Yesterday the Federal Circuit issued a blank Rule 36 summary affirmance of the U.S. International Trade Commission’s (ITC) determination that Apple did not infringe a Samsung patent alleged to cover a UMTS standard.  Recall that last year the ITC entered an exclusion order against Apple products found to infringe a Samsung standard essential patent, but the U.S. Trade Representative disapproved that exclusion order (see our post of Aug. 3, 2013).  That ended the investigation as to that patent because the U.S. Trade Representative’s decision was not reviewable.

But Samsung appealed the ITC’s determination that Apple’s products did not infringe another alleged standard essential patent.  In that appeal, Apple raised issues with respect to its standard-setting body defenses including the propriety of entering an exclusion order for a standard essential patent (see our post of Feb. 5, 2014).  Samsung responded.  And the Federal Circuit issued a Rule 36 summary affirmance without comment on the standard essential patent or other issues, simply stating “AFFIRMED.  See Fed. Cir. R. 36.”

Although Samsung technically could seek rehearing at the Federal Circuit or even petition Supreme Court review, the likelihood that any such approach would succeed is questionable in a case involving summary affirmance of a non-infringement decision that may involve fact-specific technical arguments.  And so the case that received so much world-wide attention not so long ago may have gone gently into that good night.

Today the Federal Circuit (Lourie, Dyk and Reyna) granted Microsoft’s motion to transfer Motorola’s appeal of Judge Robart’s RAND ruling to the Ninth Circuit, settling the parties dispute whether the Federal Circuit or Ninth Circuit has appellate jurisdiction over this particular appeal (see our Dec. 16, 2013 post and prior posts summarizing transfer motion).  The Federal Circuit held that law of the case prevailed and required deference to the Ninth Circuit’s prior determination that it had appellate jurisdiction in this case.

Background.  Recall that this case was filed by Microsoft against Motorola in W.D. Wash. as a contract-based action alleging that Motorola’s offered license rate on RAND-encumbered patents breached its obligations to standard setting organizations (ITU and IEEE).  Motorola then sued Microsoft in W.D. Wis. for infringing those same patents.  The W.D. Wis. case was transferred to W.D. Wash. and consolidated with Microsoft’s contract-based action before Judge Robart.

Meanwhile, Motorola had received an injunction against Microsoft in a German patent infringement action directed to the same standards where the German court rejected Microsoft’s assertion of ITU and IEEE standard setting obligations.  Judge Robart enjoined Motorola from enforcing that injunction while Microsoft’s case was pending before him to determine what a RAND royalty rate would be and whether Motorola breached its RAND obligations.  Motorola appealed Judge Robart’s preliminary injunction decision to the Ninth Circuit.  The Ninth Circuit ruled that it had appellate jurisdiction because Microsoft’s complaint “sounded in contract.”  The Ninth Circuit affirmed Judge Robart’s injunction.

Judge Robart held a bench trial and issued a first-of-its-kind RAND royalty rate determination (see our May 1, 2013 post) and later held a jury trial that found that Motorola had breached its RAND obligation (see our Sep. 4, 2014 post).  Judge Robart then issued a Rule 54(b) final judgment on the RAND rulings and stayed the remainder of the consolidated cases–e.g., Motorola’s infringement claims.  Motorola appealed the Rule 54(b) RAND judgment to the Federal Circuit (see our Nov. 12, 2013 post).  Microsoft then moved to transfer that appeal to the Ninth Circuit, which had previously ruled that it had appellate jurisdiction in that case based on Motorola’s injunction appeal.

Federal Circuit’s Transfer Decision.  The Federal Circuit granted Microsoft’s motion to transfer the appeal to the Ninth Circuit.  The Federal Circuit found that the Ninth Circuit’s decision that it has appellate jurisdiction is law of the case, which the Federal Circuit must adhere to “unless there is a showing of ‘extraordinary circumstances such as where the initial decision was clearly erroneous and would work a manifest injustice.”  The Federal Circuit found no such extraordinary circumstances, stating that “[t]he requested relief in Microsoft’s complaint plausibly supports the Ninth Circuit’s conclusion that this matter does not arise under the patent laws.”

The Federal Circuit’s decision today is limited to the unique facts and procedural posture of this particular case without the Federal Circuit deciding in its own independent view whether appellate jurisdiction properly would have resided in the Federal Circuit or regional circuit.  The issues on appeal are fascinating and complex.  This is the first case where a judge has set forth an analytical framework for deciding a RAND royalty rate and, because it was a bench trial, further explained the application of that framework to the facts at hand.  Because damages have been deemed a jury issue, the detailed thought process of most patent damages determinations usually reside within a jury black-box royalty rate decision with little insight into what swayed them to a higher or lower royalty rate.  This bench trial and written decision provide unique insight into that damages decision process.  Further, this is one of the few cases where a patent license royalty rate determination is made as to a portfolio of patents, rather than a typical litigated damages determination based on individually infringed patents.

These complex issues in this particular case will now be decided by an appeals court of general jurisdiction, rather than the specialized Federal Circuit patent appeals court that most likely will hear the bulk of cases raising similar issues — e.g., RAND obligations, damages for portfolio of patents, etc.  So there may remain uncertainty on these issues going forward, because the Federal Circuit most likely is not bound in other cases by whatever the Ninth Circuit decides in this particular case.  The other bench trial determined RAND rate and judicial analysis by Judge Holderman in the Innovatio case may not see any appellate review, because it appears that the RAND royalty determination may lead to settlement of all parties without determining infringement, validity or other issues in the first instance, much less an appeal (see our Feb. 7, 2014 post).  The other two cases so far in which a RAND rate has been determined were both jury trials with black-box verdicts.  One of those cases, Realtek v. LSI tried before Judge Whyte of N.D. Cal., most likely will be appealed to the Ninth Circuit that already has heard an interlocutory appeal in that case (see our Mar. 21, 2014 post), though appellate jurisdiction was not contested or expressly decided in that interlocutory appeal.  The other case, Ericsson v. D-Link tried before Judge Davis in E.D. Tex., was appealed and briefed at the Federal Circuit and we await the hearing and decision in that appeal.

