Today, an E.D. Tex. jury in Wi-LAN v. Apple returned a verdict that the asserted claims 1 and 10 of Wi-LAN’s RE37,802 Patent (“the ‘802 Patent”) were invalid and not infringed by Apple.  The ‘802 Patent has been a centerpiece for Wi-LAN’s prolific patent litigations and settlements thereof.  Wi-LAN has asserted that the ‘802 Patent covers various wireless industry standards, such as CDMA2000, HSPA and 802.11 standards.

As anticipated by our prior post about a second discussion draft of patent reform legislation, House Judiciary Committee Chairman Robert W. Goodlatte (R-Va) joined others in introducing today a patent reform bill entitled the “Innovation Act“.  They also provided a section-by-section summary of the Innovation Act.  This bill includes the prior proposed enhanced pleading requirement for patent infringement with a specific pleading requirement for “declared” standard essential patents, stating:

§281A.  Pleading requirements for patent infringement actions
(a) Pleading Requirements. — … a party alleging infringement shall include in the initial complaint, counterclaim, or cross-claim for patent infringement, unless the information is not reasonably accessible to such party, the following:
(1) An identification of each patent allegedly infringed.
…
(10)  For each patent identified under paragraph (1), whether such patent has been specifically declared as essential, potentially essential, or having potential to become essential to any standard-setting body, and whether the United States Government or a foreign government has imposed specific licensing requirements with respect to such patent.

In the prior discussion draft, this section (10) required pleading “whether such patent is subject to any licensing term or pricing commitments through an agency or standard-setting body.”  That provision has been revised and no longer requires pleading whether the patent is subject to an SSO obligation.  This may simplify meeting this pleading requirement and consequences thereof, because pleading whether the patent “has been specifically declared as essential …” seems a cleaner, knowable fact as compared to the prior draft’s requirement to plead whether there are SSO “commitments” and attendant pitfalls of an accused infringer’s response thereto in admitting or denying that a patent is essential or has an SSO commitment.

Last week (Thu. Oct. 17, 2013), the International Trade Commission (ITC) issued a Notice that it will review “in its entirety” Administrative Law Judge Shaw’s initial determination (ID) that found no infringement of LSI’s 802.11 and H.264 standard essential patents (SEPs), but otherwise rejected RAND-based defenses, as discussed in our prior post.

The ITC notice includes requests that the parties provide additional information about specific issues in the final ID, such as evidence of indirect infringement as well as “any record evidence of the standard essential nature of the ‘663, the ‘958 and the ‘867 patents.”  Because the review could find a violation based on alleged SEPs and any remedy thereon must consider “public interest factors”, the ITC further seeks written submissions addressing the public interest factors (including additional sworn testimony) based on the following list of RAND-related issues:

1.  Please discuss and cite any record evidence of the allegedly RAND-encumbered nature of the declared standard essential ‘663, ‘958, and ‘867 patents.  With regard to the ‘958 patent and the ‘867 patent, what specific contract rights and/or obligations exist betwen the patentee and the applicable standard-setting organization, i.e., the Insitute of Electrical and Electronic Engineers, Inc. (IEEE)?  With regard to the ‘663 patent, what specific contract rights and/or obligations exist between the patentee and the applicasble standard-setting organization, i.e., the International Telecommunication Union (ITU)?

2.  Please summarize the history to date of negotiations between LSI and Funai and between LSI and Realtek concerning any potential license to the ‘663, the ‘958, and the ‘867 patents, either alone, in conjunction with each other and/or the ‘087 patent, and/or in conjunction with non-asserted patents.  Please provide copies of, or cite to their location in the record evidence, all offers and communications related to the negotiations including any offer or counteroffer made by Funai and Realtek.

3.  Please summarize all licenses to the ‘663, the ‘958, and the ‘867 patents granted by LSI to any entity including evidence of the value of each patent if such patent was licensed as part of a patent portfolio.  Please provide copies of, or cite to their location in the record evidence, all agreements wherein LSI grants any entity a license to these patents.  Please also provide a comparison of the offers made to Funai and/or Realtek with offers made to these other entities.

4.  If applicable, please discuss the industry practice for licensing patents involving technologies similar to the technologies in the ‘663, the ‘958, and the ‘867 patents individually or as part of a patent portfolio.

5.  Please identify the forums in which you have sought and/or obtained a determination of a RAND rate for the ‘663, the ‘958, and the ‘867 patents.  LSI, Funai and Realtek are each requested to submit specific licensing terms for the ‘663, the ‘958, and the ‘867 patents that each believes are reasonable and non-discriminatory.

