A jury recently found that Huawei willfully infringed four patents owned by PanOptis alleged to be essential to mobile cellular standards and subject to a FRAND commitment as well as a fifth patent related to the H.264 video compression standard but was not subject to a FRAND commitment.   The jury awarded a reasonable royalty of $7.7 million for the single patent without a FRAND commitment, which was almost three times higher than the combined royalty awarded for the four FRAND-committed SEPs of $2.8 million.  But it is not clear at this point whether that difference is due to the FRAND-commitment or to the relative value of the patented technologies to the infringing products.

Prior to trial, the court also showed judicial restraint by limiting the case to determination of FRAND commitments on U.S. patents as a matter of U.S. law and not opining on FRAND commitments for foreign patents under foreign law.  For example, the court refused to enjoin a Chinese antitrust action based on alleged FRAND violations for related Chinese SEPs.  And the court refused to include in this case a determination of whether there was infringement of related foreign SEPs and whether licensing offers on those foreign SEPs complied with the FRAND commitment under foreign law.

The next steps in this case involves the court holding a bench trial (i.e., trial before the judge, not a jury) on whether PanOptis licensing offers complied with its FRAND commitments.  Further, the parties will file the usual post-trial motions that may challenge the jury verdict and ultimate bench trial ruling.  Those further filings may provide more insight into the case.  So stay tuned. Continue Reading Jury awards running royalty for willfully infringed SEPs subject to FRAND commitment (Optis v. Huawei)

Judge Gilstrap recently issued an Order rejecting the equitable defense of patent misuse in a case involving standard essential patents (SEPs) subject to a commitment to license them on fair, reasonable and non-discriminatory (FRAND) terms.  Motorola Mobility LLC (Motorola) alleged that Saint Lawrence Communications LLC (St. Lawrence or SLC) was guilty of patent misuse by, among other things, requiring Motorola to take a worldwide license to FRAND-committed SEPs, using the threat of injunctive relief in Germany to coerce licensing of those SEPs, entering different license terms with different licensees and not disclosing effective royalties from licensing the SEPs under a patent pool when negotiating individual licenses.  This decision is another indication that competition law claims asserted against SEPs may not prevail when patent owners have followed traditional patent enforcement and licensing strategies or even if they breach of a FRAND commitment.  Rather, there must be something more egregious or deceptive with the particular patent owner’s conduct at issue to give rise to competition law claims that are required to address harm to competition beyond harm that can be addressed by more traditional patent or contract law remedies — e.g., a contract remedy for breach of a FRAND commitment or limits on patent remedies based on a FRAND commitment. Continue Reading Judge Gilstrap rejects patent misuse defense to alleged FRAND-committed SEPs (St. Lawrence v. Motorola Mobility)

Yesterday, the U.S. International Trade Commission (ITC) gave Notice that it has determined to review in part ALJ Essex’s decision concerning claim construction and standard essential patent (SEP) issues in the investigation whether Nokia infringes InterDigital 3GPP patents (see our May 12, 2015 post on ALJ Essex’s decision).  The ITC provided a list of questions to which the parties and interested persons should submit comment by July 10, 2015 (limited to 125 pages not counting attachments) and reply submissions by July 20, 2015 (limited to 75 pages not counting attachments).

Claim Construction Estoppel Issue.  Recall that this case has a rather lengthy history that includes a trip to the Federal Circuit and remand back for the instant remand proceedings.  ALJ Essex found that, for procedural reasons based on the authorized scope of the remand proceedings, the remand proceedings were bound by claim constructions entered earlier in the investigation as to claim limitations “successively [transmits/transmitted] signals” notwithstanding those terms being construed differently in other related litigation where non-infringement or no violation was found (see our Feb. 19, 2015 post on the 800 investigation and Sep. 2, 2014 post on the 868 investigation).  The ITC has decided to review this claim construction issue and posed three specific questions on it:

  1. Have Respondents waived any reliance on the application of the Commission’s construction in the 800 and 868 investigations of the limitation “successively [transmits/transmitted] signals?”
  2. Do the Commission’s determinations in the 800 and/or 868 investigation constitute an intervening change of controlling legal authority such that the Commission should apply the construction of “successively [transmits/transmitted] signals” as found in those investigations in determining infringement in this investigation?
  3. What evidence exists in the record of this investigation with respect to whether the accused products satisfy the “successively [transmits/transmitted] signals” limitation as construed by the Commission in the 800 and 868 investigations?

SSO-Obligation (FRAND) Issues.  Recall that ALJ Essex found that Respondents had not shown that the patent owner’s standard setting organization (SSO) obligation had been triggered by a showing that the patents actually were essential to the ETSI standard at issue.  Further, he found that ETSI had rejected limiting exclusionary relief and deferred to resolution in courts, so the patent owner seeking exclusionary relief in itself did not violate its SSO obligation.  He found the focus should be on the particular SSO obligation at issue, rather than undue reliance on vague public policy concerns about patent holdup and there was no evidence of actual patent holdup in this case.  ALJ Essex also found that the accused infringers had committed patent hold-out after they lost a non-infringement ruling on appeal in this case, at which time they should have negotiated a license and there was no showing that the patent owner’s offered license in negotiation was not fair, reasonable and non-discriminatory (FRAND) under the SSO obligation.

The ITC has posed nine questions on the SSO-obligation (or FRAND) issues:

4.  Please state and explain your position on whether, for purposes of the Commission’s consideration of of the statutory public interest factors, InterDigital has in effect asserted that the patents in question are FRAND-encumbered, standard-essential patents.

5.  Please state and explain your position on whether InterDigital has offered Respondents licensing terms that reflect the value of its own patents.

6.  What portion of the accused devices is allegedly covered by the asserted claims?  Do the patents in question relate to relatively minor features of the accused devices?

7.  Please state and explain your position on the legal significance of InterDigital’s alleged willingness to accept an arbitral determination of FRAND terms with respect to the patents in question.

8.  Please state and explain your position on the legal significance of InterDigital’s alleged unwillingness to obtain a judicial determination of FRAND terms with respect to the patents in question.

9.  Please state and explain your position on whether Respondents have shown themselves willing to take licenses to the patents in question on FRAND terms.

10.  Do Respondents’ alleged delaying tactics in negotiating with InterDigital provide sufficient evidence of reverse hold-up, regardless of Respondents’ offers to license only InterDigital’s U.S. patent portfolio?

11.  Do Respondents’ licensing counteroffers satisfy the requirements of the ETSI IPR Policy?

12.  Please state and explain your position on whether the RID [i.e., ALJ Essex’s final initial determination on remand] equates patent infringement and reverse hold-up.

These questions and the ITC’s ultimate resolution of the issues promises to result in one of the most important ITC decisions in litigating SEPs in the ITC, and perhaps elsewhere.

We previously reported on a scheduling order governing FRAND and damages-related discovery in InterDigital’s two patent infringement lawsuits pending in Delaware against ZTE and Nokia Inc., Nokia Corp. and Microsoft Mobile Oy (MMO), respectively.  On Friday, the court entered a modified, agreed-to scheduling order that extends the time to complete such discovery by approximately seven (7) months.

As background, trials on liability were bifurcated from trials on damages and the defendants’ FRAND-related affirmative defenses.  ZTE’s liability trial on three (3) of InterDigital’s asserted patents occured first and, last Fall, a Delaware jury found that ZTE’s accused 4G mobile devices infringed those patents.  ZTE asserts a number of FRAND-related affirmative defenses to this finding of infringement.  A second Delaware jury later found that ZTE’s accused 4G mobile devices did not infringe a fourth patent asserted by InterDigital.

In January of this year, the court entered a scheduling order setting December 4, 2015 as the deadline for completing FRAND and damages-related discovery in both the ZTE and Nokia/MMO cases, with the trial on these issues tentatively scheduled to take place in the Spring of 2016.

