On April 9, 2020, Lenovo and Motorola Mobility filed a Complaint against InterDigital in the District of Delaware alleging InterDigital violated U.S. antitrust law and contractual FRAND commitments by its standard setting participation and licensing practices related to 3G and 4G standard essential patents (SEPs). The Complaint is the most recent development in a larger patent dispute between the companies and alleges that InterDigital “has engaged in a multi-pronged scheme, through a combination of agreements with its competitors and fraudulent promises, to unlawfully acquire, maintain, and exploit such market or hold-up power arising solely from the alleged essentiality of patents it contends have been incorporated into the Cellular Standards.”
A short background and summary of the Complaint is included below.
InterDigital’s Prior U.S. Antitrust Litigation
This isn’t InterDigital’s first bout with antitrust litigation. In April 2015, Asustek filed a complaint against InterDigital in the Northern District of California alleging monopolization in violation of Section 2 of the Sherman Act, breach of contract, and other claims that InterDigital had breached its FRAND commitment, seeking the return of royalties allegedly excessive royalties and a judgment setting FRAND terms for InterDigital’s SEP portfolio. The court entered summary judgment in December 2018, ruling inter alia that Asus is judicially estopped from arguing the companies’ 2008 patent licensing agreement is not FRAND, but denying InterDigital’s motion for summary judgment on Asustek’s Sherman Act claims. The case settled in April 2019, less than one month before a jury trial was scheduled to begin on the Sherman Act and breach of contract claims, with the parties agreeing to a multi-year amendment to the companies’ 2008 patent licensing agreement.
In May 2017, InterDigital settled a separate suit brought by Microsoft alleging monopolization in violation of Section 2 of the Sherman Act (see our April 14, 2016 post). The companies entered into a Settlement Agreement and Release of Claims under which InterDigital agreed to a limited release on the past sales of certain Microsoft product and Nokia terminal units in exchange for cash and other Microsoft commitments, recognizing roughly $47.5 million from the agreement in its second quarter 2017.
Lenovo Dispute Background
The newly filed antitrust suit comes as the most recent case in a larger patent licensing dispute between InterDigital and Lenovo. In August 2019, InterDigital brought patent suits against Lenovo in the U.K. High Court and District of Delaware, each alleging infringement of InterDigital patents related to 3G and 4G/LTE standards. In the U.K. proceedings, which are expected to proceed to a series of trials starting in March 2021, InterDigital seeks to establish the terms of a worldwide FRAND license and injunctive relief, should Lenovo refuse to take a license on those terms. Lenovo has lodged a jurisdictional challenge to the U.K. proceedings, which is currently adjourned to allow time for the U.K. Supreme Court to issue its rulings in the Unwired Planet and Conversant cases.
The August 2019 District of Delaware case filed by InterDigital seeks (1) a declaration that InterDigital has not breached its FRAND commitments to Lenovo, (2) an injunction preventing continued infringement, should Lenovo refuse a worldwide license or agree to enter into binding international arbitration to set the terms of a FRAND license and (3) damages for infringement of the eight patents asserted in the litigation.
The Complaint lodged by Lenovo and Motorola Mobility indicate that they are among the leading providers of wireless devices, such as tablets, laptops and mobile phones, that rely on technology required by 3G and 4G cellular standards developed through the Third Generation Partnership Project (3GPP) and adopted by the European Telecommunications Standards Institute (ETSI). The Complaint alleges the standards “face no meaningful competition and have been implemented by the overwhelming majority of the telecommunications industry.” Thus cellular devices must comply with the promulgated standards to be commercially viable and implementers become “locked in” to that standardized technology. The Complaint further alleges that lock-in effects give owners of standard-essential patents the power to exclude companies from practicing the standard, giving rise to hold-up issues.
The Complaint alleges that InterDigital “agreed with others in the wireless telecommunication field to restrain competition through the adoption and propagation of the Cellular Standards” and that “[t]hrough agreement, the collective action of standard-setting, and the resulting standards” InterDigital and other standard-setting participants confer significant market power on SEP owners that allows the restraint of trade an unlawful monopolization in the Relevant Technology Markets. The Complaint alleges that the relevant markets are “the markets for technologies covered by the [InterDigital] patents issued in the United States that are essential, or are alleged to be essential, to the Cellular Standards, together with all other alternative technologies to the IDC SEPs that could have been used in the Cellular Standards.” The Complaint further alleges that InterDigital has made “false or ineffective promises” to license its SEPs on FRAND terms and has declared thousands of patents as essential to the promulgated standards without regard to whether such declarations are accurate.
