Microsoft is seeking to transfer Motorola’s appeal of Judge Robart’s RAND ruling from the Federal Circuit to the Ninth Circuit.  Specifically, last Thursday, Nov. 21, Microsoft filed in the Federal Circuit a motion to transfer to the Ninth Circuit and today, Nov. 25, Microsoft filed a companion motion to terminate Motorola’s appeal through a transfer to the Ninth Circuit.  Recall that our prior blog post on Motorola’s appeal (and another prior blog post) discussed this appellate jurisdiction issue and speculated that, although the appeal of Microsoft’s contract action alone typically would go to the Ninth Circuit, the appeal might be brought to the Federal Circuit following its consolidation with Motorola’s patent action against Microsoft.  Microsoft is now putting that to the test, arguing that consolidation did not change the contract character of its action, which remains an independent action.  Our prior blog posts’ discuss the procedural posture of the actions and issue presented.

This is an interesting procedural issue, though not specific to standard essential patents.  One may be tempted to use this approach–i.e., a separate action on just the RAND breach of contract/contract issue–to shop for appellate jurisdiction.  But keep in mind a potential risk that such a license contract action on a standard essential patent without raising infringement or other patent challenges might lead to res judicata barring later attempts to argue that the standard essential patent is not valid, infringed or enforceable–see our prior post on Cummins v. TAS (Fed. Cir. Dec. 6, 2012).

We previously discussed the comments filed by third-parties in the International Trade Commission (ITC) investigation of whether Realtek infringes LSI’s alleged 802.11 and H.264 standard essential patents (SEPs).  The ALJ’s initial determination found the SEP patents were not infringed but otherwise rejected RAND-based defenses.  The Commission then decided to review the ALJ’s determination in its entirety and, as part of the review, requested comments from the parties and third-parties 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.

As we noted in our prior post, the initial comments filed by the parties – complainant LSI, the Funai respondents and  respondent Realtek – were filed under seal.  Last Monday, the redacted (and very lengthy) public versions of these party comments were made available by the ITC.  Below is a summary of Complainant LSI’s comments.  A summary of the comments filed by respondents Funai and Realtek will be the subject of a separate post.

LSI filed two sets of comments, one addressing the ALJ’s ruling on the merits and the other addressing potential remedies and the public interest. 

LSI Comments on the Merits

The majority of LSI’s merits comments focus on issues that are not unique to standard-essential patents.  However, LSI does raise standard-essential patent issues in response to three questions posed by the Commission. 

    Question Regarding Priority Date of one Alleged SEP

The Commission asked the parties to comment on the evidence, if any, that supports or does not support the conclusion that the ‘958 patent is entitled to the July 30, 1996 priority date of U.S. Patent No. 5,862,182 (“the ‘182 patent”)?

LSI argued that all of the claims at issue in the ‘958 patent were disclosed in the ‘182 patent.  With respect to one claim limitation, LSI argued that the ‘182 patent was “identical” to a portion of the 802.11 standard and, because the subsequent ‘958 patent incorporated this limitation and is essential to the 802.11 standard, the ‘958 patent was entitled to the priority date of the ‘182 patent.

Question Regarding Evidence on Essentiality

            The ‘663 patent

LSI asserts that the subject matter claimed in the ‘663 Patent represents the only commercially feasible way to comply with the H.264 standard.  “Specifically, the lack of a feasible commercial alternative is proven by a comprehensive review of the theoretical alternatives to the asserted claims of the ‘663 Patent.”  Absent any feasible commercial alternatives, the ‘663 patent is essential to the H.264 standard.  

Further, “[t]he practice of the asserted ‘663 Patent claims by the H.264.2 Reference software provided with the H.264 Standard itself corroborates the standard essential nature of the asserted claims.”   

            The ‘958 and ‘867 patents

 With respect to the ‘958 patent, LSI contends that “the detailed findings by the ALJ showing that each and every element of each asserted claim of the ‘958 Patent is met by an aspect of the 802.11 Standard under [LSI’s] proposed [claim] constructions” demonstrates that “the ‘958 Patent is essential to practice the 802.11 Standard.”  Similarly, with respect to the ‘867 patent, LSI argues that “[t]he evidence in the record showing that the ‘867 patent is essential to practice the 802.11 Standard includes the detailed findings by the ALJ that nearly every element of each asserted claim of the ‘867 Patent is met by an aspect of the 802.11 Standard under [LSI’s] proposed [claim] constructions.” 

With respect to the ‘958 patent, LSI also contends that, in adopting the 802.11 standard, the Institute of Electrical and Electronics Engineers (IEEE) specifically adopted the method proposed to IEEE by the inventor of the ‘958 patent, said method being subsequently claimed in the ‘958 patent.

     Question Regarding Whether a Domestic Industry Exists

 The last question posed by the Commission that prompted an answer relating to a standard-essential patent issue is “whether establishing a domestic industry based on licensing . . . requires proof of ‘articles protected by the patent’ (i.e., a technical prong).”   

LSI argues that one of its licensees researches, develops, markets and sells devices in the United States that are in compliance or interoperable with any of the IEEE 802.11b, 802.11g, or 802.111n standards and which, according to LSI’s expert, are highly likely to practice the claims of the ‘958 and ‘867 patents.  Therefore, a domestic industry for products that practice the patents at issue exist.

LSI Comments on Remedy

LSI contends that an exclusion order covering respondent Funai’s downstream products is appropriate without conducting an analysis under the Commission’s ruling in Certain Erasable Programmable Read Only Memories, Components Thereof, Products Containing Such Memories, And Processes for Making Such Memories, Inv. No. 337-TA-276, Comm’n Op. (May 19, 1989) (EPROM).  To the extent that the Commission determines that EPROM applies, LSI asserts that the alleged essentiality of its patents weighs in favor of a limited exclusion order barring Funai’s downstream products.  For example, under EPROM factor 1, the Commission “considers the quantitative value and functional or qualitative importance of the infringing articles to the downstream products.”  LSI contends that, under the qualitative prong, the ALJ “correctly [found] that the asserted patents are of ‘great value.’”  “Complainants’ technical experts testified [that] the asserted ‘958, ‘867 and ‘663 patents are standards-essential patents that are required in order for the accused downstream products to perform the 802.11 IEEE WiFi standard and H.264 ITU-T standard, respectively.” 