6.  Please discuss and cite any record evidence of any party attempting to gain undue leverage, or constructively refusing to negotate a license, with respect to the ‘663, the ‘958, and the ‘867 patents.  Please specify how that evidence is relevant to whether section 337 remedies with respect to such patents woudl be detrimental to competitive conditions in the U.S. economy and any other statutory public interest factor.

The questions above appear directed to information found lacking by U.S. Trade Representative Froman when he disapproved the ITC’s prior Samsung-Apple exclusion order.  Recall that USTR Froman requested that, in future ITC cases dealing with FRAND-encumbered SEPs, the ITC should  “proactively … have the parties develop a comprehensive factual record” to include “information on the standards-essential nature of the patent at issue if contested by the patent holder and the presence or absence of patent hold-up or reverse hold-up” with the ITC making “explicit findings on these issues to the maximum extent possible.”

Written submissions from the parties and “interested parties” are due Friday November 1, and reply submissions are due Tuesday, November 12 (per Corrected Notice).

Yesterday the European Commission started soliciting public comments on Samsung’s proposed commitment that, during the next five years, Samsung would not seek injunctive relief within the European Economic Area (EEA) on standard essential patents (SEPs) in the field of mobile communications against companies that agree to a particular framework for determining fair, reasonable and non-discriminatory (FRAND) licensing terms either by agreement, by court determination or by arbitration (the default forum).  Interested parties should submit comments within a month.

This relates to an investigation that the European Commission opened in January 2012 on whether Samsung honored FRAND commitments given to ETSI by seeking injunctive relief in Europe against Apple mobile products on Samsung 3G UMTS SEPs. In December 2012, the European Commission gave initial views (in both a press release and supporting memo of frequently asked questions) that seeking injunctive relief is a legitimate remedy, but may be “an abuse of a dominant position in the exceptional circumstances … where the holder of a SEP has given a commitment to license these patents on FRAND terms and where the company against which an injunction is sought is willing to negotiate a FRAND license.”  The European Commision expressed concern that seeking injunctive relief in those exceptional circumstances “may distort licensing negotiations unduly in the SEP-holder’s favour.”  The European Commision took no position on what would be a reasonable royalty rate, stating that “courts or arbitrators are generally well equipped to do this.”

In response, Samsung submitted Proposed Commitments a few weeks ago (Sep. 27, 2013) that provide a framework over the next five years where, before Samsung would seek injunctive relief on mobile communication SEPs in the EEA, Samsung and a willing licensee may negotiate licensing terms and, if they reach no agreement within 12 months, then the FRAND terms would be decided in court or arbitration (the default forum).  This approach is similar to the framework proposed in the settlement earlier this year between the U.S. Federal Trade Commission and Google/Motorola.

The European Commision thus issued its press release yesterday seeking public comments on Samsung’s proposal along with a supporting memo addressing frequently asked questions on the issues presented.

Reminder (and correcting some email notices) that the Essential Patent Blog and Kelley Drye & Warren LLP will host a complimentary webinar on Thursday, Oct. 17 at 12pm Eastern to discuss the import of Judge Holderman’s Oct. 3 RAND opinion in the Innovatio IP Ventures Patent Litigation and comparison with Judge Robart’s RAND methodology from the Microsoft v. Motorola litigation.  Some email notices inadvertantly and ambiguously indicated that the webinar was this Wednesday or Thursday — its Thursday.  Apologize for the confusion.

Our prior Oct. 11 post has the webinar particulars and sign-up information.

The Court presiding over Wi-LAN’s patent infringement litigation against HTC and Exedea recently entered an order memorializing the court’s oral rulings on various pre-trial motions and disputes during a September 26, 2013 pre-trial hearing, including whether Wi-LAN’s alleged failure to offer a license on FRAND terms remained an issue in the case after defendants voluntarily withdrew their FRAND-related affirmative defense and counterclaim. 

Wi-LAN’s Amended Complaint alleges that HTC is infringing Wi-LAN’s U.S. Patent No. RE37,802 by selling mobile handsets and other products compliant with the CDMA2000 standard and/or the IEEE 802.11 standards.  Wi-LAN further alleges that HTC is infringing its U.S. Patent No. 5,282,222 by selling mobile handsets and other products compliant with the IEEE 802.11, IEEE 802.16, LTE and/or Bluetooth 3.0 standards. 

