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)

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.

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, Administrative Law Judge Essex issued a one-page notice of initial determination holding that Nokia’s 3G mobile handsets infringe the asserted claims of InterDigital’s U.S. Patent Nos. 7,190,966 and 7,286,847 (“the ‘847 Patent”) in the International Trade Commission’s investigation styled In the Matter of Certain 3G Mobile Handsets and Components Thereof (ITC Inv. No. 337-TA-613).  In the one page notice, the Judge expressly relied upon a standard adopted by 3GPP in concluding that Nokia’s handsets meet the limitations of the one ‘847 Patent claim asserted by InterDigital:

It is held that the 3GPP standard supports a finding that the pilot signal (P-CPICH) satisfies the claim limitation ‘synchronize to the pilot signal’ as recited in the asserted claim of the ‘847 patent by synchronizing to either the P-SCH or S-SCH signals under the Commission’s construction of that claim limitation.

Judge Essex also held “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.”

No written memorandum opinion has been made available. To the extent that a more detailed opinion on the issues exists in redacted form, the parties will have a certain period of time, as directed by the court, to propose redactions to protect any confidential business information from the version of the opinion that will be made available to the public.

If you are attending the AIPLA Annual Meeting in Washington, DC this week, please join us at an educational CLE provided by the Standards & Open Source Committee on “Practical Considerations in Litigating Standard Essential Patents” on Thursday, Oct. 23 at 3:30 pm.  Our own David Long will be moderating the one-hour panel discussion with Judge Holderman of the U.S. District Court for N.D. Ill. and Judge Essex of the U.S. International Trade Commission.

You may recall that Judge Holderman presides over the Innovatio litigation where he wrote the second decision on how to calculate a FRAND royalty (see our Oct. 3, 2013 post) and he currently presides over a case contemplating the enforceability of a patent following a jury finding that the patent owner breached its RAND commitment (see our July 24, 2014 post).  Similarly, Judge Essex has presided over SEP cases in the ITC, including a recent decision that found a prospective licensee’s patent hold-out actions barred reliance on a FRAND defense (see our July 2, 2014 post).

During our one hour program, we will touch on several practical issues that arise in litigating standard essential patents in district court or the ITC,  including issues that arise from (1) determining a reasonable and non-discriminatory royalty (F/RAND), (2) when to determine such a royalty (e.g., reverse-bifurcation in district court and which phase in ITC), (3) the specificity required to plead F/RAND defense, (4) establishing whether patent “hold-up” or “hold-out” has occurred, (5) availability of damages and equitable relief, (6) who decides RAND or breach of RAND obligation (judge or jury), or (7) whether and when to determine if a patent is essential to a standard or infringed.

You will find more information about AIPLA’s Annual Meeting at their website.  Note that the preliminary brochure erroneously says 120 minutes of CLE are requested for this program; this will be a 60 minute program followed by a meeting of our Standards & Open Source Committee.  We encourage you to stay for that meeting, where you can discuss standard essential patents with the enthusiasm that strangers on the subway morning commute just don’t seem to appreciate.

The International Trade Commission issued the public version of its opinion in Inv. No. 337-868, finding no violation by either Nokia or ZTE and terminating the investigation in its entirety. On review, the Commission neither affirmed nor rejected ALJ Essex’s FRAND analysis, which criticized respondents who had not actively sought a license from InterDigitial yet raised SSO-related affirmative defenses.

As you may recall from our July 2, 2014 post, ALJ Essex issued a Final Initial Determination following a February 2014 evidentiary hearing, finding the accused products did not infringe InterDigital’s asserted patents, the domestic industry requirement had not been met, only one claim (claim 16 of U.S. Patent No. 7,941,151) was invalid as indefinite, and that respondents did not demonstrate InterDigital had violated any FRAND obligation. The Final Initial Determination also included a lengthy FRAND analysis, which was highly critical of respondents that assert FRAND defenses without having first availed themselves of SSO procedures for resolving situations where licenses are not available.

