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.