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Supreme Court rules belief that patent is invalid is not a defense to induced infringement (Commil v. Cisco)

Posted in Appeals, Litigation, Patent Alerts

Today, in Commil USA, LLC v. Cisco Systems, Inc., the U.S. Supreme Court ruled that an accused infringer’s good faith belief that a patent is invalid is not a defense to induced infringement, reversing the Federal Circuit on that issue (see our June 25, 2013 post on the Federal Circuit’s decision).  The Court also clarified that the scienter requirement for induced infringement from Global-Tech requires knowledge that the patent was infringed and not merely knowledge of the patent.  Finally, perhaps in response to the current patent legislation debate, the Court stated that it was aware of concern that some entities assert patents for purposes of extracting money based more on the cost of defending a patent lawsuit, rather than the merits of the case, and the Court “stress[ed]” that district court’s already have “the authority and responsibility to ensure frivolous cases are dissuaded.”

Background

Patent owner Commil sued Cisco in 2007 for making and selling wireless networking equipment alleged to infringe Commi’s patent, alleging both direct infringement and induced infringement for selling infringing equipment for others to use.  Cisco sought reexamination of Commil’s patent, which proceeding ultimately confirmed the validity of the patents.  Cisco argued that it had a good-faith belief that the patent was invalid as a defense to induced infringement, but the district court excluded that argument.  On appeal, the Federal Circuit ruled that the district court erred in not permitting Cisco to present evidence of its good-faith belief that the patent was invalid as a defense to induced infringement (see our June 25, 2013 post).  The Supreme Court accepted certiorari to review that ruling (see our Dec. 5, 2014 post).

Decision

Clarifying Global-Tech’s Scienter Requirement.  The Supreme Court first reaffirmed its ruling in Global-Tech that induced infringement requires knowledge that the induced acts constitute patent infringement.  The Court rejected the argument by patent owner Commil and the U.S. Government that Global-Tech merely requires knowledge of the patent, stating:

Qualifying or limiting [Global-Tech’s] holding, as the Government and Commil seek to do, would lead to the conclusion, both in inducement and contributory infringement cases, that a person, or entity, could be liable even though he did not know the acts were infringing.  In other words, even if the defendant reads the patent’s claims differently from the plaintiff, and that reading is reasonable, he would still be liable because he knew the acts might infringe.  Global-Tech requires more.  It requires proof the defendant knew the acts were infringing.  And the Court’s opinion was clear in rejecting any lesser mental state as the standard.

Belief of Invalidity No Defense To Induced Infringement.  The Supreme Court held that an accused infringer’s good faith belief that a patent is invalid is not a defense to induced infringement for several reasons.

First, the Court held that infringement and validity are separate issues under the Patent Act.  They are separately listed defenses as to liability such that “invalidity is not a defense to infringement, it is a defense to liability.”

Second, allowing belief as to validity as a defense to induced infringement would undermine the presumption of validity that “is a ‘common core of thought and truth'” and “that presumption would be lessened to a drastic degree.”

Third, maintaining the separation of infringement and validity is important in “the orderly administration of the patent system” given the different procedural burdens, presumptions and evidence attendant to each.

Fourth, an accused infringer who believes a patent is invalid has many other ways to defend itself by challenging patent validity in a declaratory judgment action, in an inter partes review or ex parte reexamination proceeding in the U.S. Patent & Trademark Office, or raising the defense in an infringement litigation.

Fifth, recognizing belief of invalidity as a defense to induced infringement would “render litigation more burdensome for everyone involved” including “increase[d] discovery costs and multiply[ing] the issues the jury must resolve” such that “the jury would be put to the difficult task of separating the defendant’s belief regarding validity from the actual issue of validity.”

Sixth, in other contexts the law recognizes that intentional acts can lead to liability “even if the actor lacked actual knowledge that her conduct violated the law”, stating: “In the usual case, ‘I thought it was legal’ is no defense.”  For similar reasons, belief that a patent is invalid “will not negate the scienter required under §271(b)”, which the court is limiting to knowledge that the patent is infringed.

Courts Should Dissuade Frivolous Cases.  The Court made clear that there was no issue of frivolity in this case.  But, as a nod to the current patent reform legislation efforts, the Court “stress[ed]” that districts “have the authority and responsibility to ensure frivolous cases are dissuaded.”  The Court stated it was “well aware” of a developing patent licensing industry where some demand money even where their claims are frivolous:

The Court is well aware that an “industry has developed in which firms use patents not as a basis for producing and selling goods but, instead, primarily for obtaining licensing fees” [citing Justice Kennedy concurrence in eBay].  Some companies may use patents as a sword to go after defendants for money, even when their claims are frivolous.  This tactic is often pursued through demand letters, which “may be sent very broadly and without prior investigation, may assert vague claims of infringement, and may be designed to obtain payments that are based more on the costs of defending litigation than on the merit of the patent claims.” [citing FTC Statement in 2014 on draft demand letter legislation].  This behavior can impose a “harmful tax on innovation.” [Id.]

The Court stated that this concern can be addressed using existing procedures for sanctioning attorneys for bringing frivolous cases, shifting attorney’s fees costs in “exceptional cases” and multiple avenues for an accused infringer to challenge patent validity, which thus favors maintaining the separation of infringement and validity, rather than conflating invalidity into a defense to induced infringement:

[I]t is still necessary and proper to stress that district courts have the authority and responsibility to ensure frivolous cases are dissuaded.  If frivolous cases are filed in federal court, it is within the power of the court to sanction attorneys for bringing such suits. Fed. Rule Civ. Proc. 11.  It is also within the district court’s discretion to award attorney’s fees to prevailing parties in “exceptional cases.” 35 U.S.C. §285; see also Octane Fitness, LLC v. ICON Health & Fitness, Inc., 572 U.S. __, __-__ (2014) (slip op., at 7-8).  These safeguards, combined with the avenues that accused inducers have to obtain rulings on the validity of patents, militate in favor of maintaining the separation expressed throughout the Patent Act between infringement and validity.  This dichotomy means that belief in invalidity is no defense to a claim of induced infringement.

 

Patent Case: Federal Circuit provides guidance on direct infringement (Akamai v. Limelight)

Posted in Appeals, Litigation, Patent Alerts

Today, a Federal Circuit panel, Judges Prost, Linn (author) and Moore (dissent), issued its long-awaited decision in the Akamia v. Limelight case following remand from the Supreme Court to consider the issue of multiple-actor direct infringement under 35 U.S.C. § 271(a) (see our June 2, 2014 post).  The panel again found that there was no direct infringement liability under § 271(a) because accused infringer Limelight “did not perform all of the steps of the asserted method claims … and because the record contains no basis on which to impose liability on Limelight for the actions of its customers who carried out the other steps.”  The majority summarized its decision as follows:

In the court’s view, … direct infringement liability of a method claim under 35 U.S.C. § 271(a) exists when all of the steps of the claim are performed by or attributed to a single entity–as would be the case, for example, in a principal-agent relationship, in a contractual arrangement, or in a joint enterprise. [fn. 1: “Because this case does not implicate joint enterprise liability, this case is not the appropriate vehicle to adopt joint enterprise liability.”]  Because this case involves neither agency nor contract nor joint enterprise, we find that Limelight is not liable for direct infringement.

 Background

Our June 2, 2014 post on the Supreme Court’s decision in this case provides the procedural background.  In summary, the patent concerns a claimed method for delivering content where certain components of a website are “tagged” to be stored on certain servers within a content delivery network (CDN).  The alleged infringer, Limelight, stored tagged content on its servers, but required its customers to do their own tagging of the content.  So Limelight itself did not perform the claimed method step of tagging components to be stored on its servers.

This case was sent to the original three-judge panel in this case following remand from the Supreme Court; but Judge Moore was added to the panel because original panel member Judge Rader had since retired from the court.

Federal Circuit Majority Opinion

The majority opinion, written by Judge Linn and joined by Chief Judge Prost, started with the premise that, “[f]or method patent claims, direct infringement only occurs when a single party or a joint enterprise performs all of the steps of the process.”  There is no such direct infringement based merely on “[e]ncouraging or instructing others to perform an act.”  When there are multiple actors, direct infringement may arise where one actor may be vicariously liable for the actions of another:

In circumstances in which one party, acting as “mastermind” exercises sufficient “direction or control” over the actions of another, such that those actions may be attributed to the mastermind, the combined performance of the steps of a method claim will directly infringe under § 271(a).  Under BMC Resources, the control or direction standard is satisfied in situations where the law would traditionally hold the accused direct infringer vicariously liable for the acts committed by another party that are required to complete performance of a claimed method.  This may occur in a principal-agent relationship, a contractual relationship or in circumstances in which parties work together in a joint enterprise functioning as a form of mutual agency.

The majority ruled that the 1952 codification of direct liability in § 271(a) did not incorporate broad concepts of joint tortfeaser liability, but only “the principles of vicarious liability.”  Rather than court developed doctrines of joint liability in patent cases, the 1952 Patent Act “removed joint-actor patent infringement liability from the discretion of the courts, defining ‘infringement’ in § 271(a) and expressly outlining in § 271(b) and (c) the only situations in which a party could be liable for something less than an infringement.” (emphasis in original)

The majority also rejected the patent owner’s argument that a defendant could be liable for § 271(a) direct infringement for “causing and intending an act or result” of another, because that would render § 271(b) induced infringement and § 271(c) contributory infringement redundant.

The majority described the “single entity rule” that applies for § 271(a) direct infringement, which requires vicarious liability in order to attribute actions of others to a single entity:

Under the language of § 271(a), this court’s “divided infringement” case law is rooted in traditional principles of vicarious liability.  Under the principles of vicarious liability, direct infringement does not occur unless all steps of a method claim are performed by or attributable to a single entity.  This is the single entity rule.  BMC confirmed that where the actions of one party can be legally imputed to another, such that a single entity can be said to have performed each and every element of the claim, that single entity is liable as a direct infringer.

The majority also indicated that limiting circumstances of § 271(a) direct infringement liability is proper given the patent owner’s ability to draft claims targeted to individual direct infringers:

[I]n patent law, unlike in other areas of tort law–where the victim has no ability to define the injurious conduct upfront–the patentee specifically defines the boundaries of his or her exclusive rights in the claims appended to the patent and provides notice thereby to the public so that it can avoid infringement. … Further, many amici have pointed out that the claim drafter is the least cost avoider of the problem of unenforceable patents due to joint infringement.  It would thus be unwise to overrule decades of precedent in an attempt to enforce poorly-drafted patents.

The majority stated that the scope of vicarious liability includes principal-agent relationships, contractual arrangements, and joint enterprises.  The majority indicated that such a “contractual arrangement will typically not be present in an arms-length seller-customer relationship.”  The majority, citing to the Restatement (Second) of Torts, provided insight as to when “[a] joint enterprise exists for the purposes of imposing vicarious liability”:

(1) an agreement, express or implied, among the members of the group;
(2) a common purpose to be carried out by the group;
(3) a community of pecuniary interest in that purpose, among the members; and
(4) an equal right to a voice in the direction of the enterprise, which gives an equal right of control.

The majority disagreed with the dissent’s suggestion to extend liability to “include[] parties who act in concert to collectively perform the claimed process pursuant to a common plan, design, or purpose,” stating that this erroneously “attempts to fit a square peg in a round hole: joint tortfeasor law and § 271 are fundamentally incompatible.”  The majority explained that “[t]here is no mutual agency or cooperation when parties act independently for their own benefit, such as in arms-length seller-customer relationships.”  The majority ruled it would be error to extend liability to arms-length agreements merely because “one party ‘know[s] of th[e] [other] party’s actions.”  Rather, Supreme Court precedent makes clear that “a direct infringer’s knowledge or intent is irrelevant.”

The majority expressed concern that extending § 271(a) direct infringement liability may improperly capture unsophisticated end user customers notwithstanding the current patent reform legislation debate that has been fueled by concerns about such end users:

The dissent’s rule also leads to several extraordinary results.  For example, a customer who performs a single step of a patented method by merely using a product as intended would be jointly and severally liable for direct infringement under § 271(a).  It is nothing short of remarkable that while Congress and state legislators express their concern about the vulnerability of innocent customers to charges of patent infringement, [patent owner] Akamai and the dissent labor to create an unprecedented interpretation of existing law to make customers significantly more vulnerable to such charges.  This is especially troubling given that the customer can be liable even without knowledge of the patent.

***

The drastic expansion of predatory customer suits is not a theoretical concern.  Several amici, the White House, and other commentators identify numerous instances where patentees have sent demand letters to or sued dozens, hundreds, or, in some cases, even thousands of unsophisticated downstream users.  If the law were expanded to impose joint and several liability on users of a single prior art method step, it would subject swathes of innocent actors across diverse industries to these practices.

The majority found no § 271(a) direct infringement liability in this case, because nothing indicates that the customers–who perform one of the claimed method steps–are performing those steps in any way “vicariously on behalf of [accused infringer] Limelight.”  Rather, the customers direct and control their own use of Limelight’s CDN network and do not act as Limelight’s agents merely because Limelight “provides its customers a written manual explaining how to operate Limelight’s products”:

… Limelight’s customers direct and control their own use of Limelight’s content delivery network (“CDN”).  Limelight’s customers serve their own web pages, and decide what content, if any, they would like delivered by Limelight’s CDN.  Customers sometimes even have Limelight’s CDN and competing CDNs simultaneously deliver the same content.  As such, customers–not Limelight–direct and control which CDN delivers each and every object of their content.  Limelight’s customers do not become Limelight’s agents simply because Limelight provides its customers a written manual explaining how to operate Limelight’s product.

The majority rejected the patent owner’s argument for liability based on Limelight contracting-out to customers the claimed method steps that Limelight does not perform:

… Limelight’s customers decide what content, if any, they choose to have delivered by Limelight’s CDN and only then perform the “tagging” and “serving” steps.  The form contract does not obligate Limelight’s customers to perform any of the method steps.  It merely explains that customers will have to perform the steps if they decide to take advantage of Limelight’s service.  Because the customers were acting for their own benefit, Limelight is not vicariously liable for the customers’ action. [emphasis in original]

Accordingly, the majority ruled that Limelight was not liable for § 271(a) direct infringement.

Judge Moore’s Dissent

Judge Moore dissented because the ruling was too narrow and “divorces patent law from mainstream legal principles by refusing to accept that § 271(a) includes joint tortfeasor liability.”  She stated that the “single entity rule” is a recent judicial creation that contravenes the statute and centuries of common law.  The drafting of claims by thousands of practitioners that are “incapable of being infringed” under the single entity rules “belies the proposition that there was a long-standing single entity requirement for direct infringement,” indicating that “we have changed the rules on these folks.”

Judge Moore argues that the term “Whoever” in § 271(a) encompasses multiple entities–e.g., “Dictionaries define ‘whoever’ in the plural as ‘[w]hatever person or persons“–and the term is used many times in the patent statute to denote “collective actions of multiple persons.”  Further, the 1952 Patent Act was not intended to make sweeping changes to infringement liability or create a “gaping hole” in liability coverage, but was intended to codify existing infringement liability that included the joint tortfeasor liability that the majority opinion now excludes.