The liability trial against Nokia/MMO was scheduled to occur in April of this year.  However, that trial was postponed until November.  As a result of this change in Nokia/MMO’s liability trial date, the parties proposed, and, on Friday, the court entered, a scheduling order modifying the FRAND and damages-related discovery period and target trial dates as follows:

  • Completion of fact discovery related to FRAND/damages:  Deadline moved from August 21, 2015 to March 4, 2016;
  • Disclosure of expert testimony for party with burden of proof:  Deadline moved from September 18, 2015  to April 15, 2016;
  • Supplemental/rebuttal expert disclosure:  Deadline moved from October 16, 2015 to May 13, 2016;
  • Reply expert reports from party with burden of proof:  Deadline moved from November 9, 2015 to June 9, 2016;
  • Completion of expert discovery:  Deadline moved from December 4, 2015 to July 13, 2016;
  • Joint letter outlining any issues the parties believe must be addressed at the status conference:  Deadline moved from December 8, 2015 to July 20, 2016;
  • Status conference:  Moved from December 15, 2015 to August 22, 2016;
  • Dispositive motions and deadline to object to expert testimony:  Moved from December 29, 2015 to August 5, 2016;
  • ZTE target trial date:  Moved from March 21, 2016 to October 17, 2016; and
  • MMO/Nokia target trial date:  Moved from April 11, 2016 to November 14, 2016.

 

 

 

Following the prior notice of decision (see our Apr. 27, 2015 post), the Public Version is now available of Administrative Law Judge (ALJ) Essex’s Initial Determination On Remand that Nokia mobile phones infringe InterDigital’s patents related to the 3rd Generation Partnership Project (3GPP) standard and that are subject to commitments the patent owner made to the European Telecommunications Standards Institute (ETSI).  Among other things, Judge Essex found that “there is no evidence of patent hold-up, that there is evidence of reverse hold-up, and that public interest does not preclude issuance of an exclusion order.”

Summary

This is an important decision concerning litigating standard essential patents (SEPs) in the U.S. International Trade Commission (ITC or the Commission) as well as litigating SEPs in general.  We provide a summary of the decision below, but highly recommend reading the decision itself to understand its full import.

On the standard essential patent (SEP) issues, ALJ Essex found that the accused infringers had not shown that the patents were essential to the standard or otherwise triggered the patent owner’s commitment to the standard setting organization (SSO).  The accused infringers had jeopardized this assertion that the patents were essential to the standard by consistently arguing in the proceedings that the patents were not infringed.  The patent owner’s statements to the SSO did not show that the patents actually were essential, because they were conditional commitments if the patents were essential.  Further, the patents could be infringed even if they were not essential to the standard, so the finding of infringement itself did not establish that the patents were essential to the standard.

ALJ Essex found that the particular agreement that the patent owner made with the SSO was controlling on whether that commitment had been breached.  In this case, ETSI specifically considered and rejected having limits on exclusionary relief and deleted its prior requirement that parties mediate differences, deferring instead to resolution in the courts under the relevant national laws if parties cannot agree on licensing terms.

He also found that general public policy concerns about potential abuse of SEPs, such as patent holdup, would not override the actual SSO agreement at issue or the need for actual evidence that the patent owner was abusing its SEPs in this particular case.  Further, the accused infringes had the burden of proof on all facts supporting its SEP arguments.  In that regard, the accused infringers’ witnesses provided no opinion as to what would be appropriate fair, reasonable and nondiscriminatory (FRAND) licensing terms, a range of reasonable FRAND terms or whether the patent owner had not offered FRAND terms in this case.  Further, there was no evidence presented that patent holdup had occurred in any case notwithstanding the intense scrutiny given to the issue in recent years by several government agencies, law professors, economist and other professionals, leading ALJ Essex to conclude: “Perhaps now we can relax our guard a little.”  Further, the threat or even entry of an exclusion order did not per se violate the SSO agreement and would not necessarily result in non-FRAND terms even if the royalty rate negotiated after an exclusion order is entered may be higher than were no exclusion order entered.

ALJ Essex found that the accused infringers had not committed patent holdout during the time period that the initial determination in this case had determined that the patents were not infringed.  But that changed when the non-infringement finding and supporting claim construction were reversed by the Federal Circuit on appeal.  After that time, the accused infringers should have known they infringed and sought a license.  There was no showing that the patent owner’s license offers, which were not accepted, were not FRAND.  Further, the accused infringer’s delay in obtaining a license benefitted it based on the passage of time removing past infringement from the six-year damages limitation as well as putting a downward pressure on the royalty rate that the patent owner could expect in a negotiated license.

In sum, he found no evidence or other reason raised that would preclude entering an exclusion order in this case.

Background

The Commission instituted this investigation in September 2007.  In 2009, the Commission affirmed Chief Administrative Law Judge (ALJ) Luckern’s determination that the two related patents-in-suit were not infringed: U.S. Patent No. 7,190,966 (the ‘966 Patent) and U.S. Patent No. 7,286,847 (the ‘847 Patent).  In 2012, the U.S. Court of Appeals for the Federal Circuit (the Federal Circuit) reversed the ITC’s construction of certain claim terms as well as its finding of no infringement and the investigation was returned to the ITC.  In March 2014, the Commission issued a revised remand opinion and order that remanded certain issues to the ALJ, including the following:

1. … [M]ake findings and issue a remand initial determination (“RID”) concerning: …

b.  whether the 3GPP standard supports a finding that the pilot signal … satisfies the claim limitation “synchronize to the pilot signal” as recited in the asserted claim of the ‘847 patent …

3.  The investigation is further remanded for the assigned administrative law judge to:
a.  take evidence concerning the public interest factors as enumerated in sections 337(d) and (f);
b.  take briefing on whether the issue of the standard-essential nature of the patents-in-suit is contested;
c.  take evidence concerning and/or briefing or whether there is patent hold-up or reverse hold-up in this investigation …

On remand, the investigation was assigned to ALJ Essex who held an evidentiary hearing in January 2015.

The accused products are Nokia mobile phones that operate on Wideband Code Division Multiple Access (WCDMA) networks and comply with the 3GPP WCDMA standard.  Those patents were subject to declarations filed with the European Telecommunications Standards Institute (ETSI), based in France.  During the course of the investigation, Nokia’s mobile phone business was sold to Microsoft Mobile Oy (MMO), which also is a respondent in this investigation.

ETSI IPR Policy.  The relevant declarations submitted under ETSI’s intellectual property rights (IPR) policy and the IPR policy itself include the following provisions considered in the investigation (with bold emphasis provided by ALJ Essex in his written opinion):

IPR INFORMATION STATEMENT
In accordance with Clause 4.1 of the ETSI IPR Policy the Declarant and/or its AFFILIATES hereby informs ETSI that it is the Declarant’s and/or its AFFILIATES’ present belief that the IPR(s) disclosed in the attached IPR Information Statement Annex may be or may become ESSENTIAL in relation to at least the ETSI Work Item(s), STANDARD(S) and/or TECHNICAL SPECIFICATION(S) identified in the attached IPR Information Statement Annex.

The Declarant and/or its AFFILIATES (check one box only):
__ are the proprietor of the IPR(s) disclosed in the attached IPR Information Statement Annex.
__ are not the proprietor of the IPR(s) disclosed in the attached IPR Information Statement Annex.

IPR LICENSING DECLARATION
In accordance with Clause 6.1 of the ETSI IPR Policy the Declarant and/or its AFFILIATES hereby irrevocably declares the following (check one box only, and subordinate box, where applicable):

To the extent that the IPR(s) disclosed in the attached IPR Information Statement Annex are or become, and remain ESSENTIAL in respect of the ETSI Work Item, STANDARD and/or TECHNICAL SPECIFICATION identified in the attached IPR Information Statement Annex, the Declarant and/or its AFFILIATES are prepared to grant irrevocable licenses under this/these IPR(s) on terms and conditions which are in accordance with Clause 6.1 of the ETSI IPR Policy.  This irrevocable undertaking is made subject to the condition that those who seek licenses agree to reciprocate (check box if applicable).

***

[ESSENTIAL IPR]
In simpler terms, an “essential IPR” is an IPR which has been included within a standard and where it would be impossible to implement the standard without making use of this IPR.  The only way to avoid the violation of this IPR in respect of the implementation of the standard is therefore to request a license from the owner.

***

4.3 Dispute Resolution
ETSI Members should attempt to resolve any dispute related to the application of the IPR Policy bilaterally in a friendly manner.
Should this fail, the Members concerned are invited to inform the ETSI GA in case a friendly mediation can be offered by other ETSI Members and/or the ETSI Secretariat.
However, it should be noted that once an IPR (patent) has been granted, in the absence of an agreement between the parties involved, the national courts of law have the sole authority to resolve IPR disputes.

