Four parties have responded to the ITC’s request for statements on the public interest regarding ALJ Essex’s Initial Determination in Inv. No. 337-TA-868 (see our July 2, 2014 post), all addressing the ALJ’s FRAND analysis rejecting arguments against exclusion orders for standard-essential patents and addressing the obligations held by potential licensees. Three of the responses, submitted by Ericsson, the Innovation Alliance, and Senator Robert P. Casey, Jr. (D-PA), support ALJ Essex’s analysis, whereas Microsoft takes the position that SEP owners should not be entitled to exclusion orders on FRAND-encumbered patents.

Statement’s Supporting ALJ Essex’s FRAND-Defense Analysis

Ericsson’s Statement.  Ericsson agrees with ALJ Essex’s analysis, specifically supporting three findings: (1) FRAND licensing obligations apply to both innovators and implementers; (2) exclusion orders are available where SEP owner has engaged in good faith negotiations, offered a license on FRAND terms, and poses no threat of hold-up; and (3) courts and other decision making bodies should consider whether an implementer failed to negotiate toward a FRAND license, posing a hold-out threat to the patent owner.  Ericsson participants in several SSOs and is both a licensor and licensee of many SEPs.  Ericsson has made significant investments in employees, R&D, and intellectual property related to standards-compliant technology.  The FRAND regime “ensures that those implementing a standard are able to secure access at a fair cost, while those providing innovative technology for the standard are able to secure a fair return on their investments.”  Ericsson agrees with the ALJ’s “proportionate focus on the obligations of the implementer to earnestly seek an amicable royalty rate” during the course of a good faith negotiation. Ericsson then supports the proposition that exclusion orders should be available when the SEP holder has negotiated in good faith and further states that “exclusion orders should also be considered when the implementer has not negotiated in good faith (i.e., there is hold-out).”

Innovation Alliance’s Statement.  Focusing on the pro-consumer and pro-economic benefits derived from patent protection and SSO participation, the Innovation Alliance’s response “commends the ALJ for developing a comprehensive record with respect to the FRAND issues in this investigation and for making explicit findings related to the presence or absence of patent hold-up or reverse hold-up with respect to patents that are subject to a FRAND licensing requirement.” The IA specifically notes that, without exclusionary relief, implementers are “incentivized to engage in ‘reverse hold up'” in which a patent holder is unable to recover its own R&D costs. The IA further commended the ALJ’s acknowledgement of the patent hold-out problem by which those benefiting from patented technology can choose to infringe a SEP and later demand a FRAND rate; the public interest favors exclusion orders to protect and enforce valid and infringed SEPs.

Senator Casey’s Statement.  Pennsylvania Senator Robert Casey also submitted a statement concerning the public interest, “writing to express [his] views on the importance of innovation to our national economy, particularly with respect to small businesses, such as InterDigital, who are significant contributors to U.S. private sector employment.” Noting InterDigital’s investment in research facilities and employees, Sen. Casey’s letter notes that the patent’s principal purpose is to encourage and protect innovation, noting that intellectual property-intensive industries supported at least 40 million U.S. jobs in 2010 and represented 34.8% of total GDP. Writing “[t]he Commission must be mindful of the significant benefits to consumers from standards-setting activities and of the need to continue incentivizing voluntary participation in standard-setting organizations,” Sen. Casey argues that holders of FRAND-committed patents should not be precluded from obtaining exclusionary relief.

Statements Criticizing ALJ Essex’s FRAND Analysis

Microsoft’s Statement.  Unlike the other statements submitted to the ITC, Microsoft’s letter warns against “the severe, long-term, and avoidable harms” caused by exclusion orders for FRAND-encumbered patents. Referring to its earlier July 7, 2012 comments on the public interest, Microsoft argues that exclusion orders should not be granted on FRAND-encumbered patents, relying upon Judge Posner’s recent denial of injunctive relief to Motorola on a FRAND-committed patent (see our April 25, 2014 post for an analysis of that decision). Microsoft argues that the public interest balance is shifted from the side of the patent owner upon assertion of an SEP and that InterDigital should not be permitted to use a threat of injunctive relief to increase royalty rates:

By assuming its FRAND obligations, InterDigital freely gave up exclusionary remedies in favor of a reasonable royalty in to have its technology incorporated into technical standards. InterDigital put its patents on the store shelf for a FRAND price, and they are available to anyone anywhere in the world willing to pay a true FRAND value. Having done so, InterDigital has no “recourse to the equity power of the Commission.”

Microsoft further argues that litigating FRAND-encumbered patents before the ITC harms the public interest, in this case by providing InterDigital with hold-up leverage and threat of an exclusion order that could adversely affect the U.S. phone operating system market. Microsoft argues that even if the ITC issues an exclusion order in the InterDigital case,  enforcement should be delayed for one year to mitigate the harm to the public interest and provide an opportunity “to appeal the ITC decision, to determine a FRAND rate…, or to explore design-around possibilities before the harsh impact of a potential exclusion order.”