Respondents petitioned the ITC to review, inter alia, ALJ Essex’s FRAND analysis. Respondents argued that under a proper FRAND analysis, the asserted patents should have been found unenforceable under the doctrines of equitable estoppel, unclean hands, and patent misuse. As previewed in the ITC’s August 14 notice, the Commission took no position on the FRAND issues raised by the respondents, finding it more efficient to decide those issues, if at all, following an appeal of a related decision:

Decision as to those issues would require further proceedings, and potentially additional factfinding. The Commission has decided that, on balance, the added delay, burdens, and expenses that would be incurred by the parties and the Commission in resolving these issues are unjustified here given their non-dispositive nature, especially in view of the existence of other pending proceedings regarding the asserted patents and patents closely related to them.  In addition, the Commission finds that it is in the interest of the efficient use of administrative, judicial, and private resources for the domestic industry and FRAND issues to be decided, if at  all, subsequent to final disposition of the pending appeal in InterDigital Communications LLC v. ITC, No. 2014-1176 (Fed. Cir.), which involves many of the same parties and issues with regard to related patents.

Four parties have responded to the ITC’s request for statements on the public interest regarding ALJ Essex’s Initial Determination in Inv. No. 337-TA-868 (see our July 2, 2014 post), all addressing the ALJ’s FRAND analysis rejecting arguments against exclusion orders for standard-essential patents and addressing the obligations held by potential licensees. Three of the responses, submitted by Ericsson, the Innovation Alliance, and Senator Robert P. Casey, Jr. (D-PA), support ALJ Essex’s analysis, whereas Microsoft takes the position that SEP owners should not be entitled to exclusion orders on FRAND-encumbered patents.

Statement’s Supporting ALJ Essex’s FRAND-Defense Analysis

Ericsson’s StatementEricsson agrees with ALJ Essex’s analysis, specifically supporting three findings: (1) FRAND licensing obligations apply to both innovators and implementers; (2) exclusion orders are available where SEP owner has engaged in good faith negotiations, offered a license on FRAND terms, and poses no threat of hold-up; and (3) courts and other decision making bodies should consider whether an implementer failed to negotiate toward a FRAND license, posing a hold-out threat to the patent owner.  Ericsson participants in several SSOs and is both a licensor and licensee of many SEPs.  Ericsson has made significant investments in employees, R&D, and intellectual property related to standards-compliant technology.  The FRAND regime “ensures that those implementing a standard are able to secure access at a fair cost, while those providing innovative technology for the standard are able to secure a fair return on their investments.”  Ericsson agrees with the ALJ’s “proportionate focus on the obligations of the implementer to earnestly seek an amicable royalty rate” during the course of a good faith negotiation. Ericsson then supports the proposition that exclusion orders should be available when the SEP holder has negotiated in good faith and further states that “exclusion orders should also be considered when the implementer has not negotiated in good faith (i.e., there is hold-out).”

Innovation Alliance’s Statement.  Focusing on the pro-consumer and pro-economic benefits derived from patent protection and SSO participation, the Innovation Alliance’s response “commends the ALJ for developing a comprehensive record with respect to the FRAND issues in this investigation and for making explicit findings related to the presence or absence of patent hold-up or reverse hold-up with respect to patents that are subject to a FRAND licensing requirement.” The IA specifically notes that, without exclusionary relief, implementers are “incentivized to engage in ‘reverse hold up'” in which a patent holder is unable to recover its own R&D costs. The IA further commended the ALJ’s acknowledgement of the patent hold-out problem by which those benefiting from patented technology can choose to infringe a SEP and later demand a FRAND rate; the public interest favors exclusion orders to protect and enforce valid and infringed SEPs.

Senator Casey’s Statement.  Pennsylvania Senator Robert Casey also submitted a statement concerning the public interest, “writing to express [his] views on the importance of innovation to our national economy, particularly with respect to small businesses, such as InterDigital, who are significant contributors to U.S. private sector employment.” Noting InterDigital’s investment in research facilities and employees, Sen. Casey’s letter notes that the patent’s principal purpose is to encourage and protect innovation, noting that intellectual property-intensive industries supported at least 40 million U.S. jobs in 2010 and represented 34.8% of total GDP. Writing “[t]he Commission must be mindful of the significant benefits to consumers from standards-setting activities and of the need to continue incentivizing voluntary participation in standard-setting organizations,” Sen. Casey argues that holders of FRAND-committed patents should not be precluded from obtaining exclusionary relief.

