Judge Gilstrap recently issued an Order rejecting the equitable defense of patent misuse in a case involving standard essential patents (SEPs) subject to a commitment to license them on fair, reasonable and non-discriminatory (FRAND) terms. Motorola Mobility LLC (Motorola) alleged that Saint Lawrence Communications LLC (St. Lawrence or SLC) was guilty of patent misuse by, among other things, requiring Motorola to take a worldwide license to FRAND-committed SEPs, using the threat of injunctive relief in Germany to coerce licensing of those SEPs, entering different license terms with different licensees and not disclosing effective royalties from licensing the SEPs under a patent pool when negotiating individual licenses. This decision is another indication that competition law claims asserted against SEPs may not prevail when patent owners have followed traditional patent enforcement and licensing strategies or even if they breach of a FRAND commitment. Rather, there must be something more egregious or deceptive with the particular patent owner’s conduct at issue to give rise to competition law claims that are required to address harm to competition beyond harm that can be addressed by more traditional patent or contract law remedies — e.g., a contract remedy for breach of a FRAND commitment or limits on patent remedies based on a FRAND commitment. Continue Reading Judge Gilstrap rejects patent misuse defense to alleged FRAND-committed SEPs (St. Lawrence v. Motorola Mobility)
Today, a Northern District of California jury in a trial before Magistrate Judge Nathanael M. Cousins entered a Verdict finding that Apple infringed two patents alleged essential to ETSI and 3GPP cellular standards, that the patents were not invalid and awarding a reasonable royalty in the amount of $3.4 Million and $3.9 Million for each patent, respectively, as single lump sum payments for past and future infringement. It is not clear from the public record how the jury reached this damages verdict or whether it favors more the patent owner Core Wireless or the adjudged infringer Apple. We may follow-up this post if more insight is provided by post-trial briefings or the trial transcripts become public.
Below is a discussion of some of the pre-trial rulings and jury instructions that would have shaped the jury’s reasonable royalty determination here. These rulings touch-on the issues of royalty stacking, the smallest salable patent practicing unit, the form of a reasonable royalty, relevant Georgia-Pacific factors and apportionment to the value of the patented technology. Continue Reading Jury awards Core Wireless $7.3 Million lump sum for Apple’s infringement of two SEPs (Core Wireless v. Apple)
Judge Gilstrap recently entered Final Judgment that included a 20% enhancement of damages based on a Jury Verdict that LG willfully infringed two patents that patent owner Core Wireless alleged to be essential to certain cellular standards. This appears to be the first case of a court enhancing damages based on willful infringement of a standard essential patent. Recall that Judge Gilstrap previously denied LG’s pre-trial motion to preclude finding willful infringement of an alleged standard essential patent, but indicated that he might consider LG’s policy arguments if he were to consider enhancing damages if the jury found that LG willfully infringed the patents (see our Sep. 7, 2016 post).
Judge Gilstrap has now ruled that he will enhance damages following the jury verdict that LG willfully infringed the patent, and he did so sua sponte, meaning that he enhanced damages without the patent owner filing a post-trial motion seeking such enhancement or the parties briefing same. Judge Gilstrap has since stayed execution of the judgment while the parties file post-trial motions, which motions most likely will address the issue of willful infringement and enhanced damages.
Judge Gilstrap’s decision to enhance damages was due to LG’s negotiation conduct and apparently weak infringement/validity defenses, which led him to conclude that “LG’s decision to terminate negotiations and continue operations without a license was driven by its resistance to being the first in the industry to take a license, and not by the merits or strength of its non-infringement and invalidity defenses.” Continue Reading Judge Gilstrap enhances damages for willful infringement of SEPs (Core Wireless v. LG)
Yesterday, a federal jury in Delaware concluded that ZTE’s accused 4G mobile devices did not infringe InterDigital’s U.S. Patent No. 7,941,151 (“the ‘151 Patent”). This jury verdict comes a little less than six months after a different jury concluded that ZTE’s accused 4G mobile devices infringe three separate patents asserted by InterDigital in the case.
Background. In its Amended Complaint, InterDigital alleged that ZTE was infringing four of its patents. With respect to the ‘151 Patent, InterDigital alleged that ZTE was infringing it by “manufacturing, using, importing, offering for sale, and/or selling wireless devices with 4G capabilities.” More specifically, InterDigital alleged that
The accused ZTE products are specifically designed to be used in at least 4G wireless communication systems. Specifically, the accused ZTE products identified by InterDigital to date that are designed to be used in a 4G wireless communications system are configured to comply with [3gPP’s] LTE (Long Term Evolution) standard. Because the accused products are specifically designed to so operate, they have no substantial non-infringing uses.
ZTE asserted a number of FRAND-related affirmative defenses and counterclaims in the litigation. The court subsequently dismissed the FRAND-related counterclaims and bifurcated the infringement liability issues from the FRAND-related affirmative defenses.
In late October, a jury found that ZTE infringed the three other patents asserted by InterDigital and also rejected ZTE’s invalidity defenses. Thereafter, and as we previously reported, Judge Andrews entered an order allowing InterDigital and ZTE to proceed with FRAND and damages discovery under the assumption that ZTE would be found to infringe InterDigital’s ‘151 Patent. Specifically, the order provided as follows:
FRAND/damages discovery may begin immediately. It is going to have to be done, and the parties should do it (as they normally would) on the assumption that ZTE will be found to have infringed the ‘151 patent. It does not need to be coordinated with any similar discovery in the Nokia case. The parties should include the scheduling for this discovery in the written proposed scheduling order submitted before the above-mentioned scheduling conference.
The infringement trial for the ‘151 Patent occured on Monday and Tuesday of this week. Yesterday, the jury found that ZTE did not infringe the ‘151 Patent.
Next Steps. According to the agreed-to Scheduling Order entered by the court, the parties will now complete FRAND and damages-related discovery and prepare for a damages trial with respect to the three InterDigital patents the first jury found ZTE to infringe last Fall. The following schedule will apply:
August 21, 2015: Completion of fact discovery related to FRAND/damages;
September 18, 2015: Disclosure of expert testimony for party with burden of proof;
October 16, 2015: Supplemental/rebuttal expert disclosure;
November 9, 2015: Reply expert reports from party with burden of proof;
December 4, 2015: Completion of expert discovery;
December 8, 2015: Joint letter outlining any issues the parties believe must be addressed at the status conference;
December 15, 2015: Status conference;
December 29, 2015: Dispositive motions and deadline to object to expert testimony;
March 21, 2016: ZTE target trial date; and
April 11, 2016: Microsoft Mobile Oy (MMO) (another defendant in the case) target trial date
Tomorrow, the Ninth Circuit will hear oral argument in Motorola’s appeal of Judge Robart’s RAND royalty rate determination as well as the jury verdict that Motorola breached its alleged RAND obligations to license its patents to Microsoft on RAND terms. Motorola also challenges whether the Ninth Circuit has jurisdiction over the appeal, arguing that exclusive jurisdiction lies in the Federal Circuit.
Below is a summary of the background of the dispute, the parties’ positions on appeal as well as those of several parties appearing as amicus curiae.
Motorola holds several patents on wireless Internet communications (“WiFi”) and video coding technologies that it declared essential to standards set by two standards-setting organizations: the International Telecommunications Union (ITU) H.264 standard governing video coding and the Institute of Electrical and Electronics Engineers (IEEE) 802.11 standard governing WiFi communications. It is undisputed that Motorola committed to license these patents on reasonable and non-discriminatory (RAND) terms by way of letters of assurance to ITU and IEEE.
On October 1, 2010, Microsoft sued Motorola in the International Trade Commission (ITC) alleging that Motorola’s smartphones infringed certain of Microsoft’s patents and also seeking an exclusion order barring Motorola’s importation from same. The same day, Microsoft sued Motorola for patent infringement in the Western District of Washington.
Prior to those suits being filed, Microsoft and Motorola had discussed a potential cross-license of certain of their patents considering the expiration of Motorola’s license to certain of Microsoft’s other patents. After Microsoft filed the lawsuits against Motorola, Microsoft again raised the possibility of a cross-license agreement. The parties scheduled a meeting for October 22, 2010 to resume cross-license discussions.
On October 21, 2010, the day before the meeting, Motorola sent Microsoft a letter offering to grant Microsoft a worldwide license to Motorola’s portfolio of alleged standard essential 802.11 patents at the rate of 2.25% per unit for each 802.11 compliant product subject to a grant back license under Microsoft’s 802.11 essential patents. On October 29, 2010, Motorola sent Microsoft a second letter offering a worldwide license to Motorola’s alleged standard essential H.264 patents under the same terms. In both letters, Motorola stated that “[i]f Microsoft is only interested in licensing some portion of [Motorola’s] portfolio, Motorola is willing to enter into such a license, also on RAND terms.” Motorola also requested in each letter that Microsoft respond within twenty (20) days.
Microsoft did not respond to either letter. On November 9, 2010, Microsoft filed the subject suit against Motorola in the Western District of Washington alleging that Motorola’s offered license rate on its alleged 802.11 and H.264 SEPs breached its obligations to ITU and IEEE to license such patents on RAND terms. Motorola then sued Microsoft in the Western District of Wisconsin alleging infringement of those same patents. The Western District of Wisconsin transferred Motorola’s action to the Western District of Washington, which then consolidated Motorola’s infringement claims with Microsoft’s contract-based action before Judge Robart.
In July of 2011, Motorola filed an action in Germany alleging that Microsoft’s Xbox and Windows infringe Motorola’s German patents essential to the H.264 standard. Motorola ultimately obtained an injunction against Microsoft from the German court prohibiting Xbox sales in that country. The German court granted the injunction after it rejected Microsoft’s assertions regarding Motorola’s obligations to ITU and IEEE. Microsoft then relocated its German distribution center to the Netherlands. Microsoft also sought and obtained an injunction from Judge Robart, which enjoined Motorola from enforcing the German injunction pending a determination of what a RAND royalty rate would be and whether Motorola breached its RAND obligations. Motorola appealed Judge Robart’s preliminary injunction decision to the Ninth Circuit. The Ninth Circuit ruled that it had appellate jurisdiction because Microsoft’s complaint “sounded in contract.” The Ninth Circuit also affirmed the injunction.
Judge Robart bifurcated the case to first hold a bench trial to determine a RAND royalty rate and then hold a jury trial to determine whether Motorola breached its obligations to offer its alleged 802.11 and H.264 SEPs on RAND terms. After the bench trial, Judge Robart issued a first-of-its-kind RAND royalty rate determination. As we previously detailed, Judge Robart set a RAND royalty rate for Motorola’s H.264 SEP portfolio at .555 cents per unit with a range of .555 cents to 16.389 cents per unit, and a RAND royalty rate for Motorola’s 802.11 SEP portfolio at 3.471 cents per unit, with a range of .8 cents to 19.5 cents per unit.
Thereafter, Judge Robart ruled that the RAND rate determination and related findings could be introduced at the jury trial on whether Motorola breached its obligations to IEEE and ITU. After a one week trial, the jury found that Motorola breached its RAND obligation, including the obligation to license its patents in good faith. Judge Robart then issued a Rule 54(b) final judgment on the RAND rulings and stayed the remainder of the consolidated cases (e.g., Motorola’s infringement claims) pending an appeal. Motorola noted its appeal of the Rule 54(b) RAND judgment to the Federal Circuit, but Microsoft moved to transfer it to the Ninth Circuit, which, as noted above, had previously ruled that it had appellate jurisdiction in the case in affirming Judge Robart’s injunction. The Federal Circuit, without addressing the substantive merits of whether the Federal Circuit or Ninth Circuit had appellate jurisdiction, agreed as a procedural matter in this particular case that the Ninth Circuit had jurisdiction based on the law of the case doctrine that the Ninth Circuit’s prior ruling of jurisdiction in the case controlled in this particular case. The case was transferred to the Ninth Circuit.
After transfer, the parties and several non-parties appearing as amicus curiae filed briefs, discussed below.
Motorola’s Opening Brief.
Jurisdiction. In its opening brief, Motorola first argues that the Ninth Circuit cannot hear the appeal because jurisdiction “lies exclusively in the Federal Circuit,” because the district court transformed the case “into one necessarily involving resolution of substantial issues of patent law” after the Ninth Circuit affirmed Judge Robart’s injunction. While the Ninth Circuit “plausibly had appellate jurisdiction over the earlier interlocutory appeal form the anti-suit injunction in this case,” Motorola argues that “the current appeal requires transfer to the Federal Circuit” because Microsoft’s right to relief “‘necessarily depends on resolution of a substantial question of federal patent law, in that patent law is a necessary element of one of [Microsoft’s] well-pleaded claims.’” Specifically, Motorola argues that “by determining that it could set a RAND rate determined at a bench trial,” the district court, “for all intents and purposes,” held a “patent damages trial” which transformed the case into “one requiring the resolution of substantial questions of patent law.” As support, Motorola cites to “technical testimony concerning the essentiality and value of [its] patents, as well as Microsoft’s use of them,” evidence regarding infringement and validity, and “a patent infringement damages analysis” presented to the district court in connection with the RAND bench trial. Motorola argues that “[w]here a contract claim necessarily requires a court to ‘interpret the patents and then determine whether [the product at issue] infringes” the patents, then “‘patent law is a necessary element of [the] breach of contract claim.'” According to Motorola, while the Federal Circuit found the Ninth Circuit’s jurisdictional analysis “plausible” when it transferred the appeal, the Ninth Circuit “should hold that the underpinnings of that ruling no longer apply to the current appeal and transfer” it back to the Federal Circuit.
