On Tuesday, a proposed Manager’s Amendment was released for the Senate’s pending PATENT Act bill.  Following is a recap of the recent wave of patent legislation proposals this year.

Innovation Act.  Since 2013, the House and the Senate have considered various forms of patent reform legislation that attempt to address perceived patent litigation abuse.  See our Dec. 9, 2013 post.  In February, the House Judiciary Committee Chairman Bob Goodlatte (R-Va.) reintroduced the Innovation Act, which is identical to the bill the House passed in December of 2013 by a vote of 325-91.  A summary of the Innovation Act’s provision is in our Feb. 11, 2015 post.

TROL Act.  In April, the House Subcommittee on Commerce, Manufacturing and Trade — a subcommittee of the House’s Energy and Commerce Committee — voted to send a separate proposed patent legislation bill to the full committee for a vote.  This bill, known as the Targeting Rogue and Opaque Letters Act, or “TROL Act,” would expressly render misleading demand letters sent by patent holders to accused infringers a violation of Section 5 of the Federal Trade Commission Act.  Under the bill’s provisions, a demand letter that states or represents “that the recipients are or may be infringing” would be deemed unfair and deceptive under Section 5 if, among other things, the sender, “in bad faith,” misrepresents that

  • it has the right to enforce the patent (when it does not);
  • a patent infringement action has been filed against the recipient and/or other persons;
  • legal action for infringement will be taken against the recipient; or
  • other persons have purchased a license to the asserted patents.

The bill also prohibits sending a demand letter in bad faith seeking compensation for infringing a patent that has been held, in a final determination, to be invalid or unenforceable due to inequitable conduct.  The FTC and states attorneys general would be granted authority to bring civil actions for penalties and other relief against persons that violate the Act, with the FTC retaining the right to intervene in any civil action brought by a state attorney general.  A previous version of the TROL Act was introduced last year.  After mark up by the House’s Subcommittee on Commerce, Manufacturing and Trade, the bill was forwarded, as amended, to the full Energy and Commerce Committee for consideration, but did not advance further.

STRONG Act.  In May of this year, Senators Coons (D-DE), Durbin (D-IL) and Hirono (D-HI) introduced a proposed bill known as the Support Technology & Research for Our Nation’s Growth Act, or “STRONG Act.”  If enacted into law, this bill would, inter alia:

  • harmonize the claim-construction standard used in post-grant proceedings at the Patent Trial and Appeal Board (PTAB) with the standard used in District Court litigation;
  • clarify that during post-grant proceedings, the patent-holder may propose amended, narrower claims for the patent(s) under consideration;
  • maintain the presumption of validity for patent rights in post-grant proceedings, and clarifies that unpatentability may be proved for existing claims by the “clear and convincing evidence” standard used in District Court litigation;
  • attempt to minimize abuse of post-grant proceedings by ensuring that a petitioner has a business or financial reason to bring a case before the PTAB, to reduce incentives for privateering or extortion of nuisance settlements; and
  • permit evidence in post-grant discovery to determine the petition’s real party in interest.

PATENT Act.  At the end of 2013, Senators Leahy (D-VT) and Lee (R-UT) introduced the Patent Transparency and Improvements Act of 2013 (see our Nov. 19, 2013 post), but the bill was pulled from debate apparently due to lack of bi-partisan support (May 23, 2014 post).  In April of this year, Senator Leahy, along with several other Senators from both sides of the aisle, introduced a separate patent reform bill known as the Protecting American Talent and Entrepreneurship Act, or “PATENT Act.”  Here is an overview of some of that version of the PATENT Act’s provisions.

  • Pleading Requirements for Patent Infringement Complaint.  The PATENT Act would expressly direct the Supreme Court to eliminate Form 18, “Complaint for Patent Infringement,” in the Appendix to the Federal Rules of Civil Procedure (as we previously reported, the Judicial Conference has already recommended the elimination of Form 18, and this rule change is expected to take effect later this year).  Similar to the re-introduced Innovation Act by the House, the PATENT Act contains provisions that would increase the specificity and information required to plead patent infringement, requiring a patentee to identify the patents, the asserted patent claims, the accused infringing products or services, and an element-by-element description of how each accused product or service infringes the asserted patent claims.  District courts would be directed to dismiss any complaint that does not include such factual information unless the plaintiff alleges that such information is inaccessible, the reason(s) why the information is inaccessible, and also generally pleads the factual information that is available.
  • Patent Ownership and Financial Interest.  The PATENT Act would require a patent plaintiff to disclose at the outset of an infringement case certain patent ownership and financial interest information to the court, other parties and the Patent Office, including the identity of the patent assignee, the assignee’s parent entity, any entity with a right to sublicense or enforce the patent, and any entity with a financial interest in the patent.
  • Other Complaints Involving the Asserted Patents.  The PATENT Act would also require a patent plaintiff to disclose at the outset of an infringement case all other complaints involving the asserted patents filed by the patentee or any of its affiliates within the preceding three (3) years.
  • Standard Setting Obligations.  The proposed PATENT Act would also require a patent plaintiff to disclose at the outset of an infringement case whether any of the asserted patents are subject to an assurance made “to a standards development organization to license others under such patent” if “the assurance specifically identifies such patent[s] or claims therein” and “the allegation of infringement relates to such standard.”
  • Customer Stay.  The PATENT Act also includes a customer stay provision, under which a District Court would be obligated to stay an infringement action against a “covered customer” (defined as a retailer or end user accused of infringement as a result of the sale, offer for sale or use of a patented product or process) where the manufacturer of the accused product or process is also a party to the action against the customer or a separate infringement action involving the same patent or patents, the covered customer agrees to be bound by the patent determinations that are made in the case against the manufacturer, and the motion to stay is filed no later than 120 days after service of the first pleading against the covered customer or the date on which the first scheduling order is entered.  If the covered customer impleads the manufacturer of the accused product or process into the case, then a stay may only be granted if the covered customer and manufacturer agree in writing to a stay.  If the manufacturer obtains or consents to entry of a consent judgment or fails to prosecute the patent issues to a final decision, the District Court may, upon motion, determine that the consent judgment or unappealed final decision is not binding on the customer if the customer shows that “such an outcome would unreasonably prejudice or be manifestly unjust to the covered customer in light of the circumstances of the case.”
  • Stay of Discovery Pending Decision on Certain Initial Motions.  The proposed PATENT Act would stay discovery in patent infringement actions during the pendency of a motion to dismiss, a motion to transfer venue and a motion to sever accused infringers if the motion or motions were filed prior to the first responsive pleading.  The District Court would retain discretion to allow limited discovery that is “necessary to resolve” such motions.
  • Discovery limitations.  The Act would also require the Judicial Conference to develop rules that address the extent to which each party in an infringement action is “entitled to receive core documentary evidence and should be responsible for the costs of producing core documentary evidence within the possession or control of each such party, and to what extent each party to the action may seek noncore documentary evidence.”
  • Fee Shifting.  Under the proposed PATENT Act, a District Court would be required to award reasonable attorney fees to a prevailing party if the court determines that “the position of the non-prevailing party was not objectively reasonable in law or fact or that the conduct of the non-prevailing party was not objectively reasonable” unless “special circumstances would make an award unjust.”
  • Pre-suit written notice.  In an action alleging infringement “in which the plaintiff has provided written notice of the accusation of infringement to the party accused of infringement prior to filing the action,” the PATENT Act would require the “initial written notice” to: (1) identify each patent believed to be infringed and at least one claim of each patent that is believed to be infringed, (2) contain a “clear and detailed description of the reasons why the plaintiff believes each patent identified . . . is infringed,” (3) notify the recipient that they may have the right to a customer-suit stay, (4) identify any person that has the right to enforce the patent, and (5) if compensation is proposed, “a short and plain statement as to how the proposed compensation was determined.”  If the initial written notice does not contain such information, the defendant’s time to respond to a complaint alleging patent infringement is extended by thirty (30) days.  Additionally, a patent plaintiff seeking to establish willful infringement may not rely on evidence of pre-suit notification unless the notification includes such information.
  • Regulation of “Abusive” Demand Letters.  Similar to the proposed TROL Act, the PATENT Act would render the “widespread” sending of unfair and deceptive demand letters a violation of Section 5 of the FTC Act and expressly grant the FTC the authority to bring enforcement actions against alleged violators.  A demand letter would be deemed to be unlawful if, among other things:
    • it falsely represents that administrative or judicial relief has been sought against the recipient or others or threatens litigation if compensation is not paid, the infringement issue is not otherwise resolved, or the communication is not responded to and there is a pattern of false statements regarding administrative or judicial relief against the recipients or others having been made without litigation or other relief then having been pursued;
    • the assertions contained in the communications lack a reasonable basis in fact or law (e.g., the sender does not have the right to enforce the patent, the sender seeks compensation for acts occurring after the patent has expired, the patent has been finally held to be invalid or unenforceable); or
    • the content of the written communication is likely to materially mislead a reasonable recipient because the content fails to include facts reasonably necessary to inform the recipient (1) of the identity of the person asserting a right to license the patent to, or enforce the patent against, the intended recipient or any affiliated person, (2) of the patent allegedly infringed by the recipient, and (3) if infringement or the need to pay compensation for a license is alleged, of an identification of at least one product, service, or other activity of the recipient that is alleged to infringe the identified patent or patents and, unless the information is not readily accessible, an explanation of the basis for such allegation.