ALJ Essex also found that ETSI use to have or considered, but later rejected, provisions barring exclusionary relief and requiring mandatory mediation to determine FRAND in lieu of court litigation:

Under the ETSI agreement, there is no duty not to seek an exclusion order.  ETSI had mandatory mediation to determine FRAND rate in 1993, and removed if from their policy.  They considered barring parties from injunctive relief, but did not do so. … [The accused infringer’s witness] Mr. Buttrick also testified that ETSI had, prior to 1994, a provision in its rules that eliminated the possibility of exclusion orders or injunctions.

 Decision

Infringement.  ALJ Essex first defined the limited scope of what was at issue in this remand proceeding, which included being bound by claim constructions already determined in this investigation notwithstanding claim constructions from other litigations.  He ultimately found that the Nokia mobile phones infringed both patents-in-suit, including reading patent claim limitations on a specific portion of the 3GPP Standard.  As is common, this portion of the public decision is fairly redacted given confidential technical disclosures.

The remaining portion of the decision focuses on several aspects of the public interest, including issues concerning any standard setting obligations.

Effect Upon Public Health and Welfare.  ALJ Essex found that the accused infringers MMO/Nokia did not address the statutory public interest factors, but instead “argue a new public interest for this case” based on patent owner InterDigital’s “possible duty to grant licenses on Fair Reasonable and Non-Discriminatory terms (FRAND), Standard Essential Patents (‘SEPs’) and the possibility of holdup.”  But he found that, even though “many professors and several government agencies” noted the possibility of holdup with SEPs, there was “no evidence” of holdup in this case.  Further, there was no evidence that the particular Nokia smartphones at issue “provide any public health and safety benefit other smart phones cannot” and evidence suggested “there will not be a shortage of smart phones … if an exclusion order should issue.”

Impact on Competitive Conditions.  The accused infringers argued that the patent owner could engage in holdup if an exclusion order was granted.  But ALJ Essex found that threat of an exclusion order might yield a higher license rate, but such a license is not necessarily “unfair unreasonable or discriminatory”:

While the threat of the exclusion order may motivate respondents to take a license at a higher rate than if they were successful in limiting the lawful remedies available to their adversary, there has been no proof that such a license would be unfair unreasonable or discriminatory.

Impact on U.S. Consumers.  ALJ Essex found that any exclusion order would not have a substantial impact on U.S. consumers. This section is fairly redacted, but includes a finding that other companies provided smart phones, including Nokia phones with WPOS (believe this stands for Windows Phone Operating System).  He also indicated that the duration of an exclusion order would be relatively short given the August 2015 date for the final determination in this investigation and expiration of the patents given their June 1996 priority dates (we assume the patents expire June 2016 based on the filing date, but without researching if terminal disclaimers or term extensions shorten or lengthen the usual 20-year term from priority date).

Whether The SEP Nature Of Patents Is Contested.  ALJ Essex found that the accused infringer’s argument about FRAND obligations arising from the patents being essential to practice the standard was undermined by their arguments “throughout the proceeding” that the patents were not infringed, stating:

[Accused infringer] MMO has contested the nature of the patents throughout the proceeding, presenting evidence at hearing and briefing in both their post-hearing brief and post hearing reply brief that they do not infringe [patent owner InterDigital’s] patents.  Nokia Corp has also argued that the products in the case do not infringe the patents.  By arguing that the products do not practice the patents, the respondents are arguing that the patents are not Standard Essential Patents.  This complicates this analysis, because if the patents in question are not SEPs, then [InterDigital] has no duty to offer a license under FRAND terms.

***

[The accused infringers] in this case have vigorously asserted that the patents in issue are not essential, but rather are not infringed.  By so claiming, they risk losing the benefit of any defense they may have under the ETSI agreement regarding FRAND rights that protect the interests of third parties.  If the patents are valid and infringed, but not SEPs, then respondents would have no rights regarding licensing under the ETSI agreement, the duty to license under FRAND terms is only triggered if the IPRs are or become and remain essential to the standard (there are other requirements as well, such as the [accused infringers] must be willing to license its portfolio to complainants).  The duty to license on FRAND terms, if there is one, is a springing duty.

ALJ Essex found that the declarations submitted to ETSI themselves “do[] not prove that patents so declared before ETSI are actually SEPs,” noting that many cases have found declared patents not infringed and that the declaration itself uses conditional language: “To the extent that the IPR(s) … are or become, and remain ESSENTIAL …” (emphasis in original).

Further, quoting favorably the ITC Staff position, ALJ Essex found that the fact that the patents are infringed does not per se establish that the patents are essential to the standard:

The Staff is of the view, however, that each of the asserted claims is infringed by Respondents’ accused products.   Thus, in this case the operation of Respondents’ accused products sheds no light on whether the asserted claims of the patents-in-suit are necessarily essential to practicing the relevant standards.  There may be circumstances in which a product may practice the 3G standard without infringing the asserted claims, or there may not.  In this investigation, the only evidence regarding the standard-essential nature of the asserted claims is [patent owner] InterDigital’s declaration to ETSI that the patents-in-suit may be essential to practicing the WCDMA standard.  While this is not a statement that the patents are actually essential, it is evidence that the patent holder believed that the patents could be standard-essential. [emphasis in original]

Accordingly, the declaration was not proof of essentiality and “there is no evidence that they have been tested or judged to be standard essential in the case.”

Importantly, ALJ Essex ruled that establishing essentiality was the accused infringers’ burden of proof, which they failed to carry, citing ITC evidentiary rules:

19 CFR S 210.37 Evidence.
(a) Burden of proof.  The proponent of any factual proposition shall be required to sustain the burden of proof with respect thereto.

ALJ Essex ruled that the public interest inquiry does not change that burden, stating “[t]he public policy issue must not be used in place of the law, nor should a party be allowed to shift the burden of persuasion in the name of public policy.”  Citing the Federal Circuit’s Ericsson v. D-Link decision (see our Dec. 5, 2014 post), he ruled that “[t]he ETSI agreement is vital, because any rights flow from the agreement” and found that “[t]here is nothing in the ETSI agreement that would shift the burden of proof in a hearing at the ITC.”  Allegations of FRAND commitment does not supersede the particular agreement at issue:

[W]e must look at the patentee’s actual FRAND commitment.  We need not be stampeded into abandoning the rule of law, or burden of proof simply because the respondants shout “FRAND”.

No Evidence InterDigital Acted In Bad Faith.  ALJ Essex found there was no evidence that patent owner InterDigital acted in bad faith in its license negotiations.  He noted his prior decision in the 337-TA-868 investigation (see our July 2, 2014 post) that found the ETSI agreement did not rise to the level of a binding contract under applicable French law given many terms and factors left open for negotiation “before the FRAND obligation is triggered.” But he further considers the issue on a contractual basis given that trend by other courts, such as the Federal Circuit in Ericsson v. D-Link.  He observed that ETSI does not set a criteria for determining FRAND, but relies on the relevant national law to determine this if the parties do not reach an agreement (citing ETSI 4.3 Dispute Resolution given in the background above).  ALJ Essex further observed that whether an offer is within a reasonable FRAND range is not known until a FRAND rate is agreed between the parties or determined by a court:

When the parties sign the letters agreeing to license their IPR at ETSI, they not only do not know what a FRAND rate is, they cannot know.  Absence agreement, there is no such rate, nor can it exist absent an agreement until a court determines the rate for the parties.  To prove a violation of FRAND, as it is defined in ETSI, there must be voluntary agreement or a trial in a district court, and only after the court determines a rate, could we look retrospectively at the negotiations and determine if the offers were within the FRAND range (FRAND contracts provide for a range of acceptable results.  While some offers could be clearly outside the range, there is no mechanism for finding the range prior to litigation).  Even then, there would be difficulty in determining if a party was acting in bad faith, because reasonable minds do differ on what may constitute a FRAND rate.

ALJ Essex noted that court rulings are giving some guidance on this, citing Judge Robart’s decision in Microsoft v. Motorola (see our May 1, 2013 post), which required SEP license offers to be “in good faith” and “found that initial offers do not have to be on RAND terms so long as a RAND license eventually issues.”  He found that, in this case, there has been no court determination whether InterDigital’s offers were FRAND and the parties had not agreed whether they were within a FRAND range.  But, even assuming they were not, “the offers demonstrate [patent owner InterDigital] was trying to reach a licensing agreement.”