The RAND Ruling. If the Ninth Circuit concludes that it has jurisdiction, Motorola argues that the district court’s RAND ruling should be vacated. “In deciding to hold a RAND-rate bench trial before the good-faith jury trial, the district court held that it was necessary to determine a ‘true RAND royalty rate’ before the jury could resolve the question of whether Motorola breached its good-faith obligations under its RAND commitments.” According to Microsoft, “[t]hat premise was erroneous and fatally tainted not only the bench trial but also the jury trial that followed.”
Specifically, Motorola contends that “Microsoft’s entire breach case turned on whether Motorola had breached the covenant of good faith and fair dealing implied by its RAND commitments.” “Under Washington contract law, that determination involves a fact-intensive, multi-factored analysis by the finder of fact in which no one factor is a prerequisite and no one fact is dispositive over any other.” According to Motorola, “[t]he district court failed to cite a single precedent in Washington or any other jurisdiction to support the view that an abstract, advisory ‘true’ price is a prerequisite to a factfinder’s determination of good faith concerning a contractual negotiation.” “To the contrary, courts repeatedly reject arguments that a party has breached good faith in a contractual negotiation by offering a higher or lower price than is consistent with an abstract ‘true’ price.”
Motorola argues that since the RAND ruling itself is not a “prerequisite to determining Motorola’s liability for” breach, the ruling is an impermissible advisory opinion. This, according to Motorola, is especially so given that “Microsoft’s complaint sought only declaratory relief and damages for Motorola’s supposed breach of its RAND commitments and injunctive relief against Motorola enforcing its SEPs.” “Microsoft’s complaint never, even as amended, sought specific performance or a court-ordered license on RAND terms.”
Motorola contends that the Western District of Washington’s decision in Apple v. Motorola demonstrates that the RAND ruling is advisory. In Apple, the court “dismissed the case as seeking an impermissible advisory opinion where Apple sought to have the court determine a RAND rate but refused to commit to take a license at that rate.” According to Motorola, “Microsoft never included a request for specific performance or a license in its complaint,” and, therefore, “the court’s determination of a RAND rate was similarly advisory.”
In the alternative, Motorola argues that “[e]ven assuming that Microsoft [was] deemed to have constructively amended its complaint to seek a license at a RAND rate set by the court, mere establishment of such a rate would still be advisory as to any license remedy.” “SEP commitments to SSOs are not simply licenses with missing price terms, like a form lease agreement with a blank for the monthly rental amount.” According to Motorola:
[t]o the contrary, patent licenses arrived at between sophisticated technology companies through bilateral negotiations—including licenses involving SEPs—are complicated endeavors with myriad variables, including duration, cross-licenses, geographical and product scope, royalty caps, carve-outs, and other material terms apart from royalty rate. For just that reason, the SSO policies concerning the RAND commitments at issue here state that ‘[t]he detailed arrangements arising from patents (licensing, royalties, etc.,) are left to the parties concerned, as these arrangements might differ from case to case.’ The royalty rate resulting from such complex licensing negotiations depends upon the cross-license, duration, scope, cap, and other non-price terms. The district court’s treatment of the RAND rate as an independent, exogenous variable was therefore error, and the RAND Order is impermissibly advisory.
Assuming that the RAND ruling is not advisory, Motorola argues that the RAND rate set by the district court should be vacated on the merits because it is contrary to “governing Federal Circuit law.” First, Motorola contends that the district court failed to set a date for the hypothetical negotiation it relied upon in reaching the RAND rate. According to Microsoft, “[t]he district court purported to follow Federal Circuit patent damages law, relying upon the ‘hypothetical negotiation’ method of calculating such a royalty.” “Under this framework, however, ‘[t]he key element in setting a reasonable royalty after determination of infringement and validity is the necessity for return to the date when the infringement began.’” Motorola argues that, because the district court did not set a date for the hypothetical negotiation it used as a basis for the RAND rate, the RAND ruling should be vacated.
Motorola next argues that the RAND ruling relies on “speculative inferences from non-comparable pool rates.” Specifically, Motorola contends that the district court erred “in using, as its chief benchmark for the RAND rate the parties would supposedly set in a hypothetical negotiation, the royalty structure of two patent pools involving a subset of industry members—the MPEGLA pool for video streaming and the Via Licensing pool for WiFi.” “Neither pool includes the Motorola patents at issue here.” Motorola contends that “[w]hile patent pools might in some circumstances provide relevant data for a hypothetical SEP licensing negotiation,” the district court purportedly “failed to identify any basis in the bench trial record for treating the two pools used here as a proper basis for comparison in describing a license that would have resulted from a hypothetical bilateral negotiation between Microsoft and Motorola in 2010.”
Motorola contends further that the district court improperly set aside “as irrelevant actual licenses that Motorola had historically entered into for its SEPs, reasoning that they had arisen from settlement negotiations.” “Under patent damages law, ‘[a]ctual licenses to the patented technology are highly probative as to what constitutes a reasonable royalty for those patent rights because such actual licenses most clearly reflect the economic value of the patented technology in the marketplace.’” According to Motorola, “litigation settlements can be ‘the most reliable license’ to evaluate and should be considered as part of any damages analysis.”
As further support for its argument that the district court failed to credit Motorola’s historical licensing activities, Motorola cites to the Federal Circuit’s ruling in Apple v. Motorola, which involved Apple’s alleged infringement of one of Motorola’s cell phone patents, arguing:
the Federal Circuit recognized the industry practice of broad crosslicensing of entire portfolios, and acknowledged Motorola’s expert testimony that Motorola’s cross-licenses ‘show that Motorola has previously received a royalty rate of approximately 2.25% for a license to its entire SEP portfolio.’ The Federal Circuit held that the district court’s exclusion of such testimony was error because the expert there ‘construct[ed] a cost estimate typically relied upon when calculating patent damages—the cost to license the technology.’ This approach is generally reliable because the royalty that a similarly-situated party pays inherently accounts for market conditions at the time of the hypothetical negotiation. The Federal Circuit noted that ‘Apple’s royalties under these agreements were in a similar range.’ Moreover, ‘[t]hese licenses also typically included cross-license agreements,’ a factor the district court here explicitly refused to consider.
For these reasons, Motorola contends that the RAND order is erroneous and that the judgment of breach based on it should be reversed or, at a minimum, vacated “because fatally tainted by it.”
Jury Verdict. Motorola contends that no reasonable jury could find that it breached an alleged obligation of good faith to license its patents on RAND terms to Microsoft. “The unrebutted evidence shows that Motorola made its standard opening offer to Microsoft in order to begin a negotiation … and that Microsoft does not accept the opening offer ‘99 percent of the time.’” Motorola indicated that it was open to licensing only part of its portfolio and Microsoft itself has included a 20-day limit in its offer letters.
Motorola argues further that “[e]ven assuming that the purpose of the RAND commitment is to prevent hold-up, Microsoft’s expert could not opine on whether Motorola’s opening offers intended to hold up Microsoft, given that Microsoft was infringing Motorola’s patents and continued its unlicensed use.”
Motorola points to the district court’s holding that “an opening offer from an SEP holder does not need to be on RAND terms.” Therefore, according to Motorola, even if its opening rate was deemed to be “high,” that, by itself, is not sufficient evidence to show that it breached. “Moreover, a rate is only one term in a complex negotiation in which other terms (such as cross-licenses, scope definitions and volume-based caps) can make any given rate more or less RAND.” Thus, according to Motorola, “the opening rate set forth in Motorola’s letters, in the abstract, cannot be commercially unreasonable as a matter of law.”
At trial, Microsoft contended that Motorola breached its obligations of good faith by seeking injunctive relief against Microsoft for alleged patent infringement. On appeal, Motorola contends that “the record fails to support any reasonable conclusion that Motorola acted in bad faith by seeking injunctive relief.” “As the district court acknowledged, the RAND commitments at issue do not contractually bar SEP holders from seeking injunctive relief, and the undisputed evidence at trial showed that Microsoft sued Motorola three times before Motorola began to seek injunctive relief against Microsoft.” “On this record, Motorola’s actions seeking injunctive relief for Microsoft’s continued unlicensed use of its patents cannot plausibly be found to violate the reasonable expectations of the parties, to be commercially unreasonable, to depart from industry custom and practice, or to evince subjective bad faith.”
Damages. Finally, Motorola argues it was entitled to judgment as a matter of law on Microsoft’s damages claims. “The $14.52 million damages judgment consists of $11.49 million in damages for Microsoft’s costs to relocate its German distribution facility to the Netherlands after Motorola sought to enjoin xBox sales in Germany and $3.03 million in attorneys’ fees Microsoft incurred as a result of Motorola’s “conduct in seeking injunctive relief.” Motorola contends that, under the Noerr-Pennington doctrine, which generally insulates a party from damages as a result of invoking its legal rights in court, it cannot be held responsible for the $11.49 million re-location costs. Further, Motorola argues that, since Washington law does not allow attorneys’ fees as damages, the inclusion of them in the damage award must be vacated.
Microsoft’s Response Brief
Jurisdiction. In its response brief, Microsoft argues that, as the Ninth Circuit previously concluded, jurisdiction is proper and that decision is the law of the case. “In asking this Court to come to a different conclusion, Motorola does not contend that Microsoft asserted a patent claim, nor does it deny that Microsoft sued for breach of contract.” “Instead, Motorola asserts that the district court (not Microsoft) ‘constructively’ (not actually) amended Microsoft’s complaint such that the bench trial was ‘for all intents and purposes’ a patent damages trial ‘requiring the resolution of substantial questions of patent law.’” According to Microsoft, “[t]his is both factually wrong and legally irrelevant.”
First, “[t]he district court did not determine damages for patent infringement.” According to Microsoft, “the court considered the value of Motorola’s patented technology to the extent relevant to the breach of contract claim.” “But that did not convert the contractual RAND royalty analysis into a determination of infringement damages under 35 U.S.C. § 284.” “As the court explained, any analysis ‘under a RAND obligation must be different than the typical [hypothetical negotiation] analysis historically conducted by courts in a patent infringement action.’” “The use of a hypothetical negotiation valuation framework is common in contexts beyond patent damages . . . and does not make this a patent case.” “Nor does the valuation of patented technology raise a substantial question of patent law, any more than would a case involving a corporate acquisition in which the price depended on the value of patents.” Microsoft contends that “this case did not require the district court to construe patent claims or address infringement.” Nor was there any dispute that “Microsoft’s products implemented the standards.” The district court “treated Motorola’s patents as essential even though ‘none of the terms comprising the claims” were construed by the district court.
The RAND Ruling. Microsoft contends that Motorola consented to the bench trial procedure to determine the RAND royalty rate. According to Microsoft, “Motorola apparently later regretted its agreement” and attempted to renege. “The district court rejected Motorola’s about-face, observing ‘isn’t it rather late in the game for Motorola to repudiate concessions made during oral argument and announce another new theory in the case?” “As the court carefully analyzed in a ruling before the jury trial, Motorola waived any right to have a jury determine the RAND royalty (or to have the jury decide breach with no such determination at all).”
Microsoft also argues that, waiver aside, Motorola’s argument mischaracterizes the RAND ruling “as dispositive of breach.” As noted above, Motorola argues that the breach analysis is fact-intensive, with no one fact being dispositive. Microsoft responds that the jury was instructed exactly in the manner that Motorola argues on appeal, in that “the size of the offer alone is not exclusively dispositive of whether Motorola has breached its duty of good faith and fair dealing.” Indeed, Microsoft points to the jury instructions’ requirement that “listed objective and subjective grounds to consider in deciding whether a breach occurred.”
Microsoft also argues that the RAND ruling was not an advisory opinion because “Motorola agreed that the court should assess RAND royalties (as terms of the relevant contracts) as a predicate to the jury trial on breach.” “Moreover, prior to the bench trial, Motorola successfully opposed Microsoft’s motion for summary judgment,” arguing that “the evidence (including Motorola’s prior licenses and licensing practices) showed that ‘Motorola’s offer plainly was reasonable.” “Motorola cannot now credibly argue that the court’s evaluation of the evidence it urged the court to evaluate produced an advisory opinion.”
Microsoft further argues that whether it sought specific performance “does not matter” to whether the court’s RAND ruling was advisory. “First, Microsoft’s request for relief was the same at the RAND royalty trial as it was months earlier when Motorola agreed to that procedure.” Second, Microsoft requested a declaration that Motorola’s offer was not on RAND terms, as well as a judicial accounting of RAND royalties for Motorola’s patents. “Each of those claims for relief required determining RAND royalties.”
Microsoft argues further that the alleged “complexity” and number of factors that go into a license negotiation identified by Motorola are irrelevant. “The RAND royalties are key contract terms, and the determination of those royalties informed the resolution of the dispute between the parties.” According to Microsoft, the “complex” terms identified by Motorola are “all subsumed in the RAND licensing commitment.” For example, the duration of any RAND license is the life of the patent. Cross-license considerations are “irrelevant” because standard-essential patents have value independent of the value of other standard-essential patents: “cross-licensing could affect the form, but not the value, of RAND compensation.” Moreover, according to Microsoft, RAND obligations bar “Motorola from varying royalties based on what patents a licensee holds.” For these reasons, Microsoft argues that the district court’s RAND ruling was not advisory.
