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.

Judge Kaplan of S.D. New York recently issued a preliminary injunction to enjoin ZTE from further disclosing information subject to a non-disclosure agreement (NDA) that ZTE had entered with Vringo to potentially settle worldwide patent litigation between them that concern FRAND-obligated standard essential patents that Vringo had purchased from Nokia.  This is an interesting case to read when considering NDAs for purposes of settlement discussions in general, as well as when they involve SEPs.

Background

In 2013, Vringo and ZTE agreed to meet to discuss settlement, and they entered an NDA for those discussions “to create an environment for productive discussions with good faith settlement offers.”  During their December 10, 2013 meeting, patent owner Vringo made a 40-page presentation marked confidential under the NDA that, among other things, included Vringo’s settlement proposal.  No settlement was reached.  Soon thereafter, on February 21, 2014, ZTE started an antitrust lawsuit in China claiming that Vringo abused its market position by refusing to license its essential patents on FRAND terms.  ZTE’s complaint relied on confidential information under the NDA and attached Vringo’s confidential 40-page presentation from their settlement discussions.  Vringo did not find out about this until four months later when it received a copy of the complaint from the Chinese court.

In April 2014, ZTE also filed a complaint against Vringo with the European Commision (“EC”).  Vringo had an opportunity to respond to the EC complaint.  So Vringo reached-out to ZTE about getting a waiver under the NDA to allow Vringo to disclose information to the EC in response to the Complaint.  ZTE did not reply before Vringo’s response time, so Vringo filed redacted materials with the EC.  A week after that, ZTE responded it would agree to such a waiver for information directly relevant to the EC complaint and only if ZTE also was permitted to do so.

Later, in June 2014, Vringo learned for the first time about ZTE’s Chinese complaint and disclosure of confidential information subject to the NDA.  Vringo then filed this suit for breach of the NDA.

Decision

At the outset of the case, Judge Kaplan had ruled that “the pleadings establish the existence and terms of the NDA and defendants breach thereof.”  The instant decision ruled on Vringo’s motion for a preliminary injunction that would enjoin ZTE from further breaching the NDA as well as seeking to enjoin ZTE from further pursuing the Chinese action.  Judge Kaplan applied the four typical factors used to determine whether a preliminary injunction is warranted:

  1. Vringo is likely to ultimately succeed on the merits of its breach of contract claim;
  2. Vringo is likely to suffer irreparable harm if preliminary injunctive relief is not granted;
  3. The balance of the equities tip in Vringo’s favor over ZTE; and
  4. Entering an injunction is in the public interest.

Vringo Likely To Succeed.  Judge Kaplan ruled that Vringo is likely to succeed in proving that ZTE breached the NDA, especially given that he already ruled as such on the pleadings.

ZTE argued that Chinese law should govern here and, under Chinese law, ZTE was required to provide the information as part of its complaint to the Chinese court.  Judge Kaplan disagreed.  No law required ZTE to bring the complaint in the first instance.  Further, the Chinese procedural rule requiring a complaint to specy “the claim and its supporting facts and grounds” and “evidence and the source thereof” did not require ZTE to submit the confidential information and ZTE’s assertion otherwise “is nothing more than gamesmanship.”  Further, the NDA expressly states that it should be govern by the laws of New York and there was sufficient contacts with New York to enforce that provision:

Vringo maintains its principal place of business in New York and sought protection under its laws when entering into the NDA.  ZTE knew this, executed the NDA, and then sent it back to Vringo in New York.  The parties, in agreeing to have the law of New York govern their contract, selected the laws of a State that has a reasonable relationship and significant contacts to the contract and that choice must be enforced by this Court.

Judge Kaplan also rejected ZTE’s argument that the NDA is unenforceable under New York law as “an agreement to suppress evidence.”  The NDA was a permissible agreement between private parties about use of information in private litigation.  New York has a strong public policy encouraging settlement and “[t]here can be no doubt that the NDA was entered into for the explicit purpose of facilitating candid settlement discussions.”  Further, the NDA permits disclosure of confidential information “upon a request from a governmental entity or third party whether by a discovery request or a subpoena.”  Thus, “it was entirely lawful for Vringo and ZTE to agree that they would not use information exchanged in settlement discussions in any judicial proceedings.”

Vringo Threatened With Immediate Irreaparable Harm.  Judge Kaplan found that the irreparable harm requirement was met because “Vringo, in the absence of a preliminary injunction, probably would suffer injury in the future that could not be undone even if it prevails in this action.”  Harm from disclosure is imminent absent an injunction, because ZTE continues to believe that an NDA cannot prohibit submitting evidence of an antitrust violation.  ZTE did not start complying with”the clear and unequivocal terms of the NDA “until after the court entered a TRO.

Judge Kaplan found that continued disclosure by ZTE of confidential information would cause irreparable harm to Vringo’s business by impacting licensing negotiations with other parties, stating:

Vringo’s business depends substantially on the value of its patent portfolio, which it licenses to third parties.  The disclosure of Vringo’s Confidential Information, including its proposal to settle years of ZTE’s alleged patent infringement, would impact the prices others would pay to obtain licenses as well as the prices its competitors would offer for their licenses.  Indeed, once such commercially-sensitive information becomes public knowledge, it can “not be made secret again.”  In short, the disclosure of that information would have a lasting and immeasurable harm to Vringo’s business.

