This is the first of a couple posts we intend to make on the FTC v. Qualcomm litigation that recently concluded a bench trial last week and is awaiting decision by Judge Koh in the Northern District of California (San Jose Division) federal court.  This case occurs at a historical point of opportunity and transformation brought by the opening stages of the 5G communication revolution.  The theories and targets of the FTC case have caused many to raise concerns about how the case will cause upheaval in long-established industry licensing practices as well as national security concerns about the United States leading the 5G revolution.

This first post will provide background and set the stage for why you may care about what is going on in this case and U.S. innovation law generally.  The next post in the series will discuss developments in the FTC v. Qualcomm case itself that led up to and molded the parties’ presentation at trial.  This will be followed by a post discussing the bench trial.  And, of course, the final post will discuss Judge Koh’s decision when it issues (guesstimate about four to six weeks from now).

This first post admittedly will mix both objective discussion and opinion that departs from the typical objective case analysis that is our core goal and strength (our last post like this was our May 2, 2013 post “The Patent Forest” during legislative efforts that threatened to harm the U.S. patent system).  As always, we recommend reading for yourself the sources we cite and other sources to determine whether this is something we all should care about or just a tempest in a tea pot.  But perhaps you too will find this is not your typical case and you too may wonder: “Where is Denzel?”

Background on Standard Essential Patents

Following is a summary of technical standard setting, standard essential patents, licensing and other issues that underlie the FTC v. Qualcomm case.

What is a Technical Industry Standard?

In its most simplistic form, a standard is an agreed upon way of doing things among several people to facilitate a smoother interaction between them.  For example, we may set a standard unit for measure for doing transactions or computations – e.g., measure distance in hands, yards, meters, miles, etc.  In some cases, people are choosing between several simple, well-known options with little, if any, innovation involved.  For example, people may agree to drive on the left side of the road or right side of the road.  Either may work equally well, but we agree on a specific side of the road so that cars do not crash if drivers simply drove on whatever side they felt like.

In a technical industry standard, those in related areas of industry may form a voluntary standard setting organization (SSO) to develop technical standards that will increase the compatibility of devices made be different companies in that industry.  For example, an SSO may consider many existing options and agree upon the shape of a wall plug and socket so that blow dryers and televisions made by different companies can plug into wall sockets made by different companies.  This is technical standard setting in its simplest form.

But standard setting also occurs in a higher form where, rather than selecting between equal known options, new technology is created or “developed” (what occurs in what some call a standards development organization or SDO).  In the wireless communication industry, for example, SDOs seek to develop technology that does not currently exist in order to create the next generation of wireless technology—e.g., 1G, 2G, 3G, 4G and now 5G wireless communication.  This has been highly successful in the wireless industry where mobile phones have transitioned from bulky suitcase-sized devices owned by the elite few that could only do phone calls (and not very well) to pocket-sized personal data assistants owned by everyday people that are used more to do amazing data-intensive services than simply make phone calls.

An SDO will have many participants in a related industry that have different roles in developing or setting the standard.  Some companies take huge risks in investing money, time and resources to create innovative technologies to propose for the next generation of wireless systems and technical standards, which is risky because not all technical designs and proposals are adopted.  These are sometimes called the Innovators and patents covering their innovations that are adopted into the standard are called standard essential patents (SEPs).  Other companies do not develop the technology, but are interested in setting a standard with technology that best matches there interest in implementing the standard in a product or service.  These are sometimes called the Implementers.  Many (perhaps most) SDO participants are some mixture of both Innovator and Implementer, but at the end of the day a particular company usually leans more on the Innovator or Implementer side.

Most SEP disputes concern standard development in creating new technologies, because the effort to create the next generation of technology naturally leads to innovations and patents thereon.  In contrast, SEPs typically do not arise from simple standard setting of just choosing between two equal and already existing alternatives.

The most prominent and influential SDO for mobile wireless communications is the European Telecommunications Standards Institute (ETSI), which has overseen development of generations of mobile wireless standards, including 5G.  Hundreds of companies participated in developing the mobile wireless standards, but only a small number of them serve as the R&D arm of the industry to actually develop and make technical contributions to the wireless standards.  That’s not to say that the other companies are not innovators in other areas, its just that they either do not innovate in the wireless area or they have chosen not to submit their innovations to a standards body so that others may use them.  Apple, for example, is no doubt an innovator with hundreds of patents, but not in the foundational wireless technologies of the wireless standards.  Estimates are that Apple made a little over a hundred technical contributions to the 3GPP mobile wireless standards as compared to tens of thousands of contributions made by each of Qualcomm, Nokia, Ericsson and Huawei.  Some say that Apple tends to keep its innovations proprietary to sell at premium prices, rather than invest in developing and contributing technology that others may use (ask anyone who has paid over $20 for a special Apple cord to charge their iPhone that was not compatible with the prevalent and inexpensive USB standard cords used by other mobile phone manufacturers).

What is a FRAND Commitment?

The term FRAND stands for “fair, reasonable and non-discriminatory” and is often used by SDOs to describe terms and conditions that a patent owner may agree to in licensing its standard essential patents (SEPs) under an SDO’s intellectual property rights (IPR) policy.  Under U.S. law, the essence of the patent right is the right to exclude and a patent owner generally can refuse to license its patents (there is no compulsory licensing in the U.S., unlike in some other countries).  The patent owner can decide not to license the patent at all, can limit to whom it is willing to license the patent, and can set whatever terms they want for the license.

Given that fundamental patent right to exclude, SDOs considered how to address concerns that a patent owner may charge unreasonable royalty rates if their patent covers the standard—i.e., concern about what’s often called “patent holdup.”  One way to avoid that concern would be to avoid using patented technology in the standard or only use technology that the patent owner is willing to give away for free.  But how good would such a standard be if it did not have valuable innovations?  SDOs don’t want to simply burn effort to develop a standard they hope will be widely adopted; they want their efforts to produce a standard that is worthy of widespread adoption.  And that requires incentives and rewards to participants to take risks, make investments and develop patented innovations to contribute to the standard.  Sure: We could and would have standards without valuable innovations, but would we want them?  East Germans had cars—the Trabant—but the superior cars that the world wanted to drive were on the other side of the wall developed in a system that rewarded the risk takers and investors in innovation.

Rather than drive a Trabant, SDOs welcome premium innovations and address patent holdup concerns by asking its participants to disclose whether they have patents that may cover the standard and, if so, whether and on what terms they would be willing to license the patent—e.g., FRAND.  A FRAND commitment, therefor, does not raise patent holdup concerns, but addresses it.  If the licensing terms for an SEP with a FRAND commitment are fair, reasonable and non-discriminatory, then there is no holdup; if the licensing terms for that FRAND committed SEP are not fair, reasonable and non-discriminatory, then there may be a remedy for breach of contract such that there still will be no holdup.  In sum, there could be patent holdup for an SEP where the patent owner maintains its full patent rights to exclude because it has no standard-setting commitment.  But the FRAND commitment imposes enforceable contractual limits to resolve the patent holdup concern.

Who to License?

Who to license and under what terms is one of the current hot topics and a subject of the FTC v. Qualcomm litigation—e.g., grant a license based on the “end product”, a “component” in the end product or elsewhere.  Wireless communication standards involve technology that is implemented at many different levels and portions of the wireless system.  Most people are familiar with the mobile phone part of the wireless system.  But that’s just the tip of the iceberg.  The mobile phone will communicate with cell phone towers (or “base stations”) that involves many complex technologies.  If someone is using the mobile phone in a car and driving past the range of one cell phone tower, there are complex processes executed by the mobile phone and cell phone towers for “handing-off” the communication between the phone with that one tower to a closer tower.  And there is prioritization of traffic between a cell phone tower and the many other mobile phones that it is in communication with to maintain balance and optimize communications with all mobile phones as a whole.  Wireless communication to a single phone is relatively easy, but not very beneficial if there were only one phone in the world.  The magic resides in communicating with a massive amount of differing communication needs from the extraordinary number of mobile devices that exist today.

The cell phone tower also communicates with other network infrastructure so that calls, video streams or other data communications are exchanged with the person who is being called, website being accessed, etc.  So patented technology for implementing a standard often is not limited to just a single component in a mobile phone or elsewhere, but involves technology that is intertwined and distributed throughout the system.  Innovative patented technology spanning a system may, for example, have a mobile phone transmit/receive data a certain way or at a certain time to the cell phone tower that is executing some of that patented technology to receive/transmit data.  The cell phone tower is communicating with further equipment implementing other parts of the technology to make the entire system as a whole functions efficiently in dealing with innumerable mobile phones.  Looking at a mobile phone in your hand and saying “This is the whole standard” would be like looking at your hand itself and saying “This is the whole person.”  It all operates together as a complete system.

