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.