The parties and amicus have now finished briefing in the appeal from Judge Crabb’s ruling that dismissed Apple’s action seeking a declaration of a FRAND royalty because Apple would not agree to be bound by that ruling.  This post summarizes the parties most recent filings.

First, recall that last summer we posted about Apple’s opening brief in the Apple v. Motorola appeal of Judge Crabb’s dismissal of Apple’s declaratory judgment action.  Motorola filed a cross-appeal arguing that the court should have dismissed Apple’s claims with prejudice to have more of a res judicata affect, rather than simply dismissing Apple’s action without prejudice.

Also, a few weeks ago, we summarized the amicus curaie briefs filed by Ericsson and Qualcomm.  The remainder of the appellate briefing by the parties is now complete and summarized below.

Motorola’s Opening Brief

Background.  In its response and cross-appeal opening brief, Motorola argues that “Apple fails to acknowledge the key fact at the core of [the] case—that Apple has long infringed Motorola’s standard-essential patents while refusing to take a license to those patents or even to engage in good faith negotiations toward such a license.”  Apple’s antitrust and contract claims were filed before Judge Crabb in response to Motorola’s patent infringement actions against Apple in the International Trade Commission Trade Commission and the district courts.  Motorola contends that it “was forced to file those actions by Apple’s incorrigible infringement and unwillingness to license.”

Apple’s Antitrust Claims.  Motorola argues that Apple’s antitrust claims against Motorola were correctly dismissed as “barred by the Noerr-Pennington doctrine.”  “While Apple attempts on appeal to reframe those claims as directed at Motorola’s actions before the standard-setting organizations (‘SSOs’) in 1999-2000, that effort is unavailing, for Apple’s sole theory of damages was that it incurred attorneys’ fees and costs in defending against Motorola’s patent actions, and any action against Motorola’s pre-litigation conduct would have been time-barred.”

Apple’s Contract Claims.  Motorola also argues that the district court “properly dismissed Apple’s contract claims, finding them nonjusticiable because they requested an advisory opinion.”  “Just as it was a persistent unwilling licensee before trial, Apple at trial sought specific performance as a remedy for Motorola’s supposed breach of its commitments to ETSI and IEEE and then refused to be bound by any adjudicated FRAND rate the court might set.” “The district court likewise properly dismissed Apple’s declaratory judgment claims for similar reasons.”  The dismissal also should be affirmed “because Apple failed to show on the record here that it was entitled as a third-party beneficiary to enforce Motorola’s FRAND commitments to ETSI and IEEE.”

Cross-Appeal.  In its cross-appeal, Motorola argues that the district court should have dismissed Apple’s claims with prejudice.  “Apple had every opportunity to litigate these claims and they should have been resolved with finality.”

Apple’s Reply and Opposition Brief

FRAND.  In its reply and opposition brief, Apple argues that it seeks “only what Motorola promised: an offer to license its patents on fair and nondiscriminatory terms” which Apple will then “assess . . . against the options.”  “One option is to continue to fend off Motorola’s infringement allegations (which thus far have failed dismally)” while another “option is to accept the offer if it makes economic sense.”  “In either case, Apple was entitled to a trial to prove that Motorola’s deceptive conduct violated antitrust laws and its contractual obligations, and to secure the offer that Motorola had promised.”

Antitrust Claims.  On the dismissal of its antitrust claims, Apple argues “it has demonstrated that Motorola violated the Sherman Act by deceiving the SSOs—not by bringing infringement suits years later.”  The Noerr-Penington doctrine and the “First Amendment do[] not protect conduct that attains, and then exploits, monopoly power through deceit.”

Contract Claims.  On the dismissal of its breach of contract claims, “Motorola concedes that ‘the FRAND commitments made by Motorola are enforceable.’”  Motorola also “does not contest that Apple presented ample evidence of the unreasonableness of Motorola’s royalty demands.” “Instead, Motorola’s primary defense of the district court’s last-minute decision to scuttle the trial substitutes ad hominem for analysis.”  “Motorola repeatedly calls Apple an “unwilling licensee” but, this “moniker is both false and incoherent” because “Apple has been requesting a license for six years” and was forced to file this lawsuit “because Motorola is an unwilling licensor—or, at least, unwilling to license at a rate that is fair and nondiscriminatory.”  Apple argues that the dismissal of its contract claims should be reversed because it is the fact finder’s job to determine which party “is the unreasonable one.”

Apple also argues that “neither law, contract, nor common sense required Apple to issue a blank check as a condition of forcing Motorola to do what it contractually committed to do: make a fair offer.”

Infringement Not In Issue.  With respect to Motorola’s accusing Apple of infringing its SEPs, Apple argues that “[i]n fact, in the course of years of litigation asserting eight declared-essential patents in multiple U.S. jurisdictions, Motorola has never—not once—succeeded in proving that Apple has infringed a valid patent.” In any event, Apple argues that “[t]his is an appeal from the district court’s decision to dismiss, pretrial, Apple’s claims that Motorola’s actions violated the antitrust laws and contractual commitments that an entire industry relies upon.”  “For purposes of this appeal, Apple is entitled to all factual inferences in its favor.”  “The ‘key facts’ for purposes of this appeal are that Motorola deceived the SSOs and refused to offer Apple a FRAND rate.”

