There are a couple of programs coming up this week and next that you may want to check out on the IEEE’s recent intellectual property rights (“IPR”) policy change (see our Feb. 3, 2015 post  and Feb. 5,  2015 post).  Both of these are programs that can be accessed remotely.

ABA Program.  This Tuesday, March 10, 2015 from 2:30 to 4:00pm Eastern, the American Bar Association is having a program entitled “An Analysis of the DOJ’s Business Review Letter.”  The program will be moderated by Koren W. Wong-Ervin of the U.S. Federal Trade Commission (“FTC”) with  speakers from the FTC, U.S. Department of Justice, industry (Qualcomm) and private practice.  More particulars and registration information can be found at the ABA website.

IPO Program.  Next Wednesday, March 18, 2015 from 2:00 pm to 3:00 pm Eastern, the Intellectual Property Owners Association is having a webinar entitled “The Future of Standards: What’s Next After the IEEE Shift.”  The program will have speakers from industry (IBM and Intel)  and private practice, including our own David Long.  More particulars and registration information can be found at the IPO website.

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.

The Antitrust Division of the U.S. Department of Justice (“DOJ”) has published a business review letter that it will not challenge the Institute of Electrical and Electronics Engineers (“IEEE”) adopting changes to its IPR Policy discussed in our Feb. 3, 2015 post. In a related DOJ press release, DOJ states that it does not dictate patent policy choices of standard setting organizations (“SSOs”), and did not believe the proposed IPR policy change “is likely to result in harm to competition”, stating:

“The department supports standards setting organizations’ efforts to clarify their patent licensing policies,” said Acting Assistant Attorney General Hesse.  “IEEE’s decision to update its policy, if adopted by the IEEE Board, has the potential to help patent holders and standards implementers to reach mutually beneficial licensing agreements and to facilitate the adoption of pro-competitive standards.  Where, as here, the department does not believe that adoption of a policy change is likely to result in harm to competition, IEEE and other standards setting organizations are free to adopt those modifications to their policies that they believe will benefit their standard setting activities.  The U.S. government does not dictate patent policy choices to private standards setting organizations.”

DOJ also explained the limited import of its business review letter as a current intent not to bring an antitrust challenge against the business activity, though it may do so later if there are anticompetitve effects:

Under the department’s business review procedure, an organization may submit a proposed action to the Antitrust Division and receive a statement as to whether the division currently intends to challenge the action under the antitrust laws based on the information provided.  The department reserves the right to challenge the proposed action under the antitrust laws if it produces anticompetitive effects.

Below is a summary review of DOJ’s action here.

IEEE Request for Business Review Letter

DOJ was responding to IEEE’s request for a business review letter.  IEEE stated it was requesting such a review because some comments in response to the proposed IPR Policy change “voiced either vague or specific antitrust concerns,” including concerns that revisions “to the term ‘reasonable rate’ … could amount to ‘buyer-side price-fixing.'”  The IPR Policy change generally is directed to four areas:

  • A definition of “Reasonable Rate” that includes reference to “the smallest saleable Compliant Implementation”
  • A definition of “Compliant Implementation” as being a component, sub-assembly or end-product so that any such implementers along the chain may seek the benefits of a RAND-commitment
  • A blanket preclusion on seeking injunctive relief prior to adjucating through appeal reasonable license terms even as to unwilling licensees
  • Reciprocity provisions that may condition providing a license in return for a cross-licensee to the licensee’s SEPs on that same standard, and permitting voluntary flexibility with other reciprocity terms.

The IEEE’s letter states that it does not believe there is “buyer-side price-fixing” for several reasons.  With respect to what IEEE considered the most specific anti-trust issue raised concerning the term “reasonable rate”, IEEE emphasized that the enumerated factors–e.g., the smallest saleable Compliant Implementation–are not required to be considered, only recommended:

1.  The proposed policy does not set a maximum royalty, either for a specific patent or for a group of all patents essential to a particular standard.  It generally defines the term “reasonable rate” and recommends (but does not require) additional factors for consideration in determining an appropriate rate.  The proposed policy does not prevent parties from discussing any other factors that they believe appropriate.

IEEE also stated that the proposed IPR Policy change “does not retroactively amend previously Accepted Letters of Assurance” and patent owners are not required to submit new Letters of Assurance under the proposed IPR Policy change if they don’t want to.

IEEE’s Process In Proposing IPR Policy Change

DOJ received concerns by some entities that “parties desiring lower royalty rates commandeered IEEE-SA” and the IPR Policy revision “was the product of a closed and biased process.”  DOJ does not go into details about those concerns, but states that most concerned an Ad Hoc committee within IEEE that drafted the revision.  Below is a summary of where that Ad Hoc committee fit into the process.  Ultimately, DOJ determined that, “[g]iven the numerous opportunities for comment, discussion, and voting at different levels within IEEE, the Department cannot conclude that the process raises antitrust concerns.”

IEEE is a large non-profit professional technology association.  The IEEE Standard Association (IEEE-SA) is an operating unit within IEEE that develops technical industry standards and which developed the IPR Policy at issue here.  The IEEE-SA is governed by its own Board of Governors, who appoint members to the IEEE-SA Standards Board that oversees the IEEE standards-development process.  The IEEE-SA Standards Board has various working committees, including the Patent Committee (“PatCom”) that oversees the use of patents in developing IEEE standards.

Participants in the IEEE standard-setting process may submit letters of assurance (“LOAs”) for patents that may be essential to a developing standard and indicate their willingness to license such patents, and under what terms, if they ultimately are essential to the finalized standard.  Those terms include, for example, an agreement to license a patent that is essential to the standard on reasonable and non-discriminatory terms (“RAND”).

The PatCom chair appointed an Ad Hoc committee to consider changes to the IPR Policy given divergent views on what constitutes “reasonable rates” under a RAND-encumbered patent.  The Ad Hoc committee then drafted changes to the IPR Policy, which was revised and ultimately approved by the PatCom to forward to the IEEE-SA Standard Board.  The IEEE-SA Standards Board approved forwarding the revised IPR Policy to the IEEE-SA Board of Governors, which then approved the revision conditioned upon receiving a favorable business review letter from DOJ (i.e., this one here) and ultimate review by the IEEE Board of Directors.  The IEEE Board is expected to vote on this revised IPR Policy soon.

“Prohibitive Order” (e.g., Injunctions)

DOJ considered the proposed IPR Policy change that would preclude seeking an injunction until after licensing terms are adjudicated and go through at least a first level of appeal. DOJ observes that a RAND commitment under IEEE’s current IPR Policy does not preclude seeking an injunction against an unwilling licensee, stating that the RAND commitment includes an “[i]nherent … pledge to make licenses available to those who practice such essential patent claims … in other words, not to exclude these implementers from using the standard unless they refuse to take a RAND license.”  DOJ also observes, however, that the proposed amended IPR Policy “place[s] additional limits on patent holders’ ability to obtain injunctive relief” and is more restrictive than current U.S. case law and guidance from U.S. agencies, stating:

This provision may place additional limits on patent holders’ ability to obtain injunctive relief in a U.S. court, but it appears that, in practice, it will not be significantly more restrictive than current U.S. case law, and the added clarity may help parties reach agreement more quickly.  Although this provision is more restrictive than recent guidance on this issue from the U.S. government, the U.S. government does not dictate patent policy choices to private SSOs.