Earlier this week, the U.S. International Trade Commission (“ITC”) issued its public opinion in an investigation where the respondent Carsem raised standard-setting obligation defenses by alleging that a patent asserted by Amkor covered a standard set by the Joint Electron Device Engineering Counsel (“JEDEC”).  The ITC rejected Carsem’s FRAND-related equitable and legal estoppel defenses as well as public interests arguments and entered a limited exclusion order because, among other things, Carsem had not shown that the asserted patent was essential to practicing the JEDEC standard.

Equitable Estoppel Defense.  Carsem argued that equitable estoppel bars Amkor from enforcing the patent-in-suit because Amkor failed to disclose the patent to JEDEC.  Specifically, Carsem argued that (1) Amkor failed to disclose the patent when introducing its MO-220 standard proposal to JEDEC ; (2) Carsem relied on Amkor’s representations when voting on the MO-220 and MO-229 standards and designing the accused products to comply with the standards; and (3) Carsem is materially prejudiced by Amkor now seeking to enforce the patents.  Relying on the Federal Circuit’s 2003 decision in Rambus v. Infineon, which also concerned duty to disclose patents in JEDEC standard setting, the ALJ ruled that Carsem must present “clear and convincing evidence that there is a reasonable expectation that the [JEDEC] standard cannot be practiced without a license under the undisclosed [patent] claims”–in other words, show that the patent is essential to the standard.  Further, the duty is based on “the scope of the claimed invention that would cover any [JEDEC] standard” because “to hold otherwise would contradict the record of evidence and render the JEDEC disclosure unbounded”, quoting the Federal Circuit’s Rambus decision:

Under such an amorphous duty, any patent or application having a vague relationship to the standard would have to be disclosed.  JEDEC members would be required to disclose improvement patents, implementation patents, and patents directed to the testing of standard-compliant devices–even though the standard itself could be practiced without licenses under such patents.
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[T]his duty encompassed any patent or application with claims that a competitor or other JEDEC member reasonably would construe to cover the standardized technology.  This does not require a formal infringement analysis.  Members are not required to perform a limitation-by-limitation comparison or conduct an equivalents analysis.  Rather, the disclosure duty operates when a reasonable competitor would not expect to practice the standard without a license to practice the undisclosed claims.  Stated another way, there must be some reasonable expectation that a license is needed to implement the standard.  By the same token, the disclosure duty does not arise for a claim that recites individual liitations directed to a feature of the JEDEC standard …

The ALJ rejected Carsem’s expert testimony on whether the patent covered the JEDEC MO-220 and 229 standards because (1) it was based on claim constructions not adopted by the ALJ and (2) was “of a general nature and does not make reference to particular claim terms in specific patents.”  Thus, Carsem had not established that the JEDEC standards “can only be complied with by using the claims in Amkor’s [patents].”  Accordingly, Carsem had not established the Carsem violated a duty to disclose on which the equitable estoppel defense relies.  The ITC affirmed the ALJ’s findings and ruling.

Legal Estoppel Defense.  Carsem argued that Amkor’s obligations to JEDEC required Carsem to license the patent-in-suit on fair, reasonable and non-discriminatory (“FRAND”) terms, but Amkor failed to offer FRAND terms consistent with offers made to other actual and prospective licensees.  The ITC ruled that the equitable estoppel ruling leads to the same result on the legal estoppel defense, because Carsem failed to show that the patent was “standard essential” so as to raise the FRAND obligation.  The ITC  noted that Carsem’s letter to JEDEC concerning the parent patent and related applications was “conditional on its face” in stating that such patents/applications “may apply to this registration.  If the current issued patent or later patents resulting from related applications do apply, Amkor Technology intends to comply with the JEDEC Patent Policy and License under reasonable terms and conditions that are demonstrably free of any unfair discrimination. [emphasis in original].”

Limited Exclusion Order.  The ITC also rejected Carsem’s argument that its allegation that the patent-in-suit covered the JEDEC standard precludes granting exclusionary relief, because Carsem had not shown that the patent was indeed standard essential:

The record, however, shows that the ‘277 patent is not essential to the practice of the JEDEC MO-220 and MO-229 standards, and also shows that Amkor has not breached any obligations to JEDEC.

The ITC considered the SEP allegation as part of its “public interest” query for granting exclusionary relief.  It resolved the issue, however, consistent with its determination of Carsem’s affirmative defenses in finding that the patent was not shown to be standard essential.  This led Commissioner Aranoff to give additional views that SEP-related defenses typically should not be considered separately for both affirmative defenses and the public interest query; principles of finality counsel resolving those arguments in the affirmative defense liability stage that, if successful, would mean no liability and hence no remedy.

The procedural issue in considering SEP allegations in the exclusionary relief stage no doubt stems from the U.S. Trade Representive’s disapproving the ITC’s granting exclusionary relief last year against Apple’s iPhones found to infringe Samsung’s patent alleged to be essential to a standard (see our Aug. 3, 2013 post).  In that investigation, the ITC entered an exclusion order where Apple had not presented evidence of whether Samsung’s patent covered the standard, what Samsung’s standard setting obligations would be, etc.–standard essential patent defenses did not appear to have been litigated in the investigation.  The U.S. Trade Representative nonetheless disapproved the exclusion order and instructed the ITC in future matters to take affirmative steps–even if the parties have not–to consider relevant standard essential patent issues, thus implying something beyond an accused infringer’s affirmative defense obligations.

Yesterday, the European Commission issued decisions in two antitrust proceedings centered around the enforcement of standard essential patents (SEPs). The decisions, one involving Samsung and the other Motorola, essentially create a “safe harbour” for willing licensees of FRAND-encumbered SEPs to avoid an injunction and address the circumstances under which an SEP holder may seek injunctive relief against a potential infringer.

Commission Vice President Joaquín Almunia stated that the decisions will provide “clarity to the industry on what constitutes an appropriate framework to settle disputes over ‘FRAND’ terms in line with EU antitrust rules” and encouraged other industry players to consider establishing dispute resolution mechanisms in line with yesterday’s decisions. These decisions significant as they will affect future analyses of whether various SEP enforcement strategies run afoul of EU antitrust rules.

The Motorola Mobility Decision

The first decision arises from Motorola Mobility’s efforts to enforce FRAND-committed SEPs related to the ETSI GPRS mobile communications standard (a part of the GSM standard) against Apple in Germany. According to the Commission’s press release regarding the Motorola decision, Apple had agreed to take a license and be bound by the German court’s FRAND determination. After receiving a complaint from Apple, the Commission opened an investigation in April 2012 and issued a Statement of Objections to Motorola’s actions in May 2013.

