Judge Holderman appears to have issued his ruling on what constitutes RAND for Innovatio’s WiFi patents following his recent bench trial on the issue.  The September 27 docket entry notes his confidential ruling (under seal) as well as instructions to the parties to jointly submit by Tuesday October 8 proposed redactions to the confidential opinion for the court to review and issue a public redacted version of the opinion.  This decision is significant, whatever the outcome, because it will be only the second district court decision to provide judicial guidance on assessing what constitutes RAND (the first being Judge Robart’s April 25 decision in Microsoft v. Motorola).

Today the Federal Trade Commission made its long-awaited announcement that it has voted to seek public comment on a proposal to conduct a Section 6(b) study of patent assertion entities and their impact on innovation and competition.  The FTC proposes this study based on requests from the public and Senators as well as the FTC’s “own role in competition policy and advocacy.”  The FTC will entertain public comments on its proposal to gather information from about 25 Patent Assertion Entities (PAEs) and about 15 other entities.

Importantly, issues regarding PAEs are distinct and separate from issues relating to standard essential patents and they should not be conflated.  So why does the Essential Patent Blog care?  Two reasons.

First, the FTC’s study will include specific requests for information about whether a PAE owns patents that are subject to a standard setting organization (SSO) obligation (see Information Request C(1)(o) at page 5 of the proposal):

o.  whether the Patent (or any claims therein) is subject to a licensing commitment made to a Standard-Setting Organization and specify:
(1) all Standard-Setting Organizations to which a licensing commitment has been made;
(2) all standards to which such a licensing commitment applies;
(3) the Person(s) who made the licensing commitment;
(4) the date(s) on which the licensing commitment was made;
(5) all encumbrances, including, but not limited to, all commitments to license the Patent or any of its claims on reasonable and non-discriminatory (RAND), fair, reasonable, and non-discriminatory (FRAND), or royalty-free (RF) terms;

Second, the FTC is targeting non-innovating, non-practicing patent monetization entities.  Specifically, the FTC defines the PAEs that are the subject of its study to be “firms with a business model based primarily on purchasing patents and then attempting to generate revenue by asserting the intellectual property against persons who are already practicing the patented technology.”  The FTC distinguished such PAEs “from other non-practicing entities or NPEs that primarily seek to develop and transfer technology, such as universities, research entities and design firms.”  This focus on non-innovating, non-practicing entities may address concerns that some have raised about patent assertion entities that own SEPs and do not have the reputational concerns of actively innovating SSO members whose licensing approach will seek to foster adoption of their continued innovations in future versions of the standard.

The FTC will accept public comments about its proposed study up to 60-days after it is published in the Federal Register.

Yesterday, Judge Robart issued an Order that denied Motorola’s motion to overturn the jury’s verdict that Motorola breached its RAND obligations in dealing with Microsoft on standard essential patents (SEPs) for IEEE 802.11 WiFi standards and ITU H.264 video compression standards. Judge Robart’s ruling here indicates that assessing compliance with a RAND obligation is a case-sensitive, fact-specific inquiry, stating that “there was enough evidence on each side for the jury to decide for either party.”

Microsoft had argued to the jury that Motorola breached its RAND obligations on several grounds:

  • Offering a royalty rate that was not RAND (offered 2.25% of end product price)
  • Seeking injunctive relief against Microsoft on the SEPs
  • Not licensing Microsoft’s 802.11 chip supplier, Marvell

The jury unanimously found that Motorola breached its contractual commitment to IEEE and ITU and awarded over $14.5 million in damages. Motorola moved for judgment as a matter of law to set-aside the jury’s verdict.