That noticeably understates the point because, as explained in our Feb. 3, 2015 post, there is universal agreement in statements by courts and agencies–including DOJ itself–that injunctive relief should be available in certain circumstances involving unwilling licensees in order to deter patent hold-out.  DOJ does not directly address this issue that the IPR Policy would preclude seeking an injunction against an unwilling licensee.  DOJ does so indirectly, indicating that implementers may be deterred from seeking to “delay payment” or being “recalcitrant about taking a license” because (i) they can avoid uncertainty caused by the absence of a license, (ii) they can avoid the cost of litigation, (iii) they may obtain a pre-litigation discount, and (iv) courts may require them to pay a bond or escrow payments, stating:

Nevertheless, patent holders have expressed concern that this damages remedy is insufficient because it permits potential licensees to benefit by delaying paying reasonable compensation for a portfolio of patents until a patent holder has litigated each patent in its portfolio individually.  The Department encourages patent holders and implementers to negotiate licensing agreements that are mutually acceptable, and there are incentives favoring a negotiated outcome.  For example, implementers have incentives to reach agreement on licensing terms to reduce cost uncertainty as they bring products to market.  In addition, litigation is expensive for both parties and licensees risk that a court will award a higher royalty for a patent that is found to be valid and infringed than a discounted pre-litigation rate offered by a licensor.

… [W]here potential licensees appear recalcitrant about taking a license, courts and other third-party decision makers may seek to ensure payment by requiring alleged infringers to post a bond or make escrow payments.  Moreover, other potential licensees will be less likely to litigate once a patent holder has demonstrated the value of its patents (or a subset of the patents in its portfolio) through successful infringement litigation.

But, again, those considerations always have been present, yet were not deemed sufficient deterrents by courts and U.S. agencies that have consistently stated that injunctive relief should be available against unwilling licensees.  This revision, therefore, actually may increase litigation over IEEE standards even though reducing such litigation is the suggested reason behind these revisions.

DOJ ultimately concludes that the proposed IPR Policy revision “is unlikely to result in competitive harm,” because it “is consistent with the direction of U.S. case law and patent holders can avoid its requirements by declining to submit an LOA.”  As discussed above, however, precluding injunctive relief against unwilling licensees is against current U.S. case law and prior guidance from U.S. agencies.  Challengers of the proposed IPR Policy change may argue this raises questions on the reliability of DOJ’s business review letter.

 “Reasonable Rate”

Mandatory Factor.  DOJ reviewed the defined “Reasonable Rate” as having a “mandatory factor” that “a Reasonable Rate ‘shall mean appropriate compensation … excluding the value, if any, resulting from the inclusion of [the patent claim’s] technology in the IEEE standard.'”  The general concept of apportioning value to the patented technology finds support in current case law, such as the Federal Circuit’s recent Ericsson decision.  DOJ also found that this provision aligns with goals of providing patent holders appropriate compensation without improper “hold-up value” connected with standardization, citing the Federal Circuit’s recent Ericsson v. D-Link decision that “the patentee’s royalty must be premised on the value of the patented feature, not any value added by the standard’s adoption of the patented technology.”  That Federal Circuit decision, however, counseled as being “neither necessary nor appropriate” instructing a jury on patent hold-up based merely on some “general argument that these phenomena are possibilities;” rather, patent hold-up may be considered if there is evidence of actual holdup, such as a patent holder seeking higher royalty rates after the IEEE standard was adopted (see our Dec. 5, 2014 post for a summary of the Ericsson v. D-Link decision).

DOJ does not refer to any actual evidence of hold-up for patents involving IEEE standards,  it is not clear that IEEE itself had considered such actual evidence, and IEEE standards (e.g., the 802.11 WiFi standard) have comprised the bulk of standard essential patent litigation, but they have no provided any actual evidence of patent holdup.  We have reported on one instance where a patent owner–that had not participated in the standard-setting process or made any associated commitment–argued its royalty rate could be enhanced by the fact that the defendant could not practice the standard absent a license to the patent, but the court in that case unsurprisingly precluded the patent owner from seeking such “hold-up” value. (See our Apr. 23, 2014 post).  Challengers of the revised IPR Policy may argue that the lack of any evidence of actual hold-up for patents involving IEEE standards raises questions about reliance on DOJ’s position here that seeks to justify a significant IPR policy change in order to address a problem for which there is no evidence actually exists.

Three Optional Factors.  DOJ also considered the remaining “three recommended factors” that include considering the “smallest saleable Compliant Implementation” and limiting consideration of comparable licenses to those not entered under threat of an injunction or in circumstances not consistent with the defined “Reasonable Rate.”  The DOJ found comfort from these factors not being required and no specific methodology being mandated:

Significantly, the Update makes clear that the determination of Reasonable Rates ‘need not be limited to’ these factors.  The Update, then, does not mandate any specific royalty calculation methodology or specific royalty rates.

Not mandating a specific methodology is consistent with developed case law, the Federal Circuit’s Ericsson v. D-Link decision rejecting a specific methodology for all RAND-encumbered patents, but relying instead on the particular facts presented in any given case:

To be clear, we do not hold that there is a modified version of the Georgia-Pacific factors that should be used for all RAND-encumbered patents.  Indeed, to the extent D-Link argues that the trial court was required to give instructions that mirrored the analysis in Innovatio or Microsoft, we specifically reject that argument.  We believe it is unwise to create a new set of Georgia-Pacific-like factors for all cases involving RAND-encumbered patents.  Although we recognize the desire for bright line rules and the need for district courts to start somewhere, courts must consider the facts of record when instructing the jury and should avoid rote reference to any particular damages formula.

Although the factors are not exclusive or required to be considered, DOJ found that they “focus attention on considerations that may be likely to lead to the appropriate valuation.”  This “focus”, however, might lead to the precise “rote reference to any particular damages formula” that the Federal Circuit counseled to avoid.

DOJ found that the “smallest saleable Compliant Implementation” factor “may be appropriate … particularly when the product is complex and incorporates many patented technologies.”  DOJ supports this by citing to three Federal Circuit decisions on the smallest saleable patent practicing unit (see our blog posts on LaserDynamics, Virnetx and Ericsson).  But those cases make clear that the “smallest saleable patent practicing unit” is solely a creature of  U.S. jury litigation under evidentiary Rule 403 that seeks to limit confusion of lay jurors considering a hypothetical negotiation and, thus, may not be applicable to real world, bilateral negotiations between sophisticated market participants (see our Feb. 3, 2015 post).  DOJ does not mention this limited applicability of the smallest saleable patent practicing unit, which challenges of the IPR Policy may argue raises questions about reliance on DOJ’s analysis.  But DOJ may have taken some comfort in that this factor is not mandatory nor does it preclude considering the end product, stating:

This factor does not mandate the use of the smallest saleable Compliant Implementation as the correct [royalty] base.  For example, the provision does not exclude evidence of the role of the relevant patented functionality in driving demand for the end product, or bar using end-product licenses to help determine the appropriate value to attribute to the technology.

