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

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

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

Today, a Northern District of California jury in a trial before Magistrate Judge Nathanael M. Cousins entered a Verdict finding that Apple infringed two patents alleged essential to ETSI and 3GPP cellular standards, that the patents were not invalid and awarding a reasonable royalty in the amount of $3.4 Million and $3.9 Million for each patent, respectively, as single lump sum payments for past and future infringement.  It is not clear from the public record how the jury reached this damages verdict or whether it favors more the patent owner Core Wireless or the adjudged infringer Apple.  We may follow-up this post if more insight is provided by post-trial briefings or the trial transcripts become public.

Below is a discussion of some of the pre-trial rulings and jury instructions that would have shaped the jury’s reasonable royalty determination here.  These rulings touch-on the issues of royalty stacking, the smallest salable patent practicing unit, the form of a reasonable royalty, relevant Georgia-Pacific factors and apportionment to the value of the patented technology. Continue Reading Jury awards Core Wireless $7.3 Million lump sum for Apple’s infringement of two SEPs (Core Wireless v. Apple)

Last week, the Federal Circuit denied en banc review by the entire court of the three-judge panel decision in the Apple v. Samsung case that had revived the ability to obtain injunctive relief against multiple component products, such as smartphones (see our Sep. 17, 2015 post).  In doing so, the original three-judge panel (Prost, Moore and Reyna) issued an Order that withdrew their original opinion and issued a revised opinion that focuses on the patented feature being “one of several [features] that cause consumers to make their purchasing decision,” rather than the patented feature having to be “the exclusive or significant driver of customer demand” as prior decisions had intimated.

Continue Reading Federal Circuit revised injunction decision to emphasize patented feature being one of several that drive purchasing decision (Apple v. Samsung)

Ericsson and Apple reportedly have settled the patent disputes between them, including those involving standard essential patents that were pending in district courts in California and Texas as well as in the U.S. International Trade Commission.  This is reported to be a 7-year agreement that involves cross-licensing as well as Apple paying royalties to Ericsson.  Details of the agreement are not available.

It is not clear what spurred the settlement.  The Federal Circuit’s recent CSIRO decision a few weeks ago on determining infringement damages for standard essential patents probably favored Ericsson’s royalty requests in those cases because it continued the Federal Circuit’s trend of favoring damages model that rely on actual real world licenses and dispels the myth that all patent damages models must always start with the smallest salable patent practicing unit (see our Dec. 3, 2015 post).  This would have allowed Ericsson to rely more heavily on its established historical licensing program to establish royalty damages against Apple, and would have hindered a smallest salable patent practicing unit damages model that defendants have sought to assert against standard essential patents (as well as patents in general).

Today, a divided Federal Circuit panel issued a decision that vacates district court’s decision not to permanently enjoin Samsung from selling mobile devices having features found to infringe Apple’s patents.  The majority decision breaths life back into injunctive relief against multi-component/multi-featured devices (like mobile phones) by not requiring the patent owner to show that its patented feature “drive[s] customer demand” for the infringing product in order to show a nexus between the infringement and alleged irreparable harm required for injunctive relief.  Rather, the patent owner need show “some connection” between the patented feature and consumer demand for the infringing product, which can be shown in “a variety of ways.”  For example, evidence that the patented features “is one of several features that cause consumers to make their purchasing decisions” or “makes a product significantly more desirable.”

Background

This case involves three Apple patents directed to features in touchscreen mobile devices:

  1. Slide-to-unlock image on touchscreen to unlock mobile device (the ‘721 Patent)
  2. Generating links within text upon detecting data structures, such as detecting a phone number in a text message and creating a link to dial that number (the ‘647 Patent)
  3. Automatic spell check and correction on touchscreen (the ‘172 Patent)

In 2012, Apple sued Samsung for infringing those patents (as well as others).  Samsung was found to infringe the three patents and a jury awarded Apple over $119 million in damages.  Apple then sought to enjoin Samsung from selling mobile phones or tablets with those infringing features — i.e., did not seek to enjoin sales of the mobile phone or tablets per se, just use of the infringing features in those devices.  Further, Apple proposed a 30 day “sunset period” before products would be enjoined, which time period coincided with Samsung’s representations at trial that it could quickly and easily remove the infringing features from the accused infringing Samsung devices.

