Ericsson and Apple reportedly have settled the patent disputes between them, including those involving standard essential patents that were pending in district courts in California and Texas as well as in the U.S. International Trade Commission.  This is reported to be a 7-year agreement that involves cross-licensing as well as Apple paying royalties to Ericsson.  Details of the agreement are not available.

It is not clear what spurred the settlement.  The Federal Circuit’s recent CSIRO decision a few weeks ago on determining infringement damages for standard essential patents probably favored Ericsson’s royalty requests in those cases because it continued the Federal Circuit’s trend of favoring damages model that rely on actual real world licenses and dispels the myth that all patent damages models must always start with the smallest salable patent practicing unit (see our Dec. 3, 2015 post).  This would have allowed Ericsson to rely more heavily on its established historical licensing program to establish royalty damages against Apple, and would have hindered a smallest salable patent practicing unit damages model that defendants have sought to assert against standard essential patents (as well as patents in general).

Today, a three-judge Federal Circuit panel (Prost (author),  Dyk and Hughes) issued its awaited decision in CSIRO v. Cisco that agreed-in-part and disagreed-in-part with Judge Davis’ damages award based on patents alleged to be essential to the IEEE 802.11 WiFi standard, but which patents did not have any FRAND or other standard-setting obligation (see our July 28, 2014 post on Judge Davis’ decision).  This is an important decision that provides incremental insight into proving and determining a reasonable royalty for a standard essential patent, which includes further insight into the Federal Circuit’s first decision on this issue a year ago in Ericsson v. D-Link that involved a standard essential patent that did have a FRAND obligation under the IEEE 802.11 WiFi standard (see our Dec. 5, 2014 post on the Ericsson v. D-Link decision).

This is an important decision to read directly to catch all the nuances and import of the decision, and the incremental guidance it provides in determining a royalty rate as a matter of patent damages law for past infringement of a patent that is essential to a standard.  A few particularly important points come from the decision.

First, the Federal Circuit soundly rejected as “untenable” the accused infringer’s argument that there is a “rule” that all patent damages methodologies always must start out using the smallest salable patent-practicing unit.  The smallest salable patent practicing unit is a principle that can aid courts to determine if a damages expert’s methodology reliably apportions to the patent only the value that the patented technology provides to the infringing product and not other unpatented features.  But it is not the only approach that may be considered, and different cases present different factual circumstances that could lend themselves to different reliable methodologies.  For example, damages methodologies properly may rely on real-world comparable licenses to reliably apportion value to the patented technology, whether the royalties are based on end products or components thereof.  This decision may very well put to rest arguments that there is some “rule” requiring use of the smallest salable patent-practicing unit or that there is any problem per se in royalties being based on the end product rather than its components.

Second, the Federal Circuit clarified that the need to apportion the value of the patented technology from the value of standardization applies whether or not a standard essential patent is subject to a FRAND or other standard setting obligation.  This is based on the long-standing, fundamental principal that statutory damages for infringement under 35 U.S.C. § 284 must be based on the value of the patented invention and not other unpatented features, whether that’s other unpatented technology in an infringing  product or the value of the patent being essential to a standard. Continue Reading Federal Circuit provides guidance on royalty determination for standard essential patents (CSIRO v. Cisco)

Today, a divided three-judge panel of the Federal Circuit (Prost, O’Malley concurring and Newman dissenting) ruled that the U.S. International Trade Commission’s (ITC) authority to provide remedies for unfair acts involving importation of “articles” does not extend to electronic transmission of digital data into the United States.  In addition to its impact on the ITC’s jurisdiction over certain patent infringement matters, this case provides insight into administrative law that may be worth reading for those interested in that issue.  We will not go into that lengthy analysis here, but do provide below a summary of the infringement at issue.  Given the division among the three-judge panel and impact of this decision on the scope of the ITC’s jurisdiction and emerging technologies (e.g., transmission of digital files used to print 3D models), this decision may be subject to requests for en banc review by the entire Federal Circuit or Supreme Court review.

The patents and infringement at issue concern using different stages of teeth aligners that are progressively swapped out over time to slowly transition a patient’s teeth from an initial (e.g., crooked) position into a final (e.g., straightened) position.  ClearCorrect US (located in the U.S.) would take measurements of the patient’s initial teeth positions and transmit that data to ClearCorrect Pakistan (located in Pakistan).  That Pakistani entity would generate digital models of intermediate positions of the teeth, each intermediate position corresponding to an aligner to be made in the progressive process of moving the teeth from an initial position to a final position.  The Pakistani entity electronically transmits those digital models back to the U.S. entity, which uses those digital models to 3D print each of the physical aligners to be used by the patient.

The patent owner argued that the Pakistani entity contributed to infringement of the patents by electronically transmitting the digital models of the different teeth aligners into the U.S.:

Here, the accused “articles” are the transmission of the “digital models, digital data and treatment plans, expressed as digital data sets, which are virtual three-dimensional models of the desired positions of the patients’ teeth at various stages of orthodontic treatment” (“digital models”) from Pakistan to the United States.

The full Commission reviewed the ALJ’s decision and held that (1) the U.S. entity’s direct infringement was solely in the United States and, thus, was not a 337 importation violation within the ITC’s jurisdiction, but (2) the Pakistani entity contributorily infringed the patents by transmitting the digital models into the United States and such infringement was a 337 violation within the ITC’s jurisdiction to grant exclsionary relief.