So there typically is not a single component of the entire network one can point to and say “That’s where the invention resides.”  The general norm in licensing patents in the wireless industry is to license the end product (the mobile phone) where benefits from use of the invention typically is realized.  This is consistent with damages awards under the patent statute that are required to be “no less than a reasonable royalty for the use made of the invention.”  How an invention is used often depends on the ultimate end product.  In the context of SEPs, for example, Judge Robart ruled that patented encryption in the WiFi standard had little value to Microsoft’s Xbox even though it implemented the standard.  The WiFi signal was encrypted using the patented technology for transmissions between the Xbox and a nearby WiFi access point.  But the Xbox had its own encryption technology so that the signal was encrypted before WiFi transmission so that it was encrypted all the way to and through the WiFi access point and through the Internet until it reached and was unencrypted by a remote server.  So the patented encryption in the WiFi standard had little, if any, value to the Xbox that used its own encryption.In some instances, a chip (i.e., component) may implement a significant part of the portion of the standard performed by the mobile phone (i.e., the end product).  Consider, for example, patented technology in a wireless standard that reduces the power consumed by the transmitter and receiver of the end product (e.g., perhaps a protocol that allows the transmitter and receiver to be turned-off for longer periods of time).  A chip implementing that patented protocol may be used in either a battery-powered mobile device (e.g., mobile phone) or a line-powered stationary device plugged into a wall (e.g., a desktop computer).  Power savings is crucial for mobile devices, so the patented technology has substantial value to the battery-powered device.  But power savings is not crucial for the desktop device that’s plugged into the wall, so the patented technology has little, if any, value to that device.

Considering the value of the patented technology in a standard to the end product device will be even more acute in our 5G future where the same components and patented technology may be used in different end products.  A wide variety of end product devices will use 5G wireless communication and each will benefit differently from that standard and the patented technology therein.  Consider, for example, patented technology that reduces lag time in transmitting data.  That can be very valuable to devices that stream real-time data, such as video or audio calls, because the human ear cannot tolerate delays of more than 150 ms.  In contrast, a 150 ms delay in receiving an alert from your toaster that your toast is done probably will not be an issue.  So licensing at the end product level will continue to be—if not more so—an efficient way to place a value on the use made of a patented invention in a standard.

Further, the price structure in existing wireless technology eco-systems relies on the value of the patented technology being accounted for at the end product level, not at the component level.  So it may be difficult to properly account for the value of patented technology if required to do so at the component level.  Let’s consider DVD movies as a loose analogy.  A movie distributor may have a manufacturer make the physical DVD.  The DVD manufacturer does not incorporate the cost of the intellectual property (IP) being imprinted on the DVD into its price, but charges the same amount (about 50-cents or so) based on material and other costs regardless of whether it is imprinting the DVD with the “Crimson Tide” movie starring Denzel Washington or “The Best of Barney” starring a purple dinosaur.  The distributor then sells the DVD at a much higher price (e.g., $2 to $30) based on that cost, marketing and other costs including the cost/value of the IP.  Even though the cost of the component is the same (i.e., the physical DVD materials with 1s and 0s stamped into it), the value of the DVD varies drastically based on the IP within it, with movies ranging in price from a few dollars to thirty or more dollars.  Plainly one would not value the IP based on the cost of making the DVD or some percentage of the price that the distributor paid the DVD manufacturer for making the DVD.  You would not likewise value patented technology based on the cost of a component, particularly where that cost does not account for the value of the IP. (see post of July 28, 2014 citing Judge Davis book analogy).

We also can carry that analogy a bit further to understand the problem with “patent counting” that the FTC is accused of doing in its case against Qualcomm to evaluate the value of a large patent portfolio—i.e., where every patent is assumed to have the same value and the value of the portfolio is assumed to be based on counting the number of patents within it.  If I had 10 DVDs of Denzel Washington’s best movies and you had 10 DVDs of Barney the purple dinosaur’s best shows, we probably would not work-out an equal trade even though it would be easier to simply count each DVD the same.  That’s because we know that IP has different value: you can buy some movies on DVD for a couple dollars, but others sell at a premium price.  Similarly, not all patents have the same value and taking a short-cut by simply counting patents to value them is fundamentally flawed and fraught with error.

If a patent is to be licensed at the component level, the value paid for the IP should not change.  The Federal Circuit made this clear in its first decision on determining a FRAND royalty (See post of Dec. 5, 2014 on Ericsson v. D-Link).  In one of the few patent cases to give us a mathematical formula as guidance, the Federal Circuit explained that either the end product or a component theoretically can be used as a royalty base as long as a corresponding royalty rate is used so that the ultimate value attributable to the patented technology does not change—i.e., if you chose a lower value royalty base (B), than you also must chose a higher value royalty rate (R) so that multiplying the base (B) times the rate (R) maintains the same value (V) of the patented invention to the end product:

So a theoretical change of the royalty base in a licensing scheme from licensing at the end product level to the component level would require a corresponding change of the royalty rate (R)—i.e., the royalty rate (R) must be higher so that the ultimate value (V) paid for the patented technology remains the same.

But it is far from practical or even feasible in an established eco-system such as DVD movie sales or wireless products to change the entire industry from paying for the cost of IP at the end of the product chain to somewhere in the middle of the chain.  For example, the IP costs may exceed what can be borne by the current price at which a DVD manufacturer sells a DVD.  A DVD manufacturer who had to pay the cost of the IP would need to raise the costs of the DVD from pennies to several dollars and then pass that cost along to the distributor.

Let’s put that in perspective for mobile devices.  In its case against Samsung, Apple argued and was awarded a “reasonable royalty” of $7.14 for each Samsung mobile phone using three Apple patents on pinch-to-zoom, bounce-back and tap-to-zoom touchscreen features.  If a couple of touchscreen features are worth $7.14, then patented technology probably is worth many times that for enhancing data rates, lag time, etc. in a mobile standard that allow seamless streaming of video, email access, internet browsing, real time location tracking, and countless mobile applications, such as Uber, that such patented features make possible.  But a mobile chip set in a mobile phone has an average cost of about $20-25.  That current mobile chipset price plainly does not and could not account for the value of that patented technology on top of the other costs of the chipset on which the current price was based.

For these and other reasons, the long-established and prevalent practice in licensing patents in the wireless communication industry has been on a mobile device end product basis, not a component basis.  And that prevalent practice existed all along the way of the stunning transformation we have seen so far in wireless communication since we started that journey with 1G.  It works.  To force a sudden change of that settled industry practice at this critical stage of 5G development could be disastrous and, at best, seems imprudent.  There certainly should be sound conviction and consensus before doing so.  But that’s a change that the FTC appears to be forcing now in its case against Qualcomm.

What is 5G?

5G stands for “Fifth Generation” wireless communication technology.  But it is more than a simple generation upgrade.  It is a revolutionary new platform for wireless communication that enables technological growth never seen before.  Prior generations (1G, 2G, 3G and 4G) were about connecting communications between people through voice, video, email, texts, etc.  5G advances this much further and concerns connecting not only people, but appliances, cars, city infrastructure, health care equipment, first responder equipment, etc.  Basically, connecting anything that has data to share with other machines, databases, people or who knows what else.  It is fascinating and the world is rightfully excited about this new communication age.

Importantly, 5G is just at its birth stage.  It is not done so that we can just sit back, relax and enjoy it.  There will be a lot of learning, growth, enhancements and revisions of the 5G standard from its current infant stage now.  This is a very unique and historical opportunity.  Whoever leads this design and development in these early stages will have a long term impact on the future of this technology throughout the world.  Indeed, this is so important that countries consider expertise and a strong presence in 5G to be of vital national security interest.  Just last year, President Trump followed the advice of the Committee on Foreign Investment in the United States (CFIUS) and blocked a hostile takeover of Qualcomm by foreign interests because “reduc[ing] Qualcomm’s long-term technological competitiveness and influence in standard setting would significantly impact U.S. national security” given this 5G transformation:

Reduction in Qualcomm’s long-term technological competitiveness and influence in standard setting would significantly impact U.S. national security.  This is in large part because a weakening of Qualcomm’s position would leave an opening for China to expand its influence on the 5G standard-setting process.  Chinese companies, including Huawei, have increased their engagement in 5G standardization working groups as part of their efforts to build out a 5G technology.  For example, Huawei has increased its R&D expenditures and owns about 10 percent of 5G essential patents.  While the United States remains dominant in the standards-setting space currently, China would likely compete robustly to fill any void left by Qualcomm as a result of this hostile takeover.  Given well-known U.S. national security concerns about Huawei and other Chinese telecommunications companies, a shift to Chinese dominance in 5G would have substantial negative national security consequences for the United States.