But Judge Koh denied Apple’s request for a permanent injunction, finding that Apple failed to show it would suffer irreparable harm without an injunction.  Among other things, Apple had not shown that it lost sales to Samsung infringing devices, because Apple had not shown that the patented features drove customer demand for those products.

Decision

Judge Moore wrote the majority decision, which was joined by Judge Reyna, who also wrote a concurring opinion.  Judge Prost dissented.

The Federal Circuit’s standard of review here is whether the district court abused its discretion in deciding whether to grant injunctive relief based on the four eBay factors, which are whether the party seeking a permanent injunction has shown:

(1) that it has suffered an irreparable injury;
(2) that remedies available at law, such as monetary damages, are inadequate to compensate for that injury;
(3) that, considering the balance of hardships between the plaintiff and defendant, a remedy in equity is warranted; and
(4) that the public interest would not be disserved by a permanent injunction.

The majority then walked through each of the four factors, the most decisive one in this instance being whether Apple had shown irreparable harm through a “causual nexus relat[ing] the alleged harm to the alleged infringement.”

Irreparable Harm.  The patent owner satisfies this first factor by showing it has been “irreparably harmed by the infringement” based on “proof that a ‘causal nexus relates the alleged harm to the alleged infringement.'”  The majority rejected Apple’s argument that there is no causal nexus requirement when the patent owner seeks only to enjoin infringing features, rather than an entire product.  The majority explained that “[t]he causal nexus requirement ensures that an injunction is only entered … on account of a harm resulting from the defendant’s wrongful conduct, not some other reason.”  This is “entirely independent of the scope of the proposed injunction.”

But the majority found that the district court erred by requiring Apple to show that the infringing features “drive consumer demand for Samsung’s infringing products” in order to establish irreparable harm based on a causal nexus between the infringement and Apple’s lost sales.  While making such a showing would establish the causal nexus, it is not required and may be “nearly impossible from an evidentiary standpoint [to show] when the accused devices have thousands of features, and thus thousands of other potential causes that must be ruled out.”  Rather, the patent owner need only “show ‘some connection’ between the patented features and the demand for the infringing products”:

Thus, in a case involving phones with hundreds of thousands of available features, it was legal error for the district court to effectively require Apple to prove that the infringement was the sole cause of the lost downstream sales.  The district court should have determined whether the record established that a smartphone feature impacts customers’  purchasing decisions.  Though the fact that the infringing features are not the only cause of the last sales may well lessen the weight of any alleged irreparable harm, it does not eliminate it entirely.

In a footnote, the majority provide more insight into the range of ways that “some connection” between the patented feature and customer demand may be shown, which provides further insight into this issue:

As we explained in Apple III [735 F.3d 1352 (Fed. Cir. 2013)], “some connection” between the patented feature and consumer demand for the products may be shown in “a variety of ways,” including, for example, “evidence that a patented feature is one of several features that cause consumers to make their purchasing decisions,” “evidence that the inclusion of a patented feature makes a product significantly more desirable,” and “evidence that the absence of a patented feature would make a product significantly less desirable.”  These examples do not delineate or set a floor on the strength of the connection that must be shown to establish a causal nexus.  Apple III included a fourth example to demonstrate a connection that does not establish a casual nexus–where consumers are only willing “to pay a nominal amount for an infringing feaure.” (using example of $10 cup holder in $2000 car).  There is a lot of ground between the examples that satisfy the causal nexus requirement and the example that does not satisfy this requirement.  The required minimum showing lies somewhere in the middle, as reflected by the “some connection” language.

Thus the district court erred in requiring Apple to show that “the infringing features were the exclusive or predominant reason why consumers bought Samsung’s [infringing] products.”  Rather, the court should have required Apple to show that “the patented features impact consumers’ decisions to purchase the accused devices.”

The majority then went through the record in the case and concluded that Apple had made the requisite showing here:

In short, the record establishes that the [patented] features … were important to product sales and that customers sought these features in the phones they purchased.  While this evidence of irreparable harm is not as strong as proof that customers buy the infringing products only because of these particular features, it is still evidence of causal nexus for lost sales and thus irreparable harm. … Apple does not need to establish that these features are the reason customers bought Samsung phones instead of Apple phones–it is enough that Apple has shown that these features were related to infringement and were important to customers when they were examining their phone choices. [emphasis in original]

The majority thus concluded that this irreparable harm factor weighs in favor of granting Apple’s requested injunction.

