Chief Administrative Law Judge (“ALJ”) Bullock of the U.S. International Trade Commission (“ITC”) recently issue an Initial Determination that accused infringer Hynix (respondent) had not established that patent owner Netlist (complainant) had breached a RAND commitment to JEDEC concerning computer memory technology standards. He found that exclusionary relief would be proper and not against the public interest if the memory products infringe valid claims of the alleged standard essential patents (“SEPs”); but he found that the alleged SEPs were not infringed.
A key part of the RAND defense was the accused infringer’s argument that the licensing offer it received from the patent owner showed discriminatory licensing that violated the RAND commitment because it differed from licensing terms that the patent owner entered with someone else. Specifically, the patent owner Netlist had entered a joint development agreement with Samsung that not only granted a license to the alleged SEPs, but also had other non-monetary consideration including a strategic partnership with Samsung that Netlist believed to have substantial benefits. The accused infringer Hynix, however, argued that the non-monetary strategic partnership terms were a sham meant to cover-up what was essentially a royalty-based licensing agreement, thus allowing Netlist to improperly seek different–and discriminatory–effective royalty terms with Hynix or others. ALJ Bullock rejected Hynix’s arguments, finding that the strategic partnership benefits did not have “no value” as Hynix had argued and that patent owner Netlist was not required to provide those same terms to Hynix.
This decision also provides some procedural insights into litigating SEPs at the ITC. For example, ALJ Bullock ruled that the party raising a RAND defense has the burden to prove that defense. Further, parties should present their standard-setting license defense and rebuttal in the context of the law that governs the IPR policy at issue — i.e., in this case, the JEDEC Manual states that its RAND commitment is subject to interpretation under New York law.
We provide a summary of the decision below.
In September 2016, Netlist filed its complaint in the ITC alleging that certain memory modules of Korean-based Hynix infringed Netlist patents alleged to be essential to a standard of the Joint Electron Device Engineering Council (“JEDEC”). The JEDEC intellectual property rights (“IPR”) policy provides that participants disclose potentially essential patents and indicate if they will license the patents on RAND terms. Specifically, Section 8.2 “Patent Policy” of the JEDEC Manual of Organization and Procedure (“JEDEC Manual”) discusses an agreement or refusal to license as follows:
8.2.4 RAND Patent Licensing Commitment
Subject to the terms and conditions of section 8.2.4, each Committee Member, as a condition of Participation, agrees to offer to license on RAND [“Reasonable and non-discriminatory licensing terms and conditions” per definition’s section 8.2.1] terms, to all Potential Licensees, such Committee Member’s Essential Patent Claims for the use, sale, offer for sale or other disposition of a portion of a product in order to be compliant with the required portions of a final approved JEDEC Standard issued during the period of membership in that Committee. The licensing commitment does not apply to Essential Patents of a Committee Member where notice of a Refusal to License has been given by the Committee Member in accordance with 188.8.131.52.
The JEDEC Manual defines Essential Patent Claims as those “necessarily … infringed” when practicing the standard, stating:
Essential Patent Claims: Those Patent claims the use of which would necessarily be infringed by the use, sale, offer for sale or other disposition of a portion of a product in order to be compliant with the required portions of a final approved JEDEC Standard.
NOTE Essential Patent Claims do not include Patent claims covering aspects that are not required to comply with a JEDEC Standard, or are required only for compliance with sections that are marked “example,” “non-normative,” or otherwise indicated as not being required for compliance, or related to underlying enabling technologies or manufacturing techniques not specified in the standard.
The JEDEC Manual distinguishes between an “Essential Patent” and a “Potentially Essential Patent” based on whether the patent actually has essential patent claims and not simply claims reasonably believed to be essential:
Essential Patent: A Patent containing one or more Essential Patent Claims.
Potentially Essential Patent: A Patent that is reasonably believed by a subject person to contain one or more Essential Patent Claims.
Note that this case concerns the prior July 2015 version JM21R version of the JEDEC Manual and not the current November 2015 JM21S version of the JEDEC Manual ; Judge Bullock’s decision in this case cites to Exhibit CX-0325 that is listed on Netlist’s exhibit list as “JEDEC Manual of Organization and Procedure JM21R (July 2015).”
