Last week, India’s High Court of Delhi issued a 64-page decision in the standard essential patent (SEP) dispute between mobile phone importer Intex Technologies and Ericsson who owns telecommunication patents subject to commitments to license on fair, reasonable and non-discriminatory (FRAND) terms under intellectual property rights (IPR) policies of standard development organizations (SDOs), such as the European Telecommunication Standards Institute (ETSI). The High Court affirmed an interim (or preliminary) injunction by a lower court (referred to in the decision as the challenged or “impugned order”) entered over eight years ago in March 2015 that required Intex to pay 50% of the expected royalty while the case was pending because Ericsson had shown it was likely to prevail in the case: e.g., Ericsson established “prima facie” that Ericsson will prevail at end of case on the issues of whether the eight patents in suit were valid and infringed and that Ericsson complied with FRAND commitment. The Court here ruled that Ericsson had made a prima facie case it will prevail, and further ordered that Intex must pay 100% of the royalty while the case was pending (not just 50%).

This is an important decision to review in understanding licensing and litigation of international SEP portfolios. This decision “endeavour[ed]” to “achieve harmonisation of basic principles of law” with other international standards and foreign decisions while taking into account differences among the national laws of different countries. The decision generally may be viewed as favorable to SEP owners. For example, the Court ruled that an injunction may be entered against an standard-compliant product if even a single SEP is found to infringe.

This decision addresses many hot topics in licensing SEPs and attempts to harmonize existing decisions in reaching its rulings here.The Court here, for example, discussed the following topics:

  • There is some dispute about whether a FRAND commitment imposes obligations on someone wanting to license an SEP. This decision indicates that a FRAND commitment is not a one-way street, but imposes obligations on both the SEP owner and someone seeking to license the SEP.
  • There is some dispute about whether an SEP owner must provide details of its licensing agreement with others to a prospective licensee (often termed “transparency”). This decision indicates that an SEP owner sometimes might need to provide information to a prospective licensee (under a confidentiality agreement), although that may not be necessary for an experienced licensee who can consult existing patent licenses they have entered with others.
  • There is some dispute about whether an implementer must make any royalty payments while negotiating to license an SEP. This decision indicates they should.
  • There is some dispute about whether an injunction may be entered on an SEP with a FRAND commitment. This decision indicates that injunctive relief, including preliminary injunctive relief, should be granted against unwilling licensees (e.g., those who stall licensing negotiations). A reasonable expectation of injunctive relief must be maintained in order to spur implementers to negotiate a license.
  • There is some dispute whether an SEP owner is required to negotiate license to individual patents, rather than licensing an entire SEP portfolio. This decision indicates that licensing an entire SEP portfolio may be permissible.

Finally, we provide our usual caveat that you should read the decision for yourself and understand that we are not familiar with the nuances of India law and procedure that can impact the decision.

For example, this decision’s background discussion of SEPs and IPR policies indicates that an SEP owner must grant a license on FRAND terms to anyone who asks for a license. This touches on the issue of whether an SEP owner must offer a license to a component supplier if asked, rather than licensing the end product (e.g., license the manufacture of a chip used in a phone, rather than the phone manufacturer). This case, however, concerned an implementer who imported and sold end product devices (mobile phones) and did not involve someone in the supply chain–e.g., chip manufacturer–requesting a license. This case did involve a dispute of whether the royalty base should be the chip or end product (the lower court ruled the end product can be the royalty base), but this case did not present the issue of whether to license the chip manufacturer. So this case may not be relevant to the issue of to whom in a supply chain licenses must be granted.

We saw a similar problem in U.S. jurisprudence where the Ninth Circuit had a single sentence statement in the background section of its Microsoft v. Motorola decision indicating that a FRAND commitment requires licensing anyone who seeks a license. ut licensing anyone (e.g., chip manufacturers) was not an issue in that case and therefore that background statement was not an actual, binding ruling under U.S. common law. Nonetheless, some argued that the background statement in the Ninth Circuit’s decision was a binding ruling that SEP owners with a FRAND commitment must license anyone who asks, including chip manufacturers. In a later decision in which whether to license a chip manufacturer actually was at issue, however, the Ninth Circuit in FTC v. Qualcomm ruled that an SEP owner reasonably could refuse to license chip manufacturers and, instead, decide to license manufacturers of the end product mobile phones that use the chips (which would covering the chips used therein).

Background

Intex Arguments On Appeal

Intex challenged the preliminary injunction order that required Intex to deposit 50% of Ericsson’s requested royalty during pendency of the case.

Intex argued that an SEP owner is not entitled to injunctive relief (even against an unwilling licensee) and an implementer could not be ordered to pay any royalty until the end of the case where infringement, etc. are finally de4termined. Intex relied on a decision by another lower court in India, Nokia vs. Oppo, that ruled a court could not require payment of a royalty unless the following four factors have been shown: (i) the asserted patent is an SEP, (ii) the defendant infringes the patent (iii) the patent owner’s requested royalty rate is FRAND and (iv) the infringer is not willing to take a license at that FRAND rate.

While negotiating with Ericsson, Intex had filed a complaint with the Competition Commission of India (CCI) and also had challenged patent validity in the Intellectual Property Appellate Board (IPAB). Intex argued that, contrary to the lower court’s decision, Intex’s CCI complaint did not admit that the patents were essential or valid.

Intex argued that only eight India patents were at issue in the lower court, which should not impact the entire portfolio. Even if those eight patents were essential, Ericsson’s entire portfolio of over 33,000 patents (including foreign patents) should not be presumed essential. Nor should Intex pay a royalty on the entire portfolio based on the handful of eight patents at issue.

Intex argued that the patents should not be presumed valid; rather, Ericsson must prove their validity. Intex pointed to U.S. Patent Office proceedings on U.S. patents, for example, as indicating that a related India patent was vulnerable to being revoked.

Ericsson’s Arguments On Cross-Appeal

Ericsson filed a cross-appeal seeking to have Intex pay 100% of the royalty during the pendency of the case, not just 50%.