Motorola’s Reply Brief

Dismissal Should Have Been With Prejudice.  Motorola contends in its reply brief that Apple incorrectly argues that dismissal without prejudice was proper “because the dismissals were not on the merits.”  Rather, “Apple’s claims were dismissed after full discovery and after Apple had every chance to present claims to the district court that would justify a trial—and lost.”  Motorola argues further that “[h]aving chosen to litigate its claims in a way that made them a nonjusticiable effort to obtain an advisory opinion on a FRAND royalty rate, Apple should be held to the consequences of that choice and its claims dismissed with prejudice.”  “Allowing Apple to replead here would invite litigants in patent cases more generally to take strategic positions that lead to adverse results and then avoid the consequences—for example by advancing overbroad claim constructions.”

“At a minimum, Apple’s claims for injunctive relief to bar Motorola from asserting its standard-essential patents should be dismissed with prejudice because the merits of these claims were indisputably reached: the district court applied the eBay factors to the claims and found that Apple could not meet them.”

 

Today, the Second Circuit will hear argument in an important case on the extent that foreign injury (reduced foreign sales and closure of foreign plants) arising from foreign RAND breaches can have remedy in the U.S. based on their impact on U.S. commerce.  The case, Lotes Co., Ltd. V. Hon Hai Precision Industry Co., Ltd., et al. (13-2280), concerns whether a Taiwanese corporation’s breach of contract and antitrust claims arising from standard setting obligations were rightly dismissed under the Foreign Trade Antitrust Improvements Act (FTAIA), which bars Sherman Act claims to conduct involving export or wholly foreign commerce except where that conduct has a “direct, substantial, and reasonably foreseeable effect” on U.S. commerce.

In the fall of 2012, Lotes sued Hon Hai, Hon Hai subsidiary Foxconn and several other related entities in S.D.N.Y. for reneging on licensing commitments made to the USB Implementers Forum (USB-IF) (see our February post for a full recap). Lotes asserts that, not only did defendants breach contracts with the USB-IF by failing to license USB 3.0-related patents on FRAND-Z terms (i.e., royalty free), but defendants also violated U.S. antitrust laws by instituting foreign patent-enforcement proceedings against Lotes in China given its FRAND-Z obligations. Defendants moved to dismiss, arguing that the FTAIA deprived the court of jurisdiction to adjudicate antitrust claims based on the alleged foreign activity. The district court found the entirely foreign activity did not have the type “direct” impact on U.S. consumers to fall within an FTAIA exception. The case was dismissed. Lotes appealed.

The FTC recently filed an amicus brief urging the Second Circuit to affirm the dismissal on alternative grounds without endorsing what it called “the District Court’s Flawed Analysis of Direct Effect”. Arguing that “direct” within the FTAIA refers to a “reasonably proximate causal nexus” rather than an “immediate consequence”, the FTC asserts that the district court was wrong to dismiss the action based on no “direct” effect on U.S. commerce because a foreign manufacturing process involving multiple transactions or steps may have a direct effect on U.S. Commerce.

Rather than affirming dismissal on that grounds, the FTC recommends affirming dismissal of Lotes’ antitrust claims “on the simpler basis” that Lotes cannot show that the alleged effect on U.S. commerce gives rise to the claims.  Rather, the FTC argues Lotes has alleged the reverse — that the foreign injury gave rise to the effect on U.S. commerce: “Lotes suffered only foreign injury from lost sales of USB 3.0 connectors in wholly foreign commerce and the potential closures of its foreign factories; that injury results from defendants’ conduct, not its effect on U.S. commerce.”  Thus, “[t]o the extent Lotes alleges any causal connection between its injury and the effects on U.S. commerce, the line of causation runs in the wrong direction.”

Whereas the Sherman act requires that the adverse effect on U.S. commerce be the direct and proximate cause of the plaintiff’s injury, Lotes alleged its foreign injury (lost sales, potential closure of foreign factories) will have an adverse effect on U.S. commerce (price increases to USB 3.0 connector purchasers).  As such, the FTC argued relief cannot be granted under the FTAIA.  The Second Circuit has invited the FTC to present oral argument on this specific alternative ground.

Today the Supreme Court granted certiorari in Limelight v. Akamai to review the Federal Circuit’s en banc decision that induced infringement under Section 271(b) involving multiple actors — e.g., internet service provider performing some steps of a patent claim and end-customers doing final step — does not require establishing direct infringement under Section 271(a).

The Federal Circuit ruled en banc that all steps of a method must be performed for indirect induced infringement under Section 271(b), but the steps need not be performed in a way that would establish direct infringement under Section 271(a) by a single actor or joint multiple actors (what some call “joint infringement”).  This is a significant area of patent law that has received increased attention given the rise in telecommunication and other complex multi-component technologies where more than one actor makes or interacts with individual components or steps in a widespread system.  A more detailed explanation of the Federal Circuit’s en banc ruling is available in our Aug. 31, 2012 post.

The Supreme Court also decided to review the Federal Circuit’s decision in Nautilus v. Biosig that has a tough standard for establishing that a patent claim is indefinite under Section 112(b) by requiring clear and convincing evidence that the claim language is “insolubly ambiguous” and not simply difficult to assess its scope.

Judge Whyte recently issued his final ruling on Daubert and other evidence regarding RAND issues for the upcoming Realtek v. LSI jury trial based on his tentative ruling discussed in our Nov. 14 post.  Judge Whyte basically kept his tentative rulings and bases thereof, as discussed in our prior post.  He did provide additional insight into his statement about Realtek not negotiating for a RAND license from LSI during the time that LSI was seeking an exclusion order from the ITC.