The FTC lawsuit against Qualcomm

In early 2017, the U.S. Federal Trade Commission (FTC) had only three Commissioners to guide FTC on policy issues, including which enforcement law suits to file (FTC usually has five Commissioners).  Following the 2016 elections, the federal Administration was set to change on January 20, 2017 when Donald Trump would be sworn-in as President, signaling a significant change in U.S. policy.  On January 17, 2017—just three days before that change—the FTC filed its lawsuit against Qualcomm.  The lawsuit was filed despite significant division between the three Commissioners.  Commissioner Ohlhausen provided a “rare” dissent in what she considered “an extraordinary situation” given the lawsuit’s “flawed legal theory” in an action that “will undermine U.S. intellectual property rights in Asia and worldwide,” stating:

I do not depart from that policy [of dissenting only on rare occasions] lightly.  Yet, in the Commission’s 2-1 decision to sue Qualcomm, I face an extraordinary situation: an enforcement action based on a flawed legal theory (including a standalone Section 5 count) that lacks economic and evidentiary support, that was brought on the eve of a new presidential administration, and that, by its mere issuance, will undermine U.S. intellectual property rights in Asia and worldwide.  These extreme circumstances compel me to voice my objections.

And its probably no coincidence that, on January 20, 2017—just three days after the FTC’s filing—Apple sued Qualcomm alleging antitrust violations.  The FTC and Apple are known to have a Common Interest agreement between them that allows them to secretly coordinate their strategy and share information toward a common goal in these litigations.

We will cover the FTC’s theories in more detail in a later post.  At a top-level, among other things, the FTC argued that Qualcomm was overcharging for the price of its patented technology and that Qualcomm’s practice of licensing the end product (e.g., mobile phones) violated alleged standard setting non-discrimination obligations that required licensing makers of chipsets used in those end products.  That argument goes against the long established practice of licensing end products followed by almost everyone—if not everyone—in the wireless industry.  Basically, there was no discrimination because similarly people were treated similarly—e.g., all the end product manufacturers were licensed, and all the component manufacturers were not licensed (they would not need a license if the end product is licensed).  Even if licensing chipset makers were required, that might be the basis for a chipset manufacturer to bring a breach of contract action for violating a contractual FRAND commitment to the SDOs.  But the FTC antitrust mission does not have jurisdiction to enforce a breach of contract action.  So the FTC alleged that this was part of activity that together raised an antitrust violation.

A key part of the FTC’s theory is an alleged “No license, no chips” policy where Qualcomm would not sell its mobile chipsets to mobile phone manufacturers if they did not have a license from Qualcomm to use patented technology in those chips (Qualcomm disputes whether it actually has declined to provide chips to someone who did not have a license).  If true, that’s rather unremarkable in the patent world.  Someone who wants to use patented technology is supposed to obtain authority from the patent owner before selling products using that technology. (see our July 2, 2014 post re Judge Essex stating implementer should obtain a license to an SEP before using that technology).  In contrast, under U.S. patent law, it would be extraordinary to force a patent owner to help someone infringe their patent—e.g., to force the patent owner to sell an unlicensed infringer the components it needs to infringe the patent.

What has happened since the split-decision by an incomplete set of Commissioners to bring the action against Qualcomm is further troubling.  Only a couple weeks after the case was filed, one of the three Commissioners who voted to bring the case left the FTC.  That left one Commissioner who was against the case and one who was for it.  It appears that, because there was a stalemate among the Commissioners, the FTC Staff would continue to pursue the lawsuit without any substantial policy guidance from appointed Commissioners.  About a year and a half later, the FTC finally had all five Commissioner slots filled.  However, one of the Commissioners recused himself from participating in the FTC case against Qualcomm.  This again left an equal split over the case with two Commissioners against the lawsuit and two Commissioners for it.  So, again in the face of a Commissioner stalemate, the FTC Staff apparently continues forward without any substantial policy guidance from appointed Commissioners.

Further, as discussed above, after the case was filed President Trump followed the CFIUS advice and precluded a hostile takeover of Qualcomm by a foreign entity given national security interests that specifically singled out concern that the U.S. could lose its lead in 5G technology to Huawei.  And during the course of this trial Huawei has come under fire for stealing U.S. technology, including charges filed just last week following intellectual property theft investigation by the Federal Bureau of Investigation.  Yet the FTC Staff continues its lawsuit that relies substantially on Huawei as what some call the FTC’s “star witness” to make its case against Qualcomm.  This has not gone unnoticed by mainstream media. (See The U.S.’s Star Witness in the Qualcomm Antitrust Suit: China’s Huawei; Trump allies warn Obama-era FTC suit against US firm giving boost to China; The Chinese government will have eyes and ears on all of us someday if the FTC gets its way; The U.S. government shouldn’t partner with Huawei)

Also within the past week or so, Makan Delrahim, the Assistant Attorney General for the Antitrust Division of the Department of Justice, criticized the theory underlying the FTC’s case against Qualcomm, indicating that disputes over patent-licensing rates should not be subject to antitrust law. (See DOJ’s Delrahim criticizes ‘theory’ underlying FTC’s Qualcomm case).

Of course, there is more to one side to any issue.  There will be excuses and arguments from all points of view.  But, taking a step back and looking at this broadly, it is plainly troubling to see an agency staff unguided by administration policy makers seek such sweeping and disruptive action against long-established industry licensing practices at a very important historical point of wireless communication development with the birth of 5G.  And doing so against a company whose continued vitality in this wireless technology was deemed a national security concern.  And basing that case on a “star witness” that is the specific foreign company identified in the national security concern and that the U.S. government recently indicted for stealing U.S. technology.

Where is Denzel?

Several years ago there was a thrilling action movie called “Crimson Tide” starring Gene Hackman as the Captain of the U.S.S. Alabama submarine and Denzel Washington as his new Executive Officer.  A political group took control of a nuclear missile base and threatened to launch them.  As tensions grew, the U.S.S. Alabama received a message ordering them to launch a preemptive strike of nuclear missiles at the facility.  After that initial message, another message was received but it was incomplete.  It might have said don’t launch or it might have said something else.  The Captain said an incomplete message is meaningless and protocol required following the last fully received and authenticated message: Launch the nuclear weapons.  The Executive Officer disagreed and refused to launch the missiles until the submarine surfaced to a level where it could receive confirmation that circumstances had not changed and the launch was still a go.  A lot of things happened, it was very tense and exciting—you have to watch it.  But [SPOILER ALERT] it turned out that, when they finally got back in communication, they were told [AGAIN – SPOILER ALERT] not to launch the missiles.

We all may be best served if a Denzel stood up to take pause and ensure that the FTC staff’s lawsuit filed by a divided and incomplete Commission under a different administration is a prudent course under current circumstances.

Magistrate Judge Fallon recently Recommended Dismissing competition law counterclaims brought by TCT Mobile (TCT) against Godo Kaisha IP Bridge 1 (IP Bridge) and Panasonic and Judge Bataillon has now Adopted that ruling.  Those counterclaims were based on alleged improper conduct relating to standard essential patents (SEPs)  on European Telecommunications Standards Institute (ETSI) 2G, 3G and 4G wireless standards that IP Bridge acquired from Panasonic after those standards were adopted.  While the standards were under development, Panasonic had committed to license the SEPs on fair, reasonable and non-discriminatory (FRAND) terms.  TCT’s competition law counterclaims generally concerned allegations that:

  • Panasonic made FRAND commitments it did not intend to keep in order to induce the standards body to keep Panasonic’s technology in the standards;
  • After the standards were adopted, Panasonic transferred the patents to IP Bridge which offered to license the patents on terms that were not FRAND and
  • There was some type of improper concerted action between Panasonic and IP Bridge (this aspect is fairly redacted and unclear).

This case presents an interesting nuance of competition claims against a party (IP Bridge) that acquired SEPs from an original owner (Panasonic) who made a FRAND commitment.  In this case, TCT alleged that something about the transfer of the patents to IP Bridge was meant to circumvent Panasonic’s FRAND commitment (but the details of those allegations are redacted in the public court documents).