On Tuesday, the co-sponsors released the Committee Manager’s proposed amendments to the PATENT Act.  Among other things, the amendments would add language that changes the procedures for inter partes review (IPR) and post grant review (PGR) at the Patent Office.  Specifically, the amendments would:

  • require IPR and PGR proceedings to apply the same claim construction standard used in District Court and consider District Court claim constructions;
  • estop parties from eschewing in later court or Patent Office proceedings arguments made on claim construction to the Patent Office;
  • presume that patents are valid in IPR and PGR proceedings, though retaining the current preponderance of the evidence burden to invalidate a patent in such proceedings;
  • clarify that the Patent Office Director has discretion not to institute an IPR or PGR if doing so would not serve the interests of justice considering factors such as whether the same prior art or arguments were decided in a prior proceeding or the patent is the subject of a current Patent Office proceeding;
  • allow patent owners to submit evidence in response to a petition to institute an IPR or PGR, and permit petitioners to file a reply to respond to new issues;
  • direct the Patent Office to modify the IPR and PGR process so that institution and merits decisions are not made by the same panels;
  • direct the Patent Office to hold a rulemaking on instituting a Fed. R. Civ. P. 11-type obligation in IPR and PGR proceedings;
  • require PTAB decisions to be publicly available and searchable on the web; and
  • remove the ability to join additional claims to a timely-filed IPR after the time for filing has elapsed, except for claims that are newly-served against the petitioner in an amended complaint (which get 1 year from amendment).

The Judiciary Committee is scheduled to mark-up the PATENT Act today.

Patent claims have “limitations.”  Accused infringing products have “elements.”  A patent owner may argue that patent claim “limitations” read onto “elements” of an accused infringing product.  The Federal Circuit, sitting en banc, resolved this divisive issue fifteen years ago: “It is preferable to use the term ‘limitation’ when referring to claim language and the term ‘element’ when referring to the accused device.” Festo v. Shoketsu, 234 F.3d 558, 563 n.1 (Fed. Cir. 2000) (en banc).  Unfortunately, in the same breath in which the Federal Circuit gaveth clarity, it also tooketh it a way, the complete Festo statement being as follows:

In our prior cases, we have used both the term “element” and the term “limitation” to refer to words in a claim.  It is preferable to use the term “limitation” when referring to claim language and the term “element” when referring to the accused device.  However, because the en banc questions use the term “element,” we use that term in this opinion. [emphasis added; internal citations omitted]

So when attorneys and courts quote other language from this Festo decision — one of the most quoted decisions in patent law — that language improperly uses the term “element” to refer to patent claim language, rather than “limitation”, thus perpetuating the very confusion that the Festo footnote sought to clarify.  Darn … missed it by that much.

It is understandable, then, that language in the newly proposed Manager’s amendment to the Senate’s PATENT Act bill may misuse the term “element”, stating the following in a portion of the bill on what information must be provided in pleading patent infringement:

(5) For each claim identified under paragraph (2), a description of the elements thereof that are alleged to be infringed by the accused instrumentality and how the accused instrumentality is alleged to infringe those elements. [emphasis added]

Perhaps this language is intended to seek a description of how claim limitations read onto elements of an accused instrumentality?

This is part of a contested provision in the bill regarding how much information must be provided in a complaint in order to initiate a district court litigation on patent infringement.  The various interested parties, Senators and their staff may be more focused at the moment on the big picture of whether and to what extent there should even be such a provision at all.  Addressing this technical problem may not be high on the priority list.  Those who oppose this provision altogether may focus more on striking the entire provision than correcting this.  Those who want this provision may be wary about proposing any change lest the house of cards fall altogether.

Patent purists would want to see the words “limitations” and “elements” used correctly.  The Federal Circuit’s well-intended attempt in Festo to teach us how to use the terms “limitations” and “elements” was less than perfect in its execution.  The current bill misses the mark.  We take no position here whether any of the bill’s provision itself or anything like it should be enacted.  But if — for good or for bad — something is enacted, may “limitations” be limitations, “elements” be elements, and “bears” be bears (okay …  bears have nothing to do with this, but it made for a more interesting title to this post).

We previously reported on a scheduling order governing FRAND and damages-related discovery in InterDigital’s two patent infringement lawsuits pending in Delaware against ZTE and Nokia Inc., Nokia Corp. and Microsoft Mobile Oy (MMO), respectively.  On Friday, the court entered a modified, agreed-to scheduling order that extends the time to complete such discovery by approximately seven (7) months.

As background, trials on liability were bifurcated from trials on damages and the defendants’ FRAND-related affirmative defenses.  ZTE’s liability trial on three (3) of InterDigital’s asserted patents occured first and, last Fall, a Delaware jury found that ZTE’s accused 4G mobile devices infringed those patents.  ZTE asserts a number of FRAND-related affirmative defenses to this finding of infringement.  A second Delaware jury later found that ZTE’s accused 4G mobile devices did not infringe a fourth patent asserted by InterDigital.

In January of this year, the court entered a scheduling order setting December 4, 2015 as the deadline for completing FRAND and damages-related discovery in both the ZTE and Nokia/MMO cases, with the trial on these issues tentatively scheduled to take place in the Spring of 2016.

The liability trial against Nokia/MMO was scheduled to occur in April of this year.  However, that trial was postponed until November.  As a result of this change in Nokia/MMO’s liability trial date, the parties proposed, and, on Friday, the court entered, a scheduling order modifying the FRAND and damages-related discovery period and target trial dates as follows:

  • Completion of fact discovery related to FRAND/damages:  Deadline moved from August 21, 2015 to March 4, 2016;
  • Disclosure of expert testimony for party with burden of proof:  Deadline moved from September 18, 2015  to April 15, 2016;
  • Supplemental/rebuttal expert disclosure:  Deadline moved from October 16, 2015 to May 13, 2016;
  • Reply expert reports from party with burden of proof:  Deadline moved from November 9, 2015 to June 9, 2016;
  • Completion of expert discovery:  Deadline moved from December 4, 2015 to July 13, 2016;
  • Joint letter outlining any issues the parties believe must be addressed at the status conference:  Deadline moved from December 8, 2015 to July 20, 2016;
  • Status conference:  Moved from December 15, 2015 to August 22, 2016;
  • Dispositive motions and deadline to object to expert testimony:  Moved from December 29, 2015 to August 5, 2016;
  • ZTE target trial date:  Moved from March 21, 2016 to October 17, 2016; and
  • MMO/Nokia target trial date:  Moved from April 11, 2016 to November 14, 2016.

 

 

 

Today, in Commil USA, LLC v. Cisco Systems, Inc., the U.S. Supreme Court ruled that an accused infringer’s good faith belief that a patent is invalid is not a defense to induced infringement, reversing the Federal Circuit on that issue (see our June 25, 2013 post on the Federal Circuit’s decision).  The Court also clarified that the scienter requirement for induced infringement from Global-Tech requires knowledge that the patent was infringed and not merely knowledge of the patent.  Finally, perhaps in response to the current patent legislation debate, the Court stated that it was aware of concern that some entities assert patents for purposes of extracting money based more on the cost of defending a patent lawsuit, rather than the merits of the case, and the Court “stress[ed]” that district court’s already have “the authority and responsibility to ensure frivolous cases are dissuaded.”