In their Answer to the Amended Complaint, defendants asserted an affirmative defense that Wi-LAN breached its FRAND obligations by not offering defendants a license to Wi-LAN’s patents on fair, reasonable and non-discriminatory (FRAND) terms.  Specifically, defendants asserted that “Wi-LAN has not…offered to HTC reasonable and nondiscriminatory royalty terms and rates that are proportionate to royalty terms and rates offered to similarly situated companies.”  Defendants also asserted a counterclaim for a declaratory judgment that they were entitled to license Wi-LAN’s patents on FRAND terms.

But defendants later “voluntarily elected to drop their counterclaim[] and affirmative defense[] as to the issue of FRAND.”  However, “the parties continue[d] to dispute the impact of such, namely whether Defendants may continue to assert FRAND as a non-affirmative defense in their reasonable royalty analysis or as a ‘business’ defense in the hypothetical negotiation scenario in response to Plaintiffs’ evidence on damages.”  During the September 26, 2013 hearing and again in its written order, the court held that FRAND was no longer an issue in the case by virtue of defendants’ voluntary election: 

“As announced on the record, the Court finds that Defendants have the affirmative burden of proof [to show breach of FRAND obligations and entitlement to a license on FRAND terms] and FRAND is not a purely defensive response to Plaintiff’s damages case.  Accordingly, the Court finds that the issue of FRAND is an affirmative defense which, in light of Defendants having voluntarily dropped their counterclaims and affirmative defenses as to FRAND, is now out of this case for all purposes.  Defendants may not raise the issue of FRAND in response to Wi-LAN’s damages case or for any other purpose in this trial.” [emphasis in original]

 We will continue to track this case and provide any interesting updates, such as the September 26, 2013 transcript when it becomes available.

The National Academy of Sciences has published a 140-page report entitled “Patent Challenges for Standard-Setting in the Global Economy: Lessons from Information and Communication Technology.”  The report presents several suggestions to standard setting organizations (SSOs) or government bodies regarding standard essential patents (SEPs) in a few topic areas:

  • Interpretation of FRAND: Suggests that SSOs clarify FRAND obligation, such as guidance on royalty, intended third-party beneficiaries, bundling SEPs in a portfolio, and license grant back provisions.
  • Patent Disclosures:  Suggests that SSOs adopt IPR policies that require participants to disclose SEPs and to make such disclosures publicly available.
  • Transfer of FRAND Encumbered Patents: Suggests that SSOs and governmental bodies develop policies or rulings that require FRAND obligations to follow SEPs when transferred, including transfers in bankruptcy.
  • Transparency of Patent Ownership:  Suggests requiring all patent ownership transfers to be recorded in the Patent Office and identify the real party in interest.
  • Injunctive Relief for FRAND Encumbered Patents: Suggests that SSOs clarify availability of injunctive relief–such as when prospective licensee does not accept independent adjudication of FRAND or there is no other recourse to SEP holder–but could not reach unanimous agreement on the scope of any limits on injunctive relief.
  • Sharing Information Between SSOs and Patent Offices:  Suggests that SSOs share draft/final standards with patent offices for prior art databases and that patent offices provide SSOs with current information on issued patent claims and pending applications, such as in existing information sharing agreements between the European Patent Office and three SSOs (ITU, ETSI and IEEE).
  • Standards in China, India and Brazil: Suggests that U.S. government entities take steps to educate, monitor and report on SEP development in these emerging economies.

Some of these topics are more controversial than others.  For example, limiting injunctive relief until after a judicial determination of RAND mirrors provisions in the FTC’s Consent Decree with Google/Motorola, which had mixed reactions.  Some also have questioned whether recording all patent ownership transfers is justified by the associated costs and burdens.  And SSOs have resisted proscribing RAND license terms in deference to bilateral negotiations that allow individual parties to define licensing terms that fit their particular circumstances, including their chosen balance of monetary and non-monetary licensing terms.

You can download the NAS report, or purchase a paper copy, from the National Academy Press website.

Please join the Essential Patent Blog and Kelley Drye & Warren LLP for a complimentary webinar on Thursday, Oct. 17 at 12:00pm Eastern to discuss the import of Judge Holderman’s recent RAND decision in the In re Innovatio IP Ventures, LLC Patent Litigation.  Judge Holderman’s October 3rd decision is only the second U.S. district court decision to determine what constitutes a proper royalty rate for a patent portfolio alleged to be essential to a standard that the patentee is obligated to license on reasonable and non-discriminatory (RAND) terms.  The webinar will review Judge Holderman’s RAND determination methodology, compare that methodology with Judge Robart’s RAND methodology from the Microsoft v. Motorola litigation, and consider some practical lessons learned based thereon.

Speakers:
David W. Long, Patent Litigation Partner, Kelley Drye & Warren LLP
Stephen R. Freeland, Commercial Litigation Associate, Kelley Drye & Warren LLP

Click here to reserve your space for the webinar or contact Alexandria Meaza at 202.945.6674.