Balance of the Equities Favor Vringo.  Judge Kaplan found that Vringo would be irreparably harmed absent an injunction by ZTE continuing to disclose Vringo’s confidential information.  In contrast, entering an injunction would prevent ZTE from not disclosing information that ZTE had agreed in the NDA that it would not to disclose.

Public Interest Favors Injunction.  Judge Kaplan found that the public interest favors the preliminary injunctive relief he would give, which would enjoin ZTE from further disclosing confidential information but would not enjoin the Chinese proceedings themselves.  Thus, international comity concerns are addressed, because the injunction would not prevent the Chinese court from evaluating its antitrust action.

Scope of Preliminary Injunction.  Judge Kaplan would not enjoin ZTE from continuing with its Chinese antitrust action.  A key reason was that a determination that ZTE breached the NDA in this case would not resolve the Chinese action, a key factor when a U.S. court determines whether to enjoin a foreign action.

Judge Kaplan also would not order ZTE to withdraw the information it submitted in the Chinese action, finding that Vringo — while close — had not met its burden to obtain such affirmative or “mandatory” injunctive relief at this early stage in the case.  But he remained open to a mandatory injunction at the end or later stages of the case.

Judge Kaplan ultimately entered a preliminary injunction that prohibits ZTE from further disclosing any more confidential information.

We previously reported on a scheduling order governing FRAND and damages-related discovery in InterDigital’s two patent infringement lawsuits pending in Delaware against ZTE and Nokia Inc., Nokia Corp. and Microsoft Mobile Oy (MMO), respectively.  On Friday, the court entered a modified, agreed-to scheduling order that extends the time to complete such discovery by approximately seven (7) months.

As background, trials on liability were bifurcated from trials on damages and the defendants’ FRAND-related affirmative defenses.  ZTE’s liability trial on three (3) of InterDigital’s asserted patents occured first and, last Fall, a Delaware jury found that ZTE’s accused 4G mobile devices infringed those patents.  ZTE asserts a number of FRAND-related affirmative defenses to this finding of infringement.  A second Delaware jury later found that ZTE’s accused 4G mobile devices did not infringe a fourth patent asserted by InterDigital.

In January of this year, the court entered a scheduling order setting December 4, 2015 as the deadline for completing FRAND and damages-related discovery in both the ZTE and Nokia/MMO cases, with the trial on these issues tentatively scheduled to take place in the Spring of 2016.

The liability trial against Nokia/MMO was scheduled to occur in April of this year.  However, that trial was postponed until November.  As a result of this change in Nokia/MMO’s liability trial date, the parties proposed, and, on Friday, the court entered, a scheduling order modifying the FRAND and damages-related discovery period and target trial dates as follows:

  • Completion of fact discovery related to FRAND/damages:  Deadline moved from August 21, 2015 to March 4, 2016;
  • Disclosure of expert testimony for party with burden of proof:  Deadline moved from September 18, 2015  to April 15, 2016;
  • Supplemental/rebuttal expert disclosure:  Deadline moved from October 16, 2015 to May 13, 2016;
  • Reply expert reports from party with burden of proof:  Deadline moved from November 9, 2015 to June 9, 2016;
  • Completion of expert discovery:  Deadline moved from December 4, 2015 to July 13, 2016;
  • Joint letter outlining any issues the parties believe must be addressed at the status conference:  Deadline moved from December 8, 2015 to July 20, 2016;
  • Status conference:  Moved from December 15, 2015 to August 22, 2016;
  • Dispositive motions and deadline to object to expert testimony:  Moved from December 29, 2015 to August 5, 2016;
  • ZTE target trial date:  Moved from March 21, 2016 to October 17, 2016; and
  • MMO/Nokia target trial date:  Moved from April 11, 2016 to November 14, 2016.

 

 

 

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

 

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.”

As we previously reported, Cisco and Ruckus Wireless filed complaints against Innovative Wireless Solutions (IWS) in the Western District of Texas for declarations of non-infringement and invalidity of three of IWS’ patents allegedly covering WiFi technology.  In their claim construction briefing, the parties disputed the meaning of the term “CSMA/CD”, which stands for “Carrier Sense Multiple Access with Collision Detection.”  The court issued a Markman claim construction opinion holding that IWS acted as its own lexicographer in the patents-in-suit by expressly referencing the Institute of Electrical and Electronics Engineers (IEEE) 802.3 Ethernet standard’s definition of the term CSMA/CD.  This term, therefore, was construed to incorporate the IEEE standard’s definition of it.

On Tuesday, the parties stipulated to a final judgment of non-infringement of IWS’ patent claims in light of the court’s claim construction ruling.  The parties stipulated that the accused “communications path” associated with each accused product “complies with the IEEE 802.11 (g), (n) and/or (ac) amendments, (ii) is not wired, and (iii) does not ‘utiliz[e] twisted-pair wiring.’” “In particular, each Accused Product contains one or more radio transceivers (in connection with other circuitry) for communicating wirelessly with devices that are compliant with the IEEE 802.11 (g), (n) and/or (ac) protocols.”  “IWS’s infringement contentions identify those wireless communications as satisfying the ‘bidirectional communications path’ and ‘communications path’ limitations.”