Ericsson argued that Intex admitted in its CCI complaint that it was required to take a license to Ericsson’s alleged SEPs because there were no non-infringing alternatives. Intex’s CCI complaint did not challenge the validity or essentiality of Ericsson’s patents. Further, during five years of negotiation between the parties before Intex filed the CCI complaint, Ericsson had provided to Intex claim charts showing essentiality and a test report showing infringement.

Ericsson argued that, under the 2015 EU decision in Huawei v. ZTE, an alleged infringer should enter a license if they are selling the accused product even though an SEPs essentiality and validity has not been litigated, but they could still reserve the right to later challenge essentiality or validity. Ericsson argued that the Nokia v. Oppo decision relied on by Intext to argue essentiality/validity must be conclusively established is contrary to the UK Unwired Planet v. Huawei decision in which an injunction may be entered based on only some of the patents in an SEP portfolio. Unwired Planet permits injunctive relief without fully adjudicating essentiality and validity of all patents because it is impossible to await adjudicating over 33,000 patents in a patent portfolio, and an implementer will benefit from certainty when taking a license to a large number of “untested” patents.

Ericsson indicated that the parallel US patent proceedings cited by Intex involved non-final actions that did not indicate a problem with the India patents at issue. Further, Ericsson provided claim charts showing that issued claims of U.S. and European patents were materially the same as the India patents, thus indicating the India patents covered patentable innovations.

Ericsson argued that it was not fair to other manufacturers who were paying royalties if Intext was not also required to pay a full royalty while this case is pending.

Court’s Decision

Developing Technology and SEP Law

The Court observed that technology was becoming more global, blurring national boundaries. Many standard development organizations (SDOs) have international stature, such as IEEE (Institute of Electrical and Electronics Engineers) and ETSI (one of the most widely recognized SDOs in the world). The Court reviewed the benefits of standardization, such as providing early adoption of technology, making products less costly and providing more value to consumers through interoperability “network effects” where products are more valuable as more people use them. Thus, although intellectual property laws are territorial (i.e., governed by the law of each country), it is helpful for courts to consider international harmonization in their rulings to the extent possible without running contrary to a countries’ national laws.

The Court focused on ETSI’s IPR policy, such as what makes a patent “essential”:

6. “ESSENTIAL” as applied to IPR [intellectual property rights, like patents] means that it is not possible on technical (but not commercial) grounds, taking into account normal technical practice and the state of the art generally available at the time of standardization, to make, sell, lease, otherwise dispose of, repair, use or operate EQUIPMENT or METHODS which comply with a STANDARD without infringing that IPR. For the avoidance of doubt in exceptional cases where a STANDARD can only be implemented by technical solutions, all of which are infringements of IPRs, all such IPRs shall be considered ESSENTIAL.

The Court ruled that, in this case, “the term ‘Essential’ means that a patent is essential to a standard i.e., it is not possible on technical grounds to comply with the standard without infringing the patent.” Thus in this (and other similar cases) a “Standard Essential Patent is a patent claiming technology that is essential to an industry standard’s use.” The Court explained that FRAND commitments were developed to address “concerns regarding standards being held to ransom by an individual patent owner.” As an example, the Court referred to ETSI’s voluntary FRAND commitment and stated that the objective of ETSI’s IPR Policy is “to ensure that a patent owner is adequately rewarded at FRAND rates for its contribution/innovation while ensuring that the latest state of the art technology is available to the implementers world over irrespective of the fact that such implementers are not involved in research and development at all.”

The Court stated that SDO IPR policies usually impose obligations not present with other patents, such as (i) duty to disclose SEPs, (ii) duty not to withhold access but make SEPs available to all willing to use it and (iii) duty to offer licenses to all willing licensees on FRAND terms.” A FRAND commitment thus limits rights SEP holders otherwise would have, such as (a) freedom to decide to whom to give a license; (b) freedom to decide the terms of a license as it has to be on FRAND terms and (c) freedom to seek an injunction without prior negotiations.

The Court stated that the FRAND commitment involves obligations by both the SEP owner and implementers. The Court discussed “hold up” and “hold out” as two “evils” to be avoided:

  • Hold Up: “In simple terms, ‘hold up’ occurs if a patentee is able to ensure that a Standard Essential Patent is incorporated into a standard and implemented by implementers in circumstances which enable the patentee to use the threat of an injunction to restrain infringement to extract license terms, and in particular royalty rates, which exceed the reasonable market value of a licence of the patented invention (i.e. treating the Standard Essential Patent as akin to a ‘ransom strip’ of land).”
  • Hold Out: “‘Hold out’ occurs if an implementer is able to implement a technical solution covered by a Standard Essential Patent without paying the reasonable market value for a licence (or perhaps anything at all). It needs to be appreciated that the FRAND undertaking is designed to prevent ‘hold up’ by giving the implementer a defence to a claim for infringement and hance to an injunction, while the patentee’s ability to obtain an injunction to restrain infringement of an unlicenced Standard Essential Patent should prevent hold out’. [citing Optis v. Apple (2022), EWCA Civ 1411]

The Court reviewed the EU’s Huawei v. ZTE SEP negotiation process, reflected in the Court’s flow chart below:

The Court stated that a FRAND commitment places mutual obligations on both the SEP owner and standard implementer: “It is not a ‘one way street’ where obligations are cast on the Essential Patent holder alone.” The Court considered the parties’ negotiation conduct to be a key factor. The Court described a willing licensor and licensee as follows:

  • Willing Licensor (SEP Owner): “A licensor will be considered a willing licensor only if it gives a FRAND offer and in certain situations provides information necessary, subject to confidentiality agreement, for a licensee to evaluate an offer (relevant to ‘ND’ [i.e., non-discriminatory] part of FRAND). If the licensor offers a supra-FRAND offer i.e. exorbitant royalty rates, it will not be considered a willing licensor.”
  • Willing Licensee (Implementer): “Similarly, an implementer has no right of silence or inaction at this stage. It is not correct to suggest that without access to other agreements executed by the Patentee no counter-offers can be made. Normally an implementer can take recourse to its own license agreements executed with other Standard Essential Patent proprietors/licensors, to determine an appropriate FRAND rate that it would be willing to pay or to determine if the rate offered by an Standard Essential Patent proprietor is FRAND or not. … Thus it is not true that the implementer, who is often a large commercial entity itself having a global business presence, enters into any kind of negotiation with a Patentee ‘blindly’.”

