The Office of Management and Budget Action has approved the FTC’s request to conduct its proposed “Patent Assertion Entity Study” directed to analyzing ongoing PAE activity (see our May 21, 2014 and Sep. 27, 2013 posts for more information on the study and questions related to SSOs and SEPs). According to the Federal Register notice published in May 2014, the study is designed to “collect information about Patent Assertion Entity (“PAE”) organization, structure, economic relationships, and activity, including acquisition, assertion, litigation, and licensing practices” in order to analyze any competitive effects of PAE activity in the market:

PAEs are firms with a business model based primarily on purchasing patents and then attempting to generate revenue by litigating against, or licensing to, persons who are already practicing the patented technology. Currently, the public record of PAE activity focuses on publicly-available litigation data. Litigation, however, is only part of the picture. PAE activity encompasses a wide range of non-public behavior related to acquisition and licensing practices, together with structural issues related to organization and economic relationships. Data analyzing this behavior is not available through the public record and it is not available from a single private source.

It has been reported that the FTC expects to begin sending queries to both PAEs and manufacturing companies very soon and that the PAE study is expected to be completed next year, though OMB has approved the study through August 31, 2017.

 

 

Back in April, we reported on the Vermont Attorney General’s suit against non-practicing-entity MPHJ being remanded to state court. Dissatisfied with the district court’s decision, MPHJ appealed the remand and filed a petition for a writ of mandamus with the Federal Circuit, arguing that the decision was an abuse of the district court’s discretion. Today, the Federal Circuit issued an order dismissing MPHJ’s writ of mandamus and appeal, holding that it lacked appellate jurisdiction over the district court’s remand order. The order is particularly interesting in view of the ongoing debates over patent reform, providing one example of how problematic behaviors of certain non-practicing, non-innovating, patent monetization entities are being addressed via existing consumer protection laws that on their face are unrelated to patent-specific practices.

As discussed in our April 18, 2014 post, Vermont’s Attorney General previously challenged MPHJ’s practice of sending patent infringement demand letters to Vermont entities as constituting unfair and deceptive trade practices under the Vermont Consumer Protection Act. The AG filed the case in Vermont state court. MPHJ removed the case to the U.S. District Court for the District of Vermont in June 2013, asserting federal question and diversity jurisdiction. Vermont’s AG moved to remand back to state court for lack of subject matter jurisdiction, arguing that the complaint was directed to state-consumer-protection violations and not questions of federal patent law. The district court agreed and remanded the case to state court.

On appeal, the Federal Circuit noted that “in the district court’s view the complaint did not raise a claim or question of federal law to give rise to federal jurisdiction.” The Federal Circuit ruled that it lacked jurisdiction over MPHJ’s writ and appeal as “the District Court relied upon a ground that is colorably characterized as subject-matter jurisdiction” and “an order remanding a case to the State court from which it was removed is not reviewable on appeal.” For the time being, it appears that Vermont’s battle against MPHJ will be confined to state court.

A significant portion of the international patent wars between Apple and Samsung have been brought to a close, according to a joint statement issued by the parties:

Apple and Samsung have agreed to drop all litigation between the two companies outside the United States. This agreement does not involve any licensing arrangements, and the companies are continuing to pursue the existing cases in U.S. courts.

We note that the statement is similar to the one that issued following resolution of the disputes between Apple and Google this May.

Since 2011, Apple and Samsung have been involved in cross-infringement actions in Australia, France, Germany, Italy, Netherlands, South Korea, and the U.K. Many of these non-U.S. cases involved significant SEP-related rulings. You may recall that earlier this year, the Japanese High Court denied Samsung injunctive relief against Apple while allowing FRAND-based damages on the asserted SEPs (see our May 21, 2014 post). In a separate proceeding related to the European Commission’s investigation of Samsung’s SEP enforcement against Apple, Samsung committed to not pursue any injunctions in the European Economic Area for a period of five years based on any SEPs related to smartphone/tablet technologies against companies that agree to a predetermined licensing framework, as discussed in our April 30, 2014 post.

Although litigation abroad has been brought to a close, the U.S. dispute between the companies moves forward — albeit without any notable SEP issues for the time being. In March, Judge Koh granted Apple and Samsung’s request to dismiss without prejudice Samsung’s SEP infringement claims and Apple’s related FRAND defenses and counterclaims (see our March 12, 2014 post).

 

 

Last week, following a bench trial in CSIRO v. Cisco,  Judge Davis in E.D. Texas determined a reasonable royalty damages award for a CSIRO patent stipulated to be valid, infringed and essential to several versions of the IEEE 802.11 WiFi standard where a RAND-obligation applied to one version of the standard, but not others.  The patent owner CSIRO sought a per-end product reasonable royalty of about $30 million.  Cisco argued a per WiFi chip reasonable royalty of about $1.1 million.  Judge Davis rejected both damages models, found the patent to play a “significant role” in the success of 802.11 products, and derived his own per-end-product reasonable royalty damages award of about $16 million.

This is the third bench trial decision to determine a royalty rate for a standard essential patent (the other two were Judge Robart’s Microsoft v. Motorola decision and Judge Holderman’s Innovatio decision).  This case differs, because this royalty rate was determined in the context of past infringement damages, rather than setting a RAND-royalty rate per se.  Further, although the patent was essential to the standard, no RAND-obligation applied to almost all of the accused infringement because the patent owner gave the IEEE a letter of assurance RAND-commitment as to only revision “a” of the standard and refused IEEE request to give such a commitment for later versions of the standard.

Background

Patent owner Commonwealth Scientific and Industrial Research Orginasation (“CSIRO”) is the principal scientific research organization for the Austrialian Federal Government.  The patent-in-suit addresses multipath problems in a wireless local area network.  That technology was incorporated into certain versions of the IEEE 802.11 WiFi standard, including revision “a” adopted in 1999 and revision “g” adopted in 2003.  In December 1998, before IEEE adopted revision “a”, CSIRO provided the IEEE with a letter of assurance that it would license the specific patent-in-suit on RAND-terms if the patent were essential to the 802.11a standard.  IEEE sought additional letters of assurance from CSIRO for later revisions of the standard, but CSIRO declined to provide them.