Statements Criticizing ALJ Essex’s FRAND Analysis

Microsoft’s Statement.  Unlike the other statements submitted to the ITC, Microsoft’s letter warns against “the severe, long-term, and avoidable harms” caused by exclusion orders for FRAND-encumbered patents. Referring to its earlier July 7, 2012 comments on the public interest, Microsoft argues that exclusion orders should not be granted on FRAND-encumbered patents, relying upon Judge Posner’s recent denial of injunctive relief to Motorola on a FRAND-committed patent (see our April 25, 2014 post for an analysis of that decision). Microsoft argues that the public interest balance is shifted from the side of the patent owner upon assertion of an SEP and that InterDigital should not be permitted to use a threat of injunctive relief to increase royalty rates:

By assuming its FRAND obligations, InterDigital freely gave up exclusionary remedies in favor of a reasonable royalty in to have its technology incorporated into technical standards. InterDigital put its patents on the store shelf for a FRAND price, and they are available to anyone anywhere in the world willing to pay a true FRAND value. Having done so, InterDigital has no “recourse to the equity power of the Commission.”

Microsoft further argues that litigating FRAND-encumbered patents before the ITC harms the public interest, in this case by providing InterDigital with hold-up leverage and threat of an exclusion order that could adversely affect the U.S. phone operating system market. Microsoft argues that even if the ITC issues an exclusion order in the InterDigital case,  enforcement should be delayed for one year to mitigate the harm to the public interest and provide an opportunity “to appeal the ITC decision, to determine a FRAND rate…, or to explore design-around possibilities before the harsh impact of a potential exclusion order.”

UPDATE (July 28, 2014): 

Senator Pat Toomey’s Statement. Pennsylvania Senator Patrick J. Toomey also submitted a statement on the public interest on July 9, 2014, though a copy of the letter was not available until last week. Sen. Toomey’s letter expresses “strong support” for the protections afforded by Section 337 investigations and urges the Commission “to strongly consider InterDigital’s petition for relief from foreign imports that violate their intellectual property.” The letter notes that InterDigital employs “high skilled workers in Pennsylvania who are on the cutting edge of mobile innovation” and that its business model depends on licensing revenues from equipment manufacturers. Absent “adequate remedies for imported goods that use their patents without paying for them,” the letter argues companies like InterDigital will be deterred from “taking bets on future research and development” to the detriment of “American innovation and job creation.”

The U.S. International Trade Commission (“ITC”) recently issued the public version of ALJ Essex’s Initial Determination in Inv. No. 337-TA-868 finding that InterDigital had not violated any FRAND obligation and that ZTE and Nokia had not infringed the patents-in-suit (see our June 19, 2014 post). Although the patents were found not to be essential to the 3G or 4G LTE standards, ALJ Essex’s Initial Determination provides an analysis of the FRAND issues at play — one that is highly critical of respondents that assert FRAND defenses without having first availed themselves of SSO procedures for resolving situations where licenses are not available (the FRAND analysis starts at page 108 of the decision).

FRAND Ruling

ALJ Essex initially indicates that, because he found that Respondents devices that practice the 3G and 4G LTE standards did not infringe the patents-in-suit, the patents are not essential to those standards and no FRAND obligations were triggered.  ALJ Essex nonetheless presents a full FRAND-defense analysis in the event that, on review, the Commission finds the patents infringed and essential to the wireless standards.

ETSI IPR Policy.  ALJ Essex summarized the Respondents’ FRAND position that is based on InterDigital’s participation in the European Telecommunication Standards Institute (ETSI)–specifically the Telecommunications Industry Association (TIA) and International Telecommunication Union (ITU) subcommittees–giving rise to certain obligations under ETSI’s Intellectual Property Rights (“IPR”) Information Statement and Licensing Declaration under ETSI’s Rules of Procedure from Nov. 30, 2011.  ALJ Essex notes that these ETSI Rules of Procedure are not themselves a contract under the applicable French law, but rather an agreement in principal, guiding parties in their interactions with ETSI, other members, and third parties.  He states that IPR policy’s “first goal … is that the IPR owner be ‘adequately and fairly rewarded for the use of their IPRs in the implementation” of the ETSI standards.  Further, patent owner agrees to license its IPR on FRAND terms only under certain conditions–e.g., the patent owner is “adequately and fairly rewarded” (though unclear how to assess that) and the patent owner has the option of requiring a licensee to reciprocate with a FRAND license on its patents covering the standard.

Duty To Declare Potentially Essential Patents.  Under the  ETSI Rules of Procedure, a patent owner must declare patents that might become essential, but need not declare or confirm that the patents actually are essential to the standard.  Specifically referencing ALJ Shaw’s finding in Inv. No. 337-TA-800, ALJ Essex notes that not all declared patents actually are essential to the standard, no ETSI or other group confirms essentiality and declared patents frequently are found not to be essential when challenged.