No Evidence of Hold-Up By The Patent Owner.  ALJ Essex found that there was no evidence that the patent owner InterDigital was guilty of patent holdup.  He ruled that, under the Federal Circuit’s Ericsson v. D-Link decision,  the accused infringer has the burden of proof to show a violation of the FRAND duty based on evidence of actual patent hold-up.  The accused infringer’s witnesses did not identify what they would consider to have been FRAND in this case and testified that a FRAND license agreement could come in many different forms:

[Accused infringer’s witness Mr. Buttrick] stated there was no preference for any particular licensing model, that the agreement was written to allow a diverse range of licensing regimes, including both monetary and nonmonetary remuneration, licenses that included both standard essential and non-standard essential patents, that the nature and coverage of the license was completely up to the parties.

***

[Accused infringer’s witness Dr. Shampine] testified that he did not reach the conclusion that [patent owner InterDigital] had violated a FRAND commitment in this case; that he had concerns that there is holdup, and that if an exclusion order were granted that holdup was a grave concern.  He goes on to admit he did not attempt to determine the value of the patents … and stated he did not attempt to assign a specific FRAND rate to them. … He goes on to state that just because rates would be higher in a system where exclusion orders are more likely than where they are less likely, that as a mathematical statement it does not mean such rates are above a FRAND rate.

Further, the accused infringer’s witnesses could not identify circumstances of a non-FRAND agreement being entered on a FRAND-obligated patent:

[Accused infringer’s witness Dr. Shampine] was not aware of any lawsuit, bankruptcy hearing or complaint to a standard-setting organization where a party alleged that they were forced to sign a non-FRAND agreement and needed to obtain relief from the agreement on the basis it violated the SSO agreement.  He also was not aware of any company making a complaint to ETSI that an IPR owner was not negotiating in good faith.   The ALJ asked Dr. Shampine if he could cite even one solid example of a holdup resulting in a non-FRAND contract.  Dr. Shampine replied, “We do not have a solid example of that occurring yet.”

***

… [Dr. Shampine] was unaware of a single case where an ITC exclusion order resulted in a license that was not on FRAND terms.

ALJ Essex gave no weight to the testimony of another accused infringer economic witness regarding holdup because the witness did not consider whether the patent owner’s offers were unfair or unreasonable or the industry practice in licensing patents:

Mr. John C. Jarosz, another MMO economic witness … stated he was offering no opinion that [patent owner InterDigital’s] offers to [accused infringers] Nokia and MMO were unfair or unreasonable, but that he did consider information in assessing the holdup and reverse holdup hypotheses.   His analysis only considered the offers between the parties, and he did not consider the industries licensing practices in forming his opinion.  Mr. Jarosz’s opinion then is entitled to little weight.  If he has no reference point as to what the FRAND rate is, nor any reference for how the licensing industry conducts negotiations and reaches FRAND contracts, he cannot reasonably assess the current negotiations.  While Mr. Jarosz was spirited in his belief in holdup, he conceded he was not aware of instances where holdup was actually found to have occurred.

ALJ Essex also ruled that patent owner InterDigital filing this ITC case did not itself violate any FRAND obligations, stating:

[T]he evidence presented does not support the [accused infringer’s] position that InterDigital has violated a FRAND obligation by filing this complaint at the ITC.  The negotiation has continued in good faith, and there are many more issues than the rate of payment to be made ….  The obligation that InterDigital has taken has been fulfilled, and the ETSI agreement anticipates that the parties if necessary will fall back on the national law involved.

He indicated that filing an ITC case prior to offering a license may be bad faith; specifically, in considering hold-out (discussed below), he referenced the Realtek v. LSI decision as an example of “failure to meaningfully negotiate” where “[patent owner] LSI made no offer for a license prior to filing a complaint at the ITC.” (see our Jan. 9, 2014 post where Judge Whyte explains the difference between the threat of an injunction that is inherent in all license negotiations and the patent owner’s filing a complaint in the ITC before negotiations that makes exclusionary relief a more credible threat in that instance).

Evidence of Hold-Out By Accused Infringers.  ALJ Essex defined “Reverse hold-up” as “describ[ing] a situation in which a manufacturer that is using standard-essential patented technology refuses to enter a license agreement with the patent owner or otherwise to pay compensation,” and further explained that “[w]here a respondent uses the technology covered by a patent, and refused to take a license to the technology or refused to negotiate in a meaningful way there is reverse holdup.”  ALJ Essex found that whether there was improper patent hold-out by the  accused infringers was a complex issue that changed over time.  The initial determination in this case was that the patents were not infringed, which was upheld by the Commission.  There could be no hold-out during this time period because there was a favorable decision that the patents were not SEPS or infringed.  During this time, the accused infringers “had every reason to be difficult negotiators,” there is no showing this was in bad faith and “[t]he exercise of legal rights by a party cannot amount to ‘holdout’.”

But this changed after the Federal Circuit reversed the Commission’s claim construction and finding of no infringement; from that date the accused infringers “should have been aware that the patents were valid, and infringed” and “should have realized they may have to take a license or face an exclusion order.”  Further, there was no evidence that patent owner InterDigital’s offer were not FRAND compliant.  The accused infringer’s witnesses did not even state what they would consider to be FRAND in this case and no one offered evidence of what a FRAND range would be for these patents.

ALJ Essex also found evidence of holdout based on “the clear gain that occurs daily for [the accused infringer] given the six-year statutory limit on past damages for patent infringement”, stating that “[e]ach day that the respondents use the patents without taking a license, IDC loses money that it will not be able to recover.”  Further, the delay in taking a license puts “unfair downward pressure on the payments that [patent owner] InterDigital could expect to realize from any license agreement resulting in a lower than FRAND rate.”

ALJ Essex ultimately found that the accused infringers were the type “unwilling licensee” that the U.S. Trade Representative indicated could be subject to an exclusion order when it disapproved an exclusion order in the Samsung-Apple investigation (see our Aug. 3, 2013 post):

In failing to negotiate in a meaningful way, and refusing to take a license, [accused infringer] MMO is currently an unwilling licensee that “is unable or refuses to take a FRAND license.” [citing U.S.T.R. letter at 2. n.3, which states: “An exclusion order may still be an appropriate remedy in some circumstances, such as where the putative licensee is unable or refuses to take a FRAND license and is acting outside the scope of the patent holder’s commitment to license on FRAND terms.”]

Public Interest and FRAND Evidence.  ALJ Essex found that the ETSI agreement did not preclude patent owner InterDigital from seeking an exclusion order.  Indeed, ETSI had required mandatory mediation, but removed that from its policy in 1993, and considered but declined to adopt a policy that would bar parties from seeking an injunction.  Although the accused infringers provided testimony that ETSI had some concerns about the availability of injunctive relief, that did not find its way into the ultimate written ETSI agreement.  Only the ultimate ETSI contractual terms matter, not articulated concerns that were not adopted: “Prohibiting exclusion orders or injunctions were specifically considered by the SSO, and rejected in the final agreement.”

ALJ Essex rejected the accused infringer’s attempt to impose on the ETSI agreement further “robust protections against hold-up” as a matter of public interest, stating:

While the contract may not protect [the accused infringer] as it wishes it would, it is to the contract we must look to determine the rights that flow from it.  If the SSO negotiators want to agree to provide greater protection from exclusion orders or injunctions, it is within their power to do so.  ETSI did this until 1994 and IEEE has done so more recently.

He also cited the U.S. Department of Justice (DOJ) business review letter of the recently revised IEEE IPR Policy that supports limiting the government role and giving SSOs flexibility in making different IPR Policy choices, because “having the variety of choices could be beneficial to the process.” (see our Feb. 5, 2015 post on the DOJ business review letter).  He also refused to let a public policy “disfavoring exclusionary relief” to “trump both the SSO contract, and the ordinary course of law.”  The accused infringer’s had relied on a policy statement by the U.S. Federal Trade Commission (FTC) as well as DOJ/U.S. Patent & Trademark Office (PTO), which ALJ Essex previously had considered in the 337-TA-868 investigation and he quotes his prior response.  That prior response indicated that there was no evidence of bad faith, that evidence showed that the “hypothetical risk of holdup” is “not a threat in this case, or in this industry,” and that one standard setting organization (SSO) in the industry, TIA, had told the FTC that “TIA has never received any complaints regarding such ‘patent hold-up’ and does not agree that ‘patent holdup’ is plaguing the information and telecommunications technology standard development process.” (see our July 2, 2014 post for the 337-TA-868 decision).  He also found that other FTC, DOJ/PTO statements brought to his attention were not based on evidence or differed from the facts of this case and gave them little weight.