UPDATE (July 28, 2014): 

Senator Pat Toomey’s Statement. Pennsylvania Senator Patrick J. Toomey also submitted a statement on the public interest on July 9, 2014, though a copy of the letter was not available until last week. Sen. Toomey’s letter expresses “strong support” for the protections afforded by Section 337 investigations and urges the Commission “to strongly consider InterDigital’s petition for relief from foreign imports that violate their intellectual property.” The letter notes that InterDigital employs “high skilled workers in Pennsylvania who are on the cutting edge of mobile innovation” and that its business model depends on licensing revenues from equipment manufacturers. Absent “adequate remedies for imported goods that use their patents without paying for them,” the letter argues companies like InterDigital will be deterred from “taking bets on future research and development” to the detriment of “American innovation and job creation.”

The U.S. International Trade Commission (“ITC”) recently issued the public version of ALJ Essex’s Initial Determination in Inv. No. 337-TA-868 finding that InterDigital had not violated any FRAND obligation and that ZTE and Nokia had not infringed the patents-in-suit (see our June 19, 2014 post). Although the patents were found not to be essential to the 3G or 4G LTE standards, ALJ Essex’s Initial Determination provides an analysis of the FRAND issues at play — one that is highly critical of respondents that assert FRAND defenses without having first availed themselves of SSO procedures for resolving situations where licenses are not available (the FRAND analysis starts at page 108 of the decision).

FRAND Ruling

ALJ Essex initially indicates that, because he found that Respondents devices that practice the 3G and 4G LTE standards did not infringe the patents-in-suit, the patents are not essential to those standards and no FRAND obligations were triggered.  ALJ Essex nonetheless presents a full FRAND-defense analysis in the event that, on review, the Commission finds the patents infringed and essential to the wireless standards.

ETSI IPR Policy.  ALJ Essex summarized the Respondents’ FRAND position that is based on InterDigital’s participation in the European Telecommunication Standards Institute (ETSI)–specifically the Telecommunications Industry Association (TIA) and International Telecommunication Union (ITU) subcommittees–giving rise to certain obligations under ETSI’s Intellectual Property Rights (“IPR”) Information Statement and Licensing Declaration under ETSI’s Rules of Procedure from Nov. 30, 2011.  ALJ Essex notes that these ETSI Rules of Procedure are not themselves a contract under the applicable French law, but rather an agreement in principal, guiding parties in their interactions with ETSI, other members, and third parties.  He states that IPR policy’s “first goal … is that the IPR owner be ‘adequately and fairly rewarded for the use of their IPRs in the implementation” of the ETSI standards.  Further, patent owner agrees to license its IPR on FRAND terms only under certain conditions–e.g., the patent owner is “adequately and fairly rewarded” (though unclear how to assess that) and the patent owner has the option of requiring a licensee to reciprocate with a FRAND license on its patents covering the standard.

Duty To Declare Potentially Essential Patents.  Under the  ETSI Rules of Procedure, a patent owner must declare patents that might become essential, but need not declare or confirm that the patents actually are essential to the standard.  Specifically referencing ALJ Shaw’s finding in Inv. No. 337-TA-800, ALJ Essex notes that not all declared patents actually are essential to the standard, no ETSI or other group confirms essentiality and declared patents frequently are found not to be essential when challenged.

ETSI Provides Procedure If FRAND Not Offered.  ALJ Essex also considered ETSI Rules of Procedure that provide a procedure for dealing with participants that refuse to grant licenses on FRAND terms after a standard is published.  Those procedures (ETSI Rules of Procedure Section 8.2 Nov. 30, 2011) include alerting ETSI’s Director-General who gathers info from complainant and patent owner, ETSI seeking to change the standard to avoid the IPR, and referral to the European Commission.  But no respondent in this case made use of those procedures.  If respondents believed InterDigital violated ETSI’s policy, they could have approached ETSI to determine whether there was such a breach and “[i]t would be helpful to this ALJ, and the ITC, if we knew InterDigital had breached its duty to ETSI.”  Nothing in ETSI Rules of Procedure appears to preclude a party, like the patent owner here that instigated the investigation, from using legal means to pressure other parties into negotiations.  Further, although ETSI does not define FRAND terms, ALJ Essex recites “a FRAND rate is a range of possible values, depending on a number of economic factors.”