Background

Patent owner Commil sued Cisco in 2007 for making and selling wireless networking equipment alleged to infringe Commi’s patent, alleging both direct infringement and induced infringement for selling infringing equipment for others to use.  Cisco sought reexamination of Commil’s patent, which proceeding ultimately confirmed the validity of the patents.  Cisco argued that it had a good-faith belief that the patent was invalid as a defense to induced infringement, but the district court excluded that argument.  On appeal, the Federal Circuit ruled that the district court erred in not permitting Cisco to present evidence of its good-faith belief that the patent was invalid as a defense to induced infringement (see our June 25, 2013 post).  The Supreme Court accepted certiorari to review that ruling (see our Dec. 5, 2014 post).

Decision

Clarifying Global-Tech’s Scienter Requirement.  The Supreme Court first reaffirmed its ruling in Global-Tech that induced infringement requires knowledge that the induced acts constitute patent infringement.  The Court rejected the argument by patent owner Commil and the U.S. Government that Global-Tech merely requires knowledge of the patent, stating:

Qualifying or limiting [Global-Tech’s] holding, as the Government and Commil seek to do, would lead to the conclusion, both in inducement and contributory infringement cases, that a person, or entity, could be liable even though he did not know the acts were infringing.  In other words, even if the defendant reads the patent’s claims differently from the plaintiff, and that reading is reasonable, he would still be liable because he knew the acts might infringe.  Global-Tech requires more.  It requires proof the defendant knew the acts were infringing.  And the Court’s opinion was clear in rejecting any lesser mental state as the standard.

Belief of Invalidity No Defense To Induced Infringement.  The Supreme Court held that an accused infringer’s good faith belief that a patent is invalid is not a defense to induced infringement for several reasons.

First, the Court held that infringement and validity are separate issues under the Patent Act.  They are separately listed defenses as to liability such that “invalidity is not a defense to infringement, it is a defense to liability.”

Second, allowing belief as to validity as a defense to induced infringement would undermine the presumption of validity that “is a ‘common core of thought and truth'” and “that presumption would be lessened to a drastic degree.”

Third, maintaining the separation of infringement and validity is important in “the orderly administration of the patent system” given the different procedural burdens, presumptions and evidence attendant to each.

Fourth, an accused infringer who believes a patent is invalid has many other ways to defend itself by challenging patent validity in a declaratory judgment action, in an inter partes review or ex parte reexamination proceeding in the U.S. Patent & Trademark Office, or raising the defense in an infringement litigation.

Fifth, recognizing belief of invalidity as a defense to induced infringement would “render litigation more burdensome for everyone involved” including “increase[d] discovery costs and multiply[ing] the issues the jury must resolve” such that “the jury would be put to the difficult task of separating the defendant’s belief regarding validity from the actual issue of validity.”

Sixth, in other contexts the law recognizes that intentional acts can lead to liability “even if the actor lacked actual knowledge that her conduct violated the law”, stating: “In the usual case, ‘I thought it was legal’ is no defense.”  For similar reasons, belief that a patent is invalid “will not negate the scienter required under §271(b)”, which the court is limiting to knowledge that the patent is infringed.

Courts Should Dissuade Frivolous Cases.  The Court made clear that there was no issue of frivolity in this case.  But, as a nod to the current patent reform legislation efforts, the Court “stress[ed]” that districts “have the authority and responsibility to ensure frivolous cases are dissuaded.”  The Court stated it was “well aware” of a developing patent licensing industry where some demand money even where their claims are frivolous:

The Court is well aware that an “industry has developed in which firms use patents not as a basis for producing and selling goods but, instead, primarily for obtaining licensing fees” [citing Justice Kennedy concurrence in eBay].  Some companies may use patents as a sword to go after defendants for money, even when their claims are frivolous.  This tactic is often pursued through demand letters, which “may be sent very broadly and without prior investigation, may assert vague claims of infringement, and may be designed to obtain payments that are based more on the costs of defending litigation than on the merit of the patent claims.” [citing FTC Statement in 2014 on draft demand letter legislation].  This behavior can impose a “harmful tax on innovation.” [Id.]

The Court stated that this concern can be addressed using existing procedures for sanctioning attorneys for bringing frivolous cases, shifting attorney’s fees costs in “exceptional cases” and multiple avenues for an accused infringer to challenge patent validity, which thus favors maintaining the separation of infringement and validity, rather than conflating invalidity into a defense to induced infringement:

[I]t is still necessary and proper to stress that district courts have the authority and responsibility to ensure frivolous cases are dissuaded.  If frivolous cases are filed in federal court, it is within the power of the court to sanction attorneys for bringing such suits. Fed. Rule Civ. Proc. 11.  It is also within the district court’s discretion to award attorney’s fees to prevailing parties in “exceptional cases.” 35 U.S.C. §285; see also Octane Fitness, LLC v. ICON Health & Fitness, Inc., 572 U.S. __, __-__ (2014) (slip op., at 7-8).  These safeguards, combined with the avenues that accused inducers have to obtain rulings on the validity of patents, militate in favor of maintaining the separation expressed throughout the Patent Act between infringement and validity.  This dichotomy means that belief in invalidity is no defense to a claim of induced infringement.

 

Today, a Federal Circuit panel, Judges Prost, Linn (author) and Moore (dissent), issued its long-awaited decision in the Akamia v. Limelight case following remand from the Supreme Court to consider the issue of multiple-actor direct infringement under 35 U.S.C. § 271(a) (see our June 2, 2014 post).  The panel again found that there was no direct infringement liability under § 271(a) because accused infringer Limelight “did not perform all of the steps of the asserted method claims … and because the record contains no basis on which to impose liability on Limelight for the actions of its customers who carried out the other steps.”  The majority summarized its decision as follows:

In the court’s view, … direct infringement liability of a method claim under 35 U.S.C. § 271(a) exists when all of the steps of the claim are performed by or attributed to a single entity–as would be the case, for example, in a principal-agent relationship, in a contractual arrangement, or in a joint enterprise. [fn. 1: “Because this case does not implicate joint enterprise liability, this case is not the appropriate vehicle to adopt joint enterprise liability.”]  Because this case involves neither agency nor contract nor joint enterprise, we find that Limelight is not liable for direct infringement.

 Background

Our June 2, 2014 post on the Supreme Court’s decision in this case provides the procedural background.  In summary, the patent concerns a claimed method for delivering content where certain components of a website are “tagged” to be stored on certain servers within a content delivery network (CDN).  The alleged infringer, Limelight, stored tagged content on its servers, but required its customers to do their own tagging of the content.  So Limelight itself did not perform the claimed method step of tagging components to be stored on its servers.

This case was sent to the original three-judge panel in this case following remand from the Supreme Court; but Judge Moore was added to the panel because original panel member Judge Rader had since retired from the court.

Federal Circuit Majority Opinion

The majority opinion, written by Judge Linn and joined by Chief Judge Prost, started with the premise that, “[f]or method patent claims, direct infringement only occurs when a single party or a joint enterprise performs all of the steps of the process.”  There is no such direct infringement based merely on “[e]ncouraging or instructing others to perform an act.”  When there are multiple actors, direct infringement may arise where one actor may be vicariously liable for the actions of another:

In circumstances in which one party, acting as “mastermind” exercises sufficient “direction or control” over the actions of another, such that those actions may be attributed to the mastermind, the combined performance of the steps of a method claim will directly infringe under § 271(a).  Under BMC Resources, the control or direction standard is satisfied in situations where the law would traditionally hold the accused direct infringer vicariously liable for the acts committed by another party that are required to complete performance of a claimed method.  This may occur in a principal-agent relationship, a contractual relationship or in circumstances in which parties work together in a joint enterprise functioning as a form of mutual agency.

The majority ruled that the 1952 codification of direct liability in § 271(a) did not incorporate broad concepts of joint tortfeaser liability, but only “the principles of vicarious liability.”  Rather than court developed doctrines of joint liability in patent cases, the 1952 Patent Act “removed joint-actor patent infringement liability from the discretion of the courts, defining ‘infringement’ in § 271(a) and expressly outlining in § 271(b) and (c) the only situations in which a party could be liable for something less than an infringement.” (emphasis in original)

The majority also rejected the patent owner’s argument that a defendant could be liable for § 271(a) direct infringement for “causing and intending an act or result” of another, because that would render § 271(b) induced infringement and § 271(c) contributory infringement redundant.