The Court stated that an implementor who does not accept an SEP owner’s offer must make a counteroffer and provide security in order to freely sell its devices in the interim so that the implementor does not benefit “to the disadvantage of other willing licensees, and get[] an unfair competitive edge in the market.”

SEP Owner Can Seek Injunction Against Unwilling Licensee

The Court rejected as “untenable in law” Intex’s argument that an SEP owner can only get damages at the end of trial and cannot obtain an injunction or direction to pay as the lower court ordered here. The Court cited to the UK Supreme Court’s Unwired Planet decision that prohibiting injunctive relief removes an implementor’s incentive to voluntarily enter a license. The Court stated that “either an injunction or a direction to pay royalty in the interim is likely to be a more effective remedy, as it does not merely result in a small increment to the cost of products which infringe the patents, but prohibits infringement altogether.” The Court also stated that decisions from other countries have rejected the argument that a FRAND commitment precludes injunctive relief, citing the EU Huawei v. ZTE decision, the UK Supreme Court Unwired Planet decision, the German court decisions in Koninklijke Philips N.V. v. Asus Tek and Tagivan (MPEG LA) v. Huawei, and the U.S. Federal Circuit decision in Apple v. Motorola.

The Court acknowledged that courts in different countries may take different approaches given differences in their national laws. For example, although the UK Unwired Planet court did not enter an injunction until after liability for patent infringement was found by trial, “this Court is of the view that the Courts can and should do so before the trial.” The Court also distinguished a recent UK Interdigital v. Lenovo decision that did not issue an injunction after an implementer had a “change of heart” and agreed to accept a Court-determined FRAND rate. In that case, the implementor furnished security by bank guarantees.

The Court raised a “common sense” concern that, “if Standard Essential Patent owners are flatly precluded from seeking injunctions, then infringers would have little reason ever to agree to, or negotiate in good faith, a licence with a Standard Essential Patent owner, ” explaining:

A well-resourced infringer would rationally reject any licence offer and compel the Standard Essential Patent owner to enter into litigation that typically requires millions of dollars in legal expenses in multiple venues around the world. In the worst-case scenario, the infringer would be compelled to pay monetary damages that are typically calculated using a methodology designed to mimic the rate in a negotiated licensing transaction. Even under the current legal regime, in which injunctive relief may be reasonably available but only after a delayed and costly litigation process, well-resourced implementers regularly decline to take licences at the outset of negotiations with Standard Essential Patent owners, compelling both parties to spend millions of dollars and thousands of personnel hours on litigations in multiple jurisdictions. Those resources could be directed more productively towards research and development to advance technologies.

…

[L]egal regimes that do not preserve a reasonable expectation of injunctive relief against infringers in Standard Essential Patent litigations will have a counterproductive “domino effect” that shifts bargaining leverage to implementers in all Standard Essential Patent licensing negotiations, devaluing existing patent-protected technologies and disincentivizing firms from developing new technologies. Absent any realistic prospect of an injunction within a reasonable period of time, the implementer enjoys acess to the innovator’s technology, deriving revenues from the products and services that embody that technology, while during the negotiations and litigation, the innovator earns nothing from the same technology that it developed at great cost and risk. This asymmetry is likely to lead to settlement amounts or, absent litigation, negotiated royalties that undervalue the innovator’s technology. This effectively transfers wealth from firms that specialize in developing technologies to firms (including some of the world’s most valuable companies) that specialize in using and integrating those technologies in branded devices/products sold to consumers.

The Court thus ruled that, based on the foregoing review of international law and the fact that India law does not bar injunctive relief, SEP owners may seek “interim and final injunctive relief if an infringer is deemed by a Court to be an ‘unwilling licensee,’ often as indicated by the use of ‘stalling’ and other opportunistic bargaining and litigation tactics.”

Test of SEP Infringement

The Court ruled that infringement of an SEP may be determined either (1) directly–i.e., reading patent claims onto an accused product directly as in a typical patent case–or (2) indirectly by reading the patent claims onto the standard and then mapping the accused device onto the standard (as in the U.S. Federal Circuit’s decision in Fujitsu v. Netgear, 620 F.3d 1321)). The Court further stated a preference for the indirect method of showing infringement of an SEP, stating it “is a sure shot and better method of proving Standard Essential Patent infringement and essentiality.”

Injunction May Be Granted For Prima Facie Showing That Only One SEP Is Infringed

The Court ruled that an injunction may be entered based on a showing that even a single patent is infringed. This ruling is supported by decisions in several other countries where only a few patents in a portfolio are used to represent and determine the value of an entire patent portfolio:

  • Microsoft v. Motorola (U.S. W.D. Wash. 2013) — U.S. district court evaluated “handful of representative patents to determine reasonable royalties … for the entire” SEP portfolio.
  • Iwncomm v. Sony (Beijing High Court 2015) — Chinese court upholds portfolio rate where sole asserted patent was key to larger portfolio.

The Court refers to a “study of decisions from various countries”, but we do not know if that refers to some unnamed study by others, or means the Court itself undertook a study of foreign decisions. The Court explains that the study indicates a “unanimous view” that (i) SEP holders assert only “a handful of representative patents”; (ii) injunctions are entered if even one patent is found infringed; (iii) FRAND royalty may be based on evaluating representative patents in suit; and (iv) “Licensing or evaluating FRAND rate on a patent-by-patent basis is impractical and is contrary to industry practice.”

The Court thus concluded that showing infringement of even a single SEP can be a “silver bullet” for an SEP owner, stating:

[T]his Court is of the view that if the patentee shows that even if one of the patents in a product has been infringed, then the implementer’s product cannot be sold and all the thousands of patent therein will be of no use to the implementer. Accordingly, if a case for infringement, even witht regard to one patent, is made out, it is like a ‘silver bullet’.

