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Ericsson Inc. v. TCL Communication Technology Holdings, Ltd.

United States District Court, E.D. Texas, Marshall Division

May 10, 2018

ERICSSON INC., TELEFONAKTIEBOLAGET LM ERICSSON, Plaintiffs,
v.
TCL COMMUNICATION TECHNOLOGY HOLDINGS, LTD., TCT MOBILE LIMITED, TCT MOBILE U.S. INC., Defendants.

          MEMORANDUM OPINION AND ORDER

          ROY S. PAYNE UNITED STATES MAGISTRATE JUDGE.

         After a four-day trial, the jury unanimously found that TCL willfully infringed claims 1 and 5 of United States Patent No. 7, 149, 510 by selling phones and devices equipped with the Google Android operating system, and the jury awarded $75 million as a lump sum royalty.[1] The court previously ordered a new trial on damages after finding Ericsson's damages theory unreliable, see ECF No. 456, but the court now reconsiders that order, reinstates the jury's verdict in full, and resolves all other remaining disputes.

         DISCUSSION

         TCL's motions for judgment as a matter of law and for a new trial raise procedural issues not unique to patent law and are therefore evaluated under regional circuit law. Promega Corp. v. Life Techs. Corp., 875 F.3d 651, 659 (Fed. Cir. 2017). The Fifth Circuit is “especially deferential” to a jury verdict. Olibas v. Barclay, 838 F.3d 442, 448 (5th Cir. 2016) (quoting Evans v. Ford Motor Co., 484 F.3d 329, 334 (5th Cir. 2007)) (internal quotation marks omitted). A party is only entitled to judgment as a matter of law on an issue where no reasonable jury would have had a legally sufficient evidentiary basis to find otherwise. Fed.R.Civ.P. 50(a); Bear Ranch, L.L.C. v. Heartbrand Beef, Inc., 885 F.3d 794, 801 (5th Cir. 2018). The evidence must be reviewed “in the light most favorable to the non-movant.” Id. (quoting Omnitech Int'l, Inc. v. Clorox Co., 11 F.3d 1316, 1323 (5th Cir. 1994)). The Fifth Circuit will reverse the denial of a motion for judgment as a matter of law “only if the jury's factual findings are not supported by substantial evidence or if the legal conclusions implied from the jury's verdict cannot in law be supported by those findings.” MM Steel, L.P. v. JSW Steel (USA) Inc., 806 F.3d 835, 843 (5th Cir. 2015) (citation omitted).

         A decision to grant a new trial must also overcome significant deference to the jury's verdict. “A trial court should not grant a new trial on evidentiary grounds unless the verdict is against the great weight of the evidence.” Seibert v. Jackson Cty., Mississippi, 851 F.3d 430, 439 (5th Cir. 2017) (quoting Whitehead v. Food Max of Miss., Inc., 163 F.3d 265, 269 (5th Cir. 1998)). This requires the movant to show “an absolute absence of evidence to support the jury's verdict.” Id. (quoting Whitehead, 163 F.3d at 269).

         I. Infringement

         TCL makes two arguments in support of judgment as a matter of law that TCL has not infringed. ECF No. 427 at 3-8. Both arguments relate to the phrase “interception module, ” which appears in claim 1 of the '510 patent:

A system for controlling access to a platform, the system comprising:
a platform having a software services component and an interface component, the interface component having at least one interface for providing access to the software services component for enabling application domain software to be installed, loaded, and run in the platform; an access controller for controlling access to the software services component by a requesting application domain software via the at least one interface, the access controller comprising:
an interception module for receiving a request from the requesting application domain software to access the software services component;
and a decision entity for determining if the request should be granted wherein the decision entity is a security access manager, the security access manager holding access and permission policies; and
wherein the requesting application domain software is granted access to the software services component via the at one least interface if the request is granted.