While the parties stipulated that the accused products practiced certain portions of the IEEE 802.11 standards, the parties nonetheless agreed that, in light of the Court’s claim construction ruling, the accused products

have not infringed and currently do not infringe the Asserted Claims of the Patents-in-Suit for at least the reason that the accused communications path associated with each Accused Product is not a ‘bidirectional communications path’ or ‘communications path’ ‘utilizing twisted-pair wiring that is too long to permit conventional 10BASE-T or similar LAN (Local Area Network) interconnections’.

Cisco, Ruckus and IWS, “therefore, stipulate[d] to entry of a final judgment that the Accused Products have not infringed and currently do not infringe the Asserted Claims of the Patents-in-Suit.”

IWS reserved the right to appeal the claim construction ruling.  If IWS chooses to do so and it successfully challenges that ruling, the Federal Circuit may remand the case to the district court for further proceedings on claim construction or to determine whether Cisco or Ruckus’ products infringe IWS’ patents.

On Wednesday, the Court entered the final judgment pursuant to the parties’ stipulation.

This case hihglights a few points that may arise when litigating standard essential patents.  First, court’s may look to see whether disputed claim terms incorporate definitions from standards adopted by standard setting organizations (SSOs).  Second, even in cases where the court finds that a disputed claim term incroporates a standard’s definition, and the alleged infringer agrees that its products practice that standard, there is still a possibility that the accused product does not infringe the patent.

Yesterday, the Federal Circuit affirmed the U.S. International Trade Commission’s (“ITC”) determination that certain Interdigital patents related to 3G CDMA technology were not infringed by Nokia and ZTE.  Recall that the ITC had reserved ruling on any RAND obligation defenses given its non-infringement finding (see our Feb. 24, 2014 post). ALJ Shaw’s Initial Determination had ruled on those defenses, finding that, among other things, InterDigital’s obligations arising from the ETSI IPR policy was to negotiate in good faith toward a license agreement and that InterDigital had negotiated in good faith notwithstanding Respondents arguments of bad faith based on InterDigital seeking an injunction, seeking to negotiate a worldwide license rather than a single country license and allegedly offering unfairly discriminatory rates given different effective royalties offered to ZTE and Nokia (see our July 30, 2013 post).

The Western District of Texas recently held that patent holder Innovative Wireless Solutions (IWS) acted as its own lexicographer by expressly referencing the Institute of Electrical and Electronics Engineers (IEEE) 802.3 Ethernet standard’s definition of a disputed claim term in the patents-in-suit.  Therefore, the disputed claim was construed to incorporate the standard’s definition.

Background.  Cisco and Ruckus Wireless both filed complaints against IWS seeking declarations of non-infringement and invalidity of three of IWS’ patents allegedly covering WiFi technology.  Cisco’s complaint alleges that IWS is a “patent assertion entity that, on information and belief, has been set up to monetize patents by filing strike suits against mere end users of 802.11 standard compliant products (also known as Wi-Fi products) for the purpose of obtaining licensing and settlement amounts to which they are not entitled.”  “[R]ather than seek to license its patents to Cisco and other manufactures of Wi-Fi compliant products, IWS instead sent demand letters to end users that have purchased Cisco products that are compliant with the Wi-Fi standards.”  According to Cisco, “[w]ithin one week of sending the letters, IWS filed 41 lawsuits against these end users of Cisco products and other similar parties.”  “In turn, Cisco received indemnity demands from a number of these purchasers.”  “Although the 41 lawsuits were dismissed without prejudice,” Cisco claims that “IWS is intent on re-filing these lawsuits against these retail purchasers after correcting one or more procedural deficiencies.”  Cisco therefore filed suit “to protect the purchasers” of its WiFi compliant products. 

Ruckus’ complaint makes similar allegations and, like Cisco, requests a declaratory judgment of non-infringement and invalidity to protect purchasers of its WiFi compliant products.

IWS filed answers generally denying the substantive allegations of both complaints but admitting that a case or controversy existed for purposes of Cisco and Ruckus’ request for declaratory relief.  IWS also counterclaimed for infringement of the three patents against both Cisco and Ruckus.

The disputed claim term.  The term “CSMA/CD” appears in claims in all three of the IWS patents at issue.  This stands for “Carrier Sense Multiple Access with Collision Detection.”  The parties disputed whether the term needed to be construed at all.  In their claim construction brief, Cisco and Ruckus argued that CSMA/CD is a well-known protocol defined by the IEEE 802.3 Working Group and that IWS’ patents defer to the published IEEE standard.  Therefore, a skilled artisan at the time of the patent would understand the use of the term CSMA/CD and no construction was necessary.

IWS, on the other hand, argued that “CSMA/CD is a term the jury cannot readily understand” and requested that the court construe it to mean:    

Techniques compatible with connecting to networks such as Ethernet networks, where a device that wishes to transmit on the network listens and checks to see if the channel is free for sending data.  If the channel is not free, or if a collision is detected during transmission, the device waits for a small amount of time and tries again.