Consequently, to restrain an infringing device, a Standard Essential Patent holder does not have to sue based on each of the thousands of patents that it claims to own in the product; it can do so by showing that one, or a handful of representative patents are infringed.

SEP Owner Can Offer Portfolio License

The Court addressed the issue whether the owner of SEPs subject to a FRAND commitment was required to offer a license to an individual patent or could offer a license a portfolio or cluster license. The Court discussed the UK Unwired Planet decision that permitted portfolio licensing. Unwired Planet considered the ETSI IPR Policy that required licensing patent families (e.g., related patents in different countries) given the global implementation of ETSI standards. Further, many portfolios have patents from many countries. In practice, negotiated licenses are often global or at least cover several different countries. And negotiating licenses for each separate country may be impractical. Thus, the Unwired Planet Court ruled that licensing portfolios of SEPs may be FRAND.

The Court then ruled that Ericsson was not required to offer individual patent licenses, but could offer a portfolio license:

[A]s value is in the technology which forms a part of the standard and the suit patents is just representative of that technology, Ericsson is not required to offer individual patent licences or country specific licences and that global portfolio licences are capable of being FRAND.

A Preliminary Injunction May Be Entered Without Awaiting Final Ruling On Essentiality and Validity

The Court ruled that the four-factor test required by a lower India court decision in Nokia v. Oppos (relied on by Intex) before granting injunctive relief is “contrary to the law” and was based on a misreading of the UK Unwired Planet decision. The Court explained that the Nokia v. Oppos decision “set an impossibly high bar” in requiring “unequivocal admission on (i) essentiality and validity of the suit patents (ii) fact of utilization (iii) fact that such utilization … would amount to infringement (iv) that the royalty rate proposed by the Plaintiff was FRAND.” The Court held such a burden “is completely alien to the patent jurisdiction and does not apply even in normal patent suits.” The Court explained that having such a high burden for preliminary injunctive relief means “there will be no incentive to innovate and it will have a ‘Domino Effect’ as pointed out hereinabove” of giving undue leverage to implementers and devaluing SEPs.

Ericsson Prima Facie Established Essentiality and Infringement

The Court then reviewed whether Ericsson had made a prima facie showing that the patents were essential and infringed by Intex. The Court’s use of the term “prima facie” appears to mean that Ericsson made a sufficient showing at this interim stage, but the lower court below ultimately could make a contrary finding after trial based on the evidence, facts and arguments presented at trial–i.e., the Court is not deciding that Ericsson ultimately will prevail at trial, but that Ericsson has made a sufficient showing to obtain interim injunctive relief while awaiting trial.

The Court found Ericsson had made a prima facie showing based on Intex’s statements in its CCI Complaint, which included Intex stating: (i) Ericsson’s patents were accepted as Industry Standard and declared as essential to ETSI; (ii) the India telecom agency accepted the ETSI/3GPP GSM standards in India and the only way to comply with them was to obtain a licence from Ericsson; (iii) every player in India’s GSM market took an Ericsson license because there were no non-infringing alternatives; and (iv) Ericsson owned a large number of SEPs.

Further, during negotiations with Ericsson, Intex did not provide any claim charts disputing Ericsson’s claim charts or indicating that Intex used alternative technology. An August 2012 Intex email also indicated that Intex tried to disable technology raised in its discussions with Ericsson, but apparently could not. If Intex believed these were not SEPs or were not infringed, then Intex would have sought a declaration of noninfringement rather than seek relief from the India competition agency CCI alleging that Ericsson sought a dominant position from SEPs. And Intex did not file any counterclaim or evidence with claim charts disputing essentiality or infringement before the lower court entered its order below. Based on all the circumstances, including “[l]ack of any material to even raise a prima facie doubt,” the Court agreed with the lower court’s finding that essentiality was established.

Patent Validity Is Presumed

The Court held that “it is for the person challenging the validity of the registered [granted] patent to raise a credible challenge” to validity. To avoid a prelimary injunction, the validity challenge need not be conclusively shown; it is sufficient to show that the patents are “vulnerable to revocation.” But this must be a credible challenge that is not met “solely on the ground that a revocation petition [challenging the patent’s validity] has been filed and is pending.” A credible challenge “cannot be incredible, fanciful or moonshine,” and “the fact that an Inventor has been granted a patent by the Patent Office after scrutiny … has to be given due weightage.” The argument that “the onus to prove validity of the suit patents is on the plaintiff … is untenable in law.”

Further, the Court found the timing of the petition challenging validity was important where Intex waited years to file the petition after being on notice of Ericsson’s patents in December 2008. The Court also did not find error in the lower court’s determination that Intex had not made a prima facie showing of invalidity based on prior art.

Intex Did Not Meet Standard For Appeal Court To Overturn The Lower Court Decision

Based on the foregoing, the Court found that “prima facie the suit patents are essential, have been infringed and the royalty sought by Ericsson is on FRAND terms.” The Court further found that Intex “is prima facie an intentional unwilling licensed and it has failed to raise a credible challenge to the validity of the suit patents.” Intex thus failed to carry its burden on appeal to establish that the lower court “exercised its discretion in a manner which was arbitrary, perverse or capricious and not in conformance with the law.”

Ericsson Showed Intex Should Pay 100% Royalty

The Court found that Ericsson had shown in its cross-appeal that “the terms suggested by Ericsson are prima facie FRAND terms” and that “to ensure parity with other implementers, Intex must pay in full for the past use of the Standard Essential Patents.” The Court based its decision in part on fact that the “telecom industry has overwhelmingly accepted Ericsson’s Standard Essential Patents” and “more than one hundred licences have been executed by Ericsson for the same technology globally and similar implementers are paying royalty in accordance with the terms suggested by Ericsson.” The Court did not discuss those licensing terms beyond noting at the outset of its decision that the lower court rejected Intex’s argument that the royalty base should be the chipset, not the end product, where the lower court “held that chipset basis for calculation of royalty cannot be accepted and the practice of royalty calculations on the end-device is non-discriminatory.” The Court ultimately ordered that “Intex is directed to pay the entire royalty amount to Ericsson within four weeks.”

