Magistrate Judge Nathanael M. Cousins recently denied Apple’s equitable defense that sought to hold a Core Wireless standard essential patent unenforceable because the prior patent owner Nokia allegedly failed to timely disclose to the ETSI standards body a pending patent application.  Judge Cousins also entered Final Judgment based on the jury’s recent verdict that awarded a $7.3 million lump sum reasonable royalty for Apple’s infringement of two SEPs (see our Dec. 15, 2016 post on the verdict).  This case provides incremental insight into litigating issues concerning a patentee’s alleged failure to disclose intellectual property rights to a standards body, at least with respect to the equitable theories of implied waiver and equitable estoppel.

In this case, the alleged failure to disclose related to a pending U.S. patent application that claimed priority to a Finnish patent application that was filed by the patent owner and pending while the standard was being developed.  The U.S. patent application did not issue as the patent-in-suit until several years after the standard was adopted.  Within a month or so of the patent’s issue, the patent owner disclosed the patent to the standards body, which was deemed to be “shortly after [the patentee] could point to the contours of its IPR with specificity because the claims were allowed.”

This did not give rise to an inference that the patent owner was relinquishing its patent rights as required to establish implied waiver.  And Apple, who did not create or sell its adjudged infringing products until many years later, did not show that it had relied on Nokia’s failure to disclose or was prejudiced by it, as required to establish equitable estoppel. Continue Reading Court denies Apple’s equitable defense that was premised on failure to disclose patent applications to a standards body (Core Wireless v. Apple)

At the same time that Judge Gilstrap recently entered his bench trial ruling that rejected Metaswitch’s standards-based equitable defenses (see our Oct. 2, 2016 post), he also entered an Order that rejected Metaswitch’s request to set aside a jury’s verdict that it infringed valid patent claims based on, among other things, SEP-related grounds.  The ruling is interesting mainly due to the procedural issues it raises.  Judge Gilstrap did make a substantive ruling that the CableLabs, IETF and ITU-T intellectual property rights (IPR) agreements at issue applied on a patent claim-by-claim basis and not on a patent-by-patent basis (i.e., some claims in a patent may be subject to the IPR agreement, but other claims within that same patent may not). Continue Reading Judge Gilstrap rejects SEP-based arguments to set aside jury infringement and damages verdict (Genband v. Metaswitch)

Judge Gilstrap recently entered an Order that rejected various defenses raised by Metaswitch based on the prior patent owner’s (Nortel) activities in standards organizations CableLabs, the Internet Engineering Task Force (“IETF”) and the International Telecommunication Union (“ITU”).  The decision highlights the importance of considering the specific language of the standard setting intellectual property rights (“IPR”) policy and patent owner commitment at issue as well as the importance of showing that the standard incorporates the patented technology and is implemented in the accused infringing products.

For example, under the wording of the specific CableLabs IPR Agreement at issue, Judge Gilstrap ruled that (1) an entities’ commitment only applied to intellectual property (e.g., patents or applications) it owned at the time the entity made the commitment and did not apply to intellectual property that the entity later acquired and (2) a subsidiary’s intellectual property commitment did not obligate its parent entity.  Thus, although one of Nortel’s subsidiary’s that owned no patents participated in the CableLabs standards process, Nortel could hold (and later sell) patents relevant to the CableLabs standard without those Nortel patents being subject to the royalty-free licensing obligation that CableLab’s otherwise required of participants.

Further, Judge Gilstrap ruled that the accused infringer failed to show one or more material parts of the alleged standard setting obligation, such as showing that (i) the standard setting document at issue was actually an adopted standard subject to an obligation (e.g., not an expired draft or request for comment), (ii) the patented technology was incorporated into the standard (e.g., the patent claims actually are “essential” to the standard), and (iii) the accused products actually implement the standard and patented technology.  The latter requirement — e.g., show that the accused products implement the patented technology within the standard — can be particularly problematic, because accused infringer’s generally deny infringement (usually a first line of defense) and are reluctant to undermine that defense by arguing that the claims read onto their product in order to support a lower priority defense, such as the standard essential patent defenses raised here.

The decision also provides incremental insight into common equitable defenses raised in standard essential patent cases: laches, equitable estoppel, implied waiver, and implied license.  In this case, the circumstances that lead to a failure to establish breach of an expressed standard setting commitment also doomed the equitable defenses as well.  Perhaps this is not too surprising, because equity generally does not step-in when there is an adequate remedy at law–e.g., enforcement of a contractual obligation that sets the rights, obligations and expectations of the parties.  This further bolsters the importance of the language used in the specific standard setting IPR policy and specific patent owner commitment at issue when determining rights and obligations under standard essential patents subject to a standard setting obligation. Continue Reading Judge Gilstrap rejects Metaswitch’s SEP defenses based on Nortel participation in CableLabs, IETF and ITU standards bodies (Genband v. Metaswitch)

Judge Gilstrap recently denied accused infringer LG’s motion for summary judgment that alleged standard essential patents (“SEPs”) were not willfully infringed, letting that issue go to the jury;  if the jury finds willful infringement, then the court may decide whether and to what extent to enhance damages based on such willful infringement.  An important procedural point is that Judge Gilstrap did not rule that there was willful infringement in this case; rather, under the permissive summary judgment standard, he ruled that there was sufficient evidence to let the jury decide the issue.  He did rule as a matter of law, however, that there is no special rule for SEPs that precludes finding willful infringement or enhancing damages, and  he left the door open to consider policy arguments about SEPs subject to FRAND commitments when exercising discretion whether to enhance damages. Continue Reading Judge Gilstrap rules that damages can be enhanced if SEPs subject to a FRAND commitment are willfully infringed (Core Wirless v. LG)

Judge Payne recently denied  defendant LG’s motion to exclude damages expert testimony on alleged standard essential patents (SEPs) where LG challenged the experts opinion (1) because he did not start with a royalty-rate that is then adjusted  by applying Georgia-Pacific factors and (2) because he failed to apportion value to the patented feature given his reliance on the end product price.  The patents-in-suit are alleged to be essential to the GSM, UMTS/HSPA and LTE cellular standards, but the parties disagreed whether the patents are SEPs and other patents-in-suit are not alleged to be SEPs.

The decision sheds some incremental insight on the entire market value rule (EMVR) that concerns when one can use the end product as the royalty base.  The court considered it a rule of evidence for U.S. jury trials to avoid jury confusion and found that the expert properly considered the end product price to assess profitability of the accused device, but otherwise did not rely on the end product as a royalty base.  He ruled that the expert may rely on that end product price in his analysis, but he cannot “publish” (i.e., disclose) that end product price to the jury given the EMVR’s “important evidentiary principle” that “care must be taken to avoid misleading the jury by placing undue emphasis on the value of the entire product” and concern that “diclosure of the end product’s total revenue cannot help but skew the damages horizon for the jury, regardless of the contribution of the patented component to this revenue.” Continue Reading Judge Payne applies “important evidentiary principle” to preclude telling jury about end product price (Core Wireless v. LG)

Yesterday, Judge Andrews in the District of Delaware issued an Order that denied InterDigital’s motion to dismiss Microsoft’s Complaint that alleged violation of antitrust laws based on InterDigital’s enforcement of patents alleged to be essential to 3G and 4G cellular ETSI standards and subject to commitments to license on fair, reasonable and non-discriminatory (“FRAND”) terms.  At this early procedural stage of the case, the issue was not whether Microsoft would prevail in the case or whether the allegations in the Complaint were true; rather, at this initial case stage Judge Andrews considered whether Microsoft had stated “plausible” claims against InterDigital upon which relief could be granted if what Microsoft alleged in the Complaint was true when viewing the Complaint in a light most favorable to Microsoft.  He decided that was the case and is allowing the case to proceed.