Inadequate Remedy at Law.  This second factor considers whether “remedies available at law, such as monetary damages, are inadequate to compensate” for the irreparable harm caused by continued infringement.  The district court had found that Apple’s lost sales “were difficult to quantify,” but still concluded that this factor weighed against an injunction because Apple had failed to establish irreparable harm.  The majority found this was error given its ruling on irreparable harm, finding that this factor “strongly weighs” in favor of an injunction given “the extent of Apple’s downstream and network effect losses are very difficult to quantify.”

Balance of Hardships.  This third factor concerns “assess[ing] the relative effect of granting or denying an injunction on both parties.”  The district court found that this factor favored injunctive relief based on (1) the proposed injunction targeting specific features, not entire products; (2) the proposed 30-day sunset provision and (3) Samsung’s repeated argument to the jury that “designing around the asserted claims … would be easy and fast.”  The latter point raises the typical Catch-22 accused infringers encounter when arguing that a patented feature has little value in order to avoid a large damages award, and then that argument being used against them when trying to avoid injunctive relief.  The majority held that this factor strongly weighed in favor of injunctive relief:

On this record, it is clear–Samsung will suffer relatively little harm from Apple’s injunction, while Apple is deprived of its exclusivity and forced to compete against its own innovation usurped by its largest and fiercest competitor.  Given the narrow feature-based nature of the injunction, this factor strongly weighs in favor of granting Apple this injunction.

Public Interest.  This fourth and final factor requires the patent owner to show that “the public interest would not be disserved by a permanent injunction.”  The district court found this factor favors injunctive relief, because (1) “enforc[ing] patent rights … promote[s] the encouragement of investment-based risk” and (2) “an injunction may prompt introduction of new alternatives to the patented features.”  The majority agreed, and then some, stating that “the public interest strongly favors an injunction” here [emphasis in original]:

Samsung is correct–the public often benefits from healthy competition.  However, the public generally does not benefit when that competition comes at the expense of a patentee’s investment-backed property right.  To conclude otherwise would suggest that this factor weighs against an injunction in every case, when the opposite is generally true.  We based this conclusion not only on the Patent Act’s statutory right to exclude, which derives from the Constitution, but also on the importance of the patent system in encouraging innovation.  Injunctions are vital to this system.  As a result, the public interest nearly always weighs in favor of protecting property rights in the absence of countervailing factors, especially when the patentee practices his inventions.  The encouragement of investment-based risk is the fundamental purpose of the patent grant, and is based directly on the right to exclude.

The majority thus vacated the district court’s denial of an injunction and remanded the case back to the district court for further proceedings consistent with this opinion.  The majority concluded that, “[i]f an injunction were not to issue in this case, such a decision would virtually foreclose the possibility of injunctive relief in any multifaceted, multifunction technology.”

Judge Reyna Concurrence.  Judge Reyna issued a concurring opinion, noting that the decision “leaves open the door for obtaining an injunction in a case involving infringement of a multi-patented device, a door that appears near shut under current law.”  He also would have ruled that irreparable harm would arise based on “injury that the infringement causes Apple’s reputation as an innovator.”  This type of harm, when it occurs, is irreparable. The majority decision written by Judge Moore, which Judge Reyna joined, stated that it need not reach that issue given the finding of irreparable harm based on lost sales.

Judge Prost Dissent.  Judge Prost dissented, finding that “[t]his is not a close case.”  Among other things, Apple did not use the patented spell correction feature and the other two patented features were “minor features (two out of many thousands) in Apple’s iPhone.”  The record does not show “clear error” in the district court’s factual findings underlying its decision to deny injunctive relief.

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

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

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

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

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

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

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

• repair, use, or operate EQUIPMENT; and

• use METHODS.

