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.

Background

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 FormHas 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 FormHas 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 FormHas 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.

Final Verdict Form.   Prior to jury deliberations, the Court adopted final jury instructions as well as a final verdict form which, on the issue of essentiality, instructed as follows:

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:

  1. Did Fujitsu agree to license the patent on RAND terms?  If not, no need to go any further
  2. Is the patent essential to the standard?  If not, no need to go any further.
  3. Did Fujitsu breach its RAND agreement in one or more of six enumerated ways?  If not, no need to go any further.
  4. Would Tellabs have been willing to negotiate a RAND license if offered by Fujitsu?  If not, no need to go any further.
  5. 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)
  6. 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:

  1. Fujitsu agreed to license the ‘737 Patent on RAND terms;
  2. 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”;
  3. 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.
  4. Tellabs was willing to negotiate a RAND license “if Fujitsu had offered Tellabs RAND terms for such a license”
  5. 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.”
  6. 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.

Last summer, we reported on a jury verdict and post-trial rulings in favor of SEP patent holder Ericsson in its infringement suit against several manufacturers of WiFi-compliant products.  As we noted, the jury awarded several million dollars for infringement of Ericsson’s 802.11-essential patents.  Thereafter, several defendants took an appeal to the Federal Circuit, which is still pending.

Earlier this week, the district court granted Ericsson and defendant Belkin’s joint motion to dismiss the case with prejudice as to Belkin.  According to the motion, Ericsson and Belkin “settled their claims against one another . . . on the record, and on the eve of the jury returning its verdict in this matter.”  “To comply with that settlement agreement, Ericsson and Belkin [] seek to dismiss their respective claims with prejudice, and to have the final record in this case reflect their settlement and dismissals.”

According to the Order, “[b]ecause the jury was deliberating when Belkin and Ericsson announced their settlement, and because Belkin and Ericsson had yet to present the Court with their now-filed agreed upon dismissal, the Court did not alter the jury verdict form and entered judgment so as to not delay proceedings, including the appeal that the other defendants in the case have now taken.”  The dismissal order “shall in no way affect or alter the judgment as to the other defendants in this action other than Belkin or have any effect on the existing appeal to which Belkin is not a party.”  The Court vacated the final judgment as to Belkin, and ordered  Ericsson and Belkin to cover their own attorneys’ fees, costs of court, and expenses.

Yesterday a jury returned a verdict finding that Apple does not infringe Golden Bridge’s patent alleged to be essential to the WCDMA standard.  The verdict thus did not reach the royalty-rate issue that was interesting for a few reasons.

Excluded FRAND Expert Testimony.  As discussed in our May 30, 2014 post, Magistrate Judge Grewal had excluded patent owner Golden Bridge’s damages expert testimony because it represented a flawed methodology for computing a fair, reasonable and non-discriminatory (FRAND) royalty rate.  He gave Golden Bridge a week to submit a revised damages report.  But during trial he excluded that revised testimony as well. 

The damages expert had abandoned his first entire market value theory and tried to focus on Apple’s license agreements with Ericsson and Nokia to support a per-unit royalty of $0.0869.  But Judge Grewal found this new theory was flawed as well, because the damages expert improperly “allocated the entire value of Apple’s portfolio licenses with Ericsson and Nokia to a tiny subset of a subset of a subset of a subset of the patents and standards in those portfolios.”  The licenses considered cover “all standard essential patents” to include technologies beyond WCDMA, such as Wi-Fi, GSM and LTE.  But the expert attributed no value to patents covering other standards and he did not address — as the patentee’s attorney tried to explained later — that WCDMA was the focus of the alleged comparable licenses because that’s what the Apple products practiced at the time.  The expert’s testimony was thus excluded for not accounting for differences between the alleged comparable licensed technology and the patents-in-suit:

Under established Federal Circuit law, an expert may not rely on broad licenses that cover technologies far beyond the patents-in-suit without accounting for the differences in his calculations.  That is precisely what [the patent owner’s damages expert] did not do here, resulting in a fundamentally unsound calculation.  That the entire dollar value of the Apple-Ericsson and Apple-Nokia agreements stemmed entirely from the actually-essential (not just declared essential) WCDMA patents (not those related to other active standards) relating to terminal devices is an implausible assumption to begin with, and [the expert] does not even attempt to justify this assumption.