The majority described the “single entity rule” that applies for § 271(a) direct infringement, which requires vicarious liability in order to attribute actions of others to a single entity:

Under the language of § 271(a), this court’s “divided infringement” case law is rooted in traditional principles of vicarious liability.  Under the principles of vicarious liability, direct infringement does not occur unless all steps of a method claim are performed by or attributable to a single entity.  This is the single entity rule.  BMC confirmed that where the actions of one party can be legally imputed to another, such that a single entity can be said to have performed each and every element of the claim, that single entity is liable as a direct infringer.

The majority also indicated that limiting circumstances of § 271(a) direct infringement liability is proper given the patent owner’s ability to draft claims targeted to individual direct infringers:

[I]n patent law, unlike in other areas of tort law–where the victim has no ability to define the injurious conduct upfront–the patentee specifically defines the boundaries of his or her exclusive rights in the claims appended to the patent and provides notice thereby to the public so that it can avoid infringement. … Further, many amici have pointed out that the claim drafter is the least cost avoider of the problem of unenforceable patents due to joint infringement.  It would thus be unwise to overrule decades of precedent in an attempt to enforce poorly-drafted patents.

The majority stated that the scope of vicarious liability includes principal-agent relationships, contractual arrangements, and joint enterprises.  The majority indicated that such a “contractual arrangement will typically not be present in an arms-length seller-customer relationship.”  The majority, citing to the Restatement (Second) of Torts, provided insight as to when “[a] joint enterprise exists for the purposes of imposing vicarious liability”:

(1) an agreement, express or implied, among the members of the group;
(2) a common purpose to be carried out by the group;
(3) a community of pecuniary interest in that purpose, among the members; and
(4) an equal right to a voice in the direction of the enterprise, which gives an equal right of control.

The majority disagreed with the dissent’s suggestion to extend liability to “include[] parties who act in concert to collectively perform the claimed process pursuant to a common plan, design, or purpose,” stating that this erroneously “attempts to fit a square peg in a round hole: joint tortfeasor law and § 271 are fundamentally incompatible.”  The majority explained that “[t]here is no mutual agency or cooperation when parties act independently for their own benefit, such as in arms-length seller-customer relationships.”  The majority ruled it would be error to extend liability to arms-length agreements merely because “one party ‘know[s] of th[e] [other] party’s actions.”  Rather, Supreme Court precedent makes clear that “a direct infringer’s knowledge or intent is irrelevant.”

The majority expressed concern that extending § 271(a) direct infringement liability may improperly capture unsophisticated end user customers notwithstanding the current patent reform legislation debate that has been fueled by concerns about such end users:

The dissent’s rule also leads to several extraordinary results.  For example, a customer who performs a single step of a patented method by merely using a product as intended would be jointly and severally liable for direct infringement under § 271(a).  It is nothing short of remarkable that while Congress and state legislators express their concern about the vulnerability of innocent customers to charges of patent infringement, [patent owner] Akamai and the dissent labor to create an unprecedented interpretation of existing law to make customers significantly more vulnerable to such charges.  This is especially troubling given that the customer can be liable even without knowledge of the patent.

***

The drastic expansion of predatory customer suits is not a theoretical concern.  Several amici, the White House, and other commentators identify numerous instances where patentees have sent demand letters to or sued dozens, hundreds, or, in some cases, even thousands of unsophisticated downstream users.  If the law were expanded to impose joint and several liability on users of a single prior art method step, it would subject swathes of innocent actors across diverse industries to these practices.

The majority found no § 271(a) direct infringement liability in this case, because nothing indicates that the customers–who perform one of the claimed method steps–are performing those steps in any way “vicariously on behalf of [accused infringer] Limelight.”  Rather, the customers direct and control their own use of Limelight’s CDN network and do not act as Limelight’s agents merely because Limelight “provides its customers a written manual explaining how to operate Limelight’s products”:

… Limelight’s customers direct and control their own use of Limelight’s content delivery network (“CDN”).  Limelight’s customers serve their own web pages, and decide what content, if any, they would like delivered by Limelight’s CDN.  Customers sometimes even have Limelight’s CDN and competing CDNs simultaneously deliver the same content.  As such, customers–not Limelight–direct and control which CDN delivers each and every object of their content.  Limelight’s customers do not become Limelight’s agents simply because Limelight provides its customers a written manual explaining how to operate Limelight’s product.

The majority rejected the patent owner’s argument for liability based on Limelight contracting-out to customers the claimed method steps that Limelight does not perform:

… Limelight’s customers decide what content, if any, they choose to have delivered by Limelight’s CDN and only then perform the “tagging” and “serving” steps.  The form contract does not obligate Limelight’s customers to perform any of the method steps.  It merely explains that customers will have to perform the steps if they decide to take advantage of Limelight’s service.  Because the customers were acting for their own benefit, Limelight is not vicariously liable for the customers’ action. [emphasis in original]

Accordingly, the majority ruled that Limelight was not liable for § 271(a) direct infringement.

Judge Moore’s Dissent

Judge Moore dissented because the ruling was too narrow and “divorces patent law from mainstream legal principles by refusing to accept that § 271(a) includes joint tortfeasor liability.”  She stated that the “single entity rule” is a recent judicial creation that contravenes the statute and centuries of common law.  The drafting of claims by thousands of practitioners that are “incapable of being infringed” under the single entity rules “belies the proposition that there was a long-standing single entity requirement for direct infringement,” indicating that “we have changed the rules on these folks.”

Judge Moore argues that the term “Whoever” in § 271(a) encompasses multiple entities–e.g., “Dictionaries define ‘whoever’ in the plural as ‘[w]hatever person or persons“–and the term is used many times in the patent statute to denote “collective actions of multiple persons.”  Further, the 1952 Patent Act was not intended to make sweeping changes to infringement liability or create a “gaping hole” in liability coverage, but was intended to codify existing infringement liability that included the joint tortfeasor liability that the majority opinion now excludes.

Judge Moore considered the majority’s concern about “predatory customer suits” to be a “smokescreen”, because only Limelight–and not its customers–were sued.  If an unsophisticated customer were sued, “the manufacturer can be joined voluntarily (or even involuntarily)” and could secure a judgment resolving the suit as to all parties.

Judge Moore also expressed concern that this panel did not have the authority to reach the decision it did here, because the panel decision conflicts with a prior panel decision in Golden Hour v. emsCharts, and only the Federal Circuit sitting en banc can overrule a prior panel decision.

Judge Moore would find Limelight liable for § 271(a) direct infringement for several reasons.  First, “Limelight is liable under the direction or control test, because Limelight has performed a number of the steps of the patented methods, and it has directed its customers to perform the remaining steps.”  Second, “Limelight could also be held liable as a joint infringer, acting in concert with the customers pursuant to a common purpose, design or plan.”

Following the prior notice of decision (see our Apr. 27, 2015 post), the Public Version is now available of Administrative Law Judge (ALJ) Essex’s Initial Determination On Remand that Nokia mobile phones infringe InterDigital’s patents related to the 3rd Generation Partnership Project (3GPP) standard and that are subject to commitments the patent owner made to the European Telecommunications Standards Institute (ETSI).  Among other things, Judge Essex found that “there is no evidence of patent hold-up, that there is evidence of reverse hold-up, and that public interest does not preclude issuance of an exclusion order.”

Summary

This is an important decision concerning litigating standard essential patents (SEPs) in the U.S. International Trade Commission (ITC or the Commission) as well as litigating SEPs in general.  We provide a summary of the decision below, but highly recommend reading the decision itself to understand its full import.

On the standard essential patent (SEP) issues, ALJ Essex found that the accused infringers had not shown that the patents were essential to the standard or otherwise triggered the patent owner’s commitment to the standard setting organization (SSO).  The accused infringers had jeopardized this assertion that the patents were essential to the standard by consistently arguing in the proceedings that the patents were not infringed.  The patent owner’s statements to the SSO did not show that the patents actually were essential, because they were conditional commitments if the patents were essential.  Further, the patents could be infringed even if they were not essential to the standard, so the finding of infringement itself did not establish that the patents were essential to the standard.

