Yesterday, the Federal Circuit affirmed the U.S. International Trade Commission’s (“ITC”) determination that certain Interdigital patents related to 3G CDMA technology were not infringed by Nokia and ZTE. Recall that the ITC had reserved ruling on any RAND obligation defenses given its non-infringement finding (see our Feb. 24, 2014 post). ALJ Shaw’s Initial Determination had ruled on those defenses, finding that, among other things, InterDigital’s obligations arising from the ETSI IPR policy was to negotiate in good faith toward a license agreement and that InterDigital had negotiated in good faith notwithstanding Respondents arguments of bad faith based on InterDigital seeking an injunction, seeking to negotiate a worldwide license rather than a single country license and allegedly offering unfairly discriminatory rates given different effective royalties offered to ZTE and Nokia (see our July 30, 2013 post).
Last week, House Judiciary Committee Chariman Bob Goodlatte (R-Va.) reintroduced the Innovation Act, a bill that attempts to address perceived patent litigation abuse. This current bill as introduced is identical to the bill that was passed by the House in December of 2013 by a vote of 325-91. Discussed below are some of the Act’s provisions as well as judicial developments since the 2013 House vote that may impact those provisions.
Heightened Pleading Requirements
The proposed Innovation Act requires a patent owner to disclose a lot more information in its initial pleadings–e.g., Complaint–in order to first start a patent infringement lawsuit, rather than awaiting that information in initial disclosures or discovery.
Pleading Infringement. The proposed Act (§ 281A(a), beginning at page 2) contains provisions to increase the specificity and information required to plead patent infringement, requiring a patentee to identify the patents, the asserted patent claims, the accused infringing products or services, and an element-by-element description of how each accused product or service infringes the asserted patent claims.
But there has been some development along these lines in the judiciary since this identical legislation was proposed in December 2013. The udicial Conference recently recommended amending the Federal Rules of Civil Procedure to eliminate example pleading forms, including Form 18 “Complaint for Patent Infringement” that provided a bare recitation for pleading direct patent infringement. The Committee concluded that the “sample complaint” forms, like Form 18, “illustrate a simplicity of pleading that has not been used in many years.” Further, “[t]he increased use of Rule 12(b)(6) motions to dismiss, the enhanced pleading requirements of Rule 9 and some federal statutes, the proliferation of statutory and other causes of action, and the increased complexity of most modern cases have resulted in a detailed level of pleading that is far beyond that illustrated in the forms.” This rule change is expected to take effect in December 2015.
Importantly, the Federal Rule’s current presumption that use of the existing Form 18 is sufficient pleading to survive a motion to dismiss had hindered courts from requiring more specificity in pleading patent infringement. The Federal Circuit indicated that Form 18 kept it from requiring more specificity in pleading direct infringement, but the court was able to require more specificity with respect to pleading induced or contributory infringement (see our June 7, 2012 post on In re Bill of Lading). The Judicial Conference’s elimination of Form 18 may allow courts to require more detailed pleadings than the current Rules require. Congress may consider this when deciding whether and to what extent there remains support for the heightened pleading provisions of the reintroduced patent reform bill.
Patent Ownership and Financial Interest. The proposed Act (Sec. 4(b), beginning at page 16) would require a patent plaintiff to disclose at the outset of an infringement case certain patent ownership and financial interest information to the court, other parties, and the U.S. Patent and Trademark Office (PTO), including the patent assignee, the assignee’s parent entity, any entity with a right to sublicense or enforce the patent, and any entity with a financial interest in the patent.
Standard Setting Obligations. A patentee would be required, under proposed § 281A.(a)(10), beginning at page 4, to identify in the initial pleadings any standard setting organizations (SSOs) to which the patent has been declared essential, stating:
[W]hether a standard-setting body has specifically declared such patent to be essential, potentially essential, or having potential to become essential to that standard-setting body, and whether the United States Government or a foreign government has imposed specific licensing requirements with respect to such patent.
As we explained previously, the language “whether a standard setting body has specifically declared such patent to be essential …” is a misnomer, as SSOs generally do not declare patents essential or potentially essential. Instead, the patent owner declares whether its patent may be essential to an industry standard, usually by way of a a letter of assurance or similar assurance to the SSO. These assurances often do not state definitively whether the patent covers the standard, only that it might cover the standard and what the patent owner would do as far as licensing the patent if the patent actually is essential to the standard. Perhaps Congress will clarify or remove this language to align with real world practices.
Prevailing Party Fee/Cost Shifting
The proposed Act (§ 285A, beginning at page 6) would depart from the “American Rule” generally applied in all civil cases that each party bears its own attorneys fees; ratther, the proposed Act would presumptively award costs and attorneys fees to a prevailing party unless the position and conduct of the nonprevailing party was reasonably justified in law and fact. There has been case law development on this issue after Congress considered this language in 2013.
Specifically, on April 29, 2014, the Supreme Court issued two opinions (Octane Fitness and Highmark) that relaxes the standard for fee-shifting in patent cases, lowers the burden of proof from clear and convincing evidence to a preponderance of the evidence, and also changes the standard of appellate review of district court fee awards in patent cases from de novo to the more deferential abuse of discretion standard (i.e., the district court’s decision is more likley to withstand appellate review).
35 U.S.C. Section 285 governs fee-shifting in patent cases and provides that a “court in exceptional cases may award reasonable attorney fees to the prevailing party.” Prior to Octane Fitness and Highmark, courts applied the Federal Circuit’s stringent test in Brooks Furniture Mfg., Inc. v. Dutailier Int’l, Inc. to analyze whether a case was “exceptional.” Under Brooks, a case was “exceptional” if (1) the case involved “material inappropriate conduct” in the litigation or prosecuting the patent or (2) the case was both “objectively baseless” and “brought in subjective bad faith.” Brooks also required a prevailing litigant to establish the “exceptional” nature of a case by “clear and convincing evidence.”
As we previously reported, Octane Fitness overruled Brooks and adopted a more flexible test that gives district courts more discretion to determine, on a case-by-case basis, whether a case is “exceptional” given the totality of the circumstances. Octane Fitness also held that a prevailing party need only show that a case is exceptional by a preponderance of the evidence, rather than the higher clear and convincing burden of proof. Highmark overruled Brooks’ holding that a de novo standard of review applies to a district court’s determination that a case is exceptional. Under Highmark, such determinations are now reviewed for an abuse of discretion, which is much more deferential to the district court’s decision and renders it less likely to be reversed on appeal.
In considering the reintroduced bill, Congress may consider how the new, flexible and discretionary fee-shifting standards set forth in Octane Fitness and Highmark, warrants revising–if not tabling altogether–the proposed fee-shifting provisions in favor of awaiting further judicial development under the new and more flexible Octane Fitness/Highmark standard.
Mandatory Disclosures of SSO Obligations. With respect to discovery obligations, the Act (Sec. 6(a)(2), beginning at page 27) also proposes that the Judicial Conference consider “documents relating to any licensing term or pricing commitment to which the patent or patents may be subject through any agency or standard-setting body” to be part of the “core documentary evidence” that must be produced by a patent-plaintiff to defendants in every litigation.
Discovery Cost Shifting. The proposed Act (Sec. 6(a)(2), beginning at page 27) also would impose fee-shifting for discovery of core documentary evidence and other discovery requests , limit the scope of discovery that would be permitted prior to claim construction, and also require the Judicial Conference to develop rules and proposals limiting discovery in patent cases and to study the efficacy of the rules enacted.
