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

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

Microsoft and Google announced that they have settled there global patent disputes, including the litigation underlying the FRAND dispute that gave rise to Judge Robart’s first-of-its-kind decision on determining a FRAND royalty that was recently affirmed on appeal at the Ninth Circuit (see our July 31, 2015 post).  Accordingly, the parties filed yesterday a stipulated motion to dismiss the remainder of the case still pending before Judge Robart.

The agreement between the parties is said to resolve about 20 lawsuits in the U.S. and abroad, so its not clear how much the Ninth Circuit’s ruling in the Judge Robart case impacted the settlement.  The settlement, however, was announced after the Ninth Circuit denied the petition for rehearing of its decision and its mandate issued without a party seeking further review from the Supreme Court.  So this decision may provide another example of a court’s determination of the royalty amount leading to resolution of the litigation without the parties or the court litigating the issue whether the patent is valid and infringed, as occurred in the Innovatio litigation before Judge Holderman under his “reverse bifurcation” procedure (see our Feb. 7, 2014 post on Innovatio).

Recall that Google inherited the Judge Robart case when it acquired Motorola Mobility, including its patent portfolio and mobile phone business, the latter of which Google later sold to Lenovo while holding onto the patents.  Google’s business model is much different from the Motorola Mobility entity it acquired, which had been actively enforcing its patent portfolio against Microsoft and others before the acquisition.  Google may value and use the patents differently than Motorola had been, such as using for defensive purposes if someone targets Google’s Android platform.  Recall that the U.S. Federal Trade Commission (FTC) investigation of Google a few years ago shifted to Motorola’s assertion of standard essential patents (SEPs) after Google acquired Motorola, which led to Google/Motorola entering a consent decree with the FTC (see our January 2013 post).  Google also ended patent litigation disputes that Motorola had with Apple, which also included SEPs (see our May 19, 2014 post).  So Google’s settlement with Microsoft here is not too surprising.

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

Background

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

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

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

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

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

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

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

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

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

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

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

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

Decision

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Background

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

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

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

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

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

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

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

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

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

Motorola’s Opening Brief.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Microsoft’s Response Brief

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Motorola’s Reply Brief.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Microsoft’s Supplemental Submission

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

Amicus Briefs in Support of Motorola

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

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

Amicus Briefs in Support of Microsoft

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

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

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

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

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

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

Qualcomm’s Brief in Support of Neither Party.

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

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

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

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

Four parties have responded to the ITC’s request for statements on the public interest regarding ALJ Essex’s Initial Determination in Inv. No. 337-TA-868 (see our July 2, 2014 post), all addressing the ALJ’s FRAND analysis rejecting arguments against exclusion orders for standard-essential patents and addressing the obligations held by potential licensees. Three of the responses, submitted by Ericsson, the Innovation Alliance, and Senator Robert P. Casey, Jr. (D-PA), support ALJ Essex’s analysis, whereas Microsoft takes the position that SEP owners should not be entitled to exclusion orders on FRAND-encumbered patents.

Statement’s Supporting ALJ Essex’s FRAND-Defense Analysis

Ericsson’s StatementEricsson agrees with ALJ Essex’s analysis, specifically supporting three findings: (1) FRAND licensing obligations apply to both innovators and implementers; (2) exclusion orders are available where SEP owner has engaged in good faith negotiations, offered a license on FRAND terms, and poses no threat of hold-up; and (3) courts and other decision making bodies should consider whether an implementer failed to negotiate toward a FRAND license, posing a hold-out threat to the patent owner.  Ericsson participants in several SSOs and is both a licensor and licensee of many SEPs.  Ericsson has made significant investments in employees, R&D, and intellectual property related to standards-compliant technology.  The FRAND regime “ensures that those implementing a standard are able to secure access at a fair cost, while those providing innovative technology for the standard are able to secure a fair return on their investments.”  Ericsson agrees with the ALJ’s “proportionate focus on the obligations of the implementer to earnestly seek an amicable royalty rate” during the course of a good faith negotiation. Ericsson then supports the proposition that exclusion orders should be available when the SEP holder has negotiated in good faith and further states that “exclusion orders should also be considered when the implementer has not negotiated in good faith (i.e., there is hold-out).”