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

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

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

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

Apple went on to allege that

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

A California federal jury handed Apple a substantial victory over patent-plaintiff GPNE yesterday afternoon, finding Apple’s iPhone and iPad products do not infringe three GPNE patents alleged to be essential to GPRS and LTE standards. After less than one day of deliberations following a two-week trial, the jury issued a verdict form finding that none of Apple’s products infringed the asserted patents and awarding no amount of the $94 million in damages sought by GPNE. The jury did not deliver a complete landslide victory to Apple, finding the tech-giant failed to prove the asserted patent claims to be invalid.

This case first appeared on our radar after GPNE submitted an expert report on damages opining that the asserted patents should be afforded a royalty rate greater than what was warranted by the technical value of the patent based on the “hold-up” value the patent. Based on the opinion of GPNE’s technical expert that the asserted patents were essential to the GPRS and LTE communication standards, GPNE’s damages expert argued that because the patents are not subject to any RAND-obligation, the alleged standard-essential patents demand a higher royalty rate higher than the particular patented technology itself warranted. As discussed in our April 23, 2014 post, Judge Koh excluded the expert’s testimony without prejudice, allowing GPNE to submit an amended expert report on damages. GPNE’s damages expert submitted a subsequent report providing additional support for the royalty calculation and was permitted to present testimony on both reports at trial.

 

Yesterday, in Virnetx, Inc. v. Cisco Systems, No. 2013-1489, the Federal Circuit ruled that an expert’s damages testimony was not admissible.  The court’s ruling provides guidance on underlying circumstances required to establish a royalty base and a royalty rate as well as questions the viability of using the Nash Bargaining Solution’s 50/50 split of profits between the patent owner and infringer  as a starting point to establish a reasonable royalty.

Background.

The patents concern technology for providing security over networks, such as the Internet.  Patent owner VirnetX accused Apple of infringing two patents based on the “FaceTime” feature provided on Apple’s iPhone, iPod, iPad and Mac computers.  VirnetX accused Apple of infringing two other patents based on its “VPN On Demand” feature in the iPhone, iPad and iPod Touch.  A jury returned a verdict that all asserted claims were valid and infringed, and awarded about $368 million reasonable royalty damages.

During the trial, the patent owner’s damages expert presented three reasonable royalty theories.

  1. First Theory.  His first theory applied a 1% royalty to the lowest sale price of each accused device to arrive at $708 million royalty.  The 1% amount was based on the patent owner’s “policy of seeking to license its patents for at least 1-2% of the entire value of products sold” as well as allegedly comparable licenses.
  2. Second Theory.  His second theory was applied to FaceTime products using the Nash Bargaining Solution to start at a 50/50 split of profits between the patent owner and accused infringer and then using factors to modify that approach to give the patent owner 45% of the profit.  This led to a $588 million royalty.
  3. Third Theory.  His third theory also applied the Nash Bargaining Solution against FaceTime products, but claimed that FaceTime “drove sales” of Apple’s iOS products based on a customer survey asserting that 18% of those sales would not have occurred without the addition of FaceTime to the device.  Using the same Nash 50/50 split of profits starting point, the expert attributed 45% of the profits to the patent owner yielding $5.13 per unit royalty that totaled $606 million royalty.

Decision

The Federal Circuit started by explaining that, “[n]o matter what the form of the royalty, a patentee must take care to seek only those damages attributable to the infringing features.”  The court instructed that apportionment generally applied for claims drawn to an individual component of a multi-component product:

Thus, when claims are drawn to an individual component of a multi-component product, it is the exception, not the rule, that damages may be based upon the value of the multi-component product.  Indeed, we recently reaffirmed that “[a] patentee may assess damages based on the entire market value of the accused product only where the patented feature creates the basis for customer demand or substantially creates the value of the component parts.”  In the absence of such a showing, principles of apportionment apply.

These strict requirements limiting the entire market value exception ensure that a reasonably royalty “does not overreach and encompass components not covered by the patent.”  Thus, “[i]t is not enough to merely show that the [patented feature] is viewed as valuable, important, or even essential to the use of the [overall product].”  Instead, this court has consistently held that “a reasonable royalty analysis requires a court to … carefully tie proof of damages to the claimed invention’s footprint in the market place.”  Additionally, we have also cautioned against reliance on the entire market value of the accused products because it “cannot help but skew the damages horizon from the jury, regardless of the contribution of the patented component to this revenue.”