ALJ Essex found that the particular agreement that the patent owner made with the SSO was controlling on whether that commitment had been breached.  In this case, ETSI specifically considered and rejected having limits on exclusionary relief and deleted its prior requirement that parties mediate differences, deferring instead to resolution in the courts under the relevant national laws if parties cannot agree on licensing terms.

He also found that general public policy concerns about potential abuse of SEPs, such as patent holdup, would not override the actual SSO agreement at issue or the need for actual evidence that the patent owner was abusing its SEPs in this particular case.  Further, the accused infringes had the burden of proof on all facts supporting its SEP arguments.  In that regard, the accused infringers’ witnesses provided no opinion as to what would be appropriate fair, reasonable and nondiscriminatory (FRAND) licensing terms, a range of reasonable FRAND terms or whether the patent owner had not offered FRAND terms in this case.  Further, there was no evidence presented that patent holdup had occurred in any case notwithstanding the intense scrutiny given to the issue in recent years by several government agencies, law professors, economist and other professionals, leading ALJ Essex to conclude: “Perhaps now we can relax our guard a little.”  Further, the threat or even entry of an exclusion order did not per se violate the SSO agreement and would not necessarily result in non-FRAND terms even if the royalty rate negotiated after an exclusion order is entered may be higher than were no exclusion order entered.

ALJ Essex found that the accused infringers had not committed patent holdout during the time period that the initial determination in this case had determined that the patents were not infringed.  But that changed when the non-infringement finding and supporting claim construction were reversed by the Federal Circuit on appeal.  After that time, the accused infringers should have known they infringed and sought a license.  There was no showing that the patent owner’s license offers, which were not accepted, were not FRAND.  Further, the accused infringer’s delay in obtaining a license benefitted it based on the passage of time removing past infringement from the six-year damages limitation as well as putting a downward pressure on the royalty rate that the patent owner could expect in a negotiated license.

In sum, he found no evidence or other reason raised that would preclude entering an exclusion order in this case.

Background

The Commission instituted this investigation in September 2007.  In 2009, the Commission affirmed Chief Administrative Law Judge (ALJ) Luckern’s determination that the two related patents-in-suit were not infringed: U.S. Patent No. 7,190,966 (the ‘966 Patent) and U.S. Patent No. 7,286,847 (the ‘847 Patent).  In 2012, the U.S. Court of Appeals for the Federal Circuit (the Federal Circuit) reversed the ITC’s construction of certain claim terms as well as its finding of no infringement and the investigation was returned to the ITC.  In March 2014, the Commission issued a revised remand opinion and order that remanded certain issues to the ALJ, including the following:

1. … [M]ake findings and issue a remand initial determination (“RID”) concerning: …

b.  whether the 3GPP standard supports a finding that the pilot signal … satisfies the claim limitation “synchronize to the pilot signal” as recited in the asserted claim of the ‘847 patent …

3.  The investigation is further remanded for the assigned administrative law judge to:
a.  take evidence concerning the public interest factors as enumerated in sections 337(d) and (f);
b.  take briefing on whether the issue of the standard-essential nature of the patents-in-suit is contested;
c.  take evidence concerning and/or briefing or whether there is patent hold-up or reverse hold-up in this investigation …

On remand, the investigation was assigned to ALJ Essex who held an evidentiary hearing in January 2015.

The accused products are Nokia mobile phones that operate on Wideband Code Division Multiple Access (WCDMA) networks and comply with the 3GPP WCDMA standard.  Those patents were subject to declarations filed with the European Telecommunications Standards Institute (ETSI), based in France.  During the course of the investigation, Nokia’s mobile phone business was sold to Microsoft Mobile Oy (MMO), which also is a respondent in this investigation.

ETSI IPR Policy.  The relevant declarations submitted under ETSI’s intellectual property rights (IPR) policy and the IPR policy itself include the following provisions considered in the investigation (with bold emphasis provided by ALJ Essex in his written opinion):

IPR INFORMATION STATEMENT
In accordance with Clause 4.1 of the ETSI IPR Policy the Declarant and/or its AFFILIATES hereby informs ETSI that it is the Declarant’s and/or its AFFILIATES’ present belief that the IPR(s) disclosed in the attached IPR Information Statement Annex may be or may become ESSENTIAL in relation to at least the ETSI Work Item(s), STANDARD(S) and/or TECHNICAL SPECIFICATION(S) identified in the attached IPR Information Statement Annex.

The Declarant and/or its AFFILIATES (check one box only):
__ are the proprietor of the IPR(s) disclosed in the attached IPR Information Statement Annex.
__ are not the proprietor of the IPR(s) disclosed in the attached IPR Information Statement Annex.

IPR LICENSING DECLARATION
In accordance with Clause 6.1 of the ETSI IPR Policy the Declarant and/or its AFFILIATES hereby irrevocably declares the following (check one box only, and subordinate box, where applicable):

To the extent that the IPR(s) disclosed in the attached IPR Information Statement Annex are or become, and remain ESSENTIAL in respect of the ETSI Work Item, STANDARD and/or TECHNICAL SPECIFICATION identified in the attached IPR Information Statement Annex, the Declarant and/or its AFFILIATES are prepared to grant irrevocable licenses under this/these IPR(s) on terms and conditions which are in accordance with Clause 6.1 of the ETSI IPR Policy.  This irrevocable undertaking is made subject to the condition that those who seek licenses agree to reciprocate (check box if applicable).

***

[ESSENTIAL IPR]
In simpler terms, an “essential IPR” is an IPR which has been included within a standard and where it would be impossible to implement the standard without making use of this IPR.  The only way to avoid the violation of this IPR in respect of the implementation of the standard is therefore to request a license from the owner.

***

4.3 Dispute Resolution
ETSI Members should attempt to resolve any dispute related to the application of the IPR Policy bilaterally in a friendly manner.
Should this fail, the Members concerned are invited to inform the ETSI GA in case a friendly mediation can be offered by other ETSI Members and/or the ETSI Secretariat.
However, it should be noted that once an IPR (patent) has been granted, in the absence of an agreement between the parties involved, the national courts of law have the sole authority to resolve IPR disputes.

ALJ Essex also found that ETSI use to have or considered, but later rejected, provisions barring exclusionary relief and requiring mandatory mediation to determine FRAND in lieu of court litigation:

Under the ETSI agreement, there is no duty not to seek an exclusion order.  ETSI had mandatory mediation to determine FRAND rate in 1993, and removed if from their policy.  They considered barring parties from injunctive relief, but did not do so. … [The accused infringer’s witness] Mr. Buttrick also testified that ETSI had, prior to 1994, a provision in its rules that eliminated the possibility of exclusion orders or injunctions.

 Decision

Infringement.  ALJ Essex first defined the limited scope of what was at issue in this remand proceeding, which included being bound by claim constructions already determined in this investigation notwithstanding claim constructions from other litigations.  He ultimately found that the Nokia mobile phones infringed both patents-in-suit, including reading patent claim limitations on a specific portion of the 3GPP Standard.  As is common, this portion of the public decision is fairly redacted given confidential technical disclosures.

The remaining portion of the decision focuses on several aspects of the public interest, including issues concerning any standard setting obligations.

Effect Upon Public Health and Welfare.  ALJ Essex found that the accused infringers MMO/Nokia did not address the statutory public interest factors, but instead “argue a new public interest for this case” based on patent owner InterDigital’s “possible duty to grant licenses on Fair Reasonable and Non-Discriminatory terms (FRAND), Standard Essential Patents (‘SEPs’) and the possibility of holdup.”  But he found that, even though “many professors and several government agencies” noted the possibility of holdup with SEPs, there was “no evidence” of holdup in this case.  Further, there was no evidence that the particular Nokia smartphones at issue “provide any public health and safety benefit other smart phones cannot” and evidence suggested “there will not be a shortage of smart phones … if an exclusion order should issue.”

Impact on Competitive Conditions.  The accused infringers argued that the patent owner could engage in holdup if an exclusion order was granted.  But ALJ Essex found that threat of an exclusion order might yield a higher license rate, but such a license is not necessarily “unfair unreasonable or discriminatory”:

While the threat of the exclusion order may motivate respondents to take a license at a higher rate than if they were successful in limiting the lawful remedies available to their adversary, there has been no proof that such a license would be unfair unreasonable or discriminatory.