Here again, there has been judicial development on this issue since 2013 that may impact the proposed bill. The Judicial Conference has revised Federal Rule of Civil Procedure 26 — which governs, inter alia, the scope and timing of discovery — to expressly incorporate a requirement that any discovery sought in a civil case be “proportional to the needs of the case, considering the importance of the issues at stake in the action, the amount in controversy, the parties’ relative access to relevant information, the parties’ resources, the importance of the discovery in resolving the issues, and whether the burden or expense of the proposed discovery outweighs its likely benefit.” The Judicial Conference has also revised Rule 26 to expressly permit a district court to “allocat[e]” the expenses for the costs of the discovery that is sought. While the Judicial Conference noted that this change “does not mean that cost-shifting should become a common practice” and that “[t]he assumption remains that the responding party ordinarily bears the costs of responding” to a discovery request, the House should nonetheless consider what impact these revisions to Rule 26 may have on the Act’s proposed discovery limitation and cost-shifting provisions.
Some supporters of the proposed Act expressed concerns about certain non-practicing entities (what some refer to as “patent trolls”) suing customers of allegedly-infringing products, rather than suing the manufacturer of those products, to leverage a quick settlement against an end user that is not familiar with the technology or patents in general (e.g., a coffee shop providing WiFi access). The proposed Act (§ 286, beginning at page 22) would allow a manufacturer to intervene in a patent suit brought against its customer. Under the Act, a patent suit against the customer may be stayed as to the customer while the manufacturer and patent plaintiff litigate the merits of the infringement action, so long as (1) the manufacturer and the customer consent, (2) the stay is sought within 120 days after the first complaint for infringement, and (3) the customer agrees to be bound by the court’s ruling on any issues in common between the customer and manufacturer. Some have expressed concern that this provision may be abused and used beyond unsophisticated end customers.
The Federal Circuit’s decision in In re Nintendo may impact this provision. As we previously reported, in Nintendo, the Federal Circuit ordered a district court to stay claims against defendant retailers accused of selling an infringing product in order to let the case proceed against the manufacturer of the accused products. The Federal Circuit ordered the district court to sever the claims against the retailers from those against the manufacturer, and to transfer the case against the manufacturer to the Western District of Washington, where the manufacturer’s U.S. operations are based. The House may consider whether and to what extent the customer-suit exception may be in necessary in light of the Nintendo decision.
As we previously reported, the Innovation Act was pulled from consideration by the Senate in May of 2014, which also was considering its own patent reform bill introduced by Senator Leahy. As Representative Goodlatte alluded, should the House vote to approve the Innovation Act, it will then be up to the Senate to resume its consideration of the Act or a competing bill and resolve any disagreements through committee. Prior to approving the Act, however, the House may consider the potential impact of the intervening judicial developments discussed above and revise accordingly.
Yesterday, Qualcomm issued a press release announcing resolution of the investigation under China’s Anti-Monopoly Law by China’s National Development and Reform Commission (“NDRC”) of Qualcomm’s licensing practice for standard essential patents. In addition to Qualcomm paying a $975 million fine, the China’s NDRC approved Qualcomm’s proposed rectification plan, summarized as follows:
- Qualcomm will offer licenses to its current 3G and 4G essential Chinese patents separately from licenses to its other patents and it will provide patent lists during the negotiation process. If Qualcomm seeks a cross license from a Chinese licensee as part of such offer, it will negotiate with the licensee in good faith and provide fair consideration for such rights.
- For licenses of Qualcomm’s 3G and 4G essential Chinese patents for branded devices sold for use in China, Qualcomm will charge royalties of 5% for 3G devices (including multimode 3G/4G devices) and 3.5% for 4G devices (including 3-mode LTE-TDD devices) that do not implement CDMA or WCDMA, in each cae using a royalty base of 65% of the net selling price of the device.
- Qualcomm will give its existing licensees an opportunity to elect to take the new terms for sales of branded devices for use in China as of January 1, 2015.
- Qualcomm will not condition the sale of baseband chips on the chip customer signing a license agreement with terms that the NDRC found to be unreasonable or on the chip customer not challenging unreasonable terms in its license agreement. However, this does not require Qualcomm to sell chips to any entity that is not a Qualcomm licensee, and does not apply to a chip customer that refuses to report its sales of licensed devices as required by its patent license agreement.
Qualcomm also gave a presentation to investors with further explanation of the agreement reached, including the following:
- Qualcomm will not pursue further legal proceedings contesting the NDRC’s findings that Qualcomm violated China’s Anti-Monopoly Law
- Requires no licensing changes outside China with limited exceptions
- Allows Qualcomm’s licensing business to fully participate in growing China opportunity
- Qualcomm does not believe that other competition agencies will interpret their laws to reach conclusions similar to China’s NDRC
The Antitrust Division of the U.S. Department of Justice (“DOJ”) has published a business review letter that it will not challenge the Institute of Electrical and Electronics Engineers (“IEEE”) adopting changes to its IPR Policy discussed in our Feb. 3, 2015 post. In a related DOJ press release, DOJ states that it does not dictate patent policy choices of standard setting organizations (“SSOs”), and did not believe the proposed IPR policy change “is likely to result in harm to competition”, stating:
“The department supports standards setting organizations’ efforts to clarify their patent licensing policies,” said Acting Assistant Attorney General Hesse. “IEEE’s decision to update its policy, if adopted by the IEEE Board, has the potential to help patent holders and standards implementers to reach mutually beneficial licensing agreements and to facilitate the adoption of pro-competitive standards. Where, as here, the department does not believe that adoption of a policy change is likely to result in harm to competition, IEEE and other standards setting organizations are free to adopt those modifications to their policies that they believe will benefit their standard setting activities. The U.S. government does not dictate patent policy choices to private standards setting organizations.”
DOJ also explained the limited import of its business review letter as a current intent not to bring an antitrust challenge against the business activity, though it may do so later if there are anticompetitve effects:
Under the department’s business review procedure, an organization may submit a proposed action to the Antitrust Division and receive a statement as to whether the division currently intends to challenge the action under the antitrust laws based on the information provided. The department reserves the right to challenge the proposed action under the antitrust laws if it produces anticompetitive effects.
Below is a summary review of DOJ’s action here.
IEEE Request for Business Review Letter
DOJ was responding to IEEE’s request for a business review letter. IEEE stated it was requesting such a review because some comments in response to the proposed IPR Policy change “voiced either vague or specific antitrust concerns,” including concerns that revisions “to the term ‘reasonable rate’ … could amount to ‘buyer-side price-fixing.'” The IPR Policy change generally is directed to four areas:
- A definition of “Reasonable Rate” that includes reference to “the smallest saleable Compliant Implementation”
- A definition of “Compliant Implementation” as being a component, sub-assembly or end-product so that any such implementers along the chain may seek the benefits of a RAND-commitment
- A blanket preclusion on seeking injunctive relief prior to adjucating through appeal reasonable license terms even as to unwilling licensees
- Reciprocity provisions that may condition providing a license in return for a cross-licensee to the licensee’s SEPs on that same standard, and permitting voluntary flexibility with other reciprocity terms.
The IEEE’s letter states that it does not believe there is “buyer-side price-fixing” for several reasons. With respect to what IEEE considered the most specific anti-trust issue raised concerning the term “reasonable rate”, IEEE emphasized that the enumerated factors–e.g., the smallest saleable Compliant Implementation–are not required to be considered, only recommended:
1. The proposed policy does not set a maximum royalty, either for a specific patent or for a group of all patents essential to a particular standard. It generally defines the term “reasonable rate” and recommends (but does not require) additional factors for consideration in determining an appropriate rate. The proposed policy does not prevent parties from discussing any other factors that they believe appropriate.
IEEE also stated that the proposed IPR Policy change “does not retroactively amend previously Accepted Letters of Assurance” and patent owners are not required to submit new Letters of Assurance under the proposed IPR Policy change if they don’t want to.