As discussed, on appeal, the panel majority held that the electronic transmission of digital data into the United States is not an “article” of importation into the United States within the remedial authority of the ITC.  The panel majority stated that Congress is in the best position to determine whether the term “article” should be extended to cover these circumstances.

Today, the Supreme Court granted certiorari in two patent cases to review the standard for willful infringement.  The two cases, consolidated for review, are Halo Electronics, Inc. v. Pulse Electronics, Inc., et al., No. 14-1513, and Stryker Corp. et al. v. Zimmer, Inc., et al., No. 14-1520.

The grant states that it will address Question 1 presented in the Halo case, which states:

     1.  Whether the Federal Circuit erred by applying a rigid, two-part test for enhancing patent infringement damages under 35 U.S.C. § 284, that is the same as the rigid, two-part test this Court rejected last term in Octane Fitness, LLC v. ICON Health & Fitness, Inc., 134 S. Ct. 1749 (2014) for imposing attorney fees under the similarly-worded 35 U.S.C. § 285.

The Stryker case had two questions presented, which were as follows:

     1. Has the Federal Circuit improperly abrogated the plain meaning of 35 U.S.C. § 284 by forbidding any award of enhanced damages unless there is a finding of willfulness under a rigid, two-part test, when this Court recently rejected an analogous framework imposed on 35 U.S.C. § 285, the statute providing for attorneys’ fee awards in exceptional cases?

2. Does a district court have discretion under 35 U.S.C. § 284 to award enhanced damages where an infringer intentionally copied a direct competitor’s patented invention, knew the invention was covered by multiple patents, and made no attempt to avoid infringing the patents on that invention?

The Federal Circuit’s opinions subject to review are Halo Electronics, Inc. v. Pulse Electronics, Inc., 769 F.3d 1371 (Fed. Cir. 2014), in which a divided court denied en banc review., and Stryker Corp. v. Zimmer, Inc., et al., 782 F.3d 649 (Fed. Cir. 2015), in which the original Federal Circuit three-judge panel granted limited panel rehearing that issued a revised opinion on the objective recklessness prong of willful infringement.

The Fall season brings not only football, changing leaves and pumpkins, but also many program opportunities on your favorite legal issues — ours being standard essential patents.  Here are some program opportunities in the coming weeks to consider:

Today, Tuesday Oct. 13 at 2pm – 3pm Eastern, Intellectual Property Owners Association IP Chat Channel online webinar program on Standards and FRAND: Recent Developments in the U.S. and Europe.  This program will look at recent developments in the U.S. and Europe concerning standard essential patents, including the Ninth Circuit’s decision in the Microsoft v. Motorola case (see our July 31, 2015 post), the European High Court’s ruling in Huawei v. ZTE (see our July 16,2015 post), and developments in the U.S. International Trade Commission after the U.S. Trade Representative’s disavowal in 2013 of exclusionary relief in the Samsung v. Apple investigation (see, e.g., our Aug. 31, 2015 post where full Commission again dodges FRAND issues).   Speakers for this program include our own David W. Long, who is a Vice-Chair of IPO’s Litigation Committee.  More information and registration can be found at this IPO website link.

Oct. 19 – 20 in Reston, VA, The 15th Annual Sedona Conference on Patent Litigation: Improving the Efficiency of Handling Patent Litigation.  This in-person program will focus on three main areas of patent litigation: (1) patent litigation case management in light of patent legislation efforts and recent case developments; (2) litigating standard essential patent cases; and (3) coordinating parallel proceedings in district court and inter partes review in the U.S. Patent and Trademark Office.  There will be three panels discussing standard essential patent issues in the areas of patent owner and prospective licensee obligations based on standard setting commitments, determining what is a fair, reasonable and non-discriminatory royalty rate, and efficiently managing cases before district courts and the International Trade Commission.  Our own David W. Long is a Co-Chair for the overall conference and a speaker.  More information and registration can be found at this Sedona Conference website link.

Oct. 22 – 24 in Washington, DC, American Intellectual Property Law Association’s 2015 Annual Meeting.  This year’s AIPLA Annual Meeting offers two programs on standard essential patents.  On Thursday, Oct. 22, at 3:30 pm, AIPLA’s Antitrust Committee and Standards & Open Source Committee are sponsoring a joint program on Antitrust Law/Standards.  This program will focus on the intersection of antitrust law and patent law, such as the U.S. and Chinese competition agency investigations and standardization reform.  Speakers include Renata Hesse, a Deputy Assistant Attorney General in the U.S. Justice Department’s Antitrust Division, and Dina Kallay, the Director of Intellectual Property & Competition at Ericsson.  This program will be moderated by our own David W. Long, Chair of AIPLA’s Standards & Open Source Committee.  On Friday, Oct. 23, at 10:30 am, there will be a program on Antitrust Challenges: The Interface Between the Competition Law and IP Law that will address those issues being faced in Europe and China.  Speakers include Mathew Heim of Qualcomm and Mark D. Whitener of General Electric.  More information and registration for AIPLA’s Annual Meeting can be found at this AIPLA website link.

