Yesterday, Qualcomm issued a press release announcing resolution of the investigation under China’s Anti-Monopoly Law by China’s National Development and Reform Commission (“NDRC”) of Qualcomm’s licensing practice for standard essential patents.  In addition to Qualcomm paying a $975 million fine, the China’s NDRC approved Qualcomm’s proposed rectification plan, summarized as follows:

  • Qualcomm will offer licenses to its current 3G and 4G essential Chinese patents separately from licenses to its other patents and it will provide patent lists during the negotiation process.  If Qualcomm seeks a cross license from a Chinese licensee as part of such offer, it will negotiate with the licensee in good faith and provide fair consideration for such rights.
  • For licenses of Qualcomm’s 3G and 4G essential Chinese patents for branded devices sold for use in China, Qualcomm will charge royalties of 5% for 3G devices (including multimode 3G/4G devices) and 3.5% for 4G devices (including 3-mode LTE-TDD devices) that do not implement CDMA or WCDMA, in each cae using a royalty base of 65% of the net selling price of the device.
  • Qualcomm will give its existing licensees an opportunity to elect to take the new terms for sales of branded devices for use in China as of January 1, 2015.
  • Qualcomm will not condition the sale of baseband chips on the chip customer signing a license agreement with terms that the NDRC found to be unreasonable or on the chip customer not challenging unreasonable terms in its license agreement.  However, this does not require Qualcomm to sell chips to any entity that is not a Qualcomm licensee, and does not apply to a chip customer that refuses to report its sales of licensed devices as required by its patent license agreement.

Qualcomm also gave a presentation to investors with further explanation of the agreement reached, including the following:

  • Qualcomm will not pursue further legal proceedings contesting the NDRC’s findings that Qualcomm violated China’s Anti-Monopoly Law
  • Requires no licensing changes outside China with limited exceptions
  • Allows Qualcomm’s licensing business to fully participate in growing China opportunity
  • Qualcomm does not believe that other competition agencies will interpret their laws to reach conclusions similar to China’s NDRC

 

The Northern District of California recently granted judgment on the pleadings in favor of patent-plaintiff ChriMar Systems, Inc. on antitrust and state law unfair competition counterclaims filed by accused infringers Cisco and Hewlett-Packard (HP).  According to the court, the crux of Cisco’s and HP’s counterclaims alleged that ChriMar failed to disclose and commit to license one of its patents on reasonable and non-discriminatory (RAND) terms during a standard-setting process and, subsequent to the standard being adopted, filed suit against them alleging infringement of the same patent.  Cisco and HP alleged that this was an abuse ChriMar’s “monopoly power” and also a violation of California’s Unfair Competition Law.  The court held that judgment on the pleadings was warranted because Cisco and HP failed to define the relevant market and also failed to plead facts showing market power and antitrust injury.  The court, however, granted Cisco and HP leave to amend their counterclaims.

Background.  On October 31, 2011, ChriMar filed a complaint against Cisco and HP alleging that Cisco’s and HP’s “Power over Ethernet telephones, switches, wireless access points, routers and other devices used in wireless local area networks, and/or cameras and components thereof that are compliant with the” Institute of Electrical and Electronic Engineers (IEEE) 802.3af and/or 802.3at standards infringed one or more claims of ChriMar’s U.S. Patent No. 7,457,250 (“the ‘250 Patent”).  In response, Cisco and HP filed counterclaims asserting causes of action for, inter alia, monopolization under the federal antitrust laws as well as for violations of California’s Unfair Competition Law.

In their counterclaims, Cisco and HP allege that the IEEE has a “patent disclosure policy” that “requires participants in the standards setting process to disclose patents or patent applications they believe to be infringed by the practice of the proposed standard.”  Cisco and HP further allege that the IEEE policy requires those who disclose intellectual property rights to provide a written assurance stating whether they would enforce any of their present or future patents “whose use would be required to implement the proposed IEEE standard or provide” a license to such patents royalty-free or on RAND terms.  The counterclaims assert that ChriMar was required to but intentionally “failed to disclose to IEEE its belief that its ‘250 Patent was essential to the proposed 802.3af and/or the 802.3at” during amendments of the 802.3 standard and that “ChriMar was not willing to license the ‘250 Patent on RAND terms.”  Cisco and HP contend that due, in part, to this alleged failure to disclose, the industry adopted the present form of IEEE 802.3af and IEEE 802.3at amendments to the IEEE 802.3 standard and that they are now “locked-in to the current implementation . . . for Power over Ethernet-enabled products.”  Had ChriMar disclosed its belief that the ‘250 Patent would be infringed by practicing the proposed amendments to the 802.3 standard as well as its unwillingness to license the patent on royalty-free or RAND terms, the IEEE would have, according to Cisco and HP, done one or more of the following:

1.  Incorporated one or more viable alternative technologies into the IEEE 802.3af and IEEE 802.3at amendments to the IEEE 802.3 standard;

2.  Requested ChriMar to provide a letter of assurance that it would license the ‘250 Patent on RAND terms;

3.  Decided to either not adopt any amendment to the IEEE 802.3; and/or

4.  Adopted an amendment that did not incorporate technology that ChriMar claims is covered by the ‘250 Patent.

Cisco and HP further contend that ChriMar has taken the position that all Power over Ethernet-enabled products infringe the ‘250 Patent and that, to the extent that the ‘250 Patent is essential to the 802.3af and the 802.3at standards, no viable technology substitutes exist and ChriMar has monopoly power over the Power over Ethernet Technology Market.  Both Cisco and HP allege that this conduct combined with ChriMar’s infringement action against them is an unlawful abuse of monopoly power under Section 2 of the Federal Sherman Antitrust Act and also unfair competition under California’s Unfair Competition Law, Cal. Bus. Code § 17200 (UCL).

HP also filed a claim for attempted monopolization under Section 2, which alleges that ChriMar’s complaint against it, Cisco and several others (Respondents) before the International Trade Commission seeking an exclusion order under Section 337 of the Tariff Act of 1930 constituted an unlawful intent to monopolize the Power over Ethernet Technology market.  According to HP, ChriMar alleged before the ITC  that Respondents infringe the ‘250 Patent by importing products that practice the Power over Ethernet Standards IEEE 802.3af and 802.3at.  HP alleges that the Respondents’ imports collectively “comprise the substantial majority of products commercially offered in the Power over Ethernet Technology Market.”  HP alleges further that ChriMar’s “baseless” allegations of infringement and request for an order prohibiting these Respondents from importing Power over Ethernet products constitutes an unlawful attempt to monopolize the Power over Ethernet Technology Market.