Today the court posted the public version of Judge Holderman’s 89-page ruling on what constitutes RAND for Innovatio’s WiFi patents — posted much sooner than anticipated in our earlier post.  The court applied a modified version of Judge Robart’s methodology to determine the RAND rate to be paid by manufacturers of WiFi equipment for nineteen of Innovatio’s 802.11 standard essential patents to be “9.56 cents for each Wi-Fi chip used or sold by the Manufacturers in the United States” (much lower than the about $4 to $40 royalty Innovatio sought on each end-product using the Wi-Fi chips).  Below is a quick, rough summary of some key portions of Judge Holderman’s opinion, which reflects a fact-sensitive and case-by-case evidentiary-based approach to assessing RAND in litigation.

Recap.  Judge Holderman recapped that the parties agreed to waive their rights to a jury trial on damages in order to have a bench trial on the issue that would allow the parties to assess early settlement without first going through the expense of a liability trial on infringement and validity.  He also had determined that all asserted patent claims were essential to practice the 802.11 WiFi standard.  He then held a six-day bench trial last month to determine RAND as applied to manufacturers of WiFi equipment (did not consider at this time a RAND rate as applied to users of the equipment).

Modified Judge Robart Method.  The parties agreed that Judge Holderman should follow Judge Robart’s methodology in Microsoft v. Motorola in setting a RAND rate, with the court making some modifications based on circumstances of this case.  Judge Holderman summarized Judge Robart’s methodology by identifying the relevant modified-Georgia Pacific factors (see pages 8-10 of the opinion) and a three-step framework to determine RAND:

First, a court should consider the importance of the patent portfolio to the standard, considering both the proportion of all patents essential to the standard that are in the portolio, and also the technical contribution of the patent portfolio as a whole to the standard.  Second, a court should consider the importance of the patent portfolio as a whole to the alleged infringer’s accused products.  Third, the court should examine other licenses for comparable patents to determine a RAND rate to license the patent portfolio, using its conclusions about the importance of the portfolio to the standard and to the alleged infringer’s products to determine whether a given license or set of licenses is comparable. [emphasis added]

 The court then modified Judge Robart’s methodology to fit this case in three ways.  First, Judge Holderman would determine only a single RAND rate (not a reasonable range of RAND rates as Judge Robart did for a jury later to assess breach of the RAND obligation).  Second, the court here already determined the patents were essential (but Judge Robart had considered patents whose essentiallity was disputed, which led to diminished value where essentiality was questionable).  Thus, “unlike Judge Robart, the court will not adjust the RAND rate in light of pre-litigation uncertainty about the essentiality of a given patent.”  Third, because Judge Holderman used the WiFi chip as the royalty base and “the purpose of a Wi-Fi chip is, by definition, to provide 802.11 functionality”, then determining the patents’ importance to the 802.11 WiFi standard “determines the importance of those patents to the Wi-Fi chip” — i.e., merges the first two steps of Judge Robart’s analysis.

Hypothetical Negotiation Date.  The court used 1997 as the date of the hypothetical negotiation because that’s when the 802.11 standard was initially adopted and the approximate time the manufacturers began to sell 802.11 compliant devices.

Patent Holdup.  Judge Holderman considered the parties’ disagreement whether patent holdup was an actual serious issue.  Based on the specific evidence presented, including concerns of the prior patent owner Broadcom, he concluded that “patent hold-up is a substantial problem that RAND is designed to prevent” and the RAND rate must “reflect only the value of the underlying technology and not the hold-up value of standardization.”  But that concern is tempered by evidence of “the difficulty of distinguishing between the intrinsic value of the technology and the value of standardization”–e.g., the ease at which an innovation adopted into a standard can be interfaced with existing technology.  Thus the court will “take into account the ease of [the SEP] patents’ integration into the standard as a whole.”

Royalty Stacking.  Judge Holderman weighed arguments about royalty-stacking concerns on “aggregate royalties” if all SEP owners made similar royalty demands against the view that royalty-stacking is not a problem if patented technology is accurately valued — “stacking the royalties … merely reflects the value that is created by combining many inventions into a single product.”  He concluded that royalty stacking may be a concern, but “[p]ractically speaking” that means royalty stacking is a rough accuracy check — e.g., if court determines SEPs at issue provide 25% of a standard’s functionality, then the other SEPs for that standard comprise the remaining 75% of the standard’s value.  Further “the court will consider whether the overall royalty of all standard-essential patents would prohibit widespread adoption of the standard.”

