Today, Judge Selna issued on Order ruling on Ericsson’s motion to alter or amend his FRAND ruling. (See our Jan. 3, 2018 post summarizing FRAND royalty ruling). Under the procedural posture of the Rule 52(b) motion for seeking modification of a judge’s bench trial findings of fact and law, Ericsson had to show that its proposed changes to that ruling were needed “to correct manifest errors of law or fact or to address newly discovered evidence or controlling law” or were not changes that “would not affect the outcome of the case or are immaterial to the court’s conclusions.” (Order at 2). Given this difficult standard, Judge Selna only agreed to make minor word changes to his decision, which he will soon reissue with other clerical corrections and some corrections to be made based on TCL’s Rule 52(b) motions (which were also apparently minor changes). To be clear: by “minor changes” we mean as far as significance in applying the decision to other cases between other parties; we could be mistaken and, moreover, have no comment on how significant the changes may be to the instant parties in this particular case. The next substantive step in this case will be the Federal Circuit appeal that Ericsson already filed, but that has been stayed pending the outcome of the parties’ Rule 52(b) motions. Continue Reading Judge Selna will make minor changes to FRAND ruling (TCL v. Ericsson)
Judge James V. Selna of the Central District of California (“C.D. Cal.”) recently released the redacted, 115-page public version of his Memo of Facts and Law with his FRAND determination in the TCL v. Ericsson SEP dispute concerning 2G, 3G and 4G cellular technology in the European Telecommunications Standards Institute (“ETSI”) standards along with his Final Judgment And Injunction, which injunction has detailed terms like one would find in a licensing agreement.
Judge Selna ultimately ruled that Ericsson’s licensing conduct did not breach its FRAND commitment, but that Ericsson’s proposed licensing terms were not FRAND. Judge Selna rejected the FRAND methodologies and resulting FRAND royalty rates proposed by both TCL and Ericsson. Judge Selna did his own FRAND methodology based on the methods and evidence presented by the parties, following mainly a modified version of a “top down” approach proposed by TCL. The FRAND rates determined by Judge Selna fell about half-way between TCL and Ericsson’s proposals, though direct comparison is difficult. For example, for Ericsson’s 4G SEPs, the royalty rates from the parties and court varied as to scope (e.g., blended global rate versus regional rate) and required some conversion to compare (e.g., Judge Selna computed an effective “unpacked” royalty that accounted for lump-sum payments and royalty floors in Ericsson’s offers):
4G SEP Royalty Rate
|TCL’s Proposed 4G Global Rate||0.16% (Blended global rate)|
|Court’s 4G Rates (by region)||0.450% (U.S.)
0.314% (Rest of World; No 4G Sales in Europe)
|Ericsson Effective U.S. 4G Rates
(Court calculated from Option A and B offers)
|1.074% (Option A Effective U.S. Rate) or
1.988% (Option B Effective U.S. Rate)
We provide below a bullet-list summary of some key points from the decision as well as a (rather lengthy) detailed discussion of Judge Selna’s decision. We consider this an important decision to read, and encourage you to do so, because it is one of the few decisions that describe a court’s analysis in determining a disputed FRAND royalty. But we also believe this case provides only incremental development of the case law itself given the highly factual nature of the decision in this still developing area of law. Judge Selna acknowledged that trying to obtain “precision and absolute certainty” here was a “doomed undertaking.” In other words: Learn from this decision, but do not assume it represents a definitive proper FRAND analysis and is representative of a FRAND royalty for all FRAND cases. Its one step in a continuing journey … Continue Reading Judge Selna determines FRAND Rate and enters contract-type injunction on ETSI SEPs (TCL v. Ericsson)
European and U.S. competition authorities may be making a course correction toward a more balanced approach to standard essential patents (“SEPs”) following contemporary enforcement activity that had favored implementers over patent holders.
Specifically, recent remarks by the new administration’s U.S. Department of Justice (“DOJ”) antitrust head explained that patent hold-up by patent owners may not be as big an issue as some had suggested and that patent hold-out by implementers may be a bigger concern. Indeed, he expressed concern about improper collusion among implementers within standard setting organizations (“SSOs”) to enact intellectual property rights (“IPR”) policies that unduly devalue patents and undermine innovation. These remarks from the new administration has caused many to question the viability of the IEEE ‘s 2015 IPR Policy change that was perceived as very implementer oriented, but not challenged by the prior DOJ administration. (See our Feb. 5, 2015 Post about the prior DOJ administration’s business review letter on the IEEE policy change).