In considering the JMOL motions, Judge Robart found the essence of the various RAND-breach theories to be “whether Motorola’s conduct violated the duty of good faith and fair dealing.” His jury instructions on that duty under Washington law was “the operative standard” for weighing the evidence in this case, the text of which is provided on pages 9-11 of the Order and is reproduced below (without internal citations) given its importance to Judge Robart’s decision:

     A duty of good faith and fair dealing is implied in every contract. This duty requires the parties to a contract to cooperate with each other so that each may obtain the full benefit of performance, even if the parties have different requirements under the contract. However, this duty does not require a party to accept a material change in the terms of its contract. The implied duty of good faith and fair dealings arises out of the obligations created by a contract and only exists in relation to the performance of specific contract terms. Thus, a party’s obligation is only to perform the obligations imposed by the contract in good faith. There is no “free-floating” duty of good faith and fair dealing that injects substantive terms into the parties’ contract.

There is no one-size-fits-all definition of good faith and fair dealing. Rather, the duty varies somewhat with the context in which it arises. It may violate the duty of good faith and fair dealing to, for example, (1) evade the spirit of a bargain; (2) willfully render imperfect performance; (3) interfere with or fail to cooperate in the other party’s performance; (4) abuse discretion granted under the contract; or (5) perform the contract without diligence. This list is in no way exhaustive, and indeed it would be nearly impossible to create a complete catalogue of conduct that violates the duty of good faith and fair dealing.

It is the fact finder’s job–in this case the jury–to determine whether a party breached its duty of good faith and fair dealing. Good faith performance of a contract requires being faithful to the agreed common purpose of the contract and performing consistently with the justified expectations of the other parties. On the other hand, bad faith performance involves conduct that violates community standards of decency, fairness, or reasonableness.

Washington law establishes that numerous considerations may inform a fact-finder’s determination of whether the defendant’s conduct violated the covenant of good faith and fair dealing. In particular, a review of state and federal case law reveals that a fact finder may consider: (1) whether the defendant’s actions were contrary to the reasonable and justified expectations of other parties to the contract; (2) whether the defendant’s conduct would frustrate the purpose of the contract; (3) whether the defendant’s conduct was commercially reasonable; (4) whether and to what extent the defendant’s conduct conformed with ordinary customer or practice in the industry; (5) to the extent the contract vested the defendant with discretion in deciding how to act, whether that discretion was exercised reasonably; and (6) subjective factors such as the defendant’s intent and motive.

The last consideration, subjective intent, is a subject of frequent dispute between the parties and so requires some elaboration. Several Washington cases have considered subjective factors in determining whether a party violated its duty of good faith and fair dealing. Thus, the court concludes that, under Washington law, these factors are relevant to the good faith inquiry. However, other cases have made it clear that bad motive does not equate to bad faith and good motive does not equate to good faith. To be more specific, bad motive or intent does not necessarily imply bad faith, and good motive or intent does not necessarily imply good faith. Likewise, bad motive or intent is not a prerequisite to bad faith, nor is good motive or intent a prerequisite to good faith.

Offer Letters. Motorola argued there was insufficient evidence of breach based on its initial offer letters (2.25% of end product price) because (1) Motorola followed industry custom of making an opening offer to be further negotiated; (2) the contractual purpose of the RAND obligation was not frustrated because there is no evidence that “hold up” is a problem in the “real world”; and (3) Motorola acted in accordance with the parties’ reasonable expectations. But Judge Robart found that, under the applicable JMOL standard, Microsoft presented sufficient evidence to the contrary, such as “evidence presented by Microsoft that hold up took place in this case.” Further, because “the good faith standard articulated above is multi-faceted and no single factor is dispositive,” the jury could have found breach based on other factors.

Injunctive Relief.  Motorola argued that its RAND obligation did not waive Motorola’s right to injunctive relief.  Judge Robart “recognized” the “jurisprudential debate” on whether injunctions are available for SEPs.  So he had not instructed the jury that there was such a waiver of injunctive relief, but left it to the jury to decide the ultimate issue whether Motorola breached its duty of good faith and fair dealing.  He found that Microsoft presented sufficient evidence to support the verdict, and the court could not reweigh the evidence in a JMOL motion.