Incentivizing Inventors.  Judge Holderman acknowledged the need to incentivize innovators to contribute their inventions to the standard.  One concern here is “reverse hold-up,” but there was no evidence of reverse hold-up in this specific case — e.g., no evidence that the manufacturers were ever offered a license or rejected an offered license.  The court also questioned whether hold-up raised “significant concerns unique to the RAND context” and, therefore he would “not give the ability of alleged infringers to force a lawsuit any special consideration in the RAND analysis beyond what it receives in a typical patent case.”  He would, however, “consider whether the proposed RAND rates provide sufficient returns” to incentive innovators to invest in new technology and make that technology available to standards.

Royalty Base.  The parties disputed what would be the “smallest salable patent-practicing unit” to form the royalty base.  Because many claims went beyond the chip to include antennas and other components as limitations, Innovatio argued that the proper base was the entire end-product as modified by a “Wi-Fi feature factor” to account for Wi-Fi’s value to a particular product–that would result in a royaty from $3.39 to $36.90 depending on the device based on Innovatio’s proposed “6% benchmark royalty rate.” The Manufacturers argued that the WiFi chip implemented all features of the 802.11 standard, so the royalty base should be the WiFi chip, which would result in a royalty from .72 to 3.09 cents per chip.

Judge Holderman ultimately adopted the Manufacturers’ WiFi chip approach based on Innovatio’s “failure of proof” to “credibly apportion the value of the end-products down to the patented features.”  For example, Innovatio had not established that its “Wi-Fi feature factor” was “based on an established method of analysis.”  Further, Innovatio’s proposed “6% benchmark rate” was not based on licenses that the court deemed comparable.

Ex Ante Alternatives.  Judge Holderman considered the presence of alternative technologies at the time the standard was adopted.  The manufacturer’s argued that even other patented alternatives were relevant, because “economic models suggest that if two patented and equally effective alternatives … charge the same royalty, the two patent holders would negotiate the price down to effectively zero.”  Innovatio argued that “no patent holder would accept a royalty that is effectively zero.”  Judge Holderman agreed that “it is implausible that in the real world, patent holders would accept effectively nothing to license their techonlogy” and such an approach “would discourage future innovators” from investing in new technology and contributing it to the standard.  Thus, “the existence of patented alternatives does not provide as much reason to discount the value of Innovatio’s patents as does the existence of alternatives in the public domain.”  Further, “the court will only consider [alternative] technology that was considered by the standard-setting body.”

No Comparable Licenses.  Judge Holderman found that “none of Innovatio’s proposed comparable licenses are appropriate for determining a royalty in the RAND licensing context.”  For example, he “agrees with Judge Robart … that the MMI-Vtech license was merely a small part of a larger licensing agreement that the parties entered into to settle significant litigation” so “the license rate is likely the product of the settlement negotiation … and not an accurate market-determined rate.”  But he also rejected the Manufacturer’s reliance on the Via licensing pool because that licensing pool “did not include high-value patents”, but in this case he determined that the Innovatio “patent portfolio is of moderate to moderate-high importance” to the 802.11 standard.  He ultimately found there were no comparable licenses.

“Top Down” Valuation Method.  Without comparable licenses, the court considered and adopted an alternative valuation method proposed by the Manufacturers’ expert — a “Top Down” approach, described as follows:

 In summary, the Top Down approach starts with the average price of a Wi-Fi chip.  Based on that average price, Dr. Leonard then calculated the average profit that a chipmaker earns on the sale of each chbip, thereby isolating the portion of the income from the sale of the chip available to the chipmaker to pay royalties on intellectual property.  Next, Dr. Leonard multiplied the available profit on a chip by a fraction calculated as the number of Innovatio’s 802.11 standard-essential patents, divided by the total number of 802.11 standard-essential patents.  Dr. Leonard also provided several alternative calculations for this step by varying the denominator of the fraction to account for varying conclusions about the value of Innovatio’s patents to the 802.11 standard.

 RAND Determination.  The court ultimately used a WiFi chip price of $14.85 and a 12.1% profit margin per chip.  The court estimated there were three thousand 802.11 SEPs, but was “cognizant of the fact that many of those 3000 patents are likely less valuable to the standard than Innovatio’s patents because their essentiality has not been judicially confirmed.”  He then plugged that into the “Top Down” model and came to 9.56 cents per WiFi chip (see pages 84-86 of the opinion for details).  He compared that to RAND rates determined in other litigations–e.g., 9.56 cents fell “comfortably within” Judge Robart’s 0.8 cents to 19.5 cents RAND range.