This ruling itself is not necessarily important as a precedential matter given the relatively low threshold for surviving a motion to dismiss and inability to challenge the factual assertions, but this will be an interesting case to follow as it matures because it is one of the few contemporary instances of a U.S. court considering the application of competition law to standard essential patents (“SEPs”) with sophisticated parties on both sides of the issue. Continue Reading Judge Andrews permits Microsoft’s SEP-based antitrust claims against InterDigital to proceed (Microsoft v. InterDigital)

Yesterday, the Ninth Circuit court of appeals issued a decision affirming Judge Robart’s RAND decision in the much watched Microsoft v. Motorola case, basically ruling that the determination of a reasonable and non-discriminatory (RAND) royalty rate and Motorola’s breach of its RAND commitments were reasonable based on the specific procedural and evidentiary issues presented.  This case provides good insight into procedural and evidentiary issues that those litigating standard essential patents (SEPs) should consider, which can have a significant impact on the outcome of a case, as they did here.

Background

This case is but one of many between Microsoft and Motorola.  In early October 2010, Microsoft sued Motorola for patent infringement of smartphone-related patents in both the U.S. International Trade Commission (ITC) and W.D. Washington district court.  Later that month, Motorola sent two letters to Microsoft offering a license under Motorola patents asserted to be essential to the IEEE 802.11 WiFi standard and the ITU-T H.264 video encoding standard, respectively, and seeking a royalty of 2.25% of the price of Microsoft end products that use that technology — e.g., XBox with WiFi or Windows with video encoding capability. (see our April 25, 2013 post for more detail about the pre-suit timeline).  A week or so later, Microsoft filed the instant case against Motorola seeking a declaratory judgment that Motorola had breached its RAND licensing obligations. (see our May 6, 2013 post for a review of the initial pleadings).  Motorola then sued Microsoft in W.D. Wisconsin district court seeking to enjoin Microsoft from using the H.264 patents and also sued Microsoft in the ITC seeking to exclude importation of Microsoft’s Xbox products.  The district court cases were consolidated before Judge Robart in W.D. Washington district court.

German Injunction.  In the meantime, the global patent dispute between the parties continued.  In July 2011, Motorola sued Microsoft in Germany for infringing a German patent directed to the H.264 video encoding standard.  A trial was held in December 2011 and several months later, in April 2012, the German court awarded Motorola an injunction against Microsoft.  While that German action was pending, Microsoft relocated one of its distribution centers out of Germany given the injunction threat.  The German injunction is not self enforcing; rather, Motorola must post a bond to secure Microsoft against damages caused by the injunction if it ultimately is overturned on appeal and Microsoft also would have an opportunity to seek a stay of that injunction.

Microsoft also asked Judge Robart in the instant case to enjoin Motorola from seeking any injunctions — including enforcement of any injunction awarded in the German action — pending resolution of the SEP issues presented in this case.  Judge Robart granted that injunction.  In a decision to haunt Motorola later, Motorola appealed Judge Robart’s injunction ruling to the Ninth Circuit–rather than the Federal Circuit–where Motorola argued that “[b]ecause Microsoft’s complaint is pleaded in terms of contractual rather than patent rights”, appellate jurisdiction properly lies withing the regional circuit’s general jurisdiction (the Ninth Circuit), rather than the Federal Circuit’s subject matter jurisdiction over patent law.  The injunction was affirmed by the Ninth Circuit, which ruled that it properly had jurisdiction over the case (see our May 6, 2013 post discussing the injunction and appeal).  In November 2012, Judge Robart later granted Microsoft’s motion to dismiss Motorola’s claims for injunctive relief and barring Motorola from seeking such relief against Microsoft in any country based on patents essential to the 802.11 WiFi or H.264 video encoding standards. (see our Jan. 3, 2013 post).

Soon thereafter, in January 2013, the U.S. Federal Trade Commission (FTC) announced a consent decree agreement with Google/Motorola (Google having acquired Motorola Mobility in 2012) where Motorola agreed to a specific procedure for licensing SEPs before Motorola would seek injunctive relief, which procedure includes an opportunity for a tribunal to determe licensing terms. (see our Jan. 3, 2013 post).

RAND Determination (Bench Trial).  In November 2012, Judge Robart held a bench trial to determine what would be a range of reasonable RAND royalty rates as well as what would be the specific RAND royalty rate to apply here.  He later requested and received additional submissions about a licensing agreement that Google– which now owned Motorola–had entered with MPEG LA on a patent pool directed to the H.264 standard. (see our Jan. 24, 2013 post,  Feb. 22, 2013 post and Mar. 4, 2013 post).

On April 25, 2013, Judge Robart issued a first-of-its-kind ruling to set a RAND royalty for the Motorola 802.11 and H.264 patents with respect to Microsoft’s alleged infringing products. (see our April 25, 2013 post; see also our May 1, 2013 post for annotated version of this decision).  He found a RAND royalty rate of 0.555 cents per unit (from a reasonable RAND range from 0.555 to 16.389 cents per unit) for Motorola’s H.264 video encoding patents.  He found a RAND royalty rate of 3.471 cents per unit (in a range from 0.8 to 19.5 cents per unit) for Motorola’s 802.11 WiFi patents.  Both of these rates fell very far below the 2.25% of the end unit selling price (about $4.50 per $199 Xbox) that Motorola requested in its initial offer letters that led Microsoft to file the instant case.

Judge Robart’s over-200-page decision was premised on a modified Georgia-Pacific royalty rate with “economic guideposts” in which he removed factors deemed at odds with an obligation to license patents on a non-discriminatory basis — e.g., remove a factor that would consider whether parties are competitors, which typically would indicate a higher royalty rate would be sought if a patent owner were licensing a competitor to use the technology. (see our Apr. 26, 2013 post on the modified Georgia-Pacific analysis).

Breach Determination (Jury Trial).  The next step was determining whether Motorola breached its RAND commitment.  Judge Robart ruled that this was a fact sensitive issue for the jury that was not controlled by any single fact detached from the underlying circumstances — e.g., Motorola’s seeking an exclusion order or the high amount sought in Motorola’s initial license offer to Microsoft. (see our Aug. 12, 2013 post).  The jury trial started in August 2013 and the jury ultimately found that Motorola breached its RAND obligations. (see our Sep. 4, 2013 post; see also our Aug. 27, 2013 post previewing the jury trial).

A few weeks later, Judge Robart ruled that sufficient evidence supported the jury’s verdict.  He found that the essence of Microsoft’s various RAND-breach theories to be “whether Motorola’s conduct violated the duty of good faith and fair dealings.”  No particular factors were deemed dispositive by themselves, but evidence of Motorola’s course of conduct supported the verdict, including factors relating to Motorola’s initial offer letters, Motorola’s seeking injunctive relief, and Motorola’s going after Microsoft based on WiFi chips within the accused products, rather than going after the WiFi chip manufacturer Marvell. (see our Sep. 26, 2013 post).

Judge Robart then issued a Rule 54(b) judgment–i.e., a final judgment on some, but not all, claims–that would allow the parties to appeal the RAND issues while the remaining claims in the case were stayed pending the appeal.  Specifically, he entered Rule 54(b) judgment in Microsoft’s favor on (1) Microsoft’s breach of contract claim; (2) Judge Robart’s prior RAND ruling; and (3) Motorola’s claim for a declaration that Microsoft repudiated RAND licensing rights by not negotiating a license. (see our Nov. 12, 2013 post).