Finally, the Court emphasized the interim nature of this decision, which will not control the ultimate outcome in the case that is still pending in the lower court for trial and final judgment.

Today, a three-judge panel of the Fifth Circuit affirmed the judgment that Ericsson’s licensing offers to HTC on 2G, 3G and 4G standard essential patents (SEPs) based on the mobile device price (rather than the price of the baseband processor component inside the mobile device) complied with Ericsson’s ETSI commitment to license SEPs on fair, reasonable and non-discriminatory (FRAND) terms.  The decision rejected HTC’s argument that the non-discrimination portion of the FRAND commitment required Ericsson to give HTC the same licensing terms as given larger mobile device manufacturers, because that would convert the ETSI FRAND commitment into a most-favored-licensee approach that ETSI had refused to adopt.  The decision also found that HTC’s proposed FRAND jury instructions were not a substantially correct statement of the law, because Ericsson’s ETSI FRAND commitment was governed by French contract law, but HTC’s instructions were based on U.S. law without reference or comparison to French contract law.  One of the three judges issuing the decision filed a concurrence (discussed below).

This is an important case to read in understanding SEP law and shows the importance of considering the specific FRAND commitment at issue, rather than arguing some general FRAND concept in the ether.  Our prior post reviewed the background of this case and district court’s decision (see May 25, 2019 post), and we also provide a background summary below.  As always, we recommend that you review the decision yourself.  In doing so, keep in mind the procedural posture and standard of appellate review here that can impact the extent to which the court’s decision may apply to other cases.

Background

Ericsson owns many patents considered essential to 2G, 3G and 4G standards (“standard essential patents” or SEPs).  Ericsson made submissions to ETSI committing to grant licenses to patents that cover those standards on fair, reasonable and non-discriminatory terms (FRAND).  HTC also owns 2G, 3G and 4G SEPs.

Ericsson and HTC had entered cross-license agreements in 2003, 2008 and 2014.  Under the 2014 license agreement, HTC paid Ericsson a lump sum of $75 million regardless of HTC’s phone sales, which effectively was $2.50 per mobile device based on HTC’s actual sales.  In 2016, just before the 2014 license expired, HTC and Ericsson began negotiating renewal of the license.  Ericsson offered a license at $2.50 per 4G device.  HTC declined and counteroffered $0.10 per 4G device based on the price of the baseband processor in the 4G device products–i.e., the smallest salable patent practicing unit or SSPPU.

In April 2017, HTC filed the instant lawsuit alleging that Ericsson breached its FRAND commitment.  In June 2017, Ericsson made another offer to license at 1% of the 4G device price, subject to a $1 floor and a $4 cap (i.e., the rate per unit would be between $1 and $4).  HTC rejected that offer.  Ericsson filed a counterclaim seeking a declaration that (1) Ericsson’s offers were FRAND and (2) HTC failed to negotiate in good faith.

At trial, HTC argued that Ericsson had breached its FRAND commitments in at least two ways.  First, the value of Ericsson’s patents must be apportioned from the profit margin of the baseband processor, rather than the net sales prices of the finished mobile device, which results in a substantially lower royalty.  Second, under the non-discrimination terms of Ericsson’s FRAND commitment, HTC was entitled to the more favorable licensing terms granted to larger mobile device manufacturers like Apple and Huawei.

Ericsson argued that the best way to determine whether its offers to HTC were fair and reasonable was to look at licenses that Ericsson had negotiated with other, similarly situated companies.  All of those licenses were based on the value Ericsson’s patents provided to the end-user product, not just the baseband processor component (SSPPU) of the products.  Further, all of the licenses that Ericsson granted to several of HTC’s competitors contained terms similar to those offered to HTC.

Ericsson and HTC proposed different jury instructions on determining a FRAND royalty that supported their respective methodologies.  The district court ultimately adopted the following as a jury instruction:

Whether or not a license is FRAND will depend upon the totality of the particular facts and circumstances existing during the negotiations and leading up to the license.  Ladies and gentleman, there is no fixed or required methodology for setting or calculating the terms of a FRAND license rate.

HTC did not object to that instruction, but did proffer eleven additional instructions for the jury.  The district court declined to give those additional instructions.

The jury verdict form had three questions:

  1. Whether HTC prove[d] by a preponderance of the evidence that Ericsson breached its contractual obligation to offer HTC a license, on FRAND terms, to Ericsson’s cellular standard-essential patents;
  2. Whether Ericsson had breached its duty of good faith negotiations;
  3. Whether HTC had breached its duty to negotiate in good faith.

The jury found that both parties had breached their duties to negotiate in good faith, but Ericsson had not breached its FRAND commitment.  Ericsson then filed a motion on its declaratory judgment action, which the district court granted in ruling “that, in its dealings with HTC as presented in this case, Ericsson complied with its FRAND assurance to HTC, as set forth” in Ericsson’s licensing declarations to ETSI.

Decision

HTC appealed three issues that are the subject of the Fifth Circuit decision today:

  1. The district court’s exclusion of three of HTC’s requested jury instructions;
  2. The district court’s declaratory judgment that Ericsson had complied with its obligation to provide HTC a license on FRAND terms; and
  3. The district court’s exclusion of testimony by an expert for Ericsson in another case that HTC wanted to use to impeach Ericsson’s expert in this case.

The Fifth Circuit ruled in Ericsson’s favor for all three issues.

Jury Instructions

The appeals court reviews the district court’s refusal to provide a jury instructions under an abuse of discretion standard, which is met if the district court refuses to give a jury instruction that:

  1. was a substantially correct statement of law,
  2. was not substantially covered in the jury charge as a whole, and
  3. concerned an important point in the trial such that the failure to instruct the jury on the issue seriously impaired the party’s ability to present a given claim.

HTC argued that the jury should have been instructed (1) to apportion the value of the patents from the non-patented features of HTC’s phones and (2) the non-discrimination requirement of FRAND “serves to level the playing field among competitors” by requiring a patent holder to provide similar terms to similarly situated licensees.