In yesterday’s decision, the Commission found that it was abusive for Motorola to both seek and enforce injunctive relief against Apple on the basis of FRAND-encumbered SEPs where Apple had agreed to be bound by the FRAND terms determined by a German court. The Commission also found Motorola’s insistence that Apple relinquish any potential infringement or invalidity challenges to be a violation of the EU’s antitrust regulations, particularly as Motorola’s demands were made under the threat of injunction:

Implementers of standards and ultimately consumers should not have to pay for invalid or non-infringed patents. Implementers should therefore be able to ascertain the validity of patents and contest alleged infringements.

Although Motorola was found to be engaged in anticompetitive behavior, the Commission declined to impose a corresponding fine, reasoning that (i) there is an absence of case-law by EU courts dealing with the legality of SEP-based injunctions under pertinent antitrust law prohibiting abusing a dominant position and (ii) European national courts have issued diverging opinions on the issue.

The European Commission commented in the FAQ memo that the decision “provides a “safe harbour” for standard implementers who are willing to take a licence on FRAND terms”, noting that such implementers may avoid getting hit with an SEP-based injunction if they are able to “demonstrate that they are a willing licensee by agreeing that a court or a mutually agreed arbitrator adjudicates the FRAND terms.”

The Samsung Electronics Decision

The second case arises from Samsung Electronic’s bid for injunctive relief against Apple based on FRAND-committed SEPs related to ETSI 3G UMTS mobile communication standards. According to the press release regarding the Samsung decision, Samsung began seeking injunctive relief for patent infringement in April 2011. The Commission opened an investigation of Samsung’s SEP enforcement in January 2012. In December 2012, the Commission issued a Statement of Objections, informing Samsung that it considered Apple to be a willing licensee of Samsung’s SEPs and expressing concern that Samsung’s SEP enforcement constituted an abuse of a dominant position under EU law. In response to the Commission’s concerns, Samsung offered a series of commitments regarding SEP enforcement and licensing.

Specifically, Samsung committed to not pursue any injunctions in the European Economic Area (made up of the EU plus Iceland, Liechtenstein, and Norway) for a period of five years based on any SEPs related to smartphone/tablet technologies against companies that agree to a licensing framework that provides for (i) a 12-month negotiation period and (ii) a third party FRAND determination if no agreement can be reached within the 12-month negotiation period (see our Oct. 18, 2013 post).

The Commission’s decision renders the commitments offered by Samsung  legally binding under EU antitrust laws. Similar to the statement issued in the Motorola decision, the Commission further commented in its FAQ memo:

Samsung’s commitments implement in this case the “safe harbour” concept established in the Motorola decision in practical terms. They provide for a “safe harbour” available to all potential licensees of the relevant Samsung SEPs. Potential licensees are protected against injunctions sought by Samsung on the basis of such SEPs if they submit to the licensing framework provided for by the commitments.

Other European Commission Statements on SEP/FRAND Issues

The European Commission also released a FAQ-style memorandum regarding antitrust decisions on SEPs, which it claimed “strike a fair balance between the interests of SEP holders to be appropriately remunerated for their IP and the interests of implementers of standards to get access to standardised technology on FRAND terms.” The FAQ summarized the Motorola and Samsung decisions as follows:

Today’s action by the Commission clarifies that it is anti-competitive to use injunctions in relation to SEPs in the following circumstances: when in a standardisation context, a SEP holder has committed to license the SEP on FRAND terms and the licensee is willing to take a licence on such terms. In these circumstances, the seeking of injunctions can distort licensing negotiations and lead to licensing terms with a negative impact on consumer choice and prices.

The FAQ-style memorandum addresses several other topics relevant to European patent disputes.

Injunctive Relief Reaffirmed. The Commission emphasized that it is not questioning the use or pursuit of injunctions by patent holders, noting that recourse to injunctive relief is generally a legitimate remedy for patent holders in infringement cases. The Commission further clarified that SEP-based injunctions should be available against unwilling licensees and that the Samsung and Motorola cases do not stand for the elimination of injunctive relief in view of anticompetitive concerns:

Rather, in the specific circumstances where the holder of a SEP has given a commitment to license on FRAND terms and where the company against which an injunction is sought is willing to enter into a FRAND licence agreement, the seeking of an injunction on the basis of SEPs can constitute an abuse of a dominant position.

Who are “willing licensees”? The Commission expressed the view that whether a company can be considered a “willing licensee” should be determined on a case by case basis. The Commission noted that while yesterday’s decisions provide a “safe harbour” for willing licensees, no findings have been made regarding the willingness of licensees that are not willing to have binding FRAND terms determined by a third party in the event of a dispute. The Commission also clarified that potential licensees who challenge validity, essentiality, or infringement are not unwilling, per se:

Potential licensees of SEPs should remain free to challenge the validity, essentiality or infringement of SEPs. It is in the public interest that potentially invalid patents can be challenged in court and that companies, and ultimately consumers, are not obliged to pay for patents that are not infringed.

What about FRAND calculations? Without providing specific guidance or input on how FRAND rates ought to be calculated, the Commission indicated that courts and arbitrators are well-placed to set FRAND rates in cases of disputes and encouraged national courts may seek guidance from the Commission on the interpretation of EU competition law. The Commission noted that Germany’s Mannheim Regional Court sought guidance on setting FRAND rates in the Motorola v. Apple SEP dispute in November 2013 and that the Commission’s responses to this inquiry would be posted on the Commission website at some point in the future.

Today, the U.S. Supreme Court issued two opinions (Octane Fitness and Highmark) that create a more flexible, deferential standard for determining what constitutes an “exceptional” patent case in which a district court has discretion to award reasonable attorney’s fees to the prevailing party.  The Court rejected the Federal Circuit’s rigid test that required a clear and convincing burden of proof and adopted a more flexible, plain meaning approach to what makes a case “exceptional” as compared to run-of-the-mill cases under the lower preponderance of the evidence burden of proof.  The Court also rejected the Federal Circuit’s appellate de novo review of such awards, and adopted an abuse of discretion standard that is much more deferential to the district court’s fee-shifting ruling.

35 U.S.C. Section 285 governs attorney fee awards in patent cases, and provides as follows:  “The court in exceptional cases may award reasonable attorney fees to the prevailing party.”