In 2003, CSIRO offered industry participants a license on RAND terms on all versions of the standard (at first indicating that it had agreed with IEEE to do so, but later clarifying there was no RAND obligation).  By June 2004, CSIRO developed a Voluntary Licensing Program offering licenses to the ‘069 Patent under “a flat-fee royalty, charged per end product unit sold.”

A company called Radiata Communications (“Radiata”)  was formed by the named inventor, CSIRO and others to commercialize the patented technology.  Radiata employed various CSIRO employees as well as another named inventor.  CSIRO entered a Technology License Agreement (TLA) with Radiata in February 1998 that, among other things, had a per-WiFi chip royalty payment.  In 2001, Cisco acquired Radiata and started paying Radiata’s license fees under the TLA license agreement for Radiata products.  This agreement was renogotiated several times, always keeping the general concept of a per-chip royalty base.

In July 2011, CSIRO sued Cisco for infringing the patent-in-suit.  Both parties stipulated to a bench trial solely on damages and that Cisco would not challenge the patent’s infringement or validity.

Judge Davis’s Ruling

Cisco’s Estoppel Affirmative Defense (Denied).  The court denied Cisco’s affirmative defense that legal and equitable estoppel should limit damages.  The elements of these defenses were summarized as follows:

To establish a defense of equitable estoppel, Cisco must demonstrate that: (1) CSIRO communicated something in a misleading way by words, conduct, or silence; (2) Cisco relied upon that communication; and (3) Cisco would be materially harmed if CSIRO is allowed to assert any claim inconsistent with its earlier communication.  Legal estoppel requires that CSIRO granted Cisco certain rights, received consideration for those rights, and then sought to derogate from the righs granted.

Cisco argued that CSIRO’s RAND commitment precluded CSIRO from seeking damages from Cisco higher than the LTA royalty rate that CSIRO gave to Radiata on the same patent.  The parties agreed that RAND commitment applied to the 802.11a version of the standard.  But CSIRO argued that the revision “a” RAND-commitment does not extend to Cisco because Cisco never made a written request for a license.  Judge Davis agreed with Cisco that this  written requirement was met based on the course of dealings between Cisco and CSIRO.  Thus. a RAND obligation applied to 802.11a products.

But that was not the case for later revisions of 802.11 (g, n and ac).  IEEE asked CSIRO to provide letters of assurance for these later versions, but CSIRO declined to do so.  Judge Davis found that CSIRO actually made no RAND commitment to IEEE or its members for “g” or later revisions of the standard: “Therefore, while CSIRO was free to offer licenses on RAND terms as to products practicing these revisions, it was not contractually obligated to do so.”  He found no RAND-license was consummated and, “[r]egardless … the parties would have sought a royalty that each believed accurately valued the ‘069 Patent”, stating:

Because CSIRO provided no letter of assurance creating a binding RAND obligation, and because any voluntary offer by CSIRO to license the ‘069 Patent technology on RAND terms was rejected, was withdrawn, or lapsed, CSIRO has no RAND obligation to Cisco as to 802.11g, 802.11n, or 802.11ac products.  Regardless of CSIRO’s RAND commitment, at the hypothetical negotiations the parties would have sought a royalty that each believed accurately valued the ‘069 Patent.

Thus, Cisco’s legal and equitable estoppel defense did not apply except for products practicing revision “a” of the 802.11 standard, which would require RAND licensing terms.

CSIRO’s Damages Model (Rejected).  CSIRO argued that the end product devices (network interface cards, routers, access points) were the smallets saleable patent practicing unit.  CSIRO also argued that its patent provides the only “improved benefits” between revisions of the standard covered by the patent and other revisions; therefore, the difference in profit margins between covered and not-covered products “largely represents the value attributable to the ‘069 Patent.”  But, among other things, Judge Davis found a “fundamental problem” in the large disperity in profit margins between covered and non-covered products– over $84 difference for consumer products and over $200 difference for enterprise  products; that disparity made it “impossible to reliably determine where the value of the patented technology lies.”  The expert also had problems in apportioning value to the patented technology distinct from unpatented features.  For example, “802.11g is backwards compatible with 802.11b, a feature not specfically attributable to the ‘069 Patent, but which adds value to the consumer” not accounted for in CSIRO’s damages model.  Further, the expert’s resultant oyalty was higher than the royalty CSIRO offered in its Voluntary Licensing Program.  Thus, the court “attributes little weight” to CSIRO’s damages model.

Cisco’s Damages Model (Rejected).  Cisco argued that the royalty should be based on WiFi chip prices capped at the royalty rate that CSIRO gave Radiata under the TLA agreement between them, where the inventive concept resides in the chip.  Judge Davis rejected Cisco’s licensing model because it relied primarily on the TLA agreement, which was a unique agreement given the relationship between CSIRO and its business partner Radiato that was not comparable to the hypothetical negotiation for CSIRO-Cisco license.  Rather, “[t]he connection between CSIRO and Radiata created a special relationship that belies the view that the negotiations leading to the TLA were purely disinterested business negotiations.”  For example, in addition to royalty payments, Radiata agreed to disclose business plans, make best efforts to exploit the technology and grant CSIRO a royalty-free license and assignment of rights to Radiata’s improvements to the technology.  Further, there were rapid improvements between the 1998 date of the TLA and the 2002/2003 hypothetical negotiation date : “Commercial viability of the technology escalated sharply as the 802.11a revision was adopted in September 1999 … and received a greater boost when the 802.11g revision was ratified in June 2003.”  Perhaps concerned that this would improperly capture the value of the standard beyond the patent’s value, Judge Davis states in a footnote:

This is not an indication that the value of the ‘069 Patent increased soelely because it was included in the standard.  Rather, the wireless marketplace as a whole benefited from the adoption of the standard.