Jury Instructions.  Another interesting aspect of this case is that one may miss that this is a standard essential patent case when simply reading the Final Jury Instructions.  The damages instructions (Instruction Nos. 17-21) read like a typical instruction for determining a Georgia-Pacific reasonable royalty without any modification (such as the modified Georgia-Pacific analysis applied to determine a RAND-rate by Judge Robart in Microsoft v. Motorola or by Judge Holderman in Innovatio, or the RAND-specific instructions given by Judge Whyte in Realtek v. LSI).  The only hint of a standard-setting issue in the jury instructions is found in one phrase of the last sentence of Instruction No. 20 “Damages–Noninfringing Alternatives”:

You may also consider the impact of any available noninfringing alternatives to the asserted claim on the royalty negotiated in the hypothetical negotiation.  In doing so, you may consider the value of any differences in benefits and costs between the noninfringing alternatives and the asserted claim.  You may also consider any alternatives that were available to a standard-setting body or to a third-party component supplier, whether the alternatives are marketed or not. [emphasis added]

 Thus, the jury instructions basically left it to the parties to argue any standard-setting obligation’s impact on the reasonable royalty analysis.

Yesterday, a Florida jury returned a verdict that BlackBerry did not infringe NXP’s patents alleged to be essential to the IEEE 802.11 WiFi and JEDEC eMMC standards and that the asserted patent claims were invalid.  The role of BlackBerry’s standard essential patent defenses is not clear from the record, though it appears to have been limited to arguments that any damages must be consistent with reasonable and non-discriminatory (RAND) licensing terms (e.g., no apparent allegation or remedy sought for NXP breaching a RAND obligation).

Specifically, a few weeks ago Judge Kane denied NXP’s motion in limine to preclude BlackBerry from offering any affirmative defense based on RAND or FRAND licensing obligations because BlackBerry allegedly did not plead or disclose any such defenses.  Judge Kane held that the RAND defense may be based on pleadings of implied license, patent misuse, or equitable estoppel even though the “better practice is to assert the RAND obligation in conjunction with pleading license, exhaustion, or implied license.”

In its opposition to NXP’s motion in limine and in its trial brief, BlackBerry did not focus on any RAND-based defenses other than arguing that, if NXP’s patents covered the standards (which BlackBerry disputed), then any damages must be based on a RAND royalty rate (though not clear how that was alleged to be different from a reasonable royalty rate).  The jury instructions did not have any RAND-specific instructions or defenses.  The RAND-obligation issue, therefore, appears to have been subsumed in the reasonable royalty damages argument (based on the typical Georgia-Pacific reasonable royalty analysis per Jury Instruction Nos 23-25), which damages issue the jury did not reach because they found that the patent claims were not infringed and were invalid.

Yesterday the U.S. International Trade Commission (ITC) issued a Notice that it was terminating the investigation of whether certain LSI 802.11 and H.264 alleged standard essential patents were infringed by Realtek and others given various circumstances that mooted the investigation as to most patents and a finding of no liability for the remaining patent.  In terminating the investigation, the ITC “determined to take no position on the ALJ’s determination with respect to the Respondents’ RAND and equitable defenses.”

The ITC terminated the investigation as to the four patents at issue for different reasons, many not related to the merits:

  • Terminated investigation as to the ‘087 and ‘663 Patents due to settlement.
  • Terminated investigation as to ‘867 Patent because it recently expired and the ITC can only give prospective relief.
  • Terminated investigation as to remaining ‘958 Patent because asserted patent claims were not infringed, the claims were invalid and there was no domestic industry based on LSI’s licensing activities.

Our Oct. 21, 2013 post discussed the ITC’s decision to review ALJ Shaw’s determination in its entirety and had requested briefing on RAND-related issues in the event liability were found.  The ITC sought such RAND-related information given U.S. Trade Representative Froman’s prior disapproval of the Samsung-Apple exclusion order that counseled  the ITC to proactively develope a factual record on RAND issues (see our Aug. 6, 2013 post).  The ITC’s decision to terminate the investigation without addressing the RAND issues is a somewhat anti-climatic end of an investigation in which much ink was spilled (see our various posts on this Inv. No. 337-TA-837).  Whether and to what extent the RAND issue may and will be briefed in any appeal to the Federal Circuit is questionable.  But they will be front and center with any appeal from the parallel district court litigation (though there may be an issue similar to the Microsoft v. Motorola case whether the case premised on breach of RAND obligation should be appealed to the Federal Circuit or regional circuit).