EP BLOG ASIDE: The latter issue of “declared SEPs” leads to a common misunderstanding of the standards setting process. SEP declarations do not declare that patents ARE essential to the standard, but declare whether and on what terms a patent owner is willing to license identified patents IF those patents turn out to be essential to the standard: e.g., if a patent is an SEP, then the patent owner is prepared to grant licenses on fair, reasonable and non-discriminatory (FRAND) terms and conditions. So this often is referred to by the short-hand “declared SEPs”, but it does not mean that the patent owner is asserting that the patent IS an SEP. Patent owners and standards organizations generally do not try to determine whether a patent is an SEP for purposes of SEP declarations, which determination can be very difficult to do because, among other things, (1) the standard under development is changing, so it is unknown what will be in the ultimately adopted standard, (2) the patent owner may have pending patent applications that are changing, so it is unknown what the ultimately issued patent may cover (or if the patent will issue at all) and (3) parties often dispute what a patent does or does not cover. Accordingly, patent owners identify patents that they reasonably believe at the time may be essential to the ultimately adopted standard, referred to by the shorthand “duty to disclose” potential SEPs. This disclosure provides notice to the standards organization about some potential patent rights while developing the standard as well as giving notice to standard implementers (i.e., companies making standard-compliant products) about who may have patent rights in the standardized technology.
This “duty to disclose,” however, also gives rise to a common defense in SEP litigations that, during the standard setting process, a patent owner who participated in that process failed to disclose a patent or pending patent application that later is asserted to be a standard essential patent. This argument is usually on the premise that the standards organization has policies that it may not adopt technology into a standard if it is covered by a disclosed patent for which the patent owner will not make a licensing commitment (though, in reality and for many practical reasons, standards organizations typically do not undertake to change a standard if a patent owner refuses to give a licensing commitment). If the patent owner breached its duty to disclose, then the SEP may be deemed unenforceable against those who implement the standard. The natural consequence of such a harsh unenforceability death blow to a patent is that patent owners err on the side of caution by over disclosing potential SEPs–if in doubt, identify the patent as a potential SEP. But that cautious over-“declaring of SEPs” then leads implementers to argue that the patent owner improperly inflated the number of potential SEPs in order to obscure what is or is not an actual SEP. So companies that sell standard-compliant products typically raise litigation defenses that put patent owners in a “heads I win, tails you lose” dilemma: If you do not disclose all patents that you believe may become SEPs, then those patents will be rendered unenforceable for breaching the duty to disclose (even if those undisclosed patents were not SEPs afterall); but if you do disclose all patents that you believe may become an SEP, then you are guilty of some competition law violation for over declaring SEPs.
This is not a new dilemma in the patent world. We saw and solved the same problem about ten years ago with respect to a patent owner’s duty to disclose to the U.S. Patent & Trademark Office (“the PTO” or “Patent Office”) potentially relevant prior art while applying for a patent (also called “prosecuting” a patent). A common defense in patent litigation was that the patent owner failed to disclose relevant prior art to the Patent Office while prosecuting the patent application, so the patent should be deemed unenforceable due to “inequitable conduct” in violating the duty to disclose. So patent owners, naturally, started to submit huge amounts of potential prior art to avoid an inequitable conduct defense later that would render the entire patent unenforceable (or at least cost a lot of time and resources to defend against). This then led patent challengers to argue that the patent owner “buried” good prior art within a large volume of submitted prior art, which they argued was tantamount to not providing that good prior art at all, so the patent should be held unenforceable for inequitable conduct. Another “heads I win, tails you lose” dilemma: If you do not disclose all potential prior art, you are guilty of inequitable conduct; but if you do disclose all potential prior art, then you obscured what was good prior art and are guilty of inequitable conduct. This got so out of control that the Federal Circuit called inequitable conduct allegations “a plague” on the patent system. The cure: The Federal Circuit ruled that failing to disclose prior art does not give rise to an inequitable conduct defense unless the defendant (1) proves by a preponderance of the evidence that the Patent Office would not have issued the patent “but for” not having the withheld prior art (e.g., the Patent Office would have found that the patent claims were invalid and would have rejected them based on the withheld prior art) and (2) proves by clear and convincing evidence that, not merely a reasonable inference, but “the single most reasonable inference able to be drawn from the evidence” is that the patent owner intended to deceive the Patent Office (see Therasense, Inc. v. Becton, Dickinson and Co., 649 F.3d 1276 (Fed. Cir. 2011).