Patent Hold-Out To Pressure Lower Royalty.  ALJ Essex then faulted respondents’ decision not to follow the ETSI procedures, but instead participate in what may be considered “patent hold-out” behavior “which is as unsettling to a fair solution as any patent hold up might be,” explaining:

These Respondents chose take the actions that led to the allegation of infringement rather than follow ETSI policy for obtaining a license. … The Respondents create, outside of the framework of the ETSI agreement a situation where they use the technology that may be covered by the patent, without having licensed it.  This puts pressure on the IPR owner to settle, as the owner is not compensated during a period of exploitation of the IP by the unlicensed parties.  The ETSI IPR policy requires companies that wish to use the IPR covered by the agreements to contact the owner of the IP, and take a license.  By skipping this step, the companies that use the IPR in violation of the policy are able to exert a pressure on the negotiations with the IPR holder to try to make the agreement in the lower range of FRAND, or perhaps even lower than a reasonable FRAND rate.  They also are able to shift the risk involve din patent negotiation to the patent holder.  By not paying for a FRAND license and negotiating in advance of the use of the IPR, they force the patent holder to take legal action.  In this action, the patent owner can lose the IPR they believe they have, but if the patent holder wins they gets no more than a FRAND solution, that is, what they should have gotten under the agreement in the first place.  There is no risk to the exploiter of the technology in not taking a license before they exhaust their litigation options if the only risk to them for violating the agreement is to pay a FRAND based royalty or fee.  This puts the risks of loss entirely on the side of the patent holder, and encourages patent hold-out, which is as unsettling to a fair solution as any patent hold up might be.

ALJ Essex found that a licensee would violate the ETSI IPR rules if it uses the patented technology prior to negotiating a license.  The requirement to negotiate rests on not only the patent owner, but on the standard implementer as well.   But Respondents appear to “pull the words Fair Reasonable and Non-discriminatory” from the ETSI IPR Rules … but have shown no interest in the rules of procedure for settling conflicts, or for obtaining licenses.”  For example, the ETSI Rules include a section “4.3 Dispute Resolution” that includes seeking mediation from other ETSI members and, if no agreement, “the national courts of law have the sole authority to resolve IPR disputes.”  But in this case there is no evidence that Respondents reported InterDigital to ETSI or sought a license.  Thus, InterDigital has not violated any duty under the ETSI policy.

Negotiate in Good Faith.  Respondent also failed to show that InterDigital did not negotiate in good faith.  ALJ  Essex discussed the different incentives the parties have in negotiating a FRAND rate.  InterDigital solely derives revenue from licensing its patents and may be inclined to grant FRAND licenses because they  “allow[] for a profit”; in contrast, respondents benefit from holding out licensing discussions  because, with each passing day, “Respondents have not had to pay anything for a license they were by ETSI policy to obtain prior to adopting the potentially infringing technology.” Acknowledging that the threat of an exclusion order may move a license fee “in the upper direction on the FRAND scale,” ALJ Essex notes “there are  hundreds of other economic factors that go into the parties finding a royalty or flat amount both can agree on.”  ALJ Essex then reviewed the substance of the parties’ negotiations (heavily redacted in the public version) and concludes that, rather than negotiate for a license, “the respondents have attempted to put pressure on InterDigital by using IPR without a license.” Summarizing his findings, ALJ Essex finds InterDigital’s FRAND obligations have not been triggered:

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. The Respondents have not taken the steps provided by ETSI to address a failure to license, and so have not done what they ought to do if they believe InterDigital has failed to negotiate in good faith. Finally, they have not followed the ETSI process for procuring a license, and have engaged in holdup by making the products that are alleged to infringe before taking a license. Under these facts there is no FRAND duty.

No “Patent Holdup” Concerns.  ALJ Essex concludes his FRAND analysis by rejecting arguments against exclusion orders for SEPs, which arguments were made by the U.S. Federal Trade Commission (“FTC”) and U.S. Patent & Trademark Office (“PTO”)/U.S. Department of Justice (“DOJ”). The FTC and PTO/DOJ essentially argued that FRAND license negotiations are tainted by the threat of an exclusion order, which creates the risk of patent holdup that allows the patent owner to secure an excessively high royalty rate on standard-essential IP. But ALJ Essex found no evidence that InterDigital had been negotiating in bad faith; rather, “it is the respondents that have taken advantage of the complainant and manufactured, marketed, and profited on good without taking a license to the IP at issue.” ALJ Essex further acknowledged the “hypothetical risk of holdup” in similar situations, but “we have evidence that it is not a threat in this case, or in this industry.” ALJ Essex cites TIA’s statement to 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.”

ALJ Essex found no basis to assume that exclusion remedy is not available in this case:

Neither the agreements imposed by ETSI, nor the law nor public policy require us to offer the Respondents a safe haven, where they are free to avoid their own obligations under the agreements, can manufacture potentially infringing goods without license or consequence, can seek to invalidate the IPR in question, and yet are free from the risk of a remedy under 19 USC 1337.

ALJ Essex concludes by fully rejecting the argument that limited exclusion orders should be removed as a remedy from cases involving FRAND encumbered patents:

For the Commission to adopt a policy that would favor a speculative and  unproven position held by other government agencies, without proof that the harm exists or that the risk of such harm was so great that the Commission should violate its statutory duty would damage the Commission’s reputation for integrity, and violate its duties under the law. We should and must determine the public interest, and the correct outcome of each matter based on the facts presented, and by applying the law to those facts. To take a pre-set position, without hearing evidence, would violate every concept of justice we are tasked to enforce.