Judge Moore considered the majority’s concern about “predatory customer suits” to be a “smokescreen”, because only Limelight–and not its customers–were sued.  If an unsophisticated customer were sued, “the manufacturer can be joined voluntarily (or even involuntarily)” and could secure a judgment resolving the suit as to all parties.

Judge Moore also expressed concern that this panel did not have the authority to reach the decision it did here, because the panel decision conflicts with a prior panel decision in Golden Hour v. emsCharts, and only the Federal Circuit sitting en banc can overrule a prior panel decision.

Judge Moore would find Limelight liable for § 271(a) direct infringement for several reasons.  First, “Limelight is liable under the direction or control test, because Limelight has performed a number of the steps of the patented methods, and it has directed its customers to perform the remaining steps.”  Second, “Limelight could also be held liable as a joint infringer, acting in concert with the customers pursuant to a common purpose, design or plan.”

PUBLIC VERSION of Judge Essex ITC Decision that Nokia phones infringe InterDigital’s 3GPP patents (337-TA-613)

Posted in International Trade Commission, Litigation

Following the prior notice of decision (see our Apr. 27, 2015 post), the Public Version is now available of Administrative Law Judge (ALJ) Essex’s Initial Determination On Remand that Nokia mobile phones infringe InterDigital’s patents related to the 3rd Generation Partnership Project (3GPP) standard and that are subject to commitments the patent owner made to the European Telecommunications Standards Institute (ETSI).  Among other things, Judge Essex found that “there is no evidence of patent hold-up, that there is evidence of reverse hold-up, and that public interest does not preclude issuance of an exclusion order.”

Summary

This is an important decision concerning litigating standard essential patents (SEPs) in the U.S. International Trade Commission (ITC or the Commission) as well as litigating SEPs in general.  We provide a summary of the decision below, but highly recommend reading the decision itself to understand its full import.

On the standard essential patent (SEP) issues, ALJ Essex found that the accused infringers had not shown that the patents were essential to the standard or otherwise triggered the patent owner’s commitment to the standard setting organization (SSO).  The accused infringers had jeopardized this assertion that the patents were essential to the standard by consistently arguing in the proceedings that the patents were not infringed.  The patent owner’s statements to the SSO did not show that the patents actually were essential, because they were conditional commitments if the patents were essential.  Further, the patents could be infringed even if they were not essential to the standard, so the finding of infringement itself did not establish that the patents were essential to the standard.

ALJ Essex found that the particular agreement that the patent owner made with the SSO was controlling on whether that commitment had been breached.  In this case, ETSI specifically considered and rejected having limits on exclusionary relief and deleted its prior requirement that parties mediate differences, deferring instead to resolution in the courts under the relevant national laws if parties cannot agree on licensing terms.

He also found that general public policy concerns about potential abuse of SEPs, such as patent holdup, would not override the actual SSO agreement at issue or the need for actual evidence that the patent owner was abusing its SEPs in this particular case.  Further, the accused infringes had the burden of proof on all facts supporting its SEP arguments.  In that regard, the accused infringers’ witnesses provided no opinion as to what would be appropriate fair, reasonable and nondiscriminatory (FRAND) licensing terms, a range of reasonable FRAND terms or whether the patent owner had not offered FRAND terms in this case.  Further, there was no evidence presented that patent holdup had occurred in any case notwithstanding the intense scrutiny given to the issue in recent years by several government agencies, law professors, economist and other professionals, leading ALJ Essex to conclude: “Perhaps now we can relax our guard a little.”  Further, the threat or even entry of an exclusion order did not per se violate the SSO agreement and would not necessarily result in non-FRAND terms even if the royalty rate negotiated after an exclusion order is entered may be higher than were no exclusion order entered.

ALJ Essex found that the accused infringers had not committed patent holdout during the time period that the initial determination in this case had determined that the patents were not infringed.  But that changed when the non-infringement finding and supporting claim construction were reversed by the Federal Circuit on appeal.  After that time, the accused infringers should have known they infringed and sought a license.  There was no showing that the patent owner’s license offers, which were not accepted, were not FRAND.  Further, the accused infringer’s delay in obtaining a license benefitted it based on the passage of time removing past infringement from the six-year damages limitation as well as putting a downward pressure on the royalty rate that the patent owner could expect in a negotiated license.

In sum, he found no evidence or other reason raised that would preclude entering an exclusion order in this case.

Background

The Commission instituted this investigation in September 2007.  In 2009, the Commission affirmed Chief Administrative Law Judge (ALJ) Luckern’s determination that the two related patents-in-suit were not infringed: U.S. Patent No. 7,190,966 (the ‘966 Patent) and U.S. Patent No. 7,286,847 (the ‘847 Patent).  In 2012, the U.S. Court of Appeals for the Federal Circuit (the Federal Circuit) reversed the ITC’s construction of certain claim terms as well as its finding of no infringement and the investigation was returned to the ITC.  In March 2014, the Commission issued a revised remand opinion and order that remanded certain issues to the ALJ, including the following:

1. … [M]ake findings and issue a remand initial determination (“RID”) concerning: …

b.  whether the 3GPP standard supports a finding that the pilot signal … satisfies the claim limitation “synchronize to the pilot signal” as recited in the asserted claim of the ‘847 patent …

3.  The investigation is further remanded for the assigned administrative law judge to:
a.  take evidence concerning the public interest factors as enumerated in sections 337(d) and (f);
b.  take briefing on whether the issue of the standard-essential nature of the patents-in-suit is contested;
c.  take evidence concerning and/or briefing or whether there is patent hold-up or reverse hold-up in this investigation …

On remand, the investigation was assigned to ALJ Essex who held an evidentiary hearing in January 2015.

The accused products are Nokia mobile phones that operate on Wideband Code Division Multiple Access (WCDMA) networks and comply with the 3GPP WCDMA standard.  Those patents were subject to declarations filed with the European Telecommunications Standards Institute (ETSI), based in France.  During the course of the investigation, Nokia’s mobile phone business was sold to Microsoft Mobile Oy (MMO), which also is a respondent in this investigation.

ETSI IPR Policy.  The relevant declarations submitted under ETSI’s intellectual property rights (IPR) policy and the IPR policy itself include the following provisions considered in the investigation (with bold emphasis provided by ALJ Essex in his written opinion):

IPR INFORMATION STATEMENT
In accordance with Clause 4.1 of the ETSI IPR Policy the Declarant and/or its AFFILIATES hereby informs ETSI that it is the Declarant’s and/or its AFFILIATES’ present belief that the IPR(s) disclosed in the attached IPR Information Statement Annex may be or may become ESSENTIAL in relation to at least the ETSI Work Item(s), STANDARD(S) and/or TECHNICAL SPECIFICATION(S) identified in the attached IPR Information Statement Annex.

The Declarant and/or its AFFILIATES (check one box only):
__ are the proprietor of the IPR(s) disclosed in the attached IPR Information Statement Annex.
__ are not the proprietor of the IPR(s) disclosed in the attached IPR Information Statement Annex.

IPR LICENSING DECLARATION
In accordance with Clause 6.1 of the ETSI IPR Policy the Declarant and/or its AFFILIATES hereby irrevocably declares the following (check one box only, and subordinate box, where applicable):

To the extent that the IPR(s) disclosed in the attached IPR Information Statement Annex are or become, and remain ESSENTIAL in respect of the ETSI Work Item, STANDARD and/or TECHNICAL SPECIFICATION identified in the attached IPR Information Statement Annex, the Declarant and/or its AFFILIATES are prepared to grant irrevocable licenses under this/these IPR(s) on terms and conditions which are in accordance with Clause 6.1 of the ETSI IPR Policy.  This irrevocable undertaking is made subject to the condition that those who seek licenses agree to reciprocate (check box if applicable).

***

[ESSENTIAL IPR]
In simpler terms, an “essential IPR” is an IPR which has been included within a standard and where it would be impossible to implement the standard without making use of this IPR.  The only way to avoid the violation of this IPR in respect of the implementation of the standard is therefore to request a license from the owner.

***

4.3 Dispute Resolution
ETSI Members should attempt to resolve any dispute related to the application of the IPR Policy bilaterally in a friendly manner.
Should this fail, the Members concerned are invited to inform the ETSI GA in case a friendly mediation can be offered by other ETSI Members and/or the ETSI Secretariat.
However, it should be noted that once an IPR (patent) has been granted, in the absence of an agreement between the parties involved, the national courts of law have the sole authority to resolve IPR disputes.

ALJ Essex also found that ETSI use to have or considered, but later rejected, provisions barring exclusionary relief and requiring mandatory mediation to determine FRAND in lieu of court litigation:

Under the ETSI agreement, there is no duty not to seek an exclusion order.  ETSI had mandatory mediation to determine FRAND rate in 1993, and removed if from their policy.  They considered barring parties from injunctive relief, but did not do so. … [The accused infringer’s witness] Mr. Buttrick also testified that ETSI had, prior to 1994, a provision in its rules that eliminated the possibility of exclusion orders or injunctions.

 Decision

Infringement.  ALJ Essex first defined the limited scope of what was at issue in this remand proceeding, which included being bound by claim constructions already determined in this investigation notwithstanding claim constructions from other litigations.  He ultimately found that the Nokia mobile phones infringed both patents-in-suit, including reading patent claim limitations on a specific portion of the 3GPP Standard.  As is common, this portion of the public decision is fairly redacted given confidential technical disclosures.

The remaining portion of the decision focuses on several aspects of the public interest, including issues concerning any standard setting obligations.

Effect Upon Public Health and Welfare.  ALJ Essex found that the accused infringers MMO/Nokia did not address the statutory public interest factors, but instead “argue a new public interest for this case” based on patent owner InterDigital’s “possible duty to grant licenses on Fair Reasonable and Non-Discriminatory terms (FRAND), Standard Essential Patents (‘SEPs’) and the possibility of holdup.”  But he found that, even though “many professors and several government agencies” noted the possibility of holdup with SEPs, there was “no evidence” of holdup in this case.  Further, there was no evidence that the particular Nokia smartphones at issue “provide any public health and safety benefit other smart phones cannot” and evidence suggested “there will not be a shortage of smart phones … if an exclusion order should issue.”

Impact on Competitive Conditions.  The accused infringers argued that the patent owner could engage in holdup if an exclusion order was granted.  But ALJ Essex found that threat of an exclusion order might yield a higher license rate, but such a license is not necessarily “unfair unreasonable or discriminatory”:

While the threat of the exclusion order may motivate respondents to take a license at a higher rate than if they were successful in limiting the lawful remedies available to their adversary, there has been no proof that such a license would be unfair unreasonable or discriminatory.

Impact on U.S. Consumers.  ALJ Essex found that any exclusion order would not have a substantial impact on U.S. consumers. This section is fairly redacted, but includes a finding that other companies provided smart phones, including Nokia phones with WPOS (believe this stands for Windows Phone Operating System).  He also indicated that the duration of an exclusion order would be relatively short given the August 2015 date for the final determination in this investigation and expiration of the patents given their June 1996 priority dates (we assume the patents expire June 2016 based on the filing date, but without researching if terminal disclaimers or term extensions shorten or lengthen the usual 20-year term from priority date).

Whether The SEP Nature Of Patents Is Contested.  ALJ Essex found that the accused infringer’s argument about FRAND obligations arising from the patents being essential to practice the standard was undermined by their arguments “throughout the proceeding” that the patents were not infringed, stating:

[Accused infringer] MMO has contested the nature of the patents throughout the proceeding, presenting evidence at hearing and briefing in both their post-hearing brief and post hearing reply brief that they do not infringe [patent owner InterDigital’s] patents.  Nokia Corp has also argued that the products in the case do not infringe the patents.  By arguing that the products do not practice the patents, the respondents are arguing that the patents are not Standard Essential Patents.  This complicates this analysis, because if the patents in question are not SEPs, then [InterDigital] has no duty to offer a license under FRAND terms.

***

[The accused infringers] in this case have vigorously asserted that the patents in issue are not essential, but rather are not infringed.  By so claiming, they risk losing the benefit of any defense they may have under the ETSI agreement regarding FRAND rights that protect the interests of third parties.  If the patents are valid and infringed, but not SEPs, then respondents would have no rights regarding licensing under the ETSI agreement, the duty to license under FRAND terms is only triggered if the IPRs are or become and remain essential to the standard (there are other requirements as well, such as the [accused infringers] must be willing to license its portfolio to complainants).  The duty to license on FRAND terms, if there is one, is a springing duty.

ALJ Essex found that the declarations submitted to ETSI themselves “do[] not prove that patents so declared before ETSI are actually SEPs,” noting that many cases have found declared patents not infringed and that the declaration itself uses conditional language: “To the extent that the IPR(s) … are or become, and remain ESSENTIAL …” (emphasis in original).

Further, quoting favorably the ITC Staff position, ALJ Essex found that the fact that the patents are infringed does not per se establish that the patents are essential to the standard:

The Staff is of the view, however, that each of the asserted claims is infringed by Respondents’ accused products.   Thus, in this case the operation of Respondents’ accused products sheds no light on whether the asserted claims of the patents-in-suit are necessarily essential to practicing the relevant standards.  There may be circumstances in which a product may practice the 3G standard without infringing the asserted claims, or there may not.  In this investigation, the only evidence regarding the standard-essential nature of the asserted claims is [patent owner] InterDigital’s declaration to ETSI that the patents-in-suit may be essential to practicing the WCDMA standard.  While this is not a statement that the patents are actually essential, it is evidence that the patent holder believed that the patents could be standard-essential. [emphasis in original]

Accordingly, the declaration was not proof of essentiality and “there is no evidence that they have been tested or judged to be standard essential in the case.”

Importantly, ALJ Essex ruled that establishing essentiality was the accused infringers’ burden of proof, which they failed to carry, citing ITC evidentiary rules:

19 CFR S 210.37 Evidence.
(a) Burden of proof.  The proponent of any factual proposition shall be required to sustain the burden of proof with respect thereto.

ALJ Essex ruled that the public interest inquiry does not change that burden, stating “[t]he public policy issue must not be used in place of the law, nor should a party be allowed to shift the burden of persuasion in the name of public policy.”  Citing the Federal Circuit’s Ericsson v. D-Link decision (see our Dec. 5, 2014 post), he ruled that “[t]he ETSI agreement is vital, because any rights flow from the agreement” and found that “[t]here is nothing in the ETSI agreement that would shift the burden of proof in a hearing at the ITC.”  Allegations of FRAND commitment does not supersede the particular agreement at issue:

[W]e must look at the patentee’s actual FRAND commitment.  We need not be stampeded into abandoning the rule of law, or burden of proof simply because the respondants shout “FRAND”.