IEEE’s Process In Proposing IPR Policy Change
DOJ received concerns by some entities that “parties desiring lower royalty rates commandeered IEEE-SA” and the IPR Policy revision “was the product of a closed and biased process.” DOJ does not go into details about those concerns, but states that most concerned an Ad Hoc committee within IEEE that drafted the revision. Below is a summary of where that Ad Hoc committee fit into the process. Ultimately, DOJ determined that, “[g]iven the numerous opportunities for comment, discussion, and voting at different levels within IEEE, the Department cannot conclude that the process raises antitrust concerns.”
IEEE is a large non-profit professional technology association. The IEEE Standard Association (IEEE-SA) is an operating unit within IEEE that develops technical industry standards and which developed the IPR Policy at issue here. The IEEE-SA is governed by its own Board of Governors, who appoint members to the IEEE-SA Standards Board that oversees the IEEE standards-development process. The IEEE-SA Standards Board has various working committees, including the Patent Committee (“PatCom”) that oversees the use of patents in developing IEEE standards.
Participants in the IEEE standard-setting process may submit letters of assurance (“LOAs”) for patents that may be essential to a developing standard and indicate their willingness to license such patents, and under what terms, if they ultimately are essential to the finalized standard. Those terms include, for example, an agreement to license a patent that is essential to the standard on reasonable and non-discriminatory terms (“RAND”).
The PatCom chair appointed an Ad Hoc committee to consider changes to the IPR Policy given divergent views on what constitutes “reasonable rates” under a RAND-encumbered patent. The Ad Hoc committee then drafted changes to the IPR Policy, which was revised and ultimately approved by the PatCom to forward to the IEEE-SA Standard Board. The IEEE-SA Standards Board approved forwarding the revised IPR Policy to the IEEE-SA Board of Governors, which then approved the revision conditioned upon receiving a favorable business review letter from DOJ (i.e., this one here) and ultimate review by the IEEE Board of Directors. The IEEE Board is expected to vote on this revised IPR Policy soon.
“Prohibitive Order” (e.g., Injunctions)
DOJ considered the proposed IPR Policy change that would preclude seeking an injunction until after licensing terms are adjudicated and go through at least a first level of appeal. DOJ observes that a RAND commitment under IEEE’s current IPR Policy does not preclude seeking an injunction against an unwilling licensee, stating that the RAND commitment includes an “[i]nherent … pledge to make licenses available to those who practice such essential patent claims … in other words, not to exclude these implementers from using the standard unless they refuse to take a RAND license.” DOJ also observes, however, that the proposed amended IPR Policy “place[s] additional limits on patent holders’ ability to obtain injunctive relief” and is more restrictive than current U.S. case law and guidance from U.S. agencies, stating:
This provision may place additional limits on patent holders’ ability to obtain injunctive relief in a U.S. court, but it appears that, in practice, it will not be significantly more restrictive than current U.S. case law, and the added clarity may help parties reach agreement more quickly. Although this provision is more restrictive than recent guidance on this issue from the U.S. government, the U.S. government does not dictate patent policy choices to private SSOs.
That noticeably understates the point because, as explained in our Feb. 3, 2015 post, there is universal agreement in statements by courts and agencies–including DOJ itself–that injunctive relief should be available in certain circumstances involving unwilling licensees in order to deter patent hold-out. DOJ does not directly address this issue that the IPR Policy would preclude seeking an injunction against an unwilling licensee. DOJ does so indirectly, indicating that implementers may be deterred from seeking to “delay payment” or being “recalcitrant about taking a license” because (i) they can avoid uncertainty caused by the absence of a license, (ii) they can avoid the cost of litigation, (iii) they may obtain a pre-litigation discount, and (iv) courts may require them to pay a bond or escrow payments, stating:
Nevertheless, patent holders have expressed concern that this damages remedy is insufficient because it permits potential licensees to benefit by delaying paying reasonable compensation for a portfolio of patents until a patent holder has litigated each patent in its portfolio individually. The Department encourages patent holders and implementers to negotiate licensing agreements that are mutually acceptable, and there are incentives favoring a negotiated outcome. For example, implementers have incentives to reach agreement on licensing terms to reduce cost uncertainty as they bring products to market. In addition, litigation is expensive for both parties and licensees risk that a court will award a higher royalty for a patent that is found to be valid and infringed than a discounted pre-litigation rate offered by a licensor.
… [W]here potential licensees appear recalcitrant about taking a license, courts and other third-party decision makers may seek to ensure payment by requiring alleged infringers to post a bond or make escrow payments. Moreover, other potential licensees will be less likely to litigate once a patent holder has demonstrated the value of its patents (or a subset of the patents in its portfolio) through successful infringement litigation.
But, again, those considerations always have been present, yet were not deemed sufficient deterrents by courts and U.S. agencies that have consistently stated that injunctive relief should be available against unwilling licensees. This revision, therefore, actually may increase litigation over IEEE standards even though reducing such litigation is the suggested reason behind these revisions.
DOJ ultimately concludes that the proposed IPR Policy revision “is unlikely to result in competitive harm,” because it “is consistent with the direction of U.S. case law and patent holders can avoid its requirements by declining to submit an LOA.” As discussed above, however, precluding injunctive relief against unwilling licensees is against current U.S. case law and prior guidance from U.S. agencies. Challengers of the proposed IPR Policy change may argue this raises questions on the reliability of DOJ’s business review letter.
Mandatory Factor. DOJ reviewed the defined “Reasonable Rate” as having a “mandatory factor” that “a Reasonable Rate ‘shall mean appropriate compensation … excluding the value, if any, resulting from the inclusion of [the patent claim’s] technology in the IEEE standard.'” The general concept of apportioning value to the patented technology finds support in current case law, such as the Federal Circuit’s recent Ericsson decision. DOJ also found that this provision aligns with goals of providing patent holders appropriate compensation without improper “hold-up value” connected with standardization, citing the Federal Circuit’s recent Ericsson v. D-Link decision that “the patentee’s royalty must be premised on the value of the patented feature, not any value added by the standard’s adoption of the patented technology.” That Federal Circuit decision, however, counseled as being “neither necessary nor appropriate” instructing a jury on patent hold-up based merely on some “general argument that these phenomena are possibilities;” rather, patent hold-up may be considered if there is evidence of actual holdup, such as a patent holder seeking higher royalty rates after the IEEE standard was adopted (see our Dec. 5, 2014 post for a summary of the Ericsson v. D-Link decision).
DOJ does not refer to any actual evidence of hold-up for patents involving IEEE standards, it is not clear that IEEE itself had considered such actual evidence, and IEEE standards (e.g., the 802.11 WiFi standard) have comprised the bulk of standard essential patent litigation, but they have no provided any actual evidence of patent holdup. We have reported on one instance where a patent owner–that had not participated in the standard-setting process or made any associated commitment–argued its royalty rate could be enhanced by the fact that the defendant could not practice the standard absent a license to the patent, but the court in that case unsurprisingly precluded the patent owner from seeking such “hold-up” value. (See our Apr. 23, 2014 post). Challengers of the revised IPR Policy may argue that the lack of any evidence of actual hold-up for patents involving IEEE standards raises questions about reliance on DOJ’s position here that seeks to justify a significant IPR policy change in order to address a problem for which there is no evidence actually exists.
Three Optional Factors. DOJ also considered the remaining “three recommended factors” that include considering the “smallest saleable Compliant Implementation” and limiting consideration of comparable licenses to those not entered under threat of an injunction or in circumstances not consistent with the defined “Reasonable Rate.” The DOJ found comfort from these factors not being required and no specific methodology being mandated:
Significantly, the Update makes clear that the determination of Reasonable Rates ‘need not be limited to’ these factors. The Update, then, does not mandate any specific royalty calculation methodology or specific royalty rates.