Microsoft and Google announced that they have settled there global patent disputes, including the litigation underlying the FRAND dispute that gave rise to Judge Robart’s first-of-its-kind decision on determining a FRAND royalty that was recently affirmed on appeal at the Ninth Circuit (see our July 31, 2015 post).  Accordingly, the parties filed yesterday a stipulated motion to dismiss the remainder of the case still pending before Judge Robart.

The agreement between the parties is said to resolve about 20 lawsuits in the U.S. and abroad, so its not clear how much the Ninth Circuit’s ruling in the Judge Robart case impacted the settlement.  The settlement, however, was announced after the Ninth Circuit denied the petition for rehearing of its decision and its mandate issued without a party seeking further review from the Supreme Court.  So this decision may provide another example of a court’s determination of the royalty amount leading to resolution of the litigation without the parties or the court litigating the issue whether the patent is valid and infringed, as occurred in the Innovatio litigation before Judge Holderman under his “reverse bifurcation” procedure (see our Feb. 7, 2014 post on Innovatio).

Recall that Google inherited the Judge Robart case when it acquired Motorola Mobility, including its patent portfolio and mobile phone business, the latter of which Google later sold to Lenovo while holding onto the patents.  Google’s business model is much different from the Motorola Mobility entity it acquired, which had been actively enforcing its patent portfolio against Microsoft and others before the acquisition.  Google may value and use the patents differently than Motorola had been, such as using for defensive purposes if someone targets Google’s Android platform.  Recall that the U.S. Federal Trade Commission (FTC) investigation of Google a few years ago shifted to Motorola’s assertion of standard essential patents (SEPs) after Google acquired Motorola, which led to Google/Motorola entering a consent decree with the FTC (see our January 2013 post).  Google also ended patent litigation disputes that Motorola had with Apple, which also included SEPs (see our May 19, 2014 post).  So Google’s settlement with Microsoft here is not too surprising.

Today, in SCA v. First Quality, the Federal Circuit sitting en banc ruled that the equitable doctrine of laches remains a valid defense in patent infringement actions notwithstanding the Supreme Court’s recent decision in Petrella v. MGM, 134 S. Ct. 1962 (2014), that precludes laches as a defense for copyrights.  This decision was not too surprising given the wording and history of the patent statute and laches defense as compared to copyright law.  But the Federal Circuit did make some changes as to the applicability of laches for on-going infringement after the patent suit is filed:

Specifically, as to injunctions, considerations of laches fit naturally within the eBay framework.  In contrast, Menendez v. Holt, 128 U.S. 514 (1888), and Petrella counsel that laches will only foreclose an ongoing royalty in extraordinary circumstances.

That is the key take-away from this decision.  You may find it to be a lengthy, but interesting, read on the history of the laches defense in patent cases.  We will see how the twist on applying laches post-suit for on-going infringement will develop.

With respect to an on-going royalty post-suit in the absence of an injunction, the Federal Circuit’s decision was premised on maintaining the distinction between laches, which focuses on the patent owner’s delay in filing suit, and equitable estoppel, which focuses on misleading acts by the patent owner that led the accused infringer to believe it could proceed with what later is alleged to infringe:

With respect to ongoing royalties, while the principles of equity apply, equity normally dictates that courts award ongoing royalties, despite laches.  Menendez, an influential case contrasting laches and equitable estoppel in the trademark context, guides us here.  According to Menendez, delay in exercising a patent right, without more, does not mean that the patentee has abandoned its right to its invention.  Rather, the patentee has abandoned its right to collect damages during the delay.  Equitable estoppel, on the other hand, is different–the patentee has granted a license to use the invention that extends throughout the life of the patent …

… Menendez and Petrella caution against erasing the distinction between laches and estoppel.  As Petrella stated, “the doctrine of estoppel may bar the copyright owner’s claims completely, eliminating all potential remedies.  The test for estoppel is more exacting than the test for laches, and the two defenses are differently oriented.  The gravamen of estoppel … is misleading and consequent loss.  Delay may be involved, but is not an element of the defense.  For laches, timeliness is the essential element.  For that reason, absent egregious circumstances, when injunctive relief is inappropriate, the patentee remains entitled to an ongoing royalty. [internal citations omitted]

 

Today, a divided Federal Circuit panel issued a decision that vacates district court’s decision not to permanently enjoin Samsung from selling mobile devices having features found to infringe Apple’s patents.  The majority decision breaths life back into injunctive relief against multi-component/multi-featured devices (like mobile phones) by not requiring the patent owner to show that its patented feature “drive[s] customer demand” for the infringing product in order to show a nexus between the infringement and alleged irreparable harm required for injunctive relief.  Rather, the patent owner need show “some connection” between the patented feature and consumer demand for the infringing product, which can be shown in “a variety of ways.”  For example, evidence that the patented features “is one of several features that cause consumers to make their purchasing decisions” or “makes a product significantly more desirable.”

