The bulk of the award relates to 18,073,797 consumer-grade products sold under the Linksys brand (Cisco acquired Linksys in 2003), with the remainder being for 1,471,319 Cisco enterprise products.
The case, Commonwealth Scientific and Industrial Research Organisation v Cisco Systems, Inc, Case No. 6:11-cv-343 [PDF, 303kB], is interesting for a number of reasons.
The judgment is entirely devoted to a determination of damages, based on an assessment of a ‘reasonable royalty rate’, since the parties agreed that liability for infringement, and validity of the patent, were not in dispute. And although both CSIRO and Cisco had originally demanded a jury trial, in the end they consented to a bench trial (i.e. where the case is heard and decided by a single judge).
Additionally, the dispute has a historical context lacking in CSIRO’s other Wi-Fi litigation. In 2001, Cisco acquired the Australian start-up, Radiata Communications Pty Ltd, originally established in 1997 by Macquarie University Professor David Skellern and his colleague Neil Weste. Radiata took a nonexclusive licence to the CSIRO wireless LAN patent with the intention of developing chips implementing the technology (see ‘The Story behind CSIRO’s Wi-Fi Patent “Windfall”’.)
The judgment also addresses issues around CSIRO’s obligations (or not) to licence the patent on ‘reasonable and non-discriminatory’ (RAND) terms, the basis for calculation of royalties (i.e. final product prices, or the value of individual lower-cost components) as well as the usefulness of expert evidence in these kinds of cases.
In the end, CSIRO was largely successful. Although the final damages award is around half of what it had asked for, it is about fifteen times the amount Cisco argued it should have to pay. And the court found in favour of CSIRO on almost every other issue that was in dispute.
The Radiata Royalty RatesCisco was once the only manufacturer of Wi-Fi equipment to be paying royalties to CSIRO, as a consequence of its acquisition of Radiata along with the existing nonexclusive ‘Technology Licence Agreement’ (TLA). However, it seems that Cisco ceased payments under the TLA sometime around 2003-2004.
Cisco wanted the court to accept that the TLA was ‘an actual, real-world license, negotiated at arm’s length, not clouded by litigation, and occurring prior to inclusion of [the WLAN patent in any Wi-Fi standard]’, and should therefore form the basis for an assessment of the reasonable royalty rate that the parties would (hypothetically) have negotiated in 2003.
The court (quite rightly, in my view) disagreed with this argument, pointing out that ‘CSIRO and Radiata had an ongoing relationship that included intellectual property rights, research and development contracts, and even Radiata’s use of office and laboratory space at CSIRO.’ The court also noted that CSIRO had an interest in commercialising the patented technology and that Radiata needed rights the exploit the patent to accomplish that goal. There was therefore a ‘special relationship’ between CSIRO and Radiata that belied ‘the view that the negotiations leading to the TLA were purely disinterested business negotiations.’
CSIRO also received more than just royalty payments as a result of the TLA. Radiata was obliged to disclose its business plans, and to meet minimum performance obligations. CSIRO was also entitled to a royalty-free licence to any improvements developed by Radiata, and an assignment of rights in the improvements upon termination of the TLA.
On top of all of that, the TLA was originally negotiated in 1998. There was therefore no reasonable prospect that Cisco would have obtained the same royalty rates as under the TLA had it independently negotiated a licence from CSIRO in 2003.
Chips or Boxes?It goes without saying that the individual component parts that go into a product such as a wireless router or interface card cost less than the finished product. Indeed, if the product manufacturer is going to make a profit, the product must cost (and be worth) more than the sum of its parts.
It is therefore not surprising that Cisco wanted the court to base a royalty calculation on the cost of a chip implementing the relevant ‘physical layer’ processing of the Wi-Fi standard, whereas CSIRO argued that royalties should be based on the cost of the end product.
The court found in favour of CSIRO, i.e. that the finished ‘boxes’ should be the basis for the royalty calculations. Although it was largely undisputed that the ‘inventive’ aspect of the patented technology was implemented in the physical layer chip, the court found that the chip was not the invention. As I have described previously in some detail, the CSIRO invention is a combination of techniques addressing the ‘multipath problem’ for indoor wireless data communication (see ‘An Analysis of the CSIRO WLAN Patent’).