Further, the European Commission (“EC”) recently issued non-binding guidance for SEPs that did not suggest bright line rules urged by implementers for negotiating SEP FRAND licenses–e.g., did not suggest component-level licensing and royalty base, rather than end product level—and reflects a balanced approach more consistent with long-standing industry custom and practice in implementing FRAND licensing commitments.
We provide a summary of these statements, but encourage you to read the DOJ remarks and EC guidance directly for yourself (they are not long), which may allow you to detect and avoid interpretive spin from those entrenched on either side of the issues. For example, some have suggested that the EC guidelines support licensing at the component level; but that’s not what the EC guidelines actually say and its been reported that the EC intentionally declined to suggest component-level licensing in these guidelines. Continue Reading U.S. and EU competition authorities may take a more balanced approach to SEPs
Judge Gilstrap recently ruled that certain challenges to a damages expert’s testimony went toward the weight a jury could give that testimony, rather than whether the testimony should be admitted. Specific FRAND-related portions of the testimony that he would admit at trial include the following:
- Expert could testify that the hypothetical FRAND royalty rate to be awarded for infringement damages (which presumes the patents are valid and infringed) would be higher than the royalty rate of a comparable FRAND license, which comparable license’s royalty rate may have been skewed low based on discounts made for litigation risks and costs.
- Expert could testify about FRAND royalties that the accused infringer charges for its own SEPs.
- Expert could testify about licenses negotiated in the context of German litigation and threat of injunction.
Judge Gilstrap indicated that the expert had sufficiently identified what he relied on and explained adjustments that he made to those proposed comparable licenses to account for differences from the hypothetical negotiated license. The defendant’s challenges to that testimony goes to the weight the jury should give the testimony, not its admissibility.
Judge Gilstrap’s ruling is an interesting example of how FRAND litigation has matured since taking the main stage in Judge Robart’s first-of-its-kind FRAND royalty decision in Microsoft v. Motorola (see our May 1, 2013 post) and Judge Holderman’s following decision in In re Innovatio (see our Oct. 3, 2013 post). Both of those 2013 decisions were based on, inter alia, a general failure of litigants to present sufficiently comparable licenses. Since then, Federal Circuit decisions have leaned toward admitting comparable licenses where expert testimony sufficiently accounts for differences from the hypothetical negotiated license.
For example, the Federal Circuit’s 2014 Virnetx decision (a non-SEP case) counseled that, although “alleging loose or vague comparability … does not suffice,” a jury may consider comparable licenses where differences from the hypothetically negotiated license are explained to them (see our Sep. 17, 2014 post). And the Federal Circuit’s 2015 Ericsson decision (an SEP FRAND case) stressed that, although real world licenses “are almost never perfectly analogous to the infringement action,” the jury may consider them if expert testimony accounts for “distinguishing facts when invoking them to value the patented invention.” (see our Dec. 5, 2015 post). Litigants following the Federal Circuit’s guidance may find courts more willing to allow expert testimony on proposed comparable licenses despite their differences from the hypothetical negotiated license.
Continue Reading Judge Gilstrap permits damages expert testimony that litigated FRAND royalty should be higher than comparable license’s FRAND royalty that was skewed low by litigation risk discount (St Lawrence v. ZTE)
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:
- 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?”
- 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?
- What evidence exists in the record of this investigation with respect to whether the accused products satisfy the “successively [transmits/transmitted] signals” limitation as construed by the Commission in the 800 and 868 investigations?
SSO-Obligation (FRAND) Issues. Recall that ALJ Essex found that Respondents had not shown that the patent owner’s standard setting organization (SSO) obligation had been triggered by a showing that the patents actually were essential to the ETSI standard at issue. Further, he found that ETSI had rejected limiting exclusionary relief and deferred to resolution in courts, so the patent owner seeking exclusionary relief in itself did not violate its SSO obligation. He found the focus should be on the particular SSO obligation at issue, rather than undue reliance on vague public policy concerns about patent holdup and there was no evidence of actual patent holdup in this case. ALJ Essex also found that the accused infringers had committed patent hold-out after they lost a non-infringement ruling on appeal in this case, at which time they should have negotiated a license and there was no showing that the patent owner’s offered license in negotiation was not fair, reasonable and non-discriminatory (FRAND) under the SSO obligation.