Recall that the particular evidentiary ruling here concerns excluding evidence of whether LSI’s June 20, 2012 license offer– made after LSI filed suit in the ITC seeking an exclusion order–was RAND in order to show that Realtek failed to mitigate damages by not negotiating with LSI for a license — i.e., argument that had Realtek negotiated it could have accepted a RAND offer and avoided litigation or other costs.  The specific state law on duty to mitigate focuses not on what options were available to Realtek, but only the reasonableness of the action Realtek took — i.e., the reasonableness of Realtek not negotiating with LSI while the ITC action was pending:

“[I]t is appropriate for courts to focus ‘not on the failure of the plaintiff to pursue the … alternative courses of action suggested by [the] defendant but upon the reasonableness of the action which [the] plaintiff did in fact take.  The fact that in retrospect a reasonable alternative course of action is shown to have been feasible is not proof of the fact that the course actually pursued by the plaintiff was unreasonable.”

Judge Whyte’s tentative ruling excluded that mitigation evidence, stating that “Realtek’s refusal to negotiate under the threat of an ITC exclusion order was a reasonable course of action” and “Realtek would not be unreasonable in declining to negotiate with LSI under the circumstances.”

In now finalizing his ruling, Judge Whyte provides some additional insight into his ruling based on the distinction between the threat of an injunction that underlies all licensing negotiations (RAND-based or otherwise) and the fact that the patent owner here filed an action actively seeking an injunction:

At the outset, it is worth noting that LSI was correct when it contended at the December 20, 2013 hearing on this court’s tentative order that the threat of an injunction is always present in license negotiations.  The patent holder’s best alternative to a negotiated agreement in patent license negotiations is typically to file suit, which necessarily involves the threat of an injunction.  However, as others have discussed, negotiated patent royalties may often be higher than the true value of the technology because an injunction would impose serious hold-up and switching costs on the accused infringer.  Therefore, a negotiation arriving at a reasonable royalty rate is unlikely to occur when one party is under the threat of an exclusion order.

     Returning to LSI’s best argument, the court recognizes that the threat of an injunction forms the backdrop to many license negotiations.  Still, one fact peculiar to this case distinguishes LSI’s June 20, 2012 proposal from the typical license negotiation:  LSI had already filed an ITC action against Realtek to enforce the patent at the time it offered Realtek a license to the patent.  In a typical license negotiation, the threat of an injunction is not always credible.  The threat’s credibility depends on the litigation, reputational, and other costs faced by the patent holder.  It is still uncertain at what point the patent holder will invoke its best alternative to a negotiated agreement of filing suit.  Here, however, LSI has already filed an ITC action against Realtek, so LSI’s threat of an exclusion order is thus entirely credible.  At this point, LSI possessed especially strong leverage over Realtek, and thus the court cannot call unreasonable Realtek’s refusal to negotiate a supposedly “fair, reasonable, and nondiscriminatory” royalty rate with LSI in this weakened position.

As stated in our prior post on the tentative ruling, it is import to avoid over-reading its import under the circumstances — e.g., not misread this as encouraging parties not to negotiate.  This is an evidentiary ruling on state law duty to mitigate based on whether the decision not to negotiate under these particular circumstances was “reasonable” or at least not “unreasonable” without deciding whether other options — e.g., negotiating — also would be more or less reasonable.

Yesterday Judge Stark followed an approach used by Judge Holdeman in the Innovatio WiFi case by bifurcating FRAND issues from liability where essentiality and a RAND royalty rate will be tried first in hopes the result will spur settlement, followed by discovery and trial on liability issues if still necessary.  Recall that this case arose last year when patent pool One Blue, LLC and several of its member licensors — including Philips, Panasonic, Pioneer, and Sony — filed a patent infringement litigation against Imation Corp. in the District of Delaware accusing Imation of infringing several patents that are alleged to either be essential or related to the Blu-ray Disc Association’s (BDA) Blu-ray standards.

Imation Bifurcation Argument.  Imation filed a letter brief requesting the court to bifurcate the case to resolve FRAND issues prior to litigating infringement and validity issues.  Relying on the decisions in Microsoft v. Motorola and In re Innovatio, Imation argued that determining FRAND issues first would likely resolve the entire case, thereby saving the parties the expense of litigating the issues of infringement and validity as well as whether the asserted patents are standard essential. Imation indicated that it “could stipulate for purposes of the FRAND phase that the patents-in-suit were valid and infringed and standards-essential, so as to avoid injecting unnecessary liability- and technology-related issues into the issue of rate determination.”

Imation asserted there were three potential FRAND-related outcomes. First, the court could conclude that, as a result of plaintiffs’ alleged breach of their FRAND obligations, plaintiffs forfeited their right to demand royalties. This result “would resolve [the] case independent of any further liability determinations.”

Second, the court could determine “a FRAND rate in line with the rate Imation offered before [the] litigation began, or a comparable rate that permits Imation to stay in the Blu-ray disc market.” This would resolve the case as well, because Imation net revenues from Blu-ray sales is “well under $2 million.” According to Imation, “[t]he patents-in-suit are a tiny fraction of all standards-essential patents relating to Blu-ray discs.” Relying on  Microsoft v. Motorola, Imation argues that “[i]t has been universally held by Courts resolving FRAND issues that the total level of royalties paid on all standards-essential patents must be a FRAND rate, a rate that does not force parties adopting the standards out of the market”, i.e., a rate that prevents royalty stacking. The FRAND rate proposed by Imation would permit it to remain in the Blue-ray market.