Jury Instructions on Entire Unit as Royalty Base.  In this case, the Federal Circuit took issue with the jury instruction that, “[i]n determining a royalty base, you should not use the value of the entire apparatus or product unless either: … (2) the product in question constitutes the smallest saleable unit containing the patented feature.”  This instruction was wrong because it “mistakenly suggests that when the smallest salable unit is used as the royalty base, there is necessarily no further constraint on the selection of the base.”  The smallest salable patent-practicing unit is a “step toward meeting the requirement of apportionment”, but more apportioning is required if such a unit is a multi-component product:

Where the smallest salable unit is, in fact, a multi-component product containing several non-infringing features with no relation to the patented feature (as [patent owner] VirnetX claims it was here), the patentee must do more to estimate what portion of the value of that product is attributable to the patented technology.

Expert’s First Approach.  The Federal Circuit agreed that the patent owner’s expert’s testimony should have been excluded because it “relied on the entire market value of Apple’s products without demonstrating that the patented features drove the demand for those products.”  In this case, the expert “did not even attempt to substract any other unpatented elements from the base, which therefore included various features indisputably not claimed by VirnetX, e.g., touchscreen, camera, processor, speaker, and microphone, to name but a few.”  Where the patented feature does not drive demand for the product, apportionment is required regardless whether the patented feature is “viewed as valuable, important, or even essential,” the Federal Circuit stating:

[A] patentee must be reasonable (though may be approximate) when seeking to identify a patent-practicing unit, tangible or intangible, with a close relation to the patented feature.  In the end, [patent owner] VirnetX should have identified a patent-practicing feature with a sufficiently close relation to the claimed functionality.  The law requires patentees to apportion the royalty down to a reasonable estimate of the value of its claimed technology, or else establish that its patented technology drove demand for the entire product.  VirnetX did neither.

The expert’s testimony should have been excluded here, because he “did not even try to link demand for the accused device to the patented feature, and failed to apportion value between the patented features and the vast number of non-patented features contained in the accused products.”

The Federal Circuit, however, did not find error in admitting the 1% royalty rate portion of the expert’s testimony based on comparable licenses.  In this case, four of the alleged comparable licenses related to the actual patents-in-suit, the others were drawn to related technology and “all of the other differences that Apple complains of were presented to the jury”:

[T]hough there were undoubtedly differences between the licenses at issue and the circumstances of the hypothetical negotiation, “[t]he jury was entitled to hear the expert testimony and decide for itself what to accept or reject.”

Expert’s Nash Bargaining Solution Theories.  The Federal Circuit agreed that the expert’s using the Nash Bargaining Solution 50/50 split as a starting point was akin to the rejected “25 percent rule of thumb” and could not be relied upon “without sufficiently establishing that the premises of the theorem actually apply to the facts of the case at hand”:

The Nash theorem arrives at a result that follows from a certain set of premises.  It itself asserts nothing about what situations in the real world fit those premises.  Anyone seeking to invoke the theorem as applicable to a particular situation must establish that fit, because the 50/50 profit-split result is proven by the theorem only on those premises.  [Patent owner’s expert] did not do so.

The key problem here was starting with the 50/50 split with no basis to do so in this case and then trying to adjust it based on the circumstances of the case, which high starting point could skew a jury’s verdict:

[E]ven if an expert could identify all of the factors that would cause negotiating parties to deviate from the 50/50 baseline in a particular case, the use of this methodology would nevertheless run the significant risk of inappropriately skewing the jury’s verdict.  This same concern underlies our rule that a patentee may not balance out an unreasonably high royalty base simply by asserting a low enough royalty rate. … [H]ere, the use of a 50/50 starting point–itself unjustified by evidence about the particular facts–provides a baseline from which juries might hesitate to stray, even if the evidence supported a radically different split.

In sum, the expert’s failure to first establish the required premises of the Nash Bargaining Solution are met in this case to justify starting with a 50/50 split rendered that testimony inadmissible even though the expert attempted to adjust that 50/50 split it started with based on the circumstances of the case.

A significant portion of the international patent wars between Apple and Samsung have been brought to a close, according to a joint statement issued by the parties:

Apple and Samsung have agreed to drop all litigation between the two companies outside the United States. This agreement does not involve any licensing arrangements, and the companies are continuing to pursue the existing cases in U.S. courts.