The Fifth Circuit held that HTC’s proposed instructions were not “substantially correct” statements of the law.  Rather, “HTC’s proposed instructions miss the mark because they rely on inapplicable law.”  HTC relies on U.S. law.  But Ericsson’s FRAND commitment made with ETSI is “governed by the laws of France” and is “solely contractual in nature”: i.e., the ETSI FRAND commitment is “a matter of French contract law.”  HTC did not support its proposed jury instructions with French law or the specific provisions of Ericsson’s FRAND commitment with ETSI:

In spite of [Ericsson’s FRAND commitment being governed by French contract law], HTC’s proposed jury instructions are based on United States patent law.  HTC did not even attempt to justify its proposed instructions under French contract law or to argue that French contract law and United States patent law are equivalent.  Nor did it try to support its position by pointing to the specific, governing provisions of Ericsson’s agreement with ETSI.  Because HTC relied on inapplicable law to support its proposed instructions, the district court was well within its discretion in refusing to give those instructions.

Even if US law governed the case, HTC’s proposed instruction arising from “patent-damages cases” was not required in this “breach-of-contract” case.

However, as other courts have recognized, a breach-of-contract case involving a breach-of-FRAND claim “is not a patent law action.”  The act of determining the value of a standard-essential patent for purposes of calculating damages is distinct from assessing whether a particular offer made during unique licensing negotiations was fair and reasonable.  So, while the Federal Circuit’s patent law methodology can serve as guidance in contract cases on questions of patent valuation, it does not explicitly govern the interpretation of contractual terms, even terms that are intertwined with patent law.  Thus, although the district court may have been permitted to use United States patent-law principles to guide its instructions (assuming that United States law were to apply), it was not obligated to do so.

The Fifth Circuit also ruled that HTC’s proposed non-discrimination instruction “flatly contradicts the agreement between Ericsson and ETSI.”  HTC’s proposal would “transform the non-discrimination element of FRAND into a most-favored licensee approach,” which ETSI already rejected:

HTC’s proposed non-discrimination instruction would do away with any “difference in terms” offered to potential licensees if the difference “creates a competitive disadvantage for a prospective licensee.”  The proposed instruction described the non-discrimination prong of FRAND as something designed to “level the playing field among competitors … by prohibiting preferential treatment that imposes different costs to different competitors.”

HTC’s proposed instruction would transform the non-discrimination element of FRAND into a most-favored-licensee approach, which would require Ericsson to provide identical licensing terms to all prospective licensees.  But ETSI has already rejected a most-favored-licensee approach and chosen to give patent holders some flexibility in coming to reasonable agreements with different potential licensees.  Giving HTC’s proposed instruction to the jury would have caused confusion regarding the scope of the non-discrimination element of the actual FRAND agreement between Ericsson and ETSI.  The district court was well within its discretion to refuse to give such an instruction.

Further, even if HTC’s proposed instructions were correct, HTC has not shown that failure to give the instruction “seriously impaired HTC’s ability to present” its case.  Both parties agreed that apportionment was required so that the patent’s value is “based on the value of the patent added to the end product and not on any value derived from being a part of the standard.”  The dispute concerned not whether apportionment was required, but whether to use the baseband processor (SSPPU) or the end product as the royalty base:

Ericsson agreed that apportionment was necessary; it simply thought that the best way to determine the value that its patents added to the end product was by looking to the negotiated-for prices that others had paid to license the patents.  Thus, HTC’s proposed apportionment instructions did not concern an important point at trial because [those apportionment instructions] addressed an undisputed issue [that apportionment was necessary].

Even if the the apportionment instructions had been inappropriately excluded, such an error was not sufficient to require reversal.  The district court’s “other FRAND instructions were legally accurate,” HTC was allowed to present evidence and argument to the jury that apportionment was required and HTC “explicitly covered the substance of its proposed instructions during its closing arguments.”  HTC thus “was fully able to present its case to the jury.”

The Fifth Circuit concludes the jury instruction section with a footnote 4 that makes clear its determination is based on both the first and third prongs of the abuse of discretion standard such that both rationales are binding precedent in the Fifth Circuit (not dicta)–i.e., the decision on the first prong is binding that HTC’s proposed instructions were not a substantially correct statement of the law and the decision on the third prong also is binding that HTC’s proposed instructions did not concern an important issue at trial and its absence did not seriously impair HTC’s ability to present its case to the jury.

Ericsson’s Licensing Offers to HTC Were FRAND

The Fifth Circuit considered HTC’s challenge to the district court’s declaratory judgment that Ericsson’s licensing offers to HTC were FRAND.  This is mainly a procedural issue that essential is resolved by the appeals court determining that (1) HTC did not preserve the issue on appeal by filing a Rule 50(b) motion challenging the jury verdict that provides the factual findings underlying the district court’s declaratory judgment ruling and (2) substantial evidence supported Ericsson’s argument that its offer was FRAND even if HTC had evidence to the contrary.

The Fifth Circuit would not reverse the decision even if HTC had filed a Rule 50(b) motion, which would require a showing that all facts and inferences viewed in favor of Ericsson nonetheless “point so strongly and overwhelmingly in favor of [HTC] that the Court believes that reasonable men could not arrived at a contrary verdict.”  The Fifth Circuit ruled that Ericsson presented “substantial evidence” supporting the verdict notwithstanding HTC’s counter evidence:

Ericsson presented substantial evidence to support its position that it had offered FRAND terms to HTC.  Ericsson pointed to licenses with similarly situated companies to HTC that had terms that were remarkably similar to those offered to HTC.  This supported both its valuation arguments (suggesting that the value of Ericsson’s patents was best determined by looking to comparable licenses) and its non-discrimination arguments (suggesting that other similarly situated competitors had received similar licenses).

HTC countered with evidence regarding the value of Ericsson’s patents using its own valuation method based on the smallest salable patent-practicing unit.  HTC further argued that Ericsson’s licenses with companies like Apple, Samsung, and Huawei were much more favorable, but Ericsson presented additional evidence indicating that those companies were not similarly situated to HTC due to a variety of factors.  The jury was not required to accept HTC’s arguments or evidence regarding valuation or non-discrimination.