On the merits, Microsoft first argues that, by making RAND licensing commitments, Motorola “waived any entitlement to ordinary patent damages for infringement, and agreed it would seek and accept only RAND royalties from any standard implementer.” Further, the district court, according to Microsoft, “did not simply adopt Federal Circuit damages law; rather, at Motorola’s urging, the court used a ‘modified form of the well-known Georgia-Pacific hypothetical negotiation.'” “Motorola’s complaints on appeal ignore what Motorola asked, and did not ask, the district court to do.”
With respect to Motorola’s claim that the district court failed to select the “correct date for the hypothetical negotiation,” Microsoft argues that “Motorola offers no reason why that inquiry would be required in this contract case” and, further, “Motorola itself never proposed a specific date,” and cannot now complain on appeal. “The court (consistent with the approach Motorola urged) considered a hypothetical negotiation in light of the RAND commitment–which includes the principle of not discriminating against any implementer at any time–and the evidence presented at trial.”
With respect to Motorola’s attack on the licensing pools relied upon the district court, Microsoft argues that Motorola ignores the record evidence. “Motorola ignores the court’s basis for concluding that H.264 pool royalties were probative of RAND royalties: Motorola participated in the formation of that pool; Motorola argued for lower royalties in that context; and Motorola approved press releases announcing the pool’s licensing terms.” “Motorola did not object to the pool’s licensing model, which treated all standard-essential patents as equal when allocating royalties–a model adopted by other pools in which Motorola already participated.” “Despite Motorola’s last-minute withdrawal from the pool, … the court had ample basis to conclude that the pool royalties informed a RAND royalty.”
Microsoft argues further that “Motorola’s claim that there ‘was no evidence’ about the relative value or technical comparability of Motorola’s patents to those in the pools” ignores the record. The patents “are indisputably comparable in a key respect: all were declared essential to the same technical standards.”
Further, according to Microsoft, “the court did not simply apply the pool royalty to Motorola’s H.264 patents; it found that the RAND royalty for Motorola’s patents was substantially higher.” As Microsoft argued:
Despite finding the pool royalty of 0.185 cents per unit a strong indicator of a RAND royalty for Motorola’s H.264 patents, the court noted Motorola would receive that amount only if it were a pool participant–and because it was not a participant, the court presumed Motorola was not receiving value back from the pool (in the form of licenses to other members’ patents). … To compensate, the court set the RAND royalties for Motorola’s patents at three times what Motorola would have received as a pool participant.
Microsoft argues that Motorola had an opportunity to argue for an even greater increase over the pool royalty, but instead argued that the pool royalty should “be rejected out-of-hand.”
With respect to Motorola’s 802.11 RAND obligations, Microsoft argues that the district court considered evidence “independent of the 6-cent-per-unit royalty suggested by the Via pool.” “The court considered evidence concerning licensing in the 802.11 industry, which suggested a RAND royalty of 3-4 cents.” The district court also considered evidence (Motorola’s InteCap valuation) suggesting “even lower RAND royalties of 0.8 to 1.6 cents per unit.” In the end, according to Microsoft, the district court took the average of these indicators, the Via pool royalty that “Motorola wishes to discard being the most favorable to Motorola.”
Jury Verdict. Microsoft argues that Motorola only challenges the jury verdict on whether it breached its duty of good faith and dealing. “Contrary to Motorola’s assertion, … Microsoft also alleged that Motorola breached the contract directly, and the jury was instructed on direct breach.” As “Motorola did not move for [judgment as a matter of law] on this ground (and does not argue here),” the Ninth Circuit “cannot review the sufficiency of the evidence supporting a finding of direct breach.” According to Microsoft, the judgement should be affirmed on this ground alone.
Even if review were available, Microsoft argues that the evidence supported a finding of breach of the duty of good faith. “The jury saw Motorola’s multi-billion-dollar demands, … and heard that Motorola maintained its demand for 2.25% royalties as late as December 2012, … while still pursuing injunctions.” This, according to Microsoft, violated Motorola’s RAND obligations.
Microsoft also argues that Motorola’s offer letters breached its duty of good faith and fair dealing. The initial letters “were not opening offers, but by their terms demands open for just 20 days that sought Microsoft’s confirmation of acceptance.” “[T]he jury was instructed (without objection) that Microsoft had no obligation to negotiate in response to Motorola’s demands.”
Microsoft argues further that “Motorola’s demands failed to account for the dozens of other” holders of patents essential to the standards at issue. “If those entities each demanded 2.25%, as Motorola did, the aggregate royalties would far exceed the prices of standard-compliant products.” Because the district court found that Motorola’s patents “reflect only minimal contributions” to the standards, “the aggregate royalty burden suggested by Motorola’s demands is even more unreasonable–especially because Microsoft’s products comply with many other standards.”
With respect to Motorola’s requests for injunctive relief, Microsoft argues that its own patent infringement cases against Motorola regarding unrelated patents are irrelevant. “Motorola blames Microsoft for asserting unrelated patents against Motorola in earlier litigation…but that has nothing to do with whether Motorola’s conduct breached its RAND licensing commitments.” Microsoft also argues that its products were “unlicensed” because of Motorola’s refusal to grant RAND licenses, thus negating Motorola’s argument that Microsoft’s alleged “continued unlicensed use of Motorola’s patents” justified injunctive relief.
Damages. According to Microsoft, “Motorola cites no authority suggesting that Noerr-Pennington could immunize it from breach of contract liability for seeking injunctions on standard-essential patents.” Microsoft contends that the only other court to address this issue, the Western District of Wisconsin, in its ruling in Apple v. Motorola, held that Noerr-Pennington does not apply. Further, outside “of the RAND licensing context, courts have ruled that the ‘Noerr-Pennington doctrine does not shield [parties] from liability for failing to comply with [a] contract.'” Even if Noerr-Pennington applied, Microsoft argues that Motorola would still be liable under the “sham litigation” exception for filing suits that were not reasonably calculated to lead to a favorable outcome.
Microsoft argues further that the costs of relocation of its German facility and defense of Motorola’s injunctive actions are recoverable damages under Washington law. “The damages awarded were not fees incurred in this contract action, but those incurred in defense of injunctions Motorola sought.” Under Washington law, Microsoft contends that “[t]hose fees were foreseeable and flow directly from Motorola’s breach.” “Motorola is not free to impose litigation harms without facing consequences.”
Motorola’s Reply Brief.
Jurisdiction. After Microsoft submitted its response brief, the Federal Circuit issued its opinion in Ericsson v. D-Link Sys. Motorola cites this opinion in its reply brief in response to Microsoft’s argument that the district court did not conduct a patent damages analysis and that patent damages law does not apply to Microsoft’s contact claim. According to Motorola, Ericsson v. D-Link forecloses this argument because the Federal Circuit ruled therein that “‘[a]s with all patents, the royalty rate for SEPs must be apportioned to the value of the patented invention,” and the district court’s RAND Order “purported to perform this very type of analysis, determining the contribution of Motorola’s patents to the standards at issue.” “Such valuation amounts to determining damages for infringing patent use, a determination governed by Federal Circuit law even if the patents are subject to RAND or any other commitment related to the quantum of damages.” Accordingly, Motorola urges transfer of the appeal to the Federal Circuit.
Motorola also contends that it never consented to the bifurcated approach adopted by the district court. “The Seventh Amendment is not a game of ‘gotcha,’ and Microsoft cannot rely on one statement [at a status conference] to show Motorola’s consent when all of Motorola’s subsequent statements and actions showed otherwise.”
The RAND Ruling. With respect to its advisory opinion argument, Motorola contends that “Microsoft does not assert that the RAND Order finally determined any dispute between the parties but instead suggests . . . that the RAND Order was not advisory because royalty rates were relevant to the determination whether Motorola acted in good faith.” “Microsoft thus suggests that the RAND Order is imporant evidence,” but, according to Motorola, “a federal court is not an expert witness tasked with determining a RAND rate with no use or purpose other than as evidence for us in negotiation or at a” breach trial.
Motorola also argues that “[c]ontrary to Microsoft’s suggestion…, Federal Circuit patent damages law governs all claims involving valuation of patents–even SEPs subject to a RAND commitment.” Motorola again cites Ericsson as support for its argument that it is “‘unwise to create a new set of Georgia-Pacific-like factors for all cases involving RAND-encumbered patents” and that the Federal Circuit standards for patent damages apply in this case. According to Motorola, the district court defied these standards in the RAND ruling. In fact, Motorola contends that “[o]nce the district court adopted the Georgia-Pacific framework to value Motorola’s SEPs by means of a hypothetical-license reasonable royalty, it was requried to apply that framework in accordance with applicable Federal Circuit precedent.”
With respect to the date of the hypothetical negotiation, Motorola contends that “the district court did not state what date it used.” According to Motorola, the earliest date for the hypothetical negotiation applied by the district court is May 2012, the date that Google acquired Motorola. This is because the district court, as Motorola argues, used Google’s participation in the applied patent pools as a comparison for what Motorola may have done in the hypothetical negotiation. Motorola argues that this was error because “Federal Circuit law…requires the analysis to pre-date the circumstances of a lawsuit.”
Motorola next asserts that, “while Microsoft contends … that royalties arising out of settlement of litigation may be not be the best indicator of a reasonable royalty, that position does not support the district court’s disregard for the licenses Motorola entered into evidence during the bench trial.” Those licenses, according to Motorola, “were for the same patents at issue in this lawsuit and thus had direct probative value.”
With respect to the MPEGLA and Via patent pools considered by the district court, Motorola argues that “[t]here is no evidence that the pool rates at issue here correspond to a license fee arrived at after the bilateral negotiation contemplated by the [SSOs]; they result rather from particular business arrangements that do not distinguish among patents based on technical merit.” “Microsoft fails to show any patent-law precedent that would allow comparable valuation based on a supposed alignment between pool purposes and a RAND commitment to bilateral negotiation.
Finally, Motorola argues that Microsoft cites to no evidence showing that the pool rates “used by the district court have probative value.” Nor does Microsoft attempt to justify the algorithm used by the district court to arrive at the RAND ranges which, according to Motorola, “no expert advocated.”
Jury verdict. Motorola argues that Microsoft cannot rely on a straight breach theory to sustain the jury’s verdict since Microsoft “did not even introduce the SSO contracts in its affirmative defense” and because the district court found, prior to the jury trial, that “Microsoft could not prove direct breach of the RAND commitment.” According to Motorola, that decision is the law of the case. Because Microsoft did not cross-appeal that ruling, “it may not argue now that the evidence supports a finding of direct contract breach based on Motorola’s offer letters and pursuit of injunctions.”
Motorola argues further that “Microsoft cites no case finding breach of good faith based upon an opening offer alone–the sole basis for the initial complaint here.” Nor does Microsoft “cite any case finding breach of a RAND commitment based on an initial offer plus pursuit of injunctions after the suit was filed–as pleaded in the amended complaint.” “The evidence concerning the opening offers and the injunction requests, separately or together, is insufficient to support liability for breach of good faith.” Motorola’s initial offers were consistent with its ordinary practice to offer a license at 2.25 percent of the end unit. Motorola contends further that the evidence showed that Microsoft rejects any initial offer 99% percent of the time. This, according to Motorola, cannot constitute bad faith.
With respect to Motorola’s requests for injunctive relief, Motorola argues that the undisputed evidence, including Microsoft’s representation to the FTC that it was not aware of any instance in which a party had attempted to “extort above-RAND rates,” shows that Motorola was not using its request for injunctive relief to “pressure Microsoft to settle on supra-RAND terms.”
Damages. Motorola argues that Apple v. Motorola, cited by Microsoft, actually supports Motorola’s argument that the Noerr-Pennington doctrine bars Microsoft’s claim for damages:
[W]hile the district court in [Apple v. Motorola] found that Noerr-Pennington did not bar enforcement of the RAND commitment, the court separately held that Apple’s asserted antitrust damages were barred by Noerr-Pennington because predicated solely upon ‘attorney fees and costs that it has incurred responding to the patent litigation initiated by Motorola.’ That holding applies equally to Microsoft’s damages here, which stem solely from Motorola’s protected litigation conduct. There is nothing in its RAND commitments precluding Motorola from seeking redress from the courts for infringement of its SEPs, as the district court held…and the Federal Circuit has affirmed.
Motorola argues further that Microsoft failed to show that the sham exception to Noerr-Pennington immunity was triggered here, having purportedly failed to show that Motorola’s claims lacked objective merit.
Finally, Motorola argues that “Microsoft points to no case permitting a party to obtain attorney fees as damages in a separate action when such recovery would not be permitted in the action in which the fees were incurred” and “the district court relied on no such rationale.” “Rather, the district court held that it was required to create a new exception to the American Rule [that each party is responsible for its own attorneys’ fees] despite the fact that Microsoft did not incur the attorney fees in the instant action.” Because, according to Motorola, the RAND commitment is not a covenant not to sue, Microsoft cannot claim as damages any attorney fees it incurred as a result of Motorola’s enforcement of its patents against it.
Microsoft’s Supplemental Submission
After the Federal Circuit issued its decision in Ericsson v. D-Link, Microsoft notified the Ninth Circuit of that decision pursuant to Fed. R. App. P. 28(j). Microsoft argues that “Ericsson is a patent infringement case, in which Ericsson asserted patents subject to contractual RAND licensing commitments, like Motorola’s patents here.” “D-Link argued that the jury was improperly instructed on the impact of those commitments on damages, and the Federal Circuit agreed, holding that” the district court erred by failing to instruct the jury adequately regarding Ericsson’s actual RAND commitment, failing to instruct the jury that any royalty for the patented technology must be apportioned from the value of the standard as a whole, and failing to instruct that the RAND royalty rate must be based on the value of the invention, not any value added by the standardization of that invention–while instructing the jury to consider irrelevant Georgia-Pacific factors. According to Microsoft, Ericsson “declined to adopt a uniform framework for evaluating RAND royalties, instead directing lower courts to ‘consider the facts of record when instructing the jury’ and ‘avoid rote reference to any particular damages formula.'” Microsoft argues that “[t]his refutes Motorola’s suggestion that RAND disputes should be subject to a ‘uniform’ standard.” Further, “[l]ike the district court here, the Federal Circuit found it ‘necessary to ensure that the royalty award is based on the incremental value that the patented invention adds to the product, not any value added by the standardization of that technology.”