DOJ also considered the second non-mandatory factor regarding apportioning value of all SEPs on a standard “addresses royalty stacking, which may hamper implementation of a standard,” relying in part on the Federal Circuit’s Ericssson decision that discussed royalty stacking concerns.  As with patent hold-up, the Federal Circuit’s recent Ericsson decision eschewed reliance on theoretical royalty stacking concerns in favor of actual evidence of such royalty stacking, stating that “[t]he mere fact that thousands of patents are declared to be essential to a standard does not mean that a standard-compliant company will necessarily have to pay a royalty to each SEP holder.”  As with patent holdup, DOJ does not state that it considered any actual evidence of royalty stacking or that IEEE had either, and the numerous litigations involving IEEE standards have not provided such evidence.  So challengers of the revised IPR Policy may argues this raises questions about relying on DOJ’s position here that is premised on a problem for which there is no evidence exists.

Regarding the third non-mandatory factor on what constitutes comparable licenses, DOJ found comfort that “[t]he Update does not prevent consideration of licensing agreements other than those specifically identified therein.”  The ability to consider a broader swath of comparable licenses is consistent with U.S. case law, which permits differences from the instant license negotiation to be factors a jury can consider without necessarily excluding those comparable licenses altogether (see our Sep. 17, 2014 post on Virnetx and Dec. 5, 2014 post on Ericsson).

Any “Compliant Implementation”

DOJ considered a revision based on the definition of “Compliant Implementation” as “meaning that a patent holder making an IEEE RAND Commitment cannot refuse to license its patents for use in IEEE-SA standards at certain level of production.”  DOJ observes that this may “entail[] a departure from historical licensing practices”, but “the Update does not mandate specific licensing terms at different levels of production,” stating:

For example, the royalty rate need not necessarily be the same at all levels of production.  In each case, the RAND royalty should reflect the value of the patented technology.  If a patented invention’s value is not reflected in the current price of upstream implementations, due to historical licensing practices, some adjustments may be necessary, and the Update does not prevent such adjustments.

DOJ’s point here is not entirely clear.  Does DOJ mean that separate licensing agreements can be entered and accumulate at each of level of the vertical supply chain so that, by the end of the supply chain, the cumulative total royalty provides full compensation for the patented technology (and can that be done given patent exhaustion concerns — see, e.g., our June 25, 2014 post considering Federal Circuit staying action against retailers while case proceeded against manufacturer).  Or does DOJ suggest, per its last sentence above, that the price of a component used to implement a standard should be increased to account for the benefits that an invention provides to each particular end product in which the component is used.

For example, how would DOJ’s proposal work in the hypothetical presented in our Feb. 3, 2015 post for patented technology that provides power savings in a wireless standard that is implemented in a microchip used (1) in a stationary end product that derives no benefit from the patented power-savings because it is powered from a wall outlet and (2) a mobile end product that substantially benefits from the patented power-saving:

  • Does the microchip vendor raise the price of the microchip across the board to pay the entire patent licensing fee so that manufacturers of the stationary end product (that do not need the patented technology) pay the same licensing fee as manufacturers of the mobile end product (that greatly benefit from the patented technology)?
  • Or does the microchip vendor sell the same microchip at different prices based on what end product within which the microchip will be implemented to account for the different value patented technology provides to different end products?
  • Or does the microchip vendor sell a different microchip to different manufacturers to exclude technology not needed by the end product?

None of these may be practical options.  This may be particularly true with the latter option given (1) costs in having many different microchip versions, (2) some nominal need for the patented technology in an end product (i.e., its needed, but is not as valuable as it is in other products) and (3) end products may be required to have the patented functionality–even if no benefit to that product–in order to state that they are fully compliant with the wireless standard (important where the fundamental premise of having standards is interoperability among disparate products that comply with the standard).  These various considerations may indeed be why, as DOJ and courts have observed, actual license negotiations often are based on licensing end products, rather than components thereof.

 Reciprocity–Grantbacks

DOJ considered a provision of the proposed IPR Policy amendment that “permits a licensor to require a potential licensee to grant back a license to its own patents essential to the same standard.”  But the proposed amendment would “prohibit[] licensors from demanding licenses to applicants’ patents that are not essential to the same standard … and from forcing an applicant to take a license to patent claims that are not essential to the referenced standard.”  This is intended to prohibit “forc[ing]” a cross-license to a licensee’s differentiating patents, which might “decrease incentives to innovate.”  DOJ found that this provision still “leaves parties free to negotiate these types of terms voluntarily.”

DOJ’s Conclusion

DOJ ultimately concludes that the proposed IPR Policy amendment has “potential to benefit”, and cannot conclude it is “likely to harm competition”, stating:

The Department concludes that the Update has the potential to benefit competition and consumers by facilitating licensing negotiations, mitigating hold up and royalty stacking, and promoting competition among technologies for inclusion in standards.  The Department cannot conclude that the Update is likely to harm competition.  Further, to the extent there are any potential competitive harms, the Department concludes that the Update’s potential procompetitive benefits likely outweigh those harms.  Accordingly, the Department has no present intention to take antitrust enforcement action against the conduct you have described.

DOJ was careful to note that its conclusion did not express views as to applying the amended IPR Policy retroactively to existing LOAs, where IEEE indicated the proposed IPR Policy would not be retroactive:

The Department’s analysis in this letter applies only to the Update;’s impact on future LOAs; the Department offers no statement regarding its intentions concerning the application of the Update retroactively to previously submitted LOAs.

*****

The import of DOJ’s action here and the proposed IEEE IPR Policy amendment is yet to be seen.  If the IEEE Board of Directors does adopt the amended IPR Policy, DOJ’s letter here may not prevent others from challenging the IPR Policy change on antitrust or other grounds and DOJ itself indicated it may take action in the future if the changed policy “produces anticompetitive effects.”  As discussed above, those challenging the IPR Policy change may raise questions about the DOJ’s positions here given conflicts with existing law, lack of evidence that problems sought to be solved even exist and other issues.  This may give the IEEE Board of Directors pause about whether to adopt or amend the proposed IPR Policy amendment when they consider the issue.

Further, the impact of the IPR Policy if adopted is not clear.  It plainly has anti-patent overtones, which is disappointing given how much we all have benefited from the innovations fueled by patents every step of the way over many decades in telecommunications and other standards-driven technology.  An important part of DOJs conclusion was the choice patent owners have whether to submit a LOA having the new IPR Policy provisions and flexibility to not be bound by various factors when negotiating a RAND-encumbered patent under that new IPR Policy.  But, in practice, will refusing to submit such an LOA be a viable competitive option for a patent holder?  For example, in the CSIRO case, Judge Davis observed that the patent holder who at first gave an LOA later expressly refused to provide an LOA for later versions of the standard, yet IEEE did not change its standard to avoid that patent. (see our July 28, 2014 post for summary of the CSIRO decision, currently on appeal to the Federal Circuit).  And if a large number of innovating patent holders refuse to submit the new LOA, will IEEE find that the cost of constant consideration of whether and how to revise standards to design around those patents as well as foregoing innovative technology warrants more flexibility in the LOA?   But the uncertainty of such an experiment might be better tested in a brand new standard setting organization, rather than an established ubiquitous one like IEEE .