The ITC has posed nine questions on the SSO-obligation (or FRAND) issues:
4. Please state and explain your position on whether, for purposes of the Commission’s consideration of of the statutory public interest factors, InterDigital has in effect asserted that the patents in question are FRAND-encumbered, standard-essential patents.
5. Please state and explain your position on whether InterDigital has offered Respondents licensing terms that reflect the value of its own patents.
6. What portion of the accused devices is allegedly covered by the asserted claims? Do the patents in question relate to relatively minor features of the accused devices?
7. Please state and explain your position on the legal significance of InterDigital’s alleged willingness to accept an arbitral determination of FRAND terms with respect to the patents in question.
8. Please state and explain your position on the legal significance of InterDigital’s alleged unwillingness to obtain a judicial determination of FRAND terms with respect to the patents in question.
9. Please state and explain your position on whether Respondents have shown themselves willing to take licenses to the patents in question on FRAND terms.
10. Do Respondents’ alleged delaying tactics in negotiating with InterDigital provide sufficient evidence of reverse hold-up, regardless of Respondents’ offers to license only InterDigital’s U.S. patent portfolio?
11. Do Respondents’ licensing counteroffers satisfy the requirements of the ETSI IPR Policy?
12. Please state and explain your position on whether the RID [i.e., ALJ Essex’s final initial determination on remand] equates patent infringement and reverse hold-up.
These questions and the ITC’s ultimate resolution of the issues promises to result in one of the most important ITC decisions in litigating SEPs in the ITC, and perhaps elsewhere.
We previously reported on a scheduling order governing FRAND and damages-related discovery in InterDigital’s two patent infringement lawsuits pending in Delaware against ZTE and Nokia Inc., Nokia Corp. and Microsoft Mobile Oy (MMO), respectively. On Friday, the court entered a modified, agreed-to scheduling order that extends the time to complete such discovery by approximately seven (7) months.
As background, trials on liability were bifurcated from trials on damages and the defendants’ FRAND-related affirmative defenses. ZTE’s liability trial on three (3) of InterDigital’s asserted patents occured first and, last Fall, a Delaware jury found that ZTE’s accused 4G mobile devices infringed those patents. ZTE asserts a number of FRAND-related affirmative defenses to this finding of infringement. A second Delaware jury later found that ZTE’s accused 4G mobile devices did not infringe a fourth patent asserted by InterDigital.
In January of this year, the court entered a scheduling order setting December 4, 2015 as the deadline for completing FRAND and damages-related discovery in both the ZTE and Nokia/MMO cases, with the trial on these issues tentatively scheduled to take place in the Spring of 2016.
The liability trial against Nokia/MMO was scheduled to occur in April of this year. However, that trial was postponed until November. As a result of this change in Nokia/MMO’s liability trial date, the parties proposed, and, on Friday, the court entered, a scheduling order modifying the FRAND and damages-related discovery period and target trial dates as follows:
- Completion of fact discovery related to FRAND/damages: Deadline moved from August 21, 2015 to March 4, 2016;
- Disclosure of expert testimony for party with burden of proof: Deadline moved from September 18, 2015 to April 15, 2016;
- Supplemental/rebuttal expert disclosure: Deadline moved from October 16, 2015 to May 13, 2016;
- Reply expert reports from party with burden of proof: Deadline moved from November 9, 2015 to June 9, 2016;
- Completion of expert discovery: Deadline moved from December 4, 2015 to July 13, 2016;
- Joint letter outlining any issues the parties believe must be addressed at the status conference: Deadline moved from December 8, 2015 to July 20, 2016;
- Status conference: Moved from December 15, 2015 to August 22, 2016;
- Dispositive motions and deadline to object to expert testimony: Moved from December 29, 2015 to August 5, 2016;
- ZTE target trial date: Moved from March 21, 2016 to October 17, 2016; and
- MMO/Nokia target trial date: Moved from April 11, 2016 to November 14, 2016.