Historically, courts applied the Federal Circuit’s holding in Brooks Furniture Mfg., Inc. v. Dutailier Int’l, Inc. for determining whether a case is “exceptional” thereby permitting a court to award attorney fees to the prevailing party.  Under Brooks Furniture, a case was “exceptional” if (1) the case involved “material inappropriate conduct” in the litigation or prosecuting the patent or (2) the case was both “objectively baseless” and “brought in subjective bad faith.”  Brooks Furniture also required that parties establish the “exceptional” nature of a case by “clear and convincing evidence.”

Octane Fitness:  The Supreme Court’s decision today in Octane Fitness, LLC v. ICON Health & Fitness, Inc. overruled Brooks Furniture.  The patent owner, ICON Health, manufactured exercise equipment and sued its competitor Octane Fitness alleging infringement of a patent directed to a certain type of elliptical exercise machine.  The district court granted Octane’s motion for summary judgment of no infringement.  Octane then moved for attorney’s fees under §285.  The district court denied Octane’s motion given the stringent Brooks Furniture standard, because Octane could not show either that ICON’s claim was objectively baseless or that ICON brought the claim in subjective bad faith.  As to objective baselessness, the district court rejected Octane’s argument that the judgment of non-infringement “should have been a foregone conclusion to anyone who visually inspected” Octane’s machines.  Although the court rejected ICON’s infringement arguments, they were neither “frivolous” nor “objectively baseless.”  The district court also found no subjective bad faith on ICON’s part, dismissing as insufficient both “the fact that [ICON] is a bigger company which never commercialized the [asserted] patent” and an e-mail exchange between two ICON sales executives, which Octane had offered as evidence that ICON had brought the infringement action “as a matter of commercial strategy.”

ICON appealed the judgment of non-infringement, and Octane cross-appealed the denial of attorney’s fees.  The Federal Circuit affirmed both orders.  In upholding the denial of attorney’s fees, the Federal Circuit rejected Octane’s argument that the district court had “applied an overly restrictive standard in refusing to find the case exceptional under §285.”  The Supreme Court granted certiorari and reversed.

The Court held that “[i]n 1952, when Congress used the word [‘exceptional’] in §285 (and today, for that matter), ‘[e]xceptional’ meant ‘uncommon,’ ‘rare,’ or ‘not ordinary.'”   “We hold, then, that an ‘exceptional’ case is simply one that stands out from others with respect to the substantive strength of a party’s litigating position (considering both the governing law and the facts of the case) or the unreasonable manner in which the case was litigated.”  Under the new Octane Fitness standard,       “[d]istrict courts may determine whether a case is ‘exceptional’ in the case-by-case exercise of their discretion, considering the totality of the circumstances.”  Drawing support from the Copyright Act, the Court held that “[t]here is no precise rule or formula for making these determinations, but instead equitable discretion should be exercised in light of the considerations we have identified.'”

According to the Court, the “Federal Circuit’s formulation [in Brooks Furniture] is overly rigid” because, under it, “a case is ‘exceptional’ only if a district court either finds litigation-related misconduct of an independently sanctionable magnitude or determines that the litigation was both ‘brought in subjective bad faith’ and ‘objectively baseless.'”  “This formulation superimposes an inflexible framework onto statutory text that is inherently flexible.”

Octane Fitness also overruled Brooks Furniture’s requirement that an “exceptional” case must be established by clear and convincing evidence.  “We have not interpreted comparable fee-shifting statutes to require proof of entitlement to fees by clear and convincing evidence” and “nothing in §285 justifies such a high standard of proof.”  Rather, “Section 285 demands a simple discretionary inquiry; it imposes no specific evidentiary burden, much less such a high one.”  “[P]atent-infringement litigation has always been governed by a preponderance of the evidence standard. . . and that is the standard generally applicable in civil actions, because it allows both parties to share the risk of error in roughly equal fashion.”

The Court reversed the Federal Circuit’s decision and remanded the case for further proceedings consistent with the Court’s holdings.

Highmark:  The Supreme Court’s decision in Highmark, Inc. v. Allcare Health Management System, Inc. concerned alleged infringer Highmark, a health insurance company, filing a declaratory judgment suit against patent owner Allcare alleging that Allcare’s patent directed to “utilization review” in “managed health care systems” was invalid, unenforceable and not infringed;  Allcare counterclaimed for patent infringement.  The district court granted summary judgment of non-infringement in favor of Highmark.

Highmark then moved for fees under §285.  The district court granted Highmark’s motion, reasoning that Allcare “had engaged in a pattern of ‘vexatious’ and ‘deceitful’ conduct throughout the litigation.”  Specifically, it found that Allcare had “pursued this suit as part of a bigger plan to identify companies potentially infringing the ‘105 patent under the guise of an informational survey, and then to force those companies to purchase a license of the ’105 patent under threat of litigation.”  The district court also “found that Allcare had ‘maintained infringement claims [against Highmark] well after such claims had been shown by its own experts to be without merit’ and had ‘asserted defenses it and its attorneys knew to be frivolous.'”  The district court fixed the award at $4,694,727.40 in attorney’s fees and $209,626.56 in expenses, in addition to $375,400.05 in expert fees.

The Federal Circuit affirmed in part and reversed in part.  It affirmed the district court’s exceptional-case determination with respect to the allegations that Highmark’s system infringed one claim of the ‘105 patent, but reversed the determination with respect to another patent claim in applying a de novo review of that determination.  The court held that because the question of whether litigation is “objectively baseless” under Brooks Furniture “‘is a question of law based on underlying mixed questions of law and fact,'” an objective-baselessness determination is reviewed on appeal “‘de novo‘” and “without deference.”  The Federal Circuit then determined that “Allcare’s argument” as to claim construction “was not ‘so unreasonable that no reasonable litigant could believe it would succeed.'”  The court further found that none of Allcare’s conduct warranted an award of fees under the Brooks Furniture litigation-misconduct prong.

The Supreme Court granted certiorari, vacated the Federal Circuit’s opinion, and remanded the case for further proceedings.  The Court began its analysis by citing its new Octane Fitness decision, which “rejects the Brooks Furniture framework as unduly rigid and inconsistent with the text of §285.”   Octane Fitness “instructs that ‘[d]istrict courts may determine whether a case is ‘exceptional’ in the case-by-case exercise of their discretion, considering the totality of the circumstances.'”  “Our holding in Octane settles this case: Because §285 commits the determination whether a case is ‘exceptional’ to the discretion of the district court, that decision is to be reviewed on appeal for abuse of discretion.”