Marvell.  Motorola argued that Microsoft had no standing to seek relief based on Motorola not  licensing WiFi chip maker Marvell (and instead going after Microsoft for using Marvell’s chip).  Judge Robart, however, stated that “Microsoft is not asserting Marvell’s rights and interests, it is merely presenting evidence that tends to show Motorola’s bad faith.”  He allowed the Marvell argument in order to “reflect[] the fact that Motorola’s course of conduct in marching toward a RAND license (i.e., the course of conduct subject to the good faith duty) may be complicated and multi-faceted and may involve third parties like Marvell.”  Thus the jury was not asked to find a breach “based on the Marvell evidence alone” and “Microsoft presented so much evidence with respect to opening offers, injunctive relief, and Motorola’s overall course of conduct” that the jury could find a breach “without considering any Marvell evidence at all.”

Judge Robart also rejected Motorola’s challenges as to the damages award.

Yesterday, House Judiciary Committee Chairman Robert W. Goodlatte (R-Va) released a second discussion draft of a patent reform bill directed to concerns about patent litigation abuse, which draft replaces his prior May 2013 discussion draft.  This second discussion draft includes the requirement to plead what standard setting organization obligations apply to an asserted patent, 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 reasonable accessible, the following:
(1)  An identification of each patent allegedly infringed.
…
(10) For each patent identified under paragraph (1), whether such patent is subject to any licensing term or pricing commitments through an agency or standard-setting body.

How many procedural issues can you spot (big or small)?

  • Would pleading “whether” a patent is subject to a standard-setting obligation include affirmatively pleading that a patent is not subject to such an obligation (could that be used later to argue that the patent owner was not aware of and, hence, did not comply with an existing obligation)?
  • Would this place a burden on the patent owner to establish any aspect of what it has pled, or must the accused infringer establish all elements of any FRAND-related defense?
  • Would the patent owner satisfy this provision by conditional pleading, such as pleading that a FRAND obligation exists if an asserted patent claim is construed to be essential to a standard?
  • How would an accused infringer respond in its Answer without prejudicing its
    non-infringement or FRAND-related defenses (recall that Apple’s denial that Samsung’s patent was standard essential is a basis for the ITC’s decision to enter its since disapproved exclusion order)?

This morning, the Federal Circuit will hold arguments in appeal no. 12-1548, Apple Inc. v. Motorola, Inc., which is the appeal of Judge Posner’s dismissal of both parties’ patent infringement claims for failure to prove entitlement to a remedy (either injunctive relief or damages).  This is a case that could have vast consequences for future SEP and non-SEP cases, as the Federal Circuit is being asked to address issues relating to RAND-constrained infringement damages, the availability of injunctive relief for infringement RAND-encumbered SEPs, and also the basic standards by which any patent holder must prove entitlement to a remedy.  If you’d like to catch up on some of the issues, check out our previous posts on this case:

We’ll be attending the oral argument in person, and will check back later today or tomorrow with notes on any interesting lines of questioning.  If you can’t attend in person and would like to listen to the audio of the oral argument, the Federal Circuit posts the audio of each argument on this page, typically by the afternoon.

Another week, and another standard-essential patent trial.  Whereas last week brought us the jury’s verdict finding a RAND breach in the Microsoft-Motorola case, the trial this week relates to a determination of the appropriate RAND royalty rate for Innovatio IP Ventures, LLC’s WiFi-essential patent portfolio (consisting of patents previously owned by Broadcom).

You may recall that Innovatio has undertaken a widespread licensing and litigation campaign, and that several WiFi equipment suppliers — Cisco, Motorola Solutions, Hewlett Packard, SonicWALL, and Netgear — stepped in a brought declaratory judgment actions against Innovatio.  Earlier this year, the court dismissed some of the WiFi suppliers’ unfair competition and RICO claims, and recently found the IEEE-related RAND obligations apply to all of Innovatio’s asserted patent claims.  In a bench trial beginning today in the Northern District of Illinois (Chicago) before Judge James F. Holderman, both Innovatio and the WiFi equipment suppliers will present evidence on what constitutes an appropriate royalty rate for Innovatio’s WiFi portfolio.  Such a determination could prove be a useful data point in determining whether Innovatio has violated its IEEE RAND obligations, as well as providing a potential “cap” for damages should Innovatio succeed on later proving infringement.  (As to this latter point, the court apparently believes a RAND determination might motivate the parties to settle the case — it has scheduled a court-mandated settlement conference for three days next week).