ChriMar’s Answers and Motion to Dismiss.  ChriMar filed an answer to Cisco’s counterclaims as well as an answer to HP’s counterclaims generally denying defendants’ antitrust and UCL allegations and asserting lack of standing and failure to state a claim as affirmative defenses.  ChriMar thereafter moved for judgment on the pleadings on the antitrust and UCL counterclaims.  In its motion, ChriMar argued that Cisco and HP failed to plead facts showing that ChriMar had monopoly power in the alleged relevant market.  Specifically, according to ChriMar, Defendants could not “simply rely on the existence of patent rights or actions to enforce them, as they have done.”  “As a matter of law, ‘patent rights are not legal monopolies in the antitrust sense of that word’ … and simply owning or enforcing the patent right does not make one a ‘prohibited monopolist.'”  ChriMar elaborated:

While the patent may give its owner a right to exclude, that is in no way synonymous with having monopoly power. … Such is presumably the case in a market related to a standards setting context where the standard does not practice the patented technology as Defendants allege in this action, where there are market alternatives to the standard itself such as Cisco’s own proprietary inline power technology, where other parties have rights to exclude in the same technology market (in the form of other patents that read on the standards) and can effectively limit the ability of other parties to exert monopoly power (i.e., control prices), or where competing technologies like wireless communication or conventional unpowered Ethernet can exert economic influences that can keep Power over Ethernet prices or the exercise of monopoly power in check — all issues Defendants’ pleadings never address.

ChriMar further argued that its enforcement of its patent rights was presumed to be valid under the Noerr-Pennington doctrine, which generally grants immunity from antitrust liability for petitioning the government in the form of litigation.  To overcome this presumption, Cisco and HP had to plead facts showing that its litigation against them and ITC proceeding seeking an exclusion order were a “sham,” that is, “objectively baseless.”  To be objectively baseless, Cisco and HP must plead facts showing that ChriMar’s claims were “‘so baseless that no reasonable litigant could realistically expect to secure favorable relief.'”  If Cisco and HP could show that ChriMar’s claims were objectively baseless, they next had to allege facts showing that the litigation was subjectively brought in bad faith in order to overcome Noerr-Pennington immunity.

ChriMar argued that the only factual allegation in HP’s counterclaim is that “‘discovery in the ITC investigation established that ChriMar’s allegations for domestic industry were baseless'” and that “ChriMar withdrew its [ITC] complaint nine months after it was filed, and after HP filed a motion for summary determination on the issue of domestic market.”  These allegations, according to ChriMar, failed to overcome ChriMar’s Noerr-Pennington immunity.

ChriMar also argued that Defendants failed to plead facts adequately defining a relevant market, a necessary element for a Section 2 claim.  Defendants alleged the following relevant market in their counterclaims:

ChriMar actually, potentially, and/or purportedly competes in the United States and worldwide markets for developing and licensing technology essential to implement the IEEE 802.3af and 802.3at amendments to the IEEE 802.3 standard and for technology essential to perform certain functions, allegedly covered by the ‘250 Patent, necessary to implement the IEEE 802.3 standard (hereinafter ‘Power over Ethernet Technology Market’).

ChriMar asserted that this definition is flawed because it fails to identify what particular technologies are included within the market.  Further, ChriMar argued that Defendants “have pled a market whose outer boundaries are defined by ChriMar’s infringement claims (one patent asserted against two standards) rather than any exploration of the ‘reasonable interchangeability’ of use or the cross-elasticity of demand’ outside this intersection.”  Cisco and HP’s counterclaims did not consider that the “technologies and products at issue in this litigation may be interchangeable with other technologies and products such as Power over-Ethernet technologies and products that are not compliant with the two standards . . . or even technologies and products not compliant with any standard, but that themselves are alternatives to the Power over Ethernet technologies and products compliant with these two standards.”  Under the Sherman Act, according to ChriMar, the relevant market cannot be defined by ChriMar’s economic power within the two standards.  Rather, the relevant market must be defined and measured by cross-elasticity of demand or product interchangeability:  “Here, Defendants plead economic power with respect to those entities voluntarily choosing to continue making products compliant with these two particular standards . . . and not the market demand for these particular Power over Ethernet technologies themselves.”

ChriMar further argued that Cisco and HP failed to plead facts showing that ChriMar had monopoly power or that Defendants have suffered antitrust injury.  Further, ChriMar asserted that HP’s attempted monopolization claim was deficient because it failed to plead facts showing that ChriMar’s ITC action “was motivated by an intent to monopolize, rather than primarily motivated by legitimate business purposes.”  Finally, ChriMar argued that Cisco and HP’s UCL claims should be dismissed because they relied on the same conduct that formed the basis of their Section 2 claims.

Cisco and HP’s Opposition.  Cisco filed an opposition to ChriMar’s motion, as did HP.  Responding to ChriMar’s arguments that Defendants failed to adequately plead a relevant market, both Cisco and HP argued that “[m]arket definition is rarely grounds for dismissal of a pleading because ‘the validity of the relevant market is typically a factual element rather than a legal element” that is not appropriate to resolve on a Rule 12 motion.  

On the merits, Defendants argued that numerous cases have consistently held “that the relevant market is defined by those technologies that — before the standard was adopted — were competing to perform the function that was covered by the purportedly essential patent.”  According to Cisco and HP, “ChriMar does not cite to a single case that considered the relevant market where antitrust violations occurred in connection with misconduct in the context of standards development.”  In contrast, Defendants argued that Apple v. Samsung, Broadcom v. Qualcomm and Apple v. Motorola confirm that their market definition was adequately pled.  In Samsung, Apple pled the relevant market as “the various markets for technologies that — before the standard was implemented — were competing to perform each of the various functions covered by each of Samsung’s purported essential patents for UMTS.”  “Apple also identified the patents Samsung declared as standard essential and alleged that ‘pre-standardization there existed alternative substitutes for the technologies covered by Samsung’s patents,’ and that after standardization, ‘viable alternative technologies were excluded.'”  Defendants asserted that the Samsung court found such allegations to “define the bounds of the relevant market” and that “Apple ha[d] sufficiently pled a relevant antitrust market” because “the incorporation of a patent into a standard . . . makes the scope of the relevant market congruent with that of the patent.”