Appeal To Ninth Circuit Via Federal Circuit.  Motorola promptly appealed to the Federal Circuit, which may have been deemed a more favorable forum for a patent owner than the a generalist regional court such as the Ninth Circuit.  But Microsoft move to transfer the case to the Ninth Circuit because, among other things, Motorola previously appealed the injunction issue to the Ninth Circuit, which ruled it had jurisdiction over the matter as a contract action.  Without deciding the merits of whether the Federal Circuit or Ninth Circuit had jurisdiction, the Federal Circuit agreed that law of the case required the Federal Circuit to respect the Ninth Circuit’s ruling that it has appellate jurisdiction over this matter.  So the appeal was transferred to the Ninth Circuit. (see our May 5, 2014 post; for summary of the parties briefs on the motion, see our Nov. 25, 2013 post, Dec. 10, 2013 post and Dec. 16, 2013 post).

The appeal then proceeded in the Ninth Circuit. (see our Apr. 7, 2015 post discussing party and amicus briefs).  The Ninth Circuit held oral argument in April 2015.  One of the appeal issues that became clearer during argument was Motorola’s challenge to Judge Robart’s bifurcated procedure where (1) the judge held a bench trial and determined a RAND royalty rate and range and then (2) held a jury trial to determine whether Motorola breached its RAND obligation.  Motorola argued this was prejudicial error, because the jury was required to accept the judge determined RAND rate without Motorola challenging any of the basis that supported it.  Microsoft argued that Motorola had agreed to this procedure and cannot be heard to complain about it now. (see our Apr. 8, 2015 post summarizing the argument and providing link to video of argument; see also our Apr. 7, 2015 post that summarized the case up to the date of oral argument).

Decision

 Contract Case or Patent Case.  The first issue was whether the Ninth Circuit or the Federal Circuit has appellate jurisdiction over this case.  The court ruled that its exercising jurisdiction over the injunction interlocutory appeal as well as the Federal Circuit’s decision to transfer the case to the Ninth Circuit were both law of the case.  That doctrine requires substantial deference to those prior decisions on appellate jurisdiction except in certain circumstances, such as the prior decision was clearly erroneous, there have been changed circumstances or to avoid manifest injustice.  None of those circumstances existed here.

In applying the law of the case standard, the court ruled that a contract dispute does not arise under law merely because the contract is a patent license:

A complaint that alleges breach of contract and seeks damages sounds in contract; its nature does not change because the contract is a patent license.   Even if a court, in interpreting a contract and assessing damages, deems it appropriate to apply the law of patent infringement, that of itself does not change the complaint into one arising under the patent law.

Motorola points out that the Federal Circuit has exercised jurisdiction in some breach-of-contract cases.  But those cases involved questions of patent infringement, patent validity, or claim construction, or included an embedded, outcome-determinative interpretation of a patent law statute.  This case, in contrast, is a straight breach of contract action.

Calculation of appropriate royalty amounts in contractual patent license cases involves similar determinations to those that arise when calculating damages in patent infringement cases.  So there is some overlap in that regard between breach of patent license cases and Federal Circuit patent infringement cases.  But Motorola has cited no case in which the Federal Circuit has exercised jurisdiction over a breach of contract claim for damages where the mode of calculating contract damages, not any pure patent issue, was at stake.  [internal quotations ommitted].

In another part of the decision, the court similarly stated that reference to Federal Circuit patent damages law may be proper in the contract action, but does not convert this into a patent case:

We reiterate that this is not a patent law action.  Still, the Federal Circuit’s patent law methodology can serve as guidance in contract cases on questions of patent valuation.  The district court’s analysis properly adapted that guidance to the current context.

Motorola Consented To Bench Trial on RAND Royalty Rate.  The court ruled that Motorola affirmatively consented to Judge Robart having a bench trial, rather than a jury trial, to determine a RAND royalty rate for each SEP portfolio.  The court found that Judge Robart “quite reasonabley” determined that a “true RAND royalty rate for Motorola’s SEPs was an important fact for the jury to consider in determining whether Motorola breached its good faith obligations under the RAND agreements.”  Judge Robart asked the parties how they would like to proceed in determining that and both parties agreed that “the court [will] decide all the material terms of the RAND license.”  But they left open the question of who would determine “the question of Motorola’s breach of its contractual obligation of good faith and fair dealing”, which Motorola later requested be determined by a jury.

In deciding that Motorola had waived a jury trial on this issue, the court did make special note that Motorola had not raised to Judge Robart or the Ninth Circuit a “Seventh Amendment claim [of right to trial by jury] with respect to the RAND rate bench trial itself.”  Given Motorola’s waiver, “[w]e therefore do not consider whether, absent consent, a jury should have made the RAND determination.”

Hypothetical Negotiation Date.  The court’s review of the hypothetical negotiation — or what they called a “Hypothetical Agreement” — focused mainly on Motorola’s argument about the date of such hypothetical.  The court found that the method for calculating a RAND rate was “generally [consistent] with Motorola’s approach” and that “[g]enerally, the court credited Motorola’s experts; where it did not, it provided reasoned explanations for not doing so,” stating:

The framework settled on was “generally [consistent] with Motorola’s approach.”  Applying that approach, the district court sought to approximate the royalty rates upon which the parties would have agreed by setting up a hypothetical negotiation between the parties.  In doing so, the court carefully thought through the “factors an SEP owner and implementer woudl consider” in an actual negotiation directed at licensing a patent subject to RAND commitments.  The court then discussed each of Motorola’s fifteen H.264 patents and eleven 802.11 patents, considering the objective value each contributed to each standard, given the quality of the technology and the available alternatives as well as the importance of those technologies to Microsoft’s business.  Finally, the court performed a meticulous analysis of the testimony of eighteen witnesses, including executives, economists, and technology experts, to sort out which evidence to rely upon in determining the RAND royalty rate.  Generally, the court credited Motorola’s experts; where it did not, it provided reasoned explanations for not doing so.

The court found that Motorola’s primary challenge was the requirement in Georgia-Pacific Factor 15 that the hypothetical negotiation occurs “at ‘the time the infringement began.'”  The court agreed that Judge Robart had, to some extent, considered “the present-day value to Microsoft of Motorola’s patents,” but ruled that “[t]his partial present-day focus did not … render the district court’s RAND-rate determination invalid.”  The court gave four reasons here.

First, the Federal Circuit has “never described the Georgia-Pacific factors as a talisman for royalty rate calculations” and agreed with Judge Robart’s approach to eliminate or modify factors to fit the circumstances of the case presented.  Here, Microsoft claimed that Motorola’s breach of contract was on-going, so Judge Robart reasonably could have “include[d] the present-day value of Motorola’s SEPs as a factor in calculating the RAND rate-and-range for use in the breach-of-contract proceeding.”

Second, “Motorola never specifies the past date the district court should have used.”  Motorola referred to both the date Microsoft’s alleged patent infringement began and the date Motorola sent Microsoft offer letters; but “Motorola did not mention either date in putting forth its version of the hypothetical negotiation analysis in its post-trial brief.”  Further, “the ‘infringement’ at issue in this case is Motorola’s breach of contract, not Microsoft’s use of Motorola’s patents,” and such breach “was not tied to any specific date.”

Third, both parties offered “volumes of data” and “Motorola itself” urged Judge Robart to consider studies and reports from different time frames.  Thus, “[a]s the data presented was not pinpointed to a past date, the district court’s approximation from that data also could not be tied to a specific historical moment.”