This case also indicates that an antitrust injury-in-fact cannot arise solely from a patent owner filing an infringement lawsuit on FRAND-committed SEPs.  That’s because a successful FRAND defense by the accused infringer will lead to remedies consistent with the FRAND commitment and, in any event, any relief ultimately granted by the court would be lawful.

The decision also has a unique procedural posture.  This is a decision by a magistrate judge that recommends to the presiding district court judge how to rule on the issue.  Such magistrate judge recommendations are common in patent  cases.  The presiding district court judge usually adopts a magistrate judge’s recommendation, but is not required to do so.  So we will await the district court judge’s decision whether to adopt Judge Fallon’s recommendation here.

Further, this decision concerns a Rule 12(b)(6) motion to dismiss causes of action based on the initial pleadings.  Such motions are difficult to win because of the tremendous deference the court must give to the challenged pleading — e.g., the court considers whether TCT states a “plausible” claim if the court assumes (without deciding) that all factual allegations TCT raises are true and draws all reasonable inferences in TCT’s favor.   And courts are even more reluctant to grant a Rule 12(b)(6) motion against competition law claims, which may be factually complex and require information in the hands of the alleged wrong-doer that can be obtained only in discovery.   In this case, however, TCT apparently had almost a year of discovery and two attempts to plead its competition law claims, which may have provided the court more comfort in its dispositive ruling here. Continue Reading Magistrate Judge Fallon recommends dismissing competition claims against SEP holder (Godo Kaisha IP Bridge v. TCL et al)

Yesterday, the U.S. Department of Justice (DOJ) Assistant Attorney General (AAG) for the Antitrust Division Makan Delrahim spoke  in Brussels about maintaining a close working relationship and coordination with European Union’s Directorate General for Competition (DG Competition) in competition law enforcement.  AAG Delrahim’s remarks included suggestion that the European competition authorities shift toward the more balanced  approach to standard essential patents (SEPs) that he recently articulated for the U.S. (See our Dec. 20, 2017 post on AAG Delrahim’s remarks on shift in U.S. DOJ’s SEP enforcement approach).  Some key points in AAG Delrahim’s remarks include:

  • “I believe that strong protection of these [IP] rights drives innovation incentives, which in turn drive a successful economy.”
  • “I worry that we have strayed too far in the direction of accommodating the concerns of technology licensees who participate in standard setting bodies, very likely at the risk of undermining incentives for the creation of new and innovative technologies.”
  • The tension between innovators and implementers “is best resolved through free market competition and bargaining.  And that bargaining process works best when standard setting bodies respect intellectual property rights … including the very important right to exclude.”
  • If a patent owner violates a standard-setting commitment, “remedies under contract law, rather than antitrust remedies, are more appropriate to address licensee’s concerns.”

Below is a a complete excerpt of AAG Delrahim’s remarks in Brussels with respect to intellectual property and SEPs: Continue Reading U.S. DOJ Antitrust Head Makan Delrahim brings his message of balanced SEP competition law enforcement to Europe

The Korea Fair Trade Commission (“KFTC”) recently issued a press release stating its intent to issue a written decision that will impose an $865 Million sanctions and a corrective order against Qualcomm for abuse in licensing standard essential patents (“SEPs”) in the mobile communications industry.  Specifically, on December 28, 2016, the KFTC released a three-page English-translated summary of a 27-page Korean-language  press release.  Qualcomm issued its own press release, which includes an unofficial English translation of the 27-page KFTC press release.

This was only a press release by the KFTC and an actual written decision  has yet to issue from which any action will be taken.  Accordingly, at this point we provide a summary of the KFTC Press Release and conclude with important questions or issues to look for when the actual written decision of the KFTC issues.  For example, Korean-based Samsung had some of the same or similar licensing practices as U.S.-based Qualcomm and prevailed in U.S. litigation on whether such practices breached the same ETSI FRAND obligations at issue here.  The KFTC written decision may show why Samsung’s activities were okay, but Qualcomm’s were not.

To be clear:  This is a summary based on a review of an unofficial translation of the KFTC Press Release and may not reflect actual facts or the facts and theories upon which the KFTC ultimately bases its written decision.  In other words, assume that the qualification “The KFTC Press Release may indicate that …” applies to everything below since there could be error in the KFTC’s factual findings, the unofficial translation of it, or our summary thereof. Continue Reading Korea FTC proposes sanctions against Qualcomm’s SEP licensing practices

Yesterday, Judge Andrews in the District of Delaware issued an Order that denied InterDigital’s motion to dismiss Microsoft’s Complaint that alleged violation of antitrust laws based on InterDigital’s enforcement of patents alleged to be essential to 3G and 4G cellular ETSI standards and subject to commitments to license on fair, reasonable and non-discriminatory (“FRAND”) terms.  At this early procedural stage of the case, the issue was not whether Microsoft would prevail in the case or whether the allegations in the Complaint were true; rather, at this initial case stage Judge Andrews considered whether Microsoft had stated “plausible” claims against InterDigital upon which relief could be granted if what Microsoft alleged in the Complaint was true when viewing the Complaint in a light most favorable to Microsoft.  He decided that was the case and is allowing the case to proceed.

This ruling itself is not necessarily important as a precedential matter given the relatively low threshold for surviving a motion to dismiss and inability to challenge the factual assertions, but this will be an interesting case to follow as it matures because it is one of the few contemporary instances of a U.S. court considering the application of competition law to standard essential patents (“SEPs”) with sophisticated parties on both sides of the issue. Continue Reading Judge Andrews permits Microsoft’s SEP-based antitrust claims against InterDigital to proceed (Microsoft v. InterDigital)

Yesterday, Qualcomm issued a press release announcing resolution of the investigation under China’s Anti-Monopoly Law by China’s National Development and Reform Commission (“NDRC”) of Qualcomm’s licensing practice for standard essential patents.  In addition to Qualcomm paying a $975 million fine, the China’s NDRC approved Qualcomm’s proposed rectification plan, summarized as follows:

  • Qualcomm will offer licenses to its current 3G and 4G essential Chinese patents separately from licenses to its other patents and it will provide patent lists during the negotiation process.  If Qualcomm seeks a cross license from a Chinese licensee as part of such offer, it will negotiate with the licensee in good faith and provide fair consideration for such rights.
  • For licenses of Qualcomm’s 3G and 4G essential Chinese patents for branded devices sold for use in China, Qualcomm will charge royalties of 5% for 3G devices (including multimode 3G/4G devices) and 3.5% for 4G devices (including 3-mode LTE-TDD devices) that do not implement CDMA or WCDMA, in each cae using a royalty base of 65% of the net selling price of the device.
  • Qualcomm will give its existing licensees an opportunity to elect to take the new terms for sales of branded devices for use in China as of January 1, 2015.
  • Qualcomm will not condition the sale of baseband chips on the chip customer signing a license agreement with terms that the NDRC found to be unreasonable or on the chip customer not challenging unreasonable terms in its license agreement.  However, this does not require Qualcomm to sell chips to any entity that is not a Qualcomm licensee, and does not apply to a chip customer that refuses to report its sales of licensed devices as required by its patent license agreement.

Qualcomm also gave a presentation to investors with further explanation of the agreement reached, including the following:

  • Qualcomm will not pursue further legal proceedings contesting the NDRC’s findings that Qualcomm violated China’s Anti-Monopoly Law
  • Requires no licensing changes outside China with limited exceptions
  • Allows Qualcomm’s licensing business to fully participate in growing China opportunity
  • Qualcomm does not believe that other competition agencies will interpret their laws to reach conclusions similar to China’s NDRC

 

The Northern District of California recently granted judgment on the pleadings in favor of patent-plaintiff ChriMar Systems, Inc. on antitrust and state law unfair competition counterclaims filed by accused infringers Cisco and Hewlett-Packard (HP).  According to the court, the crux of Cisco’s and HP’s counterclaims alleged that ChriMar failed to disclose and commit to license one of its patents on reasonable and non-discriminatory (RAND) terms during a standard-setting process and, subsequent to the standard being adopted, filed suit against them alleging infringement of the same patent.  Cisco and HP alleged that this was an abuse ChriMar’s “monopoly power” and also a violation of California’s Unfair Competition Law.  The court held that judgment on the pleadings was warranted because Cisco and HP failed to define the relevant market and also failed to plead facts showing market power and antitrust injury.  The court, however, granted Cisco and HP leave to amend their counterclaims.