ALJ Essex also found that, based on the significant scrutiny of SEP owner activity given over the past few years by government agencies, professors, economists and others, the likelihood of a patent holder stepping out of line and wandering into patent holdup is even less likely now based on the “observer effect”:

After watching for a holdup since 2011, we may be able to consider whether the fact none has occurred allows us to discount the risk today. With the FTC and DOJ/USPTO having weighed in on the risk of exclusion orders at the ITC, there have been many professors, economists and other professionals that have written on the topic.  The ALJ believes that these professionals, all voicing concern, may lessen the need for concern.  In science the term observer effect refers to changes that the act of observation will make on a phenomenon being observed.  This is often the result of instruments that, by necessity, alter the state of what they measure in some manner.  A commonplace example is checking the pressure in an automobile tire; this is difficult to do without letting out some of the air, thus changing the pressure.  This effect can be observed in many domains of physics.  The ALJ notes that this effect is also present in human events; few crimes occur in a police station, because the observers would likely change the outcome.  In the current state of IP law as it relates to SSOs and IPRs, an owner of a SEP has a long list of government agencies, law professors and companies watching what the company does, and attempting to change the law as to potential outcomes.  [Accused infringer] MMO has stated they are afraid that if [patent owner InterDigital] obtained an exclusion order, then they would use it to gain undue leverage and obtain compensation above the FRAND rate.  This is unlikely because too many hostile eyes are watching.  The fact that the FTC has been watching since at least 2011, and not found such a violation, makes it unlikely it would happen here for the first time.

ALJ Essex also found that the accused infringer’s interest could still be protected even if an exclusion order were entered, given “the availability of a remedy in District Court should [the patent owner] refuse to grant a license under FRAND terms.”  Further, because the patent owner has acted in good faith to date, there appears “minimal risk” that the patent owner would violate its obligations after an exclusion order is entered and, even if that did occur, the accused infringers would have remedy.  This also is shown by the ITC’s track record: ”

Of all the settlements and licenses that were taken under the ‘threat’ of an exclusion order, not one respondent has gone on to file in a district court that the agreement was outside the range of FRAND.  The ITC has not seen such a case, the experts presented at the hearing have not seen such a case, and the respondents did not cite an example of such a case.  With that in mind, perhaps now we can relax our guard a little.

Further, not only had TIA indicated there was no hold-up problem in the telecommunications industry, but industry participants made similar statements to the FTC.  ALJ Essex quoted extensively from comments that Microsoft Corporation provided to the FTC in 2011, which he summarized as indicating that “[Microsoft] too did not see the risk of hold-up, nor the need to deny any particular relief when there was a FRAND or RAND commitment.”

In sum, ALJ Essex found that there was no evidence patent owner InterDigital abused the SEP patents at issue in this case or evidence of the concerns raised by the various government agencies.  Further, the SSO at issue here, ETSI, was “aware of the possibility of exclusionary relief … and chose to allow such relief under its SSO agreement.”  Thus there was no evidence or reason why an exclusion order should not be issued in this case.

Yesterday, a federal jury in Delaware concluded that ZTE’s accused 4G mobile devices did not infringe InterDigital’s U.S. Patent No. 7,941,151 (“the ‘151 Patent”).  This jury verdict comes a little less than six months after a different jury concluded that ZTE’s accused 4G mobile devices infringe three separate patents asserted by InterDigital in the case.

Background.  In its Amended Complaint, InterDigital alleged that ZTE was infringing four of its patents.  With respect to the ‘151 Patent, InterDigital alleged that ZTE was infringing it by “manufacturing, using, importing, offering for sale, and/or selling wireless devices with 4G capabilities.” More specifically, InterDigital alleged that

The accused ZTE products are specifically designed to be used in at least 4G wireless communication systems.  Specifically, the accused ZTE products identified by InterDigital to date that are designed to be used in a 4G wireless communications system are configured to comply with [3gPP’s] LTE (Long Term Evolution) standard.  Because the accused products are specifically designed to so operate, they have no substantial non-infringing uses.

ZTE asserted a number of FRAND-related affirmative defenses and counterclaims in the litigation.  The court subsequently dismissed the FRAND-related counterclaims and bifurcated the infringement liability issues from the FRAND-related affirmative defenses.

In late October, a jury found that ZTE infringed the three other patents asserted by InterDigital and also rejected ZTE’s invalidity defenses.  Thereafter, and as we previously reported, Judge Andrews entered an order allowing InterDigital and ZTE to proceed with FRAND and damages discovery under the assumption that ZTE would be found to infringe InterDigital’s ‘151 Patent.  Specifically, the order provided as follows:

FRAND/damages discovery may begin immediately. It is going to have to be done, and the parties should do it (as they normally would) on the assumption that ZTE will be found to have infringed the ‘151 patent. It does not need to be coordinated with any similar discovery in the Nokia case. The parties should include the scheduling for this discovery in the written proposed scheduling order submitted before the above-mentioned scheduling conference.

The infringement trial for the ‘151 Patent occured on Monday and Tuesday of this week.  Yesterday, the jury found that ZTE did not infringe the ‘151 Patent.

Next Steps.  According to the agreed-to Scheduling Order entered by the court, the parties will now complete FRAND and damages-related discovery and prepare for a damages trial with respect to the three InterDigital patents the first jury found ZTE to infringe last Fall.  The following schedule will apply:

August 21, 2015:  Completion of fact discovery related to FRAND/damages;

September 18, 2015:  Disclosure of expert testimony for party with burden of proof;

October 16, 2015:  Supplemental/rebuttal expert disclosure;

November 9, 2015:  Reply expert reports from party with burden of proof;

December 4, 2015:  Completion of expert discovery;

December 8, 2015:  Joint letter outlining any issues the parties believe must be addressed at the status conference;

December 15, 2015:  Status conference;

December 29, 2015:  Dispositive motions and deadline to object to expert testimony;

March 21, 2016:  ZTE target trial date; and

April 11, 2016:  Microsoft Mobile Oy (MMO) (another defendant in the case) target trial date

 

Earlier this week, a Texas jury found that Apple’s iPhone and iPad products do not infringe patents owned by Core Wireless that are alleged to be essential to certain cellular standards adopted by the European Telecommunications Standards Institute (“ETSI”).  The jury also found that Core Wireless did not breach its contractual obligation to offer a license to the patents on fair, reasonable and non-discriminatory (FRAND) terms.

Core Wireless’ complaint.  Core Wireless’ complaint alleged that Apple’s iPad, iPad 2, iPad 3G, iPad with Retina display, iPad mini and iPhone 3G, 3GS, 4, 4S and 5 “were made and sold in accordance with” various 3GPP mobile standards adopted by the ETSI.  Core Wireless further alleged that the asserted patents, which it acquired from Nokia, covered those standards and, as such, the accused products infringed.  Core Wireless’ complaint prayed for an “accounting of all damages sustained b Plaintiff as the result of Apple’s acts of infringement,” enhanced damages pursuant to 35 U.S.C. § 284, and a “mandatory future royalty payable on each and every product sold by Apple in the future that is found to infringe one or more of the patents-in-suit and on all future products which are not colorably different from products found to infringe.”

Apple’s answer and counterclaim.  Apple filed an answer and counterclaim generally denying the allegations in the complaint and asserting affirmative defenses of non-infringement, invalidity and unenforceability.  Apple also asserted a counterclaim alleging that Core Wireless breached its contractual obligations to members of ETSI to license the asserted patents on FRAND terms.

For its breach claim, Apple relied upon the following provision in ETSI’s Intellectual Property Right Policy (“IPR”):

When an ESSENTIAL IPR relating to a particular STANDARD or TECHNICAL SPECIFICATION is brought to the attention of ETSI, the Director-General of ETSI shall immediately request the owner to give within three months an irrevocable undertaking in writing that it is prepared to grant irrevocable licenses on fair, reasonable and non-discriminatory [FRAND] terms and conditions under such IPR to at least the following extent:

• MANUFACTURE, including the right to make or have made customized components and sub-systems to the licensee’s own design for use in MANUFACTURE;

• sell, lease, or otherwise dispose of EQUIPMENT so MANUFACTURED;

• repair, use, or operate EQUIPMENT; and

• use METHODS.