Fourth, “Motorola has not shown–nor has it even argued–that it was prejudiced by the court’s analysis.”  Rather, Motorola pointed to only one material change since the dispute began: Google bought Motorola in 2012.  Judge Robart considered Google’s broad commercial interests in the patent pools.  But Motorola explained no prejudice from that:

But Motorola has not explained how it was prejudiced by consideration of Google’s interests.  In fact, Microsoft maintains, persuasively, that Motorola benefited from the court’s conflation of Google and Motorola, as Google, a “sophisticated, substantial technology firm[] with [a] vast array[] of technologically complex products,” would obtain more value from the pool than would Motorola as an independent entity.

The court concluded that Judge Robart properly applied the hypothetical approach under the circumstances:

In sum, given the need for flexibility in determining a royalty rate for a RAND-encumbered patent, and given that Motorola has not shown that the court’s consideration of the companies’ circumstances at the time of the bench trial prejudiced it, the district court’s RAND order properly applied the hypothetical agreement approach.

Comparable Licenses.  The court next considered Motorola’s argument that Judge Robart put too much emphasis on patent pools and not enough on Motorola’s historical licenses.  Judge Robart did credit Motorola’s experts concern that patent pools  license at lower rates than licenses entered in bilateral negotiations given, for example, non-monetary value in the patent pools such as grant-back of licenses to other pool member patents.  But he accounted for that by multiplying the pool rates by three.  Although Motorola argued this still was not enough, this was just one factor Judge Robart used and, for the 802.11 patents, it ended up “being the most favorable to Motorola.”

For the H.264 patents, the patent pool considered “were essential to the same technical standards, and Motorola provided no evidence that its patents were more valuable than the other patents in the pool”; “[i]fi anything, the record indicates that Motorola’s patents were on average less valuable than other H.264 patent.”

Many of the Motorola patents apply only to interlaced rather than (the more advanced) progressive video.  Motorola offered some evidence suggesting that interlaced video coding was still valuable to Microsoft, but it did not show that support for interlaced video was more important to Microsoft than other video-coding capabilities.  Motorola therefore was not prejudiced by the court’s assumption that its patents were of roughly equal value to those in the pool, as they probably were worth less.

With respect to Motorola’s historical licenses showing royalty rates close to the 2.25% Motorola offered Microsoft, “[i]n the current context … it was not clear error to reject the past licenses as too contextually dissimilar to be useful to the RAND rate calculation.”

Judge Robart “reasonably concluded that … VTech licenses were not reliable indicators of the RAND royalty rate” where VTech entered a license under Motorola’s cell phone patents to avoid litigation and “paid only trivial royalties” for the 802.11 and H.264 part of the much broader licensing agreement.

The RIM Agreement provided a blended rate for all Motorola patents (whether or not essential to a standard) that made it “impracticable to isolate, or apportion the value of the 802.11 and H.264 SEPs, particularly given the evidence that Motorola’s cell phone patent portfolio was highly valuable and likely dictated the terms of the agreement.”  Further, the RIM agreement was entered “to resolve an ongoing infringement dispute … further diminishing its trustworthiness as an indicator of a free-standing RAND rate.”

Similarly, the Symbol Technology agreements were “formed under threat of litigation, included monetary caps, and provided licenses for Motorola patents that expired before Motorola and Microsoft’s hypothetical agreement would have occurred.”

Thus, Judge Robart “provided reasonable explanations for giving the Motorola bilateral licenses little to no weight” and “Motorola does not address any of those explanations.”

Based on the foregoing, the court affirmed Judge Robart’s royalty rate determination, stating:

In sum, in determining the RAND rate and range for each SEP portfolio, the district court engaged in a thoughtful and detailed analysis, giving careful consideration to the parties’ briefing and evidentiary submissions, and to the testimony.  Although Motorola criticizes the district court’s approach, it provides no alternative other than strict adherence to the Georgia-Pacific factors, without accounting for the particulars of RAND agreements–a rigid approach disapproved of by the Federal Circuit in Ericsson.  We conclude that the court’s RAND determination was not based on a legal error or on a clearly erroneous view of the facts in light of the evidence.

Jury’s Breach Verdict.  The court found that evidence supported the jury’s verdict that Motorola breached its RAND commitment based on Motorola’s injunction related activity and overall course of conduct, where “the only damages argued for and awarded were tied to the fees for defending the injunctive actions and the costs of moving Microsoft’s European distribution facility out of Germany.”  The court noted that, for the allged breach based on Motorola’s injunction action, the jury was instructed that it should consider the following factors “alone or in combination”:

(1) Whether Motorola’s actions were contrary to the reasonable and justified expectations of other parties to the contract; (2), whether Motorola’s conduct would frustrate the purpose of the contract; (3), whether Motorola’s conduct was commercially reasonable; (4), whether and to what extent Motorola’s conduct conformed with ordinary custom or practice int he industry; (5) to the extent the contract vested Motorola with discretion in deciding how to act, whether Motorola exercised that discretion reasonably; (6), subjective factors, such as Motorola’s intent and whether Motorola had a bad motive.

Microsoft presented “significant evidence” under those instructions for a jury to “infer that the injunctive actions violated Motorola’s good faith and fair dealing obligations.”  The “jury could conclude that Motorola’s actions were intended to induce hold-up, i.e., to pressure Microsoft into accepting a higher RAND rate than was objectively merited, and thereby to frustrate the purpose of the contract.”  For example, consumers would not buy Microsoft products that were enjoined from having WiFi or playing back standard video.  Motorola’s requested royalty also was “significantly higher” than the court determined RAND rate, “suggest[ing] that Motorola sought to capture more than the value of its patents by inducing holdup.”  Further, Motorola filing the lawsuit immediately after expiration of the time Motorola requested for Microsoft to respond to the initial license offers indicated that the offers were just for show so that Motorola could at least say it had made an offer.

Motorola also filed the injunction suits after Microsoft filed the instant suit.  The instant suit could establish RAND rates to ultimately compensate Motorola so that Motorola would not suffer the irreparable harm needed to support injunctive relief:

Motorola’s injunction suits were also brought after Microsoft filed its breach of contract lawsuit with the district court.  At that point, Motorola was aware that the present lawsuit could establish RAND rates.  A patentee subject to FRAND commitments may have difficulty establishing irreparable harm.

Here, had Motorola accepted the RAND rates, it would then be fully compensated for Microsoft’s infringing use. The jury could have inferred, from that circumstance, that the injunctive actions were not motivated by a fear of irreparable harm, as payment of the RAND rate would eliminate any such harm.  In the absence of a fear of irreparable harm as a motive for seeking an injunction, the jury could have inferred that the real motivation was to induce Microsoft to agree to a license at a higher-than-RAND rate.  [internal citations omitted].

Further, Motorola had “knowledge that pursuing an injunctive action could breach its duty of good faith and fair dealing” based on the FTC investigation that culminated in a consent decree limiting circumstances when Motorola would seek injunctive relief.

The court made clear that the foregoing evidence may support the jury verdict, but “is susceptible to contrary interpretations as well.”  Here, “it was for the jurors to assess witness credibility, weight the evidence, and make reasonable inferences.”

Damages.  The court considered Motorola’s argument that damages based on Microsoft’s attorneys fees and litigation costs in connection with the injunction activity is barred by the Noerr-Pennington doctrine, which is a First Amendment right to access the courts that shields individuals from liability for engaging in litigation.  But courts have found that doctrine “does not protect patent holders from liability for asserting rights in violation of a commitment not to enforce those rights.”  The court ruled that “[e]nforcing a contractual commitment to refrain from litigation does not violate the First Amendment; if it did, every settlement of a lawsuit would be unenforceable as a Noerr-Pennington violation,” stating:

As we explained in Microsoft I, a patent-holder who signs “such a sweeping promise” as a RAND agreement “at least arguably … guarantee[s] that the patent-holder will not take steps to keep would-be users from using the patented material, such as seeking an injunction, but will instead proffer licenses consistent with the commitment made.”