Potential impact on pending patent legislation?:  As we previously reported, Congress is currently working on patent reform legislation targeted at reducing perceived negotiation and litigation abuses by non-practicing entities (what some call “patent trolls”).  Late last year, the House passed a bill that would, inter alia, require the losing party in patent cases to pay the prevailing party’s attorney’s fees unless the position and conduct of the non-prevailing party was reasonably justified in law and fact.  The Senate is currently debating a competing bill as well as compromise language that would insert similar fee-shifting language.  The Supreme Court’s two rulings today requiring a prevailing party to only show that a case is exceptional by a preponderance of the evidence and granting the district court broader discretion to rule which cases are indeed exceptional may impact the future of the fee-shifting provisions in the legislation under consideration.  Congress may consider tabling legislative fee-shifting provisions in favor of giving courts an opportunity to address patent litigation abuse under the new flexible and discretionary standard.

Today the Federal Circuit issued its long-awaited decision in the appeal from Judge Posner’s ruling that denied both Motorola and Apple damages and injunctive relief in Apple v. Motorola.  Among other things, the Federal Circuit ruled that there is no per se rule that prohibits a party from seeking injunctive relief on a standard essential patent (SEP) that is subject to an agreement to license the patent on fair, reasonable, and non-discriminatory terms (RAND), stating:

To the extent that the district court applied a per se rule that injunctions are unavailable for SEPs, it erred.  While Motorola’s FRAND commitments are certainly criteria relevant to its entitlement to an injunction, we see no reason to create, as some amici urge, a separate rule or analytical framework for addressing injunctions for FRAND-committed patents.  The framework laid out by the Supreme Court in eBay, as interpreted by subsequent decisions of this court, provides ample strength and flexibility for addressing the unique aspects of FRAND committed patents and industry standards in general.  A patentee subject to FRAND commitments may have difficulty establishing irreparable harm.  On the other hand, an injunction may be justified where an infringer unilaterally refuses a FRAND royalty or unreasonably delays negotiations to the same effect.  To be clear, this does not mean that an alleged infringer’s refusal to accept any license offer necessarily justifies issuing an injunction.  For example, the license offered may not be on FRAND terms.  In addition, the public has an interest in encouraging participation in standard-setting organizations but also in ensuring that SEPs are not overvalued.  While these are important concerns, the district courts are more than capable of considering these factual issues when deciding whether to issue an injunction under the principles in eBay.

 Nevertheless, the Federal Circuit affirmed the denial of injunctive relief on Motorola’s SEP given not only the FRAND commitment, but the large number of licensed industry participants that demonstrates that money damages adequately compensate for the infringement and that Motorola was not irreparably harmed by Apple’s infringement, stating:

Applying those principles [quoted above] here, we agree with the district court that Motorola is not entitled to an injunction for infringement of the ‘898 patent [an SEP].  Motorola’s FRAND commitments, which have yielded many license agreements encompassing the ‘898 patent, strongly suggest that money damages are adequate to fully compensate Motorola for any infringement.  Similarly, Motorola has not demonstrated that Apple’s infringement has caused it irreparable harm.  Considering the large number of industry participants that are already using the system claimed in the ‘898 patent, including competitors, Motorola has not provided any evidence that adding one more user would create such harm.  Again, Motorola has agreed to add as many market participants as are willing to pay a FRAND royalty.  Motorola argues that Apple has refused to accept its initial licensing offer and stalled negotiations.  However, the record reflects that negotiations have been ongoing, and there is no evidence that Apple has been, for example, unilaterally refusing to agree to a deal.  Consequently, we affirm the district court’s grant of summary judgment that Motorola is not entitled to an injunction for infringement of the ‘898 patent.

 Judge Rader dissented on this point, asserting that there was a genuine factual dispute whether Apple was an unwilling licensee, stating:

To my eyes, the record contains sufficient evidence to create a genuine dispute of material fact on Apple’s posture as an unwilling licensee whose continued infringement of the ‘898 patent caused irreparable harm.  Because of the unique and intensely factual circumstances surrounding patents adopted as industry standards, I believe the district court improperly granted summary judgment.  Therefore, on this narrow point, I respectfully dissent in part.

Judge Rader found that untangling the value of the patent from the value of being in a standard as well as issues of patent “holdup” versus “hold out” were complex factual issues not likely susceptible to summary judgment, stating:

    At the outset, a patent adopted as a standard undoubtedly gains value by virtues of that adoption.  This enhancement complicates the evaluation of the technology independent of the standardization.  By the same token, the standardization decision may also simply reflect and validate the inherent value of the technology advance accomplished by the patent.  Untangling these value components (at the heart of deciding whether a putative licensee was “unwilling” to license, and thus irreparable harm and other injunction factors) requires intense economic analysis of complex facts.  In sum, right from the theoretical outset, this question is not likely to be susceptible to summary adjudication.

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    Market analysts will no doubt observe that a “hold out” (i.e., an unwilling licensee of an SEP seeking to avoid a license based on the value that the technological advance contributed to the prior art) is equally as likely and disruptive as a “hold up” (i.e., an SEP owner demanding unjustified royalties based solely on value contributed by the standardization).  These same complex factual questions regarding “hold up” and “hold out” are highly relevant to an injunction request.  In sum, differentiating “hold up” from “hold out” requires some factual analysis of the sources of value–the inventive advance or the standardization.

     The record in this case shows evidence that Apple may have been a hold out.  This evidence alone would create a dispute of material fact.

    More important, the district court made no effort to differentiate the value due to inventive contribution from the value due to standardization.  Without some attention to that perhaps dispositive question, the trial court was adrift without a map, let alone a compass or GPS system.  In fact, without that critical inquiry, the district court could not have properly applied the eBay test as it should have.