Background

This case involves three Apple patents directed to features in touchscreen mobile devices:

  1. Slide-to-unlock image on touchscreen to unlock mobile device (the ‘721 Patent)
  2. Generating links within text upon detecting data structures, such as detecting a phone number in a text message and creating a link to dial that number (the ‘647 Patent)
  3. Automatic spell check and correction on touchscreen (the ‘172 Patent)

In 2012, Apple sued Samsung for infringing those patents (as well as others).  Samsung was found to infringe the three patents and a jury awarded Apple over $119 million in damages.  Apple then sought to enjoin Samsung from selling mobile phones or tablets with those infringing features — i.e., did not seek to enjoin sales of the mobile phone or tablets per se, just use of the infringing features in those devices.  Further, Apple proposed a 30 day “sunset period” before products would be enjoined, which time period coincided with Samsung’s representations at trial that it could quickly and easily remove the infringing features from the accused infringing Samsung devices.

But Judge Koh denied Apple’s request for a permanent injunction, finding that Apple failed to show it would suffer irreparable harm without an injunction.  Among other things, Apple had not shown that it lost sales to Samsung infringing devices, because Apple had not shown that the patented features drove customer demand for those products.

Decision

Judge Moore wrote the majority decision, which was joined by Judge Reyna, who also wrote a concurring opinion.  Judge Prost dissented.

The Federal Circuit’s standard of review here is whether the district court abused its discretion in deciding whether to grant injunctive relief based on the four eBay factors, which are whether the party seeking a permanent injunction has shown:

(1) that it has suffered an irreparable injury;
(2) that remedies available at law, such as monetary damages, are inadequate to compensate for that injury;
(3) that, considering the balance of hardships between the plaintiff and defendant, a remedy in equity is warranted; and
(4) that the public interest would not be disserved by a permanent injunction.

The majority then walked through each of the four factors, the most decisive one in this instance being whether Apple had shown irreparable harm through a “causual nexus relat[ing] the alleged harm to the alleged infringement.”

Irreparable Harm.  The patent owner satisfies this first factor by showing it has been “irreparably harmed by the infringement” based on “proof that a ‘causal nexus relates the alleged harm to the alleged infringement.'”  The majority rejected Apple’s argument that there is no causal nexus requirement when the patent owner seeks only to enjoin infringing features, rather than an entire product.  The majority explained that “[t]he causal nexus requirement ensures that an injunction is only entered … on account of a harm resulting from the defendant’s wrongful conduct, not some other reason.”  This is “entirely independent of the scope of the proposed injunction.”

But the majority found that the district court erred by requiring Apple to show that the infringing features “drive consumer demand for Samsung’s infringing products” in order to establish irreparable harm based on a causal nexus between the infringement and Apple’s lost sales.  While making such a showing would establish the causal nexus, it is not required and may be “nearly impossible from an evidentiary standpoint [to show] when the accused devices have thousands of features, and thus thousands of other potential causes that must be ruled out.”  Rather, the patent owner need only “show ‘some connection’ between the patented features and the demand for the infringing products”:

Thus, in a case involving phones with hundreds of thousands of available features, it was legal error for the district court to effectively require Apple to prove that the infringement was the sole cause of the lost downstream sales.  The district court should have determined whether the record established that a smartphone feature impacts customers’  purchasing decisions.  Though the fact that the infringing features are not the only cause of the last sales may well lessen the weight of any alleged irreparable harm, it does not eliminate it entirely.

In a footnote, the majority provide more insight into the range of ways that “some connection” between the patented feature and customer demand may be shown, which provides further insight into this issue:

As we explained in Apple III [735 F.3d 1352 (Fed. Cir. 2013)], “some connection” between the patented feature and consumer demand for the products may be shown in “a variety of ways,” including, for example, “evidence that a patented feature is one of several features that cause consumers to make their purchasing decisions,” “evidence that the inclusion of a patented feature makes a product significantly more desirable,” and “evidence that the absence of a patented feature would make a product significantly less desirable.”  These examples do not delineate or set a floor on the strength of the connection that must be shown to establish a causal nexus.  Apple III included a fourth example to demonstrate a connection that does not establish a casual nexus–where consumers are only willing “to pay a nominal amount for an infringing feaure.” (using example of $10 cup holder in $2000 car).  There is a lot of ground between the examples that satisfy the causal nexus requirement and the example that does not satisfy this requirement.  The required minimum showing lies somewhere in the middle, as reflected by the “some connection” language.

Thus the district court erred in requiring Apple to show that “the infringing features were the exclusive or predominant reason why consumers bought Samsung’s [infringing] products.”  Rather, the court should have required Apple to show that “the patented features impact consumers’ decisions to purchase the accused devices.”

The majority then went through the record in the case and concluded that Apple had made the requisite showing here:

In short, the record establishes that the [patented] features … were important to product sales and that customers sought these features in the phones they purchased.  While this evidence of irreparable harm is not as strong as proof that customers buy the infringing products only because of these particular features, it is still evidence of causal nexus for lost sales and thus irreparable harm. … Apple does not need to establish that these features are the reason customers bought Samsung phones instead of Apple phones–it is enough that Apple has shown that these features were related to infringement and were important to customers when they were examining their phone choices. [emphasis in original]

The majority thus concluded that this irreparable harm factor weighs in favor of granting Apple’s requested injunction.