Amicus Briefs in Support of Motorola
Nokia. Nokia filed an amicus brief in support of “reversal of the district court’s order to the extent that this order creates a methodology for the determination of a reasonable and non-discriminatory royalty rate in cases involving claims of infringement of standard-essential patents that applies to disputes outside the context of the present case.” According to Nokia, “[i]f the methodology used by the District Court to determine a RAND royalty rate for Motorola’s patents is applied outside the facts of this case, it will have a negative effect on the entire standardization process.” Neither the ITU nor IEEE policies “defines in specific detail what constitutes RAND royalty terms for a license to a patent declared essential to one of its standards.” Rather, the SSOs “instead emphasize the twin goals of the standardization process: ensuring adequate compensation for patent holders while preserving manufacturers’ access to essential patents.” “When determining RAND royalty rates or ranges for standard-essential U.S. patents, the Georgia-Pacific factors may be used to model a hypothetical negotiation between the parties without unduly favoring patent holders or equipment manufacturers.”
While Nokia takes no position on the underlying merits of the dispute, it argues that the modified Georgia-Pacific methodology adopted by the district court “fails to strike the proper balance between the goals of the” SSO policies at issue, “instead setting up a methodology which, if utilized in other cases, could harm the standardization process as a whole, potentially leading to fragmented standards and reduced interoperability among manufacturers.” This is because the district court assumed that royalty stacking and patent hold-up are present without requiring empirical evidence demonstrating that they actually are present, “while simultaneously ignoring the potential for ‘reverse hold-up.'” Further, Nokia argues that the district court approves an ex ante incremental value methodology for the valuation of standard-essential patents and also rejects proferred comparable licenses. According to Nokia, if the district court’s decision stands and is adopted by other district courts, future patent holders “will likely have reduced incentives to participate in the standardization process, which could have a chilling effect on the entire industry.”
Amicus Briefs in Support of Microsoft
Apple. Several entities filed amicus briefs in support of Microsoft and affirmance. Apple’s brief argues that, to determine the critical question of “what–and how much–is” a RAND rate, Judge Robart “applied several important principles inherent in the [RAND] commitment, and thus critical for resolving [RAND] disputes.” “They are based in the widely recognized precept that ‘a RAND commitment should be interpreted to limit a patent holder to a reasonable royalty on the economic value of its patented technology itself, apart from the value associated with incorporation of the patented technology into the standard’–that is, apart from hold-up value.'” According to Apple, Judge Robart’s analysis prevents implementers of standards from being caught in an alleged “thicket of SEPs” where numerous patent holders over-declare their patents to an industry standard and thereafter attempt to extract royalties from the implementers in an amount that discourages participation in the industry standard process.
Intel, Aruba Networks, Dell, H-P, Newegg, SAS Institute, Sierra Wireless, Vizio, and Xilinx also filed a joint amicus brief in support of Microsoft and affirmance. Collectively, they argue that they “have invested substantial time and resources in developing successful industry standards and implementing industry standards in their products.” “Those investments–and the incentives to make similar investments in the future–are threatened if the binding RAND commitments made during standard-setting can be evaded by patentees.”
According to them, “[t]he district court’s decisions here furthered the important goal of affirming the RAND commitment in two ways.” First, “the district court properly recognized that RAND licenses must be available to all implementers of an industry standard.” Holders of declared SEPs “cannot avoid licensing suppliers of components that provide standardization functionality in favor of licensing suppliers of higher-priced end products in an attempt to capture more than the value of the patented technology or to avoid the doctrine of patent exhaustion.” “Likewise, the district court correctly recognized that seeking injunctive relief is incompatible with the RAND commitment to license.” “The crippling threat of an injunction would allow SEP holders to extract unreasonable royalties from implementers of the standard.”
“Second, the district court properly considered the appropriate factors in setting a RAND royalty rate, including computing a royalty based on the value of the patented invention by:” starting the analysis with the smallest saleable component that implements the standard rather than the end product, focusing only on the contribution of the patent to the component at the time of standardization, and considering aggregate royalty demands that implementers of a standard face from others claiming to own patents essential to the same standard. “Further, the district court correctly excluded evidence of Motorola’s proffered licenses for its RAND-committed patents, as Motorola failed to demonstrate that those licenses reflected the actual value of its patents.”
T-Mobile also filed an amicus brief in support of Microsoft and affirmance. According to T-Mobile, it is “continuously subjected to lawsuits and licensing inquiries seeking compensation for licenses to” SEPs. “Many of these litigation and licensing inquiries come from patent holders that have never actively participated in the various standards bodies and have never offered products in the wireless mobile industry, yet they claim to hold patents that are essential to practicing industry standards.” “They assert these patents with no interest in advancing the policies or work of any standards organization.” Their “sole purpose is revenue generation” and, “[t]o this end, they often try to exploit the widespread adoption of the standards by seeking compensation that far outpaces the reasonable and nondiscriminatory (“RAND”) rate that binds their patents.” T-Mobile argues that the district court’s flexible Georgia-Pacific “framework will provide greater certainty for the marketplace and ensure that SEP owners fulfill their obligation to license at RAND rates” and that adoption of the district court’s methodology “will ensure that manufacturers, consumers, and patent owners will continue to enjoy the benefits of interoperability and widespread adoption of standards.”
Public Knowledge also filed an amicus brief in support of Microsoft and affirmance. Public Knowledge argued that RAND commitments are promises “made to the public, the beneficiary is the public, and the public is charged with enforcing the terms.” Therefore, it is “fully appropriate to interpret” the RAND contract “in view of the public interest.” According to Public Knowledge, that is “precisely what the district court did.” “First, the court considered the problem of patent hold-up, which simply describes a species of monopolistic imbalance of market power that occurs with technology standards.” “Second, it recognized the risk of royalty stacking, a problem of overvaluation of a single patent when that patent is but one of many covering a technology standard.” Public Knowledge argues that patent holdup and royalty stacking “account for significant public interest concerns at play with [RAND] commitments, and it was correct for the district court to account for them.”
Qualcomm’s Brief in Support of Neither Party.
Qualcomm, an SEP holder as well as manufacturer of WiFi chips, does not challenge the district court’s finding on the contributions of Motorola’s patents to the IEEE 802.11 and ITU H.264 standards and products at issue nor the actual rates and ranges the district court established. “Those findings may suggest that the patents at issue had little or no value under any measure.” Rather, Qualcomm identifies what it contends are manifest errors made by the district court in interpreting RAND commitments and devising its methodology that Qualcomm contends requires reversal or, if affirmed, a statement by the Ninth Circuit that the decision is “limited strictly to its facts.”
Qualcomm argues that the intellectual property rights (IPR) policies of IEEE and ITU require RAND terms to advance two equally important goals: “(i) allowing SEP owners to receive adequate compensation for their SEPs; and (ii) providing implementers access to SEPs included in standards.” According to Qualcomm, the district court’s “analysis did not accurately describe or properly balance these two objectives.” “Instead, it focused almost exclusively on the single goal of what it described as facilitating ‘widespread adoption” of standards.” Qualcomm contends that this both misstates the IPR’s policies’ goals of providing standard implementers with access to SEPs as well as ignores the “equally important ‘adequate compensation’ goal altogether.” “Driven by this one-sided view, the District Court improperly modified the Georgia-Pacific analysis…to disconnect its determination of a RAND royalty from the specific contracts at issue and the patent law principles they incorporate.”
Qualcomm also argues that the district court “gave near dispositive weight in interpreting the RAND commitments to theoretical risks of ‘royalty stacking’ and patent ‘hold-up.'” According to Qualcomm, this approach is inconsistent with the RAND commitments and the evidence presented and also “unfairly placed a thumb on the scale in favor of the implementer (and against the innovator).” This approach is also inconsistent with the holdings of other courts (e.g., Ericsson and CSIRO v. Cisco) that have rejected proposals to modify the Georgia-Pacific analysis “based on speculative risks of royalty stacking and hold-up, where there was no evidence that these risks had materialized.”
Based on these arguments, Qualcomm argues that, if the district court’s reasoning and methodology are applied in other cases, there will be “incalculable damage to innovation incentives and standards going forward.” “It would necessarily devalue all SEPs, regardless of the actual value each contributes to the success of the standardized products, and could form the basis for industrial policies that inhibit incentives to innovate and develop successful standards activities.”
Earlier this week, a Texas jury found that Apple’s iPhone and iPad products do not infringe patents owned by Core Wireless that are alleged to be essential to certain cellular standards adopted by the European Telecommunications Standards Institute (“ETSI”). The jury also found that Core Wireless did not breach its contractual obligation to offer a license to the patents on fair, reasonable and non-discriminatory (FRAND) terms.
Core Wireless’ complaint. Core Wireless’ complaint alleged that Apple’s iPad, iPad 2, iPad 3G, iPad with Retina display, iPad mini and iPhone 3G, 3GS, 4, 4S and 5 “were made and sold in accordance with” various 3GPP mobile standards adopted by the ETSI. Core Wireless further alleged that the asserted patents, which it acquired from Nokia, covered those standards and, as such, the accused products infringed. Core Wireless’ complaint prayed for an “accounting of all damages sustained b Plaintiff as the result of Apple’s acts of infringement,” enhanced damages pursuant to 35 U.S.C. § 284, and a “mandatory future royalty payable on each and every product sold by Apple in the future that is found to infringe one or more of the patents-in-suit and on all future products which are not colorably different from products found to infringe.”
Apple’s answer and counterclaim. Apple filed an answer and counterclaim generally denying the allegations in the complaint and asserting affirmative defenses of non-infringement, invalidity and unenforceability. Apple also asserted a counterclaim alleging that Core Wireless breached its contractual obligations to members of ETSI to license the asserted patents on FRAND terms.
For its breach claim, Apple relied upon the following provision in ETSI’s Intellectual Property Right Policy (“IPR”):
When an ESSENTIAL IPR relating to a particular STANDARD or TECHNICAL SPECIFICATION is brought to the attention of ETSI, the Director-General of ETSI shall immediately request the owner to give within three months an irrevocable undertaking in writing that it is prepared to grant irrevocable licenses on fair, reasonable and non-discriminatory [FRAND] terms and conditions under such IPR to at least the following extent:
• MANUFACTURE, including the right to make or have made customized components and sub-systems to the licensee’s own design for use in MANUFACTURE;
• sell, lease, or otherwise dispose of EQUIPMENT so MANUFACTURED;
• repair, use, or operate EQUIPMENT; and
• use METHODS.
The above undertaking may be made subject to the condition that those who seek licenses agree to reciprocate.
Apple alleged that ETSI members as well as members of other standard setting organizations (SSOs) “self-declare patents as ‘essential,’ or necessary to practice the UMTS standard,” but “[o]rganizations such as ETSI do not independently verify whether such patents are actually essential.”
Apple contended that Core Wireless was bound by the FRAND representations made by Nokia, the prior owner of the patents-in-suit:
Core Wireless acquired any rights it has in the Core Wireless Asserted Patents from Nokia Corporation. Nokia is a member of [ETSI], a standard-setting organization that promulgates cellular telecommunications standards. In accordance with ETSI’s Intellectual Property Rights Policy [“IPR”], Nokia made binding and enforceable promises to ETSI and its members—including Apple—to license the Core Wireless Asserted Patents to companies supporting the UMTS standard promulgated by ETSI on ‘fair, reasonable, and non-discriminatory’ or FRAND terms. Those FRAND promises traveled with the Core Wireless Asserted Patents when they were transferred to Core Wireless and continue to bind Core Wireless.
Apple went on to allege that
[d]espite and in breach of the binding contractual commitments obligating Core Wireless to license Apple to the Core Wireless Asserted Patents on FRAND terms, Core Wireless brought this infringement action before even approaching Apple to discuss a license, and since initiating this suit Core Wireless has refused to provide FRAND terms to Apple for the Core Wireless Asserted Patents.
After the suit was filed, Apple alleges that it requested that Core Wireless provide the “FRAND royalty rate for each of” the asserted patents, “with each patent’s rate separately listed” as well as the “methodology by which Core Wireless derived each rate” and “confirmation that Core Wireless offered these same rates to other companies or that companies paid” those same rates, “or if not the same, a description of the rates offered to or paid by other companies and a list of those companies.” According to Apple, Core Wireless never responded.
Core Wireless’ answer and counterclaim. Core Wireless filed an answer to Apple’s counterclaims with counterclaims of its own, alleging that it did, in fact, make several attempts to engage in licensing discussions with Apple, but that Apple refused to respond in breach of Apple’s obligations as a potential licensee of patents alleged to be essential to ETSI cellular standards.
“Apple takes the position that it is a party to license agreement(s), express or implied, to those patents that have been declared essential to an ETSI standard.” Core Wireless alleges further that Apple sent a letter to another declared essential patent owner claiming that “an agreement is formed by virtue of ‘the [ETSI] IPR policies at issue [that] require participants claiming to own essential IPR to commit to license those IPR on FRAND terms to any implementer of the standard.” Apple allegedly accepted these terms when it “began to implement the [ETSI] standard.” “According to Apple, such license agreements are subject only to agreement on the terms of a FRAND royalty as compensation for Apple’s licensed use.”