No Evidence InterDigital Acted In Bad Faith.  ALJ Essex found there was no evidence that patent owner InterDigital acted in bad faith in its license negotiations.  He noted his prior decision in the 337-TA-868 investigation (see our July 2, 2014 post) that found the ETSI agreement did not rise to the level of a binding contract under applicable French law given many terms and factors left open for negotiation “before the FRAND obligation is triggered.” But he further considers the issue on a contractual basis given that trend by other courts, such as the Federal Circuit in Ericsson v. D-Link.  He observed that ETSI does not set a criteria for determining FRAND, but relies on the relevant national law to determine this if the parties do not reach an agreement (citing ETSI 4.3 Dispute Resolution given in the background above).  ALJ Essex further observed that whether an offer is within a reasonable FRAND range is not known until a FRAND rate is agreed between the parties or determined by a court:

When the parties sign the letters agreeing to license their IPR at ETSI, they not only do not know what a FRAND rate is, they cannot know.  Absence agreement, there is no such rate, nor can it exist absent an agreement until a court determines the rate for the parties.  To prove a violation of FRAND, as it is defined in ETSI, there must be voluntary agreement or a trial in a district court, and only after the court determines a rate, could we look retrospectively at the negotiations and determine if the offers were within the FRAND range (FRAND contracts provide for a range of acceptable results.  While some offers could be clearly outside the range, there is no mechanism for finding the range prior to litigation).  Even then, there would be difficulty in determining if a party was acting in bad faith, because reasonable minds do differ on what may constitute a FRAND rate.

ALJ Essex noted that court rulings are giving some guidance on this, citing Judge Robart’s decision in Microsoft v. Motorola (see our May 1, 2013 post), which required SEP license offers to be “in good faith” and “found that initial offers do not have to be on RAND terms so long as a RAND license eventually issues.”  He found that, in this case, there has been no court determination whether InterDigital’s offers were FRAND and the parties had not agreed whether they were within a FRAND range.  But, even assuming they were not, “the offers demonstrate [patent owner InterDigital] was trying to reach a licensing agreement.”

No Evidence of Hold-Up By The Patent Owner.  ALJ Essex found that there was no evidence that the patent owner InterDigital was guilty of patent holdup.  He ruled that, under the Federal Circuit’s Ericsson v. D-Link decision,  the accused infringer has the burden of proof to show a violation of the FRAND duty based on evidence of actual patent hold-up.  The accused infringer’s witnesses did not identify what they would consider to have been FRAND in this case and testified that a FRAND license agreement could come in many different forms:

[Accused infringer’s witness Mr. Buttrick] stated there was no preference for any particular licensing model, that the agreement was written to allow a diverse range of licensing regimes, including both monetary and nonmonetary remuneration, licenses that included both standard essential and non-standard essential patents, that the nature and coverage of the license was completely up to the parties.

***

[Accused infringer’s witness Dr. Shampine] testified that he did not reach the conclusion that [patent owner InterDigital] had violated a FRAND commitment in this case; that he had concerns that there is holdup, and that if an exclusion order were granted that holdup was a grave concern.  He goes on to admit he did not attempt to determine the value of the patents … and stated he did not attempt to assign a specific FRAND rate to them. … He goes on to state that just because rates would be higher in a system where exclusion orders are more likely than where they are less likely, that as a mathematical statement it does not mean such rates are above a FRAND rate.

Further, the accused infringer’s witnesses could not identify circumstances of a non-FRAND agreement being entered on a FRAND-obligated patent:

[Accused infringer’s witness Dr. Shampine] was not aware of any lawsuit, bankruptcy hearing or complaint to a standard-setting organization where a party alleged that they were forced to sign a non-FRAND agreement and needed to obtain relief from the agreement on the basis it violated the SSO agreement.  He also was not aware of any company making a complaint to ETSI that an IPR owner was not negotiating in good faith.   The ALJ asked Dr. Shampine if he could cite even one solid example of a holdup resulting in a non-FRAND contract.  Dr. Shampine replied, “We do not have a solid example of that occurring yet.”

***

… [Dr. Shampine] was unaware of a single case where an ITC exclusion order resulted in a license that was not on FRAND terms.

ALJ Essex gave no weight to the testimony of another accused infringer economic witness regarding holdup because the witness did not consider whether the patent owner’s offers were unfair or unreasonable or the industry practice in licensing patents:

Mr. John C. Jarosz, another MMO economic witness … stated he was offering no opinion that [patent owner InterDigital’s] offers to [accused infringers] Nokia and MMO were unfair or unreasonable, but that he did consider information in assessing the holdup and reverse holdup hypotheses.   His analysis only considered the offers between the parties, and he did not consider the industries licensing practices in forming his opinion.  Mr. Jarosz’s opinion then is entitled to little weight.  If he has no reference point as to what the FRAND rate is, nor any reference for how the licensing industry conducts negotiations and reaches FRAND contracts, he cannot reasonably assess the current negotiations.  While Mr. Jarosz was spirited in his belief in holdup, he conceded he was not aware of instances where holdup was actually found to have occurred.

ALJ Essex also ruled that patent owner InterDigital filing this ITC case did not itself violate any FRAND obligations, stating:

[T]he evidence presented does not support the [accused infringer’s] position that InterDigital has violated a FRAND obligation by filing this complaint at the ITC.  The negotiation has continued in good faith, and there are many more issues than the rate of payment to be made ….  The obligation that InterDigital has taken has been fulfilled, and the ETSI agreement anticipates that the parties if necessary will fall back on the national law involved.

He indicated that filing an ITC case prior to offering a license may be bad faith; specifically, in considering hold-out (discussed below), he referenced the Realtek v. LSI decision as an example of “failure to meaningfully negotiate” where “[patent owner] LSI made no offer for a license prior to filing a complaint at the ITC.” (see our Jan. 9, 2014 post where Judge Whyte explains the difference between the threat of an injunction that is inherent in all license negotiations and the patent owner’s filing a complaint in the ITC before negotiations that makes exclusionary relief a more credible threat in that instance).

Evidence of Hold-Out By Accused Infringers.  ALJ Essex defined “Reverse hold-up” as “describ[ing] a situation in which a manufacturer that is using standard-essential patented technology refuses to enter a license agreement with the patent owner or otherwise to pay compensation,” and further explained that “[w]here a respondent uses the technology covered by a patent, and refused to take a license to the technology or refused to negotiate in a meaningful way there is reverse holdup.”  ALJ Essex found that whether there was improper patent hold-out by the  accused infringers was a complex issue that changed over time.  The initial determination in this case was that the patents were not infringed, which was upheld by the Commission.  There could be no hold-out during this time period because there was a favorable decision that the patents were not SEPS or infringed.  During this time, the accused infringers “had every reason to be difficult negotiators,” there is no showing this was in bad faith and “[t]he exercise of legal rights by a party cannot amount to ‘holdout’.”

But this changed after the Federal Circuit reversed the Commission’s claim construction and finding of no infringement; from that date the accused infringers “should have been aware that the patents were valid, and infringed” and “should have realized they may have to take a license or face an exclusion order.”  Further, there was no evidence that patent owner InterDigital’s offer were not FRAND compliant.  The accused infringer’s witnesses did not even state what they would consider to be FRAND in this case and no one offered evidence of what a FRAND range would be for these patents.

ALJ Essex also found evidence of holdout based on “the clear gain that occurs daily for [the accused infringer] given the six-year statutory limit on past damages for patent infringement”, stating that “[e]ach day that the respondents use the patents without taking a license, IDC loses money that it will not be able to recover.”  Further, the delay in taking a license puts “unfair downward pressure on the payments that [patent owner] InterDigital could expect to realize from any license agreement resulting in a lower than FRAND rate.”

ALJ Essex ultimately found that the accused infringers were the type “unwilling licensee” that the U.S. Trade Representative indicated could be subject to an exclusion order when it disapproved an exclusion order in the Samsung-Apple investigation (see our Aug. 3, 2013 post):

In failing to negotiate in a meaningful way, and refusing to take a license, [accused infringer] MMO is currently an unwilling licensee that “is unable or refuses to take a FRAND license.” [citing U.S.T.R. letter at 2. n.3, 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.”]

Public Interest and FRAND Evidence.  ALJ Essex found that the ETSI agreement did not preclude patent owner InterDigital from seeking an exclusion order.  Indeed, ETSI had required mandatory mediation, but removed that from its policy in 1993, and considered but declined to adopt a policy that would bar parties from seeking an injunction.  Although the accused infringers provided testimony that ETSI had some concerns about the availability of injunctive relief, that did not find its way into the ultimate written ETSI agreement.  Only the ultimate ETSI contractual terms matter, not articulated concerns that were not adopted: “Prohibiting exclusion orders or injunctions were specifically considered by the SSO, and rejected in the final agreement.”

ALJ Essex rejected the accused infringer’s attempt to impose on the ETSI agreement further “robust protections against hold-up” as a matter of public interest, stating:

While the contract may not protect [the accused infringer] as it wishes it would, it is to the contract we must look to determine the rights that flow from it.  If the SSO negotiators want to agree to provide greater protection from exclusion orders or injunctions, it is within their power to do so.  ETSI did this until 1994 and IEEE has done so more recently.

He also cited the U.S. Department of Justice (DOJ) business review letter of the recently revised IEEE IPR Policy that supports limiting the government role and giving SSOs flexibility in making different IPR Policy choices, because “having the variety of choices could be beneficial to the process.” (see our Feb. 5, 2015 post on the DOJ business review letter).  He also refused to let a public policy “disfavoring exclusionary relief” to “trump both the SSO contract, and the ordinary course of law.”  The accused infringer’s had relied on a policy statement by the U.S. Federal Trade Commission (FTC) as well as DOJ/U.S. Patent & Trademark Office (PTO), which ALJ Essex previously had considered in the 337-TA-868 investigation and he quotes his prior response.  That prior response indicated that there was no evidence of bad faith, that evidence showed that the “hypothetical risk of holdup” is “not a threat in this case, or in this industry,” and that one standard setting organization (SSO) in the industry, TIA, had told the FTC that “TIA has never received any complaints regarding such ‘patent hold-up’ and does not agree that ‘patent holdup’ is plaguing the information and telecommunications technology standard development process.” (see our July 2, 2014 post for the 337-TA-868 decision).  He also found that other FTC, DOJ/PTO statements brought to his attention were not based on evidence or differed from the facts of this case and gave them little weight.

ALJ Essex also found that, based on the significant scrutiny of SEP owner activity given over the past few years by government agencies, professors, economists and others, the likelihood of a patent holder stepping out of line and wandering into patent holdup is even less likely now based on the “observer effect”:

After watching for a holdup since 2011, we may be able to consider whether the fact none has occurred allows us to discount the risk today. With the FTC and DOJ/USPTO having weighed in on the risk of exclusion orders at the ITC, there have been many professors, economists and other professionals that have written on the topic.  The ALJ believes that these professionals, all voicing concern, may lessen the need for concern.  In science the term observer effect refers to changes that the act of observation will make on a phenomenon being observed.  This is often the result of instruments that, by necessity, alter the state of what they measure in some manner.  A commonplace example is checking the pressure in an automobile tire; this is difficult to do without letting out some of the air, thus changing the pressure.  This effect can be observed in many domains of physics.  The ALJ notes that this effect is also present in human events; few crimes occur in a police station, because the observers would likely change the outcome.  In the current state of IP law as it relates to SSOs and IPRs, an owner of a SEP has a long list of government agencies, law professors and companies watching what the company does, and attempting to change the law as to potential outcomes.  [Accused infringer] MMO has stated they are afraid that if [patent owner InterDigital] obtained an exclusion order, then they would use it to gain undue leverage and obtain compensation above the FRAND rate.  This is unlikely because too many hostile eyes are watching.  The fact that the FTC has been watching since at least 2011, and not found such a violation, makes it unlikely it would happen here for the first time.

ALJ Essex also found that the accused infringer’s interest could still be protected even if an exclusion order were entered, given “the availability of a remedy in District Court should [the patent owner] refuse to grant a license under FRAND terms.”  Further, because the patent owner has acted in good faith to date, there appears “minimal risk” that the patent owner would violate its obligations after an exclusion order is entered and, even if that did occur, the accused infringers would have remedy.  This also is shown by the ITC’s track record: ”

Of all the settlements and licenses that were taken under the ‘threat’ of an exclusion order, not one respondent has gone on to file in a district court that the agreement was outside the range of FRAND.  The ITC has not seen such a case, the experts presented at the hearing have not seen such a case, and the respondents did not cite an example of such a case.  With that in mind, perhaps now we can relax our guard a little.

Further, not only had TIA indicated there was no hold-up problem in the telecommunications industry, but industry participants made similar statements to the FTC.  ALJ Essex quoted extensively from comments that Microsoft Corporation provided to the FTC in 2011, which he summarized as indicating that “[Microsoft] too did not see the risk of hold-up, nor the need to deny any particular relief when there was a FRAND or RAND commitment.”

In sum, ALJ Essex found that there was no evidence patent owner InterDigital abused the SEP patents at issue in this case or evidence of the concerns raised by the various government agencies.  Further, the SSO at issue here, ETSI, was “aware of the possibility of exclusionary relief … and chose to allow such relief under its SSO agreement.”  Thus there was no evidence or reason why an exclusion order should not be issued in this case.

Judge Essex holds that Nokia’s handsets infringe two of InterDigital’s patents

Posted in International Trade Commission

Yesterday, Administrative Law Judge Essex issued a one-page notice of initial determination holding that Nokia’s 3G mobile handsets infringe the asserted claims of InterDigital’s U.S. Patent Nos. 7,190,966 and 7,286,847 (“the ‘847 Patent”) in the International Trade Commission’s investigation styled In the Matter of Certain 3G Mobile Handsets and Components Thereof (ITC Inv. No. 337-TA-613).  In the one page notice, the Judge expressly relied upon a standard adopted by 3GPP in concluding that Nokia’s handsets meet the limitations of the one ‘847 Patent claim asserted by InterDigital:

It is held that the 3GPP standard supports a finding that the pilot signal (P-CPICH) satisfies the claim limitation ‘synchronize to the pilot signal’ as recited in the asserted claim of the ‘847 patent by synchronizing to either the P-SCH or S-SCH signals under the Commission’s construction of that claim limitation.

Judge Essex also held “that there is no evidence of patent hold-up, that there is evidence of reverse hold-up, and that public interest does not preclude issuance of an exclusion order.”

No written memorandum opinion has been made available. To the extent that a more detailed opinion on the issues exists in redacted form, the parties will have a certain period of time, as directed by the court, to propose redactions to protect any confidential business information from the version of the opinion that will be made available to the public.

Delaware jury finds that ZTE did not infringe one of InterDigital’s 4G network patents

Posted in Court Orders, District Courts, Jury verdicts, Litigation

Yesterday, a federal jury in Delaware concluded that ZTE’s accused 4G mobile devices did not infringe InterDigital’s U.S. Patent No. 7,941,151 (“the ‘151 Patent”).  This jury verdict comes a little less than six months after a different jury concluded that ZTE’s accused 4G mobile devices infringe three separate patents asserted by InterDigital in the case.