Impact on U.S. Consumers.  ALJ Essex found that any exclusion order would not have a substantial impact on U.S. consumers. This section is fairly redacted, but includes a finding that other companies provided smart phones, including Nokia phones with WPOS (believe this stands for Windows Phone Operating System).  He also indicated that the duration of an exclusion order would be relatively short given the August 2015 date for the final determination in this investigation and expiration of the patents given their June 1996 priority dates (we assume the patents expire June 2016 based on the filing date, but without researching if terminal disclaimers or term extensions shorten or lengthen the usual 20-year term from priority date).

Whether The SEP Nature Of Patents Is Contested.  ALJ Essex found that the accused infringer’s argument about FRAND obligations arising from the patents being essential to practice the standard was undermined by their arguments “throughout the proceeding” that the patents were not infringed, stating:

[Accused infringer] MMO has contested the nature of the patents throughout the proceeding, presenting evidence at hearing and briefing in both their post-hearing brief and post hearing reply brief that they do not infringe [patent owner InterDigital’s] patents.  Nokia Corp has also argued that the products in the case do not infringe the patents.  By arguing that the products do not practice the patents, the respondents are arguing that the patents are not Standard Essential Patents.  This complicates this analysis, because if the patents in question are not SEPs, then [InterDigital] has no duty to offer a license under FRAND terms.

***

[The accused infringers] in this case have vigorously asserted that the patents in issue are not essential, but rather are not infringed.  By so claiming, they risk losing the benefit of any defense they may have under the ETSI agreement regarding FRAND rights that protect the interests of third parties.  If the patents are valid and infringed, but not SEPs, then respondents would have no rights regarding licensing under the ETSI agreement, the duty to license under FRAND terms is only triggered if the IPRs are or become and remain essential to the standard (there are other requirements as well, such as the [accused infringers] must be willing to license its portfolio to complainants).  The duty to license on FRAND terms, if there is one, is a springing duty.

ALJ Essex found that the declarations submitted to ETSI themselves “do[] not prove that patents so declared before ETSI are actually SEPs,” noting that many cases have found declared patents not infringed and that the declaration itself uses conditional language: “To the extent that the IPR(s) … are or become, and remain ESSENTIAL …” (emphasis in original).

Further, quoting favorably the ITC Staff position, ALJ Essex found that the fact that the patents are infringed does not per se establish that the patents are essential to the standard:

The Staff is of the view, however, that each of the asserted claims is infringed by Respondents’ accused products.   Thus, in this case the operation of Respondents’ accused products sheds no light on whether the asserted claims of the patents-in-suit are necessarily essential to practicing the relevant standards.  There may be circumstances in which a product may practice the 3G standard without infringing the asserted claims, or there may not.  In this investigation, the only evidence regarding the standard-essential nature of the asserted claims is [patent owner] InterDigital’s declaration to ETSI that the patents-in-suit may be essential to practicing the WCDMA standard.  While this is not a statement that the patents are actually essential, it is evidence that the patent holder believed that the patents could be standard-essential. [emphasis in original]

Accordingly, the declaration was not proof of essentiality and “there is no evidence that they have been tested or judged to be standard essential in the case.”

Importantly, ALJ Essex ruled that establishing essentiality was the accused infringers’ burden of proof, which they failed to carry, citing ITC evidentiary rules:

19 CFR S 210.37 Evidence.
(a) Burden of proof.  The proponent of any factual proposition shall be required to sustain the burden of proof with respect thereto.

ALJ Essex ruled that the public interest inquiry does not change that burden, stating “[t]he public policy issue must not be used in place of the law, nor should a party be allowed to shift the burden of persuasion in the name of public policy.”  Citing the Federal Circuit’s Ericsson v. D-Link decision (see our Dec. 5, 2014 post), he ruled that “[t]he ETSI agreement is vital, because any rights flow from the agreement” and found that “[t]here is nothing in the ETSI agreement that would shift the burden of proof in a hearing at the ITC.”  Allegations of FRAND commitment does not supersede the particular agreement at issue:

[W]e must look at the patentee’s actual FRAND commitment.  We need not be stampeded into abandoning the rule of law, or burden of proof simply because the respondants shout “FRAND”.

No Evidence InterDigital Acted In Bad Faith.  ALJ Essex found there was no evidence that patent owner InterDigital acted in bad faith in its license negotiations.  He noted his prior decision in the 337-TA-868 investigation (see our July 2, 2014 post) that found the ETSI agreement did not rise to the level of a binding contract under applicable French law given many terms and factors left open for negotiation “before the FRAND obligation is triggered.” But he further considers the issue on a contractual basis given that trend by other courts, such as the Federal Circuit in Ericsson v. D-Link.  He observed that ETSI does not set a criteria for determining FRAND, but relies on the relevant national law to determine this if the parties do not reach an agreement (citing ETSI 4.3 Dispute Resolution given in the background above).  ALJ Essex further observed that whether an offer is within a reasonable FRAND range is not known until a FRAND rate is agreed between the parties or determined by a court:

When the parties sign the letters agreeing to license their IPR at ETSI, they not only do not know what a FRAND rate is, they cannot know.  Absence agreement, there is no such rate, nor can it exist absent an agreement until a court determines the rate for the parties.  To prove a violation of FRAND, as it is defined in ETSI, there must be voluntary agreement or a trial in a district court, and only after the court determines a rate, could we look retrospectively at the negotiations and determine if the offers were within the FRAND range (FRAND contracts provide for a range of acceptable results.  While some offers could be clearly outside the range, there is no mechanism for finding the range prior to litigation).  Even then, there would be difficulty in determining if a party was acting in bad faith, because reasonable minds do differ on what may constitute a FRAND rate.

ALJ Essex noted that court rulings are giving some guidance on this, citing Judge Robart’s decision in Microsoft v. Motorola (see our May 1, 2013 post), which required SEP license offers to be “in good faith” and “found that initial offers do not have to be on RAND terms so long as a RAND license eventually issues.”  He found that, in this case, there has been no court determination whether InterDigital’s offers were FRAND and the parties had not agreed whether they were within a FRAND range.  But, even assuming they were not, “the offers demonstrate [patent owner InterDigital] was trying to reach a licensing agreement.”

No Evidence of Hold-Up By The Patent Owner.  ALJ Essex found that there was no evidence that the patent owner InterDigital was guilty of patent holdup.  He ruled that, under the Federal Circuit’s Ericsson v. D-Link decision,  the accused infringer has the burden of proof to show a violation of the FRAND duty based on evidence of actual patent hold-up.  The accused infringer’s witnesses did not identify what they would consider to have been FRAND in this case and testified that a FRAND license agreement could come in many different forms:

[Accused infringer’s witness Mr. Buttrick] stated there was no preference for any particular licensing model, that the agreement was written to allow a diverse range of licensing regimes, including both monetary and nonmonetary remuneration, licenses that included both standard essential and non-standard essential patents, that the nature and coverage of the license was completely up to the parties.

***

[Accused infringer’s witness Dr. Shampine] testified that he did not reach the conclusion that [patent owner InterDigital] had violated a FRAND commitment in this case; that he had concerns that there is holdup, and that if an exclusion order were granted that holdup was a grave concern.  He goes on to admit he did not attempt to determine the value of the patents … and stated he did not attempt to assign a specific FRAND rate to them. … He goes on to state that just because rates would be higher in a system where exclusion orders are more likely than where they are less likely, that as a mathematical statement it does not mean such rates are above a FRAND rate.

Further, the accused infringer’s witnesses could not identify circumstances of a non-FRAND agreement being entered on a FRAND-obligated patent:

[Accused infringer’s witness Dr. Shampine] was not aware of any lawsuit, bankruptcy hearing or complaint to a standard-setting organization where a party alleged that they were forced to sign a non-FRAND agreement and needed to obtain relief from the agreement on the basis it violated the SSO agreement.  He also was not aware of any company making a complaint to ETSI that an IPR owner was not negotiating in good faith.   The ALJ asked Dr. Shampine if he could cite even one solid example of a holdup resulting in a non-FRAND contract.  Dr. Shampine replied, “We do not have a solid example of that occurring yet.”