One wonders whether the SEP disclosure dilemma in standard setting could be resolved through a similar Therasense-type legal standard? For example, a defendant must show by a preponderance of the evidence that a patent is essential to a standard and the standards organization would not have adopted the standard with the technology covered by the patent “but for” the patent owner failing to disclose the patent. Further, the defendant must show by clear and convincing evidence that “the single most reasonable inference able to be drawn from the evidence” is that the patent owner intended to deceive the standards organization.
The Complaint alleges that InterDigital has unlawfully exploited its declared SEPs by several actions:
- Refusing to license its patents on FRAND terms (i.e., a license is offered, but not on terms that the plaintiffs believe are FRAND);
- Demanding excessive and unreasonable royalties by seeking to appropriate the value of innovations included in products that are unrelated to InterDigital’s SEPs (e.g., by licensing based on some percentage of the value of an end product that may have many features beyond those covered by the patents);
- Discriminating in licensing demands based upon size relative to larger industry participants (e.g., giving volume discounts to larger companies);
- Tying access to U.S. patents to royalty payments on worldwide sales (e.g., requiring a license to the entire portfolio that has patents from many different countries, not just the U.S.),
- Tying access to SEPs and proposed licensing terms to prospective licensees’ agreement to enter into non-disclosure agreements (NDAs), and refusing to disclose the terms and conditions from other licenses (e.g., although NDAs and not disclosing the terms of licenses with other parties is very common in typical licensing negotiations, plaintiffs’ assert that this should be different for licensing negotiations involving SEPs with FRAND commitments); and
- Dividing its portfolio among different entities in an effort to “double-dip” in collecting royalties from implementers of the Cellular Standards (e.g., the royalty on one entity’s patent portfolio is not reduced if that entity later transfers some of its patents to another entity who will charge a separate royalty).
Arising from this conduct, the Complaint asserts three causes of action: Restraint of Trade in Violation of Section 1 of the Sherman Act; Monopolization in Violation of Section 2 of the Sherman Act; and Breach of Contract.
Count I: Restraint of Trade
The Complaint asserts that the 3G and 4G standards which incorporate InterDigital’s technologies are the product of agreements between InterDigital and ETSI participants that dictate what products ultimately will be provided to consumers. The Complaint argues that “[b]y entering into such agreements with other technology holders, but evading the restraints on its collectively conferred market power (i.e., the FRAND licensing commitment), [InterDigital] has entered into a contract, combination, or conspiracy that unreasonably restrains trade in the Relevant Technology Markets” in violation of Section 1 of the Sherman Act.
The Restraint of Trade Claim asserts that InterDigital has unreasonably restrained competition in the market for technology adopted into the standard by eliminating access to alternative technologies, imposing supra-FRAND costs on purchasers, distorting competition in downstream markets by imposing discriminatory royalties favoring licensees with large sales over those with smaller sales without justification. The Complaint further alleges that InterDigital maintains monopoly power “because it is the only seller” in the market for those technologies, which bestows the power to charge supra competitive prices and create insurmountable barriers to entry into those markets.
Count II: Monopolization
With respect to unlawful monopolization in violation of Section 2 of the Sherman Act, the Complaint alleges that InterDigital has monopolized the Relevant Technology Markets through agreements with its competitors to have patented technologies incorporated into 3G and 4G cellular standards while making false and misleading (or ineffective) IPR Declarations and commitments that it would license its SEPs on FRAND terms. The Complaint alleges these acts were performed “with the specific intent to monopolize the Relevant Technology Markets because its business model depends on licensing its technology.” The Complaint argues that these actions “injure competition by excluding alternate technologies that could have been included in the standard” and impose higher costs on device makers “for access to cellular technologies necessary for the manufacture of standard-compliant products than they would have paid in a competitive marketplace.”
Count III: Breach of Contract
The third and final cause of action alleges InterDigital has breached its contractual commitments to ETSI by refusing to license its SEPs on FRAND terms. The Complaint argues that “[d]espite Plaintiffs’ repeated offers to pay tens of millions of dollars and good faith efforts to negotiate a license to [InterDigital]’s alleged SEPs, [InterDigital] has refused to offer Plaintiffs terms for a license to [InterDigital]’s SEPs that comply with [InterDigital]’s FRAND licensing obligations.