We also will see if other standard setting organizations consider a similar IPR Policy change or await the aftermath of this one if adopted.  DOJ itself noted that its role was not to assess whether the IPR Policy is right for IEEE and that having different IPR Policies among different standard setting organizations can be beneficial:

The Department’s task in the business review process is to advise the requesting party of the Department’s present antitrust enforcement intentions regarding the proposed conduct.  It is not the Department’s role to assess whether IEEE’s policy choices are right for IEEE as a standards-setting organization (“SSO”).  SSOs develop and adjust patent policies to best meet their particular needs.  It is unlikely that there is a one-size-fits-all approach for all SSOs, and, indeed, variation among SSOs’ patent policies could be beneficial to the overall standards-setting process.  Other SSOs, therefore, may decide to implement patent policies that differ from the Update.

We will continue to monitor developments here.

The IEEE apparently is considering an unusual change to its intellectual property rights (“IPR”) policy that in many ways is contrary to developing U.S. law on determining a reasonable royalty rate and the availability of injunctive relief for standard essential patents (“SEPs”).  The IEEE provides a link to the current draft of this proposed IPR policy change that shows the proposed redline revisions to the current IPR policy.  The proposed IEEE revisions have even caught the attention of the popular press and others, such as Sen. Coons’ letter to the U.S. Attorney General Holder that calls the proposal an “unprecedented move by an international standards body to weaken the value and enforceability of  patented technology.” (see Bloomberg article).

Below is a summary of some key issues raised in the proposed IEEE IPR policy amendment that we have touched on in our blog posts discussing developing case law.

Smallest Saleable Compliant Implementation

The proposed change to IEEE’s IPR policy injects a new term called the “smallest saleable Compliant Implementation”, where a “Compliant Implementation” means “any product (e.g., component, sub-assembly, or end-product) or service that conforms to any mandatory or optional portion of a normative clause of an IEEE Standard.”  The specific langauge of the proposed IPR amendment is as follows:

Reasonable Rate” shall mean appropriate compensation to the patent holder for the practice of an Essential Patent Claim excluding the value, if any, resulting from the inclusion of that Essential Patent Claim’s technology in the IEEE Standard.  In addition, determination of such Reasonable Rates should include, but need not be limited to, the consideration of:

  • The value that the functionality of the claimed invention or inventive feature within the Essential Patent Claim contributes to the value of the relevant functionality of the smallest saleable Compliant Implementation that practices the Essential Patent Claim.
  • The value that the Essential Patent Claim contributes to the smallest saleable Compliant Implementation that practices that claim, in light of the value contributed by all Essential Patent Claims for the same IEEE Standard practiced in that Compliant Implementation.
  • Existing licenses covering use of the Essential Patent Claim, where such licenses were not obtained under the explicit or implicit threat of a Prohibitive Order, and where the circumstances and resulting license are otherwise sufficiently comparable to the circumstances of the contemplated license.

This changed policy apparently was derived from the “smallest saleable patent practicing unit” concept for the entire market value theory in U.S. patent damages law.  But IEEE’s proposed adoption of that concept into real-world arms length negotiations between sophisticated market players may be misplaced, because the “smallest saleable patent practicing unit” concept is an evidentiary principle for avoiding undue prejudice and confusion of lay jurors in U.S. jury trials under evidence Rule 403 (see our Aug. 30, 2013 LaserDynamics post and Dec. 5, 2014 Ericsson v. D-Link post).

In LaserDynamics, a case concerning patents generally, the Federal Circuit expressed concern about jury confusion “[w]here small elements of multi-component products are accused of infringement, calculating a royalty on the entire product carries a considerable risk that the patentee will be improperly compensated for non-infringing components of that product.”  Further, “disclosure to the jury of the overall product revenues ‘cannot help but skew the damages horizon for the jury, regardless of the contribution of the patented component to this revenue” and may “make a patentee’s proffered damages amount appear modest by comparison [and] artificially inflate the jury’s damages calculation.”  This jury confusion problem is not “avoided by the use of a very small royalty rate.” (See our Aug. 30, 2013 post for a more complete summary of the LaserDynamics decision)

Recently in Ericsson v. D-Link, a case concerning standard essential patents, the Federal Circuit explained that the entire market value rule (“EMVR”) has two considerations: (1) a “substantive legal rule” that the “ultimate reasonable royalty”–i.e., combination royalty rate and royalty base–“must be based on the … value that the patented invention adds to the end product” and (2) an “evidentiary principle” for selecting the royalty base that is intended “to help our jury system reliably implement” the substantive legal rule.  As the Federal Circuit explained, the “smallest saleable patent practicing unit” is an application of the evidentiary principle in U.S. jury trials:

The principle, as applicable specifically to the choice of a royalty base, is that, where a multi-component product is at issue and the patented feature is not the item which imbues the combination of the other features with value, care must be taken to avoid misleading the jury by placing undue emphasis on the value of the entire product.  It is not that an appropriately apportioned royalty award could never be fashioned by starting with the entire market value of a multi-component product–by, for instance, dramatically reducing the royalty rate to be applied in those cases–it is that reliance on the entire market value might mislead the jury, who may be less equipped to understand the extent to which the royalty rate would need to do the work in such instances.  Thus, where the entire value of a machine as a marketable article is “properly and legally attributable to the patented feature,” the damages owed to the patentee may be calculated by reference to that value.  Where it is not, however, courts must insist on a more realistic starting point for the royalty calculations by juries–often, the smallest salable unit and, at times, even less. (emphasis added)

(See our Dec. 5, 2014 post for a more complete summary of the Ericsson v. D-Link decision).

Thus, the  “smallest saleable patent practicing unit” principle is an evidentiary rule to avoid jury confusion in U.S. jury trials that may not be appropriate for real-world arms length negotiations between sophisticated market participants, as IEEE’s amendment proposes.  The Federal Circuit’s recent Ericsson decision recognized that “licenses are generally negotiated without consideration of the EMVR [i.e., entire market value rule with its smallest saleable patent practicing unit evidentiary principle].”  The Federal Circuit ruled that the jury in that case could hear evidence about comparable licenses based on the ultimate end product, rather than the smallest saleable patent practicing unit, because, otherwise, “[m]aking real world, relevant licenses inadmissible … would often make it impossible for a patentee to resort to license-based evidence.”  This follows the Federal Circuit’s rationale in Virnetix that differences between comparable licenses and the hypothetical negotiation for patent damages are circumstances a jury is “entitled to hear … and decide for itself what to accept or reject.” (see our  Sep. 17, 2014 post).

Further, even in U.S. jury trials, the smallest saleable patent practicing unit evidentiary principle is not a blanket rule, the Federal Circuit in Ericsson explaining that, “where expert testimony explains to the jury the need to discount reliance on a given license to account only for the value attributed to the licensed technology, as it did here, the mere fact that licenses predicated on the value of a multi-component product are referenced in that analysis … is not reversible error.”  The IEEE proposed language above, however, appears to limit consideration of existing licenses to those “where the circumstances and resulting license are otherwise sufficiently comparable to the circumstances of the contemplated license,” which relies to some unspecified extent on the smallest saleable Compliant Implementation.  If the IEEE proposed IPR amendment is adopted, then lay jurors considering a hypothetical negotiation in litigation might be entrusted with more relevant real-world information than sophisticated market participants negotiating an actual license for a patent directed to an IEEE standard.  Odd.