***

… [Dr. Shampine] was unaware of a single case where an ITC exclusion order resulted in a license that was not on FRAND terms.

ALJ Essex gave no weight to the testimony of another accused infringer economic witness regarding holdup because the witness did not consider whether the patent owner’s offers were unfair or unreasonable or the industry practice in licensing patents:

Mr. John C. Jarosz, another MMO economic witness … stated he was offering no opinion that [patent owner InterDigital’s] offers to [accused infringers] Nokia and MMO were unfair or unreasonable, but that he did consider information in assessing the holdup and reverse holdup hypotheses.   His analysis only considered the offers between the parties, and he did not consider the industries licensing practices in forming his opinion.  Mr. Jarosz’s opinion then is entitled to little weight.  If he has no reference point as to what the FRAND rate is, nor any reference for how the licensing industry conducts negotiations and reaches FRAND contracts, he cannot reasonably assess the current negotiations.  While Mr. Jarosz was spirited in his belief in holdup, he conceded he was not aware of instances where holdup was actually found to have occurred.

ALJ Essex also ruled that patent owner InterDigital filing this ITC case did not itself violate any FRAND obligations, stating:

[T]he evidence presented does not support the [accused infringer’s] position that InterDigital has violated a FRAND obligation by filing this complaint at the ITC.  The negotiation has continued in good faith, and there are many more issues than the rate of payment to be made ….  The obligation that InterDigital has taken has been fulfilled, and the ETSI agreement anticipates that the parties if necessary will fall back on the national law involved.

He indicated that filing an ITC case prior to offering a license may be bad faith; specifically, in considering hold-out (discussed below), he referenced the Realtek v. LSI decision as an example of “failure to meaningfully negotiate” where “[patent owner] LSI made no offer for a license prior to filing a complaint at the ITC.” (see our Jan. 9, 2014 post where Judge Whyte explains the difference between the threat of an injunction that is inherent in all license negotiations and the patent owner’s filing a complaint in the ITC before negotiations that makes exclusionary relief a more credible threat in that instance).

Evidence of Hold-Out By Accused Infringers.  ALJ Essex defined “Reverse hold-up” as “describ[ing] a situation in which a manufacturer that is using standard-essential patented technology refuses to enter a license agreement with the patent owner or otherwise to pay compensation,” and further explained that “[w]here a respondent uses the technology covered by a patent, and refused to take a license to the technology or refused to negotiate in a meaningful way there is reverse holdup.”  ALJ Essex found that whether there was improper patent hold-out by the  accused infringers was a complex issue that changed over time.  The initial determination in this case was that the patents were not infringed, which was upheld by the Commission.  There could be no hold-out during this time period because there was a favorable decision that the patents were not SEPS or infringed.  During this time, the accused infringers “had every reason to be difficult negotiators,” there is no showing this was in bad faith and “[t]he exercise of legal rights by a party cannot amount to ‘holdout’.”

But this changed after the Federal Circuit reversed the Commission’s claim construction and finding of no infringement; from that date the accused infringers “should have been aware that the patents were valid, and infringed” and “should have realized they may have to take a license or face an exclusion order.”  Further, there was no evidence that patent owner InterDigital’s offer were not FRAND compliant.  The accused infringer’s witnesses did not even state what they would consider to be FRAND in this case and no one offered evidence of what a FRAND range would be for these patents.

ALJ Essex also found evidence of holdout based on “the clear gain that occurs daily for [the accused infringer] given the six-year statutory limit on past damages for patent infringement”, stating that “[e]ach day that the respondents use the patents without taking a license, IDC loses money that it will not be able to recover.”  Further, the delay in taking a license puts “unfair downward pressure on the payments that [patent owner] InterDigital could expect to realize from any license agreement resulting in a lower than FRAND rate.”

ALJ Essex ultimately found that the accused infringers were the type “unwilling licensee” that the U.S. Trade Representative indicated could be subject to an exclusion order when it disapproved an exclusion order in the Samsung-Apple investigation (see our Aug. 3, 2013 post):

In failing to negotiate in a meaningful way, and refusing to take a license, [accused infringer] MMO is currently an unwilling licensee that “is unable or refuses to take a FRAND license.” [citing U.S.T.R. letter at 2. n.3, which states: “An exclusion order may still be an appropriate remedy in some circumstances, such as where the putative licensee is unable or refuses to take a FRAND license and is acting outside the scope of the patent holder’s commitment to license on FRAND terms.”]

Public Interest and FRAND Evidence.  ALJ Essex found that the ETSI agreement did not preclude patent owner InterDigital from seeking an exclusion order.  Indeed, ETSI had required mandatory mediation, but removed that from its policy in 1993, and considered but declined to adopt a policy that would bar parties from seeking an injunction.  Although the accused infringers provided testimony that ETSI had some concerns about the availability of injunctive relief, that did not find its way into the ultimate written ETSI agreement.  Only the ultimate ETSI contractual terms matter, not articulated concerns that were not adopted: “Prohibiting exclusion orders or injunctions were specifically considered by the SSO, and rejected in the final agreement.”

ALJ Essex rejected the accused infringer’s attempt to impose on the ETSI agreement further “robust protections against hold-up” as a matter of public interest, stating:

While the contract may not protect [the accused infringer] as it wishes it would, it is to the contract we must look to determine the rights that flow from it.  If the SSO negotiators want to agree to provide greater protection from exclusion orders or injunctions, it is within their power to do so.  ETSI did this until 1994 and IEEE has done so more recently.

He also cited the U.S. Department of Justice (DOJ) business review letter of the recently revised IEEE IPR Policy that supports limiting the government role and giving SSOs flexibility in making different IPR Policy choices, because “having the variety of choices could be beneficial to the process.” (see our Feb. 5, 2015 post on the DOJ business review letter).  He also refused to let a public policy “disfavoring exclusionary relief” to “trump both the SSO contract, and the ordinary course of law.”  The accused infringer’s had relied on a policy statement by the U.S. Federal Trade Commission (FTC) as well as DOJ/U.S. Patent & Trademark Office (PTO), which ALJ Essex previously had considered in the 337-TA-868 investigation and he quotes his prior response.  That prior response indicated that there was no evidence of bad faith, that evidence showed that the “hypothetical risk of holdup” is “not a threat in this case, or in this industry,” and that one standard setting organization (SSO) in the industry, TIA, had told the FTC that “TIA has never received any complaints regarding such ‘patent hold-up’ and does not agree that ‘patent holdup’ is plaguing the information and telecommunications technology standard development process.” (see our July 2, 2014 post for the 337-TA-868 decision).  He also found that other FTC, DOJ/PTO statements brought to his attention were not based on evidence or differed from the facts of this case and gave them little weight.

ALJ Essex also found that, based on the significant scrutiny of SEP owner activity given over the past few years by government agencies, professors, economists and others, the likelihood of a patent holder stepping out of line and wandering into patent holdup is even less likely now based on the “observer effect”:

After watching for a holdup since 2011, we may be able to consider whether the fact none has occurred allows us to discount the risk today. With the FTC and DOJ/USPTO having weighed in on the risk of exclusion orders at the ITC, there have been many professors, economists and other professionals that have written on the topic.  The ALJ believes that these professionals, all voicing concern, may lessen the need for concern.  In science the term observer effect refers to changes that the act of observation will make on a phenomenon being observed.  This is often the result of instruments that, by necessity, alter the state of what they measure in some manner.  A commonplace example is checking the pressure in an automobile tire; this is difficult to do without letting out some of the air, thus changing the pressure.  This effect can be observed in many domains of physics.  The ALJ notes that this effect is also present in human events; few crimes occur in a police station, because the observers would likely change the outcome.  In the current state of IP law as it relates to SSOs and IPRs, an owner of a SEP has a long list of government agencies, law professors and companies watching what the company does, and attempting to change the law as to potential outcomes.  [Accused infringer] MMO has stated they are afraid that if [patent owner InterDigital] obtained an exclusion order, then they would use it to gain undue leverage and obtain compensation above the FRAND rate.  This is unlikely because too many hostile eyes are watching.  The fact that the FTC has been watching since at least 2011, and not found such a violation, makes it unlikely it would happen here for the first time.

