A jury recently found that Huawei willfully infringed four patents owned by PanOptis alleged to be essential to mobile cellular standards and subject to a FRAND commitment as well as a fifth patent related to the H.264 video compression standard but was not subject to a FRAND commitment. The jury awarded a reasonable royalty of $7.7 million for the single patent without a FRAND commitment, which was almost three times higher than the combined royalty awarded for the four FRAND-committed SEPs of $2.8 million. But it is not clear at this point whether that difference is due to the FRAND-commitment or to the relative value of the patented technologies to the infringing products.
Prior to trial, the court also showed judicial restraint by limiting the case to determination of FRAND commitments on U.S. patents as a matter of U.S. law and not opining on FRAND commitments for foreign patents under foreign law. For example, the court refused to enjoin a Chinese antitrust action based on alleged FRAND violations for related Chinese SEPs. And the court refused to include in this case a determination of whether there was infringement of related foreign SEPs and whether licensing offers on those foreign SEPs complied with the FRAND commitment under foreign law.
The next steps in this case involves the court holding a bench trial (i.e., trial before the judge, not a jury) on whether PanOptis licensing offers complied with its FRAND commitments. Further, the parties will file the usual post-trial motions that may challenge the jury verdict and ultimate bench trial ruling. Those further filings may provide more insight into the case. So stay tuned.
Background
Ericsson, Panasonic and LG participated in European Telecommunications Standards Institute (ETSI), which is an organizational partner of the Third Generation Partnership Project (3GPP) that maintains specifications for wireless communications for high-speed data referred to as the Long Term Evolution (LTE). ETSI has an intellectual property rights (IPR) policy that requires members to disclose patents that “are or become, and remain ESSENTIAL to practice” an ETSI standard, where “ESSENTIAL” is defined to mean that “it is not possible on technical (but not commercial) grounds, taking into account normal technical practice and the state of the art generally available at the time of standardization, to make, sell, lease, otherwise dispose of, repair, use or operate EQUIPMENT or METHODS which comply with a STANDARD without infringing that IPR.” Ericsson, Panasonic and LG submitted declarations to ETSI identifying the following patents as potentially essential to the standard:
- Ericsson: The ‘216 and ‘293 Patents
- Panasonic: The ‘851, ‘284 and ‘569 Patents
- LG: The ‘833 Patent
PanOptis ultimately became the owner of those identified patents. In 2014, PanOptis approached Huawei about licensing those LTE patents on fair, reasonable and non-discriminatory (FRAND) terms based on the licensing commitment to ETSI. This included at least ten face-to-face meetings in China from June 2014 to May 2016 to discuss the SEPs and global licensing terms. PanOptis provided claim charts for two of the SEPs as well as for an non-essential implementation patent (the ‘238 Patent directed to video encoding/decoding that may read onto certain implementations of the H.264 video codec standard).
In early 2017, Panoptis sued Huawei for willfully infringing the six LTE patents and the ‘238 Patent for video encoding/decoding (See Third Amended Complaint). Panoptis also sought a declaration that its actions in negotiating with Huawei complied with Panoptis’ commitment to license the LTE patents on FRAND terms. PanOptis sought damages for past infringement, enhanced damages for willful infringement and a compulsory future royalty on Huawei infringing products sold after trial.
In response, Huawei alleged that the patents were invalid and not infringed. (See Huawei Amended Answer to Third Amended Complaint). Huawei also alleged that the patents were unenforceable based on PanOptis failing to offer a FRAND license.
Huawei also pursued parallel proceedings in China, alleging antitrust claims against PanOptis for “refusal to transact” based on licensing offers for Chinese patents related to the SEPs at issue here.
PreTrial Rulings
The court issued several rulings that helped shape the scope of the trial.
Denied Antisuit Injunction Against Chinese Action. In April 2018, Magistrate Judge Payne issued a Report and Recommendation that Judge Gilstrap deny PanOptis’ request to enjoin Huawei from pursuing the antitrust action in China.
