Late last week, Motorola Mobility filed its Responsive and Opening Brief in Federal Circuit Appeal No. 2012-1548 (the appeal from Judge Posner’s June 2012 decision to dismiss competing infringement claims in a case between Apple and Motorola). We’ve previously discussed the large number of amicus briefs filed with the Federal Circuit by a wide variety of parties addressing the issues of damages and injunctive relief with respect to standard-essential patents. Here, Motorola characterizes Apple as an “unwilling licensee” who wants to change the rules of how standard-essential patent licensing has long been done in the cellular industry. Motorola claims that Judge Posner’s rulings — which barred injunctive relief for Motorola’s FRAND-pledged standard-essential patent at issue, and limited damages to ex ante (pre-standard) value of the patent — “devalue essential patents,” “upset the settled expectations” of patent holders who contribute to industry standards, and “create disincentives” to participate in standard-setting activities.
Although much of Motorola’s brief deals with issues relating to Apple’s asserted (non-standard-essential) patents, we’ll limit our discussion below to the SEP-focused issues — specifically those relating to the proper method of measuring and proving damages and the propriety of seeking injunctive relief.
Judge Posner had ruled that Motorola could not recover damages for the cellular-essential patent it asserted (U.S. Pat. No. 6,359,898, which Motorola alleged to be essential to ETSI’s GPRS and UMTS standards) because the damages theory it propounded was inadmissible under the Daubert standard for expert testimony. Through its experts, Motorola had argued that it has received a “standard” 2.25% royalty rate for standard-essential patents, and that as the first patent licensed, the ‘898 patent would have commanded a reasonable royalty approaching 40-50% of the 2.25% figure based on a hypothetical negotiation in 2007 (when the iPhone was released). But Judge Posner held that the proper method of computing a FRAND royalty would be the cost of obtaining a license to that patent before it was incorporated into the GPRS/UMTS standards. This is commonly known in economic circles as the ex ante value of the patent.
In its appeal brief, Motorola argues that while the ex ante value of the patent may be a factor that can be considered in a hypothetical negotiation analysis, it is not the standard by which patent damages are assessed. Damages are properly measured, Motorola argues, by evaluating a hypothetical negotiation as of the date infringement began — here, when Apple released the iPhone in 2007. According to Motorola, evaluating the patent’s value prior to incorporation in the standard as the sole point of analysis is incorrect because the patent’s value hasn’t been tested in the marketplace.
There’s considerable debate among lawyers, economists, and others about how to properly determine a FRAND royalty for standard-essential patents. The upside of the ex ante value is that it eliminates any concerns over what some call “hold-up value” — the extra value conferred on the patent simply from being included in the standard. But this simply begs the question of whether ex ante value actually can be determined. (In the Microsoft-Motorola case, for instance, Microsoft argued that the rates set by patent pools can be used as a proxy for the ex ante value for patents). Here, Motorola apparently simply relied on ex post license agreements (licenses signed after the relevant standards were adopted), and Judge Posner seemed to place the blame on them for failing to even try prove up an ex ante value for the ‘898 patent. It will be interesting to see where the Federal Circuit falls on this issue — particularly because the appellate court has been much more exacting in its damages jurisprudence lately.
But the damages issues are just undercards for the main event — injunctions for standard-essential patents. Given the history of Motorola’s standard-essential patent licensing program, it’s no surprise that Motorola places much more focus on Judge Posner’s denial of injunctive relief. Recall that Judge Posner decided that injunctive relief is unavailable for infringement of a patent governed by FRAND:
To begin with Motorola’s injunctive claim, I don’t see how, given FRAND, I would be justified in enjoining Apple from infringing the ‘898 unless Apple refuses to pay a royalty that meets the FRAND requirement.
Judge Posner wasn’t moved by Motorola’s arguments that Apple refuses to pay what Motorola categorized as a FRAND rate — 2.25% of the net selling price of its phones — saying that it was unnecessary for him to evaluate why negotiations broke down. (Note than Judge Posner’s ruling came before Apple’s statement to Judge Crabb that it wouldn’t unconditionally accept a FRAND rate of over $1.00 per phone, so it would be interesting to see what he might think about that).
Motorola’s main contention with Judge Posner’s ruling is his failure to apply the four-factor test of eBay v. MercExchange before denying injunctive relief on summary judgment. Motorola notes that Judge Posner did not do any type of any eBay analysis — Motorola claims that he instead imposed an automatic rule barring injunctions for FRAND-pledged standard essential patents, which it says violates the Supreme Court’s holding in eBay disfavoring categorical rules barring injunctive relief. According to Motorola, Judge Posner could not deny injunctive relief without doing some eBay-related fact-finding.
In addition, Motorola takes issue with Judge Posner’s conclusion that it waived injunction relief through undertaking FRAND obligations, explaining that such a finding is inconsistent with SSO participant expectations and would upset the balance in standard-setting activities. (Note that many parties expressed diverse views on waiver of injunctive relief in the public comments submitted to the FTC over its settlement with Google and Motorola Mobility). Motorola claims that there is no waiver of injunctive relief in FRAND obligations — whether express or implied — and that availability of injunctive relief is essential to prevent strategic “hold-out” by potential licensees. According to Motorola (and in a concerned echoed by others to the FTC), in the absence of the potential to obtain injunctive relief, licensees will have little to no incentive to engage in license negotiations — choosing instead to force SEP owners to serially litigate “potentially hundreds of patents in order to obtain (at most) the royalties to which [they are] entitled” (i.e., FRAND royalties).
Motorola wants to be able to at least attempt to prove entitlement to an injunction under the eBay factors at trial, and said material fact issues prevent a conclusion otherwise (but note that in the Microsoft-Motorola case, Judge Robart disagreed and barred injunctive relief on summary judgment, although that case involved different parties and different standards). Interestingly, under the “causal nexus” portion of the irreparable harm eBay factor, it could be extremely difficult for Motorola to prove entitlement to an injunction for a standard-essential patent. So Apple — which is trying hard to eliminate the causal nexus requirement in an ongoing Federal Circuit appeal relating to its litigation with Samsung — might stand to benefit from the application of this rule here.
Lastly, one interesting thing to note is that Motorola is pursuing its appeal of the denial of injunctive relief despite language in its consent decree with the FTC that appears to prohibit it from seeking injunctive relief for infringement of standard-essential patents against “willing” licensees (although (1) Motorola and Apple obviously disagree about Apple’s status, and (2) we don’t profess to know whether Motorola’s claims against Apple are exempt from the consent decree for some reason). It will be interesting to see if this is brought up by Apple either to the Federal Circuit in its responsive brief or in correspondence to the FTC (like Microsoft apparently did).