “the district court did not err in valuing the asserted patent with reference to end product licensing negotiations.”
While the Federal Circuit found that the district court did not violate apportionment principles in relying on end product license evidence, it found that the
district court’s rejection of other license evidence advanced by Cisco’s damages expert was inappropriate. The district court rejected certain license
evidence, in part, because the royalty rates utilized the wireless chip prices as the royalty base. The Federal Circuit found that “a license may not be
excluded solely because of its chosen royalty base.” As a result, the Federal Circuit directed the district court to reevaluate the relevance of such license
evidence in its damages analysis.
Additionally, the Federal Circuit found that the district court’s application of the Georgia­Pacific factors was flawed because it failed to isolate the benefits of
the patent from the benefits of the relevant standard. The Georgia­Pacific factors consist of fifteen widely employed and generally accepted qualitative
considerations relevant to the determination of a reasonable royalty. The Federal Circuit found that the district court erred in its analysis of Georgia­Pacific
factors 8, 9, and 10 – which generally address commercial success and the benefits of the patented technology – because the district court failed to isolate
the benefits of the patent from the benefits of the standard itself. More specifically, the Federal Circuit concluded that the district court improperly
determined that factors 8, 9, and 10 weighed in favor of CSIRO, as the “district court never considered the standard’s role in causing commercial success.”
The Federal Circuit also faulted the district court for failing to account for the possibility that the “starting point” royalties on which its royalty analysis was
based “may themselves be impacted by standardization.” Citing these faults as legal error, the Federal Circuit vacated the district court’s damages award
and remanded the case for a new reasonable royalty determination.
The Federal Circuit also refined its earlier guidance in Ericsson, Inc. et al. v. D­Link Systems, Inc. et al., regarding modification of the Georgia­Pacific
factors when assessing the value of SEPs and RAND­encumbered patents. CSIRO argued that Ericsson applied only to SEPs encumbered with RAND
commitments, whereas the patent­in­suit was not encumbered for all revisions to the relevant standard. The Federal Circuit rejected this argument, noting
that Ericsson applies equally to both RAND­encumbered patents and SEPs generally. The Federal Circuit reaffirmed that “reasonable royalties for SEPs
generally – and not only those subject to a RAND commitment – must not include any value flowing to the patent from the standard’s adoption.”
Abel Teshome, Ryan Penkowski, and Michael Cathcart are consultants at 284 Partners, LLC. Their practices focus on the valuation of intellectual property
and the determination of damages in intellectual property litigation.
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2. 12/8/2015 CSIRO v. Cisco­ Federal Circuit Guidance on Smallest Salable Unit and the Application of Georgia­Pacific to Standard Essential Patents
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