'510 Patent col.11 ll.1-23 (emphasis added). TCL's first argument is that the Android operating system does not include an “interception module” because the segments of code responsible for interception are not in the same place. ECF No. 427 at 3-6. TCL's second argument, as best as the court can understand it, is that the claims require the “interception module” to be separate from the “software services component, ” yet there was no evidence for the jury to conclude that these two components are separate in the Android operating system. Id. at 6-8. Neither argument is persuasive.

         TCL's first argument was raised in a pretrial motion-TCL asked the court to construe “interception module” as a self-contained segment of source code, as opposed to code that is dispersed throughout an operating system. See ECF No. 359 at 19-20. TCL did not timely raise this claim construction argument, however, and the court found the argument waived. Id. Nevertheless, because it was not clear that TCL's argument was a matter for claim construction, the court permitted TCL's expert, Dr. Malek, to explain his understanding of the plain and ordinary meaning of the term “module” at trial. Id. (citing Verizon Servs. Corp. v. Cox Fibernet Va., Inc., 602 F.3d 1325, 1330-41 (Fed. Cir. 2010) (distinguishing infringement from claim construction)); see also Nobelbiz, Inc. v. Glob. Connect, LLC, 876 F.3d 1326, 1330 (Fed. Cir. 2017) (O'Malley, J., dissenting from denial of petition for rehearing en banc) (“The fact that parties' experts might proffer differing definitions of a term's plain and ordinary meaning to a jury should not be enough to justify removing that question from the jury's consideration.”).

         Ericsson's expert, Dr. Jones, offered a competing understanding, explaining that the Android operating system included an interception “module” because it had code that is “a logically separable part of the program that has an identifiable functionality.” Trial Tr. vol. 2 (afternoon), 56:12-57:7, Dec. 6, 2017, ECF No. 404. In other words, Dr. Jones's opinion was that regardless of where in the operating system the source code resided, segments of source code could work together in the Android operating system to perform the interception function, and such segments would be considered a “module” because they are logically distinct (in terms of function) from other portions of source code. See id.

         Dr. Jones discredited Dr. Malek's testimony by highlighting that Dr. Malek's understanding of the term has not been consistent. In a claim construction declaration, Dr. Malek explained that “interception module” would be understood as software responsible for receiving a request to access the software services component from the application domain software and passing the request to the decision entity. Id. 58:3-8. Dr. Jones explained that this definition is consistent with his understanding, i.e., a segment of code that performs the interception function. Id. 58:4-24. Dr. Malek repeated essentially the same definition during his deposition. Id. 59:4-7. Yet at trial, Dr. Malek defined the term as a “program unit that is discrete and identifiable with respect to compiling, combining with other units, and loading.” Id. 60:6-8. Dr. Jones not only highlighted the inconsistency, but also explained how the Android operating system would satisfy each one of Dr. Malek's definitions. Id. 58:4-60:24.

         The real difference between the experts, according to Dr. Jones, had to do with the fact that the portions of code alleged by Ericsson to satisfy the “interception module” limitation were scattered in different places and in different files. Id. 60:25-61:9. Dr. Jones explained that in terms of computer science, it did not matter where the source code was located as long as the code segments were linked together in a way that made them logically discrete. Id. 61:10-25. Thus, “from the phone's perspective, they're executed right in a row.” Id. 61:21-22.

         Not surprisingly, the jury discredited Dr. Malek's testimony, and substantial evidence supports this finding. First, the jury could have credited Dr. Jones's understanding that the Android system has an “interception module” because it includes logically distinct segments of code that interact together to perform the interception function. TCL's argument to the contrary, that “[t]he only clear definition of the term ‘module' was presented by TCL, ” ECF No. 427 at 3, is meritless. Dr. Jones's understanding of the term was not only clear, but it made sense in terms of computer science. Second, the jury could have credited Dr. Malek's own prior definitions of the phrase, which were consistent with Dr. Jones's definition. Third, the jury could have concluded that the Android system satisfies the definition Dr. Malek offered at trial inasmuch as the Android code segments are logically discrete and identifiable with respect to compiling and loading.