Innovation Alliance’s Statement.  Focusing on the pro-consumer and pro-economic benefits derived from patent protection and SSO participation, the Innovation Alliance’s response “commends the ALJ for developing a comprehensive record with respect to the FRAND issues in this investigation and for making explicit findings related to the presence or absence of patent hold-up or reverse hold-up with respect to patents that are subject to a FRAND licensing requirement.” The IA specifically notes that, without exclusionary relief, implementers are “incentivized to engage in ‘reverse hold up'” in which a patent holder is unable to recover its own R&D costs. The IA further commended the ALJ’s acknowledgement of the patent hold-out problem by which those benefiting from patented technology can choose to infringe a SEP and later demand a FRAND rate; the public interest favors exclusion orders to protect and enforce valid and infringed SEPs.

Senator Casey’s Statement.  Pennsylvania Senator Robert Casey also submitted a statement concerning the public interest, “writing to express [his] views on the importance of innovation to our national economy, particularly with respect to small businesses, such as InterDigital, who are significant contributors to U.S. private sector employment.” Noting InterDigital’s investment in research facilities and employees, Sen. Casey’s letter notes that the patent’s principal purpose is to encourage and protect innovation, noting that intellectual property-intensive industries supported at least 40 million U.S. jobs in 2010 and represented 34.8% of total GDP. Writing “[t]he Commission must be mindful of the significant benefits to consumers from standards-setting activities and of the need to continue incentivizing voluntary participation in standard-setting organizations,” Sen. Casey argues that holders of FRAND-committed patents should not be precluded from obtaining exclusionary relief.

Statements Criticizing ALJ Essex’s FRAND Analysis

Microsoft’s Statement.  Unlike the other statements submitted to the ITC, Microsoft’s letter warns against “the severe, long-term, and avoidable harms” caused by exclusion orders for FRAND-encumbered patents. Referring to its earlier July 7, 2012 comments on the public interest, Microsoft argues that exclusion orders should not be granted on FRAND-encumbered patents, relying upon Judge Posner’s recent denial of injunctive relief to Motorola on a FRAND-committed patent (see our April 25, 2014 post for an analysis of that decision). Microsoft argues that the public interest balance is shifted from the side of the patent owner upon assertion of an SEP and that InterDigital should not be permitted to use a threat of injunctive relief to increase royalty rates:

By assuming its FRAND obligations, InterDigital freely gave up exclusionary remedies in favor of a reasonable royalty in to have its technology incorporated into technical standards. InterDigital put its patents on the store shelf for a FRAND price, and they are available to anyone anywhere in the world willing to pay a true FRAND value. Having done so, InterDigital has no “recourse to the equity power of the Commission.”

Microsoft further argues that litigating FRAND-encumbered patents before the ITC harms the public interest, in this case by providing InterDigital with hold-up leverage and threat of an exclusion order that could adversely affect the U.S. phone operating system market. Microsoft argues that even if the ITC issues an exclusion order in the InterDigital case,  enforcement should be delayed for one year to mitigate the harm to the public interest and provide an opportunity “to appeal the ITC decision, to determine a FRAND rate…, or to explore design-around possibilities before the harsh impact of a potential exclusion order.”

UPDATE (July 28, 2014): 

Senator Pat Toomey’s Statement. Pennsylvania Senator Patrick J. Toomey also submitted a statement on the public interest on July 9, 2014, though a copy of the letter was not available until last week. Sen. Toomey’s letter expresses “strong support” for the protections afforded by Section 337 investigations and urges the Commission “to strongly consider InterDigital’s petition for relief from foreign imports that violate their intellectual property.” The letter notes that InterDigital employs “high skilled workers in Pennsylvania who are on the cutting edge of mobile innovation” and that its business model depends on licensing revenues from equipment manufacturers. Absent “adequate remedies for imported goods that use their patents without paying for them,” the letter argues companies like InterDigital will be deterred from “taking bets on future research and development” to the detriment of “American innovation and job creation.”

