Judge Gilstrap recently issued an Order rejecting the equitable defense of patent misuse in a case involving standard essential patents (SEPs) subject to a commitment to license them on fair, reasonable and non-discriminatory (FRAND) terms. Motorola Mobility LLC (Motorola) alleged that Saint Lawrence Communications LLC (St. Lawrence or SLC) was guilty of patent misuse by, among other things, requiring Motorola to take a worldwide license to FRAND-committed SEPs, using the threat of injunctive relief in Germany to coerce licensing of those SEPs, entering different license terms with different licensees and not disclosing effective royalties from licensing the SEPs under a patent pool when negotiating individual licenses. This decision is another indication that competition law claims asserted against SEPs may not prevail when patent owners have followed traditional patent enforcement and licensing strategies or even if they breach of a FRAND commitment. Rather, there must be something more egregious or deceptive with the particular patent owner’s conduct at issue to give rise to competition law claims that are required to address harm to competition beyond harm that can be addressed by more traditional patent or contract law remedies — e.g., a contract remedy for breach of a FRAND commitment or limits on patent remedies based on a FRAND commitment.
VoiceAge (Original Patent Owner). In 2000, a company called VoiceAge partnered with Nokia to enter a competition by the European Telecommunications Standard Institute (ETSI) and the Third Generation Partnership Project (3GPP) to develop a speech audio encoding standard. Nine other companies entered that competition. The Nokia/VoiceAge encoder won and was incorporated into the Adaptive Multi-Rate Wideband (AMR-WB) standard by ETSI and 3GPP. AMR-WB is used for Voice over LTE (VoLTE) calls where voice calls are encoded into digital data that is transmitted over the LTE data channel, rather than over the voice channel.
W-CDMA Patent Pool. VoiceAge agreed under ETSI’s intellectual property rights (IPR) policy “to grant irrevocable licenses on fair, reasonable and non-discriminatory terms and conditions” (FRAND). VoiceAge’s patents were part of a W-CDMA patent pool. VoiceAge received a portion of the pool royalty ($1 per phone pool royalty in 2012) based on the patent pool’s patent weighting system, which VoiceAge believed to be a FRAND rate. In 2013, VoiceAge withdraw the patents from the pool and sold them to St. Lawrence’s parent company. There was no dispute that St. Lawrence assumed VoiceAge’s FRAND commitment under the patents.
Motorola Negotiations. Motorola preferred to enter bilateral license negotiations with individual patent owners, rather than taking a license under the W-CDMA pool. Motorola never took a license to VoiceAge’s patents, though other companies did. Circumstances surrounding Motorola and St. Lawrence’s patent license negotiations are not clear given the highly redacted public version of Judge Gilstrap’s decision.
St. Lawrence provided license negotiations materials to prospective licensees that listed all current licensees, but did not distinguish separately negotiated licenses from licenses under the W-CDMA patent pool rates. St. Lawrence also did not disclose what those patent pool rates were, asserting that it either did not know the rates or did not think they were relevant to negotiations involving only the asserted patents.
This Law Suit. In 2015, St. Lawrence sued Motorola, asserting that Motorola’s HD Voice phones infringed five patents on AMR-WB speech compression technology. Motorola’s Answer included a patent misuse defense and allegation that St. Lawrence’s damages claims may also be limited by FRAND principles. The case was consolidated with a related case that St. Lawrence filed against ZTE (the claims against ZTE later were dismissed following a settlement).
By party agreement, Judge Gilstrap conducted a jury trial on all issues in the case except equitable issues, which would be handled by post-trial briefing. In March 2017, the jury returned a verdict finding that Motorola willfully infringed all five asserted patents, that the patent claims were not invalid and that awarded damages of $9,177,483 (an effective royalty of 39 cents per mobile phone). The jury heard arguments and evidence about St. Lawrence’s FRAND commitment, but it is not clear from the public record what were the specific FRAND arguments or jury instructions (see, e.g., our March 1, 2017 post on ruling that damages expert could testify that negotiated FRAND licenses may need royalties raised to account for litigation discount so that they are comparable to litigated FRAND license where patent infringement and validity are established).
No Enhancement for Willful Infringement. In post-trial motions, Judge Gilstrap issued an Order that denied St. Lawrence’s request to enhance the damages award based on the jury’s finding of willful infringement. Judge Gilstrap considered the nine factors for enhanced damages articulated in Read Corp. v. Portec, 970 F.2d 816, 827 (Fed. Cir. 1992) (the Read factors):
- whether the infringer deliberately copied the ideas or design of another;
- whether the infringer, when he knew of the other’s patent protection, investigated the scope of the patent and formed a good-faith belief that it was invalid or that it was not infringed;
- the infringer’s behavior as a party to the litigation;
- the defendant’s size and financial condition;
- closeness of the case;
- dudration of the defendant’s misconduct;
- remedial action by the defendant;
- the defendant’s motivation for harm; and
- whether the defendant attempted to conceal the misconduct.