IWS contended that its proposed construction was “supported by the specification and the IEEE 802.3 standard.” Specifically, IWS cited to one sentence in the specification that states: “The term CSMA/CD is used herein to refer generically to this technology.”  IWS argued that “this sentence indicates that CSMA/CD is used throughout the patents-in-suit to describe any network technology that employs a contention scheme similar to the 802.3 scheme.”  IWS asserted further that “the contention scheme contained in its proposed construction is consistent with the contention scheme overview in the 802.3 standard.”  Finally, IWS contended that the “MA” in CSMA/CD “shows that CSMA/CD is a technology that relates to connecting to a network” and that “multiple access” shows “that the technology relates to connecting to networks in addition to facilitating communications.”

The court’s ruling.  The court rejected IWS’ proposed construction as well as Cisco and Ruckus’ position that the term required no construction.  “In light of the clear language contained in the patents’ specification, the court concludes that the patentee acted as his own lexicographer and specifically defined the term’s use in the context of the patents.”  The court relied on the specification, which defines CSMA/CD as follows:

Different technologies can be used to facilitate communications on any LAN [Local Area Network] and throughout the Network, the most common being . . . (CSMA/CD) technology.  This is documented in IEEE Standard 802.3 . . .   The 802.3 Standard is based on the 1985 Version 2 Standard for Ethernet and, although there are some differences  . . . the two Standards are largely interchangeable and can be considered equivalent as far as this invention is concerned.  The term ‘CSMA/CD’ is used herein to refer generically to this technology.  Using CSMA/CD, packets of data are communicated in frames that are generally referred to as Ethernet frames.  This term is also used herein, regardless of whether the frames comply with the 802.3 Standard or Ethernet Standard . . .

In other words, “CSMA/CD is a technology, documented in the IEEE 802.3 standard, used to facilitate network communications” and “[t]he 802.3 standard is based on the 1985 Version 2 Standard for Ethernet (‘Ethernet 2 Standard’).”  The court held that “[a]s far as this invention is concerned, the two standards are equivalent.”  “In the patents-in-suit, CSMA/CD is used to generically refer to the technology as defined in either standard.”  “Moreover, the specification references the documented IEEE standard when describing a network technology that uses CSMA/CD.”  “The specification further references the IEEE standard when describing the contention scheme employed in CSMA/CD.”

According to the court, “Cisco’s argument that the term should be given its ordinary and customary meaning fails.”  While there “is a heavy presumption that the term carries its ordinary and customary meaning,” the “presumption is overcome when the patentee acted as his own lexicographer and clearly set forth a definition of the disputed claim term.”  

The court also rejected IWS’ proposed construction.  IWS’ “relies on the use of ‘generically’ in the specification to argue for a particularly broad interpretation.”  “However, within the context of the paragraph, the word generically refers to CSMA/CD as defined in either the 802.3 Standard or the Ethernet 2 Standard.”  “As the patents-in-suit explain, the two standards are interchangeable and equivalent as far as this invention is concerned.”

The court therefore construed the term CSMA/CD to incorporate the definition in the standard:  “CSMA/CD (Carrier Sense Multiple Access with Collision Detection) as defined in either the IEEE 802.3 Standard or the 1985 Version 2 Standard for Ethernet.”

Thus, litigants should also be mindful that the definition of patent claim terms may be impacted by a patent’s reference to definitions of claim terms in industry standards.

The Northern District of California recently granted judgment on the pleadings in favor of patent-plaintiff ChriMar Systems, Inc. on antitrust and state law unfair competition counterclaims filed by accused infringers Cisco and Hewlett-Packard (HP).  According to the court, the crux of Cisco’s and HP’s counterclaims alleged that ChriMar failed to disclose and commit to license one of its patents on reasonable and non-discriminatory (RAND) terms during a standard-setting process and, subsequent to the standard being adopted, filed suit against them alleging infringement of the same patent.  Cisco and HP alleged that this was an abuse ChriMar’s “monopoly power” and also a violation of California’s Unfair Competition Law.  The court held that judgment on the pleadings was warranted because Cisco and HP failed to define the relevant market and also failed to plead facts showing market power and antitrust injury.  The court, however, granted Cisco and HP leave to amend their counterclaims.

Background.  On October 31, 2011, ChriMar filed a complaint against Cisco and HP alleging that Cisco’s and HP’s “Power over Ethernet telephones, switches, wireless access points, routers and other devices used in wireless local area networks, and/or cameras and components thereof that are compliant with the” Institute of Electrical and Electronic Engineers (IEEE) 802.3af and/or 802.3at standards infringed one or more claims of ChriMar’s U.S. Patent No. 7,457,250 (“the ‘250 Patent”).  In response, Cisco and HP filed counterclaims asserting causes of action for, inter alia, monopolization under the federal antitrust laws as well as for violations of California’s Unfair Competition Law.