Background.  In its Amended Complaint, InterDigital alleged that ZTE was infringing four of its patents.  With respect to the ‘151 Patent. InterDigital alleged that ZTE was infringing it by “manufacturing, using, importing, offering for sale, and/or selling wireless devices with 4G capabilities.” More specifically, InterDigital alleged that

The accused ZTE products are specifically designed to be used in at least 4G wireless communication systems.  Specifically, the accused ZTE products identified by InterDigital to date that are designed to be used in a 4G wireless communications system are configured to comply with [3gPP’s] LTE (Long Term Evolution) standard.  Because the accused products are specifically designed to so operate, they have no substantial non-infringing uses.

ZTE asserted a number of FRAND-related affirmative defenses and counterclaims in the litigation.  The court subsequently dismissed the FRAND-related counterclaims and bifurcated the infringement liability issues from the FRAND-related affirmative defenses.

In late October, a jury found that ZTE infringed the three other patents asserted by InterDigital and also rejected ZTE’s invalidity defenses.  Thereafter, and as we previously reported, Judge Andrews entered an order allowing InterDigital and ZTE to proceed with FRAND and damages discovery under the assumption that ZTE would be found to infringe InterDigital’s ‘151 Patent.  Specifically, the order provided as follows:

FRAND/damages discovery may begin immediately. It is going to have to be done, and the parties should do it (as they normally would) on the assumption that ZTE will be found to have infringed the ‘151 patent. It does not need to be coordinated with any similar discovery in the Nokia case. The parties should include the scheduling for this discovery in the written proposed scheduling order submitted before the above-mentioned scheduling conference.

The infringement trial for the ‘151 Patent occured on Monday and Tuesday of this week.  Yesterday, the jury found that ZTE did not infringe the ‘151 Patent.

Next Steps.  According to the agreed-to Scheduling Order entered by the court, the parties will now complete FRAND and damages-related discovery and prepare for a damages trial with respect to the three InterDigital patents the first jury found ZTE to infringe last Fall.  The following schedule will apply:

August 21, 2015:  Completion of fact discovery related to FRAND/damages;

September 18, 2015:  Disclosure of expert testimony for party with burden of proof;

October 16, 2015:  Supplemental/rebuttal expert disclosure;

November 9, 2015:  Reply expert reports from party with burden of proof;

December 4, 2015:  Completion of expert discovery;

December 8, 2015:  Joint letter outlining any issues the parties believe must be addressed at the status conference;

December 15, 2015:  Status conference;

December 29, 2015:  Dispositive motions and deadline to object to expert testimony;

March 21, 2016:  ZTE target trial date; and

April 11, 2016:  Microsoft Mobile Oy (MMO) (another defendant in the case) target trial date

 

Proposed PARTS Act limiting term of auto part design patents also is patent legislation before Congress

Posted in Legislation

With all the patent reform legislation discussion going on, PARTS are not getting as much attention.  Specifically, in February, members of the House and Senate each re-introduced the “Promoting Automotive Repair, Trade and Sales Act,” known as the “PARTS Act.” The House bill and the Senate bill are identical.  The bills were re-introduced by a bi-partisan group of lawmakers, including Representatives Darrell Issa (R-CA) and Zoe Lofgren (D-CA) and Senators Orrin Hatch (R-UT) and Sheldon Whitehouse (D-RI).  The bill was first introduced during the 2012 legislative session, with Rep. Hank Johnson (D-GA) as an original co-sponsor, but died in committee.  The PARTS Act of 2013, referred to the House Judiciary Committee on April 23, 2013, also failed to advance in Congress.

The PARTS Act would amend 35 U.S.C. § 271 to provide an exception from design patent infringement for certain external component parts of automobiles, which include collision-related parts such as hoods, fenders, tail lights, and side mirrors.  With regard to the use or sale of these motor vehicle component parts, the carve-out in the bill would reduce design patent owners’ period of exclusivity from 14 years to 30 months.  Alternative suppliers could manufacture, test, market, and distribute parts pre-sale without infringing upon these design patents.  Automobile companies could only enforce the design patents on such parts for 2.5 years – and after that period ends, the alternative suppliers could offer their own generic parts for sale.

In sum, the bill mandates that, 30 months after such parts are first offered for sale, the design patent governing the parts in question would not be infringed by the sale of parts “similar or the same in appearance” by an alternative supplier, if the generic parts are intended to repair a motor vehicle and restore its appearance as originally manufactured.  The legislation would not impact automotive companies rights to enforce design patents on parts up to 14 years against other car companies.

The House bill (H.R. 1057) was assigned to the Subcommittee on Courts, Intellectual Property, and the Internet on March 16, 2015.  The Senate bill (S. 560) was assigned to the chamber’s Judiciary Committee on February 25, 2015.

Background on design patents.  In order for the design of an invention to be patentable, it must be novel, ornamental, and unique.  Under 35 U.S.C. § 171, governing design patents, an inventor of a new, original, and ornamental design for an article of manufacture may obtain a patent for that design.  According to the United States Patent and Trademark Office’s (USPTO) Design Application Guide, a design consists of the “visual ornamental characteristics” embodied in, or applied to, an article of manufacture.  The subject matter of a design patent application may relate to “the configuration or shape of an article, to the surface ornamentation applied to an article, or to the combination of configuration and surface ornamentation.”  Thus, the protection afforded by a design patent does not cover the structural or functional characteristics of the invention; instead, the protection is limited to the invention’s ornamental design.

Items such as electronics, furniture, athletic shoes, household appliances, and lighting serve as other common subjects of design patents.  Applications for design patents have recently increased – in the five-year period from 2009 to 2013, annual filings of design patent applications increased by about 40 percent, significantly outpacing the 28 percent growth in utility parent applications during the same period.  The damages for infringement for design patents can be substantial because, unlike a utility patent, the design patent statute specifically allows the patent owner to disgorge the infringer’s entire profits from the infringing sale and not less than a statutory lower limit of $250.

Online video of Ninth Circuit argument of appeal from Judge Robart decision in Microsoft v. Motorola

Posted in Appeals, Litigation

As discussed in our post yesterday, today the Ninth Circuit held oral argument on Motorola’s appeal of Judge Robart’s decision in the Microsoft v. Motorola case.  A video of the argument is available at the Ninth Circuit website, which lasts about an hour.  Trying to predict the outcome of a case based on the hearing argument and statements from the bench is like reading tea leaves–a “fool’s errand”, as some have put it.  So we will not attempt that here (though we may talk amongst ourselves at the water cooler).

A key dispute crystalized by the oral argument concerns the bifurcated procedure where (1) Judge Robart held a bench trial to determine a RAND rate and range of reasonable RAND rates followed by (2) a jury trial to determine whether Motorola breached its RAND obligation.

Motorola argued that this was done in the wrong order–that if a jury found that Motorola breached its RAND obligations, THEN the district court could determine a RAND rate as part of ordering specific performance of a license.  Motorola argued that it was prejudiced by the court first determining a RAND rate/range at a bench trial and then having that injected into the jury trial as essentially an expert opinion that–as far as the ultimate conclusion and underlying factual findings–could not be cross-examined or contradicted.  The stark difference between the unimpeachable judge-determined RAND and Motorola’s actual initial offer to Microsoft was prejudicial and unsurprisingly led to the jury finding that Motorola breached its RAND obligation.

Motorola argued it had agreed to aspects of the procedure under the impression at the time that the case would involve determining licensing terms and specific performance thereof; but that later proved not to be the case as there was no request for license or specific performance in the case.  Motorola also challenged the scope of its agreement to proceed with the bifurcated  procedure, particularly with respect to any agreement to introduce the court-determined RAND and underlying findings without being able to challenge it.  Rather, if the case was not to determine license terms for the court to order specific performance thereon, then there was no need to determine a specific RAND royalty.  Rather, all of the evidence of what might be an appropriate RAND and other circumstances should go to the jury–subject to cross-examination and rebuttal–so that the jury could determine the single issue of breach and damages based thereon.

Microsoft argued that, whatever Motorola is saying now, it had agreed to this bifurcation procedure and either waived challenging it or did not properly object to it.  What was the point of having the bench trial determination of RAND if it were not to guide the jury?  If the court and parties agreed to go through this bifurcation procedure, then allowing challenges to the RAND determination later in the jury trial would undermine that agreed upon approach and basis for determining a RAND rate to begin with.  There is no dispute that the entire thing–including RAND determination–could have gone to jury, but Motorola waived its 7th Amendment right to jury trial on that issue in this case.

Ninth Circuit to hear oral argument on Motorola’s appeal of Judge Robart’s ruling (Microsoft v. Motorola)

Posted in Appeals, Court Orders, District Courts, Jury verdicts, Litigation

Tomorrow, the Ninth Circuit will hear oral argument in Motorola’s appeal of Judge Robart’s RAND royalty rate determination as well as the jury verdict that Motorola breached its alleged RAND obligations to license its patents to Microsoft on RAND terms.  Motorola also challenges whether the Ninth Circuit has jurisdiction over the appeal, arguing that exclusive jurisdiction lies in the Federal Circuit.

Below is a summary of the background of the dispute, the parties’ positions on appeal as well as those of several parties appearing as amicus curiae.

Background

Motorola holds several patents on wireless Internet communications (“WiFi”) and video coding technologies that it declared essential to standards set by two standards-setting organizations:  the International Telecommunications Union (ITU) H.264 standard governing video coding and the Institute of Electrical and Electronics Engineers (IEEE) 802.11 standard governing WiFi communications.  It is undisputed that Motorola committed to license these patents on reasonable and non-discriminatory (RAND) terms by way of letters of assurance to ITU and IEEE.

On October 1, 2010, Microsoft sued Motorola in the International Trade Commission (ITC) alleging that Motorola’s smartphones infringed certain of Microsoft’s patents and also seeking an exclusion order barring Motorola’s importation from same.  The same day, Microsoft sued Motorola for patent infringement in the Western District of Washington.

Prior to those suits being filed, Microsoft and Motorola had discussed a potential cross-license of certain of their  patents considering the expiration of Motorola’s license to certain of Microsoft’s other patents.  After Microsoft filed the lawsuits against Motorola, Microsoft again raised the possibility of a cross-license agreement.  The parties scheduled a meeting for October 22, 2010 to resume cross-license discussions.

On October 21, 2010, the day before the meeting, Motorola sent Microsoft a letter offering to grant Microsoft a worldwide license to Motorola’s portfolio of alleged standard essential 802.11 patents at the rate of 2.25% per unit for each 802.11 compliant product subject to a grant back license under Microsoft’s 802.11 essential patents.  On October 29, 2010, Motorola sent Microsoft a second letter offering a worldwide license to Motorola’s alleged standard essential H.264 patents under the same terms.  In both letters, Motorola stated that “[i]f Microsoft is only interested  in licensing some portion of [Motorola’s] portfolio, Motorola is willing to enter into such a license, also on RAND terms.”  Motorola also requested in each letter that Microsoft respond within twenty (20) days.

Microsoft did not respond to either letter.  On November 9, 2010, Microsoft filed the subject suit against Motorola in the Western District of Washington alleging that Motorola’s offered license rate on its alleged 802.11 and H.264 SEPs breached its obligations to ITU and IEEE to license such patents on RAND terms.  Motorola then sued Microsoft in the Western District of Wisconsin alleging infringement of those same patents. The Western District of Wisconsin transferred Motorola’s action to the Western District of Washington, which then consolidated Motorola’s infringement claims with Microsoft’s contract-based action before Judge Robart.

In July of 2011, Motorola filed an action in Germany alleging that Microsoft’s Xbox and Windows infringe Motorola’s German patents essential to the H.264 standard.  Motorola ultimately obtained an injunction against Microsoft from the German court prohibiting Xbox sales in that country. The German court granted the injunction after it rejected Microsoft’s assertions regarding Motorola’s obligations to ITU and IEEE.  Microsoft then relocated its German distribution center to the Netherlands.  Microsoft also sought and obtained an injunction from Judge Robart, which enjoined Motorola from enforcing the German injunction pending a determination of what a RAND royalty rate would be and whether Motorola breached its RAND obligations.  Motorola appealed Judge Robart’s preliminary injunction decision to the Ninth Circuit. The Ninth Circuit ruled that it had appellate jurisdiction because Microsoft’s complaint “sounded in contract.” The Ninth Circuit also affirmed the injunction.

Judge Robart bifurcated the case to first hold a bench trial to determine a RAND royalty rate and then hold a jury trial to determine whether Motorola breached its obligations to offer its alleged 802.11 and H.264 SEPs on RAND terms.  After the bench trial, Judge Robart issued a first-of-its-kind RAND royalty rate determination.  As we previously detailed, Judge Robart set a RAND royalty rate for Motorola’s H.264 SEP portfolio at .555 cents per unit with a range of .555 cents to 16.389 cents per unit, and a RAND royalty rate for Motorola’s 802.11 SEP portfolio at 3.471 cents per unit, with a range of .8 cents to 19.5 cents per unit.

Thereafter, Judge Robart ruled that the RAND rate determination and related findings could be introduced at the jury trial on whether Motorola breached its obligations to IEEE and ITU.  After a one week trial, the jury found that Motorola breached its RAND obligation, including the obligation to license its patents in good faith.  Judge Robart then issued a Rule 54(b) final judgment on the RAND rulings and stayed the remainder of the consolidated cases (e.g., Motorola’s infringement claims) pending an appeal. Motorola noted its appeal of the Rule 54(b) RAND judgment to the Federal Circuit, but Microsoft moved to transfer it to the Ninth Circuit, which, as noted above, had previously ruled that it had appellate jurisdiction in the case in affirming Judge Robart’s injunction.  The Federal Circuit, without addressing the substantive merits of whether the Federal Circuit or Ninth Circuit had appellate jurisdiction, agreed as a procedural matter in this particular case that the Ninth Circuit had jurisdiction based on the law of the case doctrine that the Ninth Circuit’s prior ruling of jurisdiction in the case controlled in this particular case.  The case was transferred to the Ninth Circuit.

After transfer, the parties and several non-parties appearing as amicus curiae  filed briefs, discussed below.

Motorola’s Opening Brief.

Jurisdiction.  In its opening brief, Motorola first argues that the Ninth Circuit cannot hear the appeal because jurisdiction “lies exclusively in the Federal Circuit,”  because the district court transformed the case “into one necessarily involving resolution of substantial issues of patent law” after the Ninth Circuit affirmed Judge Robart’s injunction.  While the Ninth Circuit “plausibly had appellate jurisdiction over the earlier interlocutory appeal form the anti-suit injunction in this case,” Motorola argues that “the current appeal requires transfer to the Federal Circuit” because Microsoft’s right to relief “‘necessarily depends on resolution of a substantial question of federal patent law, in that patent law is a necessary element of one of [Microsoft’s] well-pleaded claims.’” Specifically, Motorola argues that “by determining that it could set a RAND rate determined at a bench trial,” the district court, “for all intents and purposes,” held a “patent damages trial” which transformed the case into “one requiring the resolution of substantial questions of patent law.” As support, Motorola cites to “technical testimony concerning the essentiality and value of [its] patents, as well as Microsoft’s use of them,” evidence regarding infringement and validity, and “a patent infringement damages analysis” presented to the district court in connection with the RAND bench trial.  Motorola argues that “[w]here a contract claim necessarily requires a court to ‘interpret the patents and then determine whether [the product at issue] infringes” the patents, then “‘patent law is a necessary element of [the] breach of contract claim.'”  According to Motorola, while the Federal Circuit found the Ninth Circuit’s jurisdictional analysis “plausible” when it transferred the appeal, the Ninth Circuit “should hold that the underpinnings of that ruling no longer apply to the current appeal and transfer” it back to the Federal Circuit.