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.

Yesterday Judge Stark followed an approach used by Judge Holdeman in the Innovatio WiFi case by bifurcating FRAND issues from liability where essentiality and a RAND royalty rate will be tried first in hopes the result will spur settlement, followed by discovery and trial on liability issues if still necessary.  Recall that this case arose last year when patent pool One Blue, LLC and several of its member licensors — including Philips, Panasonic, Pioneer, and Sony — filed a patent infringement litigation against Imation Corp. in the District of Delaware accusing Imation of infringing several patents that are alleged to either be essential or related to the Blu-ray Disc Association’s (BDA) Blu-ray standards.

Imation Bifurcation Argument.  Imation filed a letter brief requesting the court to bifurcate the case to resolve FRAND issues prior to litigating infringement and validity issues.  Relying on the decisions in Microsoft v. Motorola and In re Innovatio, Imation argued that determining FRAND issues first would likely resolve the entire case, thereby saving the parties the expense of litigating the issues of infringement and validity as well as whether the asserted patents are standard essential. Imation indicated that it “could stipulate for purposes of the FRAND phase that the patents-in-suit were valid and infringed and standards-essential, so as to avoid injecting unnecessary liability- and technology-related issues into the issue of rate determination.”

Imation asserted there were three potential FRAND-related outcomes. First, the court could conclude that, as a result of plaintiffs’ alleged breach of their FRAND obligations, plaintiffs forfeited their right to demand royalties. This result “would resolve [the] case independent of any further liability determinations.”

Second, the court could determine “a FRAND rate in line with the rate Imation offered before [the] litigation began, or a comparable rate that permits Imation to stay in the Blu-ray disc market.” This would resolve the case as well, because Imation net revenues from Blu-ray sales is “well under $2 million.” According to Imation, “[t]he patents-in-suit are a tiny fraction of all standards-essential patents relating to Blu-ray discs.” Relying on  Microsoft v. Motorola, Imation argues that “[i]t has been universally held by Courts resolving FRAND issues that the total level of royalties paid on all standards-essential patents must be a FRAND rate, a rate that does not force parties adopting the standards out of the market”, i.e., a rate that prevents royalty stacking. The FRAND rate proposed by Imation would permit it to remain in the Blue-ray market.

Finally, a potential result is that the court could accept plaintiffs’ “proposed rate or otherwise determine a rate that Imation concludes will require exit from the Blu-ray disc market.” According to Imation, the total number of Blu-ray standards-essential patents “likely exceeds 200.” “That means that the total royalties attributable to the patents-in-suit likely will not exceed 3% of an overall FRAND rate”, that is, the 6 patents asserted by plaintiffs divided by the 200 alleged standard essential patents. Thus, if plaintiffs “were to obtain a judgment in this case, the damage award will likely be based on only a 3% share of some percentage royalty rate applied to revenues being earned at a rate under $2 million per year.” Whether Imation “were to win or lose on validity and infringement issues for the six patents-in-suit, Imation cannot re-litigate such issues for nearly 200 additional patents, whatever royalty rate is determined.” Therefore, this last result would also resolve the case by forcing Imation to exit the market.

One Blue’s Opposition.  Plaintiffs responded to Imation’s request by arguing that the court must first determine the FRAND rate before determining whether plaintiffs breached their alleged FRAND obligation. Quoting Microsoft, Imation argued that     “‘[w]ithout a clear understanding of what RAND means, it would be difficult or impossible to figure out if [plaintiffs] breached [their] obligtation to license [their] patents on RAND terms.’”

Relying on Microsoft and Innovatio, plaintiffs also argued that, contrary to Imation’s contention, determination of FRAND is not proper for summary judgment because it is a “‘heavily disputed, fact-sensitive issue that must be resolved by a finder of fact.’”