While the brightline drawn by a smallest patentable patent practicing unit principle may be appealing at first blush, real world negotiations may require more flexibility to fit the specific patented technology to the specific licensed product.  Consider, for example, a wireless standard implemented within a microchip that is one of many components of an end product where functional benefits of the standard include (1) wireless connectivity and (2) low power consumption.  What benefit a specific licensed product derives from a patent covering that standard may depend primarily on (A) what functionality the patent covers and (B) the importance of that functionality to the licensed product.  A patent covering power savings may be important to the standard generally, but provide little, if any, benefit to a stationary end product that is powered from a wall outlet.  The stationary end product does benefit from wireless connectivity functionality, which avoids the cost and problems of running wires.  That end-product may include the power-saving functionality solely because it is built into the microchip supplied by the microchip vendor or because the end product must have that functionality in order to advertise that the product is fully compliant with the standard.  On the other hand, the patented power-saving functionality may provide substantial benefit to a mobile device by permitting longer use time between charges, smaller battery and hence smaller and lighter device, etc..

So the benefit that a claimed invention provides to an end product–and hence what would be reasonable licensing terms–depends on the specific patent and product to be licensed and not necessarily the “smallest saleable patent practicing unit” (e.g., the microchip in this example).  Thus, Judge Davis in CSIRO used the end product rather than microchip as the royalty base, because “[b]asing a royalty solely on chip price is like valuing a copyrighted book based only on the costs of the binding, paper, and ink needed to actually produce the physical product.” (see our July 28, 2014 post summarizing the CSIRO decision, currently on appeal to the Federal Circuit).

If adopted, the new IEEE IPR policy also may lead to patent owners drafting claims to expand what constitutes a “Compliant Implementation” by claiming, for example, “a mobile phone comprising …. a microchip” or including limitations present in typical implementations beyond a microchip, such as “a mobile phone comprising an antenna, a power supply, an input device, a microchip implementing standard functionality, etc …”  And some may go bigger:  “An automobile, comprising wheels, a motor, a microchip implementing standard functionality, etc.”  So, to avoid putting form over substance, what may be deemed a “reasonable” royalty still may be better determined based on the specific patent and products at issue and not necessarily what is claimed to be the smallest saleable Compliant Implementation.

Given the fact-specific circumstances underlying a FRAND licensing negotiation, perhaps whatever issues the proposed IEEE IPR amendments are intended to address might be better served through continued case-by-case development of what is a “reasonable”, rather than directing sophisticated market participants to view their bilateral negotiations through the blinders of the smallest saleable patent practicing unit designed to limit evidence considered by a lay jury in U.S. litigation.

Injunctive Relief

The proposed change to IEEE’s IPR Policy appears to make an extreme shift in policy by precluding an SEP patent holder from even seeking injunctive relief against an unwilling licensee until after a FRAND royalty is litigated and at least a first level of appeal exhausted, stating:

A statement that the Submitter will make available a license for Essential Patent Claims to an unrestricted number of Applicants on a worldwide basis without compensation or under Reasonable Rates, with other reasonable terms and conditions that are demonstrably free of any unfair discrimination to make, have made, use sell, offer to sell, or import any Compliant Implementation that practiced the Essential Patent Claims for use in conforming with the IEEE Standard.  An Accepted LOA that contains such a statement signifies that reasonable terms and conditions, including without compensation or under Reasonable Rates, are sufficient compensation for a license to use those Essential Patent Claims and preclude seeking, or seeking to enforce, a Prohibitive Order except as provided in this policy.

***

The Submitter of an Accepted LOA who has committed to make available a license for one or more Essential Patent Claims agrees that it shall neither seek nor seek to enforce a Prohibitive Order based on such Essential Patent Claim(s) in a jurisdiction unless the implementer fails to participate in, or to comply with the outcome of, an adjudication, including an affirming first-level appellate review, if sought by any party within applicable deadlines, in that jurisdiction by one or more courts that have the authority to: determine Reasonable Rates and other reasonable terms and conditions; adjudicate patent validity, enforceability, essentiality, and infringement; award monetary damages; and resolve any defenses and counterclaims.  In jurisdictions where the failure to request a Prohibitive Order in a pleading waives the right to seek a Prohibitive Order  at a later time, a Submitter may conditionally plead the right to seek a Prohibitive Order to preserve its right to do so later, if and when this policy’s conditions for seeking, or seeking to enforce, a Prohibitive Order are met.

This proposed IEEE IPR policy appears contrary to case law and administrative actions that have considered the availability of injunctive relief for standard essential patents and universally agree that injunctive relief should be available against unwilling licensees.  For example, in ruling that there was no per se rule against injunctive relief for standard essential patents, the Federal Circuit in Motorola v. Apple recognized that “an injunction may be justified where an infringer unilaterally refuses a FRAND royalty or unreasonably delays negotiations to the same effect.” (see our April 25, 2014 post for a summary of the Motorola v. Apple decision).  The Federal Circuit ruled that a party may seek an injunction, and the FRAND obligation and other circumstances are what “the district courts are more than capable of considering … when deciding whether to issue an injunction under the principles in eBay.”  But the proposed amended IEEE IPR Policy appears to preclude even seeking an injunction against an unwilling licensee without first filing suit and going through appeals to enforce adjudicated FRAND terms.

In LSI v. Realtek, Judge Whyte held that LSI had breached its FRAND obligation by “instigating an ITC Section 337 action naming Realtek as a respondent prior to offering a RAND license to Realtek.” (see our May 21, 2013 post on LSI v. Realtek).  But Judge Whyte also recognized that “an injunction may be warranted where an accused infringer of a standard-essential patent outright refuses to accept a RAND license” that has been offered (in that case “there is no indication that Realtek is not willing to accept a RAND license.”). (emphasis in original).

When U.S. Trade Representative Froman disapproved of the exclusion order entered by the ITC in the Apple v. Samsung investigation, he noted that injunctive relief may be warranted for an unwilling licensee given concerns about harm caused by “reverse hold-up” or “hold-out” such as “constructive refusal to negotiate a FRAND license.” (see our Aug. 3, 2013 post summarizing USTR Froman’s decision).  In doing so, he quoted favorably from a joint policy statement by the U.S. Department of Justice and U.S. Patent and Trademark Office, which states:

An exclusion order may still be an appropriate remedy in some circumstances, such as where the putative licensee is unable or refuses to take a FRAND license and is acting outside the scope of the patent holder’s commitment to license on FRAND terms.  For example, if a putative licensee refuses to pay what has been determined to be a FRAND royalty, or refuses to engage in a negotiation to determine F/RAND terms, an exclusion order could be appropriate. Such a refusal could take the form of a constructive refusal to negotiate, such as by insisting on terms outside the bounds of what could reasonably be considered to be F/RAND terms in an attempt to evade the putative licensee’s obligation to fairly compensate the patent holder.