According to Defendants, the Broadcom court reached a similar conclusion, holding that Broadcom, the alleged infringer, had adequately pled a relevant market to support a monopolization claim that was defined as “the market for Qualcomm’s proprietary WCDMA technology, a technology essential to the implementation of the UMTS standard.”  Apple v. Motorola reached a similar conclusion, finding that a relevant market was sufficiently pled as “the various technologies competing to perform the functions covered by Motorola’s declared-essential patents for each of the relevant standards.”

Cisco and HP argued that, “[c]onsistent with these cases, [Defendants] defined the market to comprise the technologies that competed to perform the functions in the [Power over Ethernet] Standards allegedly covered by the ‘250 patent.”  This definition, according to Defendants, “appropriately focuses on alternative technologies that were excluded from the market by ChriMar’s deceptive conduct and which [Defendants] and other implementers of the standard cannot now choose because the industry is ‘locked-in’ to the standard.”  “To the extent ChriMar argues the correct market definition should include the entire standard, rather than some portion of the standard, that argument is inconsistent with both the complaint and with”  Samsung, Broadcom, and Apple.

With respect to monopoly power, both Cisco and HP argued that in the standards context, “it is well settled that patentees holding standard-essential patents can possess monopoly power.”  Cisco and HP again relied upon Samsung, wherein the court concluded that “because standard-essential patents may confer antitrust market power on the patent owner, Apple’s claims” that “Samsung had market power over the relevant market because it obtained the power to raise prices and exclude competition over the technologies covered by Samsung’s standard-essential patents” and that “there was a ‘lock-in’ to the standard” were sufficient to plead monopoly power.  Cisco and HP argued that their counterclaims satisfied this standard because they alleged that, as a result of ChriMar’s accusations that “the leading vendors of Power over Ethernet-enabled products” infringe the ‘250 Patent, “it is ChriMar’s position that no meaningful level of Power over Ethernet-enabled products do not infringe the ‘250 Patent.”  Further, like the allegations in Samsung, Cisco and HP both allege that “because of ‘lock-in’ to the standard,” there are no “viable technology substitutes at present.”  “Accordingly, if the ‘250 Patent claims covered products that comply with the IEEE standard as claimed by ChriMar, ChriMar has monopoly power over the Power over Ethernet Technology Market.”

The element of antitrust injury was also adequately pled, according to Cisco and HP.  Defendants argued that in order to plead that they have suffered antitrust injury, they must allege facts showing an injury to competition.  “It is well settled that misconduct before an SSO harms competition by ‘obscuring the costs of including proprietary technology in a standard and increasing the likelihood that patent rights will confer monopoly power on the patent holder.'”  Cisco and HP pointed to allegations in their counterclaims “concerning the harm to competition caused by ChriMar’s deception in the context of standards setting,” including that ChriMar “‘could charge supra-competitive prices”‘” and that “‘[c]ustomers and consumers will be harmed, either by not getting products that are compliant with the IEEE 802.af and IEEE 802.at amendment to the IEEE 802.3 standard or having to pay an exorbitant price for one.”

Cisco also took issue with ChriMar’s argument that “the anticompetitive harm alleged by Cisco ‘is a potential consequence in any successful patent litigation.'”  According to Cisco, “[t]his is not just ‘ any patent litigation,’ and the competitive harm alleged by Cisco is not the natural result of any litigation.”  “[H]ere, ChriMar deliberately subverted the goals of the IEEE standards-setting process by not disclosing its patent rights, waiting until the industry became ‘locked-in’ to the [Power over Ethernet] Standards, and demanding royalties from implementers of the standards that Cisco has alleged will lead to ‘supra-competitive prices.'”

With respect to ChriMar’s Noerr-Pennington argument, Cisco argued that “[c]ourts have repeatedly recognized that the Noerr-Pennington doctrine does not apply to monopoly power gained through deception in the context of SSOs, even when an allegedly standard-essential patent is subsequently asserted in court.”  As the doctrine does not apply, Cisco and HP need not plead facts supporting the two exceptions.

HP argued similarly, but also asserted that its counterclaim alleged facts supporting the “sham” exception to Noerr-Pennington, that is is, that ChriMar filed a sham ITC proceeding against HP and others only to later voluntarily withdraw it.

HP also asserted that its counterclaims adequately pled that ChriMar had a specific intent to monopolize and a dangerous probability of obtaining a monopoly.  “HP alleges facts that ChriMar deceitfully concealed its patent in connection with the IEEE standards-setting process and then sought to enforce its patent in the ITC.  This conduct shows a specific intent by ChriMar to monopolize the [Power over Ethernet] Technology Market through its anticompetitive conduct.”  “ChriMar became dangerously close to succeeding in its attempt, having dismissed its complaint less than two months before the start of the ITC hearing.”

Finally, Cisco and HP argued that, because they adequately pled causes of action under the federal antitrust laws, they also adequately pled a cause of action under California’s UCL.

The Court’s Decision on Cisco and HP’s Monopolization Counterclaims.  After ChriMar filed its reply, the court entered an order granting ChriMar’s motion.  With respect to Cisco and HP’s monopolization claims, the court agreed with ChriMar that their pleadings failed to allege facts sufficient to define the relevant market, a necessary element to a Section 2 claim.  “Courts typically require that the proposed relevant market be defined with reference to the rule of reasonable interchangeability and cross-elasticity of demand.”  “However, in the context of a standard setting organization (‘SSO’) locking in a standard which eliminates substitute or alternative technologies courts have allowed a relevant market to be defined by the technologies that were competing before the standard was adopted to perform the function that is covered by the standard and the essential patent.”  “For example, in [Apple v. Samsung], the court found sufficient Apple’s allegations that defined the relevant market as the ‘various markets for technologies that — before the standard was implemented — were competing to perform each of the various functions covered by each of Samsung’s purported essential patents for’ the standard.”  The court in Samsung further “noted that Apple alleged that pre-standardization there were alternative substitutes for the technologies covered by Samsung’s patents, and that after the SSO adopted the proposed standard, viable alternative technologies were excluded.”  Cisco and HP’s claims failed to plead such facts or facts defining the market “as comprising the technologies that competed to perform the functions in the Power over Ethernet standards allegedly covered by the ‘250 Patent.”  Therefore, Cisco and HP failed to sufficiently allege the relevant market.