Recall from our Feb. 27, 2014 post last week that the parallel district court case between Realtek and LSI before Judge Whyte led to a jury determined RAND rate for the ‘867 Patent (which the ITC dismissed because it expired) and the ‘958 Patent (which the ITC found not infringed).  The ITC’s decision is not inconsistent with the jury verdict for a few reasons.  First, procedurally, the ITC decision itself is not binding on the district court.  Second and more important substantively and practically, the jury was asked to determine a RAND rate for the two patents without deciding whether the patents were infringed and under the assumption that both patents are essential to the IEEE 802.11 WiFi standard.  The jury’s verdict thus is not inconsistent with the ITC’s determination, which did not decide whether the ‘867 Patent is infringed and found no infringement of the ‘958 Patent (an issue the jury was not asked to decide).

 

Yesterday, the jury in the Realtek v. LSI case before Judge Whyte returned a verdict finding that a RAND royalty for LSI’s two patents alleged essential to IEEE 802.11 WiFi standard would total about 0.19% of the total sales prices of Realtek’s WiFi chips (0.12% for one patent plus 0.07% for the other).  This RAND royalty is reported to be closer to the rate sought by patent owner LSI of 0.29% than the much lower rate sought by putative licensee Realtek of 0.017%.  The Realtek WiFi chip price is not clear from the available filings, but was reported to be $1 to $1.74, which would yield an effective royalty of about 0.19 to 0.33 cents per WiFi chip (the jury had the option to award a royalty per unit or percentage of sales price, and they chose the latter).  The jury also awarded Realtek about $3.8 million for costs in defending against LSI’s attempt to seek an exclusion order in the U.S. International Trade Commission, which Judge Whyte previously held breached LSI’s RAND obligations.

For further background on this jury trial, see our prior posts that outlined key evidentiary rulings by Judge Whyte that framed the issue for the jury (see our Jan. 9, 2014 post and our Nov. 14, 2013 post).

Another Litigated RAND Data Point.  The jury’s verdict in this case provides a fourth data point on a U.S. litigated RAND royalty rate.  To date, we have two judge-determined RAND royalty rates and two jury determined RAND royalty rates, as follows:

  • Judge Robart’s bench trial RAND determination of 3.471 cents per WiFi unit and 0.555 cents per H.264 unit  in Microsoft v. Motorola (W.D. Wash.) (see our Apr. 25, 2013 post and other posts).
  • Jury verdict before Judge Davis determining 15 cents per WiFi chip in Ericsson v. D-Link (E.D. Tex) (see our Aug. 7, 2013 post and other posts)
  • Judge Holderman’s bench trial RAND determination of 9.56 cents per WiFI chip in In re Innovatio Litigation (N.D. Ill.) (see our Oct. 3, 2013 post and other posts).
  • Jury verdict before Judge Whyte determining 0.19% per WiFi chip (about 0.19 to 0.33 cents per chip) in Realtek v. LSI (N.D. Cal.).

Probably too few data points at this point to predict future cases.  The two bench trials (Judge Robart and Judge Holderman) generally have resulted in RAND determinations substantially favoring the putative licensee.  The two jury verdicts (before Judge Davis and Judge Whyte) did not have as adverse results for the patentees, because the determined RAND rates were lower than–but closer to–what the patentees sought at trial.

Jury Instructions.  The jury was instructed to assess the RAND royalty rate by assuming the patents are essential to the standard and without determining whether the patents actually are infringed by Realtek’s WiFi chips: “Whether or not Realtek infringes the two LSI patents is not an issue in this case” and “The determination of a RAND royalty rate also assumes that the two LSI patents are essential to the 802.11 standard.”

The crux of the instructions for the jury to determine a RAND royalty rate is found in Instruction Nos. 12 to 15, reproduced below in their entirety given the importance to putting the jury’s decision in context:

INSTRUCTION NO. 12: RAND DETERMINATION – HYPOTHETICAL NEGOTIATION
     As I previously advised you, one of your tasks is to determine, based upon the evidence presented, the appropriate royalty rate for the ‘958 and ‘867 Patents that LSI needs to offer to Realtek to comply with LSI’s RAND obligations.  Whether or not Realtek infringes the two LSI patents is not an issue in this case.
A royalty is a payment made to a patent holder in exchange for the right to make, use, or sell the claimed invention.  This right is called a “license.”  A “RAND” royalty rate is a reasonable and nondiscriminatory royalty rate.
In determining the RAND royalty rate, you should consider a hypothetical negotiation between Realtek and LSI over a royalty rate for LSI’s two patents.  In considering the nature of this negotiation, you must assume that the patent holder and the licensee would have acted reasonably and would have entered into a license agreement.  The determination of a RAND royalty rate also assumes that the two LSI patents are essential to the 802.11 standard.
For the purposes of this hypothetical negotiation, you should consider all the facts known and available to the parties at the time Realtek first made, used, or sold products using the standard, which was November 2002.  You 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.  Your role is to determine what the result of the hypothetical negotiation between Realtek and LSI would have been.  You must determine what royalty would have resulted from the hypothetical negotiation and not simply what either party would have preferred.

INSTRUCTION NO. 13: RAND DETERMINATION – TYPES OF ROYALTIES
     A royalty can be calculated in several different ways and it is for you to determine which way is the most appropriate based on the evidence you have heard.  One type of royalty is a percentage royalty, in which the licensee pays the patent holder a certain percentage of its revenue.  Another type of royalty is a per unit royalty, in which the licensee pays the patent holder a predetermined amount of money for each unit the licensee sells.
It is up to you, based on the evidence, to decide what type of royalty is appropriate in this case.

INSTRUCTION NO. 14: RAND DETERMINATION – DETERMINING A RAND ROYALTY RATE
     You should follow the two steps below in determining the RAND royalty rate resulting from the hypothetical negotiation:

(1) Consider the importance of the two LSI patents to the standard as a whole, comparing the technical contribution of the two LSI patents to the technical contributions of other patents essential to the standard.
(2) Consider the contribution of the standard as a whole to the market value of Realtek’s products utilizing the standard.

INSTRUCTION NO. 15: RAND DETERMINATION – CONSIDERATION OF LICENSES
     You may consider other licenses for patents comparable to the two LSI patents.  In determining the comparability of other licenses, you may consider, among others, the following factors:

(1) the patents included in the license agreement,
(2) the date of the license,
(3) any limitations on the use of the licensed technology,
(4) the inclusion of other consideration in the agreement,
(5) whether the license was part of a settlement of litigation or arbitration,
(6) whether the royalty was a lump sum or a running royalty rate, and
(7) opinion testimony of qualified experts.

 

Today Judge Robart issued an Order certifying a Rule 54(b) judgment in the Microsoft v. Motorola case where he had issued a first of its kind RAND rate ruling on Motorola H.264 and 802.11 standard essential patents (SEPs) and sustained the jury verdict that Motorola breached its RAND obligations in offering a license to Microsoft.  Motorola promptly filed a notice of appeal of the Rule 54(b) judgment to the Federal Circuit (recall questions about whether the Ninth Circuit or Federal Circuit has appellate jurisdiction).

A Rule 54(b) judgment is one entered on some, but not all, claims in a case.  This case involved multiple claims and counterclaims in two consolidated actions:

  • Microsoft’s “contract action” against Motorola filed in W.D. Wash. on November 9, 2010
  • Motorola’s “patent action” against Microsoft filed in W.D. Wis. the next day, November 10, 2010.

Motorola’s “patent action” was later transferred to W.D. Wash. in July 2011 and consolidated with Microsoft’s “contract action”.  That consolidation probably vested appellate jurisdiction in the Federal Circuit over both the “patent action” and the “contract action” even though, standing alone, the “contract action” otherwise probably would have been appealable to the Ninth Circuit.

Judge Robart entered Rule 54(b) judgment on three claims:

  • Microsoft’s breach of contract claim, where judgment is entered in favor of Microsoft  based on the jury verdict that Motorola breached its RAND obligations.
  • Judge Robart’s prior RAND ruling entered as part of the breach of contract claim relied on by the jury in reaching its breach verdict (this ruling probably is subsumed in the breach of contract judgment, but was made an explicit part of the judgment out of an abundance of caution to ensure appellate review).
  • Motorola’s claim for a declaration that Microsoft repudiated any rights it had arising from Motorola’s RAND obligation by not accepting/negotiating the offered license, where judgment is entered against Motorola based on the court’s prior summary judgment ruling that rejected this claim.