Background.  On October 31, 2011, ChriMar filed a complaint against Cisco and HP alleging that Cisco’s and HP’s “Power over Ethernet telephones, switches, wireless access points, routers and other devices used in wireless local area networks, and/or cameras and components thereof that are compliant with the” Institute of Electrical and Electronic Engineers (IEEE) 802.3af and/or 802.3at standards infringed one or more claims of ChriMar’s U.S. Patent No. 7,457,250 (“the ‘250 Patent”).  In response, Cisco and HP filed counterclaims asserting causes of action for, inter alia, monopolization under the federal antitrust laws as well as for violations of California’s Unfair Competition Law.

In their counterclaims, Cisco and HP allege that the IEEE has a “patent disclosure policy” that “requires participants in the standards setting process to disclose patents or patent applications they believe to be infringed by the practice of the proposed standard.”  Cisco and HP further allege that the IEEE policy requires those who disclose intellectual property rights to provide a written assurance stating whether they would enforce any of their present or future patents “whose use would be required to implement the proposed IEEE standard or provide” a license to such patents royalty-free or on RAND terms.  The counterclaims assert that ChriMar was required to but intentionally “failed to disclose to IEEE its belief that its ‘250 Patent was essential to the proposed 802.3af and/or the 802.3at” during amendments of the 802.3 standard and that “ChriMar was not willing to license the ‘250 Patent on RAND terms.”  Cisco and HP contend that due, in part, to this alleged failure to disclose, the industry adopted the present form of IEEE 802.3af and IEEE 802.3at amendments to the IEEE 802.3 standard and that they are now “locked-in to the current implementation . . . for Power over Ethernet-enabled products.”  Had ChriMar disclosed its belief that the ‘250 Patent would be infringed by practicing the proposed amendments to the 802.3 standard as well as its unwillingness to license the patent on royalty-free or RAND terms, the IEEE would have, according to Cisco and HP, done one or more of the following:

1.  Incorporated one or more viable alternative technologies into the IEEE 802.3af and IEEE 802.3at amendments to the IEEE 802.3 standard;

2.  Requested ChriMar to provide a letter of assurance that it would license the ‘250 Patent on RAND terms;

3.  Decided to either not adopt any amendment to the IEEE 802.3; and/or

4.  Adopted an amendment that did not incorporate technology that ChriMar claims is covered by the ‘250 Patent.

Cisco and HP further contend that ChriMar has taken the position that all Power over Ethernet-enabled products infringe the ‘250 Patent and that, to the extent that the ‘250 Patent is essential to the 802.3af and the 802.3at standards, no viable technology substitutes exist and ChriMar has monopoly power over the Power over Ethernet Technology Market.  Both Cisco and HP allege that this conduct combined with ChriMar’s infringement action against them is an unlawful abuse of monopoly power under Section 2 of the Federal Sherman Antitrust Act and also unfair competition under California’s Unfair Competition Law, Cal. Bus. Code § 17200 (UCL).

HP also filed a claim for attempted monopolization under Section 2, which alleges that ChriMar’s complaint against it, Cisco and several others (Respondents) before the International Trade Commission seeking an exclusion order under Section 337 of the Tariff Act of 1930 constituted an unlawful intent to monopolize the Power over Ethernet Technology market.  According to HP, ChriMar alleged before the ITC  that Respondents infringe the ‘250 Patent by importing products that practice the Power over Ethernet Standards IEEE 802.3af and 802.3at.  HP alleges that the Respondents’ imports collectively “comprise the substantial majority of products commercially offered in the Power over Ethernet Technology Market.”  HP alleges further that ChriMar’s “baseless” allegations of infringement and request for an order prohibiting these Respondents from importing Power over Ethernet products constitutes an unlawful attempt to monopolize the Power over Ethernet Technology Market.

ChriMar’s Answers and Motion to Dismiss.  ChriMar filed an answer to Cisco’s counterclaims as well as an answer to HP’s counterclaims generally denying defendants’ antitrust and UCL allegations and asserting lack of standing and failure to state a claim as affirmative defenses.  ChriMar thereafter moved for judgment on the pleadings on the antitrust and UCL counterclaims.  In its motion, ChriMar argued that Cisco and HP failed to plead facts showing that ChriMar had monopoly power in the alleged relevant market.  Specifically, according to ChriMar, Defendants could not “simply rely on the existence of patent rights or actions to enforce them, as they have done.”  “As a matter of law, ‘patent rights are not legal monopolies in the antitrust sense of that word’ … and simply owning or enforcing the patent right does not make one a ‘prohibited monopolist.'”  ChriMar elaborated:

While the patent may give its owner a right to exclude, that is in no way synonymous with having monopoly power. … Such is presumably the case in a market related to a standards setting context where the standard does not practice the patented technology as Defendants allege in this action, where there are market alternatives to the standard itself such as Cisco’s own proprietary inline power technology, where other parties have rights to exclude in the same technology market (in the form of other patents that read on the standards) and can effectively limit the ability of other parties to exert monopoly power (i.e., control prices), or where competing technologies like wireless communication or conventional unpowered Ethernet can exert economic influences that can keep Power over Ethernet prices or the exercise of monopoly power in check — all issues Defendants’ pleadings never address.

ChriMar further argued that its enforcement of its patent rights was presumed to be valid under the Noerr-Pennington doctrine, which generally grants immunity from antitrust liability for petitioning the government in the form of litigation.  To overcome this presumption, Cisco and HP had to plead facts showing that its litigation against them and ITC proceeding seeking an exclusion order were a “sham,” that is, “objectively baseless.”  To be objectively baseless, Cisco and HP must plead facts showing that ChriMar’s claims were “‘so baseless that no reasonable litigant could realistically expect to secure favorable relief.'”  If Cisco and HP could show that ChriMar’s claims were objectively baseless, they next had to allege facts showing that the litigation was subjectively brought in bad faith in order to overcome Noerr-Pennington immunity.

ChriMar argued that the only factual allegation in HP’s counterclaim is that “‘discovery in the ITC investigation established that ChriMar’s allegations for domestic industry were baseless'” and that “ChriMar withdrew its [ITC] complaint nine months after it was filed, and after HP filed a motion for summary determination on the issue of domestic market.”  These allegations, according to ChriMar, failed to overcome ChriMar’s Noerr-Pennington immunity.

ChriMar also argued that Defendants failed to plead facts adequately defining a relevant market, a necessary element for a Section 2 claim.  Defendants alleged the following relevant market in their counterclaims:

ChriMar actually, potentially, and/or purportedly competes in the United States and worldwide markets for developing and licensing technology essential to implement the IEEE 802.3af and 802.3at amendments to the IEEE 802.3 standard and for technology essential to perform certain functions, allegedly covered by the ‘250 Patent, necessary to implement the IEEE 802.3 standard (hereinafter ‘Power over Ethernet Technology Market’).

ChriMar asserted that this definition is flawed because it fails to identify what particular technologies are included within the market.  Further, ChriMar argued that Defendants “have pled a market whose outer boundaries are defined by ChriMar’s infringement claims (one patent asserted against two standards) rather than any exploration of the ‘reasonable interchangeability’ of use or the cross-elasticity of demand’ outside this intersection.”  Cisco and HP’s counterclaims did not consider that the “technologies and products at issue in this litigation may be interchangeable with other technologies and products such as Power over-Ethernet technologies and products that are not compliant with the two standards . . . or even technologies and products not compliant with any standard, but that themselves are alternatives to the Power over Ethernet technologies and products compliant with these two standards.”  Under the Sherman Act, according to ChriMar, the relevant market cannot be defined by ChriMar’s economic power within the two standards.  Rather, the relevant market must be defined and measured by cross-elasticity of demand or product interchangeability:  “Here, Defendants plead economic power with respect to those entities voluntarily choosing to continue making products compliant with these two particular standards . . . and not the market demand for these particular Power over Ethernet technologies themselves.”

ChriMar further argued that Cisco and HP failed to plead facts showing that ChriMar had monopoly power or that Defendants have suffered antitrust injury.  Further, ChriMar asserted that HP’s attempted monopolization claim was deficient because it failed to plead facts showing that ChriMar’s ITC action “was motivated by an intent to monopolize, rather than primarily motivated by legitimate business purposes.”  Finally, ChriMar argued that Cisco and HP’s UCL claims should be dismissed because they relied on the same conduct that formed the basis of their Section 2 claims.

Cisco and HP’s Opposition.  Cisco filed an opposition to ChriMar’s motion, as did HP.  Responding to ChriMar’s arguments that Defendants failed to adequately plead a relevant market, both Cisco and HP argued that “[m]arket definition is rarely grounds for dismissal of a pleading because ‘the validity of the relevant market is typically a factual element rather than a legal element” that is not appropriate to resolve on a Rule 12 motion.  