Inadequate Remedy at Law.  This second factor considers whether “remedies available at law, such as monetary damages, are inadequate to compensate” for the irreparable harm caused by continued infringement.  The district court had found that Apple’s lost sales “were difficult to quantify,” but still concluded that this factor weighed against an injunction because Apple had failed to establish irreparable harm.  The majority found this was error given its ruling on irreparable harm, finding that this factor “strongly weighs” in favor of an injunction given “the extent of Apple’s downstream and network effect losses are very difficult to quantify.”

Balance of Hardships.  This third factor concerns “assess[ing] the relative effect of granting or denying an injunction on both parties.”  The district court found that this factor favored injunctive relief based on (1) the proposed injunction targeting specific features, not entire products; (2) the proposed 30-day sunset provision and (3) Samsung’s repeated argument to the jury that “designing around the asserted claims … would be easy and fast.”  The latter point raises the typical Catch-22 accused infringers encounter when arguing that a patented feature has little value in order to avoid a large damages award, and then that argument being used against them when trying to avoid injunctive relief.  The majority held that this factor strongly weighed in favor of injunctive relief:

On this record, it is clear–Samsung will suffer relatively little harm from Apple’s injunction, while Apple is deprived of its exclusivity and forced to compete against its own innovation usurped by its largest and fiercest competitor.  Given the narrow feature-based nature of the injunction, this factor strongly weighs in favor of granting Apple this injunction.

Public Interest.  This fourth and final factor requires the patent owner to show that “the public interest would not be disserved by a permanent injunction.”  The district court found this factor favors injunctive relief, because (1) “enforc[ing] patent rights … promote[s] the encouragement of investment-based risk” and (2) “an injunction may prompt introduction of new alternatives to the patented features.”  The majority agreed, and then some, stating that “the public interest strongly favors an injunction” here [emphasis in original]:

Samsung is correct–the public often benefits from healthy competition.  However, the public generally does not benefit when that competition comes at the expense of a patentee’s investment-backed property right.  To conclude otherwise would suggest that this factor weighs against an injunction in every case, when the opposite is generally true.  We based this conclusion not only on the Patent Act’s statutory right to exclude, which derives from the Constitution, but also on the importance of the patent system in encouraging innovation.  Injunctions are vital to this system.  As a result, the public interest nearly always weighs in favor of protecting property rights in the absence of countervailing factors, especially when the patentee practices his inventions.  The encouragement of investment-based risk is the fundamental purpose of the patent grant, and is based directly on the right to exclude.

The majority thus vacated the district court’s denial of an injunction and remanded the case back to the district court for further proceedings consistent with this opinion.  The majority concluded that, “[i]f an injunction were not to issue in this case, such a decision would virtually foreclose the possibility of injunctive relief in any multifaceted, multifunction technology.”

Judge Reyna Concurrence.  Judge Reyna issued a concurring opinion, noting that the decision “leaves open the door for obtaining an injunction in a case involving infringement of a multi-patented device, a door that appears near shut under current law.”  He also would have ruled that irreparable harm would arise based on “injury that the infringement causes Apple’s reputation as an innovator.”  This type of harm, when it occurs, is irreparable. The majority decision written by Judge Moore, which Judge Reyna joined, stated that it need not reach that issue given the finding of irreparable harm based on lost sales.

Judge Prost Dissent.  Judge Prost dissented, finding that “[t]his is not a close case.”  Among other things, Apple did not use the patented spell correction feature and the other two patented features were “minor features (two out of many thousands) in Apple’s iPhone.”  The record does not show “clear error” in the district court’s factual findings underlying its decision to deny injunctive relief.

On Friday, the U.S. International Trade Commission issued a Notice on its review of Judge Essex’s decision in the InterDigital v. Nokia investigation and found that Nokia did not infringe InterDigital’s 3GPP patents (see our May 12, 2015 post on Judge Essex’s decision).  Recall that, in granting partial review of Judge Essex’s decision, the Commission focused on receiving comments on both a claim construction estoppel issue and FRAND issues (see our June 26, 2015 post).  The Commission’s decision was based on the claim construction issue preclusion issue without commenting on the FRAND issues presented, stating:

[T]he Commission finds that issue preclusion applies with respect to the proper construction of the claim limitation “successively [transmits/transmitted] signals” based on the Commission’s determination in [the ] Inv. No. 337-TA-868, which relies substantively on the Commissions’ determination in [the] Inv. No. 337-TA-800, as affirmed by the United States Court of Appeals for the Federal Circuit (InterDigital Commc’ns, Inc. v. Int’l Trade Comm’n, 2015 WL 669305 (Fed. Cir. FEb. 18, 2015)).  The Commission further finds its prior constructions of the claim limitation “successively [transmits/transmitted] signals” in the 868 and 800 investigations are persuasive authority which the Commission should apply uniformly to the asserted patents.

The Commission also finds that issue preclusion requires a finding of non-infringement with respect to the asserted claims of the ‘966 and ‘847 patents, and that the evidence in the record independently supports a finding of non-infringement with respect to the claim limitation “successively [transmits/transmitted] signals as previously construed by the Commission in the 868 investigation.

So the investigation is now terminated.

The Commission noted that it had received public comments from several interested entities.  These comments are summarized below.