PanOptis alleged that the Chinese action may result in an injunction that precludes PanOptis from proceeding in this U.s. action.
Huawei, however, submitted a written agreement not to seek such an injunction. Huawei also asserted that, even though an issue in both actions is PanOptis’ offer of a global license, the Chinese action concerned only Chinese patents, just like the instant case concerns only U.S. patents. Thus, the scope of relief in either court would be limited to patents within their respective jurisdictions.
Judge Payne found that Huawei’s agreement not to pursue an injunction against this action in China and the scope of both proceedings being limited to patents within their respective jurisdictions meant there was nothing oppressive about letting both cases go forward and there would not be overlapping relief. Further, he found that, “perhaps most important” was there was no “injury resulting from the Chinese actions … immediate enough to warrant preliminary relief” because “the Chinese court has not issued any order that might affect this case.” If that later changes, PanOptis can seek relief at that time.
Judge Gilstrap Adopted Judge Payne’s recommendation.
Denied Striking ‘238 Patent Expert Testimony. Huawei sought to strike testimony from PanOptis expert as going beyond the detail disclosed in PanOptis’ infringement contentions. Those contentions alleged infringement of the ‘238 Patent based on Huawei products practicing the H.264 video encoding/decoding standard and the Android operating system.
Magistrate Judge Payne identified two ways to show infringement of a device that practices a standard either (1) indirectly by showing that the patent reads onto the standard and the accused product is standard-compliant or (2) directly by showing that the patent claims read onto the product, stating:
There are different ways of showing infringement of a standard essential patent. One could indirectly prove infringement by showing that (1) the standard necessarily meets the elements of the claim, (2) the accused product complies with the standard, and therefore (3) the accused product meets the claim. This indirect evidence approach may not require significant analysis of the accused product. However, it relies upon a necessary inference tying the product to the standard and the standard to the claim. The downside is that if the patent is not found to be essential to the standard, the link between the product and the patent breaks.
Another way is the ordinary way of proving infringement, by comparing the claims to the accused product. This bypasses the indirect, necessary inference. The advantage is that a party can establish infringement even if the asserted claims of the patent are found to be nonessential to the standard.
PanOptis did not assert that the ‘238 Patent was essential to the H.264 standard and did not commit to which of the two approaches it would take to show infringement. PanOptis’ contentions refer to the H.264 standard, rather than the specific product, for some of the infringement allegations, but also refer to the products use of the Andriod operating system for other portions of the infringement allegation.
Judge Payne found that PanOptis’ allegations were sufficient to put Huawei on notice of the alleged infringement and Huawei should have timely sought more detail earlier in the case. It was too late now for Huawei to do so. Huawei had an opportunity to depose the expert and Huawei’s own expert provided a rebuttal report. Because prejudice, if any, was minimal and avoidable, Judge Payne recommended not striking the expert’s report.
Judge Gilstrap Adopted Magistrate Judge Payne’s recommendation.
Denied Summary Judgment on FRAND Compliance. Magistrate Judge Payne recommended denying PanOptis motion for a summary judgment ruling that its global FRAND offer to Huawei was fair, reasonable and nondiscriminatory, ruling that there were factual issues requiring trial. He found that, “[w]hen the legal question uses words like [‘fair’, ‘reasonable’ and ‘nondiscriminatory’] summary judgment is hard to win.” A trial must resolve factual issues, including “whether PanOptis’ offers made during negotiations, as well as its damages claim, are consistent with the FRAND obligation” as well as whether the patents are essential to the LTE standard.
Judge Gilstrap adopted Magistriate Judge Payne’s recommendation.