    Alleged RAND-Encumbered Nature of LSI’s Patents

 LSI asserts that the patents-in-suit “have been declared to be standard-essential patents” that are subject to LSI’s commitments to the IEEE with respect to the ‘958 and ‘867 patents and the ITU-T with respect to the ‘663 patents.  According to LSI, “[t]here are no contractual limits in LSI’s Letters of Assurance [to the SSOs] that prevent a patent holder from seeking injunctive relief.”  Specifically, “the IEEE only requires that a patentee make available a license, not that it do so before seeking injunctive relief.”

History of Negotiations Between LSI and Funai and LSI and Realtek

 Most of LSI’s negotiations summary is redacted, but what can be gleaned from them is that, according to LSI, its predecessor attempted to negotiate a license with Realtek to all “patents that are essential to practice the IEEE 802.11b standard” but was unsuccessful.  LSI contends that Realtek never provided “a substantive response to [LSI’s predecessor’s] licensing overtures” and that “[i]n view of Realtek’s continued refusal to engage in licensing negotiations during [redacted], Realtek cannot be considered a ‘willing license.’”

LSI also argues that it met several times with Funai and Realtek to discuss LSI’s patents, the accused products and a potential license to LSI’s SEPs.  The parties exchanged correspondence many times, but were unable to reach agreement.  With respect to Realtek,  “instead of negotiating in good faith (or even negotiating at all), Realtek filed four lawsuits against LSI.” 

LSI’s Licenses to the Patents-in-Suit and the Patents’ Purported Value to Licensees

LSI provided a summary chart of all licenses to the ‘663, ‘958 and ‘867 patents, but that chart is redacted.   

Relying on its expert declaration, LSI asserts that “the ‘867 patent describes and claims a highly valuable technological advancement for … any product that is compliant with any of the IEEE 802.11 family of standards” and is “‘amongst the very few most valuable patents infringed by most, if not all, products that interoperate with 802.11 standards.’”  LSI also contends that the ‘958 patent “provides great value” because a portion of its functionality was incorporated into the 802.11b standard which, in turn, “‘caused exponential growth in sales of WiFi compatible products.”

 LSI similarly argues that the ‘663 patent provides “tremendous value” to a licensee because the technology was incorporated into the H.264 standard.  According to LSI, “[d]ue to [the] inclusion of the disclosure of the ‘663 patent in the H.264 Standard, there is no commercially feasible way to practice the H.264 Standard without practicing the asserted claims of the ‘663 patent.” 

     Industry-Practice for Licensing

 LSI argues that “[t]here are no uniform or universally established industry practices for forming licenses involving” the technology covered by LSI’s patents.  “Although these patents were deemed by LSI’s predecessors-in-interest as potentially SEPs, neither relevant standard organization [i.e., the IEEE and the ITU-T] has established RAND rates or procedures.”  “Instead, the organizations have relied on the common sense of their members and those adhering to their standards to arrive at mutually-satisfactory, negotiated agreements.”  According to LSI, “[i]n the absence of any express requirements or defined characteristics for a RAND license or the negotiation of a RAND license . . . common practices and principles have arisen which typically have informed the shape and formation of such agreements.” 

 The first principle is that a one-size-fits-all or take-it-or-leave-it approach “is typically unworkable.”  Citing the recent decisions in Microsoft Corp. v. Motorola, Inc. and In re Innovatio IP Ventures, LLC, LSI argues that “[v]ery recently, as courts have been called upon to interpret RAND obligations, they have uniformly recognized that the practice of RAND licensing contemplates a give-and-take negotiation between the patent holder and potential licensee.”  This comports with LSI’s experience in licensing the SEPs at issue to other entities: 

 “The terms of [the] initial offer consider the broadest possible needs of a potential licensee in that technology area, with the intention of providing appropriate rights for a licensee to operate over a potentially long period of time.  From that common, reasonable, and non-discriminatory starting point, the path to the execution of a license has diverged in many directions due to the unique circumstances surrounding the licensee and its business.”

 According to LSI, the second principle that has emerged is that “[t]ypically, a licensor prefers to execute a single license covering the patent holder’s portfolio in the subject technology as opposed to a series of single patent licenses; the larger the patent portfolio involved, the more the simple efficiencies around expenses and time drive this preference.” 

 The third principle that has emerged is that licensors typically prefer to license at the system level rather than the level of individual components. 

 Another issue that emerges in license negotiations is the duration of the grant.  According to LSI, “[m]ore commonly, both parties prefer the flexibility of a term license, for example, of only a five year duration.”  This is because “[a] limited term license potentially costs the licensee less than a lifetime license, and a limited term license allows the parties to adjust to future licensing terms to account for changes in the business climate for the particular licensed technology.” 

 An additional issue that parties negotiate in a license to an SEP is the form of payment.  LSI asserts that “[t]here is no RAND standard or established practice for a particular method or form of payment in a RAND license context.”  Nonetheless, most negotiated payments are either a running royalty, a fixed amount, or a mixture of both.  In LSI’s experience, certain “licensees prefer negotiating a fixed amount, which could be a lump sum payment or a series of predetermined payments made over time.” 

 LSI asserts that “[a] final area of interest in the context of RAND licensing is the method by which the parties determine the amount of royalties to be paid to use the patented technology.”  According to LSI, “[o]ne common method to determine an appropriate royalty rate is to base payment on assessment of the value of the technology in a component relative to the overall cost of the product in which the component is used.”  This is known as the “entire market value rule.”  “A corollary of the entire market value rule is that where the component using the technology is not the driver of sales for the product, it is neither fair nor appropriate to base a royalty payment on the full value of the product.” 