         TCL's second argument appears to be that Ericsson unwittingly limited the scope of the claims during trial by stating that the claims require a “layered” architecture. See ECF No. 427 at 6-7. According to TCL, this means that the “interception module” and “software services component” must be in separate places, yet there is no evidence to support that finding. Id. at 7. The testimony TCL cites as supporting a disclaimer of claim scope, however, has nothing to do with the claim requirements. The testimony related to the fact that the Android system contains the interception module and software services component in the same file. Trial Tr. vol. 1 (morning), 37:25-38:9, Dec. 5, 2017, ECF No. 399. Even so, according to Dr. Jones, the interception module and software services component are logically “separate and distinct things, ” and indeed, in “[d]ifferent layers.” Id. 38:4-9. Thus, even if the claims require the interception module to be in a different “layer” than the software services component, the jury heard substantial evidence to support the finding that this requirement is satisfied.

         To be clear, TCL's infringement arguments are not about the jury improperly deciding a claim construction issue. This court has commented on the so-called “O2 Micro trap, ” which can doom a jury verdict on appeal. See Huawei Techs. Co. v. T-Mobile US, Inc., No. 2:16-cv-00052-JRG-RSP, 2017 WL 4070592, at *1 (E.D. Tex. Aug. 29, 2017), adopted, 2017 WL 4049251 (E.D. Tex. Sept. 13, 2017); see also Nobelbiz, 876 F.3d at 1330 (O'Malley, J., dissenting from denial of petition for rehearing en banc). There has not been a post-trial argument from TCL that it was improper to let the jury evaluate the experts' competing understandings of the plain and ordinary meaning of the phrase “interception module.” Any such argument has been waived. See Sage Products, Inc. v. Devon Indus., Inc., 126 F.3d 1420, 1426 (Fed. Cir. 1997). Furthermore, Dr. Malek did not claim to be relying on a special meaning of the term “module” arising from the intrinsic record of the '510 patent. The dispute simply related to the ordinary understanding of the term within the art.

         II. Damages

         The parties' damages theories have been discussed in a prior opinion. See ECF No. 456; ECF No. 460 (redacted). Briefly, Ericsson contended on the basis of a consumer survey that about 28% of consumers would not have purchased an accused TCL device without the ability to grant or deny access to native functionality. See ECF No. 456 at 3-5. This 28% number was then applied directly to TCL's at-risk profit to arrive at a $3.41 royalty rate, which was factored into Ericsson's lump sum royalty analysis, providing for a total damages estimate of $245 million. See Id. TCL contended, on the basis of Ericsson's past licensing practices, that damages should be no more than $2, 465, 000. See Id. at 5-9. The jury credited Ericsson's theory and awarded $75 million, which reflects a deduction attributable at least in part to unaccused products, as discussed more below. See ECF No. 390 at 1.

         The court vacated the jury's damages verdict, concluding that (1) Ericsson's damages theory was unreliable; and (2) Ericsson's pursuit of unaccused products made a new trial on damages necessary. See ECF No. 456 at 9-15. As for Ericsson's damages theory, the court concluded that Mr. Mills' opinion was unreliable because it failed to account for patented features on a device that a consumer would consider just as essential as the accused security feature. See Id. at 10-12. Extrapolating Ericsson's theory, in other words, would quickly result in the erosion of all of TCL's profit. See id.

         Ericsson asks the court to reconsider this decision. See ECF No. 464. First, Ericsson contends that the court's decision conflicts with other courts' approval of damages theories such as the one Mr. Mills presented at trial. See Id. at 1. Second, Ericsson contends that the court's order raises a flavor of a “royalty stacking” concern, but Ericsson emphasizes that an accused infringer's profit is not a cap on damages and that TCL never presented evidence regarding patents that covered other features a consumer would find essential. See Id. at 7-9. The court agrees.

         Two principles are at the heart of the court's reconsideration of the damages issue. First, “[a] jury's decision with respect to an award of damages ‘must be upheld unless the amount is grossly excessive or monstrous, clearly not supported by the evidence, or based only on speculation or guesswork.” Lucent Techs., Inc. v. Gateway, Inc., 580 F.3d 1301, 1310 (Fed. Cir. 2009) (quotation and citations omitted). Second, “[e]stimating a reasonable royalty is not an exact science, ” and “the question of whether the expert is credible or the opinion is correct is generally a question for the fact finder, not the court.” Summit 6, LLC v. Samsung Elecs. Co., 802 F.3d 1283, 1296 (Fed. Cir. 2015).