Core Wireless also pointed to allegations that Apple made in its dispute with Samsung that “‘Apple is licensed to Samsung’s declared-essential patents’” because “‘the [ETSI] IPR policies at issue here require participants claiming to own essential IPR to commit to license those IPR on FRAND terms to any implementer of the standard.’”
Core Wireless further asserted that the patents-in-suit “have likewise been declared essential to the UMTS standard and Core Wireless’ assertion of those patents is subject to the ETSI IPR licensing obligations.” “Thus, by Apple’s own acknowledgment, by electing to practice the UMTS standard, Apple considers itself licensed to the asserted patents owned by Core Wireless.” “By its actions, Apple entered into an agreement with Standard Essential Patent owners to negotiate a FRAND royalty in good faith.” These actions include “Apple’s implementing the GSM/GPRS and/or the UMTS standards in its products and becoming a member of the relevant standards organizations, including ETSI.”
Core Wireless alleges that Apple breached its agreement with Core Wireless by refusing to negotiate a FRAND royalty with Core Wireless, refusing to timely respond to Core Wireless’ FRAND royalty offer, and Apple’s refusal to pay a FRAND royalty.
According to Core Wireless, its outside counsel sent an email to Apple the same day that the lawsuit was filed indicating Core Wireless’ “interest in an early resolution of the underlying dispute without the need for extensive litigation.” “This offer was ignored by Apple.”
“Core Wireless’ outside counsel next reached out a few weeks later . . . to Apple’s local counsel, again indicating Core Wireless’ interest in meeting with Apple, and the response back from Apple was that a discussion would be premature.”
A few weeks later, Core Wireless sent two separate letters to Apple, proposing that the parties negotiate a license on FRAND terms.” Core Wireless alleges that these letters were ignored as well.
Core Wireless also alleged that, later in the year, Apple sent a letter demanding that Core Wireless provide a FRAND royalty rate to Apple.” “After refusing Core Wireless’ offers for over eight months, Apple set a two-week deadline in which it required Core Wireless to respond to Apple’s demand.” This letter was expressly “not pursuant to Rule 408 of the Federal Rules of Evidence,” which generally precludes offers of settlement from coming into evidence to establish liability at trial. Core Wireless alleged that this letter demonstrates that Apple had “no intention of negotiating a FRAND license with Core Wireless, but rather was strictly looking for information to strengthen its positions in FRAND-related litigations.”
After sending the letter, Core Wireless contends that “Apple’s lead counsel in this case indicated to Core Wireless’ outside counsel that Apple ‘did not feel a meeting with Core was ripe yet.'” Core Wireless thereafter responded to Apple’s letter, and again asked Apple to “meet for the purpose of providing a FRAND offer and negotiating a mutually acceptable FRAND license.” “Apple refused to agree to such an offer and meeting by failing to respond to Core Wireless’s” letter.
A few weeks later, Apple sent another letter setting a two-week deadline in which it requested Core Wireless to “provide a FRAND royalty rate to Apple” without “responding, or referring, to Core Wireless'” prior letter.
Core Wireless alleged that, “[f]aced with Apple’s intentional refusal to meet or negotiate, Core Wireless made a specific FRAND royalty rate offer to Apple in writing.” “As part of that offer, Core Wireless offered, in the alternative, to negotiate FRAND rates for the asserted patents.” Apple allegedly did not respond to Core Wireless’ FRAND license offer.
Core Wireless contended that “Apple has gained profits by virtue of its breaches of the license agreement with Core Wireless to pay a FRAND royalty for its use of the Standard Essential Patents and its agreement with . . . Core Wireless to negotiate a FRAND royalty in good faith.” Core Wireless alleged that it suffered harm as a result of Apple’s alleged breach, including “being denied of the adequate and fair reward, i.e., a FRAND royalty for the use of its Standard Essential Patents, and being forced to resolve this matter through unnecessary litigation in which Core Wireless has to pay unnecessary litigation expense and attorneys’ fees.”
Core Wireless also alleged that Apple breached its contract with ETSI by failing to respond to Core Wireless’ overtures to negotiate a FRAND rate and forcing Core Wireless to litigate the issue. Clause 3.2 of the ETSI IPR Policy provides, in relevant part, as follows:
IPR holders whether members of ETSI and their AFFILIATES or third parties, should be adequately and fairly rewarded for the use of their IPRs in the implementation of STANDARDS and TECHNICAL SPECIFICATIONS
“By its membership in ETSI and its implementation of the ETSI standards, Apple is required to comply with this ETSI IPR Policy, including the requirement to adequately and fairly reward the Standard Essential Patent owner for the use of its patents in the implementation of GSM/GPRS and/or UMTS standards.”
Core Wireless alleged that Apple breached its contract with ETSI by refusing to negotiate and ultimately pay a FRAND royalty rate with Core Wireless.
In its prayer for relief, Core Wireless requested, inter alia, a judgment declaring that Apple is not a willing licensee to Core Wireless’ asserted Standard Essential Patents.” Core Wireless also requested a “judgment ordering Apple to specifically perform its obligation to pay a FRAND royalty to Core Wireless according to the agreement between Apple and Core Wireless and/or according to Apple’s duty to ETSI, including a determination of the FRAND royalty rate owed by Apple to Core Wireless.”
Trial. At trial, Core Wireless whittled its infringement case down to claims in five of its alleged standard essential patents. In the jury instructions on damages, the court noted that, to the extent that the jury found that Apple infringed, Core Wireless was seeking damages in the amount of a reasonable royalty. “A reasonable royalty must reflect that Core Wireless declared the asserted patents to be essential to cellular standards and committed to the [ETSI] to license the patents on ‘fair, reasonable, and non-discriminatory’ or FRAND terms.” The court expressly noted that it was not instructing the jury “that the asserted patents are actually essential to any standard.” That was for the jury to decide.
On several other FRAND-related issues, the parties disputed the language of the jury instructions. It is unclear from the docket which instruction the court ultimately gave, but the parties’ positions are summarized here.
Apple proposed that the court give an instruction expressly requiring the jury to “consider any evidence of patent hold-up and royalty stacking” in “deciding what amount is a FRAND royalty.” Core Wireless objected to this instruction because “Apple has not provided sufficient evidence on these concepts, and Apple made no more than a general argument that hold-up and staking were possibilities.” According to Core Wireless, “[i]n order to be instructed on these concepts, Apple was required to present actual evidence at trial; it did not.”
Core Wireless contended that, to determine FRAND, the jury should consider and apply all fifteen factors for determining a reasonable royalty set out in Georgia-Pacific Corp. v. U.S. Plywood Corp. Apple, on the other hand, contended that the “Georgia-Pacific approach is not the only way to determine a reasonable royalty.” Quoting the Federal Circuit’s decision in Ericsson v. D-Link, Apple argued that “‘many of the Georgia-Pacific factors simply are not relevant” and “‘many are even contrary to [F]RAND principles.'”
With respect to apportionment, Core Wireless asserted that the jury must “apportion the damages between the portion of the accused products that are the patented features or components and the unpatented features and components of the accused products.” “In determining the amount of a reasonable royalty [the jury] may consider not only the benefit to the patentee in licensing the technology, but also the value of the benefit conferred to the infringer by use of the patented technology.” When applying the 15 Georgia-Pacific factors, the jury “should only consider as the royalty base the portion of the value that is attributable to the patented features or components as compared to the portion of the value associated with other features or components, such as unpatented elements, features, components, or improvements developed by Apple.” If the jury found that “the patents are standard essential then damages should be apportioned from the value of the standard as a whole and should be based on the value of the invention, not any value added by the standardization of that invention.”
Apple contended, with respect to apportionment, that the Federal Circuit’s decision in Ericsson required the jury to first apportion the patented feature from all of the unpatented features reflected in the standard. Second, any royalty that is calculated “‘must be premised on the value of the patented feature, not any value added by the standard’s adoption of the patented technology.'” “‘These steps are necessary to ensure that the royalty award is based on the incremental value that the patented invention adds to the product, not any value added by the standardization of that technology.'” “‘In other words, the patent holder should only be compensated for the approximate incremental benefit derived from his invention.'” Apple argued that “‘[t]his is particularly true for [standard essential patents].” “‘When a technology is incorporated into a standard, it is typically chosen from among different options.'” “‘Once incorporated and widely adopted, that technology is not always used because it is the best or the only option; it is used because its use is necessary to comply with the standard.'” “‘In other words, widespread adoption of a standard essential technology is not entirely indicative of the added usefulness of an innovation over the prior art.'” According to Apple, to ensure that a FRAND royalty rate reflects the incremental value of the patented technology, the jury was required to consider the following two factors in setting a FRAND royalty rate: (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 value of the invention, not any value added by the standardization of that invention.
With respect to the royalty base, Apple requested that the court give an instruction requiring the jury to determine the royalty for the smallest saleable patentable unit. Again relying on Ericsson, Apple contended that, “‘as with all patents, the royalty rate for [standard essential patents] must be apportioned to the value of the patented invention.'” “‘In order to properly apportion the incremental value attributable to the patented technology, [the jury] must select the royalty base that reflects the value added by the patented feature, where the differentiation is possible.'” “In the case of multi-component products, like smartphones and tablet computers, where demand for the entire product is not attributable to the patented feature,'” the jury should not “base the royalty on the price or revenues of the entire product, but instead ‘must [use] a more realistic starting point for the royalty calculation . . . often, the smallest saleable unit and, at times, even less.'”
Core Wireless objected to this instruction as “inappropriate in this case.” According to Core Wireless, “[n]either party’s damages’ expert calculated damages based on smallest salable unit, and appropriate apportionment instructions are included elsewhere, and this is only one of many ways to ensure apportionment.”
Apple also requested that the court instruct the jury that it could calculate damages based on a one-time lump-sum royalty: “[o]ne way to calculate a royalty is to determine a one-time lump sum payment that the infringer would have paid at the time of the hypothetical negotiation for a license covering all sales of the licensed product both past and future.” “This differs from payment of an ongoing royalty where a royalty rate is applied against future sales as they occur.” “When a one-time lump sum is paid, the infringer pays a single price for a license covering both past and estimated future infringing sales.” “It is up to [the jury], based on the evidence, to decide what type of royalty (if any) is appropriate in this case.” Core Wireless objected “to the inclusion of a Lump Sum Royalty instruction as neither party’s damages expert offered any opinion on a lump sum and it is thus not relevant to the case.”
With respect to Core Wireless’ breach of contract claim, Apple disputed whether it had any contractual obligation to Core Wireless or ETSI and, in the alternative, that it did not breach any such obligation. With respect to Apple’s breach of contract claim, Core Wireless argued that Apple waived any such claim by failing to negotiate a FRAND rate and, further, that Core Wireless’s “alleged failure to comply with a FRAND obligation is excused if [the jury] find[s] Apple previously failed to comply with a material obligation of the same agreement.” Core Wireless also contended that Apple’s breach claim was barred by Apple’s anticipatory repudiation in the form of refusing to negotiate.
The jury subsequently determined that the accused Apple iPhone and iPad products did not infringe Core Wireless’ five asserted patents. As a result, the jury was not required to determine infringement damages.
The jury also determined that Core Wireless had not breached its obligation to license the patents-in-suit on FRAND terms.
Note that the verdict form provided that, if the jury did determine that Core Wireless had breached its FRAND obligations, Apple could only recover nominal damages between $.01 and $1.00. This is different from Microsoft’s recovery of damages from Motorola as a result of Motorola’s alleged breach of its obligations to license its alleged SEPs to Microsoft on RAND terms. In the Microsoft case, a jury awarded Microsoft approximately $11 million for certain costs incurred to relocate a distribution center as a result of the alleged breach as well as approximately $3 million in attorneys fees and litigation costs incurred to defend against Motorola’s infringement claims. Microsoft was able to collect the latter category of damages because Motorola sought injunctive relief for Microsoft’s alleged infringement. Core Wireless’ complaint, however, did not seek injunctive relief from Apple, which may be the reason that Apple did not seek its attorneys’ fees and litigation costs as damages for Core Wireless’ alleged breach.
Yesterday the Federal Circuit issued its long-awaited Ericsson v. D-Link decision that reviewed the Judge Davis jury verdict award for RAND-obligated 802.11 standard essential patents (see our Aug. 7, 2013 post). The Federal Circuit eschews any per se rules for RAND-obligated patents–e.g., no set modified Georgia-Pacific analysis–and instructs the court to fashion damages instructions to the specific circumstances and evidence presented in a particular case. The Federal Circuit summarized its decision as follows, and remanded the case for further consideration consistent with its decision:
In sum, we hold that, in all cases, a district court must instruct the jury only on factors that are relevant to the specific case at issue. There is no Georgia-Pacific-like list of factors that district courts can parrot for every case involving RAND-encumbered patents. The court should instruct the jury on the actual RAND commitment at issue and must be cautious not to instruct the jury on any factors that are not relevant to the record developed at trial. We further hold that district courts must make clear to the jury that any royalty award must be based on the incremental value of the invention, not the value of the standard as a whole or any increased value the patented feature gains from its inclusion in the standard. We also conclude that, if an accused infringer wants an instruction on patent hold-up and royalty stacking, it must provide evidence on the record of patent hold-up and royalty stacking in relation to both the RAND commitment at issue and the specific technology referenced therein.