Exclusion of Other Expert’s Testimony In Another Case

The Fifth Circuit reviewed under an abuse of discretion standard HTC’s challenge to the district court excluding prior testimony and report by another expert for Ericsson in another case.  HTC sought to use testimony from Ericsson’s expert Mr. Kennedy in another case to impeach the testimony of Ericsson’s expert Mr. Mills in this case.  But the district court excluded that testimony as hearsay–i.e., a statement made outside of this instant case by someone who is not a party in this case.  The Fifth Circuit ruled that the statements by Ericsson’s expert in another case could not be deemed admissions by Ericsson that could be used in this case:

Kennedy’s testimony was prepared and given at a different time for a different case.  Although Kennedy’s testimony may touch on the same general topic as Mills’s, Kennedy’s valuation was necessarily given for a different purpose and dealt with a distinct licensing situation.  It had nothing to do with the present dispute over the licensing negotiations between Ericsson and HTC.  The district court was well within its discretion in excluding Kennedy’s prior opinions.

Judge Higginson Concurrence

Judge Stephen A. Higginson filed a concurring opinion that agreed with the outcome of the majority opinion, but for different reasons.  The majority opinion is binding on all cases filed in the U.S. geographic area falling within the Fifth Circuit’s jurisdiction (e.g., the popular Eastern and Western districts of Texas).  In contrast, the concurrence is not binding on anyone.  Such concurrences, however, can give guidance to future litigants or other appellate courts on what may limit or distinguish the binding majority decision from other cases.

Judge Higginson would rule that the district court erred by “refus[ing] to incorporate a mutually-requested apportionment instruction,” but the error was not sufficient to require reversal because it “did not seriously impair HTC’s ability to present its case.”  Judge Higginson viewed HTC’s proposed instruction as being “substantially correct statements of law” based on the Federal Circuit’s Ericsson v. D-Link decision for patent infringement cases, which patent infringement cases can be instructive in FRAND contract cases.

The U.S. Department of Justice (DOJ) recently issues a business review letter (BRL) and press release concerning a proposed patent pool of patents owned by universities called the University Technology Licensing Program (UTLP) in response to UTLP’s BRL request of August 14, 2020.  The UTLP pool is not intended to have standard essential patents (SEPs), but has provisions in the event that a patent in the pool is found to be an SEP.  This business review letter provides incremental insight into DOJ’s competition law distinctions between SEP patent pools and non-SEP patent pools.

We do a quick summary of it below, but (as always) recommend that you read the BRL itself if you need to make decisions based on it.  Some incremental insights from this BRL with the distinction between SEP and non-SEP patent pools from a competition law point of view include:

  • Competition law is particularly concerned with pooling together substitute patents (e.g., pooling together patents covering mutually exclusive, competing technologies), but a pool of standard essential patents do not raise that concern because such patent pools would have only complementary patents (e.g., patents on technologies that may be used together, which generally is the case for patents essential to the same standard).
  • A licensee can pick-and-chose patents to license from a pool of non-SEPs, but cannot for a pool of SEPs because a license is required for all the SEPs (else patents in the pool are not essential to the standard after all).
  • Price flexibility based on the number of patents in a non-SEP patent pool that one licenses is helpful because–unlike with a pool of SEPs–not all implementers will require access to every patent in that pool so discounts for licensing more patents provides incentives to use the technology and has transaction efficiencies.
  • Competition concerns might be raised when sharing royalty distribution among all members of a pool of non-SEPs in which not all patents may be licensed (because not all licensees may use all the patented technology), but those concerns do not arise with SEP patent pools in which the entire SEP pool must be licensed (because licensees need a license to all patents that are essential to the standard).
  • Making the patent pool of non-SEPs the exclusive entity to obtain a license to any patents in that pool was not a concern here given other circumstances, but it may be a concern for an SEP patent pool, which is why such SEP pools typically allow the patent owners to independently license there SEPs if not licensed through the SEP pool.

As we stated with other DOJ business review letters, this letter is limited to whether DOJ currently perceives any competition law issues with the proposed business plan and does not represent an endorsement that a business plan is substantively better than other approaches.  Thus, this business review letter’s conclusion is limited to finding that the “UTLP is unlikely to harm competition” so DOJ has “no present intention to challenge the program.”  DOJ also stressed that this letter is limited to the particular type patent pools of universities that have unique issues in enforcing their patents in this particular technological area of physical sciences. Continue Reading DOJ Business Review Letter of University Tech. Licensing Program for Non-SEPs

Yesterday, Judge Gilstrap of the Eastern Division of Texas issued a preliminary injunction Order (an anti-antisuit-injunction or, more properly, an anti-interference injunction) designed to allow both the instant U.S. case filed by Ericsson and a parallel case filed by Samsung in China concerning contractual FRAND dispute on SEPs to proceed in parallel without either case interfering with the other.

This is an interesting procedural issue that we will see increased activity about as national courts from different countries seek to balance international comity–i.e., deference to the sovereignty and jurisdictional independence of another country–with enforcing national rights when parties in global disputes forum shop to file suits in perceived favorable countries.  An important undertone in this case was that the China court’s procedure when enjoining Ericsson from enforcing its SEPs anywhere else in the world did not have the timely notice and opportunity for the sued party to respond that is provided and expected in U.S. courts.  Further, Judge Gilstrap sought to limit interference with the China action and its procedures.  For example, he did not preclude Samsung from proceeding in the China action or require Samsung to timely serve Ericsson documents filed in China (which is not provided for in the China court’s procedures).   But he did Order that Samsung indemnify Ericsson if Ericsson is subject to any fines in the China action based on Ericsson proceeding in the instant U.S. case.

It will be interesting to see whether and to what extent the China court responds to Judge Gilstrap’s order, his effort to minimize interference with the China Action, and his statement that “Without hesitation this Court equally insists that it be permitted to adjudicate the issues raised here pursuant to its own legitimate jurisdiction and without interference.”