On Friday, Judge Holderman issued an order requesting briefing for the parties on a particular disputed issue that could have great relevance for future SEP-related cases (as well as many non-SEP patent cases) — the issue of the applicability of the “smallest salable patent practicing unit” royalty base limitation (as articulated by the Federal Circuit in LaserDynamics v. Quanta) to “system” or “method” claims that appear to cover devices (or methods performed by multiple devices).  Essentially, the court is trying to determine if the appropriate royalty base in this case should be the price of (1) a WiFi chip; (2) a device (e.g., a router) incorporating a WiFi chip; or (3) multiple WiFi-compliant devices — or whether the RAND royalty should be calculated in another manner.  The court’s request and the parties’ respective briefing may be downloaded from the links below.

Both Innovatio and the WiFi suppliers agree that the court should broadly apply smallest salable patent practicing unit (SSPPU) test in determining the appropriate RAND royalty rate here.  But that’s where the agreement stops.

Innovatio contends that the SSPPU test should apply to Innovatio’s asserted patent claims that cover methods or systems that span across multiple devices, and that in this case, the appropriate royalty base is the entire system.  Innovatio argues that the court should then consider the benefits to the alleged direct infringer — the network operator, such as a coffee shop, restaurant, etc. — of using the allegedly infringing system.  In this case, Innovatio states that this means considering the revenue directly obtained from offering WiFi services to customers, indirect revenue that might be associated with WiFi (such as a customer buying an additional cup of coffee), and increased business efficiencies associated with using WiFi.

On the other hand, the WiFi suppliers argue that the smallest salable unit doesn’t have to practice every single limitation of an asserted claim, asserting that the focus should be on determining the smallest unit that most closely relates to the inventive features of the patent.  In this case, the WiFi suppliers assert, the appropriate royalty base is therefore the WiFi chip that incorporates 802.11 functionality and generally sells for $2-3 per chip.  The WiFi suppliers also urge the court that if the SSPPU test does not limit the base to the WiFi chips, that the court undertake an apportionment and/or ex ante valuation analysis for each of Innovatio’s asserted patents, to ensure that Innovatio is not compensated based on the value of unpatented features or based on the patent’s mere inclusion in the 802.11 standard.

Patent-related damages law is constantly evolving.  It will be interesting to see how the court comes out on this issue, and it could certainly have ramifications for both SEP and non-SEP cases going forward.

gavel

This afternoon the RAND breach of contract case between Microsoft and Motorola went to the jury, and this evening — after just a few short hours of deliberation — the jury came back with its verdict.  According to Curtis Cartier (@curtis_cartier on Twitter), a freelance journalist who attended the trial, the jury found for Microsoft “on every question asked of them” and awarded $14.5M in damages to Microsoft.  (Note that this is approximately half of the total damages that Microsoft was seeking as compensation for Motorola’s alleged RAND breach of contract).

We can expect Motorola to try to get Judge Robart to set aside all or part of the verdict on post-trial motions, and probably appeal if that does not work (but to which court?).  In the meantime, we now have seen what appears to be the first jury verdict finding a breach of contractual RAND obligations…

  • Here’s some initial coverage on the verdict from Janet Tu at the Seattle Times, including an initial reaction from Microsoft.
  • This article from Susan Decker at Bloomberg features quotes from both Microsoft and Motorola representatives:
    • Microsoft: “This is a landmark win for all who want products that are affordable and work well together.  The jury’s verdict is the latest in a growing list of decisions by regulators and courts telling Google to stop abusing patents.”
    • Motorola: “We’re disappointed in this outcome, but look forward to an appeal of the new legal issues raised in this case.”