Note that the court’s reference to “the incremental value of the invention” refers to apportioning the value of the invention to the accused product from other non-patented features and was not referring to the different concept of the incremental value of the invention over a non-infringing alternative, which was not raised in this case.
This is a significant decision worth reading given its impact on patent damages generally–e.g., clarifying the entire market value rule and applicability of Georgia-Pacific factors–as well as the specific impact in litigating royalties for RAND-encumbered patents. A summary of the decision is provided below with generous excerpts from the decision itself given the importance thereof.
This is generally a patent friendly ruling that may increase the value of standard essential patents given the court’s rejection of some bright line rules that had been propounded that may have generally lowered the value of such patents — e.g., arguments to apply a one-size fits all RAND analysis to the smallest salable patent practicing unit based on public policy concerns beyond the actual circumstances of the case and RAND commitment that the patent owner made to the standard setting body.
Ericsson sued D-Link and others in E.D. Texas for infringing patents alleged to be essential to the IEEE 802.11(n) WiFi standard. The case ultimately was tried to a jury that found three patents infringed and awarded $10 million in damages, which was roughly 15 cents per infringing device. Judge Davis sustained the jury verdict, from which this appeal followed.
Technical Standards Background. The Federal Circuit explained the general background for industry technical standards based on an example user in a coffee shop being able to plug her laptop into the wall using a standard plug shape with standard voltage and being able to connect to the Internet through the coffee shop’s wireless network using standard protocols for wireless signal frequency, message formats, etc. The standards are needed to ensure compatibility given the many different devices and device manufacturers. Thus standard development organizations (“SDOs”) publish technical standards to ensure compatibility if the standard is adopted by “a critical mass of device developers.” The standard at issue here is the Institute of Electrical and Electronics Engineers, Inc. (“IEEE”) 802.11(n) “Wi-Fi” wireless standard.
Developing the standard is a collaborative process of many different entities that may include technology covered by different patents. The Federal Circuit defines such “standard essential patents” as follows:
Because the standard requires that devices utilize specific technology, compliant devices necessarily infringe certain claims in patents that cover technology incorporated into the standard. These patents are called “standard essential patents” (“SEPs”). [citing IEEE Amicus Br. 13-14]
The Federal Circuit also described two “potential concerns” of patent hold-up and royalty stacking that the RAND-obligation seeks to address, stating:
SEPs pose two potential problems that could inhibit widespread adoption of the standard: patent hold-up and royalty stacking. Patent hold-up exists when the holder of a SEP demands excessive royalties after companies are locked into using a standard. Royalty stacking can arise when a standard implicates numerous patents, perhaps hundreds, if not thousands. If companies are forced to pay royalties to all SEP holders, the royalties will “stack” on top of each other and may become excessive in the aggregate. To help alleviate these potential concerns, SDOs often seek assurances from patent owners before publishing the standard. IEEE, for example, asks SEP owners to pledge that they will grant licenses to an unrestricted number of applicants on “reasonable, and non-discriminatory” (“RAND”) terms. [emphasis added; citing IEEE Amicus Br. at 16-18].
In this case, patent owner Ericsson submitted letters of assurance to the IEEE that promised to offer licenses for all of its 802.11(n) SEPs on reasonable and non-discriminatory terms (“RAND”). Specifically, Ericsson pledged to “grant a license under reasonable rates to an unrestricted number of applicants on a worldwide basis with reasonable terms and conditions that are demonstrably free of unfair discrimination.” The parties agreed that Ericsson was bound by this commitment for the three asserted SEPs.
The ‘568 Patent. The asserted ‘568 Patent is directed to having a data packet header field that identifies what type of data is in the data packet–e.g., voice, video or data. This allows packets to be prioritized for when to transmit them over limited bandwidth, such as giving a higher priority to real-time voice or video data that suffer from transmission delay more than other types of data, such as downloading a file. This patent was alleged to cover the 802.11(n) traffic identifier (“TID”) field used in a data packet header to indicate the priority level of the data in the packet.
The ‘215 Patent. The asserted ‘215 Patent concerns a particular way of sending an “Automatic Repeat Request” (“ARQ”) to indicate what packets were not received so that the sending device will resend them. In the ‘215 Patent, a new “type identifier field” (“TIF”) is provided to indicate what format the ARQ field is in–e.g., is the ARQ simply the identification number of a missing packet or is it special coded bit-sequence denoting several missed packets. This patent was asserted to cover the 802.11(n) “Multi-TID subfield” of the packet header that indicates what type of feedback response is in the “BlockAck” field of the header.
The ‘625 Patent. The asserted ‘625 Patent concerns a way for the transmitting device to tell the receiving device that it does not need to wait for specific packets it may have missed during a data reception window (which would cause the receiving device to reject all other incoming packets), but to keep moving forward its data reception window to accept all transmitted packets. This is helpful for certain types of data, such as real-time voice or video data, where it may be better to keep the conversation going rather than get stalled waiting for missed packets. In contrast, for other types of data it may be important to receive all sent packets, such as in downloading a file so that you ultimately receive an exact copy of that file. This patent was asserted against the 802.11(n) requirement that all packets should be received without using a reception window.
Accused Products. The accused products include laptop computers and routers (“the end products”) that used 802.11(n)-compliant wireless chips made by Intel.
District Court Proceedings. In 2010, Ericsson brought suit in E.D. Texas asserting nine patents alleged to be essential to 802.11(n). Intel, who supplied the WiFi chip for the products, intervened. At trial, Ericsson asserted five patents. The jury found that the three patents above were infringed and awarded $10 million in past damages–about 15 cents per infringing device. Judge Davis then had a bench trial on some RAND issues and ruled on JMOL motions that ultimately sustained the jury verdict (see our Aug. 7, 2013 post).
Federal Circuit Decision
Judge O’Malley authored the opinion, joined by Judge Taranto (except for a non-RAND issue) and Judge Hughes.
Infringement/Validity. The Federal Circuit first went through challenges that the patents were not infringed or were invalid. The Federal Circuit ruled substantial evidence supported the jury finding that the ‘568 and ‘215 Patents were infringed, but reversed the finding of infringement of the ‘625 patent. This included an interesting issue for the ‘568 Patent concerning the Fantasy Sports line of cases dealing with whether there is infringement by a device simply because it is capable of performing a function even if there is little evidence that the claimed function is actually used, stating:
In sum, when the asserted claims recite capability, our case law supports finding infringement by a “reasonably capable” accused device on a case-by-case basis particularly where, as here, there is evidence that the accused device is actually used in an infringing manner and can be so used without significant alterations.
This may be a common issue for standard essential patents, because standards often have optional features that end products ultimately may not use, but must have the capability if they are to be deemed standard compliant–e.g., must be compliant to put the WiFi logo on the box.
The Federal Circuit also ruled that substantial evidence supported the jury’s verdict that the ‘625 Patent was not invalid, which appears to be the only invalidity challenge on appeal.
Entire Market Value Rule (“EMVR”). With respect to damages, the Federal Circuit first considered D-Link’s challenge to Ericsson’s damages expert relying on licenses tied to the entire value of the licensed product, rather than the smallest salable patent practicing unit within the licensed product, where Ericsson did not dispute that the patent claims are practiced entirely within the Wi-Fi chips that are components within the end products. The Federal Circuit described the EMVR as having two separate parts: (1) a “substantive legal rule” that the “ultimate reasonable royalty”–i.e., combination royalty rate and royalty base–“must be based on the incremental value that the patented invention adds to the end products”; and (2) an “evidentiary principle” applied to the choice of the royalty base that is intended “to help our jury system reliably implement” the substantive legal rule of apportionment. The Federal Circuit explained this latter evidentiary principle as follows:
The principle, as applicable specifically to the choice of a royalty base, is that, where a multi-component product is at issue and the patented feature is not the item which imbues the combination of the other features with value, care must be taken to avoid misleading the jury by placing undue emphasis on the value of the entire product. It is not that an appropriately apportioned royalty award could never be fashioned by starting with the entire market value of a multi-component product–by, for instance, dramatically reducing the royalty rate to be applied in those cases–it is that reliance on the entire market value might mislead the jury, who may be less equipped to understand the extent to which the royalty rate would need to do the work in such instances. Thus, where the entire value of a machine as a marketable article is “properly and legally attributable to the patented feature,” the damages owed to the patentee may be calculated by reference to that value. Where it is not, however, courts must insist on a more realistic starting point for the royalty calculations by juries–often, the smallest salable unit and, at times, even less.
The Federal Circuit ruled there was no error in allowing expert testimony on the challenged licenses at issue here. Following its rationale in VirnetX (see our Sep. 17, 2014 post) that concerned comparable licenses in general, the Federal Circuit ruled that any concerns about the licenses proffered here go to the weight, and not admissibility, of those licenses:
This court has recognized that licenses may be presented to the jury to help the jury decide an appropriate royalty award. Prior licenses, however, are almost never perfectly analogous to the infringement action. For example, allegedly comparable licenses may cover more patents than are at issue in the action, including cross-licensing terms, cover foreign intellectual property rights, or, as here, be calculated as some percentage of the value of a multi-component product. Testimony relying on licenses must account for such distinguishing facts when invoking them to value the patented invention. Recognizing that constraint, however, the fact that a license is not perfectly analogous generally goes to the weight of the evidence, not its admissibility. In each case, district courts must assess the extent to which the proffered testimony, evidence, and arguments would skew unfairly the jury’s ability to apportion the damages to account only for the value attributable to the infringing features.
The Federal Circuit also noted the practical issue that licenses generally are negotiated without considering the EMVR (e.g., smallest salable patent practicing unit), so too strict a rule on admissibility could preclude reliance on any actual real-world licenses, often deemed the best indication of what are reasonable licensing terms:
As the testimony at trial established, licenses are generally negotiated without consideration of the EMVR, and this was specifically true with respect to the Ericsson licenses relating to the technology at issue. Makring real world, relevant licenses inadmissible on the grounds D-Link urges would often make it impossible for a patentee to resort to license-based evidence. Such evidence is relevant and reliable, however, where the damages testimony regarding those license takes into account the very types of apportionment principles contemplated by Garretson [v. Clark, 111 U.S. 120, 121 (1884)). In short, where expert testimony explains to the jury the need to discount reliance on a given license to account only for the value attributed to the licensed technology, as it did here, the mere fact that licenses predicated on the value of a multi-component product are referenced in that analysis–and the district court exercises its discretion not to exclude the evidence–is not reversible error.
The Federal Circuit, however, did counsel district courts to give cautionary instructions if requested and explain the importance of apportionment:
We do conclude, however, that, when licenses based on the value of a multi-component product are admitted, or even referenced in expert testimony, the court should give a cautionary instruction regarding the limited purposes for which such testimony is proffered if the accused infringer requests the instruction. The court should also ensure that the instructions fully explain the need to apportion the ultimate royalty award to the incremental value of the patented feature from the overall product.
The Federal Circuit noted that simply relying on Georgia-Pacific factors–e.g., factors 9 and 13 that allude to apportionment–is not enough, but a separate instruction should be used in future cases.
The Federal Circuit also ruled that D-Link had waived its challenge to Ericsson’s counsel having referred to the total cost of the laptop when discussing the royalty rate. D-Link had only objected to the licenses (not the counsel statement), referred to its end product value itself during cross-examination and did not raise the issue in post-trial motions.
The Federal Circuit’s ruling here on the entire market value rule should provide significant guidance on the “smallest salable patent practicing unit” debate for patents in general, as well as for standard essential patents. Recall that in other SEP litigations involving the 802.11 WiFi standard, a dispute has been whether the royalty base should be the end product or the WiFi chip component within that end product. For example, in Innovatio, Judge Holderman used the WiFi chip as the royalty base given a failure of proof by the patent holder to apportion value of the invention to the end product. In CSIRO, Judge Davis used the end product as the royalty base because limiting the base to the cost of the WiFi chip would not capture the value of the patented technology.
The Federal Circuit’s emphasis on the Rule 403 jury prejudice “evidentiary principle” also may provide guidance on application of the entire market value rule. For example, both the Innovatio and CSIRO cases were bench trials in which Rule 403 prejudice concerns are less prevalent and, thus, might tend to allow more flexibility in referring to the end product as the royalty base, rather than the smallest salable patent practicing unit. Further, the Rule 403 evidentiary principle is not an issue in actual, arms-length licensing negotiations between sophisticated market participants. So actual negotiated licenses for RAND-encumbered patents may properly refer to the end product as the royalty base even though that might be precluded under a Rule 403 evidentiary basis in litigating the RAND rate before a jury on those same patents. Such a disconnect between reasonable real-world practices and packaging a case for the jury may be problematic where the jury is asked to consider whether a RAND commitment was breached based on the license terms offered in actual negotiations (where the Rule 403 evidentiary principle is not applied) and the litigated RAND rate (where the Rule 403 evidentiary principle may be applied).
No Per Se RAND-Specific Modified Georgia-Pacific Analysis. The Federal Circuit considered the issue of an appropriate RAND royalty rate “an issue of first impression”, stating knowledge of only three other district court decisions on the issue: Judge Robart’s Microsoft v. Motorola decision (on appeal to the Ninth Circuit), Judge Holderman’s Innovatio decision (settled) and Judge Whyte’s Realtek v. LSI jury decision (on appeal to the Ninth Circuit). If you follow our blog, you know there is also a Judge Davis bench trial decision in CSIRO v. Cisco (see our July 28, 2014 post).