    LSI Comments on Determination of RAND Rate and Licensing Terms

 LSI has “never sought or obtained in any forum a determination of a RAND rate for any of” its alleged SEPs at issue.  LSI comments that, in Realtek’s breach of contract action against it in the Northern District of California (referenced above), Realtek “seeks determination of a RAND rate for” two of the three alleged SEPs at issue – the ‘958 and ‘867 patents.  That “case is presently scheduled for trial on February 14, 2014” and, “[t]o date, a RAND rate for the ‘958 and the ‘867 patent[s] has not been determined.”

Respondents’ Alleged Constructive Refusal to Negotiate a License

 LSI relies upon its history of unsuccessful negotiations with the Funai respondents and Realtek (summarized above) to argue that “Funai’s continued delay was plainly an attempt to evade its obligation to fairly compensate LSI for use of its patent rights and constitutes a constructive refusal to negotiate” and, with respect to Realtek, to argue that “it is clear that the problem is not LSI’s proposal; the problem is Realtek and its refusal to engage in good faith negotiations, as found by the ALJ based on all the evidence.” 

 LSI then argues that the Funai’s and Realtek’s purported refusal to negotiate a license to LSI’s alleged SEPs justifies the remedy of an exclusion order in this investigation.   Relying again on Judge Robart’s decision in Microsoft v. Motorola and Judge Holdermann’s decision in Innovatio, LSI argues that “[a]t a minimum, injunctive relief must be available for SEPs where an infringer refuses to take a license.”  “The Commission is authorized to enforce the patent rights of all patent holders, and holders of SEPs are no exception.” 

LSI’s Statement Regarding Public Interest

 According to LSI, “[t]he Commission has found public interest considerations to outweigh the statutorily mandated exclusion order only three times before, and all in cases prior to the 1988 legislative amendment removing the requirement that a patentee show irreparable harm.”  LSI argues that “an exclusion order is the usual remedy upon a finding of violation of Section 337.”

 LSI contends that “[t]here are no public interest considerations that would exclude entry of remedial orders” given that “[n]o party has argued that there will be an impact on public health, safety, and welfare.”  Further, the availability of the accused products to the public is not a concern with respect to an exclusion order because LSI’s “many licensees could easily meet U.S. consumer demand.” 

 LSI also argues that Funai’s reliance on the United States Trade Representative’s disapproval (USTR) of the Commission’s exclusion order in Certain Electronic Devices, Including Wireless Communication Devices, Portable Music and Data Processing Devices, and Table Computers (Samsung v. Apple) in support of its argument that an exclusion order is improper in cases involving alleged SEPs is misplaced.  “As an initial matter, this was the first executive disapproval of a Commission exclusion order on policy grounds since 1987, and thus the disapproval was a rare occurrence that should not affect Commission practice.”  Further, “[t]here is nothing in the U.S. Trade Representative’s letter indicating that every exclusion order in an Investigation involving SEPs will be vetoed.”  According to LSI, “the USTR letter makes clear that the Commission retains the authority to issue exclusion orders concerning SEPs, provided that the public interest is protected.” 

 Regarding Funai’s reliance on the Policy statement from the U.S. Department of Justice cited in the USTR disapproval, LSI asserts that the Policy Statement does not “support a blanket prohibition on exclusion orders for SEPs.”  According to LSI, “[t]he Policy Statement’s concern that a patent holder may pressure a licensee to accept unreasonable licensing terms does not indicate that LSI will do so here.”  “As the ALJ recognized in the Initial Determination, Complainants have abided by their RAND obligations and will continue to do so” while all of Respondents’ RAND-related defenses were rejected by the ALJ. 

 LSI also argues that Realtek is incorrect in arguing that an initial offer must satisfy RAND obligations.  Specifically, LSI quotes the ALJ’s determination that “[t]here is no authority for the argument that a patent holder must make an initial offer for a specific fair and reasonable royalty rate. …Indeed, the limited precedent on the issue appears to indicate that an initial offer need not be the terms of a final FRAND license because SSOs intend the final license to be accomplished through negotiation.”

LSI’s Comments on Bond

 LSI contends that “[t]he Commission should adopt the ALJ’s recommendation that the bond … should be [redacted] of the entered value of the article.”  LSI argues that respondents’ position that bond should be set at zero because a standard reasonable rate is known by virtue of LSI’s license agreements with other entities “lacks merit.”  According to LSI, “[e]ach executed license…is different and, accordingly, a bond based on a standard royalty rate is not possible.” 

 What’s Next?  On November 14, 2013, the parties filed reply comments with the ITC, but those comments were filed under seal.  We await posting of the public version of the parties’ reply comments.  As noted above, we will also be providing a summary of the respondents’ publicly available comments.

Yesterday, Senate Judiciary Committee Chairman Patrick Leahy (D-Vt.) and Committee member Senator Mike Lee (R-Utah) introduced another patent reform measure called the Patent Transparency and Improvements Act of 2013, including a press release, section-by-section summary of the proposed legislation and legislation text.  This joins other currently considered patent reform legislation such as that proposed by Senator Hatch (R-Utah) and that proposed by House Judiciary Committee Chair Goodlatte (R-Va), the latter of which is entering a mark-up phase.

The newly proposed Leahy-Lee legislation does not directly address standard essential patent issues.  The legislation does have a provision that might benefit from a tweak to address standard essential patent issues.  Specifically, the proposed legislation includes provisions to ensure that licensees of U.S. patents do not have those licenses canceled in bankruptcy.  With standard essential patents, however, an obligation to a standard setting organization (SSO) often is not an actual license grant, but an agreement to negotiate a license on certain terms–e.g., fair, reasonable and non-discriminatory terms.  This has raised the issue whether such SSO commitments follow the transfer of a patent to another entity, including following a patent purchased out of bankruptcy.

At least one bankruptcy court expressly considered and assured that the SSO obligation would follow patents purchased out of bankruptcy to avoid uncertainty on the issue, as explained in our prior post about Rockstar’s purchase of Nortel Network patents out of bankruptcy.   Would there be a benefit to codifying this in the proposed legislation or is it better to have case-by-case development that extrapolates from the legislation if passed–e.g., would there ever be circumstances where SSO obligations should not follow a patent?