Yesterday, a federal jury in Delaware concluded that ZTE’s accused 4G mobile devices did not infringe InterDigital’s U.S. Patent No. 7,941,151 (“the ‘151 Patent”). This jury verdict comes a little less than six months after a different jury concluded that ZTE’s accused 4G mobile devices infringe three separate patents asserted by InterDigital in the case.
Background. In its Amended Complaint, InterDigital alleged that ZTE was infringing four of its patents. With respect to the ‘151 Patent, InterDigital alleged that ZTE was infringing it by “manufacturing, using, importing, offering for sale, and/or selling wireless devices with 4G capabilities.” More specifically, InterDigital alleged that
The accused ZTE products are specifically designed to be used in at least 4G wireless communication systems. Specifically, the accused ZTE products identified by InterDigital to date that are designed to be used in a 4G wireless communications system are configured to comply with [3gPP’s] LTE (Long Term Evolution) standard. Because the accused products are specifically designed to so operate, they have no substantial non-infringing uses.
ZTE asserted a number of FRAND-related affirmative defenses and counterclaims in the litigation. The court subsequently dismissed the FRAND-related counterclaims and bifurcated the infringement liability issues from the FRAND-related affirmative defenses.
In late October, a jury found that ZTE infringed the three other patents asserted by InterDigital and also rejected ZTE’s invalidity defenses. Thereafter, and as we previously reported, Judge Andrews entered an order allowing InterDigital and ZTE to proceed with FRAND and damages discovery under the assumption that ZTE would be found to infringe InterDigital’s ‘151 Patent. Specifically, the order provided as follows:
FRAND/damages discovery may begin immediately. It is going to have to be done, and the parties should do it (as they normally would) on the assumption that ZTE will be found to have infringed the ‘151 patent. It does not need to be coordinated with any similar discovery in the Nokia case. The parties should include the scheduling for this discovery in the written proposed scheduling order submitted before the above-mentioned scheduling conference.
The infringement trial for the ‘151 Patent occured on Monday and Tuesday of this week. Yesterday, the jury found that ZTE did not infringe the ‘151 Patent.
Next Steps. According to the agreed-to Scheduling Order entered by the court, the parties will now complete FRAND and damages-related discovery and prepare for a damages trial with respect to the three InterDigital patents the first jury found ZTE to infringe last Fall. The following schedule will apply:
August 21, 2015: Completion of fact discovery related to FRAND/damages;
September 18, 2015: Disclosure of expert testimony for party with burden of proof;
October 16, 2015: Supplemental/rebuttal expert disclosure;
November 9, 2015: Reply expert reports from party with burden of proof;
December 4, 2015: Completion of expert discovery;
December 8, 2015: Joint letter outlining any issues the parties believe must be addressed at the status conference;
December 15, 2015: Status conference;
December 29, 2015: Dispositive motions and deadline to object to expert testimony;
March 21, 2016: ZTE target trial date; and
April 11, 2016: Microsoft Mobile Oy (MMO) (another defendant in the case) target trial date
Earlier this week, a Texas jury found that Apple’s iPhone and iPad products do not infringe patents owned by Core Wireless that are alleged to be essential to certain cellular standards adopted by the European Telecommunications Standards Institute (“ETSI”). The jury also found that Core Wireless did not breach its contractual obligation to offer a license to the patents on fair, reasonable and non-discriminatory (FRAND) terms.
Core Wireless’ complaint. Core Wireless’ complaint alleged that Apple’s iPad, iPad 2, iPad 3G, iPad with Retina display, iPad mini and iPhone 3G, 3GS, 4, 4S and 5 “were made and sold in accordance with” various 3GPP mobile standards adopted by the ETSI. Core Wireless further alleged that the asserted patents, which it acquired from Nokia, covered those standards and, as such, the accused products infringed. Core Wireless’ complaint prayed for an “accounting of all damages sustained b Plaintiff as the result of Apple’s acts of infringement,” enhanced damages pursuant to 35 U.S.C. § 284, and a “mandatory future royalty payable on each and every product sold by Apple in the future that is found to infringe one or more of the patents-in-suit and on all future products which are not colorably different from products found to infringe.”