Judge Davis found Cisco’s “primary problem” is using chip prices as the royalty base, because (1) the patent was not directed solely to a chip and (2) widespread infringement depressed chip prices:

CSIRO did not invent a wireless chip.  Although it is largely undisputed that the inventive aspect of the ‘069 Patent is carried out in the PHY layer of the wireless chip, the chip itself is not the invention.  The ‘069 Patent is a combination of techniques that largely solved the multipath problem for indoor wireless data communication.  The benefit of the patent lies in the idea, not in the small amount of silicon that happens to be where that idea is physically implemented.  Compounding this problem is the depression of chip prices in the damages period resulting from rampant infringement which occured in the wireless industry.  Prior to 2008, outside of the Radiata TLA, no company in the industry sought a license from CSIRO to the ‘069 Patent and CSIRO received no royalties whatsoever for that technology.  It is simply illogical to attempt to value the contributions of the ‘069 Patent based on wireless chip prices that were artificially deflated because of pervasive infringement.  Basing a royalty solely on chip price is like valuing a copyrighted book based only on the costs of the binding, paper, and ink needed to actually produce the physical product.  While such a calculation captures the cost of the physical product, it provides no indication of its actual value.

Other CSIRO Licenses.  Judge Davis dismissed other license agreements that CSIRO entered in or after 2008, which both experts agreed were not relevant to a hypothetical negotiation in 2002.  The license came at a later time than the hypothetical negotiation, involved litigation settlements, involved worldwide licenses and varied widely in sales volumes at issue.

Court’s Hypothetical Negotiation Analysis.  Judge Davis assumed a hypothetical negotiation in 2002/2003 with no “discount” for uncertainty as to liability given the assumption that the patents were valid and infringed.  Judge Davis found a base starting royalty rate based on the Voluntary Licensing Program licensing rate and a 90-cents per end-product licensing offer Cisco made during negotiations, the latter being “the best evidence available of how Cisco valued the contribution of the ‘069 Patent … and is the best indicator of Cisco’s possible bid price at the time of the hypothetical negotiation.”

Judge Davis then considered various Georgia-Pacific factors for adjusting this starting royalty rate.  Although CSIRO had a RAND-obligation for 802.11 revision “a” products, Judge Davis did not consider a modified Georgia-Pacific analysis for them given the small volume of revision “a” product sales, stating “a modified analysis as to only those products would have a de minimus impact on the overall royalty.”  Judge Davis Davis then considered the several Georgia-Pacific factors, as follows:

  • Factors 1-2, 6-7, 12-13.  Judge Davis agreed with both experts that Georgia-Pacific factors 1, 2, 6, 7, 12, and 13 “are neutral and no adjustment to the base line royalty rate needs to be made in light of these factors.”
  • Factor 3 (nature and scope of license).  Judge Davis gave a downward adjustment because the hypothetical license would be limited to U.S. sales, but Cisco’s negotiation offer and CSIRO’s Voluntary Licensing Program implicitly used to set the hypothetical base royalty rate were for a worldwide license.
  • Factor 4 (licensor’s established program).  This factor warrants a downward adjustment because (1) “CSIRO was very willing to license the patented technology” and (2) CSIRO had a binding RAND obligation for the 802.11a products.
  • Factor 5 (commercial relationship).  This factor warrants a downward adjustment because CSIRO was a government R&D organization that “needed to license the ‘069 Patent in order to commercialize and monetize it.”
  • Factor 8 (product profitability/success).  This factor warrants an upward adjustment because the patented technology, “[a]lthough … not the only factor contributing to the growth of 802.11g products, it was an important one.”  Further, IEEE continued to rely on the patented technology even though “CSIRO declined to issue letters of assurance and in the face of ongoing litigation involving the patent.”  Accordingly, the patent “played a significant role in the commercial success of 802.11 products.”
  • Factors 9 and 10 (utility over older modes, benefits, etc.).  These two factors warrant an upward adjustment.  The patented technology’s multipath solution provided significant improvements, including higher speeds, increased capacity, etc., and alternative technology did not have commercial success.  Further, this remained core technology to the standard despite several revisions to the standard spanning over a decade.
  • Factor 11 (extent defendant uses invention).  This factor is neutral here because it already was accounted for in the starting baseline.
  • Factor 13 (profit attributable to invention).  This factor is neutral because, although the patent “played a significant role in the profitability of wireless products, … Cisco’s role in that profitability should not be diminished” such as Cisco “assum[ing] the business risk” in developing and marketing the products as well as many other non-patented features in the products.
  • Factor 14 (expert opinion).  This factor is neutral because the court rejected both experts’ damages models.
  • Factor 15 (outcome of hypothetical negotiation).  The court weighed all the factors and found they gave each party equal bargaining position and, thus, no adjustment was needed to the baseline rate of $0.90 to $1.90 per end-product with tiered values based on volume of sales.

In sum, all factors were neutral except factors 3 and 4 (downward adjustment) that were offset by factors 8-10 (upward adjustment).  Judge Davis, however, did give a downward adjustment to consumer products based on the proportional profit difference between them and the enterprise products.  The court then multiplied these tiered royalty rates by volumes of sales, discarded sales after the patent expired, discarded sales more than six years before the lawsuit was filed and assessed a total royalty damage of about $16.2 million.

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 Form:  Has Tellabs proven that Fujitsu’s ‘737 Patent’s technology was included in the standardized technology recommended by ITU-T standard G.692 titled, “Optical interfaces for multichannel systems with optical amplifiers?”
  • First Revised Jury Verdict Form:  Has Tellabs proven that Fujitsu’s ‘737 Patent’s technology was included in, meaning necessary to implement, the standardized technology recommended by ITU-T standard G.692 titled, “Optical interfaces for multichannel systems with optical amplifiers?”
  • Second Revised Preliminary Jury Verdict Form:  Has Tellabs proven that Fujitsu’s ‘737 Patent’s technology was included in, meaning the ‘737 Patents’ technology reasonably might be necessary in order to implement, one of the specifications of standardized technology recommended by ITU-T standard G.692 titled, “Optical interfaces for multichannel systems with optical amplifiers”?
  • Adopted Revised Preliminary Jury Verdict Form:  Has Tellabs proven that Fujitsu’s ‘737 Patent’s technology was included in (meaning the ‘737 Patent’s technology may be required to implement) one or more of the necessary specifications of the standardized technology recommended by the ITU-T Recommendation G.692 titled, “Optical interfaces for multichannel systems with optical amplifiers?”