Finally, a potential result is that the court could accept plaintiffs’ “proposed rate or otherwise determine a rate that Imation concludes will require exit from the Blu-ray disc market.” According to Imation, the total number of Blu-ray standards-essential patents “likely exceeds 200.” “That means that the total royalties attributable to the patents-in-suit likely will not exceed 3% of an overall FRAND rate”, that is, the 6 patents asserted by plaintiffs divided by the 200 alleged standard essential patents. Thus, if plaintiffs “were to obtain a judgment in this case, the damage award will likely be based on only a 3% share of some percentage royalty rate applied to revenues being earned at a rate under $2 million per year.” Whether Imation “were to win or lose on validity and infringement issues for the six patents-in-suit, Imation cannot re-litigate such issues for nearly 200 additional patents, whatever royalty rate is determined.” Therefore, this last result would also resolve the case by forcing Imation to exit the market.

One Blue’s Opposition.  Plaintiffs responded to Imation’s request by arguing that the court must first determine the FRAND rate before determining whether plaintiffs breached their alleged FRAND obligation. Quoting Microsoft, Imation argued that     “‘[w]ithout a clear understanding of what RAND means, it would be difficult or impossible to figure out if [plaintiffs] breached [their] obligtation to license [their] patents on RAND terms.’”

Relying on Microsoft and Innovatio, plaintiffs also argued that, contrary to Imation’s contention, determination of FRAND is not proper for summary judgment because it is a “‘heavily disputed, fact-sensitive issue that must be resolved by a finder of fact.’”

Plaintiffs also contended that the three potential results of a FRAND-phase identified by Imation is incomplete. Plaintiffs argued that the Microsoft court’s FRAND analysis proceeded in three steps: (1) determine the importance of the patent portfolio to the standard; (2) determine the importance of the patent portfolio as a whole to the alleged infringer’s accused products; and (3) examine other licenses for comparable patents. Imation’s proposal “does not account for discovery related to the technical aspects of the Blu-ray Disc standard, the One-Blue patent portfolio, Imation’s accused products, and alternative technologies in the marketplace at the time the Blue-ray Disc standard was adopted.”

To achieve the efficiencies that Imation touts, plaintiffs argue that Imation is required to stipulate that the asserted patents are valid, enforceable and infringed for the entire case, not just the FRAND phase. “The complete stipulation would close the door to arguments during the FRAND phase that Imation’s products do not use the asserted patents and it would eliminate challenges to the patents’ enforceability–both are substantial issues to litigate.” If Imation were permitted to later contest essentiality after the FRAND phase, “the Court may have to redo its royalty determination” because, as the Innovatio court held, “‘the licensing rate should be increased for patents of doubtful essentiality, on the ground that the infringement damages for such a patent would not be limited to a RAND rate.”  Rather, the patent owner would be entitled to “‘seek typical patent damages for’” patents of doubtful essentiality or patents which are not essential to the standard.

Plaintiffs also argued that “if Imation’s claims of financial hardship are true and it really will not litigate validity, enforceability, and infringement after a FRAND phase, giving up its right to do so would sacrifice little and provide the parties and the Court with the comfort that bifurcation of the FRAND issues would finally dispose of the case.” Absent the complete stipulation, Imation retains the unilateral right to decide whether it will continue litigating the case or exit from the Blu-Ray market.

Finally, plaintiffs argued that, even if Imation determines after the FRAND phase to exit the Blu-Ray market, “Imation may still be liable for damages for past infringement beginning at the latest in June 2012, when it received actual notice of the patents.” Therefore, litigation of patent issues will still be required even if the case were bifurcated.

Judge Stark’s Decision.  Judge Stark held a teleconference with the parties and issued an oral and written order granting Imation’s request and ordering that “discovery, dispositive motion practice, and trial . . . be bifurcated into separate FRAND Issues and Liability Issues” so that FRAND issues are resolved first. In the oral order, the court held that:

“For purposes of the FRAND phase, the patents-in-suit will be presumed to be valid and infringed, subject to Defendant’s right to litigate these issues following the FRAND phase. However, as part of the FRAND phase, the Court will determine whether the patents-in-suit are standards essential; this issue will not be deferred to the post-FRAND phase. For the avoidance of doubt, the Court interprets paragraph 1.f of Defendant’s Proposed Order — describing as a FRAND issue ‘[o]ther facts relating to determination of a reasonable royalty or licensing rate for the patents-in-suit’ — to include a determination of the standards essential issue.”

The court directed the parties to submit a revised scheduling order setting deadlines for the FRAND phase followed by the liability phase.

 

Two weeks ago, we posted about non-party IEEE’s amicus curaie brief in Ericsson v. D-Link, et al., an appeal pending before the Federal Circuit.  The appeal, initiated by defendants D-Link, Dell, Acer, Gateway, Netgear and Toshiba, challenges a jury’s damage award against the defendants for infringement of plaintiff Ericsson’s patents that are claimed to be essential to the IEEE’s 802.11 standard (SEPs).  Recently, non-party American Antitrust Institute (AAI) filed its own amicus curaie brief in the appeal, challenging the District Court’s instruction to the jury to apply an unmodified version of the 15 Georgia-Pacific factors in calculating damages for infringement of alleged SEPs.