A section-by-section summary of the proposed legislation is available here as well as the full text of the proposed legislation available here, which has eight general topics:

  • Transparency of Patent Ownership
  • Customer Stay
  • Bad Faith Demand Letters
  • Small business education, outreach, and information access
  • Improved post-issuance procedures
  • Protection of Intellectual Property Licenses in Bankruptcy
  • Codification of the doublle-patenting doctrine
  • Technical Corrections and Reports

Today the Federal Circuit issued a decision that reversed and remanded the denial of Apple’s request to permanently enjoin Samsung mobile devices found to infringe Apple patents.  This decision appears more flexible than the court’s prior rejection of a preliminary injunction in this case with respect to establishing a casual nexus between the alleged infringement and the alleged irreparable harm that would be caused if the infringement were not enjoined.

This case does not involve any standard essential patents (“SEPs”), but is worth reading given its general impact and guidance on seeking injunctions in patent cases.  Further, the issues presented demonstrate that some standard essential patent issues are not entirely unique and might be addressed through traditional patent law analysis.  For example, there is a concern that owners of standard essential patents may seek to extract value from the patented technology being incorporated into the standard beyond the value of the patented technology itself.  That same concern exists generally in typical patent cases involving non-standard essential patents where the Federal Circuit repeated in this case that “the casual nexus inquiry … informs … whether the patentee seeks to leverage its patent for competitive gain beyond that which the inventive contribution and value of the patent warrant.”

The court walked through the four eBay factor test for injunctive relief as applied to both design patents and utility patents found to have been infringed, ultimately affirming no permanent injunction for the design patents but remanding for further consideration whether an injunction should issue for the utility patents.  Below is a short summary on some aspects of the utility patent ruling, and we encourage you to do your own in-depth review of the decision to appreciate its import.

Irreparable Harm.  The Federal Circuit confirmed that the patentee must “show[] some casusal nexus between [the accused] infringement and the alleged harm to [the patentee] as part of the showing of irreparable harm.”  But the district court erred by requiring a showing “that one of the patented features is the sole reason consumers purchased [the accused infringing] products” [emphasis in original].  While its true that the patent owner must show that the infringing feature “drives consumer demand for the accused product”, this does not require showing that the patented feature is “the sole reason for consumer’s purchases”, “the one and only reason for consumer demand” or “the exclusive reason for consumer demand” [emphasis in original].  Rather, the patent owner “must show some connection between the patented feature and demand for [the accused infringer’s] product.”  The line distinguishing the two is far from clear, so reproduced below is the entirety of the court’s illustration of the point:

[A] battery does not necessarily drive demand for a laptop computer simply because its removal would render the laptop ineffective as a portable computer.  That is because consumers often do not chose a laptop based on its battery, and presumeably at this point, no inventor has a patent covering all laptop batteries.  Nevertheless, it is indisputable that the ability to carry around a computer without having to plug it in is one of the reasons people buy laptops.  Thus, if the first person to invent a laptop battery had obtained a patent covering all laptop batteries, then it would be reasonable to say that the patented invention was a driver of demand for laptops.  And if a particular patented laptop battery lasts significantly longer than anyother battery on the market, then the replacement of that battery with a noninfringing battery might make a laptop less desirable.  In that case, it might be reasonable to conclude that the patented battery is a driver of consumer demand for the laptop.

The court’s analysis indicates that this “nexus” issue ultimately is a question of degree.  For example, though “evidence that a patented feature significantly increases the price of a product [could] show that the feature drives demand for the product”, this may not apply if it contributes only a “nominal amount” to the price: “For example, consumers’ willingness to pay an additional $10 for an infringing cup holder in a $20,000 car does not demonstrate that the cup holder drives demand for the car.”

The Federal Circuit ultimately ruled that the district court erred in dismissing survey evidence “that consumers would be willing to pay fairly significant price premiums for the features claimed in Apple’s utility patent,” because such evidence could show that the patented features drive demand.  Although this is a question of degree, the district court erred by not reaching this question and deeming the survey evidence to be irrelevant.

Inadequecy of Legal Remedies.  Amont other things, the Federal Circuit considered whether the district court erred in finding legal remedies adequate based on Apple’s prior licensing of the patents-in-suit to others and prior licensing to Samsung of other patents.  The Federal Circuit ruled that the district court erred by not considering the differences between the patentee’s prior licensing and the current situation.  That approach erroneously “hints at a categorical rule that [the patentee’s] willingness to license its patents precludes the issuance of an injunction.”  The Federal Circuit vacated this ruling and remanded for further consideration of this factor.

Balance of Hardships.  The Federal Circuit ruled that the district court did not err in finding this factor neutral in this case.

Public Interest.  Among other things, the Federal Circuit considered whether the district court properly considered whether the breadth of the injunction sought would disserve the public interest.  The Federal Circuit defined the concern as “not that a large number of products would be enjoined, but rather that entire products would be enjoined based on ‘limited non-core features'” and “that an injunction [may] depriv[e] the public of access to a large number of non-infringing features.”  The Federal Circuit ruled that the district court did not abuse its discretion in “recogniz[ing] the public’s interest in enforcing patent rights,” but that such interest was “outweighed by other considerations” in this case such as “removing phones from the market when the infringing components constitute such limited parts of complex, multi-featured products.”

In sum, the Federal Circuit found some problems with the district court’s permanent injunction analysis and remanded the decision for further consideration of injunctive relief.

Yesterday Judge Whyte issued an Order with tentative rulings on motion’s in limine and Daubert motions for the upcoming Realtek v. LSI trial where the jury will determine (1) a RAND rate, (2) damages based on the court’s prior ruling that LSI breached its RAND obligations by seeking an exclusion order at the ITC before offering Realtek a license on RAND terms and (3) whether Realtek failed to mitigate damages by not negotiating a license.  These tentative evidentiary rulings are based on the particular arguments and circumstances of the case, but provide some general insight into how Judge Whyte has shaped the RAND issues.