The jury concluded that in these specific circumstances, seeking injunctive relief violated Motorola’s contractual RAND obligations. The Noerr-Pennington doctrine does not immunize Motorola from liability for that breach of its promise.

The court limited its ruling to the instant jury determination in these circumstances, and held that a RAND commitment does not always preclude filing an injunction action:

We agree with the Federal Circuit that a RAND commitment does not always preclude an injunctive action to enforce the SEP.  For example, if an infringer refused to accept an offer on RAND terms, seeking an injunctive relief could be consistent with the RAND agreement, even where the commitment limits recourse to litigation.  The pertinent question is whether Motorola’s obligation of good faith and fair dealing under its RAND agreements precluded it from seeking an injunction in these circumstances.  That question was for the jury to decide. [emphasis in original]

The court also went through a rather long analysis of whether Washington state law precluded an award of attorneys fees as damages.  The court ultimately concluded such damages would be allowed by a Washington court “where a party’s injunctive actions to enforce a RAND-encumbered patent violate the duty of good faith and fair dealing.”

Evidentiary Rulings.  The court reviewed two evidentiary rulings and ruled that Judge Robart did not abuse his discretion in allowing the challenged evidence.

First, Motorola challenged Judge Robart allowing the jury to receive not only the court’s bench trial RAND royalty rate determination ruling, but the full findings of fact and law of the opinion supporting that determination.  The court found this was a “close[] question.”  It ultimately ruled there was no abuse of discretion given that Motorola had waived its right to trial by jury on the RAND rate determination issue and Motorola had agreed to the bifurcated procedure.  Allowing the jury to make its own underlying factual findings that underly the judge-determined RAND rate would render that judge-determination “a nullity–a bare set of numbers, divorced from their context and meaning.”

Second, Motorola challenged the admission of evidence concerning the FTC investigation of Motorola that culminated in the FTC-Google/Motorola consent decree concerning injunctive relief for SEPs.  Although consent decrees may not be admitted to prove the truth of the government’s allegations underlying the consent decree, they may be used for other purposes such as showing notice or knowledge.  Here, the evidence was entered “to show that Motorola was aware the FTC (and Microsoft) found its conduct questionable enough to merit investigation.”  Further, this evidence “was undoubtedly probative” given similar issues in the instant case and the FTC investigation, which could have led the jury to believe the FTC instituted the investigation because it may have merit and to infer that Motorola settled because it believe its actions were wrongful.  Any prejudice from this would be cumulative of the submission of that stemming from admission into evidence of the FTC’s statement in the ITC proceedings.  And Motorola did not object to admission of that evidence.

Today, a European Union high court issued a ruling that provides guidance on what steps the owner of a FRAND-encumbered patent that may be essential to a standard should take before seeking injunctive relief.  The court also ruled that a willing licensee should act without delay, provide a counter-offer, and actively pay royalties (in trust or otherwise) for past and on-going use of the patent while the parties negotiate toward a FRAND license.  The court further ruled that there was no specific pre-filing steps needed for the owner of a FRAND-encumbered patent to file suit seeking solely an accounting and monetary relief for past infringement (i.e., not injunctive).

Background

The case involves patent owner (“proprietor”) Huawei asserting a European patent alleged essential to the Long Term Evolution (LTE) standard against alleged infringer ZTE.  That patent was subject to a commitment to license the patent on fair, reasonable and non-discriminatory terms (FRAND) made to the European Telecommunications Standards Insitute (ETSI).

ETSI has intellectual property right (IPR) policies that concern patents that are essential to ETSI standards.  A patent is essential to the standard where it is not possible on technical grounds to make equipment that complies with the standard without infringing the patent.  ETSI’s IPR policy provides that patent owners should be adequeately and fairly rewarded for the use of their patented technology, but also seeks to guard against such patents making standardized technology unavailable.  Thus ETSI seeks a balance between the needs of standardization for public use and the rights of patent owners.

To this end, ETSI participants are required to timely disclose their patents that are essential to an ETSI standard.  In response to such disclosure, ETSI will ask the patent owner to give an irrevocable FRAND commitment.  ETSI is supposed to determine whether to suspend work on adopting the standard until such a commitment is received.  ETSI does not check whether the patent actually is essential or valid.  Further, ETSI does not define what would be a “license on FRAND terms.”

In April 2011, patent owner Huawei brought an action in German court against ZTE for infringing the LTE patent following failed negotiations.  The parties had been in negotiations from November 2010 until end of March 2011.  Huawei offered what it considered a FRAND royalty and ZTE responded with a cross-license offer.  No agreement was reached, though ZTE continued to sell LTE devices.  In its lawsuit, Huawei sought both injunctive and monetary relief.

The German court stayed its proceedings and referred specific issues to this European Union high court dealing with competition issues, based on the following questions:

(1) Does the proprietor of [an SEP] which informs a standardisation body that it is willing to grant any third party a license on [FRAND] terms abuse its dominant market position if it brings an action for an injunction against a patent infringer even though the infringer has declared that it is willing to negotiate concerning such a license? or

Is an abuse of the dominant market position to be presumed only where the infringer has submitted to the proprietor of the [SEP] an acceptable, unconditional offer to conclude a licensing agreement which the patentee cannot refuse without unfairly impeding the infringer or breaching the prohibition of discrimination, and the infringer fulfils its contractual obligations for acts of use already performed in anticipation of the license to be granted?

(2) If abuse of a dominant market position is already to be presumed as a consequence of the infringer’s willingness to negotiate:

Does Article 102 TFEU lay down particular qualitative and/or time requirements in relation to the willingness to negotiate?  In particular, can willingness to negotiate be presumed where the patent infringer has merely stated (orally) in a general way that it is prepared to enter into negotiations, or must the infringer already have entered into negotiations by, for example, submitting specific conditions upon which it is prepared to conclude a licensing agreement?

(3) If the submission  of an acceptable, unconditional offer to conclude a licensing agreement is a prerequisite for abuse of a dominant market position:

Does Article 102 TFEU lay down particular qualitative and/or time requirements in relation to that offer?  Must the offer contain all the provisions which are normally included in licensing agreements in the field of technology in question?  In particular, may the offer be made subject to the condition that the [SEP] is actually used and/or is shown to be valid?

(4) If the fulfilment of the infringer’s obligations arising from the licence that is to be granted is a prerequisite for the abuse of a dominant market position:

Does Article 102 TFEU lay down particular requirements with regard to those acts of fulfilment?  Is the infringer particularly required to render an account for past acts of use and/or to pay royalties?  May an obligation to pay royalties be dischared, if necessary, by depositing a security?

(5) Do the conditions under which the abuse of a dominant positoin by the proprietor of a[n SEP] is to be presumed apply also to an action on the ground of other claims (for rendering of accounts, recall of products, damages) arising from a patent infringement?

Article 102 of the Treaty on the Functioning of the European Union (TFEU), referenced above, states as follows:

Any abuse by one or more undertakings of a dominant position within the internal market or in a substantial part of it shall be prohibited as incompatible with the internal market in so far as it may affect trade between Member States.

Such abuse may, in particular, consist in:
(a) directly or indirectly imposing unfair purchase or selling prices or other unfair trading conditions;
(b) limiting production, markets or technical development to the prejudice of consumers;
(c) applying dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage;
(d) making the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such contracts.