FRAND-Based Affirmative Defenses.  ALJ Essex found the affirmative defenses–equitable estopple, unclean hands and patent misuse–to be “moot” given his finding that “Respondents to not infringe a valid patent and that InterDigital’s FRAND obligations are not triggered.”

Following settlement, the ITC rescinded the limited exclusion order against Carsem per the parties’ request. Recall from our May 1, 2014 post that the ITC determined that respondent Carsem infringed AMkor’s patent, found that Amkor’s patent was not essential to JEDEC standard, and issued a limited exclusion order barring the unlicensed entry of infringing articles into the United States. On May 23, Carsem and Amkor jointly petitioned to rescind the limited exclusion order based on a settlement under which the products are now licensed. The ITC granted that petition and the notice of the rescission was published in the Federal Register on June 24, 2014.

Today, in In Re Nintendo involving an infringement complaint against Nintendo and eleven retailer’s of the Nintendo DS video game device, the Federal Circuit (Newman, Rader and Hughes) granted mandamus and ordered Judge Gilstrap of E.D. Texas to (1) sever the claims against Nintendo the manufacturer from the claims against the video game retailers; (2) stay the claims against the retailers and (2) transfer the claims against manufacturer Nintendo to W. D. Wash. where Nintendo’s relevant U.S. operations are based.  The court did so notwithstanding the patent owner’s argument that this may lead to collecting a low royalty rate from Nintendo that would then bar collecting a higher royalty against the retailers on those same devices (the retailers charge higher prices and do some bundling).

This case may tip the scales more toward granting “customer stays” in patent cases, which previously had about 50-50 chance of success.  This ruling was made in the wake of recent patent reform legislation that seeks to codify customer-stays in order to provide more predictability to its application.

Background.  In this case, patent owner Secure Axcess sued Nintendo and eleven retailers of the Nintendo DS video game systems alleging patent infringement by those game systems.  The defendants moved to sever and stay the actions against the retailers and transfer the action against Nintendo to W.D. Wash. where the bulk of documents and witnesses concerning the design of Nintendo’s DS video game system were located.  The retailers “stipulated that they would be bound by any judgment rendered by the transferee court in the Nintendo litigation.”

Judge Gilstrap denied the motion, noting that the patent owner “could obtain a higher royalty against the Retailers in light of ‘higher retail prices and the retailers’ practice of bundling the accused systems with video games and other accessories.'”  Thus, the patent owner should be allowed to pursue claims for damages against both Nintendo and the retailers at the same time “even though it may only collect once.”

Federal Circuit.  The Federal Circuit decision, written by Judge Newman, started by explaining the “customer-suit” exception to the “first-to-file” rule where a suit by a manufacturer “generally takes precedence” over a first suit filed by a patent owner against the manufacturer’s customers “for it is the manufacturer who is generally the ‘true defendant’ in the dispute.”  Although the manufacturer (Nintendo) and customers (retailers) were sued in the same single complaint, the customer-suit exception rationale still applies and “Nintendo is the true defendant.”  In this case, “the issues of infringement and validity are common to Nintendo and the Retailer Defendants” and “collect[ing] royalties from Nintendo … would preclude suit against the Retailers.”

The Federal Circuit rejected patent owner’s argument that the case should proceed against the retailers so that the patent owner can “have its choice of … the highest royalty rate among the defendants,” stating:

Secure Axcess [the patent owner] contends that severance should be denied so that it may pursue, and have its choice of, the highest royalty rate among the defendants.  This argument is outweighed, as in Katz, where we held that “[a]lthough there may be additional issues involving the defendants in [the customer] action, their prosecution will be advanced if [the plaintiff] is successful on the major premises being litigated in [the manufacturer litigation], and may well be mooted if [the plaintiff] is unsuccessful.”  This reasoning is similarly applicable here, for Secure Axcess has no claim against the Retailers unless the infringement claims against Nintendo are resolved in favor of Secure Axcess. … Since Nintendo’s liability is predicate to recovery from any of the defendants, the case against Nintendo must proceed first, in any forum.

Today the Supreme Court in Alice v. CLS Bank applied § 101 patentable subject matter requirements to invalidate patent claims directed to using a generic computer to implement the abstract idea of a conventional business practice that uses a third-party intermediary (e.g., clearing house or escrow agent) to mitigate the “settlement risk” that only one party to a financial transaction will pay what it owes.  The unanimous decision, written by Justice Thomas, is most closely aligned with the more restrictive view of § 101 patent eligibility found in Judge Lourie’s concurring decision in the en banc Federal Circuit ruling below that held all patent claims invalid without a majority consensus as to why (see our May 13, 2013 post).

As discussed below, the crux of the Court’s decision appears to be that the patent simply claimed implementing a conventional, well-known business practice using conventional, well-known generic computer functionality without any improvement to the computer functionality or any other technology.  The Court looked to some extent beyond the form of the claim–e.g, whether its a method, system, or computer-readable medium claim–so that patent eligibility is not readily avoided by artful claim drafting.  The Court’s decision today provides more incremental, than bright line, guidance on the patentability of computer-implemented inventions. 