Not mandating a specific methodology is consistent with developed case law, the Federal Circuit’s Ericsson v. D-Link decision rejecting a specific methodology for all RAND-encumbered patents, but relying instead on the particular facts presented in any given case:
To be clear, we do not hold that there is a modified version of the Georgia-Pacific factors that should be used for all RAND-encumbered patents. Indeed, to the extent D-Link argues that the trial court was required to give instructions that mirrored the analysis in Innovatio or Microsoft, we specifically reject that argument. We believe it is unwise to create a new set of Georgia-Pacific-like factors for all cases involving RAND-encumbered patents. Although we recognize the desire for bright line rules and the need for district courts to start somewhere, courts must consider the facts of record when instructing the jury and should avoid rote reference to any particular damages formula.
Although the factors are not exclusive or required to be considered, DOJ found that they “focus attention on considerations that may be likely to lead to the appropriate valuation.” This “focus”, however, might lead to the precise “rote reference to any particular damages formula” that the Federal Circuit counseled to avoid.
DOJ found that the “smallest saleable Compliant Implementation” factor “may be appropriate … particularly when the product is complex and incorporates many patented technologies.” DOJ supports this by citing to three Federal Circuit decisions on the smallest saleable patent practicing unit (see our blog posts on LaserDynamics, Virnetx and Ericsson). But those cases make clear that the “smallest saleable patent practicing unit” is solely a creature of U.S. jury litigation under evidentiary Rule 403 that seeks to limit confusion of lay jurors considering a hypothetical negotiation and, thus, may not be applicable to real world, bilateral negotiations between sophisticated market participants (see our Feb. 3, 2015 post). DOJ does not mention this limited applicability of the smallest saleable patent practicing unit, which challenges of the IPR Policy may argue raises questions about reliance on DOJ’s analysis. But DOJ may have taken some comfort in that this factor is not mandatory nor does it preclude considering the end product, stating:
This factor does not mandate the use of the smallest saleable Compliant Implementation as the correct [royalty] base. For example, the provision does not exclude evidence of the role of the relevant patented functionality in driving demand for the end product, or bar using end-product licenses to help determine the appropriate value to attribute to the technology.
DOJ also considered the second non-mandatory factor regarding apportioning value of all SEPs on a standard “addresses royalty stacking, which may hamper implementation of a standard,” relying in part on the Federal Circuit’s Ericssson decision that discussed royalty stacking concerns. As with patent hold-up, the Federal Circuit’s recent Ericsson decision eschewed reliance on theoretical royalty stacking concerns in favor of actual evidence of such royalty stacking, stating that “[t]he 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.” As with patent holdup, DOJ does not state that it considered any actual evidence of royalty stacking or that IEEE had either, and the numerous litigations involving IEEE standards have not provided such evidence. So challengers of the revised IPR Policy may argues this raises questions about relying on DOJ’s position here that is premised on a problem for which there is no evidence exists.
Regarding the third non-mandatory factor on what constitutes comparable licenses, DOJ found comfort that “[t]he Update does not prevent consideration of licensing agreements other than those specifically identified therein.” The ability to consider a broader swath of comparable licenses is consistent with U.S. case law, which permits differences from the instant license negotiation to be factors a jury can consider without necessarily excluding those comparable licenses altogether (see our Sep. 17, 2014 post on Virnetx and Dec. 5, 2014 post on Ericsson).
Any “Compliant Implementation”
DOJ considered a revision based on the definition of “Compliant Implementation” as “meaning that a patent holder making an IEEE RAND Commitment cannot refuse to license its patents for use in IEEE-SA standards at certain level of production.” DOJ observes that this may “entail a departure from historical licensing practices”, but “the Update does not mandate specific licensing terms at different levels of production,” stating:
For example, the royalty rate need not necessarily be the same at all levels of production. In each case, the RAND royalty should reflect the value of the patented technology. If a patented invention’s value is not reflected in the current price of upstream implementations, due to historical licensing practices, some adjustments may be necessary, and the Update does not prevent such adjustments.
DOJ’s point here is not entirely clear. Does DOJ mean that separate licensing agreements can be entered and accumulate at each of level of the vertical supply chain so that, by the end of the supply chain, the cumulative total royalty provides full compensation for the patented technology (and can that be done given patent exhaustion concerns — see, e.g., our June 25, 2014 post considering Federal Circuit staying action against retailers while case proceeded against manufacturer). Or does DOJ suggest, per its last sentence above, that the price of a component used to implement a standard should be increased to account for the benefits that an invention provides to each particular end product in which the component is used.
For example, how would DOJ’s proposal work in the hypothetical presented in our Feb. 3, 2015 post for patented technology that provides power savings in a wireless standard that is implemented in a microchip used (1) in a stationary end product that derives no benefit from the patented power-savings because it is powered from a wall outlet and (2) a mobile end product that substantially benefits from the patented power-saving:
- Does the microchip vendor raise the price of the microchip across the board to pay the entire patent licensing fee so that manufacturers of the stationary end product (that do not need the patented technology) pay the same licensing fee as manufacturers of the mobile end product (that greatly benefit from the patented technology)?
- Or does the microchip vendor sell the same microchip at different prices based on what end product within which the microchip will be implemented to account for the different value patented technology provides to different end products?
- Or does the microchip vendor sell a different microchip to different manufacturers to exclude technology not needed by the end product?
None of these may be practical options. This may be particularly true with the latter option given (1) costs in having many different microchip versions, (2) some nominal need for the patented technology in an end product (i.e., its needed, but is not as valuable as it is in other products) and (3) end products may be required to have the patented functionality–even if no benefit to that product–in order to state that they are fully compliant with the wireless standard (important where the fundamental premise of having standards is interoperability among disparate products that comply with the standard). These various considerations may indeed be why, as DOJ and courts have observed, actual license negotiations often are based on licensing end products, rather than components thereof.
DOJ considered a provision of the proposed IPR Policy amendment that “permits a licensor to require a potential licensee to grant back a license to its own patents essential to the same standard.” But the proposed amendment would “prohibit licensors from demanding licenses to applicants’ patents that are not essential to the same standard … and from forcing an applicant to take a license to patent claims that are not essential to the referenced standard.” This is intended to prohibit “forc[ing]” a cross-license to a licensee’s differentiating patents, which might “decrease incentives to innovate.” DOJ found that this provision still “leaves parties free to negotiate these types of terms voluntarily.”
DOJ ultimately concludes that the proposed IPR Policy amendment has “potential to benefit”, and cannot conclude it is “likely to harm competition”, stating:
The Department concludes that the Update has the potential to benefit competition and consumers by facilitating licensing negotiations, mitigating hold up and royalty stacking, and promoting competition among technologies for inclusion in standards. The Department cannot conclude that the Update is likely to harm competition. Further, to the extent there are any potential competitive harms, the Department concludes that the Update’s potential procompetitive benefits likely outweigh those harms. Accordingly, the Department has no present intention to take antitrust enforcement action against the conduct you have described.
DOJ was careful to note that its conclusion did not express views as to applying the amended IPR Policy retroactively to existing LOAs, where IEEE indicated the proposed IPR Policy would not be retroactive:
The Department’s analysis in this letter applies only to the Update;’s impact on future LOAs; the Department offers no statement regarding its intentions concerning the application of the Update retroactively to previously submitted LOAs.