In their counterclaims, Cisco and HP allege that the IEEE has a “patent disclosure policy” that “requires participants in the standards setting process to disclose patents or patent applications they believe to be infringed by the practice of the proposed standard.”  Cisco and HP further allege that the IEEE policy requires those who disclose intellectual property rights to provide a written assurance stating whether they would enforce any of their present or future patents “whose use would be required to implement the proposed IEEE standard or provide” a license to such patents royalty-free or on RAND terms.  The counterclaims assert that ChriMar was required to but intentionally “failed to disclose to IEEE its belief that its ‘250 Patent was essential to the proposed 802.3af and/or the 802.3at” during amendments of the 802.3 standard and that “ChriMar was not willing to license the ‘250 Patent on RAND terms.”  Cisco and HP contend that due, in part, to this alleged failure to disclose, the industry adopted the present form of IEEE 802.3af and IEEE 802.3at amendments to the IEEE 802.3 standard and that they are now “locked-in to the current implementation . . . for Power over Ethernet-enabled products.”  Had ChriMar disclosed its belief that the ‘250 Patent would be infringed by practicing the proposed amendments to the 802.3 standard as well as its unwillingness to license the patent on royalty-free or RAND terms, the IEEE would have, according to Cisco and HP, done one or more of the following:

1.  Incorporated one or more viable alternative technologies into the IEEE 802.3af and IEEE 802.3at amendments to the IEEE 802.3 standard;

2.  Requested ChriMar to provide a letter of assurance that it would license the ‘250 Patent on RAND terms;

3.  Decided to either not adopt any amendment to the IEEE 802.3; and/or

4.  Adopted an amendment that did not incorporate technology that ChriMar claims is covered by the ‘250 Patent.

Cisco and HP further contend that ChriMar has taken the position that all Power over Ethernet-enabled products infringe the ‘250 Patent and that, to the extent that the ‘250 Patent is essential to the 802.3af and the 802.3at standards, no viable technology substitutes exist and ChriMar has monopoly power over the Power over Ethernet Technology Market.  Both Cisco and HP allege that this conduct combined with ChriMar’s infringement action against them is an unlawful abuse of monopoly power under Section 2 of the Federal Sherman Antitrust Act and also unfair competition under California’s Unfair Competition Law, Cal. Bus. Code § 17200 (UCL).

HP also filed a claim for attempted monopolization under Section 2, which alleges that ChriMar’s complaint against it, Cisco and several others (Respondents) before the International Trade Commission seeking an exclusion order under Section 337 of the Tariff Act of 1930 constituted an unlawful intent to monopolize the Power over Ethernet Technology market.  According to HP, ChriMar alleged before the ITC  that Respondents infringe the ‘250 Patent by importing products that practice the Power over Ethernet Standards IEEE 802.3af and 802.3at.  HP alleges that the Respondents’ imports collectively “comprise the substantial majority of products commercially offered in the Power over Ethernet Technology Market.”  HP alleges further that ChriMar’s “baseless” allegations of infringement and request for an order prohibiting these Respondents from importing Power over Ethernet products constitutes an unlawful attempt to monopolize the Power over Ethernet Technology Market.

ChriMar’s Answers and Motion to Dismiss.  ChriMar filed an answer to Cisco’s counterclaims as well as an answer to HP’s counterclaims generally denying defendants’ antitrust and UCL allegations and asserting lack of standing and failure to state a claim as affirmative defenses.  ChriMar thereafter moved for judgment on the pleadings on the antitrust and UCL counterclaims.  In its motion, ChriMar argued that Cisco and HP failed to plead facts showing that ChriMar had monopoly power in the alleged relevant market.  Specifically, according to ChriMar, Defendants could not “simply rely on the existence of patent rights or actions to enforce them, as they have done.”  “As a matter of law, ‘patent rights are not legal monopolies in the antitrust sense of that word’ … and simply owning or enforcing the patent right does not make one a ‘prohibited monopolist.'”  ChriMar elaborated:

While the patent may give its owner a right to exclude, that is in no way synonymous with having monopoly power. … Such is presumably the case in a market related to a standards setting context where the standard does not practice the patented technology as Defendants allege in this action, where there are market alternatives to the standard itself such as Cisco’s own proprietary inline power technology, where other parties have rights to exclude in the same technology market (in the form of other patents that read on the standards) and can effectively limit the ability of other parties to exert monopoly power (i.e., control prices), or where competing technologies like wireless communication or conventional unpowered Ethernet can exert economic influences that can keep Power over Ethernet prices or the exercise of monopoly power in check — all issues Defendants’ pleadings never address.

ChriMar further argued that its enforcement of its patent rights was presumed to be valid under the Noerr-Pennington doctrine, which generally grants immunity from antitrust liability for petitioning the government in the form of litigation.  To overcome this presumption, Cisco and HP had to plead facts showing that its litigation against them and ITC proceeding seeking an exclusion order were a “sham,” that is, “objectively baseless.”  To be objectively baseless, Cisco and HP must plead facts showing that ChriMar’s claims were “‘so baseless that no reasonable litigant could realistically expect to secure favorable relief.'”  If Cisco and HP could show that ChriMar’s claims were objectively baseless, they next had to allege facts showing that the litigation was subjectively brought in bad faith in order to overcome Noerr-Pennington immunity.

ChriMar argued that the only factual allegation in HP’s counterclaim is that “‘discovery in the ITC investigation established that ChriMar’s allegations for domestic industry were baseless'” and that “ChriMar withdrew its [ITC] complaint nine months after it was filed, and after HP filed a motion for summary determination on the issue of domestic market.”  These allegations, according to ChriMar, failed to overcome ChriMar’s Noerr-Pennington immunity.