Parallel ITC Investigation.  Recall that, in a parallel ITC investigation (Inv. No. 337-TA-837), Administrative Law Judge Shaw determined that the LSI patents were not infringed and also rejected Realtek’s various RAND defenses.  The ITC has decided to review the determination in its entirety, which review is still pending.  Judge Whyte made several tentative evidentiary rulings regarding the ITC investigation.  First, he excludes the ITC’s non-infringement decision because it is not final and its relevance is outweighed by danger of undue prejudice and jury confusion.  Second, he excludes the ITC’s decision that LSI did not breach its RAND obligation.

Judge Robart’s RAND Rate.  Judge Whyte would not exclude Realtek’s economic expert from relying on a portion of Judge Robart’s RAND rate ruling in the Microsoft v. Motorola litigation, where the economic expert used a Realtek license as “the best benchmark” for a RAND rate and used Judge Robart’s finding to “futher support[]” his analysis.  Judge Whyte questioned the economic expert’s apportionment technique, where he divided Judge Robart’s rate for Motorola’s twenty-four WiFi 802.11 SEPs by 12 since only two WiFi 802.11 SEPs are at issue here, because that simple division assumes equal contributions by each patent, rather than their individual relative contributions.  But the court “nevertheless considers it a satisfactory way to reflect the RAND royalty rate that might pertain to two, versus twenty-four patents” and “a reasonable point of comparison as part of [a] more comprehensive analysis.”

No Duty To Mitigate Damages by Negotiating During Exclusion Order Threat.  Judge Whyte excluded evidence of whether LSI’s June 20, 2012 license offer to Realtek was RAND, where such evidence is intended to show whether Realtek failed to mitigate damages by not negotiating with LSI.  At the time that LSI made the offer, LSI also was seeking an exclusion order from the ITC (and is still seeking an exclusion order), and “Realtek was under no duty to negotiate in an unfair bargaining position under the threat of an exclusion order.”  Judge Whyte explained that “Realtek had no obligation to mitigate by negotiating a license with LSI after LSI breached its contract to Realtek and where Realtek was still under the threat of an exclusion order from the ITC.”  Further, even if LSI’s offer were RAND, “Realtek would not be unreasonable in declining to negotiate with LSI under the circumstances.”  Thus, Judge Whyte excluded all evidence of LSI’s June 20, 2012 offer to Realtek and responses thereto.

This particular ruling is one to be careful with to avoid over-reading its import, particularly where it is a tentative evidentiary ruling based on the particular arguments, issues and circumstances presented.  It is not likely that the court intends to encourage parties not to negotiate in any circumstances.  Rather, the finite issue presented here concerns whether evidence of refusal to negotiate may be used to show that a party seeking damages for litigation costs failed to mitigate those damages.  But the court is not endorsing the concept of not negotiating.  Rather, under the duty to mitigate case law quoted and applied by Judge Whyte, “[t]he 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 … was unreasonable.”

Via Pool.  Judge Whyte excludes LSI’s expert from relying on the “Via Pool” as a benchmark for her analysis.  The expert determined that LSI’s 802.11 SEPs were three times more valuable than those in the Via patent pool based on a comparison of (1) the number of times any of LSI’s nineteen 802.11 SEPs were cited in later patents and (2) the number of times 377 patents she believed to be SEPs in the Via Pool were cited in later patents.  She then divided the resultant rate by the number of LSI’s 802.11 SEPs (nineteen of them) to determine a rate for the two specific LSI 802.11 SEPs at issue here.

Judge Whyte found that, although the “patent counting method may be an acceptable methodology to determine the relative value of patent portfolios”, the problem here is that most of the citations in later patents to LSI’s 802.11 SEPs were not to the two SEPs at issue here; rather, another LSI 802.11 SEP not at issue here accounted for 93% of the later patent citations.  The expert also had admitted that the method was good for portfolios, but not for singling out specific patents such as  the two patents at issue here.

Infringement.  Judge Whyte excluded LSI’s expert testimony about whether Realtek actually infringes the SEPs, which is an issue “before the ITC” but “not at issue before this court” in which “the RAND issue in this case is ‘[a] determination of a RAND royalty rate” for the two LSI 802.11 SEPs at issue.  Thus, there would be no testimony about infringement or whether Realtek owed a lump-sum royalty “based on past infringement“, though testimony for a lump-sum royalty could be based on other grounds.  The intent of the ruling here does not appear to be that no royalty is owed for past activities (perhaps an issue not decided one way or the other), but only that any such royalty cannot be premised on evidence of “past infringement” since “infringement” evidence is excluded.

Today Judge Robart issued an Order certifying a Rule 54(b) judgment in the Microsoft v. Motorola case where he had issued a first of its kind RAND rate ruling on Motorola H.264 and 802.11 standard essential patents (SEPs) and sustained the jury verdict that Motorola breached its RAND obligations in offering a license to Microsoft.  Motorola promptly filed a notice of appeal of the Rule 54(b) judgment to the Federal Circuit (recall questions about whether the Ninth Circuit or Federal Circuit has appellate jurisdiction).

A Rule 54(b) judgment is one entered on some, but not all, claims in a case.  This case involved multiple claims and counterclaims in two consolidated actions:

  • Microsoft’s “contract action” against Motorola filed in W.D. Wash. on November 9, 2010
  • Motorola’s “patent action” against Microsoft filed in W.D. Wis. the next day, November 10, 2010.

Motorola’s “patent action” was later transferred to W.D. Wash. in July 2011 and consolidated with Microsoft’s “contract action”.  That consolidation probably vested appellate jurisdiction in the Federal Circuit over both the “patent action” and the “contract action” even though, standing alone, the “contract action” otherwise probably would have been appealable to the Ninth Circuit.