Further, the Court conflates to some extent the issues of patentable eligibility under §101 and novelty/nonobviousness under §§102 and 103.  Specifically, given the Court’s decision today, at what point does technology become so “well-known”, “conventional” and “ubiquitous” that claim limitations directed to it not only fail to distinguish the claimed invention from the prior art, but also fail to make the claimed invention patent eligible subject matter?  In other words, can certain technology become so conventional and ubiquitous that it becomes a “basic tool” or “building-block” of innovation that is exempt from patentability under § 101 along side traditionally exempt laws of nature, natural phenomena and abstract ideas?

Background.  Our prior May 13, 2013 post provides background for this case and the hopelessly-split Federal Circuit decision below that involves method claims, computer-readable media claims, and system claims directed to using a computer to implement having a trusted third party intermediary (e.g., escrow agent or clearing house) exchange obligations that parties have under an agreement at a designated time after determining that both parties can perform their obligations at that time in order to manage “settlement risks” in financial obligations.  Using such third-party intermediaries was a common business practice and the issue was whether the claims were drafted to patent eligible subject matter under § 101 based on implementing that conventional business practice using a generic computer. 

The district court ruled they claims were invalid under § 101, which ended the case before a decision was made on traditional prior art defenses.  The Federal Circuit ruled en banc that the claims were invalid as being patent ineligible subject matter based on a majority of the judges agreeing the claims were invalid, but there was no majority as to why the claims were invalid.

Supreme Court.  The Supreme Court’s decision reviewed the history of its decisions on §101 patent eligibility, including 150 years of applying “an important implicit exception: Laws of nature, natural phenomena, and abstract ideas are not patentable.”  These exceptions arise due to concerns about patents pre-empting use of–and grant a monopoly over– laws of nature, natural phenomena and abstract ideas that are “the basic tools of scientific and technological work.”  Such a patent “might tend to impede innovation more than it would tend to promote it”, which is the Constitutional basis for patents (“to promote the useful arts”).  Importantly, this exception should not swallow all of patent law.  A patent that involves an abstract idea may be patent eligible if applying that abstract idea “to a new and useful end,” thus distinguishing claims to only the “‘building blocks’ of human ingenuity and those that integrate the building blocks into something more.”

Following its 2012  Mayo v. Prometheus decision, the Court applied a two step framework of (1) determining whether the claims are directed to a patent-ineligible concept and (2) if so, looking at the claim limitations individually and as a whole to determine “whether the additional elements ‘transform the nature of the claim’ into a patent-eligible application.”  The second step is a search for an “an ‘inventive concept’–i.e., an element or combination of elements that is ‘sufficient to ensure that the patent in practice amounts to significantly more than a patent upon the [ineligible concept] itself.”  The Court, perhaps addressing concerns raised by various concurrences/dissents in the en banc Federal Circuit decision below, said that, “[b]ecause the approach we made explicit in Mayo considers all claim elements, both individually and in combination, it is consistent with the general rule that patent claims ‘must be considered as a whole.'”

In the first step, the Court ruled that “[t]hese claims are drawn to the abstract idea of intermediate settlement” that is a long-standing “fundamental economic practice” and “building block of the modern economy,” stating:

On their face, the claims before us are drawn to the concept of intermediated settlement, i.e., the use of a third party to mitigate settlement risks.  Like the risk hedging in Bilski, the concept of intermediate settlement is “a fundamental economic practice long prevalent in our system of commerce.”  The use of a third-party intermediary (or “clearing house”) is also a building block of the modern economy.  Thus, intermediated settlement, like hedging [in Bilski] is an “abstract idea” beyond the scope of §101.

***

[W]e need not labor to delimit the precise contours of the “abstract ideas” category in this case.  It is enough to recognize that there is no meaningful distinction between the concept of risk hedging in Bilski and the concept of intermediate settlement at issue here.

 In the second Mayo step, the Court ruled that “the method claims, which merely require generic computer implementation, fail to transform that abstract idea into a patent eligible invention.”  The Court ruled that the claim limitations “must include ‘additional features’ to ensure ‘that the [claim] is more than a drafting effort designed to monopolize the [abstract idea]” and do more than describe an abstract idea and “add[] the words ‘apply it.'”  In reviewing prior cases, the Court summarized that “[t]hese cases demonstrate that the mere recitation of a generic computer cannot transform a patent-ineligible abstract idea into a patent-eligible invention.”  The Court premised this on “the ubiquity of computers” today, stating:

[I]f a patent’s recitation of a computer amounts to a mere instruction to “implemen[t]” an abstracti idea “on … a computer,” that addition cannot impart patent eligibility.  This conclusion accords with the pre-emption concern that undergirds our §101 jurisprudence.  Given the ubiquity of computers, wholly generic computer  implementation is not generally the sort of “additional featur[e]” that provides any “practical assurance that the process is more than a drafting effort designed to monopolize the [abstract idea] itself.”