The RAND Ruling.  If the Ninth Circuit concludes that it has jurisdiction, Motorola argues that the district court’s RAND ruling should be vacated.  “In deciding to hold a RAND-rate bench trial before the good-faith jury trial, the district court held that it was necessary to determine a ‘true RAND royalty rate’ before the jury could resolve the question of whether Motorola breached its good-faith obligations under its RAND commitments.” According to Microsoft, “[t]hat premise was erroneous and fatally tainted not only the bench trial but also the jury trial that followed.”

Specifically, Motorola contends that “Microsoft’s entire breach case turned on whether Motorola had breached the covenant of good faith and fair dealing implied by its RAND commitments.” “Under Washington contract law, that determination involves a fact-intensive, multi-factored analysis by the finder of fact in which no one factor is a prerequisite and no one fact is dispositive over any other.” According to Motorola, “[t]he district court failed to cite a single precedent in Washington or any other jurisdiction to support the view that an abstract, advisory ‘true’ price is a prerequisite to a factfinder’s determination of good faith concerning a contractual negotiation.” “To the contrary, courts repeatedly reject arguments that a party has breached good faith in a contractual negotiation by offering a higher or lower price than is consistent with an abstract ‘true’ price.”

Motorola argues that since the RAND ruling itself is not a “prerequisite to determining Motorola’s liability for” breach, the ruling is an impermissible advisory opinion. This, according to Motorola, is especially so given that “Microsoft’s complaint sought only declaratory relief and damages for Motorola’s supposed breach of its RAND commitments and injunctive relief against Motorola enforcing its SEPs.” “Microsoft’s complaint never, even as amended, sought specific performance or a court-ordered license on RAND terms.”

Motorola contends that the Western District of Washington’s decision in Apple v. Motorola demonstrates that the RAND ruling is advisory.  In Apple, the court “dismissed the case as seeking an impermissible advisory opinion where Apple sought to have the court determine a RAND rate but refused to commit to take a license at that rate.” According to Motorola, “Microsoft never included a request for specific performance or a license in its complaint,” and, therefore, “the court’s determination of a RAND rate was similarly advisory.”

In the alternative, Motorola argues that “[e]ven assuming that Microsoft [was] deemed to have constructively amended its complaint to seek a license at a RAND rate set by the court, mere establishment of such a rate would still be advisory as to any license remedy.” “SEP commitments to SSOs are not simply licenses with missing price terms, like a form lease agreement with a blank for the monthly rental amount.” According to Motorola:

[t]o the contrary, patent licenses arrived at between sophisticated technology companies through bilateral negotiations—including licenses involving SEPs—are complicated endeavors with myriad variables, including duration, cross-licenses, geographical and product scope, royalty caps, carve-outs, and other material terms apart from royalty rate. For just that reason, the SSO policies concerning the RAND commitments at issue here state that ‘[t]he detailed arrangements arising from patents (licensing, royalties, etc.,) are left to the parties concerned, as these arrangements might differ from case to case.’ The royalty rate resulting from such complex licensing negotiations depends upon the cross-license, duration, scope, cap, and other non-price terms. The district court’s treatment of the RAND rate as an independent, exogenous variable was therefore error, and the RAND Order is impermissibly advisory.

Assuming that the RAND ruling is not advisory, Motorola argues that the RAND rate set by the district court should be vacated on the merits because it is contrary to “governing Federal Circuit law.”  First, Motorola contends that the district court failed to set a date for the hypothetical negotiation it relied upon in reaching the RAND rate.  According to Microsoft, “[t]he district court purported to follow Federal Circuit patent damages law, relying upon the ‘hypothetical negotiation’ method of calculating such a royalty.” “Under this framework, however, ‘[t]he key element in setting a reasonable royalty after determination of infringement and validity is the necessity for return to the date when the infringement began.’” Motorola argues that, because the district court did not set a date for the hypothetical negotiation it used as a basis for the RAND rate, the RAND ruling should be vacated.

Motorola next argues that the RAND ruling relies on “speculative inferences from non-comparable pool rates.”  Specifically, Motorola contends that the district court erred “in using, as its chief benchmark for the RAND rate the parties would supposedly set in a hypothetical negotiation, the royalty structure of two patent pools involving a subset of industry members—the MPEGLA pool for video streaming and the Via Licensing pool for WiFi.” “Neither pool includes the Motorola patents at issue here.” Motorola contends that “[w]hile patent pools might in some circumstances provide relevant data for a hypothetical SEP licensing negotiation,” the district court purportedly “failed to identify any basis in the bench trial record for treating the two pools used here as a proper basis for comparison in describing a license that would have resulted from a hypothetical bilateral negotiation between Microsoft and Motorola in 2010.”

Motorola contends further that the district court improperly set aside “as irrelevant actual licenses that Motorola had historically entered into for its SEPs, reasoning that they had arisen from settlement negotiations.” “Under patent damages law, ‘[a]ctual licenses to the patented technology are highly probative as to what constitutes a reasonable royalty for those patent rights because such actual licenses most clearly reflect the economic value of the patented technology in the marketplace.’” According to Motorola, “litigation settlements can be ‘the most reliable license’ to evaluate and should be considered as part of any damages analysis.”

As further support for its argument that the district court failed to credit Motorola’s historical licensing activities, Motorola cites to the Federal Circuit’s ruling in Apple v. Motorola, which involved Apple’s alleged infringement of one of Motorola’s cell phone patents, arguing:

the Federal Circuit recognized the industry practice of broad crosslicensing of entire portfolios, and acknowledged Motorola’s expert testimony that Motorola’s cross-licenses ‘show that Motorola has previously received a royalty rate of approximately 2.25% for a license to its entire SEP portfolio.’  The Federal Circuit held that the district court’s exclusion of such testimony was error because the expert there ‘construct[ed] a cost estimate typically relied upon when calculating patent damages—the cost to license the technology.’  This approach is generally reliable because the royalty that a similarly-situated party pays inherently accounts for market conditions at the time of the hypothetical negotiation.  The Federal Circuit noted that ‘Apple’s royalties under these agreements were in a similar range.’ Moreover, ‘[t]hese licenses also typically included cross-license agreements,’ a factor the district court here explicitly refused to consider.

For these reasons, Motorola contends that the RAND order is erroneous and that the judgment of breach based on it should be reversed or, at a minimum, vacated “because fatally tainted by it.”

Jury Verdict.  Motorola  contends that no reasonable jury could find that it breached an alleged obligation of good faith to license its patents on RAND terms to Microsoft. “The unrebutted evidence shows that Motorola made its standard opening offer to Microsoft in order to begin a negotiation … and that Microsoft does not accept the opening offer ‘99 percent of the time.’” Motorola indicated that it was open to licensing only part of its portfolio and Microsoft itself has included a 20-day limit in its offer letters.

Motorola argues further that “[e]ven assuming that the purpose of the RAND commitment is to prevent hold-up, Microsoft’s expert could not opine on whether Motorola’s opening offers intended to hold up Microsoft, given that Microsoft was infringing Motorola’s patents and continued its unlicensed use.”

Motorola  points to the district court’s holding that “an opening offer from an SEP holder does not need to be on RAND terms.” Therefore, according to Motorola, even if its opening rate was deemed to be “high,” that, by itself, is not sufficient evidence to show that it breached. “Moreover, a rate is only one term in a complex negotiation in which other terms (such as cross-licenses, scope definitions and volume-based caps) can make any given rate more or less RAND.”  Thus, according to Motorola, “the opening rate set forth in Motorola’s letters, in the abstract, cannot be commercially unreasonable as a matter of law.”

At trial, Microsoft contended that Motorola breached its obligations of good faith by seeking injunctive relief against Microsoft for alleged patent infringement. On appeal, Motorola contends that “the record fails to support any reasonable conclusion that Motorola acted in bad faith by seeking injunctive relief.” “As the district court acknowledged, the RAND commitments at issue do not contractually bar SEP holders from seeking injunctive relief, and the undisputed evidence at trial showed that Microsoft sued Motorola three times before Motorola began to seek injunctive relief against Microsoft.” “On this record, Motorola’s actions seeking injunctive relief for Microsoft’s continued unlicensed use of its patents cannot plausibly be found to violate the reasonable expectations of the parties, to be commercially unreasonable, to depart from industry custom and practice, or to evince subjective bad faith.”

Damages.  Finally, Motorola argues it was entitled to judgment as a matter of law on Microsoft’s damages claims. “The $14.52 million damages judgment consists of $11.49 million in damages for Microsoft’s costs to relocate its German distribution facility to the Netherlands after Motorola sought to enjoin xBox sales in Germany and $3.03 million in attorneys’ fees Microsoft incurred as a result of Motorola’s “conduct in seeking injunctive relief.” Motorola contends that, under the Noerr-Pennington doctrine, which generally insulates a party from damages as a result of invoking its legal rights in court, it cannot be held responsible for the $11.49 million re-location costs. Further, Motorola argues that, since Washington law does not allow attorneys’ fees as damages, the inclusion of them in the damage award must be vacated.

Microsoft’s Response Brief

Jurisdiction.  In its response brief, Microsoft argues that, as the Ninth Circuit previously concluded, jurisdiction is proper and that decision is the law of the case. “In asking this Court to come to a different conclusion, Motorola does not contend that Microsoft asserted a patent claim, nor does it deny that Microsoft sued for breach of contract.”  “Instead, Motorola asserts that the district court (not Microsoft) ‘constructively’ (not actually) amended Microsoft’s complaint such that the bench trial was ‘for all intents and purposes’ a patent damages trial ‘requiring the resolution of substantial questions of patent law.’” According to Microsoft, “[t]his is both factually wrong and legally irrelevant.”

First, “[t]he district court did not determine damages for patent infringement.” According to Microsoft, “the court considered the value of Motorola’s patented technology to the extent relevant to the breach of contract claim.” “But that did not convert the contractual RAND royalty analysis into a determination of infringement damages under 35 U.S.C. § 284.” “As the court explained, any analysis ‘under a RAND obligation must be different than the typical [hypothetical negotiation] analysis historically conducted by courts in a patent infringement action.’” “The use of a hypothetical negotiation valuation framework is common in contexts beyond patent damages . . . and does not make this a patent case.” “Nor does the valuation of patented technology raise a substantial question of patent law, any more than would a case involving a corporate acquisition in which the price depended on the value of patents.”  Microsoft contends that “this case did not require the district court to construe patent claims or address infringement.”  Nor was there any dispute that “Microsoft’s products implemented the standards.”  The district court “treated Motorola’s patents as essential even though ‘none of the terms comprising the claims” were construed by the district court.

The RAND Ruling.  Microsoft contends that Motorola consented to the bench trial procedure to determine the RAND royalty rate.  According to Microsoft, “Motorola apparently later regretted its agreement” and attempted to renege.  “The district court rejected Motorola’s about-face, observing ‘isn’t it rather late in the game for Motorola to repudiate concessions made during oral argument and announce another new theory in the case?”  “As the court carefully analyzed in a ruling before the jury trial, Motorola waived any right to have a jury determine the RAND royalty (or to have the jury decide breach with no such determination at all).”

Microsoft also argues that, waiver aside, Motorola’s argument mischaracterizes the RAND ruling “as dispositive of breach.”  As noted above, Motorola argues that the breach analysis is fact-intensive, with no one fact being dispositive.  Microsoft responds that the jury was instructed exactly in the manner that Motorola argues on appeal, in that “the size of the offer alone is not exclusively dispositive of whether Motorola has breached its duty of good faith and fair dealing.”  Indeed, Microsoft points to the jury instructions’ requirement that “listed objective and subjective grounds to consider in deciding whether a breach occurred.”

Microsoft also argues that the RAND ruling was not an advisory opinion because “Motorola agreed that the court should assess RAND royalties (as terms of the relevant contracts) as a predicate to the jury trial on breach.”  “Moreover, prior to the bench trial, Motorola successfully opposed Microsoft’s motion for summary judgment,” arguing that “the evidence (including Motorola’s prior licenses and licensing practices) showed that ‘Motorola’s offer plainly was reasonable.”  “Motorola cannot now credibly argue that the court’s evaluation of the evidence it urged the court to evaluate produced an advisory opinion.”

Microsoft further argues that whether it sought specific performance “does not matter” to whether the court’s RAND ruling was advisory.  “First, Microsoft’s request for relief was the same at the RAND royalty trial as it was months earlier when Motorola agreed to that procedure.”  Second, Microsoft requested a declaration that Motorola’s offer was not on RAND terms, as well as a judicial accounting of RAND royalties for Motorola’s patents.  “Each of those claims for relief required determining RAND royalties.”

Microsoft argues further that the alleged “complexity” and number of factors that go into a license negotiation identified by Motorola are irrelevant.  “The RAND royalties are key contract terms, and the determination of those royalties informed the resolution of the dispute between the parties.”  According to Microsoft, the “complex” terms identified by Motorola are “all subsumed in the RAND licensing commitment.”  For example, the duration of any RAND license is the life of the patent.  Cross-license considerations are “irrelevant” because standard-essential patents have value independent of the value of other standard-essential patents:  “cross-licensing could affect the form, but not the value, of RAND compensation.”  Moreover, according to Microsoft, RAND obligations bar “Motorola from varying royalties based on what patents a licensee holds.”  For these reasons, Microsoft argues that the district court’s RAND ruling was not advisory.

On the merits, Microsoft first argues that, by making RAND licensing commitments, Motorola “waived any entitlement to ordinary patent damages for infringement, and agreed it would seek and accept only RAND royalties from any standard implementer.”  Further, the district court, according to Microsoft, “did not simply adopt Federal Circuit damages law; rather, at Motorola’s urging, the court used a ‘modified form of the well-known Georgia-Pacific hypothetical negotiation.'”  “Motorola’s complaints on appeal ignore what Motorola asked, and did not ask, the district court to do.”

With respect to Motorola’s claim that the district court failed to select the “correct date for the hypothetical negotiation,” Microsoft argues that “Motorola offers no reason why that inquiry would be required in this contract case” and, further, “Motorola itself never proposed a specific date,” and cannot now complain on appeal.  “The court (consistent with the approach Motorola urged) considered a hypothetical negotiation in light of the RAND commitment–which includes the principle of not discriminating against any implementer at any time–and the evidence presented at trial.”

With respect to Motorola’s attack on the licensing pools relied upon the district court, Microsoft argues that Motorola ignores the record evidence.  “Motorola ignores the court’s basis for concluding that H.264 pool royalties were probative of RAND royalties:  Motorola participated in the formation of that pool; Motorola argued for lower royalties in that context; and Motorola approved press releases announcing the pool’s licensing terms.”  “Motorola did not object to the pool’s licensing model, which treated all standard-essential patents as equal when allocating royalties–a model adopted by other pools in which Motorola already participated.”  “Despite Motorola’s last-minute withdrawal from the pool, … the court had ample basis to conclude that the pool royalties  informed a RAND royalty.”