Judge Essex’s decision in ITC Inv. No. 337-TA-868 also recognized that a FRAND commitment has obligations going both ways and a prospective licensee should seek a license as part of satisfying its obligations under the FRAND commitment (see our July 2, 2014 post for a summary of that decision).  Judge Essex echoed concerns of U.S. Trade Representative Froman as well as other agencies about “patent hold-out”:

The ETSI IPR policy requires companies that wish to use the IPR covered by the agreements to contact the owner of the IP, and take a license.  By skipping this step, the companies that use the IPR in violation of the policy are able to exert a pressure on the negotiations with the IPR holder to try to make the agreement in the lower range of FRAND, or perhaps even lower than a reasonable FRAND? rate.  They also are able to shift the risk involved in patent negotiation to the patent holder.  By not paying for a FRAND license and negotiating in advance of the use of the IPR, they force the patent holder to take legal action.  In this action, the patent owner can lose the IPR they believe they have, but if the patent holder wins they get no more than a FRAND solution, that is, what they should have gotten under the agreement in the first place.  There is no risk to the exploiter of the technology in not taking a license before they exhaust their litigation options if the only risk to them for violating the agreement is to pay a FRAND based royalty or fee.  This puts the risks of loss entirely on the side of the patent holder, and encourages patent hold-out, which is as unsettling to a fair solution as any patent hold up might be.

The U.S. Federal Trade Commission’s consent decree settlement with Google/Motorola also recognized that injunctive relief should be available against unwilling licensees. (See our July 24, 2013 post summarizing of the FTC/Google Consent decree settlement).

In sum, the proposed amendments to the IEEE IPR Policy, if adopted, would contravene how injunctive relief for standard essential patents has been treated by U.S. courts and other governmental entities and could give rise to concerns about “patent hold-out” by unwilling licensees.  The balanced approach discussed by the Federal Circuit in Motorola v. Apple may be a better approach, where applying the general eBay factors typically will preclude injunctive relief in the usual course for FRAND-obligated standard essential patents, but such relief remains available for the parties to raise and a court to consider in exercising its discretion in extreme circumstances such as actual patent hold-out.

We understand that these are just proposed amendments to the IEEE IPR policy.  We will look for and post any relevant developments brought to our attention.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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.

Last week, following a bench trial in CSIRO v. Cisco,  Judge Davis in E.D. Texas determined a reasonable royalty damages award for a CSIRO patent stipulated to be valid, infringed and essential to several versions of the IEEE 802.11 WiFi standard where a RAND-obligation applied to one version of the standard, but not others.  The patent owner CSIRO sought a per-end product reasonable royalty of about $30 million.  Cisco argued a per WiFi chip reasonable royalty of about $1.1 million.  Judge Davis rejected both damages models, found the patent to play a “significant role” in the success of 802.11 products, and derived his own per-end-product reasonable royalty damages award of about $16 million.

This is the third bench trial decision to determine a royalty rate for a standard essential patent (the other two were Judge Robart’s Microsoft v. Motorola decision and Judge Holderman’s Innovatio decision).  This case differs, because this royalty rate was determined in the context of past infringement damages, rather than setting a RAND-royalty rate per se.  Further, although the patent was essential to the standard, no RAND-obligation applied to almost all of the accused infringement because the patent owner gave the IEEE a letter of assurance RAND-commitment as to only revision “a” of the standard and refused IEEE request to give such a commitment for later versions of the standard.

Background

Patent owner Commonwealth Scientific and Industrial Research Orginasation (“CSIRO”) is the principal scientific research organization for the Austrialian Federal Government.  The patent-in-suit addresses multipath problems in a wireless local area network.  That technology was incorporated into certain versions of the IEEE 802.11 WiFi standard, including revision “a” adopted in 1999 and revision “g” adopted in 2003.  In December 1998, before IEEE adopted revision “a”, CSIRO provided the IEEE with a letter of assurance that it would license the specific patent-in-suit on RAND-terms if the patent were essential to the 802.11a standard.  IEEE sought additional letters of assurance from CSIRO for later revisions of the standard, but CSIRO declined to provide them.

In 2003, CSIRO offered industry participants a license on RAND terms on all versions of the standard (at first indicating that it had agreed with IEEE to do so, but later clarifying there was no RAND obligation).  By June 2004, CSIRO developed a Voluntary Licensing Program offering licenses to the ‘069 Patent under “a flat-fee royalty, charged per end product unit sold.”

A company called Radiata Communications (“Radiata”)  was formed by the named inventor, CSIRO and others to commercialize the patented technology.  Radiata employed various CSIRO employees as well as another named inventor.  CSIRO entered a Technology License Agreement (TLA) with Radiata in February 1998 that, among other things, had a per-WiFi chip royalty payment.  In 2001, Cisco acquired Radiata and started paying Radiata’s license fees under the TLA license agreement for Radiata products.  This agreement was renogotiated several times, always keeping the general concept of a per-chip royalty base.

In July 2011, CSIRO sued Cisco for infringing the patent-in-suit.  Both parties stipulated to a bench trial solely on damages and that Cisco would not challenge the patent’s infringement or validity.

Judge Davis’s Ruling

Cisco’s Estoppel Affirmative Defense (Denied).  The court denied Cisco’s affirmative defense that legal and equitable estoppel should limit damages.  The elements of these defenses were summarized as follows:

To establish a defense of equitable estoppel, Cisco must demonstrate that: (1) CSIRO communicated something in a misleading way by words, conduct, or silence; (2) Cisco relied upon that communication; and (3) Cisco would be materially harmed if CSIRO is allowed to assert any claim inconsistent with its earlier communication.  Legal estoppel requires that CSIRO granted Cisco certain rights, received consideration for those rights, and then sought to derogate from the righs granted.

Cisco argued that CSIRO’s RAND commitment precluded CSIRO from seeking damages from Cisco higher than the LTA royalty rate that CSIRO gave to Radiata on the same patent.  The parties agreed that RAND commitment applied to the 802.11a version of the standard.  But CSIRO argued that the revision “a” RAND-commitment does not extend to Cisco because Cisco never made a written request for a license.  Judge Davis agreed with Cisco that this  written requirement was met based on the course of dealings between Cisco and CSIRO.  Thus. a RAND obligation applied to 802.11a products.

But that was not the case for later revisions of 802.11 (g, n and ac).  IEEE asked CSIRO to provide letters of assurance for these later versions, but CSIRO declined to do so.  Judge Davis found that CSIRO actually made no RAND commitment to IEEE or its members for “g” or later revisions of the standard: “Therefore, while CSIRO was free to offer licenses on RAND terms as to products practicing these revisions, it was not contractually obligated to do so.”  He found no RAND-license was consummated and, “[r]egardless … the parties would have sought a royalty that each believed accurately valued the ‘069 Patent”, stating:

Because CSIRO provided no letter of assurance creating a binding RAND obligation, and because any voluntary offer by CSIRO to license the ‘069 Patent technology on RAND terms was rejected, was withdrawn, or lapsed, CSIRO has no RAND obligation to Cisco as to 802.11g, 802.11n, or 802.11ac products.  Regardless of CSIRO’s RAND commitment, at the hypothetical negotiations the parties would have sought a royalty that each believed accurately valued the ‘069 Patent.

Thus, Cisco’s legal and equitable estoppel defense did not apply except for products practicing revision “a” of the 802.11 standard, which would require RAND licensing terms.