The import of DOJ’s action here and the proposed IEEE IPR Policy amendment is yet to be seen. If the IEEE Board of Directors does adopt the amended IPR Policy, DOJ’s letter here may not prevent others from challenging the IPR Policy change on antitrust or other grounds and DOJ itself indicated it may take action in the future if the changed policy “produces anticompetitive effects.” As discussed above, those challenging the IPR Policy change may raise questions about the DOJ’s positions here given conflicts with existing law, lack of evidence that problems sought to be solved even exist and other issues. This may give the IEEE Board of Directors pause about whether to adopt or amend the proposed IPR Policy amendment when they consider the issue.
Further, the impact of the IPR Policy if adopted is not clear. It plainly has anti-patent overtones, which is disappointing given how much we all have benefited from the innovations fueled by patents every step of the way over many decades in telecommunications and other standards-driven technology. An important part of DOJs conclusion was the choice patent owners have whether to submit a LOA having the new IPR Policy provisions and flexibility to not be bound by various factors when negotiating a RAND-encumbered patent under that new IPR Policy. But, in practice, will refusing to submit such an LOA be a viable competitive option for a patent holder? For example, in the CSIRO case, Judge Davis observed that the patent holder who at first gave an LOA later expressly refused to provide an LOA for later versions of the standard, yet IEEE did not change its standard to avoid that patent. (see our July 28, 2014 post for summary of the CSIRO decision, currently on appeal to the Federal Circuit). And if a large number of innovating patent holders refuse to submit the new LOA, will IEEE find that the cost of constant consideration of whether and how to revise standards to design around those patents as well as foregoing innovative technology warrants more flexibility in the LOA? But the uncertainty of such an experiment might be better tested in a brand new standard setting organization, rather than an established ubiquitous one like IEEE .
We also will see if other standard setting organizations consider a similar IPR Policy change or await the aftermath of this one if adopted. DOJ itself noted that its role was not to assess whether the IPR Policy is right for IEEE and that having different IPR Policies among different standard setting organizations can be beneficial:
The Department’s task in the business review process is to advise the requesting party of the Department’s present antitrust enforcement intentions regarding the proposed conduct. It is not the Department’s role to assess whether IEEE’s policy choices are right for IEEE as a standards-setting organization (“SSO”). SSOs develop and adjust patent policies to best meet their particular needs. It is unlikely that there is a one-size-fits-all approach for all SSOs, and, indeed, variation among SSOs’ patent policies could be beneficial to the overall standards-setting process. Other SSOs, therefore, may decide to implement patent policies that differ from the Update.
We will continue to monitor developments here.
The IEEE apparently is considering an unusual change to its intellectual property rights (“IPR”) policy that in many ways is contrary to developing U.S. law on determining a reasonable royalty rate and the availability of injunctive relief for standard essential patents (“SEPs”). The IEEE provides a link to the current draft of this proposed IPR policy change that shows the proposed redline revisions to the current IPR policy. The proposed IEEE revisions have even caught the attention of the popular press and others, such as Sen. Coons’ letter to the U.S. Attorney General Holder that calls the proposal an “unprecedented move by an international standards body to weaken the value and enforceability of patented technology.” (see Bloomberg article).
Below is a summary of some key issues raised in the proposed IEEE IPR policy amendment that we have touched on in our blog posts discussing developing case law.
Smallest Saleable Compliant Implementation
The proposed change to IEEE’s IPR policy injects a new term called the “smallest saleable Compliant Implementation”, where a “Compliant Implementation” means “any product (e.g., component, sub-assembly, or end-product) or service that conforms to any mandatory or optional portion of a normative clause of an IEEE Standard.” The specific langauge of the proposed IPR amendment is as follows:
“Reasonable Rate” shall mean appropriate compensation to the patent holder for the practice of an Essential Patent Claim excluding the value, if any, resulting from the inclusion of that Essential Patent Claim’s technology in the IEEE Standard. In addition, determination of such Reasonable Rates should include, but need not be limited to, the consideration of:
- The value that the functionality of the claimed invention or inventive feature within the Essential Patent Claim contributes to the value of the relevant functionality of the smallest saleable Compliant Implementation that practices the Essential Patent Claim.
- The value that the Essential Patent Claim contributes to the smallest saleable Compliant Implementation that practices that claim, in light of the value contributed by all Essential Patent Claims for the same IEEE Standard practiced in that Compliant Implementation.
- Existing licenses covering use of the Essential Patent Claim, where such licenses were not obtained under the explicit or implicit threat of a Prohibitive Order, and where the circumstances and resulting license are otherwise sufficiently comparable to the circumstances of the contemplated license.
This changed policy apparently was derived from the “smallest saleable patent practicing unit” concept for the entire market value theory in U.S. patent damages law. But IEEE’s proposed adoption of that concept into real-world arms length negotiations between sophisticated market players may be misplaced, because the “smallest saleable patent practicing unit” concept is an evidentiary principle for avoiding undue prejudice and confusion of lay jurors in U.S. jury trials under evidence Rule 403 (see our Aug. 30, 2013 LaserDynamics post and Dec. 5, 2014 Ericsson v. D-Link post).
In LaserDynamics, a case concerning patents generally, the Federal Circuit expressed concern about jury confusion “[w]here small elements of multi-component products are accused of infringement, calculating a royalty on the entire product carries a considerable risk that the patentee will be improperly compensated for non-infringing components of that product.” Further, “disclosure to the jury of the overall product revenues ‘cannot help but skew the damages horizon for the jury, regardless of the contribution of the patented component to this revenue” and may “make a patentee’s proffered damages amount appear modest by comparison [and] artificially inflate the jury’s damages calculation.” This jury confusion problem is not “avoided by the use of a very small royalty rate.” (See our Aug. 30, 2013 post for a more complete summary of the LaserDynamics decision)
Recently in Ericsson v. D-Link, a case concerning standard essential patents, the Federal Circuit explained that the entire market value rule (“EMVR”) has two considerations: (1) a “substantive legal rule” that the “ultimate reasonable royalty”–i.e., combination royalty rate and royalty base–“must be based on the … value that the patented invention adds to the end product” and (2) an “evidentiary principle” for selecting the royalty base that is intended “to help our jury system reliably implement” the substantive legal rule. As the Federal Circuit explained, the “smallest saleable patent practicing unit” is an application of the evidentiary principle in U.S. jury trials:
The principle, as applicable specifically to the choice of a royalty base, is that, where a multi-component product is at issue and the patented feature is not the item which imbues the combination of the other features with value, care must be taken to avoid misleading the jury by placing undue emphasis on the value of the entire product. It is not that an appropriately apportioned royalty award could never be fashioned by starting with the entire market value of a multi-component product–by, for instance, dramatically reducing the royalty rate to be applied in those cases–it is that reliance on the entire market value might mislead the jury, who may be less equipped to understand the extent to which the royalty rate would need to do the work in such instances. Thus, where the entire value of a machine as a marketable article is “properly and legally attributable to the patented feature,” the damages owed to the patentee may be calculated by reference to that value. Where it is not, however, courts must insist on a more realistic starting point for the royalty calculations by juries–often, the smallest salable unit and, at times, even less. (emphasis added)
(See our Dec. 5, 2014 post for a more complete summary of the Ericsson v. D-Link decision).
Thus, the “smallest saleable patent practicing unit” principle is an evidentiary rule to avoid jury confusion in U.S. jury trials that may not be appropriate for real-world arms length negotiations between sophisticated market participants, as IEEE’s amendment proposes. The Federal Circuit’s recent Ericsson decision recognized that “licenses are generally negotiated without consideration of the EMVR [i.e., entire market value rule with its smallest saleable patent practicing unit evidentiary principle].” The Federal Circuit ruled that the jury in that case could hear evidence about comparable licenses based on the ultimate end product, rather than the smallest saleable patent practicing unit, because, otherwise, “[m]aking real world, relevant licenses inadmissible … would often make it impossible for a patentee to resort to license-based evidence.” This follows the Federal Circuit’s rationale in Virnetix that differences between comparable licenses and the hypothetical negotiation for patent damages are circumstances a jury is “entitled to hear … and decide for itself what to accept or reject.” (see our Sep. 17, 2014 post).