Apple’s answer and counterclaim. Apple filed an answer and counterclaim generally denying the allegations in the complaint and asserting affirmative defenses of non-infringement, invalidity and unenforceability. Apple also asserted a counterclaim alleging that Core Wireless breached its contractual obligations to members of ETSI to license the asserted patents on FRAND terms.
For its breach claim, Apple relied upon the following provision in ETSI’s Intellectual Property Right Policy (“IPR”):
When an ESSENTIAL IPR relating to a particular STANDARD or TECHNICAL SPECIFICATION is brought to the attention of ETSI, the Director-General of ETSI shall immediately request the owner to give within three months an irrevocable undertaking in writing that it is prepared to grant irrevocable licenses on fair, reasonable and non-discriminatory [FRAND] terms and conditions under such IPR to at least the following extent:
• MANUFACTURE, including the right to make or have made customized components and sub-systems to the licensee’s own design for use in MANUFACTURE;
• sell, lease, or otherwise dispose of EQUIPMENT so MANUFACTURED;
• repair, use, or operate EQUIPMENT; and
• use METHODS.
The above undertaking may be made subject to the condition that those who seek licenses agree to reciprocate.
Apple alleged that ETSI members as well as members of other standard setting organizations (SSOs) “self-declare patents as ‘essential,’ or necessary to practice the UMTS standard,” but “[o]rganizations such as ETSI do not independently verify whether such patents are actually essential.”
Apple contended that Core Wireless was bound by the FRAND representations made by Nokia, the prior owner of the patents-in-suit:
Core Wireless acquired any rights it has in the Core Wireless Asserted Patents from Nokia Corporation. Nokia is a member of [ETSI], a standard-setting organization that promulgates cellular telecommunications standards. In accordance with ETSI’s Intellectual Property Rights Policy [“IPR”], Nokia made binding and enforceable promises to ETSI and its members—including Apple—to license the Core Wireless Asserted Patents to companies supporting the UMTS standard promulgated by ETSI on ‘fair, reasonable, and non-discriminatory’ or FRAND terms. Those FRAND promises traveled with the Core Wireless Asserted Patents when they were transferred to Core Wireless and continue to bind Core Wireless.
Apple went on to allege that
[d]espite and in breach of the binding contractual commitments obligating Core Wireless to license Apple to the Core Wireless Asserted Patents on FRAND terms, Core Wireless brought this infringement action before even approaching Apple to discuss a license, and since initiating this suit Core Wireless has refused to provide FRAND terms to Apple for the Core Wireless Asserted Patents.
After the suit was filed, Apple alleges that it requested that Core Wireless provide the “FRAND royalty rate for each of” the asserted patents, “with each patent’s rate separately listed” as well as the “methodology by which Core Wireless derived each rate” and “confirmation that Core Wireless offered these same rates to other companies or that companies paid” those same rates, “or if not the same, a description of the rates offered to or paid by other companies and a list of those companies.” According to Apple, Core Wireless never responded.
Core Wireless’ answer and counterclaim. Core Wireless filed an answer to Apple’s counterclaims with counterclaims of its own, alleging that it did, in fact, make several attempts to engage in licensing discussions with Apple, but that Apple refused to respond in breach of Apple’s obligations as a potential licensee of patents alleged to be essential to ETSI cellular standards.
“Apple takes the position that it is a party to license agreement(s), express or implied, to those patents that have been declared essential to an ETSI standard.” Core Wireless alleges further that Apple sent a letter to another declared essential patent owner claiming that “an agreement is formed by virtue of ‘the [ETSI] IPR policies at issue [that] require participants claiming to own essential IPR to commit to license those IPR on FRAND terms to any implementer of the standard.” Apple allegedly accepted these terms when it “began to implement the [ETSI] standard.” “According to Apple, such license agreements are subject only to agreement on the terms of a FRAND royalty as compensation for Apple’s licensed use.”
Core Wireless also pointed to allegations that Apple made in its dispute with Samsung that “‘Apple is licensed to Samsung’s declared-essential patents’” because “‘the [ETSI] IPR policies at issue here require participants claiming to own essential IPR to commit to license those IPR on FRAND terms to any implementer of the standard.’”