     Instead of a proper injunction analysis, the district court effectively considered Motorola’s FRAND commitment as dispositive by itself: “Motorola committed to license the ‘898 to anyone willing to pay a FRAND royalty and thus implicitly acknowledged that a royalty is adequate compensation for a license to use that patent.  How could it do otherwise?”  To the contrary, Motorola committed to offer a FRAND license, which begs the question: What is a “fair” and “reasonable” royalty?  If Motorola was offering a fair and reasonable royalty, then Apple was likely “refus[ing] a FRAND royalty or unreasonably delay[ing] negotiations.  In sum, the district court could not duck the question that it did not address; was Motorola’s FRAND offer actually FRAND?

 Judge Rader, therefore, would have allowed Motorola to prove that Apple was an unwilling licensee and entitled to injunctive relief.

With standard-essential-patent (SEP) damages discussions frequently focused on how to calculate a RAND rate, one can sometimes forget that not all SEPs are subject to [F]RAND obligations, which raises the issue whether and to what extent a reasonable royalty rate would be different between RAND and non-RAND encumbered patents. Last week, N.D. Cal. Judge Lucy Koh issued a Daubert ruling in an interesting case where the damages model from a non-practicing patent monetization entity attempted to affirmatively factor-in a higher royalty rate beyond the technical value of the patent based on the “hold-up” value the patent obtained by allegedly covering a cellular standard without the patent being subject to any standard setting RAND or other licensing obligation. The court, however, excluded such testimony from plaintiff’s damages expert.

Other SEP cases have theorized that patent hold-up may occur with an SEP, but there was no evidence that patent hold-up actually occurred.  This case, GPNE Corp. v. Apple, Inc. (Case No. 12-CV-02885-LHK), serves as the only litigated instance we are aware of in which actual hold-up was shown to occur based on the SEP patent owner affirmatively trying to use the value of patented technology being in a standard to demand a rate higher than the particular patented technology itself warranted.  As this is only a single data point, we cannot extrapolate too far, but the case indicates that, in a rare instance so far where actual SEP hold-up is shown to occur, a court may reject an attempt to seek a royalty beyond the value of the patented invention itself based on a patent covering a standard regardless whether that patent is or is not subject to RAND or other standard setting obligation.

Here is how the ruling came about. GPNE filed an infringement suit against Apple on May 10, 2012, asserting three patents that are alleged to be essential to 3G and 4G cellular standards. Both parties submitted expert reports and testimony on damages, each of which performed a reasonable royalty damages analysis using the Georgia Pacific factors. After expert discovery closed, both parties sought to exclude one another’s damages expert testimony from trial.  In a hypothetical negotiation for a reasonable royalty, GPNE’s damages expert relied upon a number of qualitative factors indicating the importance of 3G and 4G cellular technology as a whole to the accused infringing devices–rather than just the importance of the patented technology to those devices– to arrive at a royalty rate of $1 per device.

GPNE’s expert assumed that the patents covered cellular connectivity standards such that Apple could not design around the patents and still sell products that could work on GPRS, EDGE, and LTE networks without a license to GPNE’s patents. In other words, GPNE’s expert asserted that the hypothetical negotiation could factor-in patent “hold-up” value in which the patent owner would capture the value of the patent covering a standard–and hence the value of complying with the standard– regardless of the patent’s particular technical contribution/value to the standard or the accused product:

GPNE had the power to “hold up” Apple, giving it considerable negotiating leverage based on the scope of its intellectual property rights. GPNE had no obligations to use an ex ante framework to license its [standard-essential patents] – the ex ante evaluation would be irrelevant as would be the consideration of rates for patent pools in determining an appropriate royalty rate in this matter.

The expert apparently based the $1/unit figure on the value of cellular technology in general to the Apple products, rather than the value of the specific patents themselves. The damages expert further indicated that the $1/unit royalty amount was determined generally based on his “30 years of experience in the licensing world” and that “there is no mathematical calculation… to derive the one dollar”.

Reviewing GPNE’s proffered expert opinions, the Court granted Apple’s motion to exclude the damages testimony on the grounds that GPNE’s expert provided no methodology to derive the $1/unit royalty from the average net incremental profit ($86), performed no analysis to apportion value to the specific patent’s technological contribution, and cited various licenses that did not support the $1/unit rate. The court reasoned that GPNE’s expert analysis “is a black box that provides no basis for the $1 per unit royalty figure, cloaking this arbitrary choice in broad statements about the general value of cellular connectivity.”

The court further criticized the lack of apportionment analysis in GPNE’s expert opinion on damages, indicating GPNE’s expert presented no evidence of the value of the specific patented technologies. Citing Georgia Pacific factor  13, “[t]he portion of the realizable profit that should be credited to the invention as distinguished from non-patented elements, the manufacturing process, business risks, or significant features or improvements added by the infringer”, the court found that no such apportionment was taken into consideration. The court stated that, while the expert report relies on generic statements regarding the importance of 3G and 4G LTE connectivity technology to Apple generally, the report made no attempt to distinguish technologies covered by the patents-at-issue, which the court’s claim construction found are related primarily to pager technology, from the non-infringing features of 3G and 4G LTE technology standards. The failure to distinguish between the two proved fatal to the damages opinion, with the court ruling “GPNE must make some attempt to distinguish the allegedly infringing features of 3G and 4G LTE from the non-infringing features, so that [GPNE’s expert] may apportion value between them.”

This case indicates that a proper analysis for determining either a reasonable royalty or RAND-encumbered royalty for a patent that covers an industry standard may account for patent hold-up concerns by providing a reasoned apportionment between the value of the patented features and the unpatented technical value of other features including the affected standard.  That rationale is supported by Factor 13 of a typical Georgia-Pacific analysis that seeks to apportion value to the specific patented technology apart from other non-patented features.

After being removed to federal district court last May, the Vermont Attorney General’s suit against non-practicing entity MPHJ is being sent back to state court. The decision holds that the AG’s unfair competition claims arising from MPHJ’s patent enforcement efforts belong in state court and raises the question of whether other patent demand letter jurisprudence will be formed by patch-work state competition claims in lieu of a uniform federal law.

Background

MPHJ is widely regarded as a non-practicing entity whose patent portfolio includes a number of patents directed to scan-to-email technology. Over the past several years, MPHJ has sought to enforce these scanner patents against a large number of businesses through an extensive demand letter writing campaign.