The court also held that Cisco and HP failed to allege sufficient facts showing that ChriMar had the requisite market power to support a Section 2 claim.  On this element, Cisco and HP argued that “their allegations regarding ChriMar’s failure to disclose its belief that the ‘250 Patent was essential to the 802.3af and 802.3at amendments to the IEEE 802.3 to the standard setting organization (‘SSO’) is sufficient to allege their monopoly claims.”  Citing to an earlier decision in Apple v. Samsung, Defendants contended that “it is sufficient to allege that if the ‘250 Patent is essential, then ChriMar has monopoly power.”  The court, however, concluded that the decision did not support defendants’ contention.  Specifically, “in that case, the court determined that Apple had sufficiently alleged monopoly power.”  “The court in Samsung further noted that, in contrast to the theory that a patent holder misrepresented to an SSO that it would license its intellectual property on RAND terms, ‘[c]ourts have been more reluctant to find an antitrust violation based on the theory that a failure to disclose intellectual property rights in a declared essential patent created monopoly power for a member of the SSO.'”  Indeed, the Samsung court expressly required the plaintiff to allege that “there was an alternative technology that the SSO was considering during the standard setting process and that the SSO would have adopted an alternative standard had it known of the patent holder’s intellectual property rights.”  The Samsung court further made it “clear that the heightened pleading requirements under Rule 9(b) for fraud applies to” the types of antitrust claims brought by Cisco and HP.  Applying these standards to those claims, the court concluded that “they fail to allege non-conclusory facts which, if true, would be enough to show that ChriMar acquired sufficient monopoly power.”  “Notably, Defendants fail to clearly allege that the IEEE would have adopted an alternative standard had it known about the ‘250 Patent and ChriMar’s position with respect to its ‘250 Patent.”  Therefore, Cisco and HP failed to plead the necessary element of market power.

Finally, with respect to the necessary element of antitrust injury, the court concluded that Cisco and HP’s claims merely alleged, “in conclusory fashion, that ChriMar’s alleged conduct has ’caused and will directly and proximately cause antitrust liability to [Defendants] within the Power over Ethernet Technology Market . . .”  Neither defendant pled any facts which, if true, “would demonstrate antitrust injury.”

Because Cisco and HP failed to allege the necessary elements of a relevant market, monopoly power, and antitrust injury, the court found “that Defendants have not alleged sufficient facts to state a counterclaim for monopolization.”  However, the court provided Defendants with leave to amend their monopolization claims in an attempt to remedy the deficiencies identified by the court.

Notably, the court did not address — at least not at this time — ChriMar’s Noerr-Pennington arguments but may very well do so on any subsequent motion to dismiss the amended counterclaims permitted by the court’s decision.

The Court’s Decision on HP’s Attempted Monopolization Counterclaim.  Because HP failed to plead a relevant market as well as antitrust injury, HP’s attempted monopolization claim failed as well.  “In addition, although a lower percentage [of market share] is required for an attempted monopoly claim, as opposed to an actual monopoly claim, HP must still allege sufficient market power.”  The court concluded that HP failed to allege sufficient market power which was also “fatal to its attempted monopolization claim.”

The court disagreed with ChriMar’s argument that “HP’s attempted monopolization counterclaim fails for the additional reason that HP fails to allege specific intent to monopolize or a dangerous probability of obtaining monopoly power because HP’s attempted monopolization allegations are based solely around the terminated [ITC] investigation.”  The court concluded that “HP does not rely solely upon the ITC investigation” but “is also premised upon ChriMar’s alleged misconduct before the SSO.”  However, because the court was granting HP leave to amend its counterclaim to adequately allege a relevant market, market power and antitrust injury, the court did not reach the issue of whether HP’s additional allegations regarding the ITC investigation would be sufficient, standing alone, to state a claim for attempted monopolization “if HP sufficiently alleges the relevant market power, and an antitrust injury.”  HP’s attempted monopolization claim was therefore dismissed with leave to amend.

The Court’s Decision on Cisco and HP’s UCL Counterclaims.  The court also dismissed Cisco and HP’s UCL counterclaims.  “Courts have held that where the alleged conduct does not violate the antitrust laws, a claim based on unfair conduct under the UCL cannot survive.”  “Because the Court finds that Defendants have not alleged facts sufficient to state a a counterclaim for monopolization and attempted monopolization, Defendants’ UCL counterclaims” fail as well.  However, as with the other counterclaims, the court granted HP and Cisco leave to amend this claim as well.

We will continue to track the pleading and other developments in this case.

Yesterday, the Second Circuit in Lotus v. Hon Hai Precision affirmed the district court’s dismissal of antitrust and breach of contract claims arising from foreign activity based on the patent owner not licensing, but asserting in litigation in China, patents subject to FRAND-Z (i.e., royalty free) standard setting obligations.  Consistent with the U.S. Federal Trade Commision’s amicus brief (see our Jan. 13, 2014 post), the Second Circuit ruled that dismissal was proper because any effect on U.S. domestic or import commerce from the foreign activity did not “give[] rise to” the asserted antitrust claims as required under the Foreign Trade Antitrust Improvements Act (“FTAIA”).

We refer you to our prior post (Jan. 13, 2014 post, May 17, 2013 post and Feb. 13, 2013 post) for the background discussion of this case that involves plaintiff Lotes suing Hon Hai and related entities (such as Foxconn) for reneging on licensing commitments made to the USB Implementers Forum (USB-IF) by not licensing USB 3.0-related patents on FRAND-Z terms and violating U.S. antitrust laws by instituting foreign patent-enforcement proceedings on those patents against Lotes in China.  Below is a summary of the Second Circuit’s ruling.

FTAIA Requirements Are Substantive, Not Juridictional.  First, in overruling a prior decision, the Second Circuit ruled that the FTAIA restrictions on antitrust claims based on foreign conduct are substantive, not jurisdictional, requirements–i.e., “they go to the merits of the claim rather than the adjudicative power of the court.”  Among other things, this means the restrictions are potentially waivable (though the Second Circuit reserved ruling on whether they actually are waiveable, noting that “[A] ‘right conferred on a private party, but affecting the public interest, may not be waived or released if such waiver or release contravenese the statutory policy.”).