Further, even in U.S. jury trials, the smallest saleable patent practicing unit evidentiary principle is not a blanket rule, the Federal Circuit in Ericsson explaining that, “where expert testimony explains to the jury the need to discount reliance on a given license to account only for the value attributed to the licensed technology, as it did here, the mere fact that licenses predicated on the value of a multi-component product are referenced in that analysis … is not reversible error.” The IEEE proposed language above, however, appears to limit consideration of existing licenses to those “where the circumstances and resulting license are otherwise sufficiently comparable to the circumstances of the contemplated license,” which relies to some unspecified extent on the smallest saleable Compliant Implementation. If the IEEE proposed IPR amendment is adopted, then lay jurors considering a hypothetical negotiation in litigation might be entrusted with more relevant real-world information than sophisticated market participants negotiating an actual license for a patent directed to an IEEE standard. Odd.
While the brightline drawn by a smallest patentable patent practicing unit principle may be appealing at first blush, real world negotiations may require more flexibility to fit the specific patented technology to the specific licensed product. Consider, for example, a wireless standard implemented within a microchip that is one of many components of an end product where functional benefits of the standard include (1) wireless connectivity and (2) low power consumption. What benefit a specific licensed product derives from a patent covering that standard may depend primarily on (A) what functionality the patent covers and (B) the importance of that functionality to the licensed product. A patent covering power savings may be important to the standard generally, but provide little, if any, benefit to a stationary end product that is powered from a wall outlet. The stationary end product does benefit from wireless connectivity functionality, which avoids the cost and problems of running wires. That end-product may include the power-saving functionality solely because it is built into the microchip supplied by the microchip vendor or because the end product must have that functionality in order to advertise that the product is fully compliant with the standard. On the other hand, the patented power-saving functionality may provide substantial benefit to a mobile device by permitting longer use time between charges, smaller battery and hence smaller and lighter device, etc..
So the benefit that a claimed invention provides to an end product–and hence what would be reasonable licensing terms–depends on the specific patent and product to be licensed and not necessarily the “smallest saleable patent practicing unit” (e.g., the microchip in this example). Thus, Judge Davis in CSIRO used the end product rather than microchip as the royalty base, because “[b]asing 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.” (see our July 28, 2014 post summarizing the CSIRO decision, currently on appeal to the Federal Circuit).
If adopted, the new IEEE IPR policy also may lead to patent owners drafting claims to expand what constitutes a “Compliant Implementation” by claiming, for example, “a mobile phone comprising …. a microchip” or including limitations present in typical implementations beyond a microchip, such as “a mobile phone comprising an antenna, a power supply, an input device, a microchip implementing standard functionality, etc …” And some may go bigger: “An automobile, comprising wheels, a motor, a microchip implementing standard functionality, etc.” So, to avoid putting form over substance, what may be deemed a “reasonable” royalty still may be better determined based on the specific patent and products at issue and not necessarily what is claimed to be the smallest saleable Compliant Implementation.
Given the fact-specific circumstances underlying a FRAND licensing negotiation, perhaps whatever issues the proposed IEEE IPR amendments are intended to address might be better served through continued case-by-case development of what is a “reasonable”, rather than directing sophisticated market participants to view their bilateral negotiations through the blinders of the smallest saleable patent practicing unit designed to limit evidence considered by a lay jury in U.S. litigation.
The proposed change to IEEE’s IPR Policy appears to make an extreme shift in policy by precluding an SEP patent holder from even seeking injunctive relief against an unwilling licensee until after a FRAND royalty is litigated and at least a first level of appeal exhausted, stating:
A statement that the Submitter will make available a license for Essential Patent Claims to an unrestricted number of Applicants on a worldwide basis without compensation or under Reasonable Rates, with other reasonable terms and conditions that are demonstrably free of any unfair discrimination to make, have made, use sell, offer to sell, or import any Compliant Implementation that practiced the Essential Patent Claims for use in conforming with the IEEE Standard. An Accepted LOA that contains such a statement signifies that reasonable terms and conditions, including without compensation or under Reasonable Rates, are sufficient compensation for a license to use those Essential Patent Claims and preclude seeking, or seeking to enforce, a Prohibitive Order except as provided in this policy.
The Submitter of an Accepted LOA who has committed to make available a license for one or more Essential Patent Claims agrees that it shall neither seek nor seek to enforce a Prohibitive Order based on such Essential Patent Claim(s) in a jurisdiction unless the implementer fails to participate in, or to comply with the outcome of, an adjudication, including an affirming first-level appellate review, if sought by any party within applicable deadlines, in that jurisdiction by one or more courts that have the authority to: determine Reasonable Rates and other reasonable terms and conditions; adjudicate patent validity, enforceability, essentiality, and infringement; award monetary damages; and resolve any defenses and counterclaims. In jurisdictions where the failure to request a Prohibitive Order in a pleading waives the right to seek a Prohibitive Order at a later time, a Submitter may conditionally plead the right to seek a Prohibitive Order to preserve its right to do so later, if and when this policy’s conditions for seeking, or seeking to enforce, a Prohibitive Order are met.
This proposed IEEE IPR policy appears contrary to case law and administrative actions that have considered the availability of injunctive relief for standard essential patents and universally agree that injunctive relief should be available against unwilling licensees. For example, in ruling that there was no per se rule against injunctive relief for standard essential patents, the Federal Circuit in Motorola v. Apple recognized that “an injunction may be justified where an infringer unilaterally refuses a FRAND royalty or unreasonably delays negotiations to the same effect.” (see our April 25, 2014 post for a summary of the Motorola v. Apple decision). The Federal Circuit ruled that a party may seek an injunction, and the FRAND obligation and other circumstances are what “the district courts are more than capable of considering … when deciding whether to issue an injunction under the principles in eBay.” But the proposed amended IEEE IPR Policy appears to preclude even seeking an injunction against an unwilling licensee without first filing suit and going through appeals to enforce adjudicated FRAND terms.
In LSI v. Realtek, Judge Whyte held that LSI had breached its FRAND obligation by “instigating an ITC Section 337 action naming Realtek as a respondent prior to offering a RAND license to Realtek.” (see our May 21, 2013 post on LSI v. Realtek). But Judge Whyte also recognized that “an injunction may be warranted where an accused infringer of a standard-essential patent outright refuses to accept a RAND license” that has been offered (in that case “there is no indication that Realtek is not willing to accept a RAND license.”). (emphasis in original).
When U.S. Trade Representative Froman disapproved of the exclusion order entered by the ITC in the Apple v. Samsung investigation, he noted that injunctive relief may be warranted for an unwilling licensee given concerns about harm caused by “reverse hold-up” or “hold-out” such as “constructive refusal to negotiate a FRAND license.” (see our Aug. 3, 2013 post summarizing USTR Froman’s decision). In doing so, he quoted favorably from a joint policy statement by the U.S. Department of Justice and U.S. Patent and Trademark Office, which states:
An exclusion order may still be an appropriate remedy in some circumstances, such as where the putative licensee is unable or refuses to take a FRAND license and is acting outside the scope of the patent holder’s commitment to license on FRAND terms. For example, if a putative licensee refuses to pay what has been determined to be a FRAND royalty, or refuses to engage in a negotiation to determine F/RAND terms, an exclusion order could be appropriate. Such a refusal could take the form of a constructive refusal to negotiate, such as by insisting on terms outside the bounds of what could reasonably be considered to be F/RAND terms in an attempt to evade the putative licensee’s obligation to fairly compensate the patent holder.