At the outset, the Federal Circuit cautioned about over-reliance on all factors enumerated in Georgia-Pacific, even when not all factors are relevant:
Although we have never described the Georgia-Pacific factors as a talisman for royalty rate calculations, district courts regularly turn to this 15-factor list when fashioning their jury instructions. Indeed, courts often parrot all 15 factors to the jury, even if some of those factors clearly are not relevant to the case at hand. And, often, damages experts resort to the factors to justify urging an increase or a decrease in a royalty calculation, with little explanation as to why they do so, and little reference to the facts of record.
The Federal Circuit explained that many Georgia-Pacific factors are not applicable to RAND-encumbered patents, stating:
For example, factor 4 is “[t]he licensor’s established policy and marketing program to maintain his patent monopoly by not licensing others to use the invention or by granting licenses under special conditions designed to preserve that monopoly.” Because of Ericsson’s RAND commitment, however, it cannot have that kind of policy for maintaining a patent monopoly. Likewise, factor 5–“[t]he commercial relationship between the licensor and licensee”–is irrelevant because Ericsson must offer licenses at a non-discriminatory rate.
Several other Georgia-Pacific factors would at least need to be adjusted for RAND-encumbered patents–indeed, for SEP patents generally. For example, factor 8 accounts for an invention’s “current popularity,” which is likely inflated because a standard requires the use of the technology. Factor 9–“utility and advantages of the patented invention over the old modes or devices”–is also skewed for SEPs because the technology is used because it is essential, not necessarily because it is an improvement over the prior art. Factor 10, moreover, considers the commercial embodiment of the licensor, which is also irrelevant as the standard requires the use of the technology. [emphasis added]
Thus the district court erred by giving the jury instructions on Georgia-Pacific factors that were not relevant, “including, at least, factors 4, 5, 8, 9 and 10.” The Federal Circuit noted that referencing irrelevant factors alone may not be reversible error, but remand in this case will be necessary anyway given other errors. Further, the Federal Circuit explained that the specific jury instructions should be tailored to the specific facts and circumstances of the case, finding it “unwise” to have a single modified Georgia-Pacific rule specific to all RAND-encumbered patents:
To be clear, we do not hold that there is a modified version of the Georgia-Pacific factors that should be used for all RAND-encumbered patents. Indeed, to the extent D-Link argues that the trial court was required to give instructions that mirrored the analysis in Innovatio or Microsoft, we specifically reject that argument. We believe it is unwise to create a new set of Georgia-Pacific-like factors for all cases involving RAND-encumbered patents. Although we recognize the desire for bright line rules and the need for district courts to start somewhere, courts must consider the facts of record when instructing the jury and should avoid rote reference to any particular damages formula.
The Federal Circuit’s ruling here, thus, gives significance guidance in all cases on use of the Georgia-Pacific factors in general and the need to tailor jury instructions to the specific circumstances and evidence presented. And it plainly rejects rote application of a modified Georgia-Pacific analysis to SEPs. Rather, as with other patents, determining a RAND royalty rate will depend on the specific evidence presented in that particular case.
Consider Actual RAND Commitment. Consistent with the focus on the actual facts and circumstances presented by the particular case, the Federal Circuit explained that the district court erred by generally instructing the jury to consider Ericsson’s RAND obligations, rather than instructing the jury about what those specific RAND obligations were, stating:
Trial court’s should also consider the patentee’s actual RAND commitment in crafting the jury instructions. … The district court should have turned to the actual RAND commitment at issue to determine how to instruct the jury. In this case, Ericsson promised that it would “grant a license under reasonable rates to an unrestricted number of applicants on a worldwide basis with reasonable terms and conditions that are demonstrably free of unfair discrimination.” Rather than instruct the jury to consider “Ericsson’s obligation to license its technology on RAND terms,” the trial court should have instructed the jury about Ericsson’s actual RAND promises. “RAND terms” vary from case to case. A RAND commitment limits the market value to (what the patent owner can reasonably charge for use of) the patented technology. The court therefore must inform the jury what commitments have been made and of its obligation (not just option) to take those commitments into account when determining a royalty award. [emphasis in original]
The Federal Circuit’s decision here thus brings the focus more on what the patent owner actually committed to do, rather than on some general public policy of what a RAND commitment should be.
Apportionment. The Federal Circuit considered two special apportionment issues for SEPs:
First, the patented feature must be apportioned from all of the unpatented features reflected in the standard. Second, the patentee’s royalty must be premised on the value of the patented feature, not any value added by the standard’s adoption of the patented technology. These steps are necessary to ensure that the royalty award is based on the incremental value that the patented invention adds to the product, not any value added by the standardization of that technology. [emphasis in original]
The Federal Circuit noted that this may not be a precise science and “the jury should be told of its obligation to approximate the value added by the patented invention and that a degree of uncertainty in setting that value is permissible.” Also worth noting is that the Federal Circuit’s reference to “the incremental value that the patented invention adds to the product” should not be confused with the “incremental value” the patented invention has over non-infringing alternatives, which is a totally different issue not discussed in this opinion.
The Federal Circuit noted that, in this case, the patented functionality of the two infringed patents were directed to only a small portion of the 802.11(n) standard and that some 802.11(n)-compliant end products do not use that functionality. This is similar to computing damages for patents that cover only a small part of a device, and the jury should be instructed accordingly:
Just as we apportion damages for a patent that covers a small part of a device, we must also apportion damages for SEPs that cover only a small part of a standard. In other words, a royalty award for a SEP must be apportioned to the value of the patented invention (or at least to the approximate value thereof), not the value of the standard as a whole. A jury must be instructed accordingly. … [I]f a patentee can show that his invention makes up “the entire value of the” standard, an apportionment instruction probably would not be appropriate.
Because SEP holders should only be compensated for the added benefit of their inventions, the jury must be told to differentiate the added benefit from any value the innovation gains because it has become standard essential.
The Federal Circuit used the Realtek court’s jury instruction as illustrative of this point, where the jury was instructed it “should not consider LSI’s advantage resulting from the standard’s adoption, if any. However, you may consider any advantage resulting from the technology’s superiority.”
The Federal Circuit’s ruling here leaves some ambiguity in how to apply it. The general purpose in apportioning the value of the patent to the standard appears to be a check that patented technology making only a nominal contribution to the standard does not improperly capture the value of the entire standard simply because the technology is in the standard. But, of course, the ultimate issue to a licensee is the value of the patented technology to the licensed product, which product may not use or need all functionality provided by the standard. For example, encryption of the WiFi signal may be important to some products that may be used in public places to protect the transmitted information, but may not be important to other products that use their own encryption scheme. That was the case in the Microsoft v. Motorola case that led Judge Robart to attribute little value to encryption patents for the Xbox products that did their own encryption for transmissions from the Xbox all the way through the WiFi connection and Internet to a remote server. Judge Robart also had weighed the value of those patents to the standard itself, but it was not clear how that actually was applied in the case and the more controlling determination appeared to be the value to the licensed product, as is typically the case for all patents. So it is not clear how a jury is to apply apportioning the value of the patent to the standard itself–in conjunction with apportioning the value of the patent to the accused product–beyond a rough check that value is not being attributed to the mere fact that the patented technology is in the standard.
Need Evidence of Patent Hold-Up/Royalty Stacking. The Federal Circuit agreed with the district court’s decision not to instruct the jury on patent hold-up or royalty stacking because there was no evidence of either. Absent such evidence, an instruction would not be “necessary nor appropriate”:
In deciding whether to instruct the jury on patent hold-up and royalty stacking, again, we emphasize that the district court must consider the evidence on the record before it. The district court need not instruct the jury on hold-up or stacking unless the accused infringer presents actual evidence of hold-up or stacking. Certainly something more than a general argument that these phenomena are possibilities is necessary. Indeed, “a court should not instruct on a proposition of law about which there is no competent evidence.” Depending on the record, reference to such potential dangers may be neither necessary nor appropriate.
The Federal Circuit ruled there was no evidence of patent hold-up here, such as a showing that the patent holder started seeking higher royalty rates after the 802.11(n) standard was adopted. Further, there was no evidence of royalty-stacking here, where D-Link did not present any evidence of other licenses it had taken under 802.11 patents: “The mere fact that thousands of patents are declared to be essential to a standard does not mean that a standard-compliant company will necessarily have to pay a royalty to each SEP holder.”
On this latter point, its worth noting that patent owners typically do not declare patents “to be essential to a standard”; rather, they typically submit letters of assurances or declarations that they will license the patent on RAND or other terms if the patent ends up being essential to the standard. This is a practical issue, such as letters of assurance often are submitted before the standard is finalized so one may not know what the adopted standard will cover or there may be disagreements or uncertainty as to what a particular patent actually may cover (some patents alleged to be essential to a standard often are found not to be in litigation).
Hypothetical Negotiation Date. The Federal Circuit noted that it was not addressing the date of the hypothetical negotiation–i.e., whether it should be at the time the standard was adopted or the time of infringement–because D-Link did not request such a jury instruction. This goes to the issue whether non-infringing alternatives may include alternatives available at the time that the standard was adopted, as was considered by Judge Robart in Microsoft v. Motorola and Judge Holderman in Innovatio (modified to consider only alternatives that the SDO actually considered).
Reversed and Remanded. Given the various errors identified above, the Federal Circuit vacated the RAND determination and remanded the case back to the district court for further proceedings consistent with the decision.
Yesterday, InterDigital prevailed in its Delaware jury trial against ZTE where the jury found that ZTE’s accused phones infringe each asserted claims of InterDigital’s U.S. Patent Nos. 7,190,966, 7,286,847, and 8,380,244. The verdict form also shows that the jury found none of the asserted claims to be invalid as obvious. The jury was not asked to make any finding on issues related to damages, ZTE’s FRAND-related affirmative defenses, and ZTE’s FRAND-related counterclaims, all of which were bifurcated from patent liability issues by the parties’ joint stipulation and will be tried at a later date. As you may recall from our May 30, 2014 post, Judge Andrews previously dismissed ZTE’s amended FRAND counterclaims against InterDigital, ruling that the declaratory judgment actions would not serve a useful purpose in the context of the parties’ ongoing litigation and that ZTE’s affirmative defenses adequately encompassed the FRAND-related issues. In accord with the jury’s verdict, the Court entered judgment in favor of InterDitigal on plaintiff’s infringement counts and ZTE’s invalidity counterclaim as to the patents-at-issue. We note that the judgment does not extend to ZTE’s FRAND-related counterclaims or defenses that have yet to be litigated.
The jury verdict stands in contrast to ALJ Essex’s June 2014 Initial Determination in Inv. No. 337-TA-868 — InterDigital’s ITC case against ZTE — finding that ZTE and Nokia had not infringed the same ‘966 and ‘847 patents that were at issue in the Delaware case. As discussed in our July 2, 2014 post, ALJ Essex’s Initial Determination, which was affirmed by the Commission on review, provided a sharp critique of respondents that assert FRAND defenses without having first availed themselves of SSO procedures for resolving situations where licenses are not available. The ITC decision is currently up on appeal to the Federal Circuit, with oral arguments to take place next month.
A California federal jury handed Apple a substantial victory over patent-plaintiff GPNE yesterday afternoon, finding Apple’s iPhone and iPad products do not infringe three GPNE patents alleged to be essential to GPRS and LTE standards. After less than one day of deliberations following a two-week trial, the jury issued a verdict form finding that none of Apple’s products infringed the asserted patents and awarding no amount of the $94 million in damages sought by GPNE. The jury did not deliver a complete landslide victory to Apple, finding the tech-giant failed to prove the asserted patent claims to be invalid.
This case first appeared on our radar after GPNE submitted an expert report on damages opining that the asserted patents should be afforded a royalty rate greater than what was warranted by the technical value of the patent based on the “hold-up” value the patent. Based on the opinion of GPNE’s technical expert that the asserted patents were essential to the GPRS and LTE communication standards, GPNE’s damages expert argued that because the patents are not subject to any RAND-obligation, the alleged standard-essential patents demand a higher royalty rate higher than the particular patented technology itself warranted. As discussed in our April 23, 2014 post, Judge Koh excluded the expert’s testimony without prejudice, allowing GPNE to submit an amended expert report on damages. GPNE’s damages expert submitted a subsequent report providing additional support for the royalty calculation and was permitted to present testimony on both reports at trial.
Yesterday, a jury returned a verdict finding that Fujitsu had breached its standard-setting obligations to offer its declared ‘737 Patent (now expired) to Tellabs on reasoanble and non-discriminatory terms (RAND). Judge Holderman then issued an order to show to cause why the patent should not be held unenforceable as to Tellabs. This case presents many interesting standard essential patent (SEP) issues, including a RAND-obligation breach for a patent found essential to a standard but not infringed.
The filings in this long-running case span over six years and 1,400 docket entries, so please excuse our quick summary of salient points leading to the jury verdict and errors we may make in the process. In short, this litigation started with Fujitsu suing Tellabs for infringing four patents and was whittled-down to this jury trial limited to whether Fujitsu breached an International Telecommunications Union (ITU) G.692 optical network standard setting obligation in asserting a patent against Tellabs without offering a RAND license.
In January 2008, Fujitsu sued Tellabs in the Eastern District of Texas for infringing four of Fujitsu’s patents, including U.S. Patent 5,521,737 (“the ‘737 Patent”) at issue here related to optical amplifiers used in optic fibre transmission networks. Tellabs successfully moved the case to the Northern District of Illinois and the case was assigned to Judge Holderman (who issued the RAND-rate bench trial ruling last year in Innovatio — see our Oct. 1, 013 post). During the course of litigation one patent was dropped based on a covenant not to sue granted to Tellabs and two other patents were held invalid, leaving just the ‘737 Patent.