Chairwoman Edith Ramirez, U.S. Federal Trade Commission.  Chairwoman Edith Ramirez of the FTC, submitted Comments reflecting her view — i.e., not the official views of the FTC itself.  She took issue with Judge Essex’s allocating to the putative licensee (or “implementer”)  the burden of proving breach of a FRAND obligation, asserting that the patent holder should establish that the implementer was an unwilling licensee as part of the public interest analysis:

This investigation raises an important and unresolved question for the ITC: what standard should the ITC use to evaluate evidence concerning patent hold-up when a complainant seeks an exclusion order for alleged infringement of a FRAND-encumbered standard essential patent?  I recommend that, as part of its public interest analysis before issuing an exclusion order, the ITC require a SEP holder to prove that the implementer is unwilling or unable to take a FRAND license.  This standard would ensure that an exclusion order issues only when it would not facilitate patent hold-up and thus only when such an order would be consistent with the public interest.  It would also establish a balanced approach to ITC remedies by ensuring that a SEP holder follows through with its FRAND licensing commitment, while at the same time recognizing that both the SEP holder and the standards implementer have a duty to negotiate in good faith towards a meaningful resolution of FRAND issues.

Chairwoman Ramirez also disagreed with Judge Essex’s view that patent hold-up is not real, citing the Microsoft v. Motorola decision by Judge Robart and the Realtek v. LSI decision by Judge Whyte as examples that “the danger that bargaining conducted in the shadow of an exclusion order will lead to patent hold-up is real.”  (see our May 1, 2013 post and Feb. 27, 2014 post for summary of the FRAND determinations in the Microsoft and Realtek decisions, respectively).  Thus, she would require the patent holder to show that the implementer is an unwilling licensee, and she provided some examples of how the patent holder would show that:

A SEP holder may demonstrate an implementer’s unwillingness in a number of ways.  First, an implementer may be unwilling if it affirmatively demonstrates that it will not negotiate with the complainant.  An implementer may also be unwilling if it engages in a “constructive refusal to negotiate a FRAND license with the SEP owner or refusal to pay what has been determined to be a FRAND royalty.”  For example, this may occur when an implementer refused to license the patent holder’s FRAND-encumbered SEPs unless it also obtains a license to the patent holder’s differentiating patents, or insists on terms that are clearly outside a reasonable interpretation of FRAND.  When there is a dispute between the parties about what terms are FRAND terms, the meaning of FRAND must first be determined by a neutral adjudicator in order for the implementer’s offer to be evaluated in the context of a FRAND range.  An implementer may be unable to take a license if its is bankrupt, or otherwise financially unable to satisfy the terms of a FRAND license.  Finally, an exclusion order may be in the public interest when the respondent is outside the jurisdiction of the United States District Courts or is otherwise judgment-proof.

Chairwoman Ramirez also recommended that, if a FRAND rate is determined during an ITC investigation, “the ITC delay the effective date of Section 337 remedies and provide parties an opportunity to execute a FRAND license.”

She indicated that an implementer may be a willing licensee if it “commits to be bound by terms that either the parties themselves will determine to be FRAND, or that will be determined by neutral adjudication,” such as by the implementer “instituting a declaratory judgment action or other proceeding in which a court will set FRAND terms.”  She also indicated that a respondent should be able to “present[] affirmative defenses, including arguments about non-infringement, invalidity, or unenforceability” without “waiv[ing] the alternative position that … the patent is a SEP and hence the SEP holder’s FRAND commitment applies.”

Commissioner’s Ohlhausen and Wright, U.S. Federal Trade Commission.  Commissioners Ohlhausen and Wright of the FTC submitted Comments with a very different view from Chairwoman Ramirez.   They do not recommend “presum[ing] patent holdup is prevalent” and, instead, recommend following Judge Essex’s “evidence-based approach to the public interest inquiry.”  They approach the issue from an imperical, evidentiary economics point of view that patent hold-up is not a widespread probability in all instances, even if a theoretical possibility in some.  Their introduction, reproduced below, summarizes their key points:

The ITC should not begin its analysis by initially imposing upon the SEP holder the burden of proving that the accused infringer is unwilling or unable to take a license on FRANd terms.  This approach presumes patent holdup is frequent and results in significant negative consequences for competition and innovation.  Such a sharp departure from the current state of the law requires substantiation in the form of robust and reliable empirical evidence.  However, the data simply do not support such a presumption.  Beyond lack of empirical support, the proposed approach is contrary to sound economic analysis, would be contrary to the United States Trade Representative’s (USTR’s) directive in the Samsung matter, and would create a conflict between the standard imposed by the ITC and that required by federal courts.  It would also threaten to deter participation in standard setting by, among other things, encouraging reverse holdup and holdout, thereby depriving consumers of the substantial procompetitive benefits of standardized technology.

There is no empirical evidence to support the theory that patent holdup is a common problem in real world markets.  The theory that patent holdup is prevalent predicts that the threat of injunction leads to higher prices, reduced output, and lower rates of innovation.  These are all testable implications.  Contrary to these predictions, the empirical evidence is not consistent with the theory that patent holdup has resulted in a reduction of competition.  To the contrary, wireless prices have dropped relative to the overall consumer price index (CPI) since 2005, output has grown exponentially, features and innovation continue at a rapid pace, and competition between mobile device manufacturers has been highly robust with meaningful entry over time.