ChriMar also argued that Defendants failed to plead facts adequately defining a relevant market, a necessary element for a Section 2 claim.  Defendants alleged the following relevant market in their counterclaims:

ChriMar actually, potentially, and/or purportedly competes in the United States and worldwide markets for developing and licensing technology essential to implement the IEEE 802.3af and 802.3at amendments to the IEEE 802.3 standard and for technology essential to perform certain functions, allegedly covered by the ‘250 Patent, necessary to implement the IEEE 802.3 standard (hereinafter ‘Power over Ethernet Technology Market’).

ChriMar asserted that this definition is flawed because it fails to identify what particular technologies are included within the market.  Further, ChriMar argued that Defendants “have pled a market whose outer boundaries are defined by ChriMar’s infringement claims (one patent asserted against two standards) rather than any exploration of the ‘reasonable interchangeability’ of use or the cross-elasticity of demand’ outside this intersection.”  Cisco and HP’s counterclaims did not consider that the “technologies and products at issue in this litigation may be interchangeable with other technologies and products such as Power over-Ethernet technologies and products that are not compliant with the two standards . . . or even technologies and products not compliant with any standard, but that themselves are alternatives to the Power over Ethernet technologies and products compliant with these two standards.”  Under the Sherman Act, according to ChriMar, the relevant market cannot be defined by ChriMar’s economic power within the two standards.  Rather, the relevant market must be defined and measured by cross-elasticity of demand or product interchangeability:  “Here, Defendants plead economic power with respect to those entities voluntarily choosing to continue making products compliant with these two particular standards . . . and not the market demand for these particular Power over Ethernet technologies themselves.”

ChriMar further argued that Cisco and HP failed to plead facts showing that ChriMar had monopoly power or that Defendants have suffered antitrust injury.  Further, ChriMar asserted that HP’s attempted monopolization claim was deficient because it failed to plead facts showing that ChriMar’s ITC action “was motivated by an intent to monopolize, rather than primarily motivated by legitimate business purposes.”  Finally, ChriMar argued that Cisco and HP’s UCL claims should be dismissed because they relied on the same conduct that formed the basis of their Section 2 claims.

Cisco and HP’s Opposition.  Cisco filed an opposition to ChriMar’s motion, as did HP.  Responding to ChriMar’s arguments that Defendants failed to adequately plead a relevant market, both Cisco and HP argued that “[m]arket definition is rarely grounds for dismissal of a pleading because ‘the validity of the relevant market is typically a factual element rather than a legal element” that is not appropriate to resolve on a Rule 12 motion.  

On the merits, Defendants argued that numerous cases have consistently held “that the relevant market is defined by those technologies that — before the standard was adopted — were competing to perform the function that was covered by the purportedly essential patent.”  According to Cisco and HP, “ChriMar does not cite to a single case that considered the relevant market where antitrust violations occurred in connection with misconduct in the context of standards development.”  In contrast, Defendants argued that Apple v. Samsung, Broadcom v. Qualcomm and Apple v. Motorola confirm that their market definition was adequately pled.  In Samsung, Apple pled the relevant market as “the various markets for technologies that — before the standard was implemented — were competing to perform each of the various functions covered by each of Samsung’s purported essential patents for UMTS.”  “Apple also identified the patents Samsung declared as standard essential and alleged that ‘pre-standardization there existed alternative substitutes for the technologies covered by Samsung’s patents,’ and that after standardization, ‘viable alternative technologies were excluded.'”  Defendants asserted that the Samsung court found such allegations to “define the bounds of the relevant market” and that “Apple ha[d] sufficiently pled a relevant antitrust market” because “the incorporation of a patent into a standard . . . makes the scope of the relevant market congruent with that of the patent.”

According to Defendants, the Broadcom court reached a similar conclusion, holding that Broadcom, the alleged infringer, had adequately pled a relevant market to support a monopolization claim that was defined as “the market for Qualcomm’s proprietary WCDMA technology, a technology essential to the implementation of the UMTS standard.”  Apple v. Motorola reached a similar conclusion, finding that a relevant market was sufficiently pled as “the various technologies competing to perform the functions covered by Motorola’s declared-essential patents for each of the relevant standards.”

Cisco and HP argued that, “[c]onsistent with these cases, [Defendants] defined the market to comprise the technologies that competed to perform the functions in the [Power over Ethernet] Standards allegedly covered by the ‘250 patent.”  This definition, according to Defendants, “appropriately focuses on alternative technologies that were excluded from the market by ChriMar’s deceptive conduct and which [Defendants] and other implementers of the standard cannot now choose because the industry is ‘locked-in’ to the standard.”  “To the extent ChriMar argues the correct market definition should include the entire standard, rather than some portion of the standard, that argument is inconsistent with both the complaint and with”  Samsung, Broadcom, and Apple.

With respect to monopoly power, both Cisco and HP argued that in the standards context, “it is well settled that patentees holding standard-essential patents can possess monopoly power.”  Cisco and HP again relied upon Samsung, wherein the court concluded that “because standard-essential patents may confer antitrust market power on the patent owner, Apple’s claims” that “Samsung had market power over the relevant market because it obtained the power to raise prices and exclude competition over the technologies covered by Samsung’s standard-essential patents” and that “there was a ‘lock-in’ to the standard” were sufficient to plead monopoly power.  Cisco and HP argued that their counterclaims satisfied this standard because they alleged that, as a result of ChriMar’s accusations that “the leading vendors of Power over Ethernet-enabled products” infringe the ‘250 Patent, “it is ChriMar’s position that no meaningful level of Power over Ethernet-enabled products do not infringe the ‘250 Patent.”  Further, like the allegations in Samsung, Cisco and HP both allege that “because of ‘lock-in’ to the standard,” there are no “viable technology substitutes at present.”  “Accordingly, if the ‘250 Patent claims covered products that comply with the IEEE standard as claimed by ChriMar, ChriMar has monopoly power over the Power over Ethernet Technology Market.”