Judge Holderman explained that this latter version directed to technology that “may be required to implement” the standard was adopted to avoid “patent hold-up” and given the ITU’s Intellectual Property Rights (IPR) statement about patents that “may be required to implement this [ITU] Recommendation,” stating:

As is clear from the ITU-T’s Recommendation G.692, the purpose of its specifications, which address “multichannel optical line system interfaces,” was to provide “future transverse compatibility among such systems.”  Any patented technology that comes within G.692’s specifications that can be used to implement the Recommendations’ goal of standardization to provide compatibility should be subject to a RAND royalty commitment.  Otherwise, the owner of that patented technology could engage in “patent hold-up” by requiring implementers of the G.692 standard to conduct a work-around so as not to infringe that standard-compliant patented technology.

In the “Intellectual Property Rights” section of the ITU’s Recommendation G.692, the ITU states:
“The ITU draws attention to the possibility that the practice or implementation of this Recommendation may involve the use of a claimed Intellectual Property Right.  The ITU Takes no position concerning the evidence, validity or applicability of claimed Intellectual Property Rights, whether asserted by ITU members or others outside the Recommendation development process.  As of the date of approval of this Recommendation, the ITU had received notice of intellectual property, protected by patents, which may be required to implement this Recommendation.  However, implementors are cautioned that this may not represent the latest information and are therefore strongly urged to consult the TSB patent database. (emphasis added)”

By choosing the words “patents, which may be required to implement the Recommendation,” the ITU articulated its understanding of the patented technology that required a RAND commitment.  That phrase, “may be required to implement the Recommendation,” is now appropriately used in Question 2 for the jury to answer at this trial.

As shown below, the Final Verdict Form provided to the jury after trial was further amended so that the Question 2 essentiality issue was whether the patent “is one of the required ways to implement” the standard.

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.

InterDigital has submitted its own public interest statement  in its ITC case against Nokia and ZTE, Inv. No. 337-TA-868, regarding ALJ Essex’s FRAND analysis. As discussed in our July 9, 2014 post, Ericsson, the Innovation Alliance, Sen. Casey, and Microsoft have submitted their own statements addressing the public interest considerations affected by ALJ Essex’s Initial Determination, which rejected arguments that exclusion orders should not be available for standard-essential patents and addressed the obligations owed to a patent holder by potential licensees. Three of the responses — those submitted by Ericsson, the Innovation Alliance, and Sen. Casey — supported ALJ Essex’s analysis, while Microsoft asserted that SEP owners should not be entitled to exclusion orders on FRAND-encumbered patents.

Arguing that an exclusion order is an appropriate remedy in this case, InterDigital’s submission classifies the pending action as “one of the first investigations building a full record on the public interest in the context of potentially standard-essential patents (SEPs),” which “presents an ideal opportunity for the Commission to demonstrate the need for strong protection against reverse patent hold-up.” InterDigital notes that each of the Federal Circuit, DOJ, USPTO, FTC, ITC, and USTR have issued statements or decisions indicating that exclusion orders are not precluded solely on the basis that the asserted patent is standard-essential, further emphasizing the potential harm that can be caused by a “reverse hold-up” or “hold-out” by which a potential licensee avoids entering into a licensing agreement with a SEP-owner subject to FRAND obligations.

InterDigital argues that the record supports its position, pointing out that the ALJ found InterDigital engaged Respondents in good-faith licensing negotiations and that the Respondents engaged in reverse hold-up: “These Respondents chose to take the actions that led to the allegation of infringement rather than follow the ETSI policy for obtaining a license.”

InterDigital’s submission asserts that the ITC’s duty to enforce intellectual property rights serves to promote innovation and economic progress “through providing adequate and effective protection and enforcement” and argues the statutory public interest factors against which an exclusion order should be weighed do not overcome the importance of protecting InterDigital’s patent rights. Specifically, InterDigital argues that an exclusion order in this action (1) would not advesrsely affect competitive conditions because Respondents’ reverse hold-up should not be rewarded; (2) would not adversely affect consumers because reasonable substitutes for the devices-at-issue exist; (3) would not affect public health and welfare; and (4) would not adversely affect the production of competitive articles in the U.S., as the devices-at-issue are not produced in the United States.

 

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.

Last week, Judge Holderman issued several orders on various motions in limine filed by Fujitsu and Tellabs in advance of the jury trial of the case, which began this past Monday.  The jury will decide whether Fujitsu breached its alleged obligation to offer Tellabs a license to Fujitsu’s ‘737 patent on reasonable and non-discriminatory terms (RAND) when it, among other alleged acts, filed a patent infringement suit against Tellabs, sought preliminary injunctive relief, and sought damages that are purportedly higher than a RAND royalty rate.

While the briefing on several of the in limine motions was filed under seal, several of the orders look to shape the evidence admitted at the trial to resolve Tellabs claim that Fujitsu breached its RAND obligations.  It is important to keep in mind the procedural posture of these motions — that these are motions to exclude evidence from the jury’s consideration  — to avoid misreading the import of the ruling.  For example, the court’s ruling not to exclude an expert from testifying that seeking an injunction is inconsistent with an alleged RAND obligation does not necessarily mean that the court agrees with the expert, but simply means that this is evidence the jury will likely be permitted to hear as it deliberates the alleged RAND obligation issues.

Judge Holderman also issued preliminary jury instructions as well as a preliminary verdict form.  These documents lay out in detail the issues that the jury will have to resolve at the conclusion of the trial.  They, as well as the in limine rulings, are summarized below.