This Rule 54(b) judgment leaves several claims still pending in abeyance with the prospect that many may be mooted or otherwise resolved following appeal of the judgment.  For example, the parties agreed to stay their patent infringement claims– e.g., Motorola’s claim that Microsoft infringes three SEPs (at issue in the breach of contract case) and Microsoft’s claims that Motorola infringes two Microsoft patents.  And Microsoft’s promissory estoppel claim may be mooted by the judgment that Motorola breached its RAND obligation as a contractual matter.

Accordingly, the next steps in this action appears to be briefing and argument at the Federal Circuit.  Will keep you posted.

Today, an E.D. Tex. jury in Wi-LAN v. Apple returned a verdict that the asserted claims 1 and 10 of Wi-LAN’s RE37,802 Patent (“the ‘802 Patent”) were invalid and not infringed by Apple.  The ‘802 Patent has been a centerpiece for Wi-LAN’s prolific patent litigations and settlements thereof.  Wi-LAN has asserted that the ‘802 Patent covers various wireless industry standards, such as CDMA2000, HSPA and 802.11 standards.

Yesterday, Judge Robart issued an Order that denied Motorola’s motion to overturn the jury’s verdict that Motorola breached its RAND obligations in dealing with Microsoft on standard essential patents (SEPs) for IEEE 802.11 WiFi standards and ITU H.264 video compression standards. Judge Robart’s ruling here indicates that assessing compliance with a RAND obligation is a case-sensitive, fact-specific inquiry, stating that “there was enough evidence on each side for the jury to decide for either party.”

Microsoft had argued to the jury that Motorola breached its RAND obligations on several grounds:

  • Offering a royalty rate that was not RAND (offered 2.25% of end product price)
  • Seeking injunctive relief against Microsoft on the SEPs
  • Not licensing Microsoft’s 802.11 chip supplier, Marvell

The jury unanimously found that Motorola breached its contractual commitment to IEEE and ITU and awarded over $14.5 million in damages. Motorola moved for judgment as a matter of law to set-aside the jury’s verdict.

In considering the JMOL motions, Judge Robart found the essence of the various RAND-breach theories to be “whether Motorola’s conduct violated the duty of good faith and fair dealing.” His jury instructions on that duty under Washington law was “the operative standard” for weighing the evidence in this case, the text of which is provided on pages 9-11 of the Order and is reproduced below (without internal citations) given its importance to Judge Robart’s decision:

     A duty of good faith and fair dealing is implied in every contract. This duty requires the parties to a contract to cooperate with each other so that each may obtain the full benefit of performance, even if the parties have different requirements under the contract. However, this duty does not require a party to accept a material change in the terms of its contract. The implied duty of good faith and fair dealings arises out of the obligations created by a contract and only exists in relation to the performance of specific contract terms. Thus, a party’s obligation is only to perform the obligations imposed by the contract in good faith. There is no “free-floating” duty of good faith and fair dealing that injects substantive terms into the parties’ contract.

There is no one-size-fits-all definition of good faith and fair dealing. Rather, the duty varies somewhat with the context in which it arises. It may violate the duty of good faith and fair dealing to, for example, (1) evade the spirit of a bargain; (2) willfully render imperfect performance; (3) interfere with or fail to cooperate in the other party’s performance; (4) abuse discretion granted under the contract; or (5) perform the contract without diligence. This list is in no way exhaustive, and indeed it would be nearly impossible to create a complete catalogue of conduct that violates the duty of good faith and fair dealing.

It is the fact finder’s job–in this case the jury–to determine whether a party breached its duty of good faith and fair dealing. Good faith performance of a contract requires being faithful to the agreed common purpose of the contract and performing consistently with the justified expectations of the other parties. On the other hand, bad faith performance involves conduct that violates community standards of decency, fairness, or reasonableness.

Washington law establishes that numerous considerations may inform a fact-finder’s determination of whether the defendant’s conduct violated the covenant of good faith and fair dealing. In particular, a review of state and federal case law reveals that a fact finder may consider: (1) whether the defendant’s actions were contrary to the reasonable and justified expectations of other parties to the contract; (2) whether the defendant’s conduct would frustrate the purpose of the contract; (3) whether the defendant’s conduct was commercially reasonable; (4) whether and to what extent the defendant’s conduct conformed with ordinary customer or practice in the industry; (5) to the extent the contract vested the defendant with discretion in deciding how to act, whether that discretion was exercised reasonably; and (6) subjective factors such as the defendant’s intent and motive.