Dismissed Action Seeking Declaration of FRAND Compliance for Foreign Patents. Magistrate Judge Payne recommended dismissing PanOptis’ declaratory judgment action that sought a declaration that PanOptis’ global SEP license offer complied with its FRAND commitment. Huawei sought dismissal of the action at least as it pertained to foreign patents and foreign FRAND law. Judge Payne recommended dismissing the declaratory judgment action based on the court’s discretion whether or not to proceed on such actions as well as questions whether the court had jurisdiction to rule on foreign patents and FRAND law. He was not persuaded by PanOptis’ arguments that were based more on “fairness” than “law”:
One argument is that foreign courts are increasingly making global FRAND determinations, and it would be unfair if United States courts did not follow that trend. Or it would be unfair to require PanOptis to litigate their FRAND disputes all over the world. But at least some of the foreign courts PanOptis calls attention to are not courts of limited jurisdiction like this one is. Another argument is that Huawei has asked this court for the very same declaration PanOptis is seeking, and as a result, Huawei is estopped from disputing jurisdiction. But a party cannot subject-matter jurisdiction on a federal court through estoppel. “[N]o action of the parties can confer subject-matter jurisdiction upon a federal court.” The motion to dismiss should therefore be granted.
Judge Gilstrap adopted Magistrate Judge Payne’s recommendation, ruling that Huawei’s motion to dismiss was “GRANTED-IN-PART to the extent that the foreign aspect of PanOptis’s Count IX is DISMISSED WITHOUT PREJUDICE.”
Pretrial Order, In August 2018, Magistrate Judge Payne entered a Pretrial Order that sets parameters for the upcoming jury trial based on party agreements and court rulings. The Pretrial Order indicates that PanOptis no longer was asserting the ‘851 Patent that was alleged essential to the LTE standard. The parties stipulated that the accused Huawei products implement certain sections of the LTE standard that PanOptis alleged to be covered by the four remaining LTE patents. They also stipulated that the accused Huawei products implement certain sections of the ITU-T H.264 video compression standard alleged to be covered by the ‘238 Patent.
The parties disputed whether (1) Huawei was required to prove that PanOptis did not comply with its FRAND commitment when negotiating a license with Huawei or (2) PanOptis had to prove that PanOptis complied with its FRAND commitment. Or, perhaps this was not a dispute as much as a distinction between (1) Huawei having the burden to prove its FRAND defense and (2) PanOptis having to prove its declaratory judgment action that it complied with its FRAND obligation.
The Pretrial Order includes rulings on various motions in limine, which were motions to control what evidence and arguments may or may not be submitted at trial. Those motions were filed under seal, so its not clear what the issues were. The limited available information indicates that these were fairly routine motions in limine — e.g., excluding evidence/argument that would prejudice a large, foreign company — and no FRAND or SEP specific motion. An interesting ruling analogized the “clear and convincing evidence” burden to invalidate a patent to the standard for removing a child from her parents:
PanOptis may not compare the clear and convincing evidence burden required to invalidate a patent claim to the clear and convincing evidence burden required in other areas of law, including criminal and family law, other than to say during voir dire that the standard for invalidating a patent claim is similar to the burden required to remove a child from her parents in order to ask the panel during jury selection whether any potential juror has had experience with the clear and convincing evidence burden in child custody cases.
In the final jury instructions, discussed below, the court explained the “clear and convincing evidence” standard as follows:
Clear and convincing evidence means evidence that produces in your mind an abiding conviction that the truth of the party’s factual contetions are highly probable. Although proof to an absolute certainty is not required, the clear and convincing evidence standard requires a greater degree of persuasion than is necessary for the preponderance of the evidence standard. If the proof establishes in your mind an abiding conviction in the truth of the matter, then the clear and convincing evidence standard has been met.
The Pretrial Order set the issue of whether PanOptis complied with its FRAND commitment for a bench trial (i.e., a trial before the judge, not a jury), which will follow some time after the jury trial on infringement, validity and damages.