SEP Patent Owner Fujitsu’s Motions To Exclude Evidence

Exclude Injunction Request Violates RAND Testimony (Denied).  Tellabs’ expert stated in his report and deposition that Fujitsu’s request for an injunction against Tellabs was inconsistent with Fujitsu’s RAND obligations.  Fujitsu moved to exclude this evidence, arguing that it was “inconsistent” with the Federal Circuit’s decision in Apple v. Motorola, Inc., which “held that an injunction may be appropriate depending on the facts of the case, such as when the purported RAND licensee refuses or unreasonably delays RAND negotiations.”  Tellabs’ opposition and Fujitsu’s reply were filed under seal.  Judge Holderman issued a one sentence order denying Fujitsu’s request to exclude that expert testimony.

Exclude Willful Breach Evidence (Denied).  Fujitsu also moved to preclude Tellabs from “introducing evidence or argument that Fujitsu willfully breached any alleged obligation to offer” the ‘737 patent on RAND terms because Illinois law “does not recognize a cause of action for a willful breach of contract.”  Fujitsu contended that Illinois law applied to Tellabs’ claim that Fujitsu breached its commitment to offer a license for the ‘737 patent on RAND terms because “Tellabs is based in Illinois and Fujitsu’s alleged failure to offer a RAND license rate occurred in Illinois, where communication between the parties has taken place and the litigation has proceeded.”  “The only instance in Illinois in which a breach of contract may warrant damages beyond typical contract damages is when the alleged breach also amounts to an independent tort.”  Further, “[t]o justify damages other than contract damages (i.e., punitive damages) there must be allegations of malice, wantonness, or oppression.”  Fujitsu argues that “[i]n the case of RAND obligations, a non-breaching party implementing the patent can easily be compensated for the breach by limiting the patent-holder’s potential damages.”

Tellabs’ opposition to the motion was filed under seal, but Fujitsu’s public reply argues that Tellabs failed to identify any authority showing that a willful breach of contract is recognized under Illinois law.  Rather, Tellabs allegedly contends that Fujitsu’s willful breach “warrants equitable relief,” but, according to Fujitsu, such equitable relief is not available because Tellabs has an adequate remedy at law.  Citing Judge Holderman’s decision in the Innovatio case, Fujitsu argues further that “[a] RAND obligation is a contractual commitment:  the defendant, as the accused infringer, bears the burden of demonstrating the existence of a RAND obligation that limits the defendant’s damages if it is found to infringe.”  Again citing Innovatio, Fujitsu contends there are no “‘cases suggesting that the existence of a RAND commitment provides a complete defense against an infringement lawsuit.  Instead, most cases merely limit a patent holder’s remedy to collecting a RAND royalty, thus precluding injunctive relief.'”  According to Fujitsu, should Tellabs prove that Fujitsu breached its alleged RAND obligation to offer Tellabs a license on RAND terms, Tellabs’ remedy will be a license on RAND terms, an adequate remedy at law.  In a one sentence order, the Court denied Fujitsu’s motion to exclude evidence of willful breach.

Exclude Evidence SSO-Obligation Not Conditioned On Patent Covering Standard (Denied). Fujitsu also moved to preclude Tellabs from introducing evidence or argument that Fujitsu’s 1996 patent disclosure to the International Telecommunication Union (ITU), a standard-setting organization (SSO), was an unconditional offer to license the ‘737 patent on RAND terms, regardless of whether the ‘737 became standard essential.  “Tellabs’ RAND defense is based on a May 1996 Patent Statement (‘1996 Patent Statement’) that Fujitsu submitted to the [ITU] Telecommunication Standardization Sector (‘ITU-T’).”  “Fujitsu’s 1996 Patent Statement provided that Fujitsu was willing to grant a license to the ‘737 patent under [RAND terms] for the purposes of implementing five ITU-T Recommendations that were, at the time of the 1996 Patent Statement, in draft or ‘provisional’ form.”  Tellabs argues that the 1996 Patent Statement was an unconditional offer to license the ‘737 patent on RAND terms, regardless of whether it was later determined to be standard essential.  However, according to Fujitsu, “[a] promise to license a standard essential patent is a promise to license only the standard essential claims.”  Fujitsu argues that Tellabs’ argument is contrary to the court’s decision in Innovatio which, according to Fujitsu, held “that each asserted patent claim must be individually determined to be essential to a standard before a RAND obligation applies.”  Fujitsu argues further that “[t]he 1996 Patent Disclosure must be understood in the context of the ITU policies pursuant to which it was tendered.”  According to Fujitsu, its offer to license the ‘737 patent in the 1996 Patent Disclosure Statement was conditioned on the patent being essential to the adopted standard, and it is Tellabs burden to demonstrate essentiality in order to trigger a RAND obligation.  Tellabs’ opposition and Fujitsu’s reply were filed under seal.  The court denied the motion in a brief order.

Exclude Commercial Essentiality Evidence (Taken Under Advisement).  Fujitsu also moved to preclude Tellabs from introducing evidence or argument regarding “commercial essentiality” with respect “to the definition of standard essential under the patent policies of the” ITU.  “As a matter of law, ‘commercial essentiality’ is not a term or condition found in the ITU-T Patent Policy and, as such, commercial essentiality should not be read into the ITU-T’s policies.”  According to Fujitsu, “[t]he ITU Patent Policy only permits consideration of technically essential patents in determining whether a patent is standard-essential.”  Fujitsu contends that the ITU Patent Policies in effect at the time of the 1996 Patent Declaration “required that a patent be ’embodied fully or partly’ in” the standard in order to be considered standard essential.  “As the plain language of the ITU Patent Policy does not reference or include commercial essentiality, a standard essential patent to an ITU Recommendation is limited to one which is technically essential to practicing a particular recommendation.”  Fujitsu argues further that “[g]enerally, SSOs have not expanded the definition of essentiality to include commercially essential patents; rather, the vast majority of SSOs limit that definition to technically essential patents.”  Finally, Fujitsu urged the court not to permit Tellabs to add commercial essentiality to the ITU’s Patent Policy for policy reasons.  “The determination of commercial essentiality is a subjective determination that requires consideration of a variety of factors and balancing of competing interests.”  “If a RAND obligation were to apply to any patent which eventually becomes commercially essential, regardless of how much time has passed, the incentive to compete, develop and refine that technology would be drastically reduced.”  Here again, Tellabs’ opposition and Fujitsu’s reply were filed under the seal.  After briefing was closed, the court issued an order taking Fujitsu’ motion under advisement, and instructing the parties that commercial essentiality “should not be referred to without specific permission of the court on the record.”