Patentee’s SSO Obligation Did Not Waive FTAIA Defenses.  Second, the Second Circuit ruled that the patentee did not contractually waive the FTAIA restrictions through its standard setting commitments.  As an initial mattter, the Second Circuit stated that the plaintiff failed to first raise the issue in the district court and “an appellate court will not consider an issue raised for the first time on appeal.”  Further, even assuming arguendo that the FTAIA restrictions were waivable, “nothing in the cited [USB-IF standard setting] contractual provisions suggests that the defendants waived those [FTAIA] requirements here.”  Specifically, the plaintiff Lotes pointed to five provisions of the USB-IF’s Contributors Agreement:

  1. Paragraph 2 that recites the contributors’ understanding “that it is imperative that they and their representatives act in a manner which does not violate any state, federal or international antitrust laws and regulations.”  The Second Circuit did not find waiver here, because this “merely recites the parties’ understanding that they are subject to various antitrust laws and regulations and affirms the parties’ commitment to abide by their existing legal obligations.”  Thus, “[at] most”, this provision “can be read to recognize and incorporate into the Contribution Agreement the signatories’ preexisting obligations under U.S. antitrust law,” but “do not waive any statutory requirements or otherwise alter the scope of the signatories’ legal obligations.”  Thus the signatories “remain free to argue that, under the FTAIA, the Sherman Act does not apply to or regulate the conduct at issue in this case.”
  2. Paragraph 2 statement that “prohibits any communications regarding … exclusion of competitors or any other topic that may be construed as a violation of antitrust laws.”  The Second Circuit did not find waiver here, because this simply “prohibits the parties from engaging in anticompetitive ‘communications.'”
  3. Paragraph 6.6 statement that the Agreement is to be “construed and controlled” by New York law.  The Second Circuit found no waiver here, because this was simply a “standard choice-of-law” clause.
  4. Pargraph 6.7 statement that “all disputes arising in any way out of this Agreement shall be heard in, and all parties irrevocably consent to jurisdiction and venue in, the state and Federal courts of New York, New York.”  The Second Circuit found no waiver here, because this was simply a “standard … choice-of-forum” clause.
  5. Paragraph 6.12 statement that “the obligations of the parties hereto shall be subject to all laws, present and future, of any government having jurisdiction over the parties hereto.”  The Second Circuit found no waiver here, because this “merely reiterates the parties’ existing obligation to comply with all applicable laws” as in Paragraph 2 above.

Thus, the Second Circuit held that the patentee did not waive its FTAIA defenses by signing the USB-IF Contributor Agreement.

Foreign Conduct’s U.S. Domestic Effect.  Third, following Seventh Circuit precedent, the Second Circuit held that foreign anticompetitve conduct can have the FTAIA-required “direct, substantial, and reasonably forseeable effect”on U.S. domestic or import commerce ” even if the effect does not follow as an immediate consequence of the defendant’s conduct, so long as there is a reasonably proximate causal nexus between the conduct and the effect.”  The Second Circuit thus rejected the Ninth Circuit’s “direct … effect” standard applied by the district court below.  The Second Circuit, however, declined to decide “the rather difficult question” whether that requirement was met in this case because the case could be resolved based on the “give rise to” requirement discussed below.

Does Effect “give rise to” Antitrust Claims.  Finally, the Second Circuit ruled that the alleged anticompetive conduct did not “give[] rise to” the plaintiff’s antitrust claim because, “in the causal chain the plaintiff alleges, the plaintiff’s exclusion from the relevant market actually precedes the alleged domestic effect” [emphasis in original].  The Second Circuit described the domestic effect allegations as follows:

Lotes alleges that the defendants’ foreign conduct had the effect of driving up the prices of consumer electronics devices incorporating USB 3.0 connectors in the United States.  But those higher prices did not cause Lotes’ injury of being excluded from the market for USB 3.0 connectors–that injury flowed directly from the defendant’s exclusionary foreign conduct.  Lotes’s complaint thus seeks redress for precisely the type of “independently caused foreign injury” that … falls outside of Congress’s intent [in enacting FTAIA].

Indeed, to the extent there is any causal connection between Lotes’s injury and an effect on U.S. commerce, the direction of causation runs the wrong way.  Lotes alleges that the defendants’ patent hold-up has excluded Lotes from the market, which reduces competition and raises prices, which are then passed on to U.S. consumers.  Lotes’s injury thus precedes any domestic effect in the causual chain.  And “[a]n effect never precedes its cause.” [emphasis in original]

The Second Circuit also rejected Lotes’s “creative arguments” that “the defendants have also failed to license the necessary claims of certain U.S. patents, which has had the effect of foreclosing competition in the United States.”  Problems with the argument include no allegation that Lotes conducts business in the United States, allegation that Lotes already has rights under the U.S. patents based on the USB-IF Contributors Agreement, and fact that Lotus would still be excluded from the USB 3.0 market because of the foreign enforcement activity against Lotes’s sole-foreign-based manufacturing:

As an initial matter, we are skeptical that the defendants’ refusal to license their U.S. patents has resulted in any domestic foreclosure of competition.  Lotes has not alleged that it manufactures products in the United States, imports products into this country, or otherwise does business here.  It is thus unclear why Lotes believes it even needs a U.S. license from the defendants in order to operate.  And even to the extent a license is in fact necessary, Lotes alleges that, by virtue of the Contributors Agreement, it “either already has .. .or has in irrevocable right to a RAND-Zero license” for all patent claims and other intellectual property necessary to practice the USB 3.0 standard.  The alternative domestic effect Lotes relies upon is thus illusory.

In any event, any domestic effect resulting from the defendants’ failure to license their U.S. patents did not proximately cause Lotes’ injury.  Indeed, any such effect is not even a factual, “but for” cause of Lotes’s injury.  Even if the defendants had granted Lotes a U.S. license, Lotes would still be excluded from the USB 3.0 market by virtue of the defendants’ independent infringement suits in China.  But for the failure to license, Lotes would have suffered the same harm. [emphasis in original]

The Second Circuit thus affirmed dismissal on this alternative ground.  Further, the Second Circuit affirmed the district court’s denying Lotes a second opportunity to amend the complaint because, “[i]n light of our conclusion that any domestic effect did not ‘give[] rise to’ Lotes’s claim, amendment would be futile.”

Yesterday, the European Commission issued decisions in two antitrust proceedings centered around the enforcement of standard essential patents (SEPs). The decisions, one involving Samsung and the other Motorola, essentially create a “safe harbour” for willing licensees of FRAND-encumbered SEPs to avoid an injunction and address the circumstances under which an SEP holder may seek injunctive relief against a potential infringer.