Jury Trial
The jury trial occurred in August 2018. There is limited public information about what occurred during the trial, with most of the court documents and transcripts currently filed under seal. The trial would be guided in part by the Final Jury Instructions, which explains to the jury what the issues are that they are to decide. The jury instructions included instructions for determining damages based on a reasonable royalty, which damages instructions may be found in pages 22 to 27 of the instructions. The bulk of those instructions follow traditional reasonably royalty law. Below are excerpts from the instructions that added FRAND issues to those reasonable royalty instructions:
A reasonable royalty must reflect that the ‘216, ‘569,’293, and ‘284 Patents have been declared to be essential to the cellular standards of the European Telecommunications Standards Insitute, sometimes called “ETSI.” Further, PanOptis commited to license the ‘216, ‘569, ‘293, and ‘284 Patents on fair, reasonable, and non-discriminatory–or “FRAND”–terms.
Because of this FRAND commitment, I will refer at times in my instructions to “standard-essential” patents. By referring to standard-essential patents, the Court is not instructing you that the asserted patents are actually essential to any standard. Again, it is up to you, the jury, to decide whether or not PanOptis has proven that the patents are standard-essential and infringed.
Ericsson and Panasoni–PanOptis’ predecessors-in-interest with respecdt to the asserted patents–submitted written commitments to ETSI covering the ‘216, ‘569, ‘293, and ‘284 Patents, in which they agreed to grant irrevocable licenses on fair, reasonable, and non-discriminatory–or FRAND–terms and conditions. Because Ericsson and Panasonic are predecessors-in-interest to PanOptis, PanOptis has the same FRAND obligations as Ericsson and Panasonic had when they submitted their written commitments to ETSI.
You must make sure that any reasonable royalty determination takes into account PanOptis’ FRAND obligations as the Court has just explained them to you. A reasonable royalty in this case for the ‘216, ‘569, ‘293, and ‘284 Patents cannot exceed the amount permitted under PanOptis’ FRAND obligations. In determining what amount is a FRAND royalty, you may consider any evidence of patent hold-up and royalty stacking. The ‘238 Patent has not been declared essential to any cellular standard, and, therefore, a reasonable royalty determination regarding the ‘238 Patent need not take into account any FRAND obligations.
I will provide you with additional instructions on how the FRAND commitment for the asserted patents affects your determination of a reasonable royalty.
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For the ‘216, ‘569, ‘293, and ‘284 Patents, which have a FRAND obligation to ETSI as part of the LTE standards, you must consider the following two factors:
(1) any royalty for the patented technology must be apportioned from the value of the standard as a whole; and
(2) the FRAND royalty rate must be based on the incremental value that the patented technology adds to the product, not any value added by the standardization of that technology.
It is not clear from the public record whether and to what extent there was evidence of patent holdup or royalty stacking or what damages theories either of the parties asserted that, among other things, apportioned value of the patented technology from the value of the standard per the instructions above.
On August 27, 2018, the jury returned a Jury Verdict finding that all five patents were valid and infringed, and that Huawei’s infringement was willful. The jury awarded a “Running Royalty” (rather than “Lump Sum”) as follows for the 4 LTE Patents:
- ‘216 LTE Patent: $102,742
- ‘569 LTE Patent: $1,733,862
- ‘284 LTE Patent: $753,276
- ‘293 LTE Patent: $246,844
The jury awarded a running royalty on the ‘238 Patent (related to H.264 video compression) as follows:
- ‘238 Patent: $7,716,841
The public record does not indicate whether the jury determined royalties were substantially higher or lower to what PanOptis offered to license them on. The ‘238 Patent that was alleged to infringe (at least in part) by practicing the H.264 standard but had no FRAND commitment had a $7.7M reasonable royalty award, which was almost three times the combined reasonable royalty award for the 4 FRAND-committed LTE patents of $2.8M. But it is not clear from the record if this difference is attributable to the relative strength or values of the patents, the value to the accused products of the patented video-compression technology and patented LTE technology or the FRAND commitment.
We may learn more about those and other issues based on the bench trial that will occur to determine whether PanOptis complied with its FRAND commitment as well as the parties post-trial motions that will be filed challenging the jury verdict/bench trial findings and rulings thereon.