Continue Reading Judge Gilstrap Preliminarily Enjoins Samsung From Using Parallel Chinese Case To Interfere With U.S. Case (Ericsson v. Samsung)

Last week, on July 28, the U.S. Department of Justice (DOJ) Antitrust Division issued a press release and business review letter (BRL) based on Avanci’s request for a BRL on Avanci’s proposed joint patent-licensing pool (the Platform) to license patent claims of 5G cellular wireless standard essential patents (SEPs) of several patent owners for use in automobile vehicles (vehicles) (to later be expanded to a pool for Internet of Things (IoT) devices) and then distribute royalties among those patent owners.  A BRL provides DOJs views on whether a business model raises any competition law concerns–e.g., is the business model pro-competitive or anti-competitive–so that the business may proceed with some assurance that its activities will not violate competition laws.  The focus of the BRL is competition law and does not endorse one way or another the merits or value of a business model.  DOJ concludes that “Avanci’s proposed 5G Platform is unlikely to harm competition” and DOJ “has no present intention to challenge the Platform.”  Below is a summary of Avanci’s request and DOJs BRL in response. Continue Reading DOJ issues business review letter on Avanci SEP Pool licensing

On May 5, 2020, Germany’s highest court, the Federal Court of Justice (GFCJ), made a provisional (tentative) ruling at the hearing in Sisvel’s SEP case against Haier, determining that Sisvel had not abused a dominant market position and Haier – as the implementer – had failed to comply with its FRAND obligations in the way that it handled licensing negotiations with SEP-owner Sisvel.

The GFCJ not not yet issued its final written decision, so we’ve done our best to summarize key points from various accounts of the May 5 hearing.  So consider this post more as issue spotting with proper skepticism and understanding that the final decision may be different from what was said at the hearing.  We encourage readers to keep an eye out for the Court’s final ruling, and we will provide an update once we receive an English version of the final decision (we will give a shout-out to the first person to send us an English version of the final decision).

Following the May 5 ruling, Sisvel on May 15 filed patent infringement suits against Tesla, Dell, Honeywell, HMD Global, TCL, BLU Products, CradlePoint, OnePlus, Tinno Mobile, Sun Cupid Technology, Verifone, and Xirgo in the District of Delaware, asserting patents previously assigned to Nokia, BlackBerry, LG, and Thomson Licensing and declared essential to 3G and 4G/LTE wireless standards. Sisvel had filed cases against BLU, Dell, Honeywell, Tesla and Xirgo last June. Continue Reading Germany’s highest court tentatively rules that infringer hold-out violated its obligations to negotiate a FRAND license (Sisvel v. Haier)

Yesterday, InterDigital announced that it signed “a multi-year, worldwide, non-exclusive, royalty bearing patent license agreement” with Huawei, bringing an end to the companies’ SEP litigation in China and the U.K. over FRAND terms for InterDigital patents essential to 3G, 4G, and 5G wireless telecommunication standards. InterDigital’s press release states the new agreement “covers certain of Huawei’s products and certain of InterDigital’s essential patents” and that the companies have agreed to dismiss all pending litigation between them.  

In addition to resolving a significant overhang that the dispute posed to InterDigital’s licensing business, we anticipate the Huawei agreement could feature prominently in InterDigital’s defense against Lenovo’s newly filed antitrust claims, particularly those predicated on an alleged failure to license its patents on FRAND terms (see our April 28, 2020 post). Quoting InterDigital President and CEO William Merritt, the press release may preview the tone of InterDigital’s response in the Lenovo case by noting that the Huawei agreement “underscores the fairness and flexibility of our licensing approach, including our rate and portfolio transparency, which set an industry standard.”   Continue Reading InterDigital pens SEP license agreement with Huawei as Lenovo Dispute escalates

On April 7, 2020, the U.S. International Trade Commission issued its Notice of Opinion in Investigation No. 337-TA-1089, essentially reversing Chief Administrative Law Judge (“ALJ”) Bullock’s Initial Determination and declining to issue remedial orders blocking SK Hynix products from the sale in or import to the U.S. The ITC found that no remedy was warranted, as patent owner Netlist (complainant) failed to establish that Korean-based SK Hynix infringed the asserted patents and failed to meet the technical prong of the ITC’s domestic industry requirement. A redacted Public Version of Commission Opinion of the Commission Opinion was posted April 21, 2020.  

The ITC did not address standard essential patent issues beyond finding that ALJ Bullock erred in ruling that the JEDEC Patent Policy was unenforceable because the terms “reasonable” and “nondiscriminatory” were too ambiguous under New York law: 

[T]he Commission has determined to reverse the ALJ’s findings that the ‘907 patent is essential to a JEDEC standard and that the JEDEC Patent Policy is unenforceable, has determined to affirm the ALJ’s finding that the ‘623 patent is not shown to be essential to a JEDEC standard, and has determined to vacate all other finding relating to obligations to license on reasonable and nondiscrimatory terms.  Continue Reading ITC avoids SEP FRAND issues by finding patents not infringed (Netlist v. Hynix, 337-TA-1089)

On April 9, 2020, Lenovo and Motorola Mobility filed a Complaint against InterDigital in the District of Delaware alleging InterDigital violated U.S. antitrust law and contractual FRAND commitments by its standard setting participation and licensing practices related to 3G and 4G standard essential patents (SEPs). The Complaint is the most recent development in a larger patent dispute between the companies and alleges that InterDigital “has engaged in a multi-pronged scheme, through a combination of agreements with its competitors and fraudulent promises, to unlawfully acquire, maintain, and exploit such market or hold-up power arising solely from the alleged essentiality of patents it contends have been incorporated into the Cellular Standards.”  

A short background and summary of the Complaint is included below.  Continue Reading Lenovo, Motorola file antitrust claims against InterDigital’s standards setting participation and patent licensing practice (Lenovo v. InterDigital)

On April 3, 2020, Judge Selna issued an Order in the TCL v. Ericsson case upon remand from the Federal Circuit, teeing the matter up for a jury trial on all liability and FRAND issues in the case to be heard at the same time.  Continue Reading Judge Selna will hold jury trial on all SEP issues on remand (TCL v. Ericsson)