Commission Vice President Joaquín Almunia stated that the decisions will provide “clarity to the industry on what constitutes an appropriate framework to settle disputes over ‘FRAND’ terms in line with EU antitrust rules” and encouraged other industry players to consider establishing dispute resolution mechanisms in line with yesterday’s decisions. These decisions significant as they will affect future analyses of whether various SEP enforcement strategies run afoul of EU antitrust rules.

The Motorola Mobility Decision

The first decision arises from Motorola Mobility’s efforts to enforce FRAND-committed SEPs related to the ETSI GPRS mobile communications standard (a part of the GSM standard) against Apple in Germany. According to the Commission’s press release regarding the Motorola decision, Apple had agreed to take a license and be bound by the German court’s FRAND determination. After receiving a complaint from Apple, the Commission opened an investigation in April 2012 and issued a Statement of Objections to Motorola’s actions in May 2013.

In yesterday’s decision, the Commission found that it was abusive for Motorola to both seek and enforce injunctive relief against Apple on the basis of FRAND-encumbered SEPs where Apple had agreed to be bound by the FRAND terms determined by a German court. The Commission also found Motorola’s insistence that Apple relinquish any potential infringement or invalidity challenges to be a violation of the EU’s antitrust regulations, particularly as Motorola’s demands were made under the threat of injunction:

Implementers of standards and ultimately consumers should not have to pay for invalid or non-infringed patents. Implementers should therefore be able to ascertain the validity of patents and contest alleged infringements.

Although Motorola was found to be engaged in anticompetitive behavior, the Commission declined to impose a corresponding fine, reasoning that (i) there is an absence of case-law by EU courts dealing with the legality of SEP-based injunctions under pertinent antitrust law prohibiting abusing a dominant position and (ii) European national courts have issued diverging opinions on the issue.

The European Commission commented in the FAQ memo that the decision “provides a “safe harbour” for standard implementers who are willing to take a licence on FRAND terms”, noting that such implementers may avoid getting hit with an SEP-based injunction if they are able to “demonstrate that they are a willing licensee by agreeing that a court or a mutually agreed arbitrator adjudicates the FRAND terms.”

The Samsung Electronics Decision

The second case arises from Samsung Electronic’s bid for injunctive relief against Apple based on FRAND-committed SEPs related to ETSI 3G UMTS mobile communication standards. According to the press release regarding the Samsung decision, Samsung began seeking injunctive relief for patent infringement in April 2011. The Commission opened an investigation of Samsung’s SEP enforcement in January 2012. In December 2012, the Commission issued a Statement of Objections, informing Samsung that it considered Apple to be a willing licensee of Samsung’s SEPs and expressing concern that Samsung’s SEP enforcement constituted an abuse of a dominant position under EU law. In response to the Commission’s concerns, Samsung offered a series of commitments regarding SEP enforcement and licensing.

Specifically, Samsung committed to not pursue any injunctions in the European Economic Area (made up of the EU plus Iceland, Liechtenstein, and Norway) for a period of five years based on any SEPs related to smartphone/tablet technologies against companies that agree to a licensing framework that provides for (i) a 12-month negotiation period and (ii) a third party FRAND determination if no agreement can be reached within the 12-month negotiation period (see our Oct. 18, 2013 post).

The Commission’s decision renders the commitments offered by Samsung  legally binding under EU antitrust laws. Similar to the statement issued in the Motorola decision, the Commission further commented in its FAQ memo:

Samsung’s commitments implement in this case the “safe harbour” concept established in the Motorola decision in practical terms. They provide for a “safe harbour” available to all potential licensees of the relevant Samsung SEPs. Potential licensees are protected against injunctions sought by Samsung on the basis of such SEPs if they submit to the licensing framework provided for by the commitments.

Other European Commission Statements on SEP/FRAND Issues

The European Commission also released a FAQ-style memorandum regarding antitrust decisions on SEPs, which it claimed “strike a fair balance between the interests of SEP holders to be appropriately remunerated for their IP and the interests of implementers of standards to get access to standardised technology on FRAND terms.” The FAQ summarized the Motorola and Samsung decisions as follows:

Today’s action by the Commission clarifies that it is anti-competitive to use injunctions in relation to SEPs in the following circumstances: when in a standardisation context, a SEP holder has committed to license the SEP on FRAND terms and the licensee is willing to take a licence on such terms. In these circumstances, the seeking of injunctions can distort licensing negotiations and lead to licensing terms with a negative impact on consumer choice and prices.

The FAQ-style memorandum addresses several other topics relevant to European patent disputes.

Injunctive Relief Reaffirmed. The Commission emphasized that it is not questioning the use or pursuit of injunctions by patent holders, noting that recourse to injunctive relief is generally a legitimate remedy for patent holders in infringement cases. The Commission further clarified that SEP-based injunctions should be available against unwilling licensees and that the Samsung and Motorola cases do not stand for the elimination of injunctive relief in view of anticompetitive concerns:

Rather, in the specific circumstances where the holder of a SEP has given a commitment to license on FRAND terms and where the company against which an injunction is sought is willing to enter into a FRAND licence agreement, the seeking of an injunction on the basis of SEPs can constitute an abuse of a dominant position.

Who are “willing licensees”? The Commission expressed the view that whether a company can be considered a “willing licensee” should be determined on a case by case basis. The Commission noted that while yesterday’s decisions provide a “safe harbour” for willing licensees, no findings have been made regarding the willingness of licensees that are not willing to have binding FRAND terms determined by a third party in the event of a dispute. The Commission also clarified that potential licensees who challenge validity, essentiality, or infringement are not unwilling, per se:

Potential licensees of SEPs should remain free to challenge the validity, essentiality or infringement of SEPs. It is in the public interest that potentially invalid patents can be challenged in court and that companies, and ultimately consumers, are not obliged to pay for patents that are not infringed.

What about FRAND calculations? Without providing specific guidance or input on how FRAND rates ought to be calculated, the Commission indicated that courts and arbitrators are well-placed to set FRAND rates in cases of disputes and encouraged national courts may seek guidance from the Commission on the interpretation of EU competition law. The Commission noted that Germany’s Mannheim Regional Court sought guidance on setting FRAND rates in the Motorola v. Apple SEP dispute in November 2013 and that the Commission’s responses to this inquiry would be posted on the Commission website at some point in the future.