ALJ Essex also found that the accused infringer’s interest could still be protected even if an exclusion order were entered, given “the availability of a remedy in District Court should [the patent owner] refuse to grant a license under FRAND terms.”  Further, because the patent owner has acted in good faith to date, there appears “minimal risk” that the patent owner would violate its obligations after an exclusion order is entered and, even if that did occur, the accused infringers would have remedy.  This also is shown by the ITC’s track record: ”

Of all the settlements and licenses that were taken under the ‘threat’ of an exclusion order, not one respondent has gone on to file in a district court that the agreement was outside the range of FRAND.  The ITC has not seen such a case, the experts presented at the hearing have not seen such a case, and the respondents did not cite an example of such a case.  With that in mind, perhaps now we can relax our guard a little.

Further, not only had TIA indicated there was no hold-up problem in the telecommunications industry, but industry participants made similar statements to the FTC.  ALJ Essex quoted extensively from comments that Microsoft Corporation provided to the FTC in 2011, which he summarized as indicating that “[Microsoft] too did not see the risk of hold-up, nor the need to deny any particular relief when there was a FRAND or RAND commitment.”

In sum, ALJ Essex found that there was no evidence patent owner InterDigital abused the SEP patents at issue in this case or evidence of the concerns raised by the various government agencies.  Further, the SSO at issue here, ETSI, was “aware of the possibility of exclusionary relief … and chose to allow such relief under its SSO agreement.”  Thus there was no evidence or reason why an exclusion order should not be issued in this case.

Yesterday, Administrative Law Judge Essex issued a one-page notice of initial determination holding that Nokia’s 3G mobile handsets infringe the asserted claims of InterDigital’s U.S. Patent Nos. 7,190,966 and 7,286,847 (“the ‘847 Patent”) in the International Trade Commission’s investigation styled In the Matter of Certain 3G Mobile Handsets and Components Thereof (ITC Inv. No. 337-TA-613).  In the one page notice, the Judge expressly relied upon a standard adopted by 3GPP in concluding that Nokia’s handsets meet the limitations of the one ‘847 Patent claim asserted by InterDigital:

It is held that the 3GPP standard supports a finding that the pilot signal (P-CPICH) satisfies the claim limitation ‘synchronize to the pilot signal’ as recited in the asserted claim of the ‘847 patent by synchronizing to either the P-SCH or S-SCH signals under the Commission’s construction of that claim limitation.

Judge Essex also held “that there is no evidence of patent hold-up, that there is evidence of reverse hold-up, and that public interest does not preclude issuance of an exclusion order.”

No written memorandum opinion has been made available. To the extent that a more detailed opinion on the issues exists in redacted form, the parties will have a certain period of time, as directed by the court, to propose redactions to protect any confidential business information from the version of the opinion that will be made available to the public.

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

 

With all the patent reform legislation discussion going on, PARTS are not getting as much attention.  Specifically, in February, members of the House and Senate each re-introduced the “Promoting Automotive Repair, Trade and Sales Act,” known as the “PARTS Act.” The House bill and the Senate bill are identical.  The bills were re-introduced by a bi-partisan group of lawmakers, including Representatives Darrell Issa (R-CA) and Zoe Lofgren (D-CA) and Senators Orrin Hatch (R-UT) and Sheldon Whitehouse (D-RI).  The bill was first introduced during the 2012 legislative session, with Rep. Hank Johnson (D-GA) as an original co-sponsor, but died in committee.  The PARTS Act of 2013, referred to the House Judiciary Committee on April 23, 2013, also failed to advance in Congress.

The PARTS Act would amend 35 U.S.C. § 271 to provide an exception from design patent infringement for certain external component parts of automobiles, which include collision-related parts such as hoods, fenders, tail lights, and side mirrors.  With regard to the use or sale of these motor vehicle component parts, the carve-out in the bill would reduce design patent owners’ period of exclusivity from 14 years to 30 months.  Alternative suppliers could manufacture, test, market, and distribute parts pre-sale without infringing upon these design patents.  Automobile companies could only enforce the design patents on such parts for 2.5 years – and after that period ends, the alternative suppliers could offer their own generic parts for sale.

In sum, the bill mandates that, 30 months after such parts are first offered for sale, the design patent governing the parts in question would not be infringed by the sale of parts “similar or the same in appearance” by an alternative supplier, if the generic parts are intended to repair a motor vehicle and restore its appearance as originally manufactured.  The legislation would not impact automotive companies rights to enforce design patents on parts up to 14 years against other car companies.

The House bill (H.R. 1057) was assigned to the Subcommittee on Courts, Intellectual Property, and the Internet on March 16, 2015.  The Senate bill (S. 560) was assigned to the chamber’s Judiciary Committee on February 25, 2015.

Background on design patents.  In order for the design of an invention to be patentable, it must be novel, ornamental, and unique.  Under 35 U.S.C. § 171, governing design patents, an inventor of a new, original, and ornamental design for an article of manufacture may obtain a patent for that design.  According to the United States Patent and Trademark Office’s (USPTO) Design Application Guide, a design consists of the “visual ornamental characteristics” embodied in, or applied to, an article of manufacture.  The subject matter of a design patent application may relate to “the configuration or shape of an article, to the surface ornamentation applied to an article, or to the combination of configuration and surface ornamentation.”  Thus, the protection afforded by a design patent does not cover the structural or functional characteristics of the invention; instead, the protection is limited to the invention’s ornamental design.

Items such as electronics, furniture, athletic shoes, household appliances, and lighting serve as other common subjects of design patents.  Applications for design patents have recently increased – in the five-year period from 2009 to 2013, annual filings of design patent applications increased by about 40 percent, significantly outpacing the 28 percent growth in utility parent applications during the same period.  The damages for infringement for design patents can be substantial because, unlike a utility patent, the design patent statute specifically allows the patent owner to disgorge the infringer’s entire profits from the infringing sale and not less than a statutory lower limit of $250.

As discussed in our post yesterday, today the Ninth Circuit held oral argument on Motorola’s appeal of Judge Robart’s decision in the Microsoft v. Motorola case.  A video of the argument is available at the Ninth Circuit website, which lasts about an hour.  Trying to predict the outcome of a case based on the hearing argument and statements from the bench is like reading tea leaves–a “fool’s errand”, as some have put it.  So we will not attempt that here (though we may talk amongst ourselves at the water cooler).

A key dispute crystalized by the oral argument concerns the bifurcated procedure where (1) Judge Robart held a bench trial to determine a RAND rate and range of reasonable RAND rates followed by (2) a jury trial to determine whether Motorola breached its RAND obligation.

Motorola argued that this was done in the wrong order–that if a jury found that Motorola breached its RAND obligations, THEN the district court could determine a RAND rate as part of ordering specific performance of a license.  Motorola argued that it was prejudiced by the court first determining a RAND rate/range at a bench trial and then having that injected into the jury trial as essentially an expert opinion that–as far as the ultimate conclusion and underlying factual findings–could not be cross-examined or contradicted.  The stark difference between the unimpeachable judge-determined RAND and Motorola’s actual initial offer to Microsoft was prejudicial and unsurprisingly led to the jury finding that Motorola breached its RAND obligation.

Motorola argued it had agreed to aspects of the procedure under the impression at the time that the case would involve determining licensing terms and specific performance thereof; but that later proved not to be the case as there was no request for license or specific performance in the case.  Motorola also challenged the scope of its agreement to proceed with the bifurcated  procedure, particularly with respect to any agreement to introduce the court-determined RAND and underlying findings without being able to challenge it.  Rather, if the case was not to determine license terms for the court to order specific performance thereon, then there was no need to determine a specific RAND royalty.  Rather, all of the evidence of what might be an appropriate RAND and other circumstances should go to the jury–subject to cross-examination and rebuttal–so that the jury could determine the single issue of breach and damages based thereon.

Microsoft argued that, whatever Motorola is saying now, it had agreed to this bifurcation procedure and either waived challenging it or did not properly object to it.  What was the point of having the bench trial determination of RAND if it were not to guide the jury?  If the court and parties agreed to go through this bifurcation procedure, then allowing challenges to the RAND determination later in the jury trial would undermine that agreed upon approach and basis for determining a RAND rate to begin with.  There is no dispute that the entire thing–including RAND determination–could have gone to jury, but Motorola waived its 7th Amendment right to jury trial on that issue in this case.