Recognizing the theoretical nature of holdup concerns, federal courts, including the United States Court of Appeals for the Federal Circuit, have held that concerns about holdup must be proven, and that accused infringers must bear the burden of demonstrating that the patent holder used injunctive relief to gain undue leverage and demand supra-competitive royalties.  Likewise, in an August 3, 2013 disapproval letter in the Samsung matter, the USTR instructed the ITC to “make explicit findings” to the extent possible on the presence or absence of patent holdup or reverse holdup in each particular case when conducting the public interest inquiry.  Any proposal to presume the existence of holdup contradicts the decisions of federal courts and the USTR’s directive.

(see our Aug. 3, 2013 post for a summary of the USTR’s directive in the Samsung v. Apple ITC investigation referenced above).

The Commissioners also provide some insight into the difference between “holdup”, “reverse holdup” and “hold out”, stating:

Holdup requires lock-in, and standard-implementing companies with asset-specific investments can be locked in to the technologies defining the standard.  On the other hand, innovators that are contributing to a standard-setting organization (SSO) can also be locked-in if their technologies have a market only within the standard.  Thus, incentives to engage in holdup run in both directions.  There is also the possibility of holdout.  While reverse holdup refers to the situation when licensees use their leverage to obtain rates and terms below FRAND, holdout refers to licensees either refusing to take a FRAND license or delaying doing so.

Ericsson.  Ericsson had submitted Comments that favored Judge Essex’s evidentiary-based approach and recognition that “FRAND licensing places obligations on both” innovators and implementers.  Thus, “threats posed by either hold-up or reverse hold-up, should be evaluated based on evidence; mere conjecture regarding FRAND issues should not preclude the entry of an otherwise appropriate exclusion order.”  Ericsson also asserts that “[s]peculation regarding the impact of an exclusion order on the parties’ future negotiations shoudl play no role in the public interest analysis,” agreeing with Judge Essex that a district court action for breach of contract would provide a remedy if the patent holder breaches its obligation to license on FRAND terms after an exclusion order is entered.

Ericsson asserts that the patent holder’s “willingness to accept an arbitral determination of FRAND terms reflects an absence of hold-up.”  In contrast, “delaying tactics in negotiating indicate the presence [of] reverse hold-up.”  Ericsson also asserts that whether a patent covers a significant or minor portion of an accused device should not impact the grant of an exclusion order, because the FRAND obligation applies even after an exclusion order is entered and, “to the extent that the portion of the device that is covered by the claims is standard-essential, the FRAND commitment ensures fair and reasonable licensing terms commensurate with the value of the covered portion.”

Intel, Dell and Hewlett-Packard.  A joint submission of Comments was made by Intel, Dell and Hewlett-Packard that take a more implementer-oriented approach with concerns that standardization may confer unearned market power to SEP holders and that the public interest requires limiting exclusionary relief absent “extraordinary circumstances.”  They summarized their view as follows:

[T]he public interest generally precludes an exclusion order on FRAND-encumbered SEPs, except in limited circumstances, including when: (1) the respondent refuses to accept (or unjustifiably delays in accepting) a license on terms that have been independently determined to be FRAND-compliant by a court or binding arbitrator in a final, non-appealable judgment; (ii) the respondent is unable due to financial distress to pay a FRAND royalty; or (iii) the patentee has no ability to assert an infringement claim against the importer or its customer, such that in rem jurisdiction over imported goods in an ITC action is the only practical option that the patentee has to prevent continued infringement.

J. Gregory Sidak of Criterion Economics.  J. Gregory Sidak, Chairman of Criterion Economics, submitted Comments in response to those submitted by Chairwoman Ramirez of the FTC.  He states that Chairwoman Ramirez’s “proposal that the ITC make the SEP holder bear the burden of proving an implementer’s unwillingness is problematic and misguided.”  His discussion uses a hypothetical licensing transaction where there is a reasonable range of FRAND royalty rates, where focusing on whether the SEP holder accepted the implementer’s offer (or counter-offer) “would grant the implementer the right to obtain a FRAND rate at the lower bound of the FRAND range” that results in “a massive wealth transfer from SEP holders to implementers.”

He further states that “the Chairwoman’s presumption that patent holdup routinely occurs in the real world has no support in economic theory or empirical fact.”  Further, “if one assumes that patent holdup might occur, one should consider that the symmetric risk of reverse holdup might also occur.”  Placing the burden on the patent holder to establish reverse holdup, as Chairwoman Ramirez suggests, is an “asymmetric treatment of the patent-holdup conjecture and the reverse-holdup conjecture [that] has no basis in economic theory.”  Further, presuming that patent holdup exists in every case is contrary to the Federal Circuit’s instructions in Ericsson v. D-Link that “a jury may be instructed that a theoretical conjecture of patent holdup can affect the computation of a FRAND royalty only when empirical evidence supports that conjecture.” (see our Dec. 5, 2014 post summarizing Ericsson v. D-Link)

Today, the Federal Circuit sitting en banc changed direction again on § 271(a) direct infringement and ruled that Limelight was liable for direct infringement based on substantial evidence supporting the jury verdict of infringement where the “alleged infringer conditions participation in an activity or receipt of a benefit upon performance of a step or steps of a patented method and establishes the manner or timing of that performance.” (this overrules the panel decision in this case that was the subject of our May 13, 2015 post).  This is a relatively short–and very important–decision, so we highly recommend reading it in its entirely.  But we also provide a short summary below.