Judge Robart entered Rule 54(b) judgment on three claims:

  • Microsoft’s breach of contract claim, where judgment is entered in favor of Microsoft  based on the jury verdict that Motorola breached its RAND obligations.
  • Judge Robart’s prior RAND ruling entered as part of the breach of contract claim relied on by the jury in reaching its breach verdict (this ruling probably is subsumed in the breach of contract judgment, but was made an explicit part of the judgment out of an abundance of caution to ensure appellate review).
  • Motorola’s claim for a declaration that Microsoft repudiated any rights it had arising from Motorola’s RAND obligation by not accepting/negotiating the offered license, where judgment is entered against Motorola based on the court’s prior summary judgment ruling that rejected this claim.

This Rule 54(b) judgment leaves several claims still pending in abeyance with the prospect that many may be mooted or otherwise resolved following appeal of the judgment.  For example, the parties agreed to stay their patent infringement claims– e.g., Motorola’s claim that Microsoft infringes three SEPs (at issue in the breach of contract case) and Microsoft’s claims that Motorola infringes two Microsoft patents.  And Microsoft’s promissory estoppel claim may be mooted by the judgment that Motorola breached its RAND obligation as a contractual matter.

Accordingly, the next steps in this action appears to be briefing and argument at the Federal Circuit.  Will keep you posted.

On Friday (November 1, 2013), the parties and several non-parties filed comments in the International Trade Commission (ITC) investigation of whether Realtek infringed LSI’s alleged 802.11 and H.264 standard essential patents (SEPs), where the ALJ’s initial determination found the patents were not infringed but otherwise rejected RAND-based defenses.  As discussed in our prior post, in deciding to review that initial determination in its entirety, the ITC requested party and public comment 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. 

Complainant LSI, respondent Realtek and the Funai respondents filed comments with the ITC, but these comments were filed under seal and the public versions are not yet available.  Non-party public comments were filed by Barnes & Noble, Intel and Cisco (jointly) and Interdigital, which comments are summarized below.

Non-Party Barnes & Noble

Barnes & Noble’s (“B&N”) comments focus on the potential remedy of an exclusion order (should the finding of non-infringement be reversed) and whether that remedy would be in the public interest.  According to B&N, an exclusion order would be against the public interest because LSI is a non-practicing, patent assertion entity:

 “Although there is a legitimate interest in protecting intellectual property rights, that interest does not extend to granting patent assertion entities like LSI the right to gain undue leverage by obtaining an exclusion order at the Commission.  It is not in the public interest to issue an exclusion order when monetary damages would be adequate compensation to complainants like the ones in this Investigation.”

B&N asserts further that “[t]he legislative history of Section 337 shows that it was designed to protect companies that are exploiting the asserted patent through manufacturing or through licensing directed to bringing products to market.”  Any remedial order issued by the ITC would not further Sections 337’s purpose because LSI’s “primary business involves seeking out potential licensees that manufacture and sell products that are already in the marketplace” which “is not the type of activity that Section 337’s legislative history contemplates.” 

After summarizing the history of the patent infringement litigation between B&N and LSI pending in the Northern District of California involving the same patents, B&N asserts that “LSI has very clearly adopted a business model that is predicated on extracting license fees from unsuspecting targets–often true innovators–that far exceed any reasonable value of the patents.”  “[E]xclusion of the accused products would be contrary to LSI’s financial interests but for the would-be ‘hold-up’ value the prospect of such exclusion provides.”  B&N argues that “[i]f an exclusion order were to issue, LSI could use that order to demand even more aggressive licensing terms–thereby permitting LSI to artificially and wrongfully inflate the value of its patents.”

B&N concludes that “the issuance of any remedial order would only buttress a business model that does nothing to encourage innovation and harms the true innovators that drive the U.S. economy.” 

Non-Parties Intel Corporation and Cisco Systems, Inc.

In their jointly submitted comments, Intel Corporation (Intel) and Cisco Systems, Inc. (Cisco) argue that the ITC should deny an exclusion order for RAND-encumbered patents like those at issue in the case absent “limited circumstances.”  One such “limited circumstance” is where a respondent rejects a RAND royalty established by a U.S. court in a final, non-appealable judgment prior to the patent holder initiating a Section 337 action before the ITC.  Other such circumstances justifying an exclusion order include: (1) “a determination in binding arbitration (prior to the institution of the Commission proceeding) establishing a RAND royalty that respondents rejected;” (2) “when respondents are unable to pay a RAND royalty;” or (3) when respondents “are not subject to the jurisdiction of U.S. courts and the Commission’s in rem authority is the only recourse.” 

Intel and Cisco argue that an exclusion order for products that infringe RAND-encumbered patents would be against the public interest, albeit a different public interest than that relied upon by the ITC previously in refusing to enter an exclusion order:

 “In the past, the Commission has refused to enter exclusion orders that would cause serious harm to the public.  That harm often took the form of depriving the public of products necessary for consumer welfare. … An exclusion order on the basis of RAND-encumbered SEPs in this case would result in a different, but also severe, public interest harm:  the exploitation of market power (which was created by an industry standard, not by the individual SEPs) to deny producers and consumers the benefits of industry standard-setting, after the patentee publicly relinquished that market power and waived its right to exclude prospective RAND licensees from practicing the SEPs in exchange for RAND royalties.”

Intel and Cisco cite to the United States Trade Representative’s (USTR) decision disapproving an exclusion order in Samsung v. Apple (Investigation No. 337-TR-794) to argue that, as part of the public interest analysis, the Commission should “‘review…the various policy considerations … as they relate to the effect on competitive conditions in the U.S. economy and the effect on U.S. consumers.”  They also rely upon a joint policy statement by the U.S. Department of Justice and U.S. Patent and Trademark Office providing that, “in cases where an exclusion order based on a F/RAND-encumbered patent appears to be incompatible with the terms of a patent holder’s existing F/RAND licensing commitment to [a standards-developing organization],” the remedy “of an injunction or exclusion order may be inconsistent with the public interest.” 

Intel and Cisco argue that competition and consumers will benefit from enforcing RAND obligations: 

“Because of the commercial infeasibility of designing around standards, allowing an SEP holder to obtain an injunction against a party willing to pay RAND royalties would empower SEP holders to extract a disproportionate share of the value of accused products, making an unreasonably high settlement the only plausible outcome, and thereby raising prices to consumers.  An exclusion order would force respondents to choose between withdrawing products from the market or potentially paying far more than a RAND royalty.  Competition and consumers would be harmed in either event.” 

