It’s no surprise that most of the attention being paid to standard-essential patent issues is focused on the companies involved in the “smartphone wars” — Motorola, Microsoft, Apple. Samsung, etc. But while these consumer product companies are of course affected by issues involving standard-essential patents, so too are their component suppliers. A lawsuit filed this past fall in the Southern District of New York by Lotes Co. against Hon Hai Precision Industry Co. and Foxconn over SEP issues relating to the Universal Serial Bus (USB) 3.0 standard is a great example of this. Here, we attempt to provide a brief overview of the issues in the Lotes-Hon Hai case.
First, a bit of background about the parties for the uninitiated. Lotes is a Taiwanese original design manufacturing (ODM) company that designs and manufactures various computer components, including USB 3.0-compatible connectors. Foxconn (a subsidiary of Hon Hai) is one of the largest electrical equipment ODMs in the world, designing, making, supplying and assembling products for companies such as Apple, HP, Dell, and Acer (and many, many others). Like Lotes, Foxconn designs and manufactures USB 3.0-compatible connectors.
Lotes’s Complaint and Allegations
Lotes filed its original complaint in October 2012, and subsequently filed an amended complaint in December 2012. Lotes accuses Foxconn of reneging on licensing commitments that it made to the USB Implementers Forum (USB-IF). According to Lotes, Foxconn was required by USB-IF to grant licenses to all USB 3.0-essential patents on “RAND-Z” (i.e., royalty-free) terms, and committed to licensed USB 3.0-related (but not essential) patents on RAND terms. To support its claims, Lotes quotes a February 2012 letter sent from Foxconn to the USB-IF, where Foxconn stated:
Foxconn unequivocally affirms that it will make the “Necessary Claims” used in connection with all USB 3.0 “Compliant Portions” – i.e., that IP that is necessary to practice the USB 3.0 specification – available to other USB 3.0 contributors and adopters under RAND-Zero terms pursuant to the USB 3.0 Contributors Agreement. In addition to those Necessary Claims, Foxconn holds other IP that is necessary to practice the USB 3.0 specification, but that may be optionally incorporated into USB 3.0 connectors. Foxconn unequivocally affirms that it will license its IP covering these optional features on RAND terms.
However, according to Lotes, Foxconn has not granted a RAND-Z or RAND license to Lotes for USB 3.0 patents. Lotes claims that Foxconn instituted patent infringement claims in China to enjoin Lotes from making or selling USB 3.0 connectors, based on patents that name USB 3.0 contributors as inventors.
Thus, Lotes asserts that through its failure to license and institution of patent enforcement activities, Foxconn has breached its contracts with the USB-IF and is violating the antitrust laws of the United States. Lotes’s complaints include claims for (1) breach of contract; (2) promissory estoppel; (3) waiver; (4) tortious interference; (5) a declaration that Lotes is licensed; (6) violation of Sherman Act Section 1; (7) violation of Sherman Act Section 2.
Foxconn’s Motions to Dismiss
Foxconn, of course, has a different view of the situation. In November 2012, Foxconn moved to dismiss Lotes’s original complaint. Judge Shira Scheindlin invited Lotes to amend its complaint in lieu of opposing Foxconn’s motion, which Lotes did. However, after Lotes filed its amended complaint, Foxconn moved to dismiss that as well.
The primary issue Foxconn takes with Lotes’s version of the facts is that Foxconn claims the patents-in-suit in China are not essential to the USB 3.0 standard, and therefore not subject to the the USB-IF agreement. Foxconn claims that it offered a license to Lotes on these patents, but that license was rejected. Foxconn also asserts that its patent enforcement activities are protected by the Noerr-Pennington doctrine. Lastly, Foxconn argues that Lotes’s complaint suffers from various legal deficiencies, including a failure to properly plead the elements of an antitrust claim.
However, in a February 5 judicial conference, Judge Scheindlin informed the parties that Foxconn’s motion would be denied without prejudice, subject to renewal at a later time. Unfortunately, the court has not issued an order outlining its reasoning, so we do not have any information as to why the court denied Foxconn’s motion at this time.