Plaintiffs also contended that the three potential results of a FRAND-phase identified by Imation is incomplete. Plaintiffs argued that the Microsoft court’s FRAND analysis proceeded in three steps: (1) determine the importance of the patent portfolio to the standard; (2) determine the importance of the patent portfolio as a whole to the alleged infringer’s accused products; and (3) examine other licenses for comparable patents. Imation’s proposal “does not account for discovery related to the technical aspects of the Blu-ray Disc standard, the One-Blue patent portfolio, Imation’s accused products, and alternative technologies in the marketplace at the time the Blue-ray Disc standard was adopted.”

To achieve the efficiencies that Imation touts, plaintiffs argue that Imation is required to stipulate that the asserted patents are valid, enforceable and infringed for the entire case, not just the FRAND phase. “The complete stipulation would close the door to arguments during the FRAND phase that Imation’s products do not use the asserted patents and it would eliminate challenges to the patents’ enforceability–both are substantial issues to litigate.” If Imation were permitted to later contest essentiality after the FRAND phase, “the Court may have to redo its royalty determination” because, as the Innovatio court held, “‘the licensing rate should be increased for patents of doubtful essentiality, on the ground that the infringement damages for such a patent would not be limited to a RAND rate.”  Rather, the patent owner would be entitled to “‘seek typical patent damages for’” patents of doubtful essentiality or patents which are not essential to the standard.

Plaintiffs also argued that “if Imation’s claims of financial hardship are true and it really will not litigate validity, enforceability, and infringement after a FRAND phase, giving up its right to do so would sacrifice little and provide the parties and the Court with the comfort that bifurcation of the FRAND issues would finally dispose of the case.” Absent the complete stipulation, Imation retains the unilateral right to decide whether it will continue litigating the case or exit from the Blu-Ray market.

Finally, plaintiffs argued that, even if Imation determines after the FRAND phase to exit the Blu-Ray market, “Imation may still be liable for damages for past infringement beginning at the latest in June 2012, when it received actual notice of the patents.” Therefore, litigation of patent issues will still be required even if the case were bifurcated.

Judge Stark’s Decision.  Judge Stark held a teleconference with the parties and issued an oral and written order granting Imation’s request and ordering that “discovery, dispositive motion practice, and trial . . . be bifurcated into separate FRAND Issues and Liability Issues” so that FRAND issues are resolved first. In the oral order, the court held that:

“For purposes of the FRAND phase, the patents-in-suit will be presumed to be valid and infringed, subject to Defendant’s right to litigate these issues following the FRAND phase. However, as part of the FRAND phase, the Court will determine whether the patents-in-suit are standards essential; this issue will not be deferred to the post-FRAND phase. For the avoidance of doubt, the Court interprets paragraph 1.f of Defendant’s Proposed Order — describing as a FRAND issue ‘[o]ther facts relating to determination of a reasonable royalty or licensing rate for the patents-in-suit’ — to include a determination of the standards essential issue.”

The court directed the parties to submit a revised scheduling order setting deadlines for the FRAND phase followed by the liability phase.

 

Two weeks ago, we posted about non-party IEEE’s amicus curaie brief in Ericsson v. D-Link, et al., an appeal pending before the Federal Circuit.  The appeal, initiated by defendants D-Link, Dell, Acer, Gateway, Netgear and Toshiba, challenges a jury’s damage award against the defendants for infringement of plaintiff Ericsson’s patents that are claimed to be essential to the IEEE’s 802.11 standard (SEPs).  Recently, non-party American Antitrust Institute (AAI) filed its own amicus curaie brief in the appeal, challenging the District Court’s instruction to the jury to apply an unmodified version of the 15 Georgia-Pacific factors in calculating damages for infringement of alleged SEPs.

AAI argues that the Georgia-Pacific factors “are not an appropriate basis for instructing a jury how to determine damages for infringement of a standard-essential patent encumbered by a RAND commitment, at least not without significant modification.”  According to AAI, the district court’s wholesale adoption of the Georgia-Pacific factors in its jury instructions was error that “was not cured by the court additionally instructing the jury that any damages award be consistent with the patentee’s RAND obligation, without explaining what the RAND obligation entails.”