The above undertaking may be made subject to the condition that those who seek licenses agree to reciprocate.

Apple alleged that ETSI members as well as members of other standard setting organizations (SSOs) “self-declare patents as ‘essential,’ or necessary to practice the UMTS standard,” but “[o]rganizations such as ETSI do not independently verify whether such patents are actually essential.”

Apple contended that Core Wireless was bound by the FRAND representations made by Nokia, the prior owner of the patents-in-suit:

Core Wireless acquired any rights it has in the Core Wireless Asserted Patents from Nokia Corporation. Nokia is a member of [ETSI], a standard-setting organization that promulgates cellular telecommunications standards.  In accordance with ETSI’s Intellectual Property Rights Policy [“IPR”], Nokia made binding and enforceable promises to ETSI and its members—including Apple—to license the Core Wireless Asserted Patents to companies supporting the UMTS standard promulgated by ETSI on ‘fair, reasonable, and non-discriminatory’ or FRAND terms.  Those FRAND promises traveled with the Core Wireless Asserted Patents when they were transferred to Core Wireless and continue to bind Core Wireless.

Apple went on to allege that

[d]espite and in breach of the binding contractual commitments obligating Core Wireless to license Apple to the Core Wireless Asserted Patents on FRAND terms, Core Wireless brought this infringement action before even approaching Apple to discuss a license, and since initiating this suit Core Wireless has refused to provide FRAND terms to Apple for the Core Wireless Asserted Patents.

After the suit was filed, Apple alleges that it requested that Core Wireless provide the “FRAND royalty rate for each of” the asserted patents, “with each patent’s rate separately listed” as well as the “methodology by which Core Wireless derived each rate” and “confirmation that Core Wireless offered these same rates to other companies or that companies paid” those same rates, “or if not the same, a description of the rates offered to or paid by other companies and a list of those companies.”  According to Apple, Core Wireless never responded.

Core Wireless’ answer and counterclaim.  Core Wireless filed an answer to Apple’s counterclaims with counterclaims of its own, alleging that it did, in fact, make several attempts to engage in licensing discussions with Apple, but that Apple refused to respond in breach of Apple’s obligations as a potential licensee of patents alleged to be essential to ETSI cellular standards.

“Apple takes the position that it is a party to license agreement(s), express or implied, to those patents that have been declared essential to an ETSI standard.”  Core Wireless alleges further that Apple sent a letter to another declared essential patent owner claiming that “an agreement is formed by virtue of ‘the [ETSI] IPR policies at issue [that] require participants claiming to own essential IPR to commit to license those IPR on FRAND terms to any implementer of the standard.”  Apple allegedly accepted these terms when it “began to implement the [ETSI] standard.”  “According to Apple, such license agreements are subject only to agreement on the terms of a FRAND royalty as compensation for Apple’s licensed use.”

Core Wireless also pointed to allegations that Apple made in its dispute with Samsung that “‘Apple is licensed to Samsung’s declared-essential patents’” because “‘the [ETSI] IPR policies at issue here require participants claiming to own essential IPR to commit to license those IPR on FRAND terms to any implementer of the standard.’”

Core Wireless further asserted that the patents-in-suit “have likewise been declared essential to the UMTS standard and Core Wireless’ assertion of those patents is subject to the ETSI IPR licensing obligations.”  “Thus, by Apple’s own acknowledgment, by electing to practice the UMTS standard, Apple considers itself licensed to the asserted patents owned by Core Wireless.”  “By its actions, Apple entered into an agreement with Standard Essential Patent owners to negotiate a FRAND royalty in good faith.”  These actions include “Apple’s implementing the GSM/GPRS and/or the UMTS standards in its products and becoming a member of the relevant standards organizations, including ETSI.”

Core Wireless alleges that Apple breached its agreement with Core Wireless by refusing to negotiate a FRAND royalty with Core Wireless, refusing to timely respond to Core Wireless’ FRAND royalty offer, and Apple’s refusal to pay a FRAND royalty.

According to Core Wireless, its outside counsel sent an email to Apple the same day that the lawsuit was filed indicating Core Wireless’ “interest in an early resolution of the underlying dispute without the need for extensive litigation.”  “This offer was ignored by Apple.”

“Core Wireless’ outside counsel next reached out a few weeks later . . . to Apple’s local counsel, again indicating Core Wireless’ interest in meeting with Apple, and the response back from Apple was that a discussion would be premature.”

A few weeks later, Core Wireless sent two separate letters to Apple, proposing that the parties negotiate a license on FRAND terms.”  Core Wireless alleges that these letters were ignored as well.

Core Wireless also alleged that, later in the year, Apple sent a letter demanding that Core Wireless provide a FRAND royalty rate to Apple.”  “After refusing Core Wireless’ offers for over eight months, Apple set a two-week deadline in which it required Core Wireless to respond to Apple’s demand.”   This letter was expressly “not pursuant to Rule 408 of the Federal Rules of Evidence,” which generally precludes offers of settlement from coming into evidence to establish liability at trial.  Core Wireless alleged that this letter demonstrates that Apple had “no intention of negotiating a FRAND license with Core Wireless, but rather was strictly looking for information to strengthen its positions in FRAND-related litigations.”

After sending the letter, Core Wireless contends that “Apple’s lead counsel in this case indicated to Core Wireless’ outside counsel that Apple ‘did not feel a meeting with Core was ripe yet.'”  Core Wireless thereafter responded to Apple’s letter, and again asked Apple to “meet for the purpose of providing a FRAND offer and negotiating a mutually acceptable FRAND license.”  “Apple refused to agree to such an offer and meeting by failing to respond to Core Wireless’s” letter.

A few weeks later, Apple sent another letter setting a two-week deadline in which it requested Core Wireless to “provide a FRAND royalty rate to Apple” without “responding, or referring, to Core Wireless'” prior letter.

Core Wireless alleged that, “[f]aced with Apple’s intentional refusal to meet or negotiate, Core Wireless made a specific FRAND royalty rate offer to Apple in writing.”  “As part of that offer, Core Wireless offered, in the alternative, to negotiate FRAND rates for the asserted patents.”  Apple allegedly did not respond to Core Wireless’ FRAND license offer.

Core Wireless contended that “Apple has gained profits by virtue of its breaches of the license agreement with Core Wireless to pay a FRAND royalty for its use of the Standard Essential Patents and its agreement with . . . Core Wireless[] to negotiate a FRAND royalty in good faith.”  Core Wireless alleged that it suffered harm as a result of Apple’s alleged breach, including “being denied of the adequate and fair reward, i.e., a FRAND royalty for the use of its Standard Essential Patents, and being forced to resolve this matter through unnecessary litigation in which Core Wireless has to pay unnecessary litigation expense and attorneys’ fees.”

Core Wireless also alleged that Apple breached its contract with ETSI by failing to respond to Core Wireless’ overtures to negotiate a FRAND rate and forcing Core Wireless to litigate the issue.  Clause 3.2 of the ETSI IPR Policy provides, in relevant part, as follows:

IPR holders whether members of ETSI and their AFFILIATES or third parties, should be adequately and fairly rewarded for the use of their IPRs in the implementation of STANDARDS and TECHNICAL SPECIFICATIONS

“By its membership in ETSI and its implementation of the ETSI standards, Apple is required to comply with this ETSI IPR Policy, including the requirement to adequately and fairly reward the Standard Essential Patent owner for the use of its patents in the implementation of GSM/GPRS and/or UMTS standards.”

Core Wireless alleged that Apple breached its contract with ETSI by refusing to negotiate and ultimately pay a FRAND royalty rate with Core Wireless.

In its prayer for relief, Core Wireless requested, inter alia, a judgment declaring that Apple is not a willing licensee to Core Wireless’ asserted Standard Essential Patents.”  Core Wireless also requested a “judgment ordering Apple to specifically perform its obligation to pay a FRAND royalty to Core Wireless according to the agreement between Apple and Core Wireless and/or according to Apple’s duty to ETSI, including a determination of the FRAND royalty rate owed by Apple to Core Wireless.”