Exclude Specific RAND Rate (Denied).  Fujitsu next moved to preclude Tellabs from introducing evidence of specific royalty rates that may constitute a RAND rate.  “The threshold issue in this trial is whether Fujitsu is obligated to offer Tellabs a RAND license on the ‘737 patent because Fujitsu submitted this patent during the ITU-T Recommendation” process.  “Assuming there is such an obligation, the next issue is whether the obligation was breached, and if so, whether it was willful.”  “Tellabs has further stipulated that a specific damages amount is not an issue for the trial.”  “Therefore, evidence regarding a possible specific RAND rate is not an issue or relevant.”  Tellabs’ opposition and Fujitsu’s reply were filed under seal.  The court issued an order denying the motion.

Exclude Competing Contract Bids As Motivation To Breach RAND Obligation (Denied).  Fujitsu also moved to preclude Tellabs from introducing evidence or argument regarding a 2005 request for proposal from Verizon to both Tellabs and Fujitsu.  According to Fujitsu, both it and Tellabs “bid to provide products and services to Verizon.”  “Fujitsu offered to sell its Flashware 7500 and Tellabs offered to sell its 7100 Optical Transport System.”  “Verizon awarded the bid to Tellabs…because Verizon believed the 7100 system was more advanced [than] the Flashware 7500.”  According to Fujitsu, the “details of the 2005 Verizon bid” and “Fujitsu’s internal communications following the same” are irrelevant to the issues to be tried.  Specifically, Fujitsu contends that “[t]he RAND issue to be determined at trial has to do with whether Fujitsu was contractually obligated to offer the ‘737 patent on RAND terms, and whether Fujitsu breached that obligation.”  “The market competition between the parties, including the Verizon bid competition, is entirely irrelevant to whether or not Fujitsu had a contractual RAND obligation to Tellabs and breached the same.”

Tellabs’ opposition was filed under seal.  According to Fujitsu’s reply, Tellabs “admits that it plans to use internal Fujitsu communications at trial, which supposedly demonstrate Fujitsu’s motivation to breach an alleged RAND obligation.”  “However, even if the question of whether Fujitsu’s alleged RAND breach was willful is presented to the jury, Fujitsu’s internal communications and business motivations are irrelevant to willfulness and should be excluded” as irrelevant and prejudicial.  The court denied the motion.

Exclude Specific Infringement Damages Amount Sought (Denied).  Fujitsu next moved to preclude Tellabs from introducing evidence or argument regarding the specific damage amounts claimed by Fujitsu in its infringement claim against Tellabs.  Here again, Fujitsu argued that “[t]he threshold issue in this trial is whether Fujitsu is obligated to offer Tellabs a RAND license on the ‘737 patent.”  “Tellabs has stipulated that a specific damages amount is not an issue for the trial.”  “Therefore, evidence regarding any specific damages amounts claimed by Fujitsu are not at issue or relevant.”  The remainder of the briefing on this motion was filed under seal.  The court denied the motion.

Tellabs’ Motions To Exclude Evidence

Exclude Argument ITU Distinguishes Between Commercially and Technically Necessary (Granted).  Tellabs cross-moved to prevent Fujitsu from arguing “that the ITU Patent Policy distinguishes between commercially essential and technically essential patents.”  According to Tellabs, “this issue has already been decided as a matter of law.”  Specifically, “in Qualcomm v. Broadcom, the Federal Circuit analyzed various sections of the ITU Patent Policy and specifically rejected the argument that Qualcomm was not subject to a duty of disclosure if the relevant standard could be practiced without infringing Qualcomm’s patents.”  “Instead, the Federal Circuit ruled that, according to the ITU Patent Policy, the disclosure duty applies to all patents that ‘reasonably might be necessary’ to practice the standard, not only patents that must ‘actually be necessary.'”  According to Tellabs, “[i]n attempting to distinguish between commercially essential and technically essential, Fujitsu is simply rehashing Qualcomm’s rejected argument — that the duty applies only to patents that must ‘actually be necessary’ to practice the standard.”  “Regardless of whether the ‘737 patent is commercially essential or technically essential, it ‘reasonably might be necessary’ to practice the standard.”

Fujitsu opposed the motion, arguing that “[t]he Qualcomm Court did not address technical or commercial essentiality.”  “The tenuous nature of [Tellabs’] argument is highlighted when one considers that Fujitsu intends to call Gregory Ratta, a long-time former ITU-T employee who has offered testimony that the ITU-T definition of a standard essential patent does not include commercial essentiality.”

Tellabs’ reply was filed under seal.  The Court granted Tellabs’ motion.

Exclude Argument That RAND Commitment Was Conditional (Denied).  Tellabs also moved to prevent Fujitsu from presenting testimony, evidence or argument that Fujitsu’s declaration to the ITU and commitment to license the ‘737 patent on RAND terms is subject to any conditions, “including the ‘737 patent being essential,” other than those conditions set out in a declaration submitted by Fujitsu.  All briefing on this motion was filed under seal.  In a one paragraph order, the Court denied the motion.

Exclude Argument RAND License Offered To Tellabs (Granted).  Tellabs next moved to preclude Fujitsu from introducing evidence or argument that Fujitsu offered Tellabs a RAND license for the ‘737 patent.  The briefing on this motion was filed under seal.  However, the court granted the motion because “Fujitsu admits that it never offered Tellabs ‘any royalty rate, RAND or otherwise.'”  Therefore, “[n]o evidence suggesting the contrary will be allowed.”