ETSI Provides Procedure If FRAND Not Offered.  ALJ Essex also considered ETSI Rules of Procedure that provide a procedure for dealing with participants that refuse to grant licenses on FRAND terms after a standard is published.  Those procedures (ETSI Rules of Procedure Section 8.2 Nov. 30, 2011) include alerting ETSI’s Director-General who gathers info from complainant and patent owner, ETSI seeking to change the standard to avoid the IPR, and referral to the European Commission.  But no respondent in this case made use of those procedures.  If respondents believed InterDigital violated ETSI’s policy, they could have approached ETSI to determine whether there was such a breach and “[i]t would be helpful to this ALJ, and the ITC, if we knew InterDigital had breached its duty to ETSI.”  Nothing in ETSI Rules of Procedure appears to preclude a party, like the patent owner here that instigated the investigation, from using legal means to pressure other parties into negotiations.  Further, although ETSI does not define FRAND terms, ALJ Essex recites “a FRAND rate is a range of possible values, depending on a number of economic factors.”

Patent Hold-Out To Pressure Lower Royalty.  ALJ Essex then faulted respondents’ decision not to follow the ETSI procedures, but instead participate in what may be considered “patent hold-out” behavior “which is as unsettling to a fair solution as any patent hold up might be,” explaining:

These Respondents chose take the actions that led to the allegation of infringement rather than follow ETSI policy for obtaining a license. … The Respondents create, outside of the framework of the ETSI agreement a situation where they use the technology that may be covered by the patent, without having licensed it.  This puts pressure on the IPR owner to settle, as the owner is not compensated during a period of exploitation of the IP by the unlicensed parties.  The ETSI IPR policy requires companies that wish to use the IPR covered by the agreements to contact the owner of the IP, and take a license.  By skipping this step, the companies that use the IPR in violation of the policy are able to exert a pressure on the negotiations with the IPR holder to try to make the agreement in the lower range of FRAND, or perhaps even lower than a reasonable FRAND rate.  They also are able to shift the risk involve din patent negotiation to the patent holder.  By not paying for a FRAND license and negotiating in advance of the use of the IPR, they force the patent holder to take legal action.  In this action, the patent owner can lose the IPR they believe they have, but if the patent holder wins they gets no more than a FRAND solution, that is, what they should have gotten under the agreement in the first place.  There is no risk to the exploiter of the technology in not taking a license before they exhaust their litigation options if the only risk to them for violating the agreement is to pay a FRAND based royalty or fee.  This puts the risks of loss entirely on the side of the patent holder, and encourages patent hold-out, which is as unsettling to a fair solution as any patent hold up might be.

ALJ Essex found that a licensee would violate the ETSI IPR rules if it uses the patented technology prior to negotiating a license.  The requirement to negotiate rests on not only the patent owner, but on the standard implementer as well.   But Respondents appear to “pull the words Fair Reasonable and Non-discriminatory” from the ETSI IPR Rules … but have shown no interest in the rules of procedure for settling conflicts, or for obtaining licenses.”  For example, the ETSI Rules include a section “4.3 Dispute Resolution” that includes seeking mediation from other ETSI members and, if no agreement, “the national courts of law have the sole authority to resolve IPR disputes.”  But in this case there is no evidence that Respondents reported InterDigital to ETSI or sought a license.  Thus, InterDigital has not violated any duty under the ETSI policy.

Negotiate in Good Faith.  Respondent also failed to show that InterDigital did not negotiate in good faith.  ALJ  Essex discussed the different incentives the parties have in negotiating a FRAND rate.  InterDigital solely derives revenue from licensing its patents and may be inclined to grant FRAND licenses because they  “allow[] for a profit”; in contrast, respondents benefit from holding out licensing discussions  because, with each passing day, “Respondents have not had to pay anything for a license they were by ETSI policy to obtain prior to adopting the potentially infringing technology.” Acknowledging that the threat of an exclusion order may move a license fee “in the upper direction on the FRAND scale,” ALJ Essex notes “there are  hundreds of other economic factors that go into the parties finding a royalty or flat amount both can agree on.”  ALJ Essex then reviewed the substance of the parties’ negotiations (heavily redacted in the public version) and concludes that, rather than negotiate for a license, “the respondents have attempted to put pressure on InterDigital by using IPR without a license.” Summarizing his findings, ALJ Essex finds InterDigital’s FRAND obligations have not been triggered:

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. The Respondents have not taken the steps provided by ETSI to address a failure to license, and so have not done what they ought to do if they believe InterDigital has failed to negotiate in good faith. Finally, they have not followed the ETSI process for procuring a license, and have engaged in holdup by making the products that are alleged to infringe before taking a license. Under these facts there is no FRAND duty.