Vermont’s attorney general initially filed suit in Vermont’s Superior Court last May, alleging that MPHJ’s local patent assertion efforts constitute unfair and deceptive trade practices in violation of state unfair competition laws. See our May 22, 2014 post for more information. MPHJ moved to have the action heard in federal court, and action was removed to district court in June 2014. The Vermont Attorney General then moved the district court to have the action returned to state court, arguing the claim that MPHJ has violated state consumer protection laws must be heard in state court. In response, MPHJ argued that the suit involved questions of federal patent law and as such was properly before the District Court.

The District Court’s Ruling

U.S. District Court Judge William Sessions agreed with Vermont’s position, ruling that the case “is premised solely on Vermont state law, not federal patent law” and belongs in state court. In reaching this decision, Judge Sessions reasoned that the suit claims MPHJ violated state unfair competition law without raising claims related to the infringement or validity of MPHJ’s patents:

Instead, the state is targeting bad faith conduct irrespective of whether the letter recipients were patent infringers or not, on the basis that MPHJ’s bad faith conduct would be unlawful even MPHJ’s patents were valid and the conduct was directed toward actual patent infringers.

The court weighed the claims made in the complaint, such as the allegation that MPHJ’s letters falsely claimed to have performed an infringement analysis and that the letters falsely asserted that most recipients had already taken a license, and found that none involved questions of patent law. From the Court’s perspective, “this case is about consumer protection, not about patents”.

Opponents of the decision will likely question whether it will have a chilling affect on patent enforcement, placing patent owners seeking to enforce their rights at the risk of being subjected to numerous state court challenges across multiple jurisdictions. Opposing Vermont’s motion, MPHJ specifically argued that the suit would undermine the patent system by subjecting patent owners to potential liability for sending licensing demand letters and by providing patent infringers with relative immunity. The court called such arguments a “gross mischaracterization” of the case at hand and indicated the action is directed not to prevent MPHJ from lawfully enforcing its patent rights in Vermont, but rather to prevent MPHJ from engaging in activity that violates state law.

Activity in Other States

Vermont’s AG isn’t the only one giving MPHJ’s scanner-patent-enforcement programs some  unwanted attention. As discussed in our January 22, 2014 post, MPHJ’s counsel received a cease and desist order from Nebraska’s attorney general in July 2013, though MPHJ was able to secure an injunction preventing the order from being enforced. MPHJ also reached settlement with New  York’s attorney general in January, pursuant to which MPHJ is required to repay licensing money received from organizations in New York after a similar letter-writing campaign. MPHJ also filed suit against the FTC in January, preemptively seeking to prevent an enforcement action threatened by the commission. See our March 21, 2014 and January 14, 2014 posts for more information.

The Senate Judiciary Committee was scheduled to mark-up and vote on the Patent Transparency and Improvements Act of 2013 last Thursday but again postponed the vote until after the Senate recess.  The mark-up and vote have been postponed several times before.  As we discussed in a prior post, the bill, if passed would require patent-plaintiffs to disclose ownership information for asserted patents at the outset of infringement litigation and would also require courts to stay infringement suits against customers of infringing products or processes in certain situations where the manufacturer is also a party to an action involving the same patents, products or services.

A statement released by Senator Leahy, the Committee’s Chairman and the sponsor of the bill, indicated that “[f]or weeks, members of the Judiciary Committee have been engaged in extensive bipartisan negotiations on legislation to address abuses in the patent system” that the bill is supposed to remedy.  The Committee has apparently “made enormous progress, and . . . now have a broad bipartisan agreement in principle” regarding the bill’s provisions.   However, the vote was again postponed to allow Committee members and their staff to attempt to reach agreement on fee-shifting provisions proposed by Republican Committee members that would require the loser in cases involving non-practicing entities to pay the winner’s attorneys’ fees.  According to Senator Leahy, this “is a complex issue” and the Committee needs “additional time to draft the important provisions that have been the subject of discussion.”  Senator Leahy went on to indicate that he would circulate a revised version of the bill on April 28, the day the Committee returns from recess.   The Committee “will consider [the bill] the first week [they] are back.”

The House of Representatives has already passed a bill that includes fee-shifting provisions.  Specifically, the House bill includes provisions providing for the award of costs and attorneys fees to a prevailing party unless the position and conduct of the nonprevailing party was reasonably justified in law and fact.

Update: Senators reach tentative compromise on patent reform legislation

Senators Chuck Schumer (D-NY) and John Cornyn (R-TX) have apparently reached a bipartisan compromise on certain provisions of the Patent Transparency and Improvements Act of 2013.  A revised version of the bill including the compromise will be circulated to the Committee for a vote the week of April 28 after the Senate recess concludes.

Heightened Pleading Standards: The compromise would add a provision to the Senate bill imposing heightened pleading requirements similar those in the Innovation Act passed by the House late last year.  Specifically, unless the following “information is not readily accessible,” patent-plaintiffs will be required to include “in a complaint, counterclaim, or cross-claim” a “short and plain statement setting forth” the patents, the patent claims specifically asserted, the instrumentalities accused of infringement, and an element-by-element description of how each accused instrumentality practices the asserted patent claims.

The compromise also attempts to resolve a misnomer in the House bill that we identified in a prior post. The House bill would require complaints for patent infringement to describe

whether a standard-setting body has specifically declared [the asserted] patent to be essential, potentially essential, or having potential to become essential to that standard-setting body, and whether the United States Government or a foreign government has imposed specific licensing requirements with respect to such patent.

As we discuss in our prior post, standard setting organizations (SSOs) generally do not declare patents essential or potentially essential.  Instead, declarations of potential essentiality are generally made by patent holders themselves in a letter of assurance or similar disclosure to the SSO.  These disclosures typically do not state definitively whether the patent covers the standard, but that it may cover the standard and what the patent owner agrees to do if the patent actually is essential to the standard.

The compromise language from Senators Schumer and Conyn attempts to clean-up this issue and would require pleadings alleging patent infringement to include, for each asserted patent:

a statement as to whether the patent is subject to an assurance made to a standards development organization to license others under such patent should the patent be deemed essential under the relevant standards development organization’s policy to practice that standard, provided that the allegation of infringement is related to such standard.

Unlike the House bill, the compromise language would specifically require patent infringement plaintiffs to plead whether the patent is encumbered by a licensing obligation as a result of an assurance made to an SSO.