Judge Gilstrap found that enhancement was not appropriate because the record did not show “the type of egregious conduct that is characteristic of cases where enhancement is warranted.” For example, Motorola did not delibarately copy the patented technology, because that technology was in a chip supplied by someone else and Motorola did not even have access to the chip’s source code. Motorola did not intend to harm St. Lawrence. Further, alleged litigation misconduct by Motorola is more appropriately considered in a separate motion of whether this is an exceptional case warranting an award of attorney fees to St. Lawrence. But “Motorola was not engaged in the type of ‘willful, wanton, or malicious’ conduct which warrants enhancement.”
Ongoing Future Royalty At Jury-Implied Royalty Rate. In that same Order, Judge Gilstrap ruled that an ongoing royalty at the effective jury awarded royalty rate of 39 cents per mobile phone would be appropriate in lieu of an injunction. The amount of an on-going royalty is guided “by ‘the jury’s implied royalty rate’ and ‘a renewed analysis of a reasonable royalty based on a post-verdict hypothetical negotiations.” Deference to the jury’s assessment is warranted “to the extent the jury can be discerned to have made a decision based on the assumption that the patent was infringed and valid, and to the extent that other considerations do not compel a departure from the jury’s assessment of the proper royalty rate.”
In this case, both parties agree that the likely outcome of a hypothetical negotiation would be a running royalty. The key issue here was whether to double the jury’s implied royalty of 39 cents to 78 cents based on changed circumstances and Motorola’s ongoing willful infringement or cut the royalty based on Motorola’s alleged design around. St. Lawrence argued that changes since the date of the hypothetical negotiation used at trial (presumably when Motorola first started infringing the patents) require a higher on-going royalty because (i) widespread adoption of the standard shows the commercial success and advantages of the patented technology and (ii) the value and benefits to Motorola have increased as more smartphones have used the standard. In contrast, Motorola argued that (i) the jury already considered and accounted for widespread adoption of the AMR-WB codec and (ii) Motorola developed a design around the patents that favors decreasing the royalty. [Note: If Motorola had a design around, then that might raise an issue of whether the patents actually were essential to the standard and subject to a FRAND commitment, which commitments typically are limited to patents that actually are essential to the standard.].
Judge Gilstrap found that the jury already considered the alleged changed circumstances of both parties. The jury heard evidence of the widespread adoption of AMR-WB and St. Lawrence’s damages expert testified that the hypothetical negotiation allows the parties to have “the benefit of hindsight” and the jury could assume that the negotiating parties “know things that haven’t even happened yet” including “information about the success of the products.” Further, there was no evidence that Motorola’s alleged workaround actually did not infringe the patents. Even if the events were considered post-verdict changes, its “a wash”: widespread adoption favors increasing the jury determined royalty, but Motorola’s workaround favors against that.
Judge Gilstrap also declined to enhance the ongoing future royalties based on Motorola’s willful infringement, because he already had determined that the Read factors did not favor enhancement of the jury’s past infringement damages award. Accordingly, Judge Gilstrap ruled that an on-going royalty for Motorola’s continued future use of the invention would be the same 39-cents royalty that the jury found for past infringement. He declined St. Lawrence’s suggestion that such royalty should apply to products other than those specifically identified and found to infringe in the case.
Final Judgment. In December 2017, Judge Gilstrap entered Final Judgment according to the foregoing as well as his decision to deny Motorola’s equitable defenses, discussed below. His equitable defenses decision was filed under seal; the discussion below concerns the recently released and redacted public version of that decision. Judge Gilstrap will consider and rule on the typical and currently pending post-trial motions that will challenge the judgment entered on the jury verdict.
Judge Gilstrap described the patent misuse equitable defense as follows based on Princo v. ITC, 616 F.3d 1318, 1328 (Fed. Cir. 2010) (en banc):
[T]he key inquiry under the patent misuse doctrine is whether, by imposing the condition in question, the patentee has impermissibly broadened the physical or temporal scope of the patent grant and has done so in a manner that has anticompetitive effects. [Op. at 12]
Judge Gilstrap applied a clear and convincing evidence burden of proof, which is the same burden required for the equitable defense of unclean hands, rather than applying a preponderance of the evidence burden that would be easier to satisfy. He found that Motorola’s defense fails under either burden of proof.
No Patent Misuse For Alleged Breach of FRAND Commitment
Judge Gilstrap rejected Motorola’s argument that past cases “stand for the proposition that a breach of FRAND obligations constitutes patent misuse.” [Order at 13-14 (referring to Broadcom v. Qualcomm, 501 F.3d 297 (3d Cir. 2007); Multimedia Patent Trust v. Apple, No. 10-CV2618-H, 2012 WL 6853471 (S.D. Cal. Nov. 9, 2012); Apple v. Motorola Mobility, No. 11-cv-178-bbc, 2011 WL 7324582 (W.D. Wis. June 7, 2011); and UTStarcom v. Starent Networks, No. 07 CV 2582, 2008 WL 5142194 (N.D. Ill. Dec. 5, 2008)]. Further, “the Federal Circuit has cautioned against a broad application of the patent misuse doctrine” and “the only time Congress has spoken on the judicially created doctrine of misuse, it circumscribed the doctrine.” [Order at 14-15]
Judge Gilstrap reviewed the parties negotiations, discussed above, which was highly redacted. Motorola apparently argued that St. Lawrence improperly sought licenses under the threat of injunction, leading Judge Gilstrap to find no evidence that such threats actually influenced the licensing negotiations:
However, Motorola did not establish that prospective licensees who were under the threat of an injunction actually paid substantially more than companies who were not.