Judge Essex’s decision in ITC Inv. No. 337-TA-868 also recognized that a FRAND commitment has obligations going both ways and a prospective licensee should seek a license as part of satisfying its obligations under the FRAND commitment (see our July 2, 2014 post for a summary of that decision). Judge Essex echoed concerns of U.S. Trade Representative Froman as well as other agencies about “patent hold-out”:
The ETSI IPR policy requires companies that wish to use the IPR covered by the agreements to contact the owner of the IP, and take a license. By skipping this step, the companies that use the IPR in violation of the policy are able to exert a pressure on the negotiations with the IPR holder to try to make the agreement in the lower range of FRAND, or perhaps even lower than a reasonable FRAND? rate. They also are able to shift the risk involved in patent negotiation to the patent holder. By not paying for a FRAND license and negotiating in advance of the use of the IPR, they force the patent holder to take legal action. In this action, the patent owner can lose the IPR they believe they have, but if the patent holder wins they get no more than a FRAND solution, that is, what they should have gotten under the agreement in the first place. There is no risk to the exploiter of the technology in not taking a license before they exhaust their litigation options if the only risk to them for violating the agreement is to pay a FRAND based royalty or fee. This puts the risks of loss entirely on the side of the patent holder, and encourages patent hold-out, which is as unsettling to a fair solution as any patent hold up might be.
The U.S. Federal Trade Commission’s consent decree settlement with Google/Motorola also recognized that injunctive relief should be available against unwilling licensees. (See our July 24, 2013 post summarizing of the FTC/Google Consent decree settlement).
In sum, the proposed amendments to the IEEE IPR Policy, if adopted, would contravene how injunctive relief for standard essential patents has been treated by U.S. courts and other governmental entities and could give rise to concerns about “patent hold-out” by unwilling licensees. The balanced approach discussed by the Federal Circuit in Motorola v. Apple may be a better approach, where applying the general eBay factors typically will preclude injunctive relief in the usual course for FRAND-obligated standard essential patents, but such relief remains available for the parties to raise and a court to consider in exercising its discretion in extreme circumstances such as actual patent hold-out.
We understand that these are just proposed amendments to the IEEE IPR policy. We will look for and post any relevant developments brought to our attention.
The Western District of Texas recently held that patent holder Innovative Wireless Solutions (IWS) acted as its own lexicographer by expressly referencing the Institute of Electrical and Electronics Engineers (IEEE) 802.3 Ethernet standard’s definition of a disputed claim term in the patents-in-suit. Therefore, the disputed claim was construed to incorporate the standard’s definition.
Background. Cisco and Ruckus Wireless both filed complaints against IWS seeking declarations of non-infringement and invalidity of three of IWS’ patents allegedly covering WiFi technology. Cisco’s complaint alleges that IWS is a “patent assertion entity that, on information and belief, has been set up to monetize patents by filing strike suits against mere end users of 802.11 standard compliant products (also known as Wi-Fi products) for the purpose of obtaining licensing and settlement amounts to which they are not entitled.” “[R]ather than seek to license its patents to Cisco and other manufactures of Wi-Fi compliant products, IWS instead sent demand letters to end users that have purchased Cisco products that are compliant with the Wi-Fi standards.” According to Cisco, “[w]ithin one week of sending the letters, IWS filed 41 lawsuits against these end users of Cisco products and other similar parties.” “In turn, Cisco received indemnity demands from a number of these purchasers.” “Although the 41 lawsuits were dismissed without prejudice,” Cisco claims that “IWS is intent on re-filing these lawsuits against these retail purchasers after correcting one or more procedural deficiencies.” Cisco therefore filed suit “to protect the purchasers” of its WiFi compliant products.
Ruckus’ complaint makes similar allegations and, like Cisco, requests a declaratory judgment of non-infringement and invalidity to protect purchasers of its WiFi compliant products.
IWS filed answers generally denying the substantive allegations of both complaints but admitting that a case or controversy existed for purposes of Cisco and Ruckus’ request for declaratory relief. IWS also counterclaimed for infringement of the three patents against both Cisco and Ruckus.
The disputed claim term. The term “CSMA/CD” appears in claims in all three of the IWS patents at issue. This stands for “Carrier Sense Multiple Access with Collision Detection.” The parties disputed whether the term needed to be construed at all. In their claim construction brief, Cisco and Ruckus argued that CSMA/CD is a well-known protocol defined by the IEEE 802.3 Working Group and that IWS’ patents defer to the published IEEE standard. Therefore, a skilled artisan at the time of the patent would understand the use of the term CSMA/CD and no construction was necessary.
IWS, on the other hand, argued that “CSMA/CD is a term the jury cannot readily understand” and requested that the court construe it to mean:
Techniques compatible with connecting to networks such as Ethernet networks, where a device that wishes to transmit on the network listens and checks to see if the channel is free for sending data. If the channel is not free, or if a collision is detected during transmission, the device waits for a small amount of time and tries again.
IWS contended that its proposed construction was “supported by the specification and the IEEE 802.3 standard.” Specifically, IWS cited to one sentence in the specification that states: “The term CSMA/CD is used herein to refer generically to this technology.” IWS argued that “this sentence indicates that CSMA/CD is used throughout the patents-in-suit to describe any network technology that employs a contention scheme similar to the 802.3 scheme.” IWS asserted further that “the contention scheme contained in its proposed construction is consistent with the contention scheme overview in the 802.3 standard.” Finally, IWS contended that the “MA” in CSMA/CD “shows that CSMA/CD is a technology that relates to connecting to a network” and that “multiple access” shows “that the technology relates to connecting to networks in addition to facilitating communications.”
The court’s ruling. The court rejected IWS’ proposed construction as well as Cisco and Ruckus’ position that the term required no construction. “In light of the clear language contained in the patents’ specification, the court concludes that the patentee acted as his own lexicographer and specifically defined the term’s use in the context of the patents.” The court relied on the specification, which defines CSMA/CD as follows:
Different technologies can be used to facilitate communications on any LAN [Local Area Network] and throughout the Network, the most common being . . . (CSMA/CD) technology. This is documented in IEEE Standard 802.3 . . . The 802.3 Standard is based on the 1985 Version 2 Standard for Ethernet and, although there are some differences . . . the two Standards are largely interchangeable and can be considered equivalent as far as this invention is concerned. The term ‘CSMA/CD’ is used herein to refer generically to this technology. Using CSMA/CD, packets of data are communicated in frames that are generally referred to as Ethernet frames. This term is also used herein, regardless of whether the frames comply with the 802.3 Standard or Ethernet Standard . . .
In other words, “CSMA/CD is a technology, documented in the IEEE 802.3 standard, used to facilitate network communications” and “[t]he 802.3 standard is based on the 1985 Version 2 Standard for Ethernet (‘Ethernet 2 Standard’).” The court held that “[a]s far as this invention is concerned, the two standards are equivalent.” “In the patents-in-suit, CSMA/CD is used to generically refer to the technology as defined in either standard.” “Moreover, the specification references the documented IEEE standard when describing a network technology that uses CSMA/CD.” “The specification further references the IEEE standard when describing the contention scheme employed in CSMA/CD.”
According to the court, “Cisco’s argument that the term should be given its ordinary and customary meaning fails.” While there “is a heavy presumption that the term carries its ordinary and customary meaning,” the “presumption is overcome when the patentee acted as his own lexicographer and clearly set forth a definition of the disputed claim term.”