Well that didn’t take long — yesterday the Ninth Circuit dismissed LSI’s appeal from Judge Whyte’s preliminary injunction that enjoined LSI from seeking to enforce any exclusion order entered by the ITC on the standard essential patents at issue in the district court litigation before LSI first offered a RAND license to Realtek.  Our March 13, 2014 post summarized this appeal issue and the pending post-trial motion by Realtek that seeks to essentially convert the preliminary injunction into a permanent injunction (hearing scheduled May 9, 2014). 

Recall that both parties agreed that, although the ITC did not find a Section 337 infringement violation so no exclusion order issued, the issues presented in the Ninth Circuit appeal of the preliminary injunction were not moot because, for example, LSI could appeal the ITC’s decision and revive the prospect of an exclusion order.

The Ninth Circuit disagreed.  The Ninth Circuit ruled that, by its own terms, the preliminary injunction would be “moot” if the ITC did not find an infringement violation.  Thus “the preliminary injunction itself is no longer operative by virtue of the initial decision of the ITC that there was no Section 337 violation.” So the appeal was dismissed.

The Ninth Circuit’s dismissal of the preliminary injunction appeal puts the ball squarely in Judge Whyte’s court — without guidance from this Ninth Circuit appeal — to decide whether and to what extent LSI should be permanently enjoined from enforcing any exclusion order or injunctive relief prior to offering RAND licensing terms on the WiFi SEPs at issue.

As a reminder that standard essential patent issues go beyond information technology, last week SawStop LLC sued manufacturers of table saws alleging that they conspired to convince Underwriters Laboratories, Inc. (“UL”) to not adopt SawStop’s patented table saw safety technology into UL standard 987 (Stationary and Fixed Electric Tools) and to adopt a different technology that required SawStop to alter its design.

SawStop alleges that it patented a saw blade safety feature that places an electrical current on the blade to allow distinguishing between the blade cutting through wood or cutting through someone’s finger, stopping the blade if the latter is detected.  SawStop alleges that it offered to license this technology to other saw manufacturers, but they did not want to adopt the technology given cost considerations.  The UL standard 987 applicable to table saws is overseen by UL Standards Technical Panel 745 alleged to “consist[] primarily of manufacturers and individuals with connections to manufacturers.”  SawStop alleges that the manufacturers convinced UL to not adopt SawStops patented technology, but to adopt a saw safety guard technology that required SawStop to incur expenses to redesign its saws.  SawStop thus filed this lawsuit alleging various unfair competition claims.

This is an interesting case because it reminds us that standards are all around us and not limited to information technology.  It also is a unique example of a patent owner bringing suit because its technology was not adopted by an industry standard setting organization.  Another such case is one brought in 2011 by TruePosition that sued manufacturers and standard setting organizations Third Generation Partnership Project (3GPP) and European Telecommunications Standards Insitute (ETSI) alleging that they conspired to not adopt into mobile phone standards certain location-based technology patented by TruePosition (TruePosition, Inc. v. Ericsson, et al., Case No. 2:11-cv-04574 (E.D. Pa)).  The TruePosition case is in the discovery stage with summary judgment deadline set for Dec. 2014 and trial set for Aug. 2015.

On Friday, the U.S. Department of Justice (“DOJ”) announced that it was closing its investigation into Samsung’s use of standard essential patents, which investigation had “focused on Samsung’s attempts to use its SEPs to obtain exclusion orders from the [ITC] relating to certain iPhone and iPad models.”  DOJ stated that further investigation was no longer needed given U.S. Trade Representative Michael Froman’s disapproval last year of an exclusion order in the ITC’s investigation of Apple’s infringement of Samsung’s SEPs (see our Aug. 3, 2013 post).

Samsung’s Proactive European Proposal.  DOJ states that its “Antitrust Division has worked closely and consulted frequently with its colleagues at the European Commission,” which raises the question whether DOJ took comfort in Samsung’s recent European activities.   Recall that the European Commission is considering Samsung’s proactive proposal  in response to a competition investigation that, during the next five years, Samsung would not seek injunctive relief within the European Economic Area (EEA) on SEPs in the field of mobile communications against companies that agree to a particular framework for determining fair, reasonable and non-discriminatory (FRAND) licensing terms either by agreement, by court determination or by arbitration (see our Oct. 18, 2013 post).  Samsung made this proposal on Sep. 27, 2013, several weeks after USTR Froman’s Aug. 3, 2013  disapproval of the exclusion order Samsung was awarded against Apple.  Further, Samsung’s proposal to the European Commission is similar to the consent decree entered between the U.S. Federal Trade Commission and Google/Motorola to settle an investigation about Motorola’s assertion of SEPs (see our July 24, 2013 post).

Samsung’s Cross-Licensing.  In addition to the European activity, Samsung recently entered into cross-license agreements with at least Google and Cisco.  Perhaps recent successful cross-licensing of Samsung’s patents by sophisticated companies through bilateral negotiations gave DOJ further comfort in ending its investigation.

In an order dated January 16, 2014, the Competition Commission of India (“CCI”) ordered another investigation into Ericsson’s licensing of cellular patents that are subject to FRAND obligations, which investigation will parallel a similar investigation of Ericsson that CCI ordered on November 12, 2013 (discussed in our prior post).  The rationale for this new investigation, requested by Intex Technologies, is the same as that for the prior investigation requested by Micromax Informatics and we refer you to our prior post’s discussion thereof.

One difference concerns Ericsson’s refusal to disclose what licensing terms it gave to other licensee’s that the prospective licensee requested to assess whether the license offer to them is fair, reasonable and non-discriminatory.  In the Micromax investigation, the parties were in litigation and Ericsson refused to produce the other comparable licenses in a mediation of that dispute, leading CCI to state that “Refusal of OP [Ericsson] to share commercial terms of FRAND licenses with licensees similarly placed to the informant [Micromax], fortified accusations of the Informant, regarding discriminatory commercial terms imposed by the OP.”