Core Wireless further asserted that the patents-in-suit “have likewise been declared essential to the UMTS standard and Core Wireless’ assertion of those patents is subject to the ETSI IPR licensing obligations.” “Thus, by Apple’s own acknowledgment, by electing to practice the UMTS standard, Apple considers itself licensed to the asserted patents owned by Core Wireless.” “By its actions, Apple entered into an agreement with Standard Essential Patent owners to negotiate a FRAND royalty in good faith.” These actions include “Apple’s implementing the GSM/GPRS and/or the UMTS standards in its products and becoming a member of the relevant standards organizations, including ETSI.”
Core Wireless alleges that Apple breached its agreement with Core Wireless by refusing to negotiate a FRAND royalty with Core Wireless, refusing to timely respond to Core Wireless’ FRAND royalty offer, and Apple’s refusal to pay a FRAND royalty.
According to Core Wireless, its outside counsel sent an email to Apple the same day that the lawsuit was filed indicating Core Wireless’ “interest in an early resolution of the underlying dispute without the need for extensive litigation.” “This offer was ignored by Apple.”
“Core Wireless’ outside counsel next reached out a few weeks later . . . to Apple’s local counsel, again indicating Core Wireless’ interest in meeting with Apple, and the response back from Apple was that a discussion would be premature.”
A few weeks later, Core Wireless sent two separate letters to Apple, proposing that the parties negotiate a license on FRAND terms.” Core Wireless alleges that these letters were ignored as well.
Core Wireless also alleged that, later in the year, Apple sent a letter demanding that Core Wireless provide a FRAND royalty rate to Apple.” “After refusing Core Wireless’ offers for over eight months, Apple set a two-week deadline in which it required Core Wireless to respond to Apple’s demand.” This letter was expressly “not pursuant to Rule 408 of the Federal Rules of Evidence,” which generally precludes offers of settlement from coming into evidence to establish liability at trial. Core Wireless alleged that this letter demonstrates that Apple had “no intention of negotiating a FRAND license with Core Wireless, but rather was strictly looking for information to strengthen its positions in FRAND-related litigations.”
After sending the letter, Core Wireless contends that “Apple’s lead counsel in this case indicated to Core Wireless’ outside counsel that Apple ‘did not feel a meeting with Core was ripe yet.'” Core Wireless thereafter responded to Apple’s letter, and again asked Apple to “meet for the purpose of providing a FRAND offer and negotiating a mutually acceptable FRAND license.” “Apple refused to agree to such an offer and meeting by failing to respond to Core Wireless’s” letter.
A few weeks later, Apple sent another letter setting a two-week deadline in which it requested Core Wireless to “provide a FRAND royalty rate to Apple” without “responding, or referring, to Core Wireless'” prior letter.
Core Wireless alleged that, “[f]aced with Apple’s intentional refusal to meet or negotiate, Core Wireless made a specific FRAND royalty rate offer to Apple in writing.” “As part of that offer, Core Wireless offered, in the alternative, to negotiate FRAND rates for the asserted patents.” Apple allegedly did not respond to Core Wireless’ FRAND license offer.
Core Wireless contended that “Apple has gained profits by virtue of its breaches of the license agreement with Core Wireless to pay a FRAND royalty for its use of the Standard Essential Patents and its agreement with . . . Core Wireless to negotiate a FRAND royalty in good faith.” Core Wireless alleged that it suffered harm as a result of Apple’s alleged breach, including “being denied of the adequate and fair reward, i.e., a FRAND royalty for the use of its Standard Essential Patents, and being forced to resolve this matter through unnecessary litigation in which Core Wireless has to pay unnecessary litigation expense and attorneys’ fees.”
Core Wireless also alleged that Apple breached its contract with ETSI by failing to respond to Core Wireless’ overtures to negotiate a FRAND rate and forcing Core Wireless to litigate the issue. Clause 3.2 of the ETSI IPR Policy provides, in relevant part, as follows:
IPR holders whether members of ETSI and their AFFILIATES or third parties, should be adequately and fairly rewarded for the use of their IPRs in the implementation of STANDARDS and TECHNICAL SPECIFICATIONS
“By its membership in ETSI and its implementation of the ETSI standards, Apple is required to comply with this ETSI IPR Policy, including the requirement to adequately and fairly reward the Standard Essential Patent owner for the use of its patents in the implementation of GSM/GPRS and/or UMTS standards.”