 Decision

The European high court answered the questions above as follows:

1.  Article 102 TFEU must be interpreted as meaning that the proprietor of a patent essential to a standard established by a standardisation body, which has given an irrevocable undertaking to that body to grant a licence to third parties on fair, reasonable and non-discriminatory (‘FRAND’) terms, does not abuse its dominant position, within the meaning of that article, by bringing an action for infringement seeking an injunction prohibiting the infringement of its patent or seeking the recall of products for the manufacture of which that patent has been used, as long as:

prior to bringing an action, the proprietor has, first, alerted the alleged infringer of the infringement complained about by designating that patent and specifying the way in which it has been infringed, and, secondly, after the alleged infringer has expressed its willingness to conclude a licensing agreement on FRAND terms, presented to that infringer a specific, written offer for a licence on such terms, specifying, in particular, the royalty and the way in which it is to be calculated, and

where the alleged infringer continues to use the patent in question, the alleged infringer has not diligently responded to that offer, in accordance with recognised commercial practices in the field and in good faith, this being a matter which must be established on the basis of objective factors and which implies, in particular, that there are no delaying tactics.

2.  Article 102 TFEU must be interpreted as not prohibiting, in circumstances such as those in the main proceedings [i.e., the stayed German action], an undertaking in a dominant position and holding a patent essential to a standard established by a standardisation body, which has given an undertaking to the standardisation body to grant licenses for that patent on FRAND terms, from bringing an action for infringement against the alleged infringer of its patent and seeking the rendering of accounts in relation to past acts of use of that patent or an award of damages in respect of those acts of use.

The court started by noting the balance it must strike between “maintaining free competition” based on “Article 102 TFEU prohibit[ing] abuses of a dominate position” and “the requirement to safeguard th[e] proprietor’s intellectual-property rights and its right to judicial protection.”  The court further noted the limits of its ruling, stating that, in this case, “the existence of a dominant position has not been contested” and the questions to be addressed “relate only to the existence of an abuse”, thus “the analysis must be confined to the latter criterion.”

FRAND-Encumber SEPs Differ From Other Patents.  The court stated that filing a lawsuit for patent infringement “forms part of the rights of the proprietor of an intellectual-property right” and normally is not an abuse of a dominant position.  But there are “exceptional circumstances” when it may be an abuse.  This case presents two distinguishing features from most patents.  First, it involves a standard essential patent (SEP) that, unlike other patents, can preclude competitors from making standard compliant products.  Second, the patent “obtained SEP status only in return for the proprietor’s irrevocable undertaking … that it is prepared to grant licences on FRAND terms.”  Thus, a refusal to grant such a license “may, in principle, constitute an abuse within the meaning of Article 102 TFEU.”

Balance High Level of Protection Given Patent Rights.  The court noted that applicable law “provides for a range of legal remedies aimed at ensuring a high level of protection for intellectual-property rights in the internal market, and the right to effective judicial protection.”  This counsels not hindering a patent owner’s right to seek judicial relief and requiring a user to obtain a license before using the patented technology:

This need for a high level of protection for intellectual-property rights means that, in principle, the proprietor may not be deprived of the right to have recourse to legal proceedings to ensure effective enforcement of his exclusive rights, and that, in principle, the user of those rights, if he is not the proprietor, is required to obtain a licence prior to any use.

This is balanced with considerations for FRAND-encumbered SEPs, which “justif[ies] the imposition … of an obligation to comply with specific requirements when bringing actions against alleged infringers for a prohibitory injunction.”

First Step – Prior Notice to Infringer.  The court thus ruled that, before bringing suit for injunctive relief, an SEP owner must “first … alert the alleged infringer of the infringement complained about by designating that SEP and specifying the way in which it has been infringed.”  One reason for this is that, because there are a large number of patents that may be essential to a standard, the accused infringer may not “necessarily be aware that it is using the teaching of an SEP that is both valid and essential to a standard.”

Second Step – Written FRAND Terms.  If, after notice, the alleged infringer “expressed its willingness to conclude” a FRAND license, the SEP owner must then provide “a specific, written offer for a licence on FRAND terms … specifying, in particular, the amount of the royalty and the way in which that royalty is to be calculated.”  The court explained it was proper to have the SEP owner make such an offer, who may have nonpublic agreements with other licensees, since the patent owner “is better placed to check whether its offer complies with the condition of non-discrimination than is the alleged infringer.”

Accused Infringer’s Obligation.  An accused infringer has its own obligations before it can take advantage of a FRAND defense.

First, if an accused infringer objects to the proferred license offer, it must submit, “promptly and in writing, a specific counter-offer that corresponds to FRAND terms.”  This response must be in “good faith” with “no delaying tactics”:

[I]t is for the alleged infringer diligently to respond to that offer, in accordance with recognised commercial practices in the field and in good faith, a point which must be established on the basis of objective factors and which implies, in particular, that there are no delaying tactics.

Second, if its counter-offer is rejected, an accused infringer who already has been selling or otherwise using the technology before a license is entered must provide “appropriate security” for the past use of the technology and render an account of same:

The calculation of that security must include, inter alia, the number of the past acts of use of the SEP, and the alleged infringer must be able to render an account in respect of those acts of use.

Third-Party Royalty Determination.  If the parties do not reach agreement, they can seek a “royalty determined by an independent third party, by decision without delay.”

Can Challenge Patent.  The court ruled that, because the standard setting body did not determine essentiality or validity, the accused infringer should be allowed to challenge whether the patent is infringed, essential or valid during the negotiations or to reserve the right to do so in the future.

No Abuse If Seeking Past Money Damages.  The court ruled that “seeking the rendering of accounts in relation to past acts of use of [an] SEP or an award of damages in respect of those acts” are not an abuse of dominance, because such actions “do not have a direct impact on products complying with the standard … appearing or remaining on the market.”

Today, the Supreme Court declined to overrule its prior decision in Brulotte v. Thys Co., 379 U.S. 29 (1964), and maintained its ruling that a patent holder cannot charge royalties for the use of his invention where the use occurs after the patent term has expired.  The Supreme Court held that stare decisis ruled the day, and it would be up to Congress to change the Brulotte rule if a change is to be made.  The Court also gave advice on how to structure an agreement to avoid the Brulotte rule.

Further, in explaining the strength that stare decisis plays in patent cases, the Court gave insight into distinctions between competition issues under the Sherman Act–where courts are more expected to overrule prior decisions based on newer economic theories–and patent (as property law) and contract law where parties rely on settled decisions and Congress is the more appropriate body to overrule prior case rulings.

Justice Kagan authored the opinion; Justices Alito authored a dissent joined by Chief Justice Roberts and Justice Thomas.

Background

The patent at issue (U.S. Patent No. 5,072,856) allows “children (and young-at-heart adults)” to role play as “a spider person” by shooting “webs” (i.e., pressurized string) from the palm of their hand.  The patent owner, Kimble, sought to sell or license his patent to Marvel Entertainment for their Spider-Man character.  Marvel did not buy or license the patent.  But Marvel later sold its own “Web Blaster” toy that used a canister of foam to shoot a web.  The patent owner sued Marvel in 1997 and they reached a settlement agreement in which Marvel bought the patent for a lump sum (about $500,000) and a 3% royalty royalty on Marvel’s future sales of the Web Blaster and similar products. The agreement provided no end to such running royalty payments.