Also yesterday, both Microsoft and Motorola each filed motions for judgment as a matter of law (commonly known as JMOL motions), asserting that because no reasonable jury could find otherwise, Judge Robart should find in their (respective) favor on various issues.  The court has taken these motions under advisement — if you’d like to check out the motions, we’ve linked to them below.

[UPDATE]  The jury verdict form has now been made available [LINK].  The jury did in fact find for Microsoft on all counts, and did not unanimously — 8-0.  [/UPDATE]

Today, the U.S. International Trade Commission issued its delayed decision on whether it would review ALJ David P. Shaw’s Initial Determination finding no violation of Section 337 in In the Matter of Certain Wireless Devices with 3G Capabilities and Components Thereof, Inv. No. 337-TA-800.  (For some background, see our previous post on the ALJ’s Initial Determination.)  Here’s the Notice, indicating that the Commission will review the ALJ’s Initial Determination in its entirety:

[337-TA-800 Notice of Commission Decision to Review Initial Determination] 

You may recall that despite the fact that the ALJ found no violation of Section 337, both InterDigital and the Respondents (Nokia, Huawei, and ZTE) filed petitions for review on certain issues.  And because the Commission is going to review the ID in its entirety, it could potentially reverse the ALJ’s findings on many different issues, ranging from infringement and invalidity to FRAND defenses and domestic industry issues.  The end result could be a finding of a violation of Section 337 on one or more of the asserted patents, or it might be that the Commission comes to many of the same conclusions as ALJ Shaw.

Despite all the attention surrounding SEPs at the ITC, though, the Commission has not called for additional briefing on FRAND issues.  In fact, the Commission expressly stated that it is not interested in receiving submissions that address the public interest or the appropriate remedy in this case (some submissions addressing this have actually already been filed).

What the Commission seems to be most interested in, however, is the issue of domestic industry.  The ALJ had determined that InterDigital satisfied this ITC statutory requirement through its investments in licensing its patents to third parties, but the Respondents want the ITC to reverse this finding.  The ITC has requested submissions from the parties addressing this issue in particular:

Please discuss, in light of the statutory language, legislative history, the Commission’s prior decisions, and relevant court decisions, including InterDigital Commc’ns, LLC v. Int’l Trade Comm’n, 690 F.3d 1318 (Fed. Cir. 2012), whether establishing a domestic industry based on licensing under 19 U.S.C. § 1337(a)(3)(C) requires proof of “articles protected by the patent” (i.e., a technical prong).  If so, please identify and describe the evidence in the record that establishes articles protected by the asserted patents.

(Incidentally, the Federal Circuit case referenced by the Commission (see our post on that decision here) is currently the subject of a petition for certiorari to the U.S. Supreme Court.)

The current target date for completion of the investigation — the date by which the ITC will issue its Final Determination — is October 28, 2013.  Despite the fact that the Commission did not order additional briefing on FRAND issues, this will be the first post-USTR veto opportunity for the ITC to address how FRAND might affect exclusionary relief.  Stay tuned.

The week leading up to Labor Day was a relatively quiet one on the SEP litigation front, with the exception of the ongoing Microsoft-Motorola RAND jury trial in Seattle (scheduled to wrap up and go to the jury tomorrow).  Late last week, the ITC also postponed until tomorrow the decision whether to review the ALJ’s determination of no Section 337 violation in Inv. No. 337-TA-800 (InterDigital’s 3G-related complaint against Nokia, Huawei, and ZTE).  So, in the meantime, we thought it’d be worth passing along an interesting new paper from Prof. Thomas F. Cotter from the University of Minnesota Law School, who authors the excellent Comparative Patent Remedies blog.