On the merits, Defendants argued that numerous cases have consistently held “that the relevant market is defined by those technologies that — before the standard was adopted — were competing to perform the function that was covered by the purportedly essential patent.”  According to Cisco and HP, “ChriMar does not cite to a single case that considered the relevant market where antitrust violations occurred in connection with misconduct in the context of standards development.”  In contrast, Defendants argued that Apple v. Samsung, Broadcom v. Qualcomm and Apple v. Motorola confirm that their market definition was adequately pled.  In Samsung, Apple pled the relevant market as “the various markets for technologies that — before the standard was implemented — were competing to perform each of the various functions covered by each of Samsung’s purported essential patents for UMTS.”  “Apple also identified the patents Samsung declared as standard essential and alleged that ‘pre-standardization there existed alternative substitutes for the technologies covered by Samsung’s patents,’ and that after standardization, ‘viable alternative technologies were excluded.'”  Defendants asserted that the Samsung court found such allegations to “define the bounds of the relevant market” and that “Apple ha[d] sufficiently pled a relevant antitrust market” because “the incorporation of a patent into a standard . . . makes the scope of the relevant market congruent with that of the patent.”

According to Defendants, the Broadcom court reached a similar conclusion, holding that Broadcom, the alleged infringer, had adequately pled a relevant market to support a monopolization claim that was defined as “the market for Qualcomm’s proprietary WCDMA technology, a technology essential to the implementation of the UMTS standard.”  Apple v. Motorola reached a similar conclusion, finding that a relevant market was sufficiently pled as “the various technologies competing to perform the functions covered by Motorola’s declared-essential patents for each of the relevant standards.”

Cisco and HP argued that, “[c]onsistent with these cases, [Defendants] defined the market to comprise the technologies that competed to perform the functions in the [Power over Ethernet] Standards allegedly covered by the ‘250 patent.”  This definition, according to Defendants, “appropriately focuses on alternative technologies that were excluded from the market by ChriMar’s deceptive conduct and which [Defendants] and other implementers of the standard cannot now choose because the industry is ‘locked-in’ to the standard.”  “To the extent ChriMar argues the correct market definition should include the entire standard, rather than some portion of the standard, that argument is inconsistent with both the complaint and with”  Samsung, Broadcom, and Apple.

With respect to monopoly power, both Cisco and HP argued that in the standards context, “it is well settled that patentees holding standard-essential patents can possess monopoly power.”  Cisco and HP again relied upon Samsung, wherein the court concluded that “because standard-essential patents may confer antitrust market power on the patent owner, Apple’s claims” that “Samsung had market power over the relevant market because it obtained the power to raise prices and exclude competition over the technologies covered by Samsung’s standard-essential patents” and that “there was a ‘lock-in’ to the standard” were sufficient to plead monopoly power.  Cisco and HP argued that their counterclaims satisfied this standard because they alleged that, as a result of ChriMar’s accusations that “the leading vendors of Power over Ethernet-enabled products” infringe the ‘250 Patent, “it is ChriMar’s position that no meaningful level of Power over Ethernet-enabled products do not infringe the ‘250 Patent.”  Further, like the allegations in Samsung, Cisco and HP both allege that “because of ‘lock-in’ to the standard,” there are no “viable technology substitutes at present.”  “Accordingly, if the ‘250 Patent claims covered products that comply with the IEEE standard as claimed by ChriMar, ChriMar has monopoly power over the Power over Ethernet Technology Market.”

The element of antitrust injury was also adequately pled, according to Cisco and HP.  Defendants argued that in order to plead that they have suffered antitrust injury, they must allege facts showing an injury to competition.  “It is well settled that misconduct before an SSO harms competition by ‘obscuring the costs of including proprietary technology in a standard and increasing the likelihood that patent rights will confer monopoly power on the patent holder.'”  Cisco and HP pointed to allegations in their counterclaims “concerning the harm to competition caused by ChriMar’s deception in the context of standards setting,” including that ChriMar “‘could charge supra-competitive prices”‘” and that “‘[c]ustomers and consumers will be harmed, either by not getting products that are compliant with the IEEE 802.af and IEEE 802.at amendment to the IEEE 802.3 standard or having to pay an exorbitant price for one.”

Cisco also took issue with ChriMar’s argument that “the anticompetitive harm alleged by Cisco ‘is a potential consequence in any successful patent litigation.'”  According to Cisco, “[t]his is not just ‘ any patent litigation,’ and the competitive harm alleged by Cisco is not the natural result of any litigation.”  “[H]ere, ChriMar deliberately subverted the goals of the IEEE standards-setting process by not disclosing its patent rights, waiting until the industry became ‘locked-in’ to the [Power over Ethernet] Standards, and demanding royalties from implementers of the standards that Cisco has alleged will lead to ‘supra-competitive prices.'”

With respect to ChriMar’s Noerr-Pennington argument, Cisco argued that “[c]ourts have repeatedly recognized that the Noerr-Pennington doctrine does not apply to monopoly power gained through deception in the context of SSOs, even when an allegedly standard-essential patent is subsequently asserted in court.”  As the doctrine does not apply, Cisco and HP need not plead facts supporting the two exceptions.

HP argued similarly, but also asserted that its counterclaim alleged facts supporting the “sham” exception to Noerr-Pennington, that is is, that ChriMar filed a sham ITC proceeding against HP and others only to later voluntarily withdraw it.

HP also asserted that its counterclaims adequately pled that ChriMar had a specific intent to monopolize and a dangerous probability of obtaining a monopoly.  “HP alleges facts that ChriMar deceitfully concealed its patent in connection with the IEEE standards-setting process and then sought to enforce its patent in the ITC.  This conduct shows a specific intent by ChriMar to monopolize the [Power over Ethernet] Technology Market through its anticompetitive conduct.”  “ChriMar became dangerously close to succeeding in its attempt, having dismissed its complaint less than two months before the start of the ITC hearing.”

Finally, Cisco and HP argued that, because they adequately pled causes of action under the federal antitrust laws, they also adequately pled a cause of action under California’s UCL.

The Court’s Decision on Cisco and HP’s Monopolization Counterclaims.  After ChriMar filed its reply, the court entered an order granting ChriMar’s motion.  With respect to Cisco and HP’s monopolization claims, the court agreed with ChriMar that their pleadings failed to allege facts sufficient to define the relevant market, a necessary element to a Section 2 claim.  “Courts typically require that the proposed relevant market be defined with reference to the rule of reasonable interchangeability and cross-elasticity of demand.”  “However, in the context of a standard setting organization (‘SSO’) locking in a standard which eliminates substitute or alternative technologies courts have allowed a relevant market to be defined by the technologies that were competing before the standard was adopted to perform the function that is covered by the standard and the essential patent.”  “For example, in [Apple v. Samsung], the court found sufficient Apple’s allegations that defined the relevant market as the ‘various markets for technologies that — before the standard was implemented — were competing to perform each of the various functions covered by each of Samsung’s purported essential patents for’ the standard.”  The court in Samsung further “noted that Apple alleged that pre-standardization there were alternative substitutes for the technologies covered by Samsung’s patents, and that after the SSO adopted the proposed standard, viable alternative technologies were excluded.”  Cisco and HP’s claims failed to plead such facts or facts defining the market “as comprising the technologies that competed to perform the functions in the Power over Ethernet standards allegedly covered by the ‘250 Patent.”  Therefore, Cisco and HP failed to sufficiently allege the relevant market.

The court also held that Cisco and HP failed to allege sufficient facts showing that ChriMar had the requisite market power to support a Section 2 claim.  On this element, Cisco and HP argued that “their allegations regarding ChriMar’s failure to disclose its belief that the ‘250 Patent was essential to the 802.3af and 802.3at amendments to the IEEE 802.3 to the standard setting organization (‘SSO’) is sufficient to allege their monopoly claims.”  Citing to an earlier decision in Apple v. Samsung, Defendants contended that “it is sufficient to allege that if the ‘250 Patent is essential, then ChriMar has monopoly power.”  The court, however, concluded that the decision did not support defendants’ contention.  Specifically, “in that case, the court determined that Apple had sufficiently alleged monopoly power.”  “The court in Samsung further noted that, in contrast to the theory that a patent holder misrepresented to an SSO that it would license its intellectual property on RAND terms, ‘[c]ourts have been more reluctant to find an antitrust violation based on the theory that a failure to disclose intellectual property rights in a declared essential patent created monopoly power for a member of the SSO.'”  Indeed, the Samsung court expressly required the plaintiff to allege that “there was an alternative technology that the SSO was considering during the standard setting process and that the SSO would have adopted an alternative standard had it known of the patent holder’s intellectual property rights.”  The Samsung court further made it “clear that the heightened pleading requirements under Rule 9(b) for fraud applies to” the types of antitrust claims brought by Cisco and HP.  Applying these standards to those claims, the court concluded that “they fail to allege non-conclusory facts which, if true, would be enough to show that ChriMar acquired sufficient monopoly power.”  “Notably, Defendants fail to clearly allege that the IEEE would have adopted an alternative standard had it known about the ‘250 Patent and ChriMar’s position with respect to its ‘250 Patent.”  Therefore, Cisco and HP failed to plead the necessary element of market power.