Hynix argued that patent owner Netlist’s patent license offer to Hynix did not comply with the JEDEC RAND commitment for several reasons. Note that, given the high-level of redaction in the Initial Determination, it is not clear what those licensing terms actually were.
First, Hynix argued that Netlist’s offer to Hynix was discriminatory. Hynix compared that offer to a Joint Development and Licensing Agreement (“JDLA”) that patent owner Netlist entered with Samsung, which was the only license Netlist had given under the patents. Hynix’s expert “unpacked” the different monetary and non-monetary consideration exchanged in the JDLA to determine an effective per unit royalty rate for standard-compliant products under the JDLA. Hynix argued this demonstrated discriminatory licensing given the differences in the effective royalty Samsung pays under the JDLA and the actual royalty that Netlist offered to Hynix.
Second, Hynix argued that the licensing offer was unreasonable because the SEPs had minimal value given, among other things, prior art alternatives to the claim technology and the SEPs’ failure to cover key enabling technology in the JEDEC standards at issue.
In response, Netlist argued that Hynix was guilty of patent holdout and refused to engage meaningfully on a license to the SEPs. Among other things, Netlist argued that Hynix failed to make any counter-offer to license the patents.
Netlist also argued that Hynix failed to show that the JDLA agreement with bilateral exchange of monetary and non-monetary consideration was comparable to the one-way RAND license contemplated by the JEDEC Manual. Most of Netlist’s argument about the JDLA agreement is redacted. ALJ Bullock summarized Netlist’s argument here as “present[ing] the JDLA as a wide-reaching agreement.” (ID at 189).
Netlist challenged the “unpacking” of the JDLA by Hynix’s expert. Among other things, Netlist argued that the expert erroneously relied on accounting, not economic, principles. Further, the expert failed to assign any value to certain benefits that Hynix obtained from the JDLA. ALJ Bullock summarized Netlist’s argument being that the Hynix expert “ignored, or undervalued, benefits received by [patent owner Netlist] under the JDLA.”
Finally, Netlist challenged Hynix’s overall “nondiscriminatory” analysis as being erroneously akin to a “most-favored nations clause”, meaning “that a licensor would be required to offer the same effective rate to all licensees, regardless of whether market assumptions that led to one offer were no longer accurate at the time of a later offer.” (ID at 191)
The bulk of ALJ Bullock’s decision concerns whether the asserted patents are valid and infringed. He ultimately ruled that the patents were valid, but not infringed. Following ITC practice, however, ALJ Bullock further considered whether an exclusion order should be entered based on the public interest in the event that the full Commission decides that the patents are infringed.
RAND Defense In Public Interest Inquiry
As an initial matter, ALJ Bullock notes that the parties did not address the RAND defense in the initial liability phase of the investigation. Rather, the parties addressed the RAND defense in the public interest phase. Further, ALJ Bullock observed that he was authorized by the Commission to consider “the statutory pubic interest factors set forth in 19 U.S.C. 1337(d)(1), (f)(1), (g)(1),” but none of the parties tied the RAND defense to any of those specific public interest factors. Nonetheless, he considers the RAND defense in the public interest inquiry since that is how the parties presented the defense. (ID at 181)
ALJ Bullock ruled that the JEDEC RAND commitment applies only to SEP patent claims that are actually essential to the standard, not simply claims that are “potentially” essential (i.e., claims one reasonably believes are essential), stating:
Thus, the JEDEC Manual articulates a system where committee members are required to disclose “potentially essential patents” to the other JEDEC committee members, but attaches a RAND licensing obligation only to those patent claims that are actually essential to a final approved JEDEC standard. Thus, a necessary pre-requisite to any determination that Complainant has violated a RAND licensing obligation is a showing that the asserted patents in this investigation are actually standard essential. If the asserted patents are not essential to a JEDEC standard, [patent owner] Netlist does not have a RAND licensing obligation for those patent claims according to the terms of the JEDEC Manual. [ID at 182]
In this case, ALJ Bullock had decided that the patent claims are not infringed. If the patents are not infringed, then they cannot be essential and any RAND obligation is “purely hypothetical”:
In the absence of an infringement finding, as here, any RAND obligation on Netlist’s part is purely hypothetical, and cannot form a factual basis for foregoing or delaying an exclusion order on the basis of the public interest.