Microsoft argues further that “Motorola’s claim that there ‘was no evidence’ about the relative value or technical comparability of Motorola’s patents to those in the pools” ignores the record.  The patents “are indisputably comparable in a key respect:  all were declared essential to the same technical standards.”

Further, according to Microsoft, “the court did not simply apply the pool royalty to Motorola’s H.264 patents; it found that the RAND royalty for Motorola’s patents was substantially higher.”  As Microsoft argued:

Despite finding the pool royalty of 0.185 cents per unit a strong indicator of a RAND royalty for Motorola’s H.264 patents, the court noted Motorola would receive that amount only if it were a pool participant–and because it was not a participant, the court presumed Motorola was not receiving value back from the pool (in the form of licenses to other members’ patents). … To compensate, the court set the RAND royalties for Motorola’s patents at three times what Motorola would have received as a pool participant.

Microsoft argues that Motorola had an opportunity to argue for an even greater increase over the pool royalty, but instead argued that the pool royalty should “be rejected out-of-hand.”

With respect to Motorola’s 802.11 RAND obligations, Microsoft argues that the district court considered evidence “independent of the 6-cent-per-unit royalty suggested by the Via pool.”  “The court considered evidence concerning licensing in the 802.11 industry, which suggested a RAND royalty of 3-4 cents.”  The district court also considered evidence (Motorola’s InteCap valuation) suggesting “even lower RAND royalties of 0.8 to 1.6 cents per unit.”  In the end, according to Microsoft, the district court took the average of these indicators, the Via pool royalty that “Motorola wishes to discard being the most favorable to Motorola.”

Jury Verdict.  Microsoft argues that Motorola only challenges the jury verdict on whether it breached its duty of good faith and dealing.  “Contrary to Motorola’s assertion, … Microsoft also alleged that Motorola breached the contract directly, and the jury was instructed on direct breach.”  As “Motorola did not move for [judgment as a matter of law] on this ground (and does not argue here),” the Ninth Circuit “cannot review the sufficiency of the evidence supporting a finding of direct breach.”  According to Microsoft, the judgement should be affirmed on this ground alone.

Even if review were available, Microsoft argues that the evidence supported a finding of breach of the duty of good faith.  “The jury saw Motorola’s multi-billion-dollar demands, … and heard that Motorola maintained its demand for 2.25% royalties as late as December 2012, … while still pursuing injunctions.”  This, according to Microsoft, violated Motorola’s RAND obligations.

Microsoft also argues that Motorola’s offer letters breached its duty of good faith and fair dealing.  The initial letters “were not opening offers, but by their terms demands open for just 20 days that sought Microsoft’s confirmation of acceptance.”  “[T]he jury was instructed (without objection) that Microsoft had no obligation to negotiate in response to Motorola’s demands.”

Microsoft argues further that “Motorola’s demands failed to account for the dozens of other” holders of patents essential to the standards at issue.  “If those entities each demanded 2.25%, as Motorola did, the aggregate royalties would far exceed the prices of standard-compliant products.”  Because the district court found that Motorola’s patents “reflect only minimal contributions” to the standards, “the aggregate royalty burden suggested by Motorola’s demands is even more unreasonable–especially because Microsoft’s products comply with many other standards.”

With respect to Motorola’s requests for injunctive relief, Microsoft argues that its own patent infringement cases against Motorola regarding unrelated patents are irrelevant.  “Motorola blames Microsoft for asserting unrelated patents against Motorola in earlier litigation…but that has nothing to do with whether Motorola’s conduct breached its RAND licensing commitments.”  Microsoft also argues that its products were “unlicensed” because of Motorola’s refusal to grant RAND licenses, thus negating Motorola’s argument that Microsoft’s alleged “continued unlicensed use of Motorola’s patents” justified injunctive relief.

Damages.  According to Microsoft, “Motorola cites no authority suggesting that Noerr-Pennington could immunize it from breach of contract liability for seeking injunctions on standard-essential patents.”  Microsoft contends that the only other court to address this issue, the Western District of Wisconsin, in its ruling in Apple v. Motorola, held that Noerr-Pennington does not apply.  Further, outside “of the RAND licensing context, courts have ruled that the ‘Noerr-Pennington doctrine does not shield [parties] from liability for failing to comply with [a] contract.'”  Even if Noerr-Pennington applied, Microsoft argues that Motorola would still be liable under the “sham litigation” exception for filing suits that were not reasonably calculated to lead to a favorable outcome.

Microsoft argues further that the costs of relocation of its German facility and defense of Motorola’s injunctive actions are recoverable damages under Washington law.  “The damages awarded were not fees incurred in this contract action, but those incurred in defense of injunctions Motorola sought.”  Under Washington law, Microsoft contends that “[t]hose fees were foreseeable and flow directly from Motorola’s breach.”  “Motorola is not free to impose litigation harms without facing consequences.”

Motorola’s Reply Brief.

Jurisdiction.  After Microsoft submitted its response brief, the Federal Circuit issued its opinion in Ericsson v. D-Link Sys.  Motorola cites this opinion in its reply brief in response to Microsoft’s argument that the district court did not conduct a patent damages analysis and that patent damages law does not apply to Microsoft’s contact claim.  According to Motorola, Ericsson v. D-Link forecloses this argument because the Federal Circuit ruled therein that “‘[a]s with all patents, the royalty rate for SEPs must be apportioned to the value of the patented invention,” and the district court’s RAND Order “purported to perform this very type of analysis, determining the contribution of Motorola’s patents to the standards at issue.”  “Such valuation amounts to determining damages for infringing patent use, a determination governed by Federal Circuit law even if the patents are subject to RAND or any other commitment related to the quantum of damages.”  Accordingly, Motorola urges transfer of the appeal to the Federal Circuit.

Motorola also contends that it never consented to the bifurcated approach adopted by the district court.  “The Seventh Amendment is not a game of ‘gotcha,’ and Microsoft cannot rely on one statement [at a status conference] to show Motorola’s consent when all of Motorola’s subsequent statements and actions showed otherwise.”

The RAND Ruling.  With respect to its advisory opinion argument, Motorola contends that “Microsoft does not assert that the RAND Order finally determined any dispute between the parties but instead suggests . . . that the RAND Order was not advisory because royalty rates were relevant to the determination whether Motorola acted in good faith.”  “Microsoft thus suggests that the RAND Order is imporant evidence,” but, according to Motorola, “a federal court is not an expert witness tasked with determining a RAND rate with no use or purpose other than as evidence for us in negotiation or at a” breach trial.

Motorola also argues that “[c]ontrary to Microsoft’s suggestion…, Federal Circuit patent damages law governs all claims involving valuation of patents–even SEPs subject to a RAND commitment.”  Motorola again cites Ericsson as support for its argument that it is “‘unwise to create a new set of Georgia-Pacific-like factors for all cases involving RAND-encumbered patents” and that the Federal Circuit standards for patent damages apply in this case.  According to Motorola, the district court defied these standards in the RAND ruling.  In fact, Motorola contends that  “[o]nce the district court adopted the Georgia-Pacific framework to value Motorola’s SEPs by means of a hypothetical-license reasonable royalty, it was requried to apply that framework in accordance with applicable Federal Circuit precedent.”

With respect to the date of the hypothetical negotiation, Motorola contends that “the district court did not state what date it used.”  According to Motorola, the earliest date for the hypothetical negotiation applied by the district court is May 2012, the date that Google acquired Motorola.  This is because the district court, as Motorola argues, used Google’s participation in the applied patent pools as a comparison for what Motorola may have done in the hypothetical negotiation.  Motorola argues that this was error because “Federal Circuit law…requires the analysis to pre-date the circumstances of a lawsuit.”

Motorola next asserts that, “while Microsoft contends … that royalties arising out of settlement of litigation may be not be the best indicator of a reasonable royalty, that position does not support the district court’s disregard for the licenses Motorola entered into evidence during the bench trial.”  Those licenses, according to Motorola, “were for the same patents at issue in this lawsuit and thus had direct probative value.”

With respect to the MPEGLA and Via patent pools considered by the district court, Motorola argues that “[t]here is no evidence that the pool rates at issue here correspond to a license fee arrived at after the bilateral negotiation contemplated by the [SSOs]; they result rather from particular business arrangements that do not distinguish among patents based on technical merit.”  “Microsoft fails to show any patent-law precedent that would allow comparable valuation based on a supposed alignment between pool purposes and a RAND commitment to bilateral negotiation.

Finally, Motorola argues that Microsoft cites to no evidence showing that the pool rates “used by the district court have probative value.”  Nor does Microsoft attempt to justify the algorithm used by the district court to arrive at the RAND ranges which, according to Motorola, “no expert advocated.”

Jury verdict.  Motorola argues that Microsoft cannot rely on a straight breach theory to sustain the jury’s verdict since Microsoft “did not even introduce the SSO contracts in its affirmative defense” and because the district court found, prior to the jury trial, that “Microsoft could not prove direct breach of the RAND commitment.”  According to Motorola, that decision is the law of the case.  Because Microsoft did not cross-appeal that ruling, “it may not argue now that the evidence supports a finding of direct contract breach based on Motorola’s offer letters and pursuit of injunctions.”

Motorola argues further that “Microsoft cites no case finding breach of good faith based upon an opening offer alone–the sole basis for the initial complaint here.”  Nor does Microsoft “cite any case finding breach of a RAND commitment based on an initial offer plus pursuit of injunctions after the suit was filed–as pleaded in the amended complaint.”  “The evidence concerning the opening offers and the injunction requests, separately or together, is insufficient to support liability for breach of good faith.”  Motorola’s initial offers were consistent with its ordinary practice to offer a license at 2.25 percent of the end unit.  Motorola contends further that the evidence showed that Microsoft rejects any initial offer 99% percent of the time.  This, according to Motorola, cannot constitute bad faith.

With respect to Motorola’s requests for injunctive relief, Motorola argues that the undisputed evidence, including Microsoft’s representation to the FTC that it was not aware of any instance in which a party had attempted to “extort above-RAND rates,” shows that Motorola was not using its request for injunctive relief to “pressure Microsoft to settle on supra-RAND terms.”

Damages.  Motorola argues that Apple v. Motorola, cited by Microsoft, actually supports Motorola’s argument that the Noerr-Pennington doctrine bars Microsoft’s claim for damages:

[W]hile the district court in [Apple v. Motorola] found that Noerr-Pennington did not bar enforcement of the RAND commitment, the court separately held that Apple’s asserted antitrust damages were barred by Noerr-Pennington because predicated solely upon ‘attorney fees and costs that it has incurred responding to the patent litigation initiated by Motorola.’  That holding applies equally to Microsoft’s damages here, which stem solely from Motorola’s protected litigation conduct.  There is nothing in its RAND commitments precluding Motorola from seeking redress from the courts for infringement of its SEPs, as the district court held…and the Federal Circuit has affirmed.

Motorola argues further that Microsoft failed to show that the sham exception to Noerr-Pennington immunity was triggered here, having purportedly failed to show that Motorola’s claims lacked objective merit.

Finally, Motorola argues that “Microsoft points to no case permitting a party to obtain attorney fees as damages in a separate action when such recovery would not be permitted in the action in which the fees were incurred” and “the district court relied on no such rationale.”  “Rather, the district court held that it was required to create a new exception to the American Rule [that each party is responsible for its own attorneys’ fees] despite the fact that Microsoft did not incur the attorney fees in the instant action.”  Because, according to Motorola, the RAND commitment is not a covenant not to sue, Microsoft cannot claim as damages any attorney fees it incurred as a result of Motorola’s enforcement of its patents against it.

Microsoft’s Supplemental Submission

After the Federal Circuit issued its decision in Ericsson v. D-Link, Microsoft notified the Ninth Circuit of that decision pursuant to Fed. R. App. P. 28(j).  Microsoft argues that “Ericsson is a patent infringement case, in which Ericsson asserted patents subject to contractual RAND licensing commitments, like Motorola’s patents here.”  “D-Link argued that the jury was improperly instructed on the impact of those commitments on damages, and the Federal Circuit agreed, holding that” the district court erred by failing to instruct the jury adequately regarding Ericsson’s actual RAND commitment, failing to instruct the jury that any royalty for the patented technology must be apportioned from the value of the standard as a whole, and failing to instruct that the RAND royalty rate must be based on the value of the invention, not any value added by the standardization of that invention–while instructing the jury to consider irrelevant Georgia-Pacific factors.  According to Microsoft, Ericsson “declined to adopt a uniform framework for evaluating RAND royalties, instead directing lower courts to ‘consider the facts of record when instructing the jury’ and ‘avoid rote reference to any particular damages formula.'”  Microsoft argues that “[t]his refutes Motorola’s suggestion that RAND disputes should be subject to a ‘uniform’ standard.”  Further, “[l]ike the district court here, the Federal Circuit found it ‘necessary to ensure that the royalty award is based on the incremental value that the patented invention adds to the product, not any value added by the standardization of that technology.”

Amicus Briefs in Support of Motorola

Nokia.  Nokia filed an amicus brief in support of “reversal of the district court’s order to the extent that this order creates a methodology for the determination of a reasonable and non-discriminatory royalty rate in cases involving claims of infringement of standard-essential patents that applies to disputes outside the context of the present case.”  According to Nokia, “[i]f the methodology used by the District Court to determine a RAND royalty rate for Motorola’s patents is applied outside the facts of this case, it will have a negative effect on the entire standardization process.”  Neither the ITU nor IEEE policies “defines in specific detail what constitutes RAND royalty terms for a license to a patent declared essential to one of its standards.”  Rather, the SSOs “instead emphasize the twin goals of the standardization process:  ensuring adequate compensation for patent holders while preserving manufacturers’ access to essential patents.”  “When determining RAND royalty rates or ranges for standard-essential U.S. patents, the Georgia-Pacific factors may be used to model a hypothetical negotiation between the parties without unduly favoring patent holders or equipment manufacturers.”

While Nokia takes no position on the underlying merits of the dispute, it argues that the modified Georgia-Pacific methodology adopted by the district court “fails to strike the proper balance between the goals of the” SSO policies at issue, “instead setting up a methodology which, if utilized in other cases, could harm the standardization process as a whole, potentially leading to fragmented standards and reduced interoperability among manufacturers.”  This is because the district court assumed that royalty stacking and patent hold-up are present without requiring empirical evidence demonstrating that they actually are present, “while simultaneously ignoring the potential for ‘reverse hold-up.'”  Further, Nokia argues that the district court approves an ex ante incremental value methodology for the valuation of standard-essential patents and also rejects proferred comparable licenses.  According to Nokia, if the district court’s decision stands and is adopted by other district courts, future patent holders “will likely have reduced incentives to participate in the standardization process, which could have a chilling effect on the entire industry.”