 In reviewing the “representative” method claim limitations themselves, the Court framed the question as “whether the claims here do more than simply instruct the practitioner to implement the abstract idea of intermediated settlement on a generic computer” and held “They do not.”  The Court found that each separate claim step “does no more than require a generic computer to perform generic computer functions” without improving the computing function or any other technology:

Taking the claim elements separately, the function performed by the computer at each step of the process is “[p]urely conventional.”  Using a computer to create and maintain “shadow” accounts amounts to electronic recordkeeping–one of the most basic functions of a computer.  The same is true with respect to the use of a computer to obtain data, adjust account balances, and issue automated instructions; all of these computer functions are “well-understood, routine, conventional activit[ies] previously known to the industry. …

… “Viewed as a whole, petitioner’s method claims simply recite the concept of intermediated settlement as performed by a generic computer.  The method claims do not, for example, purport to improve the functioning of the computer itself.  Nor do they effect an improvement in any other technology or field.  Instead, the claims at issue amount to “nothing significantly more” than an instruction to apply the abstract idea of intermediated settlement using some unspecified, generic computer.

Thus the Court held the method claims invalid.  The Court ruled that the computer system and computer-readable medium claims “fail for substantially the same reasons.”  The patentee had conceded that the computer-readable medium claims  “rise or fall with its method claims.”  The system claims failed as well, because the recited “hardware” is “purely functional and generic”:

As to its system claims, petitioner emphasizes that those claims recite “specific hardware” configured to perform “specific computerized functions.”  But what petitioner characterizes as specific hardware–a “data processing system” with a “communication controller” and “data storage unit,” for example–is purely functional and generic.  Nearly every computer will include a “communications controller” and “data storage unit” capable of performing the basic calculation, storage, and transmission functions required by the method claims.  As a result, none of the hardware recited by the system claims “offers a meaningful limitation beyond generally linking ‘the use of the [method] to a particular technological environment,’ that is, implementation via computers.”

Thus the system claims were no different from the invalidated method claims “in substance,” and patent eligibility should not “depend simply on the draftsman’s art.”

Justice Sotomayor concurred (joined by Justices Ginsburg and Breyer) because claiming “a method of doing business” is not a patentable process.  Further, like in Bilski, the claims “are drawn to an abstract ideal.”

 

Yesterday, the ITC issued a notice regarding conclusions of law and corresponding correction showing that no FRAND violation was found in ALJ Essex’s June 13, 2014 Initial Determination that ZTE and Nokia did not infringe InterDigital’s patents alleged to be essential to 3G/4G standards (see our June 17, 2014 post).  Specifically, Conclusion of Law No. 10, as corrected, states that “Respondents have failed to show that InterDigital has violated any FRAND obligation.”  The Notice is sparse on details, so we must await a public version of the Initial Determination for more information.  We further note that the ITC issued a routine notice seeking comment on public interest issues that would be raised if the Commission, on review of the Initial Determination, finds a violation by Nokia or ZTE and issues a limited exclusion order. The request for public comment does not provide any special requests regarding standard essential patents or the FRAND obligation.

Judge Essex issued a Notice Regarding Initial Determination in InterDigital’s ITC action against ZTE and Nokia (Inv. No. 337-TA-868) on Friday, indicating that there has been a finding of no violation with respect to any of the 3G and 4G devices at issue. The notice is sparse on details, indicating only that no violation of the Tariff Act of 1930, as amended, has occurred by reason of infringement. A public version of the Initial Determination should be available in the coming weeks, as well as the Commission’s decision whether or not to review the ALJ’s decision.

As discussed in our June 6 post, Samsung recently settled out of this investigation as part of a settlement resolving all disputes involving InterDigital’s 3G/4G cellular standard-essential patents. ALJ Essex issued a separate Initial Determination on June 9, granting a joint motion by Samsung and InterDigital to terminate the investigation as to Samsung based on the settlement agreement. Huawei also settled-out of this investigation earlier this year.

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

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

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

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

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

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

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

Today Judge Whyte issued his awaited post-trial rulings following the jury’s RAND determination on LSI’s IEEE 802.11 WiFi patents in which he (1) denied JMOL motions by  both Realtek and LSI, (2) ruled on Realtek’s injunction and declaratory relief requests by denying Realtek’s request to enjoin LSI from seeking to enforce RAND-obligated patents without first making a RAND offer, but granting modified declaratory judgment relief, and (3) entered final judgment.  The declaratory judgment ruling (discussed below) provides an interesting analysis on declaring patent owner LSI’s RAND obligation as well as equating the contractual RAND determination analysis in this case with a reasonable royalty analysis that a jury would use to assess past damages on the same patents.