CSIRO’s Damages Model (Rejected).  CSIRO argued that the end product devices (network interface cards, routers, access points) were the smallets saleable patent practicing unit.  CSIRO also argued that its patent provides the only “improved benefits” between revisions of the standard covered by the patent and other revisions; therefore, the difference in profit margins between covered and not-covered products “largely represents the value attributable to the ‘069 Patent.”  But, among other things, Judge Davis found a “fundamental problem” in the large disperity in profit margins between covered and non-covered products– over $84 difference for consumer products and over $200 difference for enterprise  products; that disparity made it “impossible to reliably determine where the value of the patented technology lies.”  The expert also had problems in apportioning value to the patented technology distinct from unpatented features.  For example, “802.11g is backwards compatible with 802.11b, a feature not specfically attributable to the ‘069 Patent, but which adds value to the consumer” not accounted for in CSIRO’s damages model.  Further, the expert’s resultant oyalty was higher than the royalty CSIRO offered in its Voluntary Licensing Program.  Thus, the court “attributes little weight” to CSIRO’s damages model.

Cisco’s Damages Model (Rejected).  Cisco argued that the royalty should be based on WiFi chip prices capped at the royalty rate that CSIRO gave Radiata under the TLA agreement between them, where the inventive concept resides in the chip.  Judge Davis rejected Cisco’s licensing model because it relied primarily on the TLA agreement, which was a unique agreement given the relationship between CSIRO and its business partner Radiato that was not comparable to the hypothetical negotiation for CSIRO-Cisco license.  Rather, “[t]he connection between CSIRO and Radiata created a special relationship that belies the view that the negotiations leading to the TLA were purely disinterested business negotiations.”  For example, in addition to royalty payments, Radiata agreed to disclose business plans, make best efforts to exploit the technology and grant CSIRO a royalty-free license and assignment of rights to Radiata’s improvements to the technology.  Further, there were rapid improvements between the 1998 date of the TLA and the 2002/2003 hypothetical negotiation date : “Commercial viability of the technology escalated sharply as the 802.11a revision was adopted in September 1999 … and received a greater boost when the 802.11g revision was ratified in June 2003.”  Perhaps concerned that this would improperly capture the value of the standard beyond the patent’s value, Judge Davis states in a footnote:

This is not an indication that the value of the ‘069 Patent increased soelely because it was included in the standard.  Rather, the wireless marketplace as a whole benefited from the adoption of the standard.

Judge Davis found Cisco’s “primary problem” is using chip prices as the royalty base, because (1) the patent was not directed solely to a chip and (2) widespread infringement depressed chip prices:

CSIRO did not invent a wireless chip.  Although it is largely undisputed that the inventive aspect of the ‘069 Patent is carried out in the PHY layer of the wireless chip, the chip itself is not the invention.  The ‘069 Patent is a combination of techniques that largely solved the multipath problem for indoor wireless data communication.  The benefit of the patent lies in the idea, not in the small amount of silicon that happens to be where that idea is physically implemented.  Compounding this problem is the depression of chip prices in the damages period resulting from rampant infringement which occured in the wireless industry.  Prior to 2008, outside of the Radiata TLA, no company in the industry sought a license from CSIRO to the ‘069 Patent and CSIRO received no royalties whatsoever for that technology.  It is simply illogical to attempt to value the contributions of the ‘069 Patent based on wireless chip prices that were artificially deflated because of pervasive infringement.  Basing a royalty solely on chip price is like valuing a copyrighted book based only on the costs of the binding, paper, and ink needed to actually produce the physical product.  While such a calculation captures the cost of the physical product, it provides no indication of its actual value.

Other CSIRO Licenses.  Judge Davis dismissed other license agreements that CSIRO entered in or after 2008, which both experts agreed were not relevant to a hypothetical negotiation in 2002.  The license came at a later time than the hypothetical negotiation, involved litigation settlements, involved worldwide licenses and varied widely in sales volumes at issue.

Court’s Hypothetical Negotiation Analysis.  Judge Davis assumed a hypothetical negotiation in 2002/2003 with no “discount” for uncertainty as to liability given the assumption that the patents were valid and infringed.  Judge Davis found a base starting royalty rate based on the Voluntary Licensing Program licensing rate and a 90-cents per end-product licensing offer Cisco made during negotiations, the latter being “the best evidence available of how Cisco valued the contribution of the ‘069 Patent … and is the best indicator of Cisco’s possible bid price at the time of the hypothetical negotiation.”

Judge Davis then considered various Georgia-Pacific factors for adjusting this starting royalty rate.  Although CSIRO had a RAND-obligation for 802.11 revision “a” products, Judge Davis did not consider a modified Georgia-Pacific analysis for them given the small volume of revision “a” product sales, stating “a modified analysis as to only those products would have a de minimus impact on the overall royalty.”  Judge Davis Davis then considered the several Georgia-Pacific factors, as follows:

  • Factors 1-2, 6-7, 12-13.  Judge Davis agreed with both experts that Georgia-Pacific factors 1, 2, 6, 7, 12, and 13 “are neutral and no adjustment to the base line royalty rate needs to be made in light of these factors.”
  • Factor 3 (nature and scope of license).  Judge Davis gave a downward adjustment because the hypothetical license would be limited to U.S. sales, but Cisco’s negotiation offer and CSIRO’s Voluntary Licensing Program implicitly used to set the hypothetical base royalty rate were for a worldwide license.
  • Factor 4 (licensor’s established program).  This factor warrants a downward adjustment because (1) “CSIRO was very willing to license the patented technology” and (2) CSIRO had a binding RAND obligation for the 802.11a products.
  • Factor 5 (commercial relationship).  This factor warrants a downward adjustment because CSIRO was a government R&D organization that “needed to license the ‘069 Patent in order to commercialize and monetize it.”
  • Factor 8 (product profitability/success).  This factor warrants an upward adjustment because the patented technology, “[a]lthough … not the only factor contributing to the growth of 802.11g products, it was an important one.”  Further, IEEE continued to rely on the patented technology even though “CSIRO declined to issue letters of assurance and in the face of ongoing litigation involving the patent.”  Accordingly, the patent “played a significant role in the commercial success of 802.11 products.”
  • Factors 9 and 10 (utility over older modes, benefits, etc.).  These two factors warrant an upward adjustment.  The patented technology’s multipath solution provided significant improvements, including higher speeds, increased capacity, etc., and alternative technology did not have commercial success.  Further, this remained core technology to the standard despite several revisions to the standard spanning over a decade.
  • Factor 11 (extent defendant uses invention).  This factor is neutral here because it already was accounted for in the starting baseline.
  • Factor 13 (profit attributable to invention).  This factor is neutral because, although the patent “played a significant role in the profitability of wireless products, … Cisco’s role in that profitability should not be diminished” such as Cisco “assum[ing] the business risk” in developing and marketing the products as well as many other non-patented features in the products.
  • Factor 14 (expert opinion).  This factor is neutral because the court rejected both experts’ damages models.
  • Factor 15 (outcome of hypothetical negotiation).  The court weighed all the factors and found they gave each party equal bargaining position and, thus, no adjustment was needed to the baseline rate of $0.90 to $1.90 per end-product with tiered values based on volume of sales.

In sum, all factors were neutral except factors 3 and 4 (downward adjustment) that were offset by factors 8-10 (upward adjustment).  Judge Davis, however, did give a downward adjustment to consumer products based on the proportional profit difference between them and the enterprise products.  The court then multiplied these tiered royalty rates by volumes of sales, discarded sales after the patent expired, discarded sales more than six years before the lawsuit was filed and assessed a total royalty damage of about $16.2 million.