Amicus Briefs in Support of Microsoft

Apple.  Several entities filed amicus briefs in support of Microsoft and affirmance.  Apple’s brief argues that, to determine the critical question of “what–and how much–is” a RAND rate, Judge Robart “applied several important principles inherent in the [RAND] commitment, and thus critical for resolving [RAND] disputes.”  “They are based in the widely recognized precept that ‘a RAND commitment should be interpreted to limit a patent holder to a reasonable royalty on the economic value of its patented technology itself, apart from the value associated with incorporation of the patented technology into the standard’–that is, apart from hold-up value.'”  According to Apple, Judge Robart’s analysis prevents implementers of standards from being caught in an alleged “thicket of SEPs” where numerous patent holders over-declare their patents to an industry standard and thereafter attempt to extract royalties from the implementers in an amount that discourages participation in the industry standard process.

Intel, Aruba Networks, Dell, H-P, Newegg, SAS Institute, Sierra Wireless, Vizio, and Xilinx also filed a joint amicus brief in support of Microsoft and affirmance.  Collectively, they argue that they “have invested substantial time and resources in developing successful industry standards and implementing industry standards in their products.”  “Those investments–and the incentives to make similar investments in the future–are threatened if the binding RAND commitments made during standard-setting can be evaded by patentees.”

According to them, “[t]he district court’s decisions here furthered the important goal of affirming the RAND commitment in two ways.”  First, “the district court properly recognized that RAND licenses must be available to all implementers of an industry standard.”  Holders of declared SEPs “cannot avoid licensing suppliers of components that provide standardization functionality in favor of licensing suppliers of higher-priced end products in an attempt to capture more than the value of the patented technology or to avoid the doctrine of patent exhaustion.”  “Likewise, the district court correctly recognized that seeking injunctive relief is incompatible with the RAND commitment to license.”  “The crippling threat of an injunction would allow SEP holders to extract unreasonable royalties from implementers of the standard.”

“Second, the district court properly considered the appropriate factors in setting a RAND royalty rate, including computing a royalty based on the value of the patented invention by:” starting the analysis with the smallest saleable component that implements the standard rather than the end product, focusing only on the contribution of the patent to the component at the time of standardization, and considering aggregate royalty demands that implementers of a standard face from others claiming to own patents essential to the same standard.  “Further, the district court correctly excluded evidence of Motorola’s proffered licenses for its RAND-committed patents, as Motorola failed to demonstrate that those licenses reflected the actual value of its patents.”

T-Mobile also filed an amicus brief in support of Microsoft and affirmance.  According to T-Mobile, it is “continuously subjected to lawsuits and licensing inquiries seeking compensation for licenses to” SEPs.  “Many of these litigation and licensing inquiries come from patent holders that have never actively participated in the various standards bodies and have never offered products in the wireless mobile industry, yet they claim to hold patents that are essential to practicing industry standards.”  “They assert these patents with no interest in advancing the policies or work of any standards organization.”  Their “sole purpose is revenue generation” and, “[t]o this end, they often try to exploit the widespread adoption of the standards by seeking compensation that far outpaces the reasonable and nondiscriminatory (“RAND”) rate that binds their patents.”  T-Mobile argues that the district court’s flexible Georgia-Pacific “framework will provide greater certainty for the marketplace and ensure that SEP owners fulfill their obligation to license at RAND rates” and that adoption of the district court’s methodology “will ensure that manufacturers, consumers, and patent owners will continue to enjoy the benefits of interoperability and widespread adoption of standards.”

Public Knowledge also filed an amicus brief in support of Microsoft and affirmance.  Public Knowledge argued that RAND commitments are promises “made to the public, the beneficiary is the public, and the public is charged with enforcing the terms.”  Therefore, it is “fully appropriate to interpret” the RAND contract “in view of the public interest.”  According to Public Knowledge, that is “precisely what the district court did.”  “First, the court considered the problem of patent hold-up, which simply describes a species of monopolistic imbalance of market power that occurs with technology standards.”  “Second, it recognized the risk of royalty stacking, a problem of overvaluation of a single patent when that patent  is but one of many covering a technology standard.”  Public Knowledge argues that patent holdup and royalty stacking “account for significant public interest concerns at play with [RAND] commitments, and it was correct for the district court to account for them.”

Qualcomm’s Brief in Support of Neither Party.

Qualcomm, an SEP holder as well as manufacturer of WiFi chips, does not challenge the district court’s finding on the contributions of Motorola’s patents to the IEEE 802.11 and ITU H.264 standards and products at issue nor the actual rates and ranges the district court established.  “Those findings may suggest that the patents at issue had little or no value under any measure.”  Rather, Qualcomm identifies what it contends are manifest errors made by the district court in interpreting RAND commitments and devising its methodology that Qualcomm contends requires reversal or, if affirmed, a statement by the Ninth Circuit that the decision is “limited strictly to its facts.”

Qualcomm argues that the intellectual property rights (IPR) policies of IEEE and ITU require RAND terms to advance two equally important goals:  “(i) allowing SEP owners to receive adequate compensation for their SEPs; and (ii) providing implementers access to SEPs included in standards.”  According to Qualcomm, the district court’s “analysis did not accurately describe or properly balance these two objectives.”  “Instead, it focused almost exclusively on the single goal of what it described as facilitating ‘widespread adoption” of standards.”  Qualcomm contends that this both misstates the IPR’s policies’ goals of providing standard implementers with access to SEPs as well as ignores the “equally important ‘adequate compensation’ goal altogether.”  “Driven by this one-sided view, the District Court improperly modified the Georgia-Pacific analysis…to disconnect its determination of a RAND royalty from the specific contracts at issue and the patent law principles they incorporate.”

Qualcomm also argues that the district court “gave near dispositive weight in interpreting the RAND commitments to theoretical risks of ‘royalty stacking’ and patent ‘hold-up.'”  According to Qualcomm, this approach is inconsistent with the RAND commitments and the evidence presented and also “unfairly placed a thumb on the scale in favor of the implementer (and against the innovator).”  This approach is also inconsistent with the holdings of other courts (e.g., Ericsson and CSIRO v. Cisco) that have rejected proposals to modify the Georgia-Pacific analysis “based on speculative risks of royalty stacking and hold-up, where there was no evidence that these risks had materialized.”

Based on these arguments, Qualcomm argues that, if the district court’s reasoning and methodology are applied in other cases, there will be “incalculable damage to innovation incentives and standards going forward.”  “It would necessarily devalue all SEPs, regardless of the actual value each contributes to the success of the standardized products, and could form the basis for industrial policies that inhibit incentives to innovate and develop successful standards activities.”

Jury finds Apple does not infringe alleged SEPs but rejects claim that plaintiff did not offer license on FRAND terms

Posted in Complaints, District Courts, Jury verdicts, Litigation

Earlier this week, a Texas jury found that Apple’s iPhone and iPad products do not infringe patents owned by Core Wireless that are alleged to be essential to certain cellular standards adopted by the European Telecommunications Standards Institute (“ETSI”).  The jury also found that Core Wireless did not breach its contractual obligation to offer a license to the patents on fair, reasonable and non-discriminatory (FRAND) terms.

Core Wireless’ complaint.  Core Wireless’ complaint alleged that Apple’s iPad, iPad 2, iPad 3G, iPad with Retina display, iPad mini and iPhone 3G, 3GS, 4, 4S and 5 “were made and sold in accordance with” various 3GPP mobile standards adopted by the ETSI.  Core Wireless further alleged that the asserted patents, which it acquired from Nokia, covered those standards and, as such, the accused products infringed.  Core Wireless’ complaint prayed for an “accounting of all damages sustained b Plaintiff as the result of Apple’s acts of infringement,” enhanced damages pursuant to 35 U.S.C. § 284, and a “mandatory future royalty payable on each and every product sold by Apple in the future that is found to infringe one or more of the patents-in-suit and on all future products which are not colorably different from products found to infringe.”

Apple’s answer and counterclaim.  Apple filed an answer and counterclaim generally denying the allegations in the complaint and asserting affirmative defenses of non-infringement, invalidity and unenforceability.  Apple also asserted a counterclaim alleging that Core Wireless breached its contractual obligations to members of ETSI to license the asserted patents on FRAND terms.

For its breach claim, Apple relied upon the following provision in ETSI’s Intellectual Property Right Policy (“IPR”):

When an ESSENTIAL IPR relating to a particular STANDARD or TECHNICAL SPECIFICATION is brought to the attention of ETSI, the Director-General of ETSI shall immediately request the owner to give within three months an irrevocable undertaking in writing that it is prepared to grant irrevocable licenses on fair, reasonable and non-discriminatory [FRAND] terms and conditions under such IPR to at least the following extent:

• MANUFACTURE, including the right to make or have made customized components and sub-systems to the licensee’s own design for use in MANUFACTURE;

• sell, lease, or otherwise dispose of EQUIPMENT so MANUFACTURED;

• repair, use, or operate EQUIPMENT; and

• use METHODS.

The above undertaking may be made subject to the condition that those who seek licenses agree to reciprocate.

Apple alleged that ETSI members as well as members of other standard setting organizations (SSOs) “self-declare patents as ‘essential,’ or necessary to practice the UMTS standard,” but “[o]rganizations such as ETSI do not independently verify whether such patents are actually essential.”

Apple contended that Core Wireless was bound by the FRAND representations made by Nokia, the prior owner of the patents-in-suit:

Core Wireless acquired any rights it has in the Core Wireless Asserted Patents from Nokia Corporation. Nokia is a member of [ETSI], a standard-setting organization that promulgates cellular telecommunications standards.  In accordance with ETSI’s Intellectual Property Rights Policy [“IPR”], Nokia made binding and enforceable promises to ETSI and its members—including Apple—to license the Core Wireless Asserted Patents to companies supporting the UMTS standard promulgated by ETSI on ‘fair, reasonable, and non-discriminatory’ or FRAND terms.  Those FRAND promises traveled with the Core Wireless Asserted Patents when they were transferred to Core Wireless and continue to bind Core Wireless.

Apple went on to allege that

[d]espite and in breach of the binding contractual commitments obligating Core Wireless to license Apple to the Core Wireless Asserted Patents on FRAND terms, Core Wireless brought this infringement action before even approaching Apple to discuss a license, and since initiating this suit Core Wireless has refused to provide FRAND terms to Apple for the Core Wireless Asserted Patents.

After the suit was filed, Apple alleges that it requested that Core Wireless provide the “FRAND royalty rate for each of” the asserted patents, “with each patent’s rate separately listed” as well as the “methodology by which Core Wireless derived each rate” and “confirmation that Core Wireless offered these same rates to other companies or that companies paid” those same rates, “or if not the same, a description of the rates offered to or paid by other companies and a list of those companies.”  According to Apple, Core Wireless never responded.

Core Wireless’ answer and counterclaim.  Core Wireless filed an answer to Apple’s counterclaims with counterclaims of its own, alleging that it did, in fact, make several attempts to engage in licensing discussions with Apple, but that Apple refused to respond in breach of Apple’s obligations as a potential licensee of patents alleged to be essential to ETSI cellular standards.

“Apple takes the position that it is a party to license agreement(s), express or implied, to those patents that have been declared essential to an ETSI standard.”  Core Wireless alleges further that Apple sent a letter to another declared essential patent owner claiming that “an agreement is formed by virtue of ‘the [ETSI] IPR policies at issue [that] require participants claiming to own essential IPR to commit to license those IPR on FRAND terms to any implementer of the standard.”  Apple allegedly accepted these terms when it “began to implement the [ETSI] standard.”  “According to Apple, such license agreements are subject only to agreement on the terms of a FRAND royalty as compensation for Apple’s licensed use.”

Core Wireless also pointed to allegations that Apple made in its dispute with Samsung that “‘Apple is licensed to Samsung’s declared-essential patents’” because “‘the [ETSI] IPR policies at issue here require participants claiming to own essential IPR to commit to license those IPR on FRAND terms to any implementer of the standard.’”

Core Wireless further asserted that the patents-in-suit “have likewise been declared essential to the UMTS standard and Core Wireless’ assertion of those patents is subject to the ETSI IPR licensing obligations.”  “Thus, by Apple’s own acknowledgment, by electing to practice the UMTS standard, Apple considers itself licensed to the asserted patents owned by Core Wireless.”  “By its actions, Apple entered into an agreement with Standard Essential Patent owners to negotiate a FRAND royalty in good faith.”  These actions include “Apple’s implementing the GSM/GPRS and/or the UMTS standards in its products and becoming a member of the relevant standards organizations, including ETSI.”

Core Wireless alleges that Apple breached its agreement with Core Wireless by refusing to negotiate a FRAND royalty with Core Wireless, refusing to timely respond to Core Wireless’ FRAND royalty offer, and Apple’s refusal to pay a FRAND royalty.

According to Core Wireless, its outside counsel sent an email to Apple the same day that the lawsuit was filed indicating Core Wireless’ “interest in an early resolution of the underlying dispute without the need for extensive litigation.”  “This offer was ignored by Apple.”

“Core Wireless’ outside counsel next reached out a few weeks later . . . to Apple’s local counsel, again indicating Core Wireless’ interest in meeting with Apple, and the response back from Apple was that a discussion would be premature.”

A few weeks later, Core Wireless sent two separate letters to Apple, proposing that the parties negotiate a license on FRAND terms.”  Core Wireless alleges that these letters were ignored as well.

Core Wireless also alleged that, later in the year, Apple sent a letter demanding that Core Wireless provide a FRAND royalty rate to Apple.”  “After refusing Core Wireless’ offers for over eight months, Apple set a two-week deadline in which it required Core Wireless to respond to Apple’s demand.”   This letter was expressly “not pursuant to Rule 408 of the Federal Rules of Evidence,” which generally precludes offers of settlement from coming into evidence to establish liability at trial.  Core Wireless alleged that this letter demonstrates that Apple had “no intention of negotiating a FRAND license with Core Wireless, but rather was strictly looking for information to strengthen its positions in FRAND-related litigations.”

After sending the letter, Core Wireless contends that “Apple’s lead counsel in this case indicated to Core Wireless’ outside counsel that Apple ‘did not feel a meeting with Core was ripe yet.'”  Core Wireless thereafter responded to Apple’s letter, and again asked Apple to “meet for the purpose of providing a FRAND offer and negotiating a mutually acceptable FRAND license.”  “Apple refused to agree to such an offer and meeting by failing to respond to Core Wireless’s” letter.

A few weeks later, Apple sent another letter setting a two-week deadline in which it requested Core Wireless to “provide a FRAND royalty rate to Apple” without “responding, or referring, to Core Wireless'” prior letter.

Core Wireless alleged that, “[f]aced with Apple’s intentional refusal to meet or negotiate, Core Wireless made a specific FRAND royalty rate offer to Apple in writing.”  “As part of that offer, Core Wireless offered, in the alternative, to negotiate FRAND rates for the asserted patents.”  Apple allegedly did not respond to Core Wireless’ FRAND license offer.

Core Wireless contended that “Apple has gained profits by virtue of its breaches of the license agreement with Core Wireless to pay a FRAND royalty for its use of the Standard Essential Patents and its agreement with . . . Core Wireless[] to negotiate a FRAND royalty in good faith.”  Core Wireless alleged that it suffered harm as a result of Apple’s alleged breach, including “being denied of the adequate and fair reward, i.e., a FRAND royalty for the use of its Standard Essential Patents, and being forced to resolve this matter through unnecessary litigation in which Core Wireless has to pay unnecessary litigation expense and attorneys’ fees.”