The court explained that ‘[t]he benefit of the patent lies in the idea, not in the small amount of silicon that happens to be where that idea is physically implemented.’ It also noted that wireless chip prices had been significantly deflated during the relevant period, because no company in the industry took a licence from CSIRO, describing the infringement as ‘rampant’ and ‘pervasive’! The judgment also includes this handy analogy:
Basing a royalty solely on chip price is like valuing a copyrighted book based only on the costs of the binding, paper, and ink needed to actually produce the physical product. While such a calculation captures the cost of the physical product, it provides no indication of its actual value.
The point is that the value of the CSIRO invention lies not in how much it costs to make a chip implementing the novel features, but rather in how much the resulting benefits (in this case, primarily greater speed and reliability of wireless communications) are worth to the end user, as compared with the pre-existing technology.
RAND Obligations?When the Institute of Electrical and Electronics Engineers (IEEE) was developing the original Wi-Fi standard (known as IEEE 802.11a), CSIRO was represented, indirectly, by Radiata. Subsequently, CSIRO provided the IEEE with a letter of assurance, confirming that if its patent was essential to implementing the standard then it would, upon written request, grant any party a nonexclusive licence on reasonable terms and at then-current royalty rates. IEEE bylaws provide that letters of assurance to the organisation constitute binding contractual commitments to the IEEE and its members.
CSIRO argued that because Cisco never made a written request, as required by its letter of assurance, it was not bound to provide Cisco with a licence on RAND terms. With respect to the 802.11a standard, the court did not agree, finding that the existing relationship between CSIRO and Cisco, along with the ongoing discussions regarding a future licence, meant that Cisco was not required make an explicit written request.
However, this applied only to the original 802.11a standard. CSIRO had no direct or indirect involvement in the setting of subsequent, more advanced, standards, and never provided any further RAND commitments. During the relevant period, the 802.11a standard was largely obsolete, and sales of corresponding products made up a tiny proportion (under 0.03%) of sales.
Nonetheless, the court noted that if the parties had been negotiating a licence in 2003, they would have been mindful of CSIRO’s RAND commitment in relation to 802.11a, and that this would have been a factor in settling on a final royalty rate.
Duelling ExpertsThe court’s treatment of expert evidence is revealing. Both sides engaged licensing experts to determine and explain the basis for their damages calculations. Not surprisingly, Cisco’s expert arrived at a relatively low value (just over $1 million) while CSIRO’s expert arrived at a much higher result (around $30 million). The judge found both experts’ testimony to be ‘informative’, but flawed, and of little use in assisting him to reach a final figure on damages.
CSIRO’s expert attempted to determine a total payment based upon profit margins for Wi-Fi products sold at retail in or around 2003. However, the court found that he did not use a sufficiently large sample of prices, and that he drew on data from inconsistent sources. In the end, the judge considered that the range of profit premiums the CSIRO expert attributed to the patented technology were so wide as to be essentially meaningless.
Cisco’s expert fared no better, with the court finding that he placed undue reliance on the TLA as a basis for determining royalties, and that it was fundamentally wrong to base the calculations on the chip price rather than the end product price.
As a result, the judge basically went his own way in determining damages.
Conclusion – A Good Result for CSIROIt is almost invariably the case, in any trial relating to damages for patent infringement, that the parties will show up with arguments and evidence supporting quite different outcomes. The infringer naturally wants damages to be determined at the lowest level possible, while the patentee will seek the highest level of damages that it thinks can be justified.
This case is no exception. Cisco’s damages theory resulted in a calculated payment of no more than US$1,100,000, whereas CSIRO’s approach brought it to a total of US$30,182,922.
While much of the judgment is devoted to explaining and rejecting both parties’ calculations of damages, as well as to justifying the court’s own determination, I cannot help noting that if we simply split the difference between the two proposed sums, the result is US$15,641,461, which is not so far away from the court’s award of US$16,243,069. After all, it makes considerable sense that the ‘correct’ figure should lie somewhere between CSIRO’s high estimate, and Cisco’s low estimate.
CSIRO may have been awarded only half the sum it was asking for, however US$16 million is a significant payout, and a lot more than Cisco had submitted it should have to pay. Furthermore, this win comes at a time when CSIRO is facing particular challenges due to budget cuts. I would not be the first to suggest that extracting maximum value from its substantial IP portfolio is one strategy it might employ to assist in meeting these challenges.