In this new investigation, the rub comes from an NDA required by Ericsson to negotiate a license with requester Intex.  Intex asserts that Ericsonn’s NDA prevents them from consulting with vendors of components that implement the standard, allowed Ericsson to claim it could not produce license agreements with others given similar NDAs entered with them, and required adjudicating any disputes in another country.  CCI found that the NDA was problematic for several reasons, including allowing Ericsson to hide whether its licensing terms were discriminatory as compared to other licenses it granted on the same FRAND-obligated standard essential patents:

Charging of two different license fees per unit phone for use of the same technology prima faci is discriminatory and also reflects excessive pricing vis-à-vis high cost phones.  NDA thrust upon the consumers by OP [Ericsson] strengthens this doubt as after NDA, each of the user of SEPs is unable to know the terms of royalty of other users.  This is contrary to the spirit of ‘applying FRAND terms fairly and uniformly to similarly placed players.’  Transparency is hallmark of fairness.  Both forcing a party to execute NDA and imposing excessive and unfair royalty rates prima facie was abuse of dominance and violation of section 4 of the Act.  Imposing a jurisdiction clause debarring Informant [Intex] from getting disputes adjudicated in the country where both parties were in business and vesting jurisdiction in a foreign land prima facie was also an abuse of dominance.

Concerns about improper NDA requirements are not unique to this CCI investigation.  The recent cable operator lawsuit against Rockstar includes concerns about Rockstar requiring NDA terms in negotiating licenses under patents it acquired from Nortel, which patents include standard essential patents subject to standard-setting organization (SSO) obligations such as RAND, FRAND or  royalty-free licensing obligations.

As with the prior Ericsson investigation, CCI’s order makes clear that these are just initial observations, not final expressions of opinion, and the investigation should proceed without being swayed by the initial observations.

Today, the Second Circuit will hear argument in an important case on the extent that foreign injury (reduced foreign sales and closure of foreign plants) arising from foreign RAND breaches can have remedy in the U.S. based on their impact on U.S. commerce.  The case, Lotes Co., Ltd. V. Hon Hai Precision Industry Co., Ltd., et al. (13-2280), concerns whether a Taiwanese corporation’s breach of contract and antitrust claims arising from standard setting obligations were rightly dismissed under the Foreign Trade Antitrust Improvements Act (FTAIA), which bars Sherman Act claims to conduct involving export or wholly foreign commerce except where that conduct has a “direct, substantial, and reasonably foreseeable effect” on U.S. commerce.

In the fall of 2012, Lotes sued Hon Hai, Hon Hai subsidiary Foxconn and several other related entities in S.D.N.Y. for reneging on licensing commitments made to the USB Implementers Forum (USB-IF) (see our February post for a full recap). Lotes asserts that, not only did defendants breach contracts with the USB-IF by failing to license USB 3.0-related patents on FRAND-Z terms (i.e., royalty free), but defendants also violated U.S. antitrust laws by instituting foreign patent-enforcement proceedings against Lotes in China given its FRAND-Z obligations. Defendants moved to dismiss, arguing that the FTAIA deprived the court of jurisdiction to adjudicate antitrust claims based on the alleged foreign activity. The district court found the entirely foreign activity did not have the type “direct” impact on U.S. consumers to fall within an FTAIA exception. The case was dismissed. Lotes appealed.

The FTC recently filed an amicus brief urging the Second Circuit to affirm the dismissal on alternative grounds without endorsing what it called “the District Court’s Flawed Analysis of Direct Effect”. Arguing that “direct” within the FTAIA refers to a “reasonably proximate causal nexus” rather than an “immediate consequence”, the FTC asserts that the district court was wrong to dismiss the action based on no “direct” effect on U.S. commerce because a foreign manufacturing process involving multiple transactions or steps may have a direct effect on U.S. Commerce.

Rather than affirming dismissal on that grounds, the FTC recommends affirming dismissal of Lotes’ antitrust claims “on the simpler basis” that Lotes cannot show that the alleged effect on U.S. commerce gives rise to the claims.  Rather, the FTC argues Lotes has alleged the reverse — that the foreign injury gave rise to the effect on U.S. commerce: “Lotes suffered only foreign injury from lost sales of USB 3.0 connectors in wholly foreign commerce and the potential closures of its foreign factories; that injury results from defendants’ conduct, not its effect on U.S. commerce.”  Thus, “[t]o the extent Lotes alleges any causal connection between its injury and the effects on U.S. commerce, the line of causation runs in the wrong direction.”

Whereas the Sherman act requires that the adverse effect on U.S. commerce be the direct and proximate cause of the plaintiff’s injury, Lotes alleged its foreign injury (lost sales, potential closure of foreign factories) will have an adverse effect on U.S. commerce (price increases to USB 3.0 connector purchasers).  As such, the FTC argued relief cannot be granted under the FTAIA.  The Second Circuit has invited the FTC to present oral argument on this specific alternative ground.

Yesterday the European Commission started soliciting public comments on Samsung’s proposed commitment that, during the next five years, Samsung would not seek injunctive relief within the European Economic Area (EEA) on standard essential patents (SEPs) in the field of mobile communications against companies that agree to a particular framework for determining fair, reasonable and non-discriminatory (FRAND) licensing terms either by agreement, by court determination or by arbitration (the default forum).  Interested parties should submit comments within a month.

This relates to an investigation that the European Commission opened in January 2012 on whether Samsung honored FRAND commitments given to ETSI by seeking injunctive relief in Europe against Apple mobile products on Samsung 3G UMTS SEPs. In December 2012, the European Commission gave initial views (in both a press release and supporting memo of frequently asked questions) that seeking injunctive relief is a legitimate remedy, but may be “an abuse of a dominant position in the exceptional circumstances … where the holder of a SEP has given a commitment to license these patents on FRAND terms and where the company against which an injunction is sought is willing to negotiate a FRAND license.”  The European Commision expressed concern that seeking injunctive relief in those exceptional circumstances “may distort licensing negotiations unduly in the SEP-holder’s favour.”  The European Commision took no position on what would be a reasonable royalty rate, stating that “courts or arbitrators are generally well equipped to do this.”

In response, Samsung submitted Proposed Commitments a few weeks ago (Sep. 27, 2013) that provide a framework over the next five years where, before Samsung would seek injunctive relief on mobile communication SEPs in the EEA, Samsung and a willing licensee may negotiate licensing terms and, if they reach no agreement within 12 months, then the FRAND terms would be decided in court or arbitration (the default forum).  This approach is similar to the framework proposed in the settlement earlier this year between the U.S. Federal Trade Commission and Google/Motorola.

The European Commision thus issued its press release yesterday seeking public comments on Samsung’s proposal along with a supporting memo addressing frequently asked questions on the issues presented.