The element of antitrust injury was also adequately pled, according to Cisco and HP.  Defendants argued that in order to plead that they have suffered antitrust injury, they must allege facts showing an injury to competition.  “It is well settled that misconduct before an SSO harms competition by ‘obscuring the costs of including proprietary technology in a standard and increasing the likelihood that patent rights will confer monopoly power on the patent holder.'”  Cisco and HP pointed to allegations in their counterclaims “concerning the harm to competition caused by ChriMar’s deception in the context of standards setting,” including that ChriMar “‘could charge supra-competitive prices”‘” and that “‘[c]ustomers and consumers will be harmed, either by not getting products that are compliant with the IEEE 802.af and IEEE 802.at amendment to the IEEE 802.3 standard or having to pay an exorbitant price for one.”

Cisco also took issue with ChriMar’s argument that “the anticompetitive harm alleged by Cisco ‘is a potential consequence in any successful patent litigation.'”  According to Cisco, “[t]his is not just ‘ any patent litigation,’ and the competitive harm alleged by Cisco is not the natural result of any litigation.”  “[H]ere, ChriMar deliberately subverted the goals of the IEEE standards-setting process by not disclosing its patent rights, waiting until the industry became ‘locked-in’ to the [Power over Ethernet] Standards, and demanding royalties from implementers of the standards that Cisco has alleged will lead to ‘supra-competitive prices.'”

With respect to ChriMar’s Noerr-Pennington argument, Cisco argued that “[c]ourts have repeatedly recognized that the Noerr-Pennington doctrine does not apply to monopoly power gained through deception in the context of SSOs, even when an allegedly standard-essential patent is subsequently asserted in court.”  As the doctrine does not apply, Cisco and HP need not plead facts supporting the two exceptions.

HP argued similarly, but also asserted that its counterclaim alleged facts supporting the “sham” exception to Noerr-Pennington, that is is, that ChriMar filed a sham ITC proceeding against HP and others only to later voluntarily withdraw it.

HP also asserted that its counterclaims adequately pled that ChriMar had a specific intent to monopolize and a dangerous probability of obtaining a monopoly.  “HP alleges facts that ChriMar deceitfully concealed its patent in connection with the IEEE standards-setting process and then sought to enforce its patent in the ITC.  This conduct shows a specific intent by ChriMar to monopolize the [Power over Ethernet] Technology Market through its anticompetitive conduct.”  “ChriMar became dangerously close to succeeding in its attempt, having dismissed its complaint less than two months before the start of the ITC hearing.”

Finally, Cisco and HP argued that, because they adequately pled causes of action under the federal antitrust laws, they also adequately pled a cause of action under California’s UCL.

The Court’s Decision on Cisco and HP’s Monopolization Counterclaims.  After ChriMar filed its reply, the court entered an order granting ChriMar’s motion.  With respect to Cisco and HP’s monopolization claims, the court agreed with ChriMar that their pleadings failed to allege facts sufficient to define the relevant market, a necessary element to a Section 2 claim.  “Courts typically require that the proposed relevant market be defined with reference to the rule of reasonable interchangeability and cross-elasticity of demand.”  “However, in the context of a standard setting organization (‘SSO’) locking in a standard which eliminates substitute or alternative technologies courts have allowed a relevant market to be defined by the technologies that were competing before the standard was adopted to perform the function that is covered by the standard and the essential patent.”  “For example, in [Apple v. Samsung], the court found sufficient Apple’s allegations that defined the relevant market as the ‘various markets for technologies that — before the standard was implemented — were competing to perform each of the various functions covered by each of Samsung’s purported essential patents for’ the standard.”  The court in Samsung further “noted that Apple alleged that pre-standardization there were alternative substitutes for the technologies covered by Samsung’s patents, and that after the SSO adopted the proposed standard, viable alternative technologies were excluded.”  Cisco and HP’s claims failed to plead such facts or facts defining the market “as comprising the technologies that competed to perform the functions in the Power over Ethernet standards allegedly covered by the ‘250 Patent.”  Therefore, Cisco and HP failed to sufficiently allege the relevant market.

