The US District Court for the Eastern District of Texas ruled that for the purposes of honoring a fair, reasonable and non-discriminatory (FRAND) commitment, a pool member is not required to base royalties for its standard essential patents (SEPs) on the value of components. HTC America Inc. et al. v. Ericsson Inc., Case No. 6:18-cv-00243-JRG (E.D. Tex. Jan. 7, 2019) (Gilstrap, J). According to the court, Ericsson’s commitment to the European Telecommunications Standards Institute (ETSI) does not specify whether it must use the value of components or end-user devices to calculate royalty rates. Thus, there is no ETSI prescribed methodology for calculating the license fee under the FRAND commitment.

Ericsson holds patents that are essential to the 2G, 3G, 4G and WLAN wireless communication standards and made a commitment to ETSI to license those SEPs on FRAND terms. HTC makes smartphones that implement Ericsson’s SEPs and alleged that Ericsson is overcharging for SEP licenses. According to HTC, Ericsson’s FRAND commitment to ETSI requires it to base its royalties on the value of the “smallest salable patent-practicing unit (SSPPU) in the phones.” In October 2018, Ericsson moved for a ruling that its FRAND commitment does not require this method of calculation and allows Ericsson to base its royalties on the value of end-user devices, i.e., smartphones.

Applying French contract law, the district court concluded that Ericsson’s FRAND commitment, embodied in ETSI’s intellectual property rights policy, does not automatically require that royalties be based on the SSPPU. Rather, what constitutes a FRAND royalty rate depends on the particular facts of a case. The court emphasized that the IPR policy contains no express language requiring SEP holders to base royalties on the SSPPU. The court also noted that the prevailing industry standard has been to base FRAND licenses on the end-user device. Thus, a “reasonable person” would not interpret Ericsson’s FRAND commitment to mean that it must base its SEP royalties on the SSPPU.

The Texas court’s ruling does not end the case. The parties are now heading to trial, and the jury must determine what constitutes FRAND terms based on the particular facts of the case. Although HTC lost its argument that the ETSI intellectual property rights policy automatically requires that Ericsson’s royalties be based on the value of components, HTC may still argue to the jury that given the facts of the case, its licenses should be calculated at the component level.

Practice Note: In another recent decision, a US district court in California ruled that Qualcomm must license its SEPs to all comers on FRAND terms, regardless of whether they make component products or end-user devices. FTC v. Qualcomm, Inc., No. 17-cv-00220, 2018 US Dist. LEXIS 190051 (N.D. Cal. Nov. 6, 2018). HTC v. Ericsson presents a different factual scenario, as HTC is not arguing that Ericsson must license its SEPs to component makers. Rather, HTC claims that Ericsson must offer licenses to end-user device makers based on the value of components. The court did not address whether Ericsson must offer to license its SEPs to component makers on FRAND terms.