AAI argues that the Georgia-Pacific factors “are not an appropriate basis for instructing a jury how to determine damages for infringement of a standard-essential patent encumbered by a RAND commitment, at least not without significant modification.”  According to AAI, the district court’s wholesale adoption of the Georgia-Pacific factors in its jury instructions was error that “was not cured by the court additionally instructing the jury that any damages award be consistent with the patentee’s RAND obligation, without explaining what the RAND obligation entails.”

AAI asserts that the purpose of a patent holder’s RAND commitment “is to mitigate the problem of patent holdup, namely obtaining royalties on the basis that implementers are locked into the standard rather than on the basis of the value of the patented technology itself.”  AAI goes on to argue that the value of the patented technology

“is properly understood as the incremental value of the patented technology over the next best alternative at the time the technology was under consideration for inclusion in the standard (the ex ante value), subject to a ‘royalty stacking’ constraint, i.e. that the combined royalties on all of the patented technologies included in the standard must not undermine implementation of the standard.”

AAI points out that commentators have criticized the use of the Georgia-Pacific factors  “as indeterminate at best for determining a reasonble royalty for patents generally.”  Those factors, according to AAI, are “particularly inadequate for setting a RAND royalty.”  This is because they “do not explicitly focus on the ex ante value at the time the standard is adopted nor expressly take into account royalty stacking,” both of which are integral to the primary purpose of a RAND commitment.  Specifically, setting a RAND rate based on the ex ante value of the patented technology at the time the standard is set — rather than just before infringement under Georgia-Pacific — “is necessary for consumers to benefit from competition among technologies to be incorporated into the standard — competition that the standard setting process itself otherwise displaces.”

AAI then cites to the modified Georgia-Pacific factors used by the courts in Microsoft v. Motorola and In re Innovatio as potential cures for the alleged shortcomings in the standard Georgia-Pacific analysis in capturing the ex ante value of the patented technology at the time the standard is adopted:  “In adopting a substantially modified version of the Georgia-Pacific factors, the district courts in Microsoft and Innovatio recognized that this ‘pre-inclusion’ ex ante vantage point is appropriate, although they also referred to the time of infringement.”   Specifically, both courts held that the parties would consider alternatives that could have been adopted in lieu of the asserted SEPs at the time the standard was set, and those potential alternatives could potentially “drive down the royalty that the patent holder could reasonably demand.”

AAI also argues that the jury must be instructed that any damage award should be measured so as to avoid royalty stacking, which “is not completely captured in the bilateral hypothetical negotiation contemplated by Georgia-Pacific.”  This is because SEP holders “collectively have an ex ante interest in preventing royalty stacking and ensuring that the overall royalty burden of the standard is reasonable.”  “[A]bsent explicit instructions, a jury will not understand the significance of royalty stacking and may, for example, reasonably believe that Georgia-Pacific’s first factor—proof of an established royalty for the patents in suit—does not permit the RAND royalty to vary depending on the number of patents (and patentees) essential to the standard, as stacking concerns would otherwise suggest.”

Finally, AAI argues that several of the Georgia-Pacific “factors are either flatly inconsistent with a RAND commitment or are irrelevant.”  For example, quoting Judge Robart’s decision in Microsoft v. Motorola, AAI asserts that Georgia-Pacific Factor 4, which considers the licensor’s policy of maintaining his patent monopoly by not licensing others or by granting licenses under special conditions designed to preserve the monopoly, “‘is inapplicable in the RAND context because the licensor has made a commitment to license on RAND terms and may no longer maintain a patent monopoly by not licensing to others.'”

AAI further asserts that:

“[w]hile the remaining Georgia-Pacific factors may be relevant to the RAND determination and understandable to juries if modified in ways suggested by the district courts in Microsoft and Innovatio, those factors that involve consideration of the benefits or profits earned by the licensee from the sale of the ‘product made under the patent’ (factors 6, 8, 10, 11) are problematic insofar as they obscure the need to ‘apportion the defendant’s profits and the patentee’s damages between the patented feature and the unpatented features’ . . . in a context where the SEP holder is not entitled to a royalty based on the value derived from the incorporation of the patented technology into the standard, or to discriminate among licensees.”

As in Microsoft and Innovatio, the district court in Ericsson’s case should modify “Georgia-Pacific factors 6, 8, 10, and 11 [to] expressly to take into account ‘only the value of the patented technology and not the value associated with incorporating the patented technology into the standard.'”  This will potentially prevent the factfinder from mistakenly taking into account, “as a factor in the RAND analysis, the relative value of the functionality provided by the standard itself (here, Wi-Fi) to the licensee’s products.”

We previously discussed the opening comments filed by respondent Funai in the International Trade Commission (ITC) investigation of whether Realtek and Funai infringe complainant LSI’s alleged 802.11 and H.264 standard essential patents (SEPs). Funai recently filed two sets of reply comments as part of the ITC’s review of the ALJ’s initial determination rejecting Realtek and Funai’s RAND-based defenses but otherwise concluding that they did not infringe LSI’s SEPs.  The opening and reply comments were filed in response to the ITC’s request for comments on various issues, including RAND obligations, the history of license negotiations among the parties, other licenses for the patents-in-suit, and industry practice for licensing similar technologies.