Preliminary Jury Instructions and Preliminary Verdict Form

As noted above, Judge Holderman also issued preliminary jury instructions as well as a preliminary verdict form, the latter of which was subsequently revised for a second time.  The preliminary instructions were read to the jury at the outset of the trial to give them a brief overview of the dispute.  The preliminary verdict form was also provided to the jury as a guide for the questions that they will have to unanimously answer at the conclusion of the trial.  While the purpose of these documents was to brief the jury on the issues they will decide, the final jury instructions and verdict form, which will be read to the jury at the conclusion of the case, will control the jury’s determination.

The preliminary instrucitons as well as the verdict form tell the jury that Tellabs has the burden of proving the following elements by a preponderance of the evidence (i.e., tipping the scales in its favor):

  1. Fujitsu agreed that it was willing to grant a license of its ‘737 patent’s technology on RAND terms in compliance with the ITU’s Patent Policies;
  2. Fujitsu’s ‘737 patent’s technology was included in — meaning “may be required to implement” — one or more of the necessary specifications of the standardized technology recommended in ITU-T Recommendation G.692;
  3. Fujitsu breached its agreement that it was willing to grant a license of its ‘737 patent’s technology on RAND terms by, among things, not offering Tellabs a license and filing suit seeking injunctive relief for infringement; and
  4. Tellabs would have been willing to negotiate a license of Fujitsu’s ‘737 patent’s technology from Fujitsu on RAND terms in compliance with the ITU’s patent policies, if Fujitsu had offered Tellabs RAND terms for such a license;

Finally, Tellabs must show, by clear and convincing evidence, that Fujitsu was willful in its alleged breach of its agreement that it was willing to grant a license on RAND terms for its ‘737 patent’s technology, 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.

The Eastern District of Virginia recently dismissed SawStop’s suit against a number of table-saw and power-tool manufacturers, finding SawStop failed to sufficiently plead its antitrust and “standards conspiracy” claims.

As you may recall from our February 7, 2014 post, SawStop’s complaint alleged that the manufacturers collectively convinced Underwriters Laboratories, Inc. (“UL”) not to adopt SawStop’s patented table-saw safety technology into its product-safety standards. SawStop had also entered into unsuccessful licensing negotiations with several manufacturers in the early 2000s, including Emerson, Ryobi, and Black & Decker. The complaint further alleged that SawStop suffered economic injury due to the alleged “standards conspiracy” among the defendant manufacturers. Several defendants filed motions to dismiss SawStop’s complaint in May 2014 and the Court granted these motions on July 15.

Lack of Competitive Harm

The Court found that the ”standards conspiracy” allegations were insufficient to support a claim and failed to allege a competitive harm suffered by SawStop. The Court noted that only five of the twenty-or-so defendants actually participated in the relevant standards-setting committee and that there were no allegations that the remaining defendants had any involvement in standards setting:

Nevertheless, Plaintiff lumps their allegations together against the Defendants, failing to state sufficient facts as to each defendant joining the conspiracy and their role within it… Even so, neither mere participation in a standards-setting body nor mere membership in a trade association is sufficient to state an antitrust conspiracy claim… Here, UL did not exclude “SawStop” technology from the market in any way; it merely declined to impose it upon the market.

(Emphasis added). The Court ruled that the manufacturers’ actions are not “per se unlawful” absent a showing of competitive harm. Relying on precedent that a “competitive harm” must harm the competitive process and thereby harm consumers, the Court found SawStop’s allegations insufficient to maintain a cause of action:

Plaintiffs’ allegations of competitive harm ultimately amount to lost sales and profits from UL failing to mandate its safety technology upon the market. This is insufficient in at least two respects: One, ”lost sales” do not amount to competitive harm because AIMT-product users were not “in some way constrained from buying [Plaintiffs’] products,” …and two, failing to mandate Plaintiffs’ proposed safety standard does not thereby harm their market access… The fact that UL safety standards permitted other safety technologies to compete with Plaintiffs’ does not give rise to an antitrust violation.

Permissible Self-Interest in SSO Participation

Addressing SawStop’s allegations that the saw manufacturers corrupted the standard-setting process, the Court found that although SawStop alleged defendants had participated in and dominated the UL standard setting process by voting down the SawStop patented technology, the complaint failed to allege that such participation was either undisclosed or otherwise impermissible. The Court further noted that standards participants need not consider public interests over their own interests when considering standards changes.

The Court also addressed SawStop’s allegation that some of the saw-manufacturers had created joint ventures for promoting new safety technologies to UL, which the Court found did not give rise to antitrust violation. The Court ruled “an antitrust violation is not composed of merely advocating for an industry standard that accords with one’s own economic interest” pointing out that SawStop itself “sought to mandate their technology throughout the table-saw industry and reap the royalties of such widely-imposed technology.”

Finding no support for an inference that defendants had entered into an agreement to boycott SawStop’s product or otherwise restrain trade, the Court dismissed SawStop’s complaint in its entirety.

Last week the Federal Circuit reversed the decision by  Judge Gilstrap of E.D. Texas to proceed with litigation, rather than stay the litigation pending the U.S. Patent Trial and Appeal Board (“PTAB”) review of the asserted patents under the Transitional Program for Covered Business Method Patents (“CBM”).  This is the first time the Federal Circuit has ruled on a post-AIA interlocutory appeal on a motion to stay pending CBM, providing initial insight into how the court may treat these reviews moving forward. We note that this appeal was made under AIA § 18(b)(2), which deals only with stay requests pending CBM,  and does not bear directly on stays pending IPR, which are addressed in separate sections of the AIA (e.g., §§ 315, 325).

Background

In January 2013, VirtualAgility filed suit in E.D. Texas asserting that Salesforce.com, Dell, Kimberly-Clark, Bank of America, FedEx, and a host of other defendants infringe U.S. Patent No. 8,095,413. A few months later, on May 24, 2013, Salesforce.com sought CBM review in the the PTAB of all claims of the ‘413 patent. Salesforce argued that the claims are directed to a “covered business method” within the meaning of the AIA and warranted CBM review as the claims were likely invalid for patentability and prior art grounds under 35 U.S.C. 101, 102, and 103.  A few days later, on May 29, 2013, the Defendants filed a motion to stay the litigation proceedings pending the outcome of the CBM proceedings.  Although the CBM statutory estoppel provision applied only to the CBM petitioner Salesforce, the other Defendants agreed to the same scope of estoppel if the stay were granted.