Prof. Cotter’s new paper is titled “The Comparative Law and Economics of Standard-Essential Patents and FRAND Royalties,” and will be published in a forthcoming volume of the Texas Intellectual Property Law Journal (Prof. Cotter will also apparently be presenting the paper next week at a workshop at the University of Florida).  In the paper, Prof. Cotter argues that FRAND-encumbered SEP owners should generally not be entitled to injunctions, and instead be awarded reasonable royalties as compensation for infringement — but that wherever possible, contract and patent law (as opposed to antitrust law) should be used to enforce FRAND commitments.  Here is the full abstract:

Standard setting organizations often require their members to declare which of their patents are essential to the practice of a prospective standard, and to agree to license any such standard-essential patents (SEPs) on “fair, reasonable, and nondiscriminatory” (FRAND) terms. Among the issues that have arisen in recent disputes involving FRAND-encumbered SEPs are (1) whether a FRAND commitment creates a binding contract for the benefit of third parties, obligating the SEP owner to forgo the right to seek injunctive relief for the infringement of the SEP; (2) whether the law of remedies, or other principles of generally applicable civil law such as the doctrine of “abuse of right,” can limit the prevailing SEP owner’s ability to obtain injunctive relief; (3) the circustances under which competition law (antitrust) may play a role in resolving these matters; (4) whether the patentee is entitled to relief in the form of ongoing damages, if one or more of these bodies of law eliminates the possibility of an injunction; and (5) if so, how should courts calculate those damages. This article provides both an overview of how courts and other entities have begun to address these questions in the United States and elsewhere, and my analysis of the advantages and disadvantages of different possible approaches. I argue, among other things, first that courts generally should not allow SEP owners to obtain injunctions, but rather only ongoing damages; second, that in principle though perhaps not always in practice, it is preferable to use contract and patent law to achieve this result, as opposed to antitrust; and third, that in awarding monetary relief for the infringement of SEPs courts should apply the same methodology the use to calculate reasonable royalties generally, subject to a few modifications.

Whether you agree with Prof. Cotter or not, the paper is worth checking out.

Yesterday marked the start of the long-awaited Microsoft-Motorola RAND breach of contract jury trial, taking place before Judge James L. Robart in the Western District of Washington.  Over the next week or so, the jury will hear testimony on whether Motorola breached its IEEE- and ITU-related RAND obligations through its licensing negotiations and course of dealing with Microsoft, as well as whether Motorola owes damages to Microsoft (Microsoft is apparently seeking $23M stemming from a move of its European distribution center to avoid a German patent injunction, plus $6M in attorneys’ fees incurred in defending injunction claims).  We’ll try to keep you apprised of any interesting rulings or nuggets that come to light during the trial.  In the meantime…

  • Even on the first day, there were already some reporters tweeting live updates from the courtroom, including Janet Tu of The Seattle Times (Twitter feed @janettu) and Todd Bishop of Geekwire (Twitter feed @toddbishop).  You can read Janet’s recap of the first day here, and check out Todd’s recap here.  For those of you who are interested in following live updates on Twitter, check out the hashtag #motosoft.
  • Last week we dove a little bit into the issues raised by Motorola’s dealings with Marvell — Microsoft’s 802.11 chip supplier — and the parties’ arguments regarding whether the jury should be allowed to consider Motorola’s conduct toward Marvell as part of its breach of contract analysis, and also whether a hypothetical license between Motorola and Marvell would have exhausted Motorola’s patent rights with respect to Microsoft.  Yesterday, Judge Robart issued an order excluding Microsoft’s efforts to argue that patent exhaustion would apply.  However, Judge Robart will allow Microsoft to introduce evidence relating to Motorola’s conduct with Marvell, finding that such evidence could be relevant to Microsoft’s claim that Motorola violated its RAND-based duty of good faith and fair dealing.
  • Tim Worstall of Forbes also brings us a preview of the trial.
  • Over at AllThingsD, John Paczkowski wonders what if any effect the outcome of this trial could have on BlackBerry, speculating that a jury verdict of breach might lead BlackBerry to file a similar RAND breach of contract suit against Motorola (the parties were previously involved in a wide-ranging patent dispute from 2008-2010).
  • Lastly, FOSS Patents’ Florian Mueller argues that this jury trial wouldn’t be taking place if not for what he calls [Motorola parent company] Google’s “patent schizophrenia.”