Funai’s reply comments on the merits as well as on issues of public interest, remedy and bond are summarized below.

Funai’s Reply to LSI’s Comments on the Merits

Infringement:  Funai argues that LSI failed to respond to its argument that the products at issue are capable of operating without performing certain optional steps in the H.264 standard that LSI contends read on its alleged SEPs. LSI “cannot rely on a feature of a product to show infringement of a method claim.” “Rather, [LSI] must demonstrate that a third party has actually practiced the claim, which they have utterly failed to do.”

Essentiality:  Funai argues that LSI’s assertion that its patents are essential to the 802.11 and H.264 standards is not supported by the record because there are many ways to perform the standards without infringing LSI’s patents. LSI’s experts failed to show why these other methods of meeting the standard are not commercially feasible alternatives.

Technical Prong for Showing Domestic Industry:  Funai argues that LSI’s comments fail to identify any product that practices a valid claim of any asserted patent. Instead, LSI again relies upon its argument that certain of its licensees sell product that comply with the 802.11 standard. Funai argues that this is insufficient to show a domestic industry for products that practice the asserted patents. “The ALJ correctly found that a product’s mere compliance with the 802.11 standard is an insufficient basis to find that the product practices any claim of the ‘867 and ‘958 patents, and thus [LSI] failed to show that [redacted] products satisfy the technical prong.”

Funai’s Reply to LSI’s Comments on Remedy and Bond

History of License Negotiations:  Funai asserts that LSI’s recount of the parties’ license negotiations “distorts” the record evidence, although the majority of Funai’s comments on this score are redacted.

Industry Practice for Licensing:  Funai indicates that it and LSI are largely in “agreement concerning standard industry practice for licensing patents.”  Both Funai and LSI “believe that extended negotiations, in which there is discussion between the parties concerning whether a license is needed, and if so, the proper terms, is the norm.” Both parties also “agree that generally (but not always) patents are licensed as part of a portfolio if an agreement can be reached as to terms.”  Funai and LSI “agree that the time period of a license can be variable, and that licenses can be either lump sum or running royalty.” “Thus, in those instances where the parties are able to agree, industry practice provides for a great deal of flexibility in structuring the final terms of a license.”

Funai disagrees that LSI has adhered to these norms and the substance of its comments are redacted.

Undue Leverage:  Funai asserts that LSI “cannot candidly argue that Funai has constructively refused to negotiate a license, and expends a minimal amount of effort even trying in its papers.” Funai points out that “[i]n a single paragraph, [LSI argues] that Funai’s refusal to negotiate is shown by ‘dragging out the parties” discussions.”  Funai then asserts that “[i]n essence, [LSI argues] that simply because Funai did not succumb to LSI’s pressure tactics and agree to onerous terms,” Funai has constructively refused to negotiate.  This position “effectively negates any possibility that the parties could have a good faith dispute over the value of the three patents at issue” and is also factually incorrect.

Exclusion Order/Injunctive Relief:  Funai contends that LSI is absurd in arguing that it is “not obligated to enter into negotiations with a potential licensee instead of (or even prior to) seeking injunctive relief” and that “the IEEE and ITU ‘do[] not impose any restrictions on a patent holder’s right to redress infringement.’”  According to Funai,     “[t]he entire purpose of a standard-setting organization (SSO) setting a standard, and requiring members of its standard-setting committee to commit to licensing their patents on RAND terms, is to avoid ‘patent hold-up’ by the owners of standard-essential patents (SEPs).”  If, as LSI argues, their declarations to the SSOs do not place any restrictions on the “‘timing and manner of license offers or negotiations, the farcical result is that [LSI] would be comfortably within their rights to declare their patents to be SEPs, contractually undertake FRAND obligations, proceed to file suit alleging infringement of their SEPs seeking an injunction, and (if successful) offer a license only after an injunction has issued, notwithstanding a request by the accused infringer to begin negotiations.” According to Funai, “[a] more obvious hold up strategy could hardly be imagined.”

In addition, Funai again argues that, by agreeing to license its patents on RAND terms, LSI has agreed that monetary damages are sufficient to make LSI whole, rendering injunctive relief improper.

A few weeks ago we summarized the opening comments filed by respondent Realtek in the International Trade Commission (ITC) investigation of whether Realtek and Funai infringe complainant LSI’s alleged 802.11 and H.264 standard essential patents (SEPs). The ITC is currently reviewing the ALJ’s initial determination of non-infringement of LSI’s SEPs and rejection of Realtek and Funai’s RAND-based defenses.  To assist in its review, the ITC requested comments on various issues, including RAND obligations, the history of license negotiations among the parties, other licenses for the patents-in-suit, and industry practice for licensing similar technologies.

In response to LSI’s initial comments, Realtek filed comments responding to LSI’s arguments on the merits as well as comments on the issues of public interest, remedy and bond.  Realtek’s publicly available comments on the merits do not address any material SEP issues.  The SEP issues addressed in Realtek’s comments on public interest, remedy and bond are summarized below.

RAND Obligations/History of Negotiations:  Realtek argues that LSI mischaracterizes its IEEE commitments “as merely agreeing to ‘negotiate in good faith with potential licensees’”, which, according to LSI, requires “nothing more than making any offer to Realtek, no matter how unreasonable and discriminatory.”  Realtek contends that LSI’s commitments to the IEEE “impose a much higher burden than” LSI suggests.