         It is often difficult to draw the line between a credibility issue and a Daubert issue in patent cases, but the flaw in Ericsson's damages theory should have gone to the weight of the evidence, not its admissibility. “The primary purpose of the Daubert filter is to protect juries from being bamboozled by technical evidence of dubious merit, as is implicit in the courts' insistence that the Daubert inquiry performs a ‘gatekeeper' function.” SmithKline Beecham Corp. v. Apotex Corp., 247 F.Supp.2d 1011, 1042 (N.D. Ill. 2003), vacated on other grounds, 403 F.3d 1331 (Fed. Cir. 2005) (Posner, J., sitting by designation). Effective cross-examination and the presentation of contrary evidence should have been adequate to prevent the jury from being misled by Ericsson's damages theory. Daubert v. Merrell Dow Pharm., Inc., 509 U.S. 579, 596 (1993) (“Vigorous cross-examination, presentation of contrary evidence, and careful instruction on the burden of proof are the traditional and appropriate means of attacking shaky but admissible evidence.”). Indeed, any juror can understand that if one infringing feature on a device demands nearly a third of the device's profit, it may become impossible to sell a profitable device. TCL made this point to the jury, but much less effectively than the court expected, and the point was clouded by other unpersuasive arguments. Thus, to the extent Mr. Mills overlooked that consumers considered other features essential, and that these features would demand additional royalties, the flaw went to the weight of Mr. Mills' testimony.

         Other courts have come to the same conclusion. See ECF No. 464 at 4-7. Mr. Mills presented his damages theory in Sentius International, LLC v. Microsoft Corporation, and the court declined to find it inadmissible under Daubert. See No. 5:13-CV-00825-PSG, 2015 WL 451950, at *9 (N.D. Cal. Jan. 27, 2015). Specifically, “Mills used Wecker's survey to calculate the revenue and profit that Microsoft would have allegedly lost if it had not included the accused spell and grammar check features in its accused products.” Id. Rejecting the same argument TCL made in its post-trial motion, the court concluded that “Mills' income approach theory is not a hidden attempt to avoid the entire market value rule because Mills did not derive damages using Microsoft's revenue and profit from all sales of the accused products.” Id. at *11. Two other decisions are consistent with the result in Sentius. See Lucent Techs., Inc. v. Microsoft Corp., 837 F.Supp.2d 1107, 1117 (S.D. Cal. 2011); Apple, Inc. v. Samsung Elecs. Co., No. 12-CV-00630-LHK, 2014 WL 794328, at *15 (N.D. Cal. Feb. 25, 2014).

         A review of these cases also reveals that the court's previous order gave more credit to TCL's post-trial damages motion than was due. TCL made arguments identical to the ones rejected in Sentius, namely that Dr. Wecker's survey was unreliable and that “Ericsson's damages model violates the entire market value rule.” ECF No. 427 at 13-14. The survey itself was not unreliable, however, as the court has already explained, see ECF No. 456 at 11-12, and TCL's entire market value argument did not clearly highlight the flaw in Mr. Mills' opinion, see Id. at 12. The problem identified by the court-that Mr. Mills directly applied the 28% survey result to the at-risk profit- is at best another way of framing TCL's more convoluted argument, but a common sense articulation of the court's point is nowhere to be found in TCL's motion, see ECF No. 427, and was therefore not squarely addressed by Ericsson until its motion for reconsideration.