Intel and Cisco further argue that the standard-setting process, which “is so vital to U.S. innovation, economic growth, and consumer welfare,” would be undermined if an exclusion order issues “in the face of unfulfilled RAND commitments.”  Companies will be reluctant to “to agree on standards and to incorporate them into their products if SEP holders can unfairly exploit the resulting standard-derived market power through exclusion orders.”

Intel and Cisco argue that the actual negotiations between the parties are irrelevant to the determination of whether to enter an exclusion order, because LSI first initiated the ITC proceeding seeking an exclusion order “before any U.S. court with competent jurisdiction or a binding arbitrator had determined (prior to the institution of the Commission investigation) in a final, non-appealable judgment both RAND licensing terms and that respondents failed to accept those terms after their determination.”  Intel and Cisco point to the parallel district court litigation between LSI and Realtek where the judge found that LSI violated its RAND obligations by initiating the ITC proceeding and seeking an exclusion order “before offering a license to respondents on RAND terms.”  According to the district court, seeking an exclusion order before offering a license on RAND terms is “inherently inconsistent” with LSI’s contractual RAND obligations.  Therefore, according to Intel and Cisco, “there is no need for the Commission to examine the parties’ license negotiations before concluding that an exclusion order would be contrary to the public interest.” 

Non-Party InterDigital

InterDigital’s comments discuss how RAND obligations can differ across standard setting organizations (SSOs), industry practice for licensing similar technologies, and the issue of constructive refusal to license and reverse hold-up.   

RAND.  Interdigital states that the specific standard-setting organization’s (SSO’s) intellectual property rights (IPR) policy and patent owner’s declarations thereto defines the patent holder’s RAND obligations, and these policies and obligations differ across SSOs.  The RAND “obligations imposed by standard-setting organizations are derived from the actual language of the policies and declarations of the particular SSO of which the patent holder is a member.”  The patent holder’s declaration to the SSO “defines the scope of the commitment made by the patent holder.”  Interdigital states that “[i]t would not be proper to add or infer additional obligations beyond what the patent holder actually stated in a declaration.”  Interdigital cautions that, as a result of the different obligations imposed by different SSOs, “there is no ‘one-size-fits-all’ definition of ‘RAND-encumbered’ that is applicable to all SSOs.”  Rather, “[e]ach SSO’s policy has its own language and history that informs the nature and boundaries of the commitment that patent holders understood themselves to be making when submitting a declaration.”  “Retroactively changing the settled expectations of standard participants would be inequitable and counterproductive to the standard-setting process.”

Interdigital provides an example of disputes that can arise when a potential licensee attempts to modify the patent holder’s RAND obligations.  Specifically, the International Telecommunications Union (ITU) requires a declaration that the patent holder “is prepared to grant a license on a ‘world-wide’ non-discriminatory basis.”  Interditigal argues that “prospective licensees who say they require single-country licenses, even when they have global operations and sales in many countries, are not reasonably interpreting the RAND commitment made by the patent holder, given the express expectation that licenses will be on a ‘worldwide’ basis.” 

Industry Licensing Practice.  Interdigital asserts that it generally licenses “on a worldwide portfolio basis, and not on an individual-patent basis” for its patents that are essential to certain wireless standards.  Interdigital states that “[l]icenses also commonly include technology generations,” citing license summaries publicly filed in the Apple v. Samsung case in the Northern District of California “that indicated that licenses considered in that case were almost exclusively worldwide licenses that included portfolios of patents covering particular products and/or standards.” 

Interdigital argues that “[t]here are many reasons why parties prefer worldwide portfolio licenses in the context of agreements negotiated in the ordinary course of conducting the business.”  These are: (1) provision of the broadest coverage to licensees “who wish to achieve ‘patent peace’ from the licensor;” and (2) efficiency in negotiating a license for a broad portfolio rather than piecemeal negotiation of “multiple, individual licenses” for individual patents.  “In the absence of worldwide portfolio licensing, licensors would have no effective means of obtaining compensation for the use of their patents, and would be forced to pursue individual actions for patent infringement on each patent owned by the licensor in each jurisdiction where the patents were issued” and, “[f]or licensors with large global portfolios, this would be prohibitively inefficient.”  

Quoting Nokia’s recently-filed amicus brief in Apple v. Motorola, Interdigital cautions that, in the absence of injunctive relief for patent infringement, “‘[e]ach manufacturer could simply infringe until litigation was brought, allowing the court to set the royalty rate for them several years after the commencement of the litigation, and in some cases potentially escape responsibility by making enforcement prohibitively difficult… .’”  This could “‘threaten the standardization process as a whole, as patent holders would be forced to consider the likely difficulties in obtaining fair compensation for the use of their patents before making FRAND commitments concerning them.’”

Constructive Refusal To License/Reverse Hold-Up.  Interdigital comments that “[t]he actions of prospective licensees in seeking individual licenses only for patents on which lawsuits have been filed … can be an obstructionist tactic designed to accomplish reverse hold-up, in which the licensor’s R&D investments are held hostage with no path to a return on their investments.” 

Interdigital asserts that constructive refusal to license and reverse hold-up “are real and significant concerns for industry participants that license their innovative patented technologies that are the result of their sizeable investments in research and development.”  For example, “[o]ne common tactic is the simple strategy of delay, where the prospective licensee engages in correspondence and meetings with the patent holder over an extended period of time, without actually intending to move the license discussions forward.” 

Another example of constructive refusal to license occurs when prospective licensees “demand to know the terms of confidential licenses between the patent holder and other licensees as a condition of negotiating – even where the other licensees may be competitors of the prospective licensee.”  Interdigtal asserts that “[n]othing about SSO RAND policies obliges a patent holder to ignore, violate, or dispense with ordinary confidentiality provisions that businesses typically employ.”