AAI asserts that the purpose of a patent holder’s RAND commitment “is to mitigate the problem of patent holdup, namely obtaining royalties on the basis that implementers are locked into the standard rather than on the basis of the value of the patented technology itself.”  AAI goes on to argue that the value of the patented technology

“is properly understood as the incremental value of the patented technology over the next best alternative at the time the technology was under consideration for inclusion in the standard (the ex ante value), subject to a ‘royalty stacking’ constraint, i.e. that the combined royalties on all of the patented technologies included in the standard must not undermine implementation of the standard.”

AAI points out that commentators have criticized the use of the Georgia-Pacific factors  “as indeterminate at best for determining a reasonble royalty for patents generally.”  Those factors, according to AAI, are “particularly inadequate for setting a RAND royalty.”  This is because they “do not explicitly focus on the ex ante value at the time the standard is adopted nor expressly take into account royalty stacking,” both of which are integral to the primary purpose of a RAND commitment.  Specifically, setting a RAND rate based on the ex ante value of the patented technology at the time the standard is set — rather than just before infringement under Georgia-Pacific — “is necessary for consumers to benefit from competition among technologies to be incorporated into the standard — competition that the standard setting process itself otherwise displaces.”

AAI then cites to the modified Georgia-Pacific factors used by the courts in Microsoft v. Motorola and In re Innovatio as potential cures for the alleged shortcomings in the standard Georgia-Pacific analysis in capturing the ex ante value of the patented technology at the time the standard is adopted:  “In adopting a substantially modified version of the Georgia-Pacific factors, the district courts in Microsoft and Innovatio recognized that this ‘pre-inclusion’ ex ante vantage point is appropriate, although they also referred to the time of infringement.”   Specifically, both courts held that the parties would consider alternatives that could have been adopted in lieu of the asserted SEPs at the time the standard was set, and those potential alternatives could potentially “drive down the royalty that the patent holder could reasonably demand.”

AAI also argues that the jury must be instructed that any damage award should be measured so as to avoid royalty stacking, which “is not completely captured in the bilateral hypothetical negotiation contemplated by Georgia-Pacific.”  This is because SEP holders “collectively have an ex ante interest in preventing royalty stacking and ensuring that the overall royalty burden of the standard is reasonable.”  “[A]bsent explicit instructions, a jury will not understand the significance of royalty stacking and may, for example, reasonably believe that Georgia-Pacific’s first factor—proof of an established royalty for the patents in suit—does not permit the RAND royalty to vary depending on the number of patents (and patentees) essential to the standard, as stacking concerns would otherwise suggest.”

Finally, AAI argues that several of the Georgia-Pacific “factors are either flatly inconsistent with a RAND commitment or are irrelevant.”  For example, quoting Judge Robart’s decision in Microsoft v. Motorola, AAI asserts that Georgia-Pacific Factor 4, which considers the licensor’s policy of maintaining his patent monopoly by not licensing others or by granting licenses under special conditions designed to preserve the monopoly, “‘is inapplicable in the RAND context because the licensor has made a commitment to license on RAND terms and may no longer maintain a patent monopoly by not licensing to others.'”

AAI further asserts that:

“[w]hile the remaining Georgia-Pacific factors may be relevant to the RAND determination and understandable to juries if modified in ways suggested by the district courts in Microsoft and Innovatio, those factors that involve consideration of the benefits or profits earned by the licensee from the sale of the ‘product made under the patent’ (factors 6, 8, 10, 11) are problematic insofar as they obscure the need to ‘apportion the defendant’s profits and the patentee’s damages between the patented feature and the unpatented features’ . . . in a context where the SEP holder is not entitled to a royalty based on the value derived from the incorporation of the patented technology into the standard, or to discriminate among licensees.”

As in Microsoft and Innovatio, the district court in Ericsson’s case should modify “Georgia-Pacific factors 6, 8, 10, and 11 [to] expressly to take into account ‘only the value of the patented technology and not the value associated with incorporating the patented technology into the standard.'”  This will potentially prevent the factfinder from mistakenly taking into account, “as a factor in the RAND analysis, the relative value of the functionality provided by the standard itself (here, Wi-Fi) to the licensee’s products.”