According to Realtek, LSI’s summary of the license negotiations between the parties is factually incorrect, although much of this discussion is redacted. What can be gleaned from the comments is that LSI apparently made an offer, but “then stalled Realtek’s attempts to negotiate by making empty promises and refusing to provide information that Realtek requested in a timely manner.”

Realtek’s Lawsuits Against LSI:  Realtek asserts that the lawsuits it filed against LSI have “no relevance to whether or not Realtek was willing to negotiate in good faith.”  “[A]s the history of negotiations show, Realtek initiated the license discussions in 2012 and has continued to try to negotiate with [LSI], despite [LSI’s] constant efforts to derail those discussions.”

Injunctive Relief/Exclusion Order:  Realtek admits that “neither [LSI’s] letters of assurance nor the IEEE bylaws explicitly preclude [LSI] from seeking injunctive relief.” However, citing to several cases, Realtek argues that “[c]ourts have consistently found that seeking injunctive relief is inconsistent with RAND commitments, particularly when the patent holder had not even made a license proposal.” According to Realtek, LSI “cites no authority to the contrary.”

Realtek then argues that LSI took a contrary position when LSI was a respondent in an ITC proceeding brought by Rambus wherein Rambus sought an exclusion order. In that proceeding, “LSI argued that ‘injunctive relief is antithetical to [Rambus’] promises’” to European antitrust officials that Rambus would accept royalties for the use of the patents at issue.

Finally, Realtek argues that, contrary to LSI’s assertions, Realtek never took the position that “an exclusion order is categorically barred because [LSI] declared [its] patents standard essential.” “Realtek’s position from Day 1 has been that an exclusion order against Realtek is against the public interest because [LSI has] repeatedly violated their RAND obligations.” “Realtek’s position is entirely consistent with the position of all governmental and international agencies who have issued an opinion on this important issue.”

 

 

We previously discussed the opening comments filed by Complainant LSI in the International Trade Commission (ITC) investigation of whether Realtek and Funai infringe LSI’s alleged 802.11 and H.264 standard essential patents (SEPs). To recap, the ALJ’s initial determination found the SEP patents were not infringed but rejected RAND-based defenses. The Commission decided to review the ALJ’s determination in its entirety and requested comments on various issues, including RAND obligations, the history of license negotiations among the parties, other licenses for the patents-in-suit, and industry practice for licensing similar technologies.

LSI recently filed three sets of reply comments. The first and second respond to the opening merits comments of respondents Realtek and Funai, respectively. The last set responds to the comments of Realtek, Funai and third-parties on SEP and RAND-issues.

LSI’s Reply to Funai’s and Realtek’s Comments on Liability

Infringement: LSI argues that testimony from its own expert shows that the “accused Funai products necessarily infringe when playing high-definition H.264-encoded Blu-ray discs or when streaming high-definition H.264-compliant videos” and that other expert testimony found the infringing functionality to be “a critical feature of the Blu-Ray disc players and the smart TVs that constitute the Funai” accused products.

Validity:  LSI responds that Funai’s alleged prior art Harris proposal was rejected by the IEEE when developing the 802.11 standard —  “[t]he Harris proposal was riddled with the very problems the ‘958 patent solved.”

LSI argues that secondary considerations of non-obviousness support patent validity, including the fact that the ‘958 patent was adopted into the 802.11 standard. Without the contribution of the ‘958 patent, “the consumer WLAN industry would not have taken off in the way it did.”

LSI’s Reply to Funai’s, Realtek’s and Third-Party Comments on Remedy/Bond

History of Negotiations:  LSI asserts that Funai mischaracterizes the history of license negotiations between the parties. LSI provided several RAND license offers to Funai, but Funai unreasonably did not respond.  Further, LSI’s offers were not “take or leave it demands,” but were good faith “offers” to license LSI’s patents.

LSI also takes issue with Funai’s argument that LSI could have chosen to pursue licenses at the component level, rather than the end product level, which would render Funai’s end products licensed where components are licensed: “The fact that LSI could have chosen to pursue licenses at the component level rather than at the end product level has no bearing on whether the license terms offered to Funai for its infringing end products were reasonable and non-discriminatory.”

LSI also points to the ALJ’s holding that “‘the facts presented in this investigation show that the failure of the parties to agree to terms for the licensing of the asserted SEPs cannot be attributed to” LSI. “Given this negotiation history, there is no legitimate basis for Funai’s unsupported assertion that it ‘is prepared to accept a FRAND offer.’”

With respect to negotiations with Realtek, LSI asserts that the ALJ properly held that “Realtek’s refusal to negotiate with Complainants undercut its arguments that Complainants breached their RAND obligation.” Realtek’s comments do not cite to any evidence in the record contrary to the ALJ’s holding.  Instead, it seeks to improperly inject new evidence from its Northern District of California litigation against LSI which was not before the ALJ and has not been tested through cross-examination or otherwise.

Comparable Offers:  LSI asserts that Funai’s RAND arguments were premised on “a faulty comparison between LSI’s opening license proposal to Funai and the final negotiated terms of LSI’s executed license agreements with” unidentified entities. According to LSI, “[t]he ALJ correctly agreed with Complainants that such a comparison is improper.” LSI argues that Funai failed to correct this in its comments to the Commission because it contains no comparison of offers made by LSI to other entities with the offers made to Funai.