Finally, with respect to the necessary element of antitrust injury, the court concluded that Cisco and HP’s claims merely alleged, “in conclusory fashion, that ChriMar’s alleged conduct has ’caused and will directly and proximately cause antitrust liability to [Defendants] within the Power over Ethernet Technology Market . . .”  Neither defendant pled any facts which, if true, “would demonstrate antitrust injury.”

Because Cisco and HP failed to allege the necessary elements of a relevant market, monopoly power, and antitrust injury, the court found “that Defendants have not alleged sufficient facts to state a counterclaim for monopolization.”  However, the court provided Defendants with leave to amend their monopolization claims in an attempt to remedy the deficiencies identified by the court.

Notably, the court did not address — at least not at this time — ChriMar’s Noerr-Pennington arguments but may very well do so on any subsequent motion to dismiss the amended counterclaims permitted by the court’s decision.

The Court’s Decision on HP’s Attempted Monopolization Counterclaim.  Because HP failed to plead a relevant market as well as antitrust injury, HP’s attempted monopolization claim failed as well.  “In addition, although a lower percentage [of market share] is required for an attempted monopoly claim, as opposed to an actual monopoly claim, HP must still allege sufficient market power.”  The court concluded that HP failed to allege sufficient market power which was also “fatal to its attempted monopolization claim.”

The court disagreed with ChriMar’s argument that “HP’s attempted monopolization counterclaim fails for the additional reason that HP fails to allege specific intent to monopolize or a dangerous probability of obtaining monopoly power because HP’s attempted monopolization allegations are based solely around the terminated [ITC] investigation.”  The court concluded that “HP does not rely solely upon the ITC investigation” but “is also premised upon ChriMar’s alleged misconduct before the SSO.”  However, because the court was granting HP leave to amend its counterclaim to adequately allege a relevant market, market power and antitrust injury, the court did not reach the issue of whether HP’s additional allegations regarding the ITC investigation would be sufficient, standing alone, to state a claim for attempted monopolization “if HP sufficiently alleges the relevant market power, and an antitrust injury.”  HP’s attempted monopolization claim was therefore dismissed with leave to amend.

The Court’s Decision on Cisco and HP’s UCL Counterclaims.  The court also dismissed Cisco and HP’s UCL counterclaims.  “Courts have held that where the alleged conduct does not violate the antitrust laws, a claim based on unfair conduct under the UCL cannot survive.”  “Because the Court finds that Defendants have not alleged facts sufficient to state a a counterclaim for monopolization and attempted monopolization, Defendants’ UCL counterclaims” fail as well.  However, as with the other counterclaims, the court granted HP and Cisco leave to amend this claim as well.

We will continue to track the pleading and other developments in this case.

Yesterday, the Second Circuit in Lotus v. Hon Hai Precision affirmed the district court’s dismissal of antitrust and breach of contract claims arising from foreign activity based on the patent owner not licensing, but asserting in litigation in China, patents subject to FRAND-Z (i.e., royalty free) standard setting obligations.  Consistent with the U.S. Federal Trade Commision’s amicus brief (see our Jan. 13, 2014 post), the Second Circuit ruled that dismissal was proper because any effect on U.S. domestic or import commerce from the foreign activity did not “give[] rise to” the asserted antitrust claims as required under the Foreign Trade Antitrust Improvements Act (“FTAIA”).

We refer you to our prior post (Jan. 13, 2014 post, May 17, 2013 post and Feb. 13, 2013 post) for the background discussion of this case that involves plaintiff Lotes suing Hon Hai and related entities (such as Foxconn) for reneging on licensing commitments made to the USB Implementers Forum (USB-IF) by not licensing USB 3.0-related patents on FRAND-Z terms and violating U.S. antitrust laws by instituting foreign patent-enforcement proceedings on those patents against Lotes in China.  Below is a summary of the Second Circuit’s ruling.

FTAIA Requirements Are Substantive, Not Juridictional.  First, in overruling a prior decision, the Second Circuit ruled that the FTAIA restrictions on antitrust claims based on foreign conduct are substantive, not jurisdictional, requirements–i.e., “they go to the merits of the claim rather than the adjudicative power of the court.”  Among other things, this means the restrictions are potentially waivable (though the Second Circuit reserved ruling on whether they actually are waiveable, noting that “[A] ‘right conferred on a private party, but affecting the public interest, may not be waived or released if such waiver or release contravenese the statutory policy.”).

Patentee’s SSO Obligation Did Not Waive FTAIA Defenses.  Second, the Second Circuit ruled that the patentee did not contractually waive the FTAIA restrictions through its standard setting commitments.  As an initial mattter, the Second Circuit stated that the plaintiff failed to first raise the issue in the district court and “an appellate court will not consider an issue raised for the first time on appeal.”  Further, even assuming arguendo that the FTAIA restrictions were waivable, “nothing in the cited [USB-IF standard setting] contractual provisions suggests that the defendants waived those [FTAIA] requirements here.”  Specifically, the plaintiff Lotes pointed to five provisions of the USB-IF’s Contributors Agreement:

  1. Paragraph 2 that recites the contributors’ understanding “that it is imperative that they and their representatives act in a manner which does not violate any state, federal or international antitrust laws and regulations.”  The Second Circuit did not find waiver here, because this “merely recites the parties’ understanding that they are subject to various antitrust laws and regulations and affirms the parties’ commitment to abide by their existing legal obligations.”  Thus, “[at] most”, this provision “can be read to recognize and incorporate into the Contribution Agreement the signatories’ preexisting obligations under U.S. antitrust law,” but “do not waive any statutory requirements or otherwise alter the scope of the signatories’ legal obligations.”  Thus the signatories “remain free to argue that, under the FTAIA, the Sherman Act does not apply to or regulate the conduct at issue in this case.”
  2. Paragraph 2 statement that “prohibits any communications regarding … exclusion of competitors or any other topic that may be construed as a violation of antitrust laws.”  The Second Circuit did not find waiver here, because this simply “prohibits the parties from engaging in anticompetitive ‘communications.'”
  3. Paragraph 6.6 statement that the Agreement is to be “construed and controlled” by New York law.  The Second Circuit found no waiver here, because this was simply a “standard choice-of-law” clause.
  4. Pargraph 6.7 statement that “all disputes arising in any way out of this Agreement shall be heard in, and all parties irrevocably consent to jurisdiction and venue in, the state and Federal courts of New York, New York.”  The Second Circuit found no waiver here, because this was simply a “standard … choice-of-forum” clause.
  5. Paragraph 6.12 statement that “the obligations of the parties hereto shall be subject to all laws, present and future, of any government having jurisdiction over the parties hereto.”  The Second Circuit found no waiver here, because this “merely reiterates the parties’ existing obligation to comply with all applicable laws” as in Paragraph 2 above.

Thus, the Second Circuit held that the patentee did not waive its FTAIA defenses by signing the USB-IF Contributor Agreement.

Foreign Conduct’s U.S. Domestic Effect.  Third, following Seventh Circuit precedent, the Second Circuit held that foreign anticompetitve conduct can have the FTAIA-required “direct, substantial, and reasonably forseeable effect”on U.S. domestic or import commerce ” even if the effect does not follow as an immediate consequence of the defendant’s conduct, so long as there is a reasonably proximate causal nexus between the conduct and the effect.”  The Second Circuit thus rejected the Ninth Circuit’s “direct … effect” standard applied by the district court below.  The Second Circuit, however, declined to decide “the rather difficult question” whether that requirement was met in this case because the case could be resolved based on the “give rise to” requirement discussed below.