We previously discussed the opening comments filed by Complainant LSI in the International Trade Commission (ITC) investigation of whether Realtek and Funai infringe LSI’s alleged 802.11 and H.264 standard essential patents (SEPs). To recap, the ALJ’s initial determination found the SEP patents were not infringed but rejected RAND-based defenses. The Commission decided to review the ALJ’s determination in its entirety and requested comments on various issues, including RAND obligations, the history of license negotiations among the parties, other licenses for the patents-in-suit, and industry practice for licensing similar technologies.

LSI recently filed three sets of reply comments. The first and second respond to the opening merits comments of respondents Realtek and Funai, respectively. The last set responds to the comments of Realtek, Funai and third-parties on SEP and RAND-issues.

LSI’s Reply to Funai’s and Realtek’s Comments on Liability

Infringement: LSI argues that testimony from its own expert shows that the “accused Funai products necessarily infringe when playing high-definition H.264-encoded Blu-ray discs or when streaming high-definition H.264-compliant videos” and that other expert testimony found the infringing functionality to be “a critical feature of the Blu-Ray disc players and the smart TVs that constitute the Funai” accused products.

Validity:  LSI responds that Funai’s alleged prior art Harris proposal was rejected by the IEEE when developing the 802.11 standard —  “[t]he Harris proposal was riddled with the very problems the ‘958 patent solved.”

LSI argues that secondary considerations of non-obviousness support patent validity, including the fact that the ‘958 patent was adopted into the 802.11 standard. Without the contribution of the ‘958 patent, “the consumer WLAN industry would not have taken off in the way it did.”

LSI’s Reply to Funai’s, Realtek’s and Third-Party Comments on Remedy/Bond

History of Negotiations:  LSI asserts that Funai mischaracterizes the history of license negotiations between the parties. LSI provided several RAND license offers to Funai, but Funai unreasonably did not respond.  Further, LSI’s offers were not “take or leave it demands,” but were good faith “offers” to license LSI’s patents.

LSI also takes issue with Funai’s argument that LSI could have chosen to pursue licenses at the component level, rather than the end product level, which would render Funai’s end products licensed where components are licensed: “The fact that LSI could have chosen to pursue licenses at the component level rather than at the end product level has no bearing on whether the license terms offered to Funai for its infringing end products were reasonable and non-discriminatory.”

LSI also points to the ALJ’s holding that “‘the facts presented in this investigation show that the failure of the parties to agree to terms for the licensing of the asserted SEPs cannot be attributed to” LSI. “Given this negotiation history, there is no legitimate basis for Funai’s unsupported assertion that it ‘is prepared to accept a FRAND offer.’”

With respect to negotiations with Realtek, LSI asserts that the ALJ properly held that “Realtek’s refusal to negotiate with Complainants undercut its arguments that Complainants breached their RAND obligation.” Realtek’s comments do not cite to any evidence in the record contrary to the ALJ’s holding.  Instead, it seeks to improperly inject new evidence from its Northern District of California litigation against LSI which was not before the ALJ and has not been tested through cross-examination or otherwise.

Comparable Offers:  LSI asserts that Funai’s RAND arguments were premised on “a faulty comparison between LSI’s opening license proposal to Funai and the final negotiated terms of LSI’s executed license agreements with” unidentified entities. According to LSI, “[t]he ALJ correctly agreed with Complainants that such a comparison is improper.” LSI argues that Funai failed to correct this in its comments to the Commission because it contains no comparison of offers made by LSI to other entities with the offers made to Funai.

Industry Practice for Licensing/Patent Pools:  LSI notes that “Funai appears to agree with Complainants that portfolio rather than single-patent licensing is typical practice in the consumer electronics industry.” However, LSI argues that Funai is incorrect in arguing that “‘[p]articularly for standard-essential patents, industry practice is to aggregate the relevant patents from multiple licensors into a single portfolio, commonly called a patent pool.’” According to LSI, “[p]articipation in patent pools is voluntary and most patent holders choose to license SEPs outside of a pool.” “For instance, a patent holder may choose not to join a pool if its SEPs are of particularly high value, because pools typically provide equal compensation for each patent in the pool regardless of the importance of individual patents to the standard or to licensees’ products.”