However, the last phrase of the compromise language – “provided that the allegation of infringement is related to such standard” – may create further controversy.   A plaintiff that files a complaint asserting infringement of potentially essential patents may not specifically plead in their complaint that the defendant is practicing the respective standard and, therefore, infringing plaintiff’s patents.  In some cases, it is the accused infringer that raises a patent-plaintiff’s alleged license obligation to the SSO as a defense to a claim of infringement.  The language in the compromise, as currently drafted, may create further dispute as to whether it is the patent-plaintiff’s complaint or the defendant’s answer or counterclaim (or, potentially, both) that controls whether “the allegation of infringement is related to such standard” thereby requiring the plaintiff to include a statement about whether the asserted patent(s) is/are encumbered by an assurance made to an SSO.

Some other differences between the compromise language and the House bill on heightened pleading standards are:

• The House bill would require patent-plaintiffs to list all other complaints that have asserted the same patents. The Senate compromise would only require patent-plaintiffs to identify such other complaints that were filed within the three years preceding the date of the filing of the instant suit.

• The compromise expressly includes language permitting amendment of pleadings based on newly discovered information.

Fee Shifting:  Unlike the bill passed by the House, the Senate bill does not currently include any language addressing fee-shifting. The Schumer-Cornyn compromise adds such language to the Senate bill, attempting to resolve what Senator Leahy has characterized as a “complex issue.” The House fee-shifting language provides as follows:

The court shall award, to a prevailing party, reasonable fees and other expenses incurred by that party in connection with a civil action in which any party asserts a claim for relief arising under any Act of Congress relating to patents, unless the court finds that the position and conduct of the nonprevailing party or parties were reasonably justified in law and fact or that special circumstances (such as severe economic hardship to a named inventor) make an award unjust.

The Senate compromise expressly requires the Court to determine whether the positions of the non-prevailing party as well as such party’s conduct were “objectively reasonable”, and only addresses an award of fees, not expenses:

[U]pon on a motion by a prevailing party, the court shall determine whether the position of the non-prevailing party was objectively reasonable in law and fact, and whether the conduct of the non-prevailing party was objectively reasonable. If the court finds that the position of the non-prevailing party was not objectively reasonable in law or fact or that the conduct of the non-prevailing party was not objectively reasonable, it shall award reasonable attorney’s fees unless special circumstances make an award unjust.

Other Provisions:  With some modification, the Schumer-Cornyn Compromise also includes provisions that are similar to those of the bill passed by the House, such as:

• Core Discovery and Discovery Fee Shifting, limiting the types of discovery prior to claim construction and requiring the Judicial Conference to develop rules and proposals limiting discovery in patent cases;

• Demand Letters, a claimant seeking to establish willful infringement may not rely on evidence of pre-suit notification that fails to set forth claimant’s infringement allegations with particularity.

As the Senate continues to weigh patent reform measures focused on improving preliminary disclosures in patent litigation, courts continue to distinguish between sufficient and insufficient disclosures under their own patent local rules. According to a recent ruling from the Northern District of California, a generalized claim that any products practicing a technical standard infringe an asserted patent does not adequately identify the specific products accused of infringement under the court’s Patent Local Rules. Asus Computer Int’l v. Round Rock Research, LLC, Case No. 12-cv-02099 JST (NC) (N.D. Cal.).

Case Background

On April 26, 2012, ASUS filed for Declaratory Judgment of Patent Non-Infringement, Invalidity, and Unenforceability against Round Rock. According to the schedule set forth under the Northern District’s Patent Local Rules, Round Rock served its original infringement contentions in September 2012, accusing over 300 ASUS products of infringing six Round Rock patents and providing claim charts for three products, stating that those three products were representative of hundreds of other accused products that infringe in the same manner without specifically identifying those products by name or model number.

Fact discovery closed December 20, 2013. Round Rock moved to amend its infringement contentions on December 23, 2013, but the Court denied Round Rock’s request on the basis that the proposed amendments relied upon “documents that have been in Round Rock’s possession for many months or even a year” and Round Rock had not met its burden to establish that the amendments had been diligently sought.

Sufficiency of Round Rock’s Disclosures

The parties submitted opening expert reports on January 8, 2014. Three weeks later, ASUS moved to strike portions of Round Rock’s expert reports on infringement, arguing that the portions at issue were  directed to allegedly infringing products that were not specifically identified in Round Rock’s original infringement contentions. In response, Round Rock argued that the infringement contentions sufficiently identified: (i) products that include DDR3 SDRAM memory or otherwise practice the JEDEC standard, (ii) products that have different names but are substantially similar to other identified products, and (iii) devices falling within a specific series of ASUS products.

Citing a 2011 decision in which the court ruled that accusing all products running Android did not specifically identify the accused products (See Oracle Am., Inc. v. Google Inc., No. 10-cv-03561 WHA, 2011 WL 4479305, at *2 (N.D. Cal. Sept. 26, 2011)), Magistrate Judge Cousins granted ASUS’s motion to strike
all references to newly accused products that Round Rock alleged were identified as practicing the JEDEC standard:

The Court finds that identifying products “that include DDR3 SDRAM memory” or otherwise practice the JEDEC standard is not sufficient to specifically identify products that may fall into those categories. Although identifying that a component practices a standard may be useful for proving an infringement theory across several products that contain that component, identifying a standard is not sufficient to specifically name an accused product.

The court reasoned that the Northern District’s Patent Local Rule 3-1(b) requires a  patentee to identify products accused of infringing each claim as specifically as possible, identifying each accused product, device, and apparatus by name or model number, to the extent known, and that such disclosures were never made to ASUS.

Round Rock also argued that identifying the standard was sufficient to put ASUS on notice of the accused products practicing the standard. However, the court declined to rule on the sufficiency of the notice, instead finding the Local Rules require a patentee “to do the work of identifying those products.”

Comparison with Previous Rulings

The ASUS v. Round Rock decision provides an interesting contrast from Magistrate Judge Cousins’ May 2013 ruling in France Telecom v. Marvell, where he found that infringement contentions based on ETSI 3GPP industry standards were sufficient to comply with N.D. Cal. Patent Local Rule 3-1(c), which requires a patentee to disclose its theory of infringement. (See our May 7, 2013 post for more information). Although a cursory look at the two decisions might lead one to conclude Magistrate Judge Cousins has come down on both sides of the issue, a closer comparison distinguishes the cases: a standard may not be used to identify specific accused products, as the Court held in ASUS, though a patentee is not prohibited from relying on a standard to disclose its infringement theory.