Last summer, we reported on a jury verdict and post-trial rulings in favor of SEP patent holder Ericsson in its infringement suit against several manufacturers of WiFi-compliant products.  As we noted, the jury awarded several million dollars for infringement of Ericsson’s 802.11-essential patents.  Thereafter, several defendants took an appeal to the Federal Circuit, which is still pending.

Earlier this week, the district court granted Ericsson and defendant Belkin’s joint motion to dismiss the case with prejudice as to Belkin.  According to the motion, Ericsson and Belkin “settled their claims against one another . . . on the record, and on the eve of the jury returning its verdict in this matter.”  “To comply with that settlement agreement, Ericsson and Belkin [] seek to dismiss their respective claims with prejudice, and to have the final record in this case reflect their settlement and dismissals.”

According to the Order, “[b]ecause the jury was deliberating when Belkin and Ericsson announced their settlement, and because Belkin and Ericsson had yet to present the Court with their now-filed agreed upon dismissal, the Court did not alter the jury verdict form and entered judgment so as to not delay proceedings, including the appeal that the other defendants in the case have now taken.”  The dismissal order “shall in no way affect or alter the judgment as to the other defendants in this action other than Belkin or have any effect on the existing appeal to which Belkin is not a party.”  The Court vacated the final judgment as to Belkin, and ordered  Ericsson and Belkin to cover their own attorneys’ fees, costs of court, and expenses.

Today the Federal Circuit (Lourie, Dyk and Reyna) granted Microsoft’s motion to transfer Motorola’s appeal of Judge Robart’s RAND ruling to the Ninth Circuit, settling the parties dispute whether the Federal Circuit or Ninth Circuit has appellate jurisdiction over this particular appeal (see our Dec. 16, 2013 post and prior posts summarizing transfer motion).  The Federal Circuit held that law of the case prevailed and required deference to the Ninth Circuit’s prior determination that it had appellate jurisdiction in this case.

Background.  Recall that this case was filed by Microsoft against Motorola in W.D. Wash. as a contract-based action alleging that Motorola’s offered license rate on RAND-encumbered patents breached its obligations to standard setting organizations (ITU and IEEE).  Motorola then sued Microsoft in W.D. Wis. for infringing those same patents.  The W.D. Wis. case was transferred to W.D. Wash. and consolidated with Microsoft’s contract-based action before Judge Robart.

Meanwhile, Motorola had received an injunction against Microsoft in a German patent infringement action directed to the same standards where the German court rejected Microsoft’s assertion of ITU and IEEE standard setting obligations.  Judge Robart enjoined Motorola from enforcing that injunction while Microsoft’s case was pending before him to determine 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 affirmed Judge Robart’s injunction.

Judge Robart held a bench trial and issued a first-of-its-kind RAND royalty rate determination (see our May 1, 2013 post) and later held a jury trial that found that Motorola had breached its RAND obligation (see our Sep. 4, 2014 post).  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.  Motorola appealed the Rule 54(b) RAND judgment to the Federal Circuit (see our Nov. 12, 2013 post).  Microsoft then moved to transfer that appeal to the Ninth Circuit, which had previously ruled that it had appellate jurisdiction in that case based on Motorola’s injunction appeal.

Federal Circuit’s Transfer Decision.  The Federal Circuit granted Microsoft’s motion to transfer the appeal to the Ninth Circuit.  The Federal Circuit found that the Ninth Circuit’s decision that it has appellate jurisdiction is law of the case, which the Federal Circuit must adhere to “unless there is a showing of ‘extraordinary circumstances such as where the initial decision was clearly erroneous and would work a manifest injustice.”  The Federal Circuit found no such extraordinary circumstances, stating that “[t]he requested relief in Microsoft’s complaint plausibly supports the Ninth Circuit’s conclusion that this matter does not arise under the patent laws.”

The Federal Circuit’s decision today is limited to the unique facts and procedural posture of this particular case without the Federal Circuit deciding in its own independent view whether appellate jurisdiction properly would have resided in the Federal Circuit or regional circuit.  The issues on appeal are fascinating and complex.  This is the first case where a judge has set forth an analytical framework for deciding a RAND royalty rate and, because it was a bench trial, further explained the application of that framework to the facts at hand.  Because damages have been deemed a jury issue, the detailed thought process of most patent damages determinations usually reside within a jury black-box royalty rate decision with little insight into what swayed them to a higher or lower royalty rate.  This bench trial and written decision provide unique insight into that damages decision process.  Further, this is one of the few cases where a patent license royalty rate determination is made as to a portfolio of patents, rather than a typical litigated damages determination based on individually infringed patents.

These complex issues in this particular case will now be decided by an appeals court of general jurisdiction, rather than the specialized Federal Circuit patent appeals court that most likely will hear the bulk of cases raising similar issues — e.g., RAND obligations, damages for portfolio of patents, etc.  So there may remain uncertainty on these issues going forward, because the Federal Circuit most likely is not bound in other cases by whatever the Ninth Circuit decides in this particular case.  The other bench trial determined RAND rate and judicial analysis by Judge Holderman in the Innovatio case may not see any appellate review, because it appears that the RAND royalty determination may lead to settlement of all parties without determining infringement, validity or other issues in the first instance, much less an appeal (see our Feb. 7, 2014 post).  The other two cases so far in which a RAND rate has been determined were both jury trials with black-box verdicts.  One of those cases, Realtek v. LSI tried before Judge Whyte of N.D. Cal., most likely will be appealed to the Ninth Circuit that already has heard an interlocutory appeal in that case (see our Mar. 21, 2014 post), though appellate jurisdiction was not contested or expressly decided in that interlocutory appeal.  The other case, Ericsson v. D-Link tried before Judge Davis in E.D. Tex., was appealed and briefed at the Federal Circuit and we await the hearing and decision in that appeal.

Last Friday, several cable operators filed a Complaint against Rockstar in D. Del. alleging that Rockstar’s assertion against them of patents breached obligations owed to various standard setting organizations (“SSOs”) based on prior owner Nortel’s commitment to license patents on RAND, FRAND or royalty-free terms.  Our Jan. 2 and Nov. 1 posts discussed Rockstar’s purchase of Nortel’s patents from bankruptcy and recent Rockstar lawsuits against other cable operators as well as Google, Andriod device manufacturers and Cisco.

The Complaint accuses Rockstar–alleged to own over 4,000 patents acquired from Nortel–of “misuse and attempt[ing] to obtain exorbitant royalties” based on several acts:

Rockstar has misused and attempted to obtain exorbitant royalties from licensing the patents it purchased from Nortel by:
(a) refusing to identify to potential licensees the patents it seeks to enforce and instead broadly accusing companies of infringing the portfolio as a whole;
(b) requiring all potential licensees to sign non-disclosure agreements as a precondition to negotiating licensing agreements for the purpose of obtaining royalties in excess of its FRAND obligations;
(c) refusing to identify patents already licensed to vendors in an attempt to avoid exhaustion and extort multiple royalties; and
(d) once requests are made to license standard essential patents, transferring those patents to third parties in an attempt to obtain increased royalties and avoid its FRAND licensing obligations.

You may find here the Complaint with exhibits, which include Rockstar demand letters to the cable operators (but without the attached patents to reduce file size).