But ALJ Bullock acknowledged that the Commission may disagree with his finding that the patents are not infringed, in which case the RAND obligation may be relevant. Importantly, a patent that is infringed is not necessarily essential to the standard. So there should be some showing that infringed patent claims are essential to the standard.
In this case, Hynix submitted evidence that the patent owner Netlist asserted in interrogatory’s, deposition testimony and elsewhere that the patents were essential to the JEDEC standard. Further, the patent owner Netlist does not appear to dispute essentially. ALJ Bullock, therefore, ruled that the patents may be considered essential to the JEDEC standard if the Commission finds that the patents are infringed. (ID at 184).
Implementer’s Burden To Prove RAND Defense
ALJ Bullock ruled that “the burden to prove an affirmative defense based on a breach of RAND obligations lies with Respondents [Hynix].” He rejected Hynix’s argument that the JEDEC Manual placed the burden on the patent owner to show that its licensing was “demonstrably free of any unfair discrimination.” Hynix was referring to the example License Assurance/Disclosure Form shown in the section A.3 Annex to the JEDEC Manual, which stated in relevant part:
For any Essential Patent Claims held or controlled by the entity, pending or anticipated to be filed, the entity states:
__(i) A license will be offered, without compensation, under reasonable terms and conditions that are demonstrably free of any unfair discrimination to applicants desiring to utilize the license for the purpose of implementing the JEDEC Standard; or
__(ii) A license will be offered, with compensation, to applicants desiring to utilize the license for the purpose of implementing the JEDEC Standard under reasonable terms and conditions that are demonstrably free of any unfair discrimination.
ALJ Bullock observed, however, that there is some inconsistency in the manual whether the unfair discrimination must be “deontrabl[e].” Specifically, the Licensing Assurance/Disclosure Form “section 8.2.5, by its own terms, only refers to ‘terms and conditions that are free of any unfair discrimination” (ID at 193) — i.e., uses only the term “free” and not “demonstrably free” of any unfair discrimination. Hynix’s expert did not address that inconsistency.
In any event, ALJ Bullock ruled that the JEDEC Manual did not purport to address which party bears the burden of proof in a RAND dispute. And the JEDEC Manual could not be used to set aside the ITC’s practice of “placing the burden of proof on the party advancing a RAND defense.” (ID at 193). He ruled that placing the burden on the patent owner to prove there was no unfair discrimination would be contrary to the ITC enabling statute, stating:
[T]he undersigned is not persuaded that the JEDEC Manual, which does not even purport to address which party bears the burden of proof in a RAND dispute, can serve as a basis to set aside the Commission’s practice of placing the burden of proof on the party advancing a RAND defense. To find otherwise would effectively add a new element of proof to section 337 investigations for RAND encumbered patents, i.e., complainants seeking to establish a violation based on their RAND encumbered patents would necessarily have to show that they made licensing offers that were free from unfair discrimination. Such a requirement is untethered from the statutory language of section 337. See 19 U.S.C. S 1337. Of course, in the face of a prima facie showing of unfair discrimination by a respondent, a complainant would need to rebut that showing, but Respondents [Hynix] have failed to articulate a legal basis to place the initial evidentiary burden on Complainant for what is essentially their own affirmative defense. [ID at 193]
Is JEDEC RAND Commitment An Enforceable Contract?