The last consideration, subjective intent, is a subject of frequent dispute between the parties and so requires some elaboration. Several Washington cases have considered subjective factors in determining whether a party violated its duty of good faith and fair dealing. Thus, the court concludes that, under Washington law, these factors are relevant to the good faith inquiry. However, other cases have made it clear that bad motive does not equate to bad faith and good motive does not equate to good faith. To be more specific, bad motive or intent does not necessarily imply bad faith, and good motive or intent does not necessarily imply good faith. Likewise, bad motive or intent is not a prerequisite to bad faith, nor is good motive or intent a prerequisite to good faith.

Offer Letters. Motorola argued there was insufficient evidence of breach based on its initial offer letters (2.25% of end product price) because (1) Motorola followed industry custom of making an opening offer to be further negotiated; (2) the contractual purpose of the RAND obligation was not frustrated because there is no evidence that “hold up” is a problem in the “real world”; and (3) Motorola acted in accordance with the parties’ reasonable expectations. But Judge Robart found that, under the applicable JMOL standard, Microsoft presented sufficient evidence to the contrary, such as “evidence presented by Microsoft that hold up took place in this case.” Further, because “the good faith standard articulated above is multi-faceted and no single factor is dispositive,” the jury could have found breach based on other factors.

Injunctive Relief.  Motorola argued that its RAND obligation did not waive Motorola’s right to injunctive relief.  Judge Robart “recognized” the “jurisprudential debate” on whether injunctions are available for SEPs.  So he had not instructed the jury that there was such a waiver of injunctive relief, but left it to the jury to decide the ultimate issue whether Motorola breached its duty of good faith and fair dealing.  He found that Microsoft presented sufficient evidence to support the verdict, and the court could not reweigh the evidence in a JMOL motion.

Marvell.  Motorola argued that Microsoft had no standing to seek relief based on Motorola not  licensing WiFi chip maker Marvell (and instead going after Microsoft for using Marvell’s chip).  Judge Robart, however, stated that “Microsoft is not asserting Marvell’s rights and interests, it is merely presenting evidence that tends to show Motorola’s bad faith.”  He allowed the Marvell argument in order to “reflect[] the fact that Motorola’s course of conduct in marching toward a RAND license (i.e., the course of conduct subject to the good faith duty) may be complicated and multi-faceted and may involve third parties like Marvell.”  Thus the jury was not asked to find a breach “based on the Marvell evidence alone” and “Microsoft presented so much evidence with respect to opening offers, injunctive relief, and Motorola’s overall course of conduct” that the jury could find a breach “without considering any Marvell evidence at all.”

Judge Robart also rejected Motorola’s challenges as to the damages award.

gavel

This afternoon the RAND breach of contract case between Microsoft and Motorola went to the jury, and this evening — after just a few short hours of deliberation — the jury came back with its verdict.  According to Curtis Cartier (@curtis_cartier on Twitter), a freelance journalist who attended the trial, the jury found for Microsoft “on every question asked of them” and awarded $14.5M in damages to Microsoft.  (Note that this is approximately half of the total damages that Microsoft was seeking as compensation for Motorola’s alleged RAND breach of contract).

We can expect Motorola to try to get Judge Robart to set aside all or part of the verdict on post-trial motions, and probably appeal if that does not work (but to which court?).  In the meantime, we now have seen what appears to be the first jury verdict finding a breach of contractual RAND obligations…

  • Here’s some initial coverage on the verdict from Janet Tu at the Seattle Times, including an initial reaction from Microsoft.
  • This article from Susan Decker at Bloomberg features quotes from both Microsoft and Motorola representatives:
    • Microsoft: “This is a landmark win for all who want products that are affordable and work well together.  The jury’s verdict is the latest in a growing list of decisions by regulators and courts telling Google to stop abusing patents.”
    • Motorola: “We’re disappointed in this outcome, but look forward to an appeal of the new legal issues raised in this case.”

Also yesterday, both Microsoft and Motorola each filed motions for judgment as a matter of law (commonly known as JMOL motions), asserting that because no reasonable jury could find otherwise, Judge Robart should find in their (respective) favor on various issues.  The court has taken these motions under advisement — if you’d like to check out the motions, we’ve linked to them below.

[UPDATE]  The jury verdict form has now been made available [LINK].  The jury did in fact find for Microsoft on all counts, and did not unanimously — 8-0.  [/UPDATE]