Background.  Our prior posts provide background about this case in which Realtek sought declaratory judgment relief for breach of RAND-obligation and declaration of a RAND-royalty rate based on LSI seeking an exclusion order in the U.S. International Trade Commission on RAND-encumbered IEEE 802.11 WiFi patents.  Judge Whyte had preliminarily enjoined LSI from seeking to enforce any exclusion order or other injunctive-type relief before making a RAND-offer to Realtek (see our May 21, 2013 post).  The ITC ultimately ruled that one of the patents was not infringed and the other patent had expired and, thus, dismissed that portion of the case because the ITC can only provide prospective relief (see our Mar. 27, 2014 post). The Ninth Circuit then dismissed LSI’s appeal of the preliminary injunction as having been mooted by the ITC’s dismissal of the investigation (see our Mar. 21, 2014 post). 

In the meantime, Judge Whyte issued evidentiary rulings to frame the RAND issues for the jury trial (see our Jan. 9, 2014 post).  The jury  verdict awarded Realtek over $3.8 million for damages caused to Realtek by LSI’s breach of the RAND obligation (based primarily on attorneys fees Realtek spent in the ITC investigation) and assessed a RAND royalty rate totaling 0.19% of the sales price of Realtek’s WiFi chips — i.e., 0.12% for one patent and 0.07% for the other patent (see our Feb. 27, 2014 post).  The parties then presented post-verdict motions (see our Mar. 13, 2014 post).

Order Denying Permanent Injunction.  Judge Whyte denied Realtek’s permanent injunction motion because irreparable harm was too speculative at this point.  Realtek moved for permanent injunctive relief similar to the preliminary injunction that was granted, asking the court to enjoin LSI from demanding royalties from Realtek on the patents-in-suit that were inconsistent with the jury’s RAND determination and to enjoin LSI from enforcing any alleged standard essential patents without first offering a RAND license.  Judge Whyte denied Realtek’s requested injunction because “the ITC’s Final Determination of no domestic industry, invalidity, and no infringement extinguishes the likelihood of immediate irreparable harm.”  Such harm would be too “speculative” at this point because, even though LSI is appealing the ITC’s ruling, “several events must align in LSI’s favor for the entry of an exclusion order to occur,” including Federal Circuit reversal on three issues, the ITC issuing an exclusion order on remand and the exclusion order surviving a possible presidential veto.  The injunction was denied without prejudice in case later events make an exclusion order threat more immediate.

Order Granting Declaratory Judgment.  In the same order that denied injunctive relief, Judge Whyte granted a modified version of the declaratory judgment relief sought by Realtek.  Realtek sought a declaration that the patents-in-suit would be unenforceable if LSI “fail[s] to offer Realtek an ongoing license on RAND terms and conditions, consistent with the jury’s February 26, 2014 verdict.”  Judge Whyte first ruled that the requested declaration sounded more like injunctive relief–e.g., it “would functionally require LSI to forbear from a specific action: enforcing its patent rights as to Realtek.”  He thus denied that requested declaratory relief for the same reason he denied the permanent injunction.

Nonetheless, the court had discretion “to craft its own appropriate declaratory judgment.”  Judge Whyte contrasted this case with Judge Robart’s decision in Microsoft v. Motorola that had dismissed claims seeking a declaration of RAND rates as being duplicative of Microsoft’s breach of contract claims.  In Judge Robart’s case, the breach claim was premised on Motorola offering licensing terms alleged not to be RAND-compliant that, thus, already  required the court to determine a RAND rate as part of the breach of contract claim.  In this case, however, the breach of contract claim was premised on LSI instituting the ITC suit prior to offering any license (i.e., it was not premised on the patent owner offering a non-RAND license).  Thus, separate declaratory judgment jurisdiction exists over the existing controversy of what constitutes a RAND royalty rate.

Another issue is that one of the patents (the ‘867 Patent) recently expired.  But declaratory judgment jurisdiction still exists as long as there is a case or controversy over the RAND royalty rate for the patent.  Such a controversy exists “because Realtek has reasonable apprehension of LSI bringing suit for past infringement of the ‘867 Patent, thereby implicating LSI’s RAND obligations.”  Interestingly, Judge Whyte equated the reasonable royalty methodology for a patent infringement suit on these patents with the contractual RAND determination made in this case, stating:

In the RAND context, determining damages for patent infringement is equivalent to declaring the parties’ rights under the RAND contract.  The court here was tasked with declaring the parties’ rights under the RAND contract, but it drew from case law on patent infringement damages for its methodology.  In its instructions to the jury, the court applied the hypothetical negotiation framework to instruct the jury on arriving at an appropriate RAND royalty rate.  While this court altered some of the details of the Microsoft [Judge Robart decision] and the Innovatio [Judge Holderman decision] framework, it followed the same general approach.  The reasonable royalty methodology in a patent infringement suit between Realtek and LSI would be identical to the methodology given to the jury to declare the parties’ rights under the RAND contract.  Therefore, even though the patent has expired, the RAND commitment would still inform the hypothetical negotiation over a reasonable royalty, so the court retains jurisdiction to declare the parties’ rights under that commitment.