We note that the statement is similar to the one that issued following resolution of the disputes between Apple and Google this May.

Since 2011, Apple and Samsung have been involved in cross-infringement actions in Australia, France, Germany, Italy, Netherlands, South Korea, and the U.K. Many of these non-U.S. cases involved significant SEP-related rulings. You may recall that earlier this year, the Japanese High Court denied Samsung injunctive relief against Apple while allowing FRAND-based damages on the asserted SEPs (see our May 21, 2014 post). In a separate proceeding related to the European Commission’s investigation of Samsung’s SEP enforcement against Apple, Samsung committed to not pursue any injunctions in the European Economic Area for a period of five years based on any SEPs related to smartphone/tablet technologies against companies that agree to a predetermined licensing framework, as discussed in our April 30, 2014 post.

Although litigation abroad has been brought to a close, the U.S. dispute between the companies moves forward — albeit without any notable SEP issues for the time being. In March, Judge Koh granted Apple and Samsung’s request to dismiss without prejudice Samsung’s SEP infringement claims and Apple’s related FRAND defenses and counterclaims (see our March 12, 2014 post).

 

 

Yesterday a jury returned a verdict finding that Apple does not infringe Golden Bridge’s patent alleged to be essential to the WCDMA standard.  The verdict thus did not reach the royalty-rate issue that was interesting for a few reasons.

Excluded FRAND Expert Testimony.  As discussed in our May 30, 2014 post, Magistrate Judge Grewal had excluded patent owner Golden Bridge’s damages expert testimony because it represented a flawed methodology for computing a fair, reasonable and non-discriminatory (FRAND) royalty rate.  He gave Golden Bridge a week to submit a revised damages report.  But during trial he excluded that revised testimony as well. 

The damages expert had abandoned his first entire market value theory and tried to focus on Apple’s license agreements with Ericsson and Nokia to support a per-unit royalty of $0.0869.  But Judge Grewal found this new theory was flawed as well, because the damages expert improperly “allocated the entire value of Apple’s portfolio licenses with Ericsson and Nokia to a tiny subset of a subset of a subset of a subset of the patents and standards in those portfolios.”  The licenses considered cover “all standard essential patents” to include technologies beyond WCDMA, such as Wi-Fi, GSM and LTE.  But the expert attributed no value to patents covering other standards and he did not address — as the patentee’s attorney tried to explained later — that WCDMA was the focus of the alleged comparable licenses because that’s what the Apple products practiced at the time.  The expert’s testimony was thus excluded for not accounting for differences between the alleged comparable licensed technology and the patents-in-suit:

Under established Federal Circuit law, an expert may not rely on broad licenses that cover technologies far beyond the patents-in-suit without accounting for the differences in his calculations.  That is precisely what [the patent owner’s damages expert] did not do here, resulting in a fundamentally unsound calculation.  That the entire dollar value of the Apple-Ericsson and Apple-Nokia agreements stemmed entirely from the actually-essential (not just declared essential) WCDMA patents (not those related to other active standards) relating to terminal devices is an implausible assumption to begin with, and [the expert] does not even attempt to justify this assumption.

Jury Instructions.  Another interesting aspect of this case is that one may miss that this is a standard essential patent case when simply reading the Final Jury Instructions.  The damages instructions (Instruction Nos. 17-21) read like a typical instruction for determining a Georgia-Pacific reasonable royalty without any modification (such as the modified Georgia-Pacific analysis applied to determine a RAND-rate by Judge Robart in Microsoft v. Motorola or by Judge Holderman in Innovatio, or the RAND-specific instructions given by Judge Whyte in Realtek v. LSI).  The only hint of a standard-setting issue in the jury instructions is found in one phrase of the last sentence of Instruction No. 20 “Damages–Noninfringing Alternatives”:

You may also consider the impact of any available noninfringing alternatives to the asserted claim on the royalty negotiated in the hypothetical negotiation.  In doing so, you may consider the value of any differences in benefits and costs between the noninfringing alternatives and the asserted claim.  You may also consider any alternatives that were available to a standard-setting body or to a third-party component supplier, whether the alternatives are marketed or not. [emphasis added]

 Thus, the jury instructions basically left it to the parties to argue any standard-setting obligation’s impact on the reasonable royalty analysis.