No “Patent Holdup” Concerns.  ALJ Essex concludes his FRAND analysis by rejecting arguments against exclusion orders for SEPs, which arguments were made by the U.S. Federal Trade Commission (“FTC”) and U.S. Patent & Trademark Office (“PTO”)/U.S. Department of Justice (“DOJ”). The FTC and PTO/DOJ essentially argued that FRAND license negotiations are tainted by the threat of an exclusion order, which creates the risk of patent holdup that allows the patent owner to secure an excessively high royalty rate on standard-essential IP. But ALJ Essex found no evidence that InterDigital had been negotiating in bad faith; rather, “it is the respondents that have taken advantage of the complainant and manufactured, marketed, and profited on good without taking a license to the IP at issue.” ALJ Essex further acknowledged the “hypothetical risk of holdup” in similar situations, but “we have evidence that it is not a threat in this case, or in this industry.” ALJ Essex cites TIA’s statement to 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.”

ALJ Essex found no basis to assume that exclusion remedy is not available in this case:

Neither the agreements imposed by ETSI, nor the law nor public policy require us to offer the Respondents a safe haven, where they are free to avoid their own obligations under the agreements, can manufacture potentially infringing goods without license or consequence, can seek to invalidate the IPR in question, and yet are free from the risk of a remedy under 19 USC 1337.

ALJ Essex concludes by fully rejecting the argument that limited exclusion orders should be removed as a remedy from cases involving FRAND encumbered patents:

For the Commission to adopt a policy that would favor a speculative and  unproven position held by other government agencies, without proof that the harm exists or that the risk of such harm was so great that the Commission should violate its statutory duty would damage the Commission’s reputation for integrity, and violate its duties under the law. We should and must determine the public interest, and the correct outcome of each matter based on the facts presented, and by applying the law to those facts. To take a pre-set position, without hearing evidence, would violate every concept of justice we are tasked to enforce.

FRAND-Based Affirmative Defenses.  ALJ Essex found the affirmative defenses–equitable estopple, unclean hands and patent misuse–to be “moot” given his finding that “Respondents to not infringe a valid patent and that InterDigital’s FRAND obligations are not triggered.”

Yesterday, the ITC issued a notice regarding conclusions of law and corresponding correction showing that no FRAND violation was found in ALJ Essex’s June 13, 2014 Initial Determination that ZTE and Nokia did not infringe InterDigital’s patents alleged to be essential to 3G/4G standards (see our June 17, 2014 post).  Specifically, Conclusion of Law No. 10, as corrected, states that “Respondents have failed to show that InterDigital has violated any FRAND obligation.”  The Notice is sparse on details, so we must await a public version of the Initial Determination for more information.  We further note that the ITC issued a routine notice seeking comment on public interest issues that would be raised if the Commission, on review of the Initial Determination, finds a violation by Nokia or ZTE and issues a limited exclusion order. The request for public comment does not provide any special requests regarding standard essential patents or the FRAND obligation.

Judge Essex issued a Notice Regarding Initial Determination in InterDigital’s ITC action against ZTE and Nokia (Inv. No. 337-TA-868) on Friday, indicating that there has been a finding of no violation with respect to any of the 3G and 4G devices at issue. The notice is sparse on details, indicating only that no violation of the Tariff Act of 1930, as amended, has occurred by reason of infringement. A public version of the Initial Determination should be available in the coming weeks, as well as the Commission’s decision whether or not to review the ALJ’s decision.

As discussed in our June 6 post, Samsung recently settled out of this investigation as part of a settlement resolving all disputes involving InterDigital’s 3G/4G cellular standard-essential patents. ALJ Essex issued a separate Initial Determination on June 9, granting a joint motion by Samsung and InterDigital to terminate the investigation as to Samsung based on the settlement agreement. Huawei also settled-out of this investigation earlier this year.