 Judge Whyte thus entered declaratory judgment (but without the “unenforceab[ility]” language that Realtek sought) by declaring that “upon Realtek’s request for a license, to be in compliance with its RAND commitment, LSI must offer Realtek a license to the ‘958 Patent [or ‘867 Patent] on RAND terms, including a royalty rate of 0.12% [or 0.07% for the ‘867 Patent] on the total sales of Realtek’s products.”

Order Denying JMOL Motions.  Judge Whyte also denied motions by both parties seeking judgment as a matter of law notwithstanding the jury verdict. 

First, Judge Whyte declined to overturn the jury verdict damages award to Realtek for LSI’s breach of contract claim, which turned on procedural issues regarding burdens of proof and the such in establishing Realtek’s attorneys fees for defending itself in the ITC investigation.

Second, Judge Whyte declined to overturn the jury’s verdict on the RAND royalty rate.  Among other things, Realtek challenged LSI’s profferd damages rate because LSI’s damages expert’s used an erroneous estimation of the number of SEPs subject to an alleged comparable license as part of her royalty analysis.  The expert had arrived at a per-patent royalty rate from an alleged  comparable license by dividing the comparable license’s royalty rate by an estimated number of standard essential patents licensed therein.  But the expert later admitted in cross-examination that that number may have been off by one, five or so patents and her calculation may need adjustment.  Judge Whyte sustained the jury verdict because, even with that discrepancy, the jury still could have returned a royalty rate higher than they found — and higher than the amount Realtek argued.  Further, Judge Whyte would not exclude the testimony under Daubert because the expert’s calculations were reliable, testable and subject to critique.  This was true even though the expert adjusted her calculations based on cross-examination, because courts should encourage honest adjustments by experts of minor estimation errors.

Yet another high-profile SEP case settled earlier this week, with InterDigital announcing that it has reached a licensing deal with Samsung. Similar to the InterDigital’s recent settlement with Huawei, the Samsung settlement brings to a close ongoing litigation in Delaware’s District Court and before the ITC (Inv. No. 337-TA-868) involving InterDigital’s assertion of 3G/4G cellular standard-essential patents. Having settled with Samsung and Huawei, InterDigital continues to litigate the FRAND issues raised by these patents with Nokia and ZTE.

InterDigital initiated this round of SEP litigation against Samsung, Nokia, and ZTE in January 2013, first filing suit in the District of Delaware and then initiating a corresponding ITC action against the phone manufacturers in February 2013. As you may recall from our February 2013 post, the respondents asserted several FRAND-specific defenses in addition to customary patent infringement defenses. Whereas Huawei, Nokia, and ZTE asserted defenses of patent misuse, implied license, unclean hands, breach of contract, and equitable/promissory estoppel generally arising from InterDigital’s SSO activities and FRAND obligations,  Samsung had taken a slightly different approach due primarily to its own attempts to procure exclusion orders on FRAND-pledged standard-essential patents in Inv. No. 337-TA-794 (against Apple) and Inv. No. 337-TA-866 (against Ericsson) and in Japan (see our May 21, 2014 post on how Samsung’s efforts at injunctive relief played out before the Japanese High Court).

Instead of arguing that a party undertaking a FRAND promise waives all rights to an exclusion order in the ITC, Samsung alleged that FRAND obligations and related defenses should be evaluated on a case by case basis and that here, InterDigital violated its FRAND obligations.  Samsung also took the position that it was willing to renew a prior license with InterDigital on FRAND terms, but that InterDigital has refused to do so. Samsung had previously entered into a royalty-bearing license with InterDigital in 2008, following resolution of a  patent dispute involving Samsung’s 2G and 3G productss incorporating the WCDMA and CDMA2000 standards, which was reported to extend through 2012.

Huawei settled-out of this round of InterDigital infringement actions earlier this year, leaving Samsung, Nokia, and ZTE to defend both the district court and ITC cases. As discussed in our May 30 post, Judge Andrews recently dismissed Nokia and ZTE’s FRAND counterclaims in the Delaware action and the ALJ’s initial determination in the ITC case is scheduled to issue later this month.

According to InterDigital, the resulting license with Samsung resolves all pending patent litigation between the companies and covers Samsung’s 3G and 4G products as well as certain future generations of wireless products. InterDigital’s press release quotes its President and Chief Executive Officer, William J. Merritt, as saying the newly minted agreement with Samsung demonstrates “how our longstanding patent licensing framework and process can lead to effective, productive discussions and eventual resolution on fair and reasonable terms.” Although the specific terms of the settlement are not public, there is speculation that the deal may involve quarterly payments in the tens-of-millions dollar range from Samsung in exchange for a license to InterDigital’s wireless patents. Following the announcement, InterDigital issued updated financial information, indicating recurring revenue was expected to increase by $17-$23 million per quarter beyond previous estimates until 2017. A company representative has indicated that not all of the additional revenue is attributable directly to the agreement with Samsung.