RAND Rate:  LSI argues that it provided the Commission with a “high-level term sheet for Funai that would offer” certain patents on undisclosed (redacted) terms. In contrast, Funai provided only a statement as to what it contends is a RAND rate for the three SEPs at issue (the rate was redacted in LSI’s comments). Funai “cites to no evidence in support of its proposed rate, relying only on RAND royalty rates that have been determined by other courts in cases involving different patents, different products, and different parties, as well as on the pool rates for the MPEG LA and Via licensing pools.” LSI argues further that “the court-determined rates in the Microsoft and Innovatio cases are of little or no relevance” because “[t]he courts in those cases determined RAND rates specifically for licenses of Motorola and Innovatio SEPs, respectively, but did not determine rates for all patents essential to either the H.264 or 802.11 standards.”

LSI further criticizes Funai’s reliance on patent pools because “patent pools ignore the value of the individual patents being licensed” and thus “their usefulness as an indicator of a RAND rate is markedly diminished in cases such as this one where the patents at issue are of high value.”

LSI criticizes Realtek’s proposed royalty rate because it is based on Realtek’s own license with an unidentified third-party and not any of the licenses LSI has entered into with other entities for the patents at issue. The license relied upon by Realtek can only be a comparable license “if a fact finder were to determine that [LSI’s SEPs] have no value to the standard” which Realtek failed to show before the ALJ. Second, Realtek makes no effort to identify how the patents licensed under its license compare to the ‘958 and the ‘867 patents or how the patents that are the subject to its license are incorporated into the 802.11 standard.

Undue Leverage/Patent Hold-Up/Patent Hold-Out:  LSI argues that Funai, Realtek and the third-party commenters are incorrect in arguing for a per se rule that holders of SEPs cannot seek injunctive relief. None of LSI’s commitments to SSOs include a promise not to seek injunctive relief. Those commitments only include a promise to offer a license to willing licensees on fair, reasonable and non-discriminatory terms. Requesting injunctive relief at the ITC or in court cannot amount to undue leverage because, as found by the USTR, DOJ and PTO, an “exclusion order should continue to be available for Section 337 violations involving RAND-encumbered SEPs, upon consideration of relevant factors specific to the circumstances at issue in each case.”

Further, “[a] company should not be permitted to constructively refuse to negotiate regarding the terms of a RAND license, unreasonably prolong negotiations and force the prospective licensor to turn to the courts for enforcement of its SEPs, all the while evading its obligation to fairly compensate the SEP-holder for use of the patented technology.” Permitting such behavior jeopardizes the patent system and the effectiveness of SSOs “as patent holders may no longer participate in the standard-setting process or contribute their patents to a standard if they believe that they will not be able to receive full and fair value for RAND-encumbered patents.”

Ex Ante Alternatives:  LSI asserts that there were no alternatives to its patents at the time the 802.11 standard was adopted. Certain of the “alternatives” cited by Funai were “rejected in voting by the 802.11 Working Group based on technical inadequacies in” them. The other alternatives were technologically inferior.

Bond:  Contrary to Realtek and Fuani’s arguments, LSI argues that it “presented volumes of evidence showing [LSI’s] negotiations with numerous companies to reach a reasonable royalty to license the asserted patents.”  However, each executed license “is different and, accordingly, a bond based on a standard royalty rate is not possible.” Therefore, LSI argues that the bond should be set at a rate of an undisclosed percentage of the entered value of the product, or such other reasonable rate as may be established.

Exclusion Order:  LSI asserts that exclusion orders are the default remedy for a Section 337 violation and the Commission should not depart from its usual practice, particularly since both LSI and Realtek are unwilling licensees.

Realtek and Funai’s reply comments will be the subject of separate posts.