The court also rejected IWS’ proposed construction. IWS’ “relies on the use of ‘generically’ in the specification to argue for a particularly broad interpretation.” “However, within the context of the paragraph, the word generically refers to CSMA/CD as defined in either the 802.3 Standard or the Ethernet 2 Standard.” “As the patents-in-suit explain, the two standards are interchangeable and equivalent as far as this invention is concerned.”
The court therefore construed the term CSMA/CD to incorporate the definition in the standard: “CSMA/CD (Carrier Sense Multiple Access with Collision Detection) as defined in either the IEEE 802.3 Standard or the 1985 Version 2 Standard for Ethernet.”
Thus, litigants should also be mindful that the definition of patent claim terms may be impacted by a patent’s reference to definitions of claim terms in industry standards.
Earlier this week, in Teva v. Sandoz, the U.S. Supreme Court ruled that the “factual underpinnings” of a district court’s claim construction decision must be reviewed by the Federal Circuit under the “clear error” standard of review (see our Mar. 31, 2014 post for the question presented). Many thanks to Clifford A. Katz and Beth D. Jacob who prepared this post.
District Court. Teva sued Sandoz and Mylan for patent infringement under its patent purportedly covering the drug Copaxone. Copaxone is used to treat multiple sclerosis and has had more than $2 billion in sales per year. In this Hatch-Waxman litigation, the validity of Teva’s patent was challenged for indefiniteness under 35 U.S.C. § 112(b). Sandoz argued that the term “molecular weight” could have three different meanings based on how it was calculated. The district court considered evidence from experts and agreed with Teva’s expert that a person of ordinary skill in the art would understand how to calculate “molecular weight,” and thus, the term was definite.
Federal Circuit Appeal. On appeal, the Federal Circuit reviewed the district court’s decision with the Cybor de novo standard of review—i.e., no deference to the district court’s legal or factual determinations—and reversed the district court.
In a later unrelated case, , the Federal Circuit issued an en banc decision maintaining the Cybor standard of review. The majority maintained the Cybor standard under principles of stare decisis to “provid[e] national uniformity, consistency, and finality to the meaning and scope of patent claims.” Judge Lourie concurred, noting that the standard applied is “legal jargon” that does not negate the practical point that the appellate court will give “informal deference” to the district court’s decision when “appropriate”. Judge O’Malley dissented, arguing that Rule 52(a)(6) requires deference to the district court’s underlying factual determinations in construing claims. See our Feb. 21, 2014 post for a more detailed discussion of that Federal Circuit decision.
Supreme Court Reversal
The Supreme Court reversed the Federal Circuit’s decision and remanded the case with instructions to apply a “clear error” standard of review to certain factual findings made by the District Court when construing patent claims.
Majority Decision. The majority decision, written by Justice Breyer and joined by Justices Scalia, Kennedy, Ginsburg, Sotomayor and Kagan, approached the issue in a very straight-forward manner. Rule 52(a)(6) provides that a court of appeals reviews a district court findings of fact for “clear error”; evidentiary questions underpinning claim construction are findings of fact; therefore, the Federal Circuit’s review of those findings should have been for clear error and not de novo. Where district courts need to “consult extrinsic evidence in order to understand, for example, the background science or the meaning of a term in the relevant art during the relevant time period … courts will need to make subsidiary factual findings about that extrinsic evidence. These are the “evidentiary underpinnings” of claim construction that we discussed in Markman, and this subsidiary factfinding must be reviewed for clear error on appeal.”
Recognizing that Markman v. Westview Instruments, Inc., 517 U.S. 370 (1996) held that claim construction is a question of law for the court, the Court noted that the Markman opinion “neither created, nor argued for, an exception to Rule 52(a).” Patents do not require a separate jurisprudence; construction of a patent is much the same as “construing other written instructions, such as deeds, contracts, or tariffs.” Similarly, appellate courts have experience in separating factual and legal matters to apply different standards in reviewing district court decisions. Even if exceptions to Rule 52 could be found, “we cannot find any convincing ground for creating an exception to that Rule here.”
The Court emphasized that “the Federal Circuit will continue to review de novo the district court’s ultimate interpretation of the patent claims,” even if based on a factual finding. Where the district court relies on extrinsic evidence, and in particular when – as in the case at issue – it resolves a dispute between expert witnesses, the district court’s factual findings cannot be overturned unless the lower court “has made a clear error.” When only intrinsic evidence is considered below, the district court’s determination will be “solely” a question of law and “the Federal Circuit will review that construction de novo.”
The Court recognized that while sometimes the factual finding “will play only a small role,” in other instances it “may be close to dispositive of the ultimate legal question of the proper meaning of the term.” Nevertheless, according to the Court, “subsidiary factfinding is unlikely to loom large in the universe of litigated claim construction.”
The Court then pointed to one dispute between experts which was resolved by the district court in favor of the plaintiff patent holder, but was overturned by the Federal Circuit without a finding that it was clearly erroneous, and noted that plaintiff had claimed two other instances of improper rejection of factual findings. The case was remanded to the Federal Circuit to apply the proper standard of review.
Justice Thomas Dissent. Justice Thomas in dissent, joined by Justice Alito, changed the question. A patent is more similar to a statute than to a contract, since it binds the public at large and has a historical basis in grants of royal prerogatives. Claim construction, he wrote, does not involve findings of fact as understood by Rule 52; since they involve more than “a simple historical fact of the case,” thus, “determinations underlying claim construction fall on the law side of the dividing line.” After all, he pointed out, there is no actual “skilled artisan” with an understanding of a given phrase; this is a legal fiction. The analysis is no different from a determination of technical meanings in statutes and regulations. He concluded by noting that the ultimate question at issue was whether the patent claim was indefinite. As a question of law, this holding “does not turn on ‘findings of fact’ as that term is used in Rule 52(a)(6)” so the Federal Circuit properly applied a de novo standard of review.
Justice Thomas included an additional comment about the majority opinion in his first footnote. The majority responded to the dissent’s attempt to redefine the question as whether claim construction involved a finding of fact by pointing out that the parties agreed that it did, and so defined the issue presented. If the majority decision is premised on a stipulation of the parties, he commented, then “its holding applies only to the present dispute, and other parties remain free to contest this premise in the future.”
Last week, Judge Holderman issued an Announcement that Fujitsu and Tellabs reached a settlement in this case where a jury had found that Fujitsu breached its RAND obligations and Judge Holderman had ordered Fujitsu to show cause why its patent should not be deemed unenforceable as to Tellabs (see our July 24, 2014 post). Judge Holderman noted that, “[a]s this litigation has waged forward, millions of dollars in attorney fees and costs have been spent by the parties, the very kind of financial toll that successful RAND royalty licensing negotiations culminating in a RAND royalty licensing agreement would have avoided.”
Judge Holderman had delayed ruling on the pending show cause order so that the parties could pursue settlement, as they have done here. So this the second high-profile standard essential patent case before Judge Holderman that has led to settlement, the first being the Innovatio litigation where Judge Holderman had determined a RAND royalty at the outset of the case in a unique reverse bifurcation proceeding that led to settlement before any trial on whether the patents were valid and infringed. So we will remain forever curious about what the ruling might have been on the interesting show cause order. But our curiosity readily gives way to privately negotiated agreements that have more flexibility than the tools courts have to resolve disputes.
Today in Commil v. Cisco the Supreme Court granted the petition for writ of certiorari to review the following specific question presented:
Whether the Federal Circuit erred in holding that a defendant’s belief that a patent is invalid is a defense to induced infringement under 35 U.S.C. § 271(b).
We provided a summary of the underlying Federal Circuit decision in our June 25, 2013 post.