ALJ Bullock raised questions whether the JEDEC RAND commitment would constitute an enforceable obligation under the New York law that governs its interpretation. Specifically, the JEDEC Manual states that “[t]he Patent Policy will be interpreted and governed under the laws of the State of New York.” (ID at 194). ALJ Bullock was concerned that the parties “ma[d]e no attempt” to analyze the RAND obligation under New York law, but instead erroneously rely on “unhelpful” economic expert testimony for a legal framework to interpret the JEDEC Manual, stating:
[T]he parties make no attempt to analyze Complainant’s RAND obligations according to the New York state law. Rather, the parties have relied on the testimony of their economic experts to lay out what is essentially a legal framework for interpreting the JEDEC Manual. That approach is largely unhelpful, as both experts’ opinions appear to be based primarily on policy concerns as opposed to controlling principles of law. [ID at 194]
Addressing New York contract law was important here, because “[a] court cannot enforce a contract unless it is able to determine what in fact the parties have agreed to ” and “[i]f an agreement is not reasonably certain in its material terms, there can be no legally enforceable contract.” In this case, there is “a fundamental disagreement about what is required by the ‘reasonable’ and ‘unfair discrimination’ terms of the JEDEC patent policy.” (ID at 194) ALJ Bullock found such disagreement unsurprising, because the JEDEC Manual did not define those terms and expressly leaves it to the parties to negotiate them “outside the context of JEDEC”, section 8.2.8 of the JEDEC Manual stating:
JEDEC makes no representation as to the reasonableness of any terms or conditions of the license agreements offered by such patent rights holders, and all negotiations regarding such terms and conditions must take place between the individual parties outside the context of JEDEC.
ALJ Bullock found that the JEDEC Patent Policy was intentionally ambiguous about what are reasonable licensing terms and the parties had not shown that a judge could “inject clarity into the RAND obligation when there is none in the JEDEC manual.”
Accordingly, ALJ Bullock questioned whether the RAND commitment would be an enforceable agreement under New York law. (ID at 195). In this case, however, none of the parties–including the patent owner Netlist–have asserted that the RAND commitment is not enforceable. So ALJ Bullock would assume that it was and continue his RAND analysis.
Patent Owner Did Not Breach RAND Commitment
ALJ Bullock ruled that the implementer Hynix failed to show that patent owner Netlist breached its RAND commitment.
First, ALJ Bullock rejected Hynix’s argument that patent owner Netlist was required, but failed, to offer the same “effective rate” to Hynix that Netlist gave to Samsung under the JDLA. (ID at 195) The JDLA agreement went beyond a mere license grant and had strategic partnership and other terms that Hynix’s expert erroneously assumed had no value:
The JDLA, however, is not the same type of agreement that is required under the JEDEC Patent Policy. While the JDLA does include terms directed to a license to Samsung for Complainant’s asserted patents, it also includes a number of other terms that are directed to establishing a strategic partnership between Samsung and Complainant. Respondents [Hynix] are overly-dismissive of these terms, and their expert … was only able to determine his low effective royalty by concluding that those terms had no value to Complaint [patent owner Netlist]. Those conclusions are at odds with the testimony of record. [ID at 195]
The evidence showed that, at the time the JDLA agreement was entered with Samsung, patent owner Netlist “believed it was receiving valuable consideration from having Samsung sign on as a strategic partner.” (ID at 196) The JEDEC RAND commitment “surely cannot mean” that Netlist must offer the same JDLA terms without receiving the strategic partnership benefits that Netlist contemplated when entering the JDLA:
Whatever the RAND obligation means, it surely cannot mean that Complainant [patent owner Netlist] is required to offer a license to every JEDEC implementer on the same terms as the JDLA with Samsung, but without even the prospect of obtaining the strategic partnership benefits contemplated by the JDLA.
ALJ Bullock thus summarized his ruling on the RAND defense as follows:
In sum, Respondents have failed to tie their RAND arguments to a recognizable affirmative defense, a scenario that the Commission has previously noted with disapproval. Assuming the RAND arguments are breach of contract arguments, the undersign finds that the underlying contract–the JEDEC Manual–lacks sufficient clarity to enforce its terms against Complainant [patent owner Netlist], which the Commission has also noted as a reason a RAND argument may fail. And finally, even assuming that the RAND agreement is related to a cognizable affirmative defense, and that the terms of the JEDEC Manual are sufficiently definite to be enforceable, the undersigned finds that Respondents have failed to establish unfair discrimination based on the evidence of record. [ID at 196-197]