Trial.  At trial, Core Wireless whittled its infringement case down to claims in five of its alleged standard essential patents.  In the jury instructions on damages, the court noted that, to the extent that the jury found that Apple infringed, Core Wireless was seeking damages in the amount of a reasonable royalty.  “A reasonable royalty must reflect that Core Wireless declared the asserted patents to be essential to cellular standards and committed to the [ETSI] to license the patents on ‘fair, reasonable, and non-discriminatory’ or FRAND terms.”  The court expressly noted that it was not instructing the jury “that the asserted patents are actually essential to any standard.”  That was for the jury to decide.

On several other FRAND-related issues, the parties disputed the language of the jury instructions.  It is unclear from the docket which instruction the court ultimately gave, but the parties’ positions are summarized here.

Apple proposed that the court give an instruction expressly requiring the jury to “consider any evidence of patent hold-up and royalty stacking” in “deciding what amount is a FRAND royalty.”  Core Wireless objected to this instruction because “Apple has not provided sufficient evidence on these concepts, and Apple made no more than a general argument that hold-up and staking were possibilities.”  According to Core Wireless, “[i]n order to be instructed on these concepts, Apple was required to present actual evidence at trial; it did not.” 

Core Wireless contended that, to determine FRAND, the jury should consider and apply all fifteen factors for determining a reasonable royalty set out in Georgia-Pacific Corp. v. U.S. Plywood Corp.  Apple, on the other hand, contended that the “Georgia-Pacific approach is not the only way to determine a reasonable royalty.”  Quoting the Federal Circuit’s decision in Ericsson v. D-Link, Apple argued that “‘many of the Georgia-Pacific factors simply are not relevant” and “‘many are even contrary to [F]RAND principles.'”

With respect to apportionment, Core Wireless asserted that the jury must “apportion the damages between the portion of the accused products that are the patented features or components and the unpatented features and components of the accused products.”  “In determining the amount of a reasonable royalty [the jury] may consider not only the benefit to the patentee in licensing the technology, but also the value of the benefit conferred to the infringer by use of the patented technology.”  When applying the 15 Georgia-Pacific factors, the jury “should only consider as the royalty base the portion of the value that is attributable to the patented features or components as compared to the portion of the value associated with other features or components, such as unpatented elements, features, components, or improvements developed by Apple.”  If the jury found that “the patents are standard essential then damages should be apportioned from the value of the standard as a whole and should be based on the value of the invention, not any value added by the standardization of that invention.”

Apple contended, with respect to apportionment, that the Federal Circuit’s decision in Ericsson required the jury to first apportion the patented feature from all of the unpatented features reflected in the standard.  Second, any royalty that is calculated “‘must be premised on the value of the patented feature, not any value added by the standard’s adoption of the patented technology.'”  “‘These steps are necessary to ensure that the royalty award is based on the incremental value that the patented invention adds to the product, not any value added by the standardization of that technology.'”  “‘In other words, the patent holder should only be compensated for the approximate incremental benefit derived from his invention.'”   Apple argued that “‘[t]his is particularly true for [standard essential patents].”  “‘When a technology is incorporated into a standard, it is typically chosen from among different options.'”  “‘Once incorporated and widely adopted, that technology is not always used because it is the best or the only option; it is used because its use is necessary to comply with the standard.'”  “‘In other words, widespread adoption of a standard essential technology is not entirely indicative of the added usefulness of an innovation over the prior art.'”  According to Apple, to ensure that a FRAND royalty rate reflects the incremental value of the patented technology, the jury was required to consider the following two factors in setting a FRAND royalty rate: (1) any royalty for the patented technology must be apportioned from the value of the standard as a whole; and (2) the FRAND royalty rate must be based on the value of the invention, not any value added by the standardization of that invention.

With respect to the royalty base, Apple requested that the court give an instruction requiring the jury to determine the royalty for the smallest saleable patentable unit.  Again relying on Ericsson, Apple contended that, “‘as with all patents, the royalty rate for [standard essential patents] must be apportioned to the value of the patented invention.'”  “‘In order to properly apportion the incremental value attributable to the patented technology, [the jury] must select the royalty base that reflects the value added by the patented feature, where the differentiation is possible.'”  “In the case of multi-component products, like smartphones and tablet computers, where demand for the entire product is not attributable to the patented feature,'” the jury should not “base the royalty on the price or revenues of the entire product, but instead ‘must [use] a more realistic starting point for the royalty calculation . . . often, the smallest saleable unit and, at times, even less.'”

Core Wireless objected to this instruction as “inappropriate in this case.”  According to Core Wireless, “[n]either party’s damages’ expert calculated damages based on smallest salable unit, and appropriate apportionment instructions are included elsewhere, and this is only one of many ways to ensure apportionment.”

Apple also requested that the court instruct the jury that it could calculate damages based on a one-time lump-sum royalty:  “[o]ne way to calculate a royalty is to determine a one-time lump sum payment that the infringer would have paid at the time of the hypothetical negotiation for a license covering all sales of the licensed product both past and future.” “This differs from payment of an ongoing royalty where a royalty rate is applied against future sales as they occur.”  “When a one-time lump sum is paid, the infringer pays a single price for a license covering both past and estimated future infringing sales.”  “It is up to [the jury], based on the evidence, to decide what type of royalty (if any) is appropriate in this case.”  Core Wireless objected “to the inclusion of a Lump Sum Royalty instruction as neither party’s damages expert offered any opinion on a lump sum and it is thus not relevant to the case.”

With respect to Core Wireless’ breach of contract claim, Apple disputed whether it had any contractual obligation to Core Wireless or ETSI and, in the alternative, that it did not breach any such obligation.  With respect to Apple’s breach of contract claim, Core Wireless argued that Apple waived any such claim by failing to negotiate a FRAND rate and, further, that Core Wireless’s “alleged failure to comply with a FRAND obligation is excused if [the jury] find[s] Apple previously failed to comply with a material obligation of the same agreement.”  Core Wireless also contended that Apple’s breach claim was barred by Apple’s anticipatory repudiation in the form of refusing to negotiate.

The jury subsequently determined that the accused Apple iPhone and iPad products did not infringe Core Wireless’ five asserted patents.  As a result, the jury was not required to determine infringement damages.

The jury also determined that Core Wireless had not breached its obligation to license the patents-in-suit on FRAND terms.

Note that the verdict form provided that, if the jury did determine that Core Wireless had breached its FRAND obligations, Apple could only recover nominal damages between $.01 and $1.00.  This is different from Microsoft’s recovery of damages from Motorola as a result of Motorola’s alleged breach of its obligations to license its alleged SEPs to Microsoft on RAND terms.  In the Microsoft case, a jury awarded Microsoft approximately $11 million for certain costs incurred to relocate a distribution center as a result of the alleged breach as well as approximately $3 million in attorneys fees and litigation costs incurred to defend against Motorola’s infringement claims.  Microsoft was able to collect the latter category of damages because Motorola sought injunctive relief for Microsoft’s alleged infringement.  Core Wireless’ complaint, however, did not seek injunctive relief from Apple, which may be the reason that Apple did not seek its attorneys’ fees and litigation costs as damages for Core Wireless’ alleged breach.

Magistrate Judge Grewal in N.D. Cal. recently issued an Order excluding the testimony of Golden Bridge Technology’s damages expert because it was based on a flawed methodology for determing a fair, reasonable and non-discriminatory (FRAND) royalty rate for the asserted patent alleged to be essential to the 3GPP WCDMA standard.  The primary problem appears to be the expert’s failure to allocate value to the specific patent apart from non-patented product features and failure to rely on real-world industry practices (as opposed to theoretical or asperational practices):

In calculating the royalty base, Schulze did not even try to link demand for the accused product to the patented feature, and failed to apportion value between the patented feature and the vast number of non-patented features in the accused products.  Schulze [the damages expert] had no basis to ignore the fundamental teaching of the entire market value rule, which permits a royalty based on the entire market value of an accused product only where “the patent-related feature is the basis for customer demand.”  In calculating the royalty rate, Schulze impermissibly relied on licenses without any showing of comparability, relied on a maximum, cumulative royalty rate without any showing that anyone had committed to such a notion and failed to allocate particular value to the invention claimed in the ‘793 patent[in-suit].

Judge Grewal stated that, in this case, the typical reasonable royalty analysis involved additional consideration of FRAND licensing terms resulting in a modified Georgia-Pacific hypothetical negotiation that seeks to prevent “patent holdup” or “royalty stacking” by ensuring that “a FRAND license should compensate a patentee for their technical contribution to the technology embodied in a standard, but should not compensate them for mere inclusion in the standard.”  Judge Grewal thus focused on ensuring that the royalty was based on the technical contribution of the patent (without further discussing or giving weight to concerns about “patent holdup” or “royalty stacking”).