Motorola also did not establish that the threat of an injunction actually caused licensees to be coerced into taking a license. In fact, Motorola was enjoined by a court in Germany based on patents related to the Asserted Patents, yet it persisted in not taking a license to the Asserted Patents. [Order at 11]
Judge Gilstrap ruled there was no evidence or authority that St. Lawrence seeking injunctions in Germany “impermissibly broadened the physical or temporal scope of the patent grant.” [Order at 15-16]. Rather, even if “seeking injunctions in Germany constituted a breach of SLC’s [St. Lawrence’s] FRAND obligations,” such alleged breach “is not determinate of patent misuse and here it is not indicative of SLC broadening the scope of its patent rights.” [Order at 16]. Further, “Motorola did notestablish that SLC’s efforts to seek injunctions in Germany harmed competition.” [Order at 16].
Judge Gilstrap also ruled there was no patent misuse based on the patent owner seeking different rates and terms with different licenses under different circumstances, stating:
Similarly, the Court is not persuaded that SLC [St. Lawrence] engaged in patent misuse by negotiating different rates and terms for different licensees when presented with different circumstances. To hold as such would tell patent owners that their first license for a FRAND encumbered patent must also be their last, tying the hands of patent owners and future licensees who may not be similarly situated. [Order at 16-17]
Judge Gilstrap also rejected Motorola’s argument that patent misuse arose from alleged misrepresentations during license negotiations, such as not alerting potential licensees about the effective royalty rate based on licenses under the W-CDMA patent pool. Even if that was true, such conduct “would not rise to the level of a patent misuse because Motorola did not demonstrate that this conduct harmed competition.” [Order at 17]
No Patent Misuse By Tying
Judge Gilstrap also rejected Motorola’s argument that patent misuse arose from St. Lawrence requiring some licensees to obtain a single license under both U.S. and German patents. Judge Gilstrap described patent misuse tying as a two step inquiry:
- Does the patent holder have market power in a clearly defined market?
- Is the conduct at issue is either per se misuse, or misuse under the rule of reason? [Order at 17]
Judge Gilstrap indicated that per se misuse from patent tying is unlikely:
[T]he Federal Circuit has expressed skepticism that a patent-to-patent tying arrangement should be treated as per se misuse. In particular, the Federal Circuit has explained that “while grouping patents together in package licenses has anticompetitive potential, it also has potential to create substantial procompetitive efficiencies such as clearing possible blocking patents, integrating complementary technology, and avoiding litigation.” [Order at 18-19]
He found that there was no per se patent misuse in this case given, for example, the procompetitive efficiencies of worldwide licensing:
SLC’s [St. Lawrence’s] pursuit of worldwide licenses achieves many of the procompetitive efficiencies that the Federal Circuit identified in U.S. Phillips [v. ITC, 424 F.3d 1179 (Fed. Cir. 2005)] and emphasized again in Princo. For example, seeking a worldwide license helps both parties avoid the extraordinary transaction costs of litigating or licensing a global patent portfolio on a country-by-country or patent-by-patent basis. [Order at 19-20]
Judge Gilstrap, therefore, applied a “rule of reason” analysis where “the finder of fact must decide whether the questioned practice imposes an unreasonable restraint on competition, taking into account a variety of factors, including specific information about the relevant business, its condition before and after the restraint was imposed, and the restraint’s history, nature and effect.” [Order at 20] Motorola identified three alleged anticompetitive effects flowing from the global licensing practice:
- Extracting more money from licensees than they would have paid for just licenses to the U.S. or German patents.
- Foreclosing development of workarounds of St. Lawrence’s foreign patents.
- Harming other licensee’s ability to compete with [REDACTED].
Judge Gilstrap found no patent misuse under the rule of reason. First, in his factual determinations, Judge Gilstrap ultimately found that “Motorola did not establish that SLC’s [St. Lawrence’s] licensing conduct, including its practice of seeking worldwide licenses, actually harmed competition.” [Order at 11] Further, Motorola had not shown that the alleged anticompetitive harm “outweighed the potential benefits” of global licensing.
Defer Ruling on FRAND Limit on Damages
Judge Gilstrap declined to rule as an equitable matter on Motorola’s argument that St. Lawrence violated its FRAND commitment by seeking damages at trial that “disregarded the rates paid in the W-CDMA patent pool, and instead relied on SLC’s [St. Lawrence’s] ‘tinkered with [REDACTED] license and SLC’s injunction-induced licenses.” [Order at 21]. The jury awarded damages after hearing extensive evidence whether the license sought and to be awarded Motorola was FRAND, so the court will rule on any FRAND limit challenge as part of the typical post trial motions parties file to challenge the jury’s verdict. Those motions currently are pending before the court.