Background

We provided background on this case in our prior posts as this case made its way from the Federal Circuit, to the Supreme Court, and back to the Federal Circuit (see our May 13, 2015 post, June 2, 2014 post, Jan. 10, 2014 post and Aug. 31, 2013 post).

Patent owner Akamai sued Limelight in 2006 for infringing a patent with method claims directed to delivering content over the Internet.  Limelight performed all steps of a method claim except that Limelight’s customers performed the claimed method steps of “tagging” and “serving”.  The trial court instructed the jury that Limelight would be responsible for the customer’s performing those steps if Limelight directs or controls its customers’ activities.  The jury found that Limelight infringed, which the court initially confirmed, but later set aside after the Federal Circuit’s decision in Muniauction v. Thomson Corp., 532 F.3d 1318 (Fed. Cir. 2008).

On appeal, the Federal Circuit took the matter en banc and decided not to review the direct infringement issue, because there was indirect infringement if all steps are performed even if by different actors — i.e., even if no § 271(a) direct infringement attributed to a single actor. (see our Aug. 31, 2012 post).  The Supreme Court reviewed and reversed that decision, holding that § 271(a) direct infringement attributable to a single person is required for indirect infringement. (see our Jan. 10, 2014 post and June 2, 2014 post).  The Supreme Court raised questions whether the Federal Circuit’s standard for multiple-actor direct infringement (also called “divided” or “joint” infringement) was proper, but left that issue for the Federal  Circuit to sort through on remand.  On remand, the three-judge panel endorsed the prior divided infringement standard of direct infringement and found that Limelight was not liable for infringement. (see our May 13, 2015 post).

Decision

The Federal Circuit stated there were two instances where an entity will be held responsible as a § 271(a) direct infringer for steps of a method claim performed by others:

(1) where that entity directs or controls others’ performance, and

(2) where the actors form a joint enterprise.

But the court further counseled that “Section 271(a) is not limited solely to principal-agent relationships, contractual arrangements, and joint enterprises,” leaving the issue up for further case-by-case development.  Thus, the ultimate consideration is “whether all method steps can be attributed to a single entity.”

“Directs or Controls”.  The Federal Circuit looks to “general principles of vicarious liability” to determine “if a single entity directs or controls the acts of another.”  The court ruled that this is a question of fact that, when tried to a jury, is reviewed under the deferential “substantial evidence” standard.  The court identified three circumstances where a single actor is liable for § 271(a) direct infringement for directing and controlling the actions of another:

First, where that single actor “acts through an agent (applying traditional agency principles.”

Second, where that single actor “contracts with another to perform one or more steps of a claimed method.”

Third, as in this case, “when an alleged infringer conditions participation in an activity or receipt of a benefit upon performance of a step or steps of a patented method and establishes the manner or timing of that performance.”

“Joint Enterprise”.  The court also held that, “where two or more actors form a joint enterprise, all can be charged with the acts of the other, rendering each liable for the steps performed by the other as if each is a single actor.”  The court ruled that this, too, is a “question of fact” reviewed under the deferential “substantial evidence” standard when tried to a jury.

The court held that such joint enterprise liability for § 271(a) direct infringement requires proof of four elements:

(1) an agreement, express or implied, among the members of the group;

(2) a common purpose to be carried out by the group;

(3) a community of pecuniary interest in that purpose, among the members; and

(4) an equal right to a voice in the direction of the enterprise, which gives an equal right of control.

In this case, the Federal Circuit found Limelight liable as a § 271(a) direct infringer under the “directs and controls” test, rather than this “joint enterprise” test.

 Standard Applied to This Case.  The Federal Circuit ruled that substantial evidence supported the jury verdict of infringement based on evidence that Limelight “condition[s] use of the content delivery network” upon its customers performing the “tagging” and “serving” steps and that Limelight “establish[es] the manner or timing of performance” of those steps by the customer.

First, Limelight’s standard contract requires its customers to perform the tagging and serving steps if they want to use Limelight’s service: “if Limelight’s customers wish to use Limelight’s product, they must tag and serve content.”

Second, evidence supports finding that Limelight established the manner or timing of its customers performance.  Limelight sends a welcoming letter telling customers that a Limelight Technical Account Manager will lead implementation of Limelight’s services, and includes a “hostname” that Limelight assigns to the customer to integrate into the customer’s webpages, which integration includes the “tagging” step.  Limelight provides “step-by-step instructions” that customers must follow to use the service and Limelight provides guidelines to customers with further information on tagging content.  Further, Limelight’s engineers “continuously engage with customers’ activities”, including installation, testing and availability when problems arise.

In sum, Limelight’s customers do not merely take Limelight’s guidance and act independently on their own.  Rather, Limelight establishes the manner and timing of its customers’ performance so that customers can only avail themselves of the service upon their performance of the method steps.

The court thus concluded that substantial evidence supported the jury’s verdict “that all steps of the claimed methods were performed by or attributable to Limelight.”  The court then remanded the case to the Federal Circuit three-judge panel “for resolution of all residual issues consistent with this opinion.”