Judge Holderman denied Fujitsu’s summary judgment motion that Tellabs infringed claims 4, 5, 11 and 12 of the ‘737 Patent. But Judge Holderman granted summary judgment that Tellabs did not infringe Claims 4 and 5 of the ‘737 Patent (Fujitsu consented to noniinfringement due to claim construction ruling) and entered a Rule 54(b) final judgment of no infringement of those claims (we are not sure what happened with Claims 11 and 12, but speculate that Fujitsu dropped them to simplify case and immediately appeal the Rule 54(b) final judgment). This thus left a jury trial on Tellabs allegation that Fujitsu breached its standard-setting commitment to offer Tellabs a license under the ‘737 Patent on reasonable and non-discriminatory terms.
Preliminary Jury Instructions. Judge Holderman’s pre-trial evidentiary rulings and preliminary jury instructions framed the evidence and arguments to be presented at trial (see our July 18 post). The ten-page preliminary jury instructions are worth reading to see how the issue was presented to the jury.
In summary, Tellabs argued that a May 27, 1996 letter and attached “Patent Statement” from Fujitsu to the ITU was an agreement to license the patent on RAND terms, the letter stating:
Fujitsu is willing to grant license under reasonable terms and conditions for the purpose of implementation of Q.25 – Q.27 recommendations, in compliance with ITU-T TSB patent policy 2.2 to any party which will comply with TSB patent policy 2.1 or 2.2.
The Patent Statement expressly identified the ‘737 Patent at issue here. The referenced sections of the ITU-T TSB patent policy concern giving either a royalty-free license (Section 2.1) or a RAND license where “negotiations are left to the parties concerned” (Section 2.2), stating:
2.1: “The patent holder waives his rights; hence, the Recommendation is freely accessible to everybody, subject to no particular conditions, no royalties are due, etc.”
2.2: “The patent holder is willing to negotiate licenses with other parties on a non-discriminatory basis on reasonable terms and conditions. Such negotiations are left to the parties concerned.”
The jury was instructed about Fujitsu’s “two aims” in submitting the Patent Statement:
In Fujitsu’s Patent Statement, Fujitsu expressed two aims: (1) “drawing the attention of SIG15/WP4 Q.25, Q26 and Q.27 to the existence of Fujitsu Patents that relate to work covered by these study areas” and (2) “clarifying the position of Fujitsu relative to the ITU patent policy.” Fujitsu’s ‘737 Patent was among the patents to which Fujitsu expressly drew the ITU’s attention in Fujitsu’s May 27, 1996 Patent Statement.
Ultimately, Fujitsu communicated to the ITU in Fujitsu’s Patent Statement, that as to all the patents it drew the ITU’s attention to, including the ‘737 Patent, Fujitsu was “willing to grant license under reasonable terms and conditions for the purpose of implementation of Q.25 – Q.27 recommendations, in compliance with ITU-T TSB patent policy 2.2 to any party which will comply with TSB patent policy 2.1 or 2.2.”
With respect to the “essentiality” of the patent, the jury was instructed that Tellabs must prove the patent “might be reasonably necessary” to implement the standard, stating:
Tellabs must also prove that Fujitsu’s ‘737 Patent’s technology was included in, meaning its use might be reasonably necessary if someone were to try to implement certain of the standards recommended by ITU-T standard G.692 title, “Optical interfaces for multichannel systems with optical amplifiers.”
The jury was also instructed that Tellabs must prove that it was willing to negotiate a license on RAND terms.
The jury was instructed that Tellabs could prove that Fujitsu breached its RAND obligation (if there was one) in one of six ways based on (1) not offering Tellabs a patent license on RAND terms or (2) filing an infringement lawsuit against Tellabs that (i) sought an injunction, (ii) sought a non-RAND royalty rate, (iii) sought lost profits, (iv) damaged Tellabs business or (v) “requir[ed] Tellabs to devote management attention and various resources to defending the lawsuit, such as attorney’s fees, expert fees, and related costs.”
For what its worth (meaning we readily may be wrong since not familiar with the record) some of those circumstances seem easily provable as having occurred or not occurred — e.g., did Tellabs file a lawsuit seeking an injunction, lost profits or requiring Tellabs to incur attorneys fees. Although the parties stipulated facts were filed under seal, we believe from some filings that the jury may have been instructed that:
- Fujitsu admits it never offered Tellabs any royalty rate, RAND or otherwise (see MIL Order Dkt. # 1289)
- Fujitsu sought lost profits in its complaint against Telebs (see Amended Complaint Dkt. #91)
- Fujitsu gave some kind of stipulation that it breached its RAND Agreement by Seeking a Non-RAND Royalty Rate” (see Tellabs’ JMOL Motion Dkt. #1409 at 21 referring to “Stipulation read into Record, Trial Tr. at 602:13-603:5 (7/21/14))”
Thus, the key dispute may be the threshold issue of what Fujitsu offered under what conditions in its statements to ITU and were those conditions met. We do not know what exactly was argued and presented in the trial, but a high-level summary of Fujitsu’s contentions given in the jury instructions were as follows:
Fujitsu contends that to implement the ITU’s standards it is not necessary to use the technology of Fujitsu’s ‘737 Patent and Fujitsu therefore did not have to offer to license the technology of the ‘737 Patent on RAND terms. Fujitsu asserts that the ITU did not accept Fujitsu’s offer to grant a license to Fujitsu’s ‘737 Patent’s technology on RAND terms, and Fujitsu also asserts that Fujitsu had no obligation to grant a license to Fujitsu’s ‘737 Patent’s technology on RAND terms to Tellabs. Fujitsu also contends, even if it did breach a RAND obligation, the breach was not willful.
Further, from other briefing, we believe Fujitsu argued that Fujitsu was not required to grant Tellabs a license because Tellabs would not reciprocate a license to Fujitsu under Tellabs standard essential patents (a condition of Fujitsu’s Patent Statement quoted above).
The jury was not instructed or presented evidence as to damages if a breach occurred, the parties having stated in the Pre-Trial order that the jury need not quantify financial damages.
Pretrial Verdict Form Revisions. Case dynamics and perhaps uncertainties in this developing area of law led to revisions in the pretrial verdict form, which is provided to the jury at the start of the trial so they know what questions they will be asked to answer at the end of trial. For example, Question 2 of the Pretrial Verdict Form concerning the patent’s essentiality to the standard–an important issue as to whether a RAND obligation existed–was revised from whether the patented technology is “included” or “necessary” to implement the standard to a potentially broader view of whether the patent “may be required” to implement the standard, as shown below:
- Initial Preliminary Jury Verdict Form: Has Tellabs proven that Fujitsu’s ‘737 Patent’s technology was included in the standardized technology recommended by ITU-T standard G.692 titled, “Optical interfaces for multichannel systems with optical amplifiers?”
- First Revised Jury Verdict Form: Has Tellabs proven that Fujitsu’s ‘737 Patent’s technology was included in, meaning necessary to implement, the standardized technology recommended by ITU-T standard G.692 titled, “Optical interfaces for multichannel systems with optical amplifiers?”
- Second Revised Preliminary Jury Verdict Form: Has Tellabs proven that Fujitsu’s ‘737 Patent’s technology was included in, meaning the ‘737 Patents’ technology reasonably might be necessary in order to implement, one of the specifications of standardized technology recommended by ITU-T standard G.692 titled, “Optical interfaces for multichannel systems with optical amplifiers”?
- Adopted Revised Preliminary Jury Verdict Form: Has Tellabs proven that Fujitsu’s ‘737 Patent’s technology was included in (meaning the ‘737 Patent’s technology may be required to implement) one or more of the necessary specifications of the standardized technology recommended by the ITU-T Recommendation G.692 titled, “Optical interfaces for multichannel systems with optical amplifiers?”
Judge Holderman explained that this latter version directed to technology that “may be required to implement” the standard was adopted to avoid “patent hold-up” and given the ITU’s Intellectual Property Rights (IPR) statement about patents that “may be required to implement this [ITU] Recommendation,” stating:
As is clear from the ITU-T’s Recommendation G.692, the purpose of its specifications, which address “multichannel optical line system interfaces,” was to provide “future transverse compatibility among such systems.” Any patented technology that comes within G.692’s specifications that can be used to implement the Recommendations’ goal of standardization to provide compatibility should be subject to a RAND royalty commitment. Otherwise, the owner of that patented technology could engage in “patent hold-up” by requiring implementers of the G.692 standard to conduct a work-around so as not to infringe that standard-compliant patented technology.
In the “Intellectual Property Rights” section of the ITU’s Recommendation G.692, the ITU states:
“The ITU draws attention to the possibility that the practice or implementation of this Recommendation may involve the use of a claimed Intellectual Property Right. The ITU Takes no position concerning the evidence, validity or applicability of claimed Intellectual Property Rights, whether asserted by ITU members or others outside the Recommendation development process. As of the date of approval of this Recommendation, the ITU had received notice of intellectual property, protected by patents, which may be required to implement this Recommendation. However, implementors are cautioned that this may not represent the latest information and are therefore strongly urged to consult the TSB patent database. (emphasis added)”
By choosing the words “patents, which may be required to implement the Recommendation,” the ITU articulated its understanding of the patented technology that required a RAND commitment. That phrase, “may be required to implement the Recommendation,” is now appropriately used in Question 2 for the jury to answer at this trial.
As shown below, the Final Verdict Form provided to the jury after trial was further amended so that the Question 2 essentiality issue was whether the patent “is one of the required ways to implement” the standard.
Has Tellabs proven that Fujitsu’s ‘737 Patent’s technology is essential to (meaning the ‘737 Patent’s technology is one of the alternative ways required to implement) one or more of the necessary specifications of the standardized technology recommended by the ITU-T Recommendation G.692 titled, “Optical interfaces for multichannel systems with optical amplifiers?”
The general flow of the verdict form was:
- Did Fujitsu agree to license the patent on RAND terms? If not, no need to go any further
- Is the patent essential to the standard? If not, no need to go any further.
- Did Fujitsu breach its RAND agreement in one or more of six enumerated ways? If not, no need to go any further.
- Would Tellabs have been willing to negotiate a RAND license if offered by Fujitsu? If not, no need to go any further.
- Did Fujitsu willfully breach the agreement? (presumabley under a preponderance of the evidence burden of proof, which appears to distinguish this from the next question)
- Did Fujitsu willfully breach the agreement under a clear and convincing evidence burden of proof?
Yesterday’s Jury Verdict/Show Cause Order
Jury Verdict. Yesterday, the jury returned a verdict (attached to the show to cause order) in favor of Tellabs on every single question and subparts thereof, finding that Tellabs had shown that:
- Fujitsu agreed to license the ‘737 Patent on RAND terms;
- Fujitsu’s ‘737 Patent’s technology is essential to (meaning the ‘737 Patent’s technology is one of the alternative ways required to implement) one or more of the necessary specifications of the standardized technology recommended by the ITU-T Recommendation G.692 titled, “Optical interfaces for multichannel systems with optical amplifiers”;
- Fujitsu breached its agreement by:
(a) Not offering to grant Tellabs a license on RAND terms for its ‘737 Patent’s technology;
(b) Filing a lawsuit against Tellabs seeking injunctive relief based upon the alleged infringement of Fujitsu’s ‘737 Patent;
(c) Filing a lawsuit against Tellabs seeking a non-RAND royalty rate based on alleged infringement of Fujitsu’s ‘737 Patent;
(d) Filing a lawsuit against Tellabs seeking damages in the form of lost profits based on alleged infringement of Fujitsu’s ‘737 Patent;
(e) Filing a lawsuit against Tellabs alleging infringement of the ‘737 Patent that damaged Tellabs’ business; and
(f) Filing a lawsuit against Tellabs alleging infringement of the ‘737 Patent that required Tellabs to devote management attention and time, as well as other resources to defending the lawsuit, such as attorney’s fees, expert fees, and related costs.
- Tellabs was willing to negotiate a RAND license “if Fujitsu had offered Tellabs RAND terms for such a license”
- Fujitsu’s breach was willful “in that Fujitsu’s breach was intentional, knowing and with conscious disregard for Tellabs’ rights, or alternatively, was done with reckless disregard for Tellabs’ obvious or known rights.”
- There was clear and convincing evidence that Fujitsu willfully breached the agreement.
Show Cause Order. After the jury verdict, Judge Holderman issued an order requiring Fujitsu to “show cause why the ‘737 Patent should not be held by the court in the exercise of the court’s equitable powers to be unenforceable as to Tellabs.” With the patent now expired, this issue may be limited to the patent’s enforceability against any infringement by Tellabs prior to Fujitsu offering a RAND license and may not touch on a patent’s enforceability after the patent owner cures a breach by offering a license on RAND terms.
Recall that, in the Realtek v. LSI litigation, Judge Whyte recently faced a similar (yet different) request to declare LSI’s patents (including an expired patent) unenforceable if LSI does not offer Realtek a license on RAND terms. But Judge Whyte denied that request with respect to “unenforceability” because it sounded like injunctive relief that he had denied. Judge Whyte did, however, declare that “upon Realtek’s request for a license, to be in compliance with its RAND commitment, LSI must offer Realtek a license … on RAND terms” consistent with the jury’s determined RAND rate (see our June 16, 2014 post).
What’s Next? The briefing on the show cause order should shed more light on the unenforceability issue, which may be heard during a Septemer 23 status conference. The parties post-verdict motions and Judge Holderman’s rulings thereon should provide more insight into what was argued and presented to the jury on the various RAND-breach issues.