When entering the agreement, neither party had considered the Supreme Court’s Brulotte decision that prevents a patentee from receiving royalties for sales made after the patent expires.  But Marvel did later, and brought a declaratory judgment action seeking a ruling that it need not pay royalties after the patent expired in 2010.  The Brulotte case involved a patent owner who maintained ownership while licensing the patent at a running royalty; in this case, however, the running royalty was part of the sale of the patent to the party making the royalty payments.  The Supreme Court noted that “no one here disputes that Brulotte covers a transaction structured in that alternative way.”

The district court agreed with Marvel and applied Brulotte to preclude royalty payments after the patent expired.  The Ninth Circuit reluctantly affirmed, stating that the Brulotte rule “is counterintuitive and its rationale is arguably unconvincing.”

Decision

Following the theme presented, the Supreme Court initially noted that “Patents endow their holders with certain superpowers, but only for a limited time.” (emphasis added)  The Court has “carefully guarded that cut-off date.”

The Court noted that the Brulotte rule may “prevent[] some parties from entering into deals they desire.”  But the Court also noted that “parties can often find ways around Brulotte, enabling them to achieve those same ends.”  For example, parties can (1) amortize payments after the patent expires for products sold during the royalty period, (2) require payment until the last of several licensed patents expire, (3) tie royalties to non-patent rights or (4) make “business arrangements other than royalties–all kinds of joint ventures”:

Yet parties can often find ways around Brulotte, enabling them to achieve those same ends.  To start, Brulotte allows a licensee to defer payments for pre-expiration use of a patent into the post-expiration period; all the decision bars are royalties for using an invention after it has moved into the public domain. A licensee could agree, for example, to pay the licensor a sum equal to 10% of sales during the 20-year patent term, but to amortize that amount over 40 years. That arrangement would at least bring down early outlays, even if it would not do everything the parties might want to allocate risk over a long time frame.  And parties have still more options when a licensing agreement covers either multiple patents or additional non-patent rights.  Under Brulotte, royalties may run until the latest-running patent covered in the parties’ agreement expires.  Too, post-expiration royalties are allowable so long as tied to a non-patent right–even when close related to a patent.  That means, for example, that a license involving both a patent and a trade secret can set a 5% royalty during the patent period (as compensation for the two combined) and a 4% royalty afterward (as payment for the trade secret alone).  Finally and most broadly, Brulotte poses no bar to business arrangements other than royalties–all kinds of joint ventures, for example–that enable parties to share the risks and rewards of commercializing an invention.

The Court stated that the Brulotte rule “is simplicity itself to apply”:

A court need only ask whether a licensing agreement provides royalties for post-expiration use of a patent.  If not, no problem; if so, no dice.

The Court stressed the importance of stare decisis — “the idea that today’s Court should stand by yesterday’s decisions” — particularly in the areas of “property (patents) and contracts (licensing agreements)” where “parties are especially likely to rely on such precedents when ordering their affairs.”  Keeping with the theme, the Supreme Court called this context a “superpowered form of stare decisis” requiring “a superspecial justification to warrant reversing Brulotte.” (emphasis added)

The Court discussed at length the patent owner’s competition law arguments, but found them ill-suited in the patent context.  Basically, competition law under the Sherman Act may be based on economic theory that may change over time and, hence, may require courts to be more inclined to overrule prior decisions where “to overturn [a prior] decision in light of sounder economic reasoning was to take them ‘on [their] own terms.'”.  But patent law interprets statutes where stare decisis is more important and “Congress is the right entity to fix” problematic court rulings, the Court stating:

Although some of [Brulotte’s] language invoked economic concepts, the Court did not rely on the notion that post-patent royalties harm competition.  Nor is that surprising. The patent laws–unlike the Sherman Act–do not aim to maximize competition (to a large extent, the opposite).  And the patent term–unlike the “restraint of trade” standard–provides an all-encompassing bright-line rule, rather than calling for practice-specific analysis.

We previously discussed the Vermont attorney general’s enforcement action against MPHJ Technology Investments, LLC, a non-practicing entity that has recently been the subject of regulatory scrutiny.  The attorney general’s complaint, filed in Vermont state court in early May of 2013, alleges that MPHJ’s patent assertion conduct directed toward Vermonters violates the state’s Consumer Protection Act.  The state seeks permanent injunctive relief, an award of restitution to Vermont businesses that were damaged by MPHJ’s alleged conduct, civil penalties of up to $10,000 for each violation of the Consumer Protection Act, and costs.

A few weeks after the suit was filed, Vermont’s governor signed into law the Bad Faith Assertions of Patent Infringement Act (Bad Faith Demand Act) which, as its title suggests, attempts to regulate patent demand letters sent in bad faith.

After several unsuccessful attempts by MPHJ to remove the attorney general’s action to federal court (see our August 11, 2014 post), MPHJ filed a separate action against the attorney general in federal district court seeking a declaration that the Bad Faith Demand Act is constitutionally invalid or federally preempted as well as a declaration that the Vermont Consumer Protection Act — as it is being applied by the attorney general in the state court action against MPHJ — is constiutionally invalid or federally preempted.  MPHJ also sought an injunction prohibiting the attorney general from prosecuting the state court action against it.

Recently, the federal judge presiding over MPHJ’s case granted in part and denied in part the attorney general’s motion to dismiss MPHJ’s amended complaint.  A summary of the Bad Faith Demand Act, MPHJ’s claims, the motion to dismiss briefing and the court’s decision is provided below.

The Bad Faith Demand Act.  The Bad Faith Demand Act provides that “[a] person shall not make a bad faith assertion of patent infringement.”  The statute permits a court to consider several factors “as evidence that a person has made a bad faith assertion of patent infringement,” including, but not limited to:

  • The demand letter does not contain the patent number, the name and address of the patent owner(s) and assignee(s), or “factual allegations concerning the specific areas in which the” recipient’s “products, services, and technology infringe”;
  • The demand letter fails to include the above-listed information, the recipient of the letter requests it, and the patentee fails to provide it within a reasonable period of time;
  • The patent owner fails to compare the claims to the recipient’s products, services and technology prior to sending the demand letter, or such analysis was “done but does not identify the specific areas in which the” recipient’s products, services and technology are covered;
  • The demand letter demands payment of a license fee or response within an “unreasonably short period of time”;
  • The patentee “offers to license the patent for an amount that is not based on a reasonable estimate of the value of the license”;
  • The claim “of patent infringement is meritless, and  the person knew, or should have known, that the claim or assertion is meritless”‘; and
  • The patentee, its subsidiaries or affiliates “have previously filed or threatened to file” a lawsuit “based on the same or similar claim of patent infringement” and those threats lacked the information listed above (e.g., the patent number, name and address of the patent owner and assignee(s), etc.) and a court found the claims to be meritless.

In analyzing whether patent assertion conduct was done in bad faith, the Bad Faith Demand Act also permits a court to consider whether such conduct was “deceptive.”  The court may also consider “[a]ny other factor [it] finds relevant.”  The facial breadth of this language may give a court discretion to consider whether a standard essential patent owner has informed the recipient that the asserted patents have been declared essential by the patent owner to a standard setting organization (SSO) and/or whether the patent owner has promised to license the patents on reasonable and non-discriminatory (RAND) terms.