Core Wireless also alleged that Apple breached its contract with ETSI by failing to respond to Core Wireless’ overtures to negotiate a FRAND rate and forcing Core Wireless to litigate the issue.  Clause 3.2 of the ETSI IPR Policy provides, in relevant part, as follows:

IPR holders whether members of ETSI and their AFFILIATES or third parties, should be adequately and fairly rewarded for the use of their IPRs in the implementation of STANDARDS and TECHNICAL SPECIFICATIONS

“By its membership in ETSI and its implementation of the ETSI standards, Apple is required to comply with this ETSI IPR Policy, including the requirement to adequately and fairly reward the Standard Essential Patent owner for the use of its patents in the implementation of GSM/GPRS and/or UMTS standards.”

Core Wireless alleged that Apple breached its contract with ETSI by refusing to negotiate and ultimately pay a FRAND royalty rate with Core Wireless.

In its prayer for relief, Core Wireless requested, inter alia, a judgment declaring that Apple is not a willing licensee to Core Wireless’ asserted Standard Essential Patents.”  Core Wireless also requested a “judgment ordering Apple to specifically perform its obligation to pay a FRAND royalty to Core Wireless according to the agreement between Apple and Core Wireless and/or according to Apple’s duty to ETSI, including a determination of the FRAND royalty rate owed by Apple to Core Wireless.”

Trial.  At trial, Core Wireless whittled its infringement case down to claims in five of its alleged standard essential patents.  In the jury instructions on damages, the court noted that, to the extent that the jury found that Apple infringed, Core Wireless was seeking damages in the amount of a reasonable royalty.  “A reasonable royalty must reflect that Core Wireless declared the asserted patents to be essential to cellular standards and committed to the [ETSI] to license the patents on ‘fair, reasonable, and non-discriminatory’ or FRAND terms.”  The court expressly noted that it was not instructing the jury “that the asserted patents are actually essential to any standard.”  That was for the jury to decide.

On several other FRAND-related issues, the parties disputed the language of the jury instructions.  It is unclear from the docket which instruction the court ultimately gave, but the parties’ positions are summarized here.

Apple proposed that the court give an instruction expressly requiring the jury to “consider any evidence of patent hold-up and royalty stacking” in “deciding what amount is a FRAND royalty.”  Core Wireless objected to this instruction because “Apple has not provided sufficient evidence on these concepts, and Apple made no more than a general argument that hold-up and staking were possibilities.”  According to Core Wireless, “[i]n order to be instructed on these concepts, Apple was required to present actual evidence at trial; it did not.” 

Core Wireless contended that, to determine FRAND, the jury should consider and apply all fifteen factors for determining a reasonable royalty set out in Georgia-Pacific Corp. v. U.S. Plywood Corp.  Apple, on the other hand, contended that the “Georgia-Pacific approach is not the only way to determine a reasonable royalty.”  Quoting the Federal Circuit’s decision in Ericsson v. D-Link, Apple argued that “‘many of the Georgia-Pacific factors simply are not relevant” and “‘many are even contrary to [F]RAND principles.'”

With respect to apportionment, Core Wireless asserted that the jury must “apportion the damages between the portion of the accused products that are the patented features or components and the unpatented features and components of the accused products.”  “In determining the amount of a reasonable royalty [the jury] may consider not only the benefit to the patentee in licensing the technology, but also the value of the benefit conferred to the infringer by use of the patented technology.”  When applying the 15 Georgia-Pacific factors, the jury “should only consider as the royalty base the portion of the value that is attributable to the patented features or components as compared to the portion of the value associated with other features or components, such as unpatented elements, features, components, or improvements developed by Apple.”  If the jury found that “the patents are standard essential then damages should be apportioned from the value of the standard as a whole and should be based on the value of the invention, not any value added by the standardization of that invention.”

Apple contended, with respect to apportionment, that the Federal Circuit’s decision in Ericsson required the jury to first apportion the patented feature from all of the unpatented features reflected in the standard.  Second, any royalty that is calculated “‘must be premised on the value of the patented feature, not any value added by the standard’s adoption of the patented technology.'”  “‘These steps are necessary to ensure that the royalty award is based on the incremental value that the patented invention adds to the product, not any value added by the standardization of that technology.'”  “‘In other words, the patent holder should only be compensated for the approximate incremental benefit derived from his invention.'”   Apple argued that “‘[t]his is particularly true for [standard essential patents].”  “‘When a technology is incorporated into a standard, it is typically chosen from among different options.'”  “‘Once incorporated and widely adopted, that technology is not always used because it is the best or the only option; it is used because its use is necessary to comply with the standard.'”  “‘In other words, widespread adoption of a standard essential technology is not entirely indicative of the added usefulness of an innovation over the prior art.'”  According to Apple, to ensure that a FRAND royalty rate reflects the incremental value of the patented technology, the jury was required to consider the following two factors in setting a FRAND royalty rate: (1) any royalty for the patented technology must be apportioned from the value of the standard as a whole; and (2) the FRAND royalty rate must be based on the value of the invention, not any value added by the standardization of that invention.

With respect to the royalty base, Apple requested that the court give an instruction requiring the jury to determine the royalty for the smallest saleable patentable unit.  Again relying on Ericsson, Apple contended that, “‘as with all patents, the royalty rate for [standard essential patents] must be apportioned to the value of the patented invention.'”  “‘In order to properly apportion the incremental value attributable to the patented technology, [the jury] must select the royalty base that reflects the value added by the patented feature, where the differentiation is possible.'”  “In the case of multi-component products, like smartphones and tablet computers, where demand for the entire product is not attributable to the patented feature,'” the jury should not “base the royalty on the price or revenues of the entire product, but instead ‘must [use] a more realistic starting point for the royalty calculation . . . often, the smallest saleable unit and, at times, even less.'”

Core Wireless objected to this instruction as “inappropriate in this case.”  According to Core Wireless, “[n]either party’s damages’ expert calculated damages based on smallest salable unit, and appropriate apportionment instructions are included elsewhere, and this is only one of many ways to ensure apportionment.”

Apple also requested that the court instruct the jury that it could calculate damages based on a one-time lump-sum royalty:  “[o]ne way to calculate a royalty is to determine a one-time lump sum payment that the infringer would have paid at the time of the hypothetical negotiation for a license covering all sales of the licensed product both past and future.” “This differs from payment of an ongoing royalty where a royalty rate is applied against future sales as they occur.”  “When a one-time lump sum is paid, the infringer pays a single price for a license covering both past and estimated future infringing sales.”  “It is up to [the jury], based on the evidence, to decide what type of royalty (if any) is appropriate in this case.”  Core Wireless objected “to the inclusion of a Lump Sum Royalty instruction as neither party’s damages expert offered any opinion on a lump sum and it is thus not relevant to the case.”

With respect to Core Wireless’ breach of contract claim, Apple disputed whether it had any contractual obligation to Core Wireless or ETSI and, in the alternative, that it did not breach any such obligation.  With respect to Apple’s breach of contract claim, Core Wireless argued that Apple waived any such claim by failing to negotiate a FRAND rate and, further, that Core Wireless’s “alleged failure to comply with a FRAND obligation is excused if [the jury] find[s] Apple previously failed to comply with a material obligation of the same agreement.”  Core Wireless also contended that Apple’s breach claim was barred by Apple’s anticipatory repudiation in the form of refusing to negotiate.

The jury subsequently determined that the accused Apple iPhone and iPad products did not infringe Core Wireless’ five asserted patents.  As a result, the jury was not required to determine infringement damages.

The jury also determined that Core Wireless had not breached its obligation to license the patents-in-suit on FRAND terms.

Note that the verdict form provided that, if the jury did determine that Core Wireless had breached its FRAND obligations, Apple could only recover nominal damages between $.01 and $1.00.  This is different from Microsoft’s recovery of damages from Motorola as a result of Motorola’s alleged breach of its obligations to license its alleged SEPs to Microsoft on RAND terms.  In the Microsoft case, a jury awarded Microsoft approximately $11 million for certain costs incurred to relocate a distribution center as a result of the alleged breach as well as approximately $3 million in attorneys fees and litigation costs incurred to defend against Motorola’s infringement claims.  Microsoft was able to collect the latter category of damages because Motorola sought injunctive relief for Microsoft’s alleged infringement.  Core Wireless’ complaint, however, did not seek injunctive relief from Apple, which may be the reason that Apple did not seek its attorneys’ fees and litigation costs as damages for Core Wireless’ alleged breach.

Innovatio files three new SEP cases against WiFi chip manufacturers

Posted in Complaints, District Courts, Litigation

This week, Innovatio IP Ventures, LLP filed three new patent infringement cases in the Northern District of Illinois against Realtek Semiconductor Corporation, Marvell Semiconductor, Inc.  and Media USA, Inc., manufacturers of WiFi chips.  The complaints are identical, save for the defendants’ names and accused products.

Innovatio alleges that the WiFi chips made and sold by each defendant comply with the Institute of Electrical and Electronics Engineers (IEEE) 802.11 WiFi standard and also infringe Innovatio patent claims held to be essential to that standard by Judge Holderman in the In re Innovatio case.  Innovatio alleges further that it offered each defendant a license at the 10 cent per-chip RAND royalty rate set by Judge Holderman , but, to date, none of them have accepted the license offer.  As a result, defendants’ WiFi chips are unlicensed, and Innovatio brought suit for infringement.

Below, we summarize the history of the In re Innovatio case, Judge Holderman’s rulings therein, and Innovatio’s three new cases.

Background of In re Innovatio

On February 28, 2011, Broadcom Corporation assigned 31 U.S. patents to Innovatio.  Prior to assigning them, however, Broadcom and two other prior owners submitted letters of assurance to the IEEE, promising to license patents essential to the 802.11 standard on either reasonable and non-discriminatory (RAND) terms or royalty-free.

After acquiring these patents, Innovatio sent letters to thousands of entities — including restaurants, coffee shops, hotels, and grocery stores — claiming that the patents were essential to the 802.11 standard and alleging infringement of same.  Innovatio sought royalties reportedly in the range of $2500-3000 from each outlet for a license to the patents.  Innovatio also began filing patent infringement suits in a variety of federal courts against entities that did not take a license.  During this same time, at least five major suppliers of WiFi equipment filed declaratory judgment actions against Innovatio seeking declarations of invalidity and non-infringement of Innovatio’s patents.  The Joint Panel on Multi-District Litigation (JPML) consolidated these actions for pretrial proceedings before Judge Holderman in the Northern District of Illinois under the case caption In re Innovatio IP Ventures, LLC Patent Litigation.

As we previously reported, Judge Holderman ruled that all of Innovatio’s asserted claims in nineteen (19) of its patetns were essential to the 802.11 standard and Innovatio was required to license them on RAND terms based on the prior assurances to IEEE.

Thereafter, the parties agreed to a bench trial on the issue of damages in order to assess prospects for early settlement before incurring the expense of a liability trial.  Judge Holderman held a six-day bench trial to determine the RAND rate to be applied to manufacturers of WiFi equipment.  Judge Holderman did not consider the RAND rate that should be applied to users of WiFi equipment.

After the trial concluded, Judge Holderman issued a lenghty RAND Ruling holding that the appropriate royalty base is the WiFi chip, “the small module that provides Wi-Fi capability to electronic devices in which it is inserted.”  Judge Holderman further ruled that the RAND rate to be paid by manufacturers of WiFi equipment for practicing claims in Innovatio’s patents that are essential to the 802.11 standard is “9.56 cents for each Wi-Fi chip used or sold by the Manufacturers in the United States.”  This amount is much lower than the $4 to $40 royalty that Innovatio was seeking at trial on each end-product using the WiFi chips.

Aftermath of the RAND Decision and Innovatio’s New Complaints

After the RAND decision issued, SonicWall, Motorola and Cisco — three of the five major WiFi equipment manufacturers involved in the suit — settled with Innovatio.   The other two, HP and Netgear, thereafter settled as well.

Innovatio’s new complaints allege that Realtek, Marvell and Mediatek are selling WiFi chips that infringe claims held to be essential in thirteen (13) of the nineteen (19) patents that were the subject of Judge Holderman’s essentiality ruling.  According to Innovatio, Judge Holderman ruled that “the use of all such claims are necessary to create a compliant implementation of either mandatory or optional portions of the normative clauses of the standard.”

Innovatio also quotes Judge Holderman’s RAND ruling, wherein he concluded that “all of the instructions to the various devices mentioned in the claims of Innovatio’s patents that operate Wi-Fi are included on the chip.”  All three complaints also tout the court’s conclusion regarding the importance of Innovatio’s patents to the 802.11 standard.

Realtek, Marvel and Mediatek are all alleged to be making, offering for sale, selling or importing “802.11-compliant products used in connection with local area networks.”  Each company’s respective offerings  are alleged to “include 802.11-chips as described in [Judge Holderman’s] Essentiality Ruling and RAND Ruling.”

Innovatio alleges that, in October and November 2013, it offered Realtek, Marvel and Mediatek a license to its standard essential patent claims “for any compliant implementation of the 802.11 standard at the $.0956 per chip rate set by” Judge Holderman.  Innovatio claims further that it thereafter communicated with representatives from each defendant or its outside counsel regarding the license offer.  “Despite the parties’ communications, they have not made any meaningful progress toward negotiating a license agreement; nor has [any defendant] applied for, or otherwise requested, a license to Innovatio’s Standard Essential Claims.”

Each of Innovatio’s complaints assert causes of action for direct infringement, induced infringement and contributory infringement of the thirteen (13) patents that were the subject of Judge Holderman’s ruling on essentiality.  Innovatio does not expressly plead which claims are essential and infringed by claim number, even though Judge Holderman’s essentiality ruling identified, by number, each claim that was concluded to be essential to the 802.11 standard.  Instead, for each asserted patent, Innovatio alleges infringement of any claim that “is necessary to create compliant implementations of mandatory or optional portions of the 802.11 standard.”

Innovatio’s prayer for relief is not expressly limited to recouping the ten cents per-chip RAND royalty for past sales of allegedly infringing chips.  Rather, the prayer for relief requests that each defendant “account for damages sustained by Innovatio as a result of [defendant’s] infringement of the Patents-in-suit to the extent, and for such infringement as Innovatio elects to recover” from each defendant, “including both pre- and post-judgment interest and costs as fixed by this Court under 35 U.S.C. § 284.”  Innovatio does not affirmatively plead a request for injunctive relief.

On Wednesday, Innovatio filed notices in the RealtekMarvell and MediaTek cases informing the court that the cases were related to the pending In re Innovatio MDL proceeding.  Each notice stated that a prior order in the MDL proceeding “provides in relevant part that ‘[a]ny tag-along actions later filed in, removed to, or transferred to this Court will be consolidated automatically with this action.”  On Thursday, the Executive Committee entered an order directing the Clerk of the Court to reassign all three cases to Judge Holderman.

 

 

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