While Defendants’ motion to stay was pending, the district court continued with the litigation, setting dates for claim construction and jury selection. In November 2013, the Patent Office granted-in-part Salesforce’s petition for CBM review, concluding that the claims of the ‘413 patent are directed to a business method and are more likely than not patent-ineligible under Section 101 and invalid under Section 102 in view of a single patent reference. A few months later, in January 2014, the district court denied defendants’ motion to stay.

Defendants then filed an interlocutory appeal to the Federal Circuit, requested and received a temporary stay order of the litigation pending appeal.

The Majority Opinion

The Federal Circuit reviewed the AIA statutory stay provision where district courts are to consider four factors when determining whether to stay district court litigation pending CMB review: (1) whether the stay will simplify the issues and streamline the trial; (2) whether discovery is complete and a trial date set; (3) potential undue prejudice to the nonmovant or tactical advantage to the requestor; and (4) whether the stay will reduce the burden of litigation on the parties and the court. The AIA provides immediate interlocutory appeal from a district court’s decision to grant or deny a stay “to ensure consistent application of established precedent” and such review “may be de novo,” which majority suggests varies significantly from the pre-AIA “abuse of discretion” standard.  But the Federal Circuit did not decide what the standard of review would be, finding reversal would proper even under the abuse of discretion standard that is more deferential to the district court’s decision.

Simplification of the Issues. On review, the Federal Circuit concluded that factors (1) and (4) strongly favored a stay.  The district court was “not convinced” that the CBM would result in cancelled claims.  But the Federal Circuit ruled that “[t]he district court erred as a matter of law to the extent that it decided to ‘review’ the PTAB’s determination,” because under AIA “district courts have no role in reviewing” the PTAB’s determination.  To allow such a collateral attack on the PTAB’s decision to institute CBM review “would create serious practical problems.”  Congress made CBM more difficult to obtain than reexamination and “clearly did not intend district court to hold mini-trials reviewing the PTAB’s decision on the merits of CBM review.”  This same concern applies to the PTAB’s determination whether the patent qualifies for CBM review as a “covered business method patent.”

Importantly, although CBM may be granted if “it is more likely than not that at least 1 of the claims challenged … is unpatentable,” in this case the PTAB determined “that all of the claims are more likely than not unpatentable.” (emphasis in original). Thus PTAB review “could dispose of the entire litigation: the ultimate simplification of issues.”  This “heavily” favors a stay.  This is the case even though the petitioner Salesforce decided “to save two pieces of its important prior art for district court proceedings,” because CBM review was granted for the only patent-in-suit in which the PTAB determined that “more likely than not” all patent claims will be canceled.  But the Federal Circuit indicated this could give a tactical advantage to Defendants that should be under the third factor.

Timing. Reviewing factor (2), the Federal Circuit found that the procedural timing — the early stages of litigation — heavily favored a stay and “that it was not error for the district court to wait until the PTAB made its decision to institute CBM review before it ruled on the motion.”  Although the district court need not “freeze” the litigation before the PTAB makes its decision whether to institute a CBM proceeding, it should “expeditiously resolve the stay motion” after the PTAB makes that decision.  The Federal Circuit stated that, “[g]enerally, the time of the motion is the relevant time to measure the stage of litigation,” but the district court may “tak[e] into account the stage of litigation as of the date that CBM review was granted.”

Prejudice and Tactical Advantage. The district court found the third factor weighed heavily against a stay given “credible evidence” that some parties were direct competitors who would be harmed by delayed adjudication. Although agreeing that “competition between parties can weigh in favor of finding undue prejudice,” the Federal Circuit found a stay would not diminish the monetary damages to which a successful plaintiff is entitled — “it only delays realization of those damages and delays any potential injunctive relief.” Finding VirtualAgility had not sought a preliminary injunction and would not suffer irreparable harm as a result of the stay, the Federal Circuit found this factor weighed slightly against a stay.

Although a decision to hold back from CBM review certain prior art can give a tactical advantage that weighs against a stay, in this case Saleforce adequately explained why it did not have sufficient evidence to raise the withheld prior art references at the time it filed the petition for CBM review.  Defendants had explained this difficulty as follows:

Defendants responded that Salesforce did not include Oracle Projects in the CBM petition because it is “a proprietary software system, not strictly a printed publication of the type typically considered by the PTO,” and would require testimony from “live third party witnesses at trial.”  Defendants also indicated that they had difficulties in obtaining evidence in connection with another piece of prior art “of particular importance” not used in CBM review, “Tecskor product,” necessitating a letter of requires for international judicial assistance from Canada from the district court.

Balancing the factors. The Federal Circuit found three of the four factors weighed in favor of staying the litigation and reversed the district court’s decision with instructions to grant the stay.

Judge Newman’s Dissent

In dissent, Judge Newman points to a district court’s discretionary authority to manage its own docket and balance equitable factors.  The majority failed to identify an abuse of discretion or acknowledge “the deference owed to a trial judge in rulings on matters of equity and the balance of interests.”  The AIA permits, but does not require, a district court to stay earlier-filed litigation pending post-grant patent review. The dissent cautions that the ruling “effectively creates a rule that stays of district court litigation pending CBM review must always be granted.”

But the decision of whether or not to stay an infringement action “is consigned to the discretion of the judge” and the district court in this case found a stay inappropriate after it “carefully considered” the traditional stay factors set forth in AIA Section 18(b). Whereas appellate review of a district court’s decision to grant or deny a stay may be reviewed de novo, Judge Newman writes that a trial judge’s determination warrants appellate respect:

The panel majority has imposed greater rigor on “stay” considerations than the statute warrants. Postgrant review in the PTO is a useful tool, but the principle of post-grant review does not require elimination of judicial discretion to proceed with pending litigation.