         Even if TCL preserved the essence of the court's point about Mr. Mills overlooking facts of the case, namely other features a consumer might consider essential, Ericsson is correct that TCL fell short of producing evidence to establish these facts. See ECF No. 464 at 7-9. The lack of evidence highlighting the flaw in Mr. Mills' opinion is an important reason why the flaw should have gone to the weight of the evidence, not its admissibility. First, the jury did not hear evidence about Mr. Mills' opinion regarding the other patents-in-suit, which the court relied on to illustrate how TCL's profit would quickly vanish. See ECF No. 456 at 10. Second, while there was evidence that consumers would consider a few other features essential to their purchase, including ability to make a call, text messaging, and Wi-Fi, see Trial Tr. vol. 1 (morning), 90:3-9:98:17, Dec. 5, 2017, ECF No. 398, the jury was not presented evidence that any one of these features was covered by another patent. At most, the jury heard evidence that the '510 patent was “one of many thousands of patents potentially that read on that phone.” Trial Tr. vol. 2 (afternoon), 9:1-4, Dec. 6, 2017, ECF No. 404 (emphasis added). Although there are many patents that likely read on the accused devices, as far as the jury was concerned, this was only a possibility. See id.

         Ericsson persuasively argues that the evidence presented at trial would not have been enough to warrant an instruction on royalty stacking. See ECF No. 464 at 8-9. The Federal Circuit has explained that “[t]he district court need not instruct the jury on hold-up or stacking unless the accused infringer presents actual evidence of hold-up or stacking.” Ericsson, Inc. v. D-Link Sys., Inc., 773 F.3d 1201, 1234 (Fed. Cir. 2014). “The mere fact that thousands of patents are declared to be essential to a standard does not mean that a standard-compliant company will necessarily have to pay a royalty to each SEP holder.” Id. Though this case did not deal with a patent declared essential to an industry standard, the Federal Circuit's point applies equally to testimony about unidentified patents that potentially cover the accused devices and the royalties those patents might demand. Indeed, Federal Circuit precedent suggests that TCL's theory about features covered by other unidentified patents would be unreliable opinion without actual evidence of royalty stacking. See Commonwealth Sci. & Indus. Research Organisation v. Cisco Sys., Inc., 809 F.3d 1295, 1302 (Fed. Cir. 2015) (“[A]bstract recitations of royalty stacking theory . . . are insufficiently reliable.”).

         The concern that Ericsson's theory would erode all of TCL's profit should also have gone to the weight of the evidence. The law is clear that an accused infringer's profit is not a cap on a reasonable royalty. See Powell v. Home Depot USA Inc., 663 F.3d 1221, 1238 (Fed. Cir. 2011) (“[I]t is settled law that an infringer's net profit margin is not the ceiling by which a reasonable royalty is capped.”). More important, while an accused infringer's profit is relevant to the analysis, see id., TCL opened the door to evidence that TCL underestimated its profit. See Trial Tr. vol. 2 (afternoon), 63:1-3, Dec. 5, 2017, ECF No. 400 (Q. “Do you have any reason to doubt that [profit] figure?” A. “Yes.” Q. “What's that?”). The profit figure the parties referenced at trial, according to Mr. Mills, was the figure used in TCL's “financial reporting accounting, ” which did not correlate to TCL's actual profit. See Id. 63:5-25. Mr. Mills explained, for example, that TCL kept a war chest for patent royalties that were included in the financial reporting accounting as “costs, ” even though royalties were never paid. See Id. 64:1-19. These unpaid royalties, according to Mr. Mills, inflated costs “to the tune of more than $50 million for some years.” Id. 64:1-5.

         Ericsson also persuasively argues that references to unaccused products should not have necessitated a new trial on damages. Cf. ECF No. 456 at 12-15. TCL argues otherwise, but not because the discussion of unaccused products was prejudicial under Rule 403. See ECF No. 427 at 13. Rather, TCL's complaint is that the damages model “is flawed” and “contrary to law” inasmuch as a patentee “can only receive infringement damages on those devices that actually performed the patented method during the relevant infringement period.” Id. (quoting Cardiac Pacemakers, Inc. v. St. Jude Med., Inc., 576 F.3d 1348, 1358-59 (Fed. Cir. 2009). Yet TCL was not assessed damages on unaccused products because the jury was instructed that lump sum damages are available only for ...


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