Flawed Royalty Base.  Judge Grewal ruled that the expert failed to show an industry practice in using the entire unit price — e.g., price of Apple’s iPad or iPhone — as the royalty base, failed to apportion the royalty base among patented and non-patented features and failed to show that the patented feature drove demand for the entire unit as required under the entire market value rule.  This conflicted with the Federal Circuit’s Lucent decision that “stands for the proposition that, in the absence of evidence that the infringing feature drives demand, the royalty base must be somehow apportioned to reflect the value of the patent-related feature in the absence of the non-infringing features.”  The expert’s attempt to rely on industry practice in using a per unit price relied on aspirational papers of a per unit price without showing “actual practice in the field.”  Further, the entire unit is not the smallest saleable unit, because “throughout this litigation, GBT [the patentee] has taken the position that the entire infringing functionality lies in the baseband processor, not the accused product as a whole.”  Even if the entire unit were the smallest saleable unit, that would “not relieve a patentee of the burden of apportioning the base,” which the damages expert failed to do here.

Flawed Royalty Rate.  Judge Grewal also found that the damages expert’s royalty rate analysis was flawed.  First, the expert erroneously relied on portfolio licenses that the patentee secured in settling several infringement cases that did not involve the patent at issue here.  The expert did not assess the comparability of those licenses by comparing (1) the value of those portfolio patents to those accused products or (2) the value of the patent-in-suit to the accused products in this case.  Further, the expert did not account for the lump-sum settlement payment in those licenses as having included future sales.

Second, the expert erroneously relied on there being some maximum, cumulative royalty rate for all WCDMA patents even though “he identifies no evidence that any party ever agreed to such a [maximum, cumulative] rate.”

Third, the expert erroneously treated the value of the ‘793 Patent-in-suit to be the same as the value of all other patents essential to the WCDMA standard.  The expert appears to have done this by doing a straight division of the number of SEPs into an assumed estimated cumulative royalty rate for all SEPs, thus giving each SEP the same value:

The heart of Schulze’s rate analysis dealt with [Georgia-Pacific] factor 12.  Based on his study of the 1999 UMTS Intellectual Property Association proposed maximum global royalty rate, and various academic studies regarding cumulative rates for standard-essential patents, Schulze opined that the participants in the market for 3G technology would have settled on a certain cumulative royalty rate for all 3G standard-essential patents.  He then calculated a royalty for the ‘793 patent[in-suit] alone as follows.  Looking to the declared WCDMA standard essential patent families provided by Sipro Lab Telecom, and Sipro’s classificaton of those families, he determined the percentage of the families related to terminals like the accused products.  Schulze then multiplied the nuimber of WCDMA standard essential patents identifed in one article by the percentage to determine the number of patent famlies, including the ‘793 patent, that read on terminals.  Dividing his estimated cumulative royalty rate by number of terminal-related eseential patents, he arrived at a rate for the ‘793 patent.  Regarding factor thirteen, Schulze assumed that each standard essential patent shares an equivalent value to each other standard essential patent within the overall standard.

Judge Grewal found such methodology flawed, stating that “the case law is clear that mere patent counting and dividing is not enough”, which does not account for the particular value (vel non) of the patent-in-suit:

Third, Schulze erred in assuming the value of the ‘793 patent was no different than the value of each of the other WCDMA standard-essential patents considered.  GBT identifies no case law supporting the notion that a claimed standard-essential patent gets a free pass on the fundamental notion that a patent damages methodology must be tied to the relevant facts and circumstances of the case at issue.  If anything, the case law is clear that mere patent counting and dividing is not enough.

Judge Grewal, therefore, excluded the patentee’s damages expert opinions “in their current form”, but allowed the expert “another shot” to tender a new report with opinions consistent with the court’s ruling.

As a reminder that standard essential patent issues go beyond information technology, last week SawStop LLC sued manufacturers of table saws alleging that they conspired to convince Underwriters Laboratories, Inc. (“UL”) to not adopt SawStop’s patented table saw safety technology into UL standard 987 (Stationary and Fixed Electric Tools) and to adopt a different technology that required SawStop to alter its design.

SawStop alleges that it patented a saw blade safety feature that places an electrical current on the blade to allow distinguishing between the blade cutting through wood or cutting through someone’s finger, stopping the blade if the latter is detected.  SawStop alleges that it offered to license this technology to other saw manufacturers, but they did not want to adopt the technology given cost considerations.  The UL standard 987 applicable to table saws is overseen by UL Standards Technical Panel 745 alleged to “consist[] primarily of manufacturers and individuals with connections to manufacturers.”  SawStop alleges that the manufacturers convinced UL to not adopt SawStops patented technology, but to adopt a saw safety guard technology that required SawStop to incur expenses to redesign its saws.  SawStop thus filed this lawsuit alleging various unfair competition claims.

This is an interesting case because it reminds us that standards are all around us and not limited to information technology.  It also is a unique example of a patent owner bringing suit because its technology was not adopted by an industry standard setting organization.  Another such case is one brought in 2011 by TruePosition that sued manufacturers and standard setting organizations Third Generation Partnership Project (3GPP) and European Telecommunications Standards Insitute (ETSI) alleging that they conspired to not adopt into mobile phone standards certain location-based technology patented by TruePosition (TruePosition, Inc. v. Ericsson, et al., Case No. 2:11-cv-04574 (E.D. Pa)).  The TruePosition case is in the discovery stage with summary judgment deadline set for Dec. 2014 and trial set for Aug. 2015.

Over the past few years, courts have begun cracking down on improper damages theories.  The Federal Circuit’s 2012 opinion in LaserDynamics v. Quanta is instructive on this point, noting that in the absence of evidence that the patented functionality is the source of the demand for the entire product, then damages must be based on the “smallest salable patent-practicing unit.”  This is an issue that has particular relevance to standard-essential patent litigation, as the functionality that allows for standards compliance is often implemented on a smaller chip within a larger consumer product device — think of a baseband chip within a smartphone, for instance.

In fact, this very issue just arose in a pending litigation (set to go to trial later this month in E.D. Tex.) brought by non-practicing entity Wi-LAN against Alcatel-Lucent, Ericsson, Sony Mobile Communications, and HTC, in which Wi-LAN accused the defendants of infringing several Wi-LAN patents by manufacturing and selling base stations and handsets that are compliant with the 3GPP High-Speed Packet data Access cellular standard (HSPA).  This past Friday, presiding Judge Leonard Davis granted in part a Daubert motion brought by Alcatel-Lucent, HTC, and Sony to exclude certain Wi-LAN expert testimony on damages.

[13.06.28 Wi-LAN v. Alcatel Lucent Daubert Order]

Wi-LAN’s expert, John C. Jarosz, had analyzed several existing Wi-LAN license agreements involving the patents-in-suit, and calculated a damages figure in the amount of a lump-sum royalty that was based on a reasonable royalty and a hypothetical negotiation between the parties.  But the court found that Mr. Jarosz did not tie the calculation of damages to the smallest saleable patent-practicing unit, instead using the price of the entire HSPA-compliant base station as a base without offering evidence that the patented features drove demand for the entire product.  The court noted that in fact, the base stations needed only an optional software upgrade and modem card to comply with the HSPA standard — and the patents-in-suit represent only a small portion of the overall HSPA standard.  As such, the court excluded Mr. Jarosz’s reasonable royalty calculations as being a violation of the Entire Market Value rule.  The court also rejected a “catch-all” statement by Mr. Jarosz that he had taken all the evidence into consideration in arriving at a final lump-sum royalty (based in part on a reasonably royalty), calling this “a poor substitute for the required analysis” that distinguishes between patented and unpatented features of an accused device.

The court did, however, allow for Wi-LAN to present an amended report by July 3, with subsequent (and expedited) depositions and rebuttal reports to follow if necessary.  Having expert damages testimony excluded can be crippling or even fatal to a patent owner’s case (as Apple and Motorola learned before Judge Posner last year), so you can bet that Wi-LAN’s expert is currently preparing a supplemental report.  We’ll keep you posted on any interesting trial and post-trial happenings in this case over the next few weeks.