Interdigital concludes by arguing that “[w]hen reverse hold-up tactics force a patent holder to settle for licenses providing substantially less than fair and adequate compensation, this reduces incentives for innovators to develop and contribute technology for standards” which, in turn, deprives consumers and the public “of technological advances that would otherwise have been developed and commercialized.” 

What’s Next?

What’s Next?  We await posting of the public version of the parties’ comments.  And reply comments are due on or before Tuesday, November 12, 2013.

 

Lest we forget the prevalence of standards in many industries beyond smartphones and Wi-Fi, last Friday (Nov. 1), several radio stations were sued by patent monetization entity Wyncomm in D. Del. for infringing three patents alleged to cover “transmission of radio broadcasts using HD radio techniques further described by the IBOC [In-Band/On-Channel] Digital Radio Standard” that is promulgated by the National Radio Systems Committee (NRSC).

The patents were granted in 1995 to 1997 and no injuctive relief is directly pled. The standard at issue, NRSC-5, was originally adopted in April 2005 and has gone through a few revisions, most recently in September 2011 (NRSC-5-C).  NRSC-5 has been reported to be the only system approved by the FCC for digital AM/FM broadcasts in the U.S.  The NRSC has an IPR policy (Procedures Manual Section 7.2.5.1) with certain disclosure requirements for standard essential patents and a declaration whether licenses would be granted “without charge” or “under reasonable terms and conditions” and, in either event, “demonstrably free of any unfair discrimination.”  Whether and to what extent that IPR policy comes into play is yet to be seen — e.g., did any prior owner of the patents participate in the NRSC standard-setting process and, if so, what was the IPR policy at the time?

Yesterday, the Rockstar Consortium (and its subsidiaries MobileStar Technologies LLC and NetStar Technologies LLC) sued Google and several Andriod device manufactures (Asustek, HTC, Huawei, LG, Pantech, Samsung and ZTE) in E.D. Tex. on several patents that Rockstar had acquired in July 2011 out of the Nortel bankruptcy.

You may recall that Rockstar is a consortium that, according to Rockstar’s corporate disclosures, currently includes Apple, Blackberry, Ericsson and Microsoft. The Rockstar consortium and Google had been in a bidding war to purchase Nortel’s patent portfolio out of bankruptcy, including reported memoriable bids by Google based on the distance to the sun and pi ($3.14159 billion).  Rockstar ultimately paid $4.5 billion for the portfolio.

Along the way, concern was raised about what would happen with Nortel’s standard essential patents.  For example, the IEEE filed with the bankruptcy court an objection to any sale of the Nortel patents “in a way that permits a successor patent-holder to disavow the patent commitments that IEEE, other standards setting organizations (SSOs), entire industries, and end-users have relied upon.”  The bankruptcy court’s order approving the sale maintained to some extent the “promises, declarations and commitments granted, made or committed in writing … to standard-setting bodies and industry groups.”

The U.S. Department of Justice (DOJ) also investigated the acquisition of Nortel’s patents where DOJ, per its report, “focused on standard essential patents (SEPs) that … Nortel had committed to license to industry participants through their participation in standard-setting orginazations (SSOs).”  DOJ reviewed whether the acquisition would have an anti-competitive impact in view of Rockstar’s stakeholders.  DOJ ultimately approved the acquisition, stating that it “continues to monitor the use of SEPs in the wireless device industry, particularly in the smartphone and computer tablet markets,” and “will not hesitate to take appropriate enforcement action to stop any anticompetitive use of SEP rights.”

A focus of the patent bidding war and DOJ scrutiny appeared to be Nortel’s wireless LTE patents.  But those patents do not appear to be at issue in Rockstar’s instant lawsuit, and many of Nortel’s LTE patents reportedly were transferred to Rockstar’s stakeholder Apple.  Rather, the seven patents asserted against Google appear directed to search functionality, such as matching search terms with ads through Google’s AdWords.  A different set of seven patents are asserted against the Andriod device manufacturers based on electronic packaging, graphical interfaces, mobile hotspot functionality, messaging, etc.

It may not be coincidence that Rockstar’s newly filed complaint is against Google and Andriod devices that compete with Rockstar stakeholders.  But did Rockstar decide to avoid standard-essential patent issues in this skirmish?  Rockstar’s complaints do not state whether any of the asserted patents are subject to a standard setting obligation.  One of those patents is related to an IETF “informational” Request For Comment (RFC).  Specifically, in October 2005, Nortel filed an IPR declaration with IETF stating that U.S. Pat. No. 6,128,298 entitled “Internet Protocol Filter” “may be related to at least a portion of RFC 3022” entitled “Traditional IP Network Address Translator (Traditional NAT)”.  Nortel’s IPR declaration characterizes RFC 3022 as “an Information RFC and not an IETF standards-track document,” and RFC 3022 itself states that it “provides information for the Internet community” and “does not specify an Internet standard of any kind.”

We’ll keep a watch on whether and to what extent standard essential patent issues are raised here.

U.S. Senator Orrin Hatch (R-Utah) introduced today the Patent Litigation Integrity Act (S. 1612) “to address the growing threat of so-called ‘patent trolls'” who “purchase existing broad patents and then threaten businesses of infringing” them.  Sen. Hatch issued a press release and one-page summary of the proposed legisltation, which provides two reform measures.

First, the legislation would replace the discretionary “exceptional case” standard for awarding attorneys fees under 35 U.S.C. § 285 with a mandatory award of attorney fees and expenses to the prevailing party unless the non-prevailing party’s position and conduct “were substantially justified” or “special circumstances make an award unjust.”

Second, the legistlation would provide for circumstances in which a court may require a patent owner to “post a bond sufficient to ensure payment of the accused infringer’s reasonable fees and other expenses, including attorney fees.”

The first fee-shifting provision is similar to that proposed last week by Rep. Goodlatte. The main difference is that, in Rep. Goodlatte’s proposal, if the nonprevailing party could not pay the prevailing party’s fees and expenses, then the court could require another party joined in the case to pay them. Perhaps Sen. Hatch considered this latter provision unnecessary given his proposed bond to secure such fees and expenses.