Industry Practice for Licensing/Patent Pools:  LSI notes that “Funai appears to agree with Complainants that portfolio rather than single-patent licensing is typical practice in the consumer electronics industry.” However, LSI argues that Funai is incorrect in arguing that “‘[p]articularly for standard-essential patents, industry practice is to aggregate the relevant patents from multiple licensors into a single portfolio, commonly called a patent pool.’” According to LSI, “[p]articipation in patent pools is voluntary and most patent holders choose to license SEPs outside of a pool.” “For instance, a patent holder may choose not to join a pool if its SEPs are of particularly high value, because pools typically provide equal compensation for each patent in the pool regardless of the importance of individual patents to the standard or to licensees’ products.”

RAND Rate:  LSI argues that it provided the Commission with a “high-level term sheet for Funai that would offer” certain patents on undisclosed (redacted) terms. In contrast, Funai provided only a statement as to what it contends is a RAND rate for the three SEPs at issue (the rate was redacted in LSI’s comments). Funai “cites to no evidence in support of its proposed rate, relying only on RAND royalty rates that have been determined by other courts in cases involving different patents, different products, and different parties, as well as on the pool rates for the MPEG LA and Via licensing pools.” LSI argues further that “the court-determined rates in the Microsoft and Innovatio cases are of little or no relevance” because “[t]he courts in those cases determined RAND rates specifically for licenses of Motorola and Innovatio SEPs, respectively, but did not determine rates for all patents essential to either the H.264 or 802.11 standards.”

LSI further criticizes Funai’s reliance on patent pools because “patent pools ignore the value of the individual patents being licensed” and thus “their usefulness as an indicator of a RAND rate is markedly diminished in cases such as this one where the patents at issue are of high value.”

LSI criticizes Realtek’s proposed royalty rate because it is based on Realtek’s own license with an unidentified third-party and not any of the licenses LSI has entered into with other entities for the patents at issue. The license relied upon by Realtek can only be a comparable license “if a fact finder were to determine that [LSI’s SEPs] have no value to the standard” which Realtek failed to show before the ALJ. Second, Realtek makes no effort to identify how the patents licensed under its license compare to the ‘958 and the ‘867 patents or how the patents that are the subject to its license are incorporated into the 802.11 standard.

Undue Leverage/Patent Hold-Up/Patent Hold-Out:  LSI argues that Funai, Realtek and the third-party commenters are incorrect in arguing for a per se rule that holders of SEPs cannot seek injunctive relief. None of LSI’s commitments to SSOs include a promise not to seek injunctive relief. Those commitments only include a promise to offer a license to willing licensees on fair, reasonable and non-discriminatory terms. Requesting injunctive relief at the ITC or in court cannot amount to undue leverage because, as found by the USTR, DOJ and PTO, an “exclusion order should continue to be available for Section 337 violations involving RAND-encumbered SEPs, upon consideration of relevant factors specific to the circumstances at issue in each case.”

Further, “[a] company should not be permitted to constructively refuse to negotiate regarding the terms of a RAND license, unreasonably prolong negotiations and force the prospective licensor to turn to the courts for enforcement of its SEPs, all the while evading its obligation to fairly compensate the SEP-holder for use of the patented technology.” Permitting such behavior jeopardizes the patent system and the effectiveness of SSOs “as patent holders may no longer participate in the standard-setting process or contribute their patents to a standard if they believe that they will not be able to receive full and fair value for RAND-encumbered patents.”

Ex Ante Alternatives:  LSI asserts that there were no alternatives to its patents at the time the 802.11 standard was adopted. Certain of the “alternatives” cited by Funai were “rejected in voting by the 802.11 Working Group based on technical inadequacies in” them. The other alternatives were technologically inferior.

Bond:  Contrary to Realtek and Fuani’s arguments, LSI argues that it “presented volumes of evidence showing [LSI’s] negotiations with numerous companies to reach a reasonable royalty to license the asserted patents.”  However, each executed license “is different and, accordingly, a bond based on a standard royalty rate is not possible.” Therefore, LSI argues that the bond should be set at a rate of an undisclosed percentage of the entered value of the product, or such other reasonable rate as may be established.

Exclusion Order:  LSI asserts that exclusion orders are the default remedy for a Section 337 violation and the Commission should not depart from its usual practice, particularly since both LSI and Realtek are unwilling licensees.

Realtek and Funai’s reply comments will be the subject of separate posts.

 

On December 30, 2013, InterDigital and Huawei filed a stipulation to dismiss the pending Delaware district court action (13-cv-00008) without prejudice, indicating the parties entered into a “binding settlement agreement and agreement to arbitrate”.  The Court promptly dismissed the case.

Yesterday, InterDigital and Huawei similarly moved to terminate the corresponding ITC action, Inv. No. 337-TA-868, with respect to Huawei pursuant to a settlement and arbitration agreement.  We anticipate the ALJ will grant the parties’ joint motion, removing Huawei from the case.  The 868 Investigation was initiated by InterDigital against Huawei, Nokia, Samsung, and ZTE in February 2013, after a set of corresponding district court actions were filed in Delaware against each party last January.  As of right now, Huawei is the only party to have settled-out of this round of InterDigital infringement actions, and Nokia, Samsung, and ZTE continue to defend both the district court and ITC cases.