Does Effect “give rise to” Antitrust Claims.  Finally, the Second Circuit ruled that the alleged anticompetive conduct did not “give[] rise to” the plaintiff’s antitrust claim because, “in the causal chain the plaintiff alleges, the plaintiff’s exclusion from the relevant market actually precedes the alleged domestic effect” [emphasis in original].  The Second Circuit described the domestic effect allegations as follows:

Lotes alleges that the defendants’ foreign conduct had the effect of driving up the prices of consumer electronics devices incorporating USB 3.0 connectors in the United States.  But those higher prices did not cause Lotes’ injury of being excluded from the market for USB 3.0 connectors–that injury flowed directly from the defendant’s exclusionary foreign conduct.  Lotes’s complaint thus seeks redress for precisely the type of “independently caused foreign injury” that … falls outside of Congress’s intent [in enacting FTAIA].

Indeed, to the extent there is any causal connection between Lotes’s injury and an effect on U.S. commerce, the direction of causation runs the wrong way.  Lotes alleges that the defendants’ patent hold-up has excluded Lotes from the market, which reduces competition and raises prices, which are then passed on to U.S. consumers.  Lotes’s injury thus precedes any domestic effect in the causual chain.  And “[a]n effect never precedes its cause.” [emphasis in original]

The Second Circuit also rejected Lotes’s “creative arguments” that “the defendants have also failed to license the necessary claims of certain U.S. patents, which has had the effect of foreclosing competition in the United States.”  Problems with the argument include no allegation that Lotes conducts business in the United States, allegation that Lotes already has rights under the U.S. patents based on the USB-IF Contributors Agreement, and fact that Lotus would still be excluded from the USB 3.0 market because of the foreign enforcement activity against Lotes’s sole-foreign-based manufacturing:

As an initial matter, we are skeptical that the defendants’ refusal to license their U.S. patents has resulted in any domestic foreclosure of competition.  Lotes has not alleged that it manufactures products in the United States, imports products into this country, or otherwise does business here.  It is thus unclear why Lotes believes it even needs a U.S. license from the defendants in order to operate.  And even to the extent a license is in fact necessary, Lotes alleges that, by virtue of the Contributors Agreement, it “either already has .. .or has in irrevocable right to a RAND-Zero license” for all patent claims and other intellectual property necessary to practice the USB 3.0 standard.  The alternative domestic effect Lotes relies upon is thus illusory.

In any event, any domestic effect resulting from the defendants’ failure to license their U.S. patents did not proximately cause Lotes’ injury.  Indeed, any such effect is not even a factual, “but for” cause of Lotes’s injury.  Even if the defendants had granted Lotes a U.S. license, Lotes would still be excluded from the USB 3.0 market by virtue of the defendants’ independent infringement suits in China.  But for the failure to license, Lotes would have suffered the same harm. [emphasis in original]

The Second Circuit thus affirmed dismissal on this alternative ground.  Further, the Second Circuit affirmed the district court’s denying Lotes a second opportunity to amend the complaint because, “[i]n light of our conclusion that any domestic effect did not ‘give[] rise to’ Lotes’s claim, amendment would be futile.”

SanDisk brought suit against Round Rock Research in the District of Delaware last week, alleging that the patent assertion entity’s acquisition and enforcement of standard essential patents previously held by Micron Technology has violated federal and state antitrust laws and breached contractual commitments to license the patents on RAND terms. The action, Sandisk Corporation v. Round Rock Research LLC, Case No. 1:14-cv-00352, comes in the midst of two ongoing patent cases between the companies — one declaratory judgment action filed by SanDisk in the Northern District of California and the other an infringement action filed by Round Rock in Delaware.

SanDisk’s March 20, 2014 complaint alleges that Round Rock Research conspired with flash memory device manufacturer Micron Technology to acquire and subsequently monetize patents that Micron could not enforce itself due to SSO commitments.  Specifically, SanDisk alleges Micron’s participation in the JEDEC Solid State Technology Association obligated Micron to disclose patents that might be relevant to JEDEC’s work, even after the adoption of a given standard and to offer participants licenses on RAND terms.  SanDisk alleges that Micron failed to disclose the patents-at-issue despite their relevance to JEDEC eMMC standards and that Round Rock acquired the patents in attempt to monetize them free of Micron’s SSO obligations:

After acquiring patents from Micron, Round Rock sought from SanDisk supracompetitive, hold-up royalties for patents that Micron had never disclosed to JEDEC and that Round Rock claimed SanDisk infringed by practicing a JEDEC standard (“the eMMC standard”). When SanDisk did not capitulate to its demands, Round Rock sued seeking above-RAND royalties and treble damages based on undisclosed alleged standard-essential patents.

SanDisk further alleges that Round Rock has admitted to targeting SanDisk’s current eMMC-compliant products by acquiring patents it believed covered those devices.

By way of background as set forth in the complaint, Round Rock acquired a group of patents from Micron in 2009. Round Rock later approached SanDisk regarding these patents and made a presentation to SanDisk in October 2011, during which Round Rock claimed to have acquired patents reading on products compliant with JEDEC eMMC standard JESD84-A441.   Round Rock sought “supracompetitive” royalty fees on SanDisk’s embedded flash drive products. SanDisk filed for declaratory judgment that the patents presented by Round Rock were invalid and not infringed by SanDisk. Case No. 3:11-cv-05243 (N.D. Cal.). Round Rock then acquired new patents from Micron in 2012 and filed a separate patent infringement action against SanDisk in Delaware. Case No. 1:12-cv-00569.

Since 2011, Round Rock has filed approximately 20 patent infringement actions against a variety of companies, including Acer, Amazon.com, American Apparel, ASUSTeK, Dell, Dole Foods, Fruit of the Loom, Gap, Hanes, HTC, JC Penny, Lenovo, Macy’s, Oracle, Pepsi, V F, and Wal-Mart, almost all of which were also filed in the District of Delaware.

In an order dated January 16, 2014, the Competition Commission of India (“CCI”) ordered another investigation into Ericsson’s licensing of cellular patents that are subject to FRAND obligations, which investigation will parallel a similar investigation of Ericsson that CCI ordered on November 12, 2013 (discussed in our prior post).  The rationale for this new investigation, requested by Intex Technologies, is the same as that for the prior investigation requested by Micromax Informatics and we refer you to our prior post’s discussion thereof.

One difference concerns Ericsson’s refusal to disclose what licensing terms it gave to other licensee’s that the prospective licensee requested to assess whether the license offer to them is fair, reasonable and non-discriminatory.  In the Micromax investigation, the parties were in litigation and Ericsson refused to produce the other comparable licenses in a mediation of that dispute, leading CCI to state that “Refusal of OP [Ericsson] to share commercial terms of FRAND licenses with licensees similarly placed to the informant [Micromax], fortified accusations of the Informant, regarding discriminatory commercial terms imposed by the OP.”

In this new investigation, the rub comes from an NDA required by Ericsson to negotiate a license with requester Intex.  Intex asserts that Ericsonn’s NDA prevents them from consulting with vendors of components that implement the standard, allowed Ericsson to claim it could not produce license agreements with others given similar NDAs entered with them, and required adjudicating any disputes in another country.  CCI found that the NDA was problematic for several reasons, including allowing Ericsson to hide whether its licensing terms were discriminatory as compared to other licenses it granted on the same FRAND-obligated standard essential patents:

Charging of two different license fees per unit phone for use of the same technology prima faci is discriminatory and also reflects excessive pricing vis-à-vis high cost phones.  NDA thrust upon the consumers by OP [Ericsson] strengthens this doubt as after NDA, each of the user of SEPs is unable to know the terms of royalty of other users.  This is contrary to the spirit of ‘applying FRAND terms fairly and uniformly to similarly placed players.’  Transparency is hallmark of fairness.  Both forcing a party to execute NDA and imposing excessive and unfair royalty rates prima facie was abuse of dominance and violation of section 4 of the Act.  Imposing a jurisdiction clause debarring Informant [Intex] from getting disputes adjudicated in the country where both parties were in business and vesting jurisdiction in a foreign land prima facie was also an abuse of dominance.

Concerns about improper NDA requirements are not unique to this CCI investigation.  The recent cable operator lawsuit against Rockstar includes concerns about Rockstar requiring NDA terms in negotiating licenses under patents it acquired from Nortel, which patents include standard essential patents subject to standard-setting organization (SSO) obligations such as RAND, FRAND or  royalty-free licensing obligations.

As with the prior Ericsson investigation, CCI’s order makes clear that these are just initial observations, not final expressions of opinion, and the investigation should proceed without being swayed by the initial observations.