The court also held that Cisco and HP failed to allege sufficient facts showing that ChriMar had the requisite market power to support a Section 2 claim.  On this element, Cisco and HP argued that “their allegations regarding ChriMar’s failure to disclose its belief that the ‘250 Patent was essential to the 802.3af and 802.3at amendments to the IEEE 802.3 to the standard setting organization (‘SSO’) is sufficient to allege their monopoly claims.”  Citing to an earlier decision in Apple v. Samsung, Defendants contended that “it is sufficient to allege that if the ‘250 Patent is essential, then ChriMar has monopoly power.”  The court, however, concluded that the decision did not support defendants’ contention.  Specifically, “in that case, the court determined that Apple had sufficiently alleged monopoly power.”  “The court in Samsung further noted that, in contrast to the theory that a patent holder misrepresented to an SSO that it would license its intellectual property on RAND terms, ‘[c]ourts have been more reluctant to find an antitrust violation based on the theory that a failure to disclose intellectual property rights in a declared essential patent created monopoly power for a member of the SSO.'”  Indeed, the Samsung court expressly required the plaintiff to allege that “there was an alternative technology that the SSO was considering during the standard setting process and that the SSO would have adopted an alternative standard had it known of the patent holder’s intellectual property rights.”  The Samsung court further made it “clear that the heightened pleading requirements under Rule 9(b) for fraud applies to” the types of antitrust claims brought by Cisco and HP.  Applying these standards to those claims, the court concluded that “they fail to allege non-conclusory facts which, if true, would be enough to show that ChriMar acquired sufficient monopoly power.”  “Notably, Defendants fail to clearly allege that the IEEE would have adopted an alternative standard had it known about the ‘250 Patent and ChriMar’s position with respect to its ‘250 Patent.”  Therefore, Cisco and HP failed to plead the necessary element of market power.

Finally, with respect to the necessary element of antitrust injury, the court concluded that Cisco and HP’s claims merely alleged, “in conclusory fashion, that ChriMar’s alleged conduct has ’caused and will directly and proximately cause antitrust liability to [Defendants] within the Power over Ethernet Technology Market . . .”  Neither defendant pled any facts which, if true, “would demonstrate antitrust injury.”

Because Cisco and HP failed to allege the necessary elements of a relevant market, monopoly power, and antitrust injury, the court found “that Defendants have not alleged sufficient facts to state a counterclaim for monopolization.”  However, the court provided Defendants with leave to amend their monopolization claims in an attempt to remedy the deficiencies identified by the court.

Notably, the court did not address — at least not at this time — ChriMar’s Noerr-Pennington arguments but may very well do so on any subsequent motion to dismiss the amended counterclaims permitted by the court’s decision.

The Court’s Decision on HP’s Attempted Monopolization Counterclaim.  Because HP failed to plead a relevant market as well as antitrust injury, HP’s attempted monopolization claim failed as well.  “In addition, although a lower percentage [of market share] is required for an attempted monopoly claim, as opposed to an actual monopoly claim, HP must still allege sufficient market power.”  The court concluded that HP failed to allege sufficient market power which was also “fatal to its attempted monopolization claim.”

The court disagreed with ChriMar’s argument that “HP’s attempted monopolization counterclaim fails for the additional reason that HP fails to allege specific intent to monopolize or a dangerous probability of obtaining monopoly power because HP’s attempted monopolization allegations are based solely around the terminated [ITC] investigation.”  The court concluded that “HP does not rely solely upon the ITC investigation” but “is also premised upon ChriMar’s alleged misconduct before the SSO.”  However, because the court was granting HP leave to amend its counterclaim to adequately allege a relevant market, market power and antitrust injury, the court did not reach the issue of whether HP’s additional allegations regarding the ITC investigation would be sufficient, standing alone, to state a claim for attempted monopolization “if HP sufficiently alleges the relevant market power, and an antitrust injury.”  HP’s attempted monopolization claim was therefore dismissed with leave to amend.

The Court’s Decision on Cisco and HP’s UCL Counterclaims.  The court also dismissed Cisco and HP’s UCL counterclaims.  “Courts have held that where the alleged conduct does not violate the antitrust laws, a claim based on unfair conduct under the UCL cannot survive.”  “Because the Court finds that Defendants have not alleged facts sufficient to state a a counterclaim for monopolization and attempted monopolization, Defendants’ UCL counterclaims” fail as well.  However, as with the other counterclaims, the court granted HP and Cisco leave to amend this claim as well.

We will continue to track the pleading and other developments in this case.

Judge Andrews has entered an order allowing InterDigital and ZTE to proceed with FRAND and damages discovery, following last week’s jury verdict finding that ZTE’s accused handset devices infringe the patents asserted by InterDigital. As we previously mentioned, ZTE asserted a number of FRAND-related affirmative defenses and counterclaims in the litigation, all of which were bifurcated from the infringement liability issues on trial last week. With respect to the SSO-related portion of the case, the order instructs the parties to proceed with FRAND and damages discovery under the assumption that the infringement verdict will stand and without the need to coordinate with discovery in InterDigital’s co-pending case against Nokia, scheduled for trial March 2015:

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 schedule should culminate in a trial disposing of the FRAND/damages issues.

The order also denies the pending JMOL motions — after trial, ZTE filed for JMOL of noninfringement and InterDigital sought JMOL declaring each of the asserted patents were not invalid — sets a briefing schedule for ZTE’s renewed JMOL or motion for new trial, invites the parties to submit an agreed-upon revised judgment form, and indicates the Court will “issue an order in the Nokia case to learn Nokia’s position on further claim construction in relation to the ‘151 patent” which was presented at trial but ultimately not decided by the jury. During the trial, the Court suggested and the parties stipulated to a mistrial with respect to the ‘151 patent after certain claim construction evidence was presented by InterDitigal. The parties afterwards agreed to hold separate claim construction proceedings on the ‘151 patent and, in accord with yesterday’s order, will proceed with a two-day trial on infringement issues related to this patent alone at a later date.