Conversely, the Bad Faith Demand Act also lists several factors that may show that patent assertion conduct was not committed in bad faith.  Among the factors that a court may consider are:

  • The demand letter contains the patent number, the name and address of the patent owner(s) and assignee(s), and “factual allegations concerning the specific areas in which the” recipient’s “products, services, and technology infringe”;
  • Where the demand letter lacks such information and the recipient requests it, the patent owner provides it within a reasonable time;
  • The patent owner “engages in a good faith effort to establish that the target has infringed the patent and to negotiate an appropriate remedy”;
  • The patent owner “makes a substantial investment in the use of the patent or in the production or sale of a product or item covered by the patent”;
  • The patent owner is the inventor or joint inventor of the asserted patent, the original assignee, an institution of higher education or a technology transfer organization owned or affiliated with an institution of higher education;
  • The patent owner has engaged in “good faith business practices in previous efforts to enforce the patent” or a “substantially similar patent” or successfully enforced the patent, or a substantially similar patent, through litigation”; and
  • Any other factor the court deems relevant.

The Vermont attorney general is empowered to bring enforcement actions for restitution, civil penalties and injunctive relief against violators of the statute.

Additionally, a recipient of a bad faith demand letter or target of other bad patent assertion conduct may bring an action and, if they prevail, may be awarded equitable relief, damages, costs and attorneys fees, exemplary damages in an amount equal to $50,000 or three times the total damages, costs, and fees, whichever is greater.

As an interim remedy, the Bad Faith Demand Act also provides that if a recipient of a demand letter or target of other patent assertion conduct establishes “a reasonable likelihood that a person has made a bad faith assertion of patent infringement” in violation of the statute, “the court shall require the person [making the demand] to post a bond in an amount equal to a good faith estimate of the target’s costs to litigate the claim and the amounts reasonably likely to be recovered” under the civil remedies provisions of the statute discussed above, “conditioned upon payment of any amounts finally determined to be due to the target” of the patent assertion conduct.  The bond may not exceed $250,000 and the court may waive it “if it finds [that] the person [making the demand] has available assets equal to the amount of the proposed bond or for other good cause shown.”

MPHJ’s Complaint.  In September of 2014, MPHJ filed a complaint against the attorney general challenging the constitutionality of the Bad Faith Demand Act as well as the attorney general’s application of Vermont’s Consumer Protection Act in the state court action against MPHJ.  In response to the attorney general’s motion to dismiss, MPHJ filed an amended complaint.

Count I-A seeks a declaration that the Bad Faith Demand Act is invalid under, or preempted by, the First and Fourteenth Amendments to the United States Constitution.  MPHJ also alleges that the Bad Faith Demand Act is preempted by Title 35 of the United States Code and the Federal Circuit’s decisions thereunder, in that it “permits liability to attach to patent owners, including injunctive and monetary liability, without a requirement that the plaintiff prove that the conduct at issue was both objectively baseless and subjectively baseless pursuant to the standard outlined in” the Federal Circuit’s 2004 decision in Globetrotter Software, Inc. v. Elan Computer Group, Inc.

Count I-B seeks a declaration that the Vermont Consumer Protection Act, as it is being applied by the attorney general in the state action against MPHJ, is also invalid under, or preempted by, the First and Fourteenth Amendments to the United States Constitution.  Specifically, MPHJ alleges that the attorney general “has [asserted] and currently asserts that the Vermont Consumer Protection Act may be applied against correspondence related to patent enforcement without pleading or proof that such conduct is objectively baseless and subjectively baseless.”  “As a result, as applied, the Vermont Consumer Protection Act is invalid or preempted under the First, Fifth and Fourteenth Amendments, and the Supremacy and Patent Clauses of the U.S. Constitution, and Title 35 of the U.S. Code.”

The other counts in MPHJ’s amended complaint assert causes of action for, inter alia, a declaration that the Bad Faith Demand Act and the Vermont Consumer Protection Act, as applied, are invalid under or preempted by the Dormant Commerce Clause as well as a count for attorneys fees under Section 1988 of Title 42 of the United States Code for the attorney general’s allegedly unconstitutional conduct.

Motion to dismiss to briefing.

The Vermont attorney general moved to dismiss MPHJ’s First Amended Complaint, arguing that the court should abstain from hearing any of MPHJ’s challenges to the constiutionality of the Vermont Consumer Protection Act because those claims could be litigated in the state court action as affirmative defenses or counterclaims.

The attorney general also argued that MPHJ lacked standing to challenge the constitutionality of the Bad Faith Demand Act because those claims were based on MPHJ’s intention to send demand letters in the future and, according to the attorney general, such potential future conduct was too speculative to support standing.  Even if MPHJ could establish standing, its claims were not ripe because the allegations of MPHJ’s potential future conduct were too “cursory.”

MPHJ opposed the motion.  MPHJ argued that, because the state court action did not involve claims under the Bad Faith Demand Act, abstention was not proper and MPHJ is entitled to pursue its federal challenges to the Bad Faith Demand Act.  MPHJ argued further that its challenges to the Bad Faith Demand Act were both ripe and that it has standing to pursue them because MPHJ has “alleged that Defendant’s conduct represents a credible threat of suit that chills the exercise of MPHJ’s First Amendment rights” to enforce its patents by sending demand letters.

With respect to its challenges to the attorney general’s application of the Consumer Protection Act in the state court action, MPHJ argued that abstention was not proper because, inter alia, the state does not have an important interest in deciding MPHJ’s claims.  Specifically, MPHJ argued that “it is clear that dominion over patents, and their enforcement, is not an attribute of sovereignty retained by the American states.”

The attorney general filed a reply, arguing, inter alia, that even substantial claims of federal preemption do not warrant federal court action, and that MPHJ should be required to litigate those claims in the state court action.  The attorney general also argued that MPHJ had not alleged that its asserted patent claim was valid and infringed and, therefore, MPHJ lacked standing to challenge the Bad Faith Demand Act based on potential future demand letters involving the patent claim at issue.

MPHJ filed a supplemental opposition identifying new authority regarding the attorney general’s abstention arguments that MPHJ contended required the denial of the attorney general’s motion.

The Court’s decision.  The court granted the attorney general’s motion to the extent it related to MPHJ’s challenges to the AG’s application of the Consumer Protection Act in the state action, deciding to abstain in favor of having those challenges resolved by the state court.  “The constiutionality of the [Consumer Protection Act] being enforced can be determined by the state courts…”

The court, however, denied the attorney general’s motion to dismiss MPHJ’s challenges to the Bad Faith Demand  Act.  “As there has been no civil enforcement action under the [Bad Faith Demand Act], abstention with respect to that statute is unwarranted.”

The court also rejected the attorney general’s argument that MPHJ lacked standing to challenge the Bad Faith Demand Act because the attorney general has not brought any enforcement action under that statute.  According to the court, the lack of any enforcement action was not dispositive to the standing issue.  Rather, because MPHJ “has made plain its intention to send enforcement letters in the future” and that the attorney general, in an interview, discussed the Bad Faith Demand Act’s intentions “to deter patent trolling in Vermont” and also mentioned MPHJ specifically in that same interview, “future enforcement under the [Bad Faith Demand Act] seems neither conjectural nor hypothetical.”  MPHJ, according to the court, had established “a credible threat of enforcement” sufficient to give it standing to challenge the constitutionality of the Bad Faith Demand Act and that such claims were ripe for review.

As we previously discussed, the Senate Judiciary Committee recently approved the PATENT Act, and that bill will soon go to the full Senate floor.  The House Judiciary Committee has also approved competing patent reform legislation that will be voted on by the full House.  Both of these bills contain provisions that would regulate patent demand letters and other patent assertion conduct.  Should either bill or revised versions of them be enacted into law, Vermont’s Bad Faith Demand Act as well as other states’ laws that attempt to regulate patent assertion conduct may be expressly pre-empted, likely mooting MPHJ’s constitutional challenges.  MPHJ’s claims for monetary damages, however, might not be mooted.