Core Wireless alleged that Apple breached its contract with ETSI by refusing to negotiate and ultimately pay a FRAND royalty rate with Core Wireless.
In its prayer for relief, Core Wireless requested, inter alia, a judgment declaring that Apple is not a willing licensee to Core Wireless’ asserted Standard Essential Patents.” Core Wireless also requested a “judgment ordering Apple to specifically perform its obligation to pay a FRAND royalty to Core Wireless according to the agreement between Apple and Core Wireless and/or according to Apple’s duty to ETSI, including a determination of the FRAND royalty rate owed by Apple to Core Wireless.”
Trial. At trial, Core Wireless whittled its infringement case down to claims in five of its alleged standard essential patents. In the jury instructions on damages, the court noted that, to the extent that the jury found that Apple infringed, Core Wireless was seeking damages in the amount of a reasonable royalty. “A reasonable royalty must reflect that Core Wireless declared the asserted patents to be essential to cellular standards and committed to the [ETSI] to license the patents on ‘fair, reasonable, and non-discriminatory’ or FRAND terms.” The court expressly noted that it was not instructing the jury “that the asserted patents are actually essential to any standard.” That was for the jury to decide.
On several other FRAND-related issues, the parties disputed the language of the jury instructions. It is unclear from the docket which instruction the court ultimately gave, but the parties’ positions are summarized here.
Apple proposed that the court give an instruction expressly requiring the jury to “consider any evidence of patent hold-up and royalty stacking” in “deciding what amount is a FRAND royalty.” Core Wireless objected to this instruction because “Apple has not provided sufficient evidence on these concepts, and Apple made no more than a general argument that hold-up and staking were possibilities.” According to Core Wireless, “[i]n order to be instructed on these concepts, Apple was required to present actual evidence at trial; it did not.”
Core Wireless contended that, to determine FRAND, the jury should consider and apply all fifteen factors for determining a reasonable royalty set out in Georgia-Pacific Corp. v. U.S. Plywood Corp. Apple, on the other hand, contended that the “Georgia-Pacific approach is not the only way to determine a reasonable royalty.” Quoting the Federal Circuit’s decision in Ericsson v. D-Link, Apple argued that “‘many of the Georgia-Pacific factors simply are not relevant” and “‘many are even contrary to [F]RAND principles.'”
With respect to apportionment, Core Wireless asserted that the jury must “apportion the damages between the portion of the accused products that are the patented features or components and the unpatented features and components of the accused products.” “In determining the amount of a reasonable royalty [the jury] may consider not only the benefit to the patentee in licensing the technology, but also the value of the benefit conferred to the infringer by use of the patented technology.” When applying the 15 Georgia-Pacific factors, the jury “should only consider as the royalty base the portion of the value that is attributable to the patented features or components as compared to the portion of the value associated with other features or components, such as unpatented elements, features, components, or improvements developed by Apple.” If the jury found that “the patents are standard essential then damages should be apportioned from the value of the standard as a whole and should be based on the value of the invention, not any value added by the standardization of that invention.”
Apple contended, with respect to apportionment, that the Federal Circuit’s decision in Ericsson required the jury to first apportion the patented feature from all of the unpatented features reflected in the standard. Second, any royalty that is calculated “‘must be premised on the value of the patented feature, not any value added by the standard’s adoption of the patented technology.'” “‘These steps are necessary to ensure that the royalty award is based on the incremental value that the patented invention adds to the product, not any value added by the standardization of that technology.'” “‘In other words, the patent holder should only be compensated for the approximate incremental benefit derived from his invention.'” Apple argued that “‘[t]his is particularly true for [standard essential patents].” “‘When a technology is incorporated into a standard, it is typically chosen from among different options.'” “‘Once incorporated and widely adopted, that technology is not always used because it is the best or the only option; it is used because its use is necessary to comply with the standard.'” “‘In other words, widespread adoption of a standard essential technology is not entirely indicative of the added usefulness of an innovation over the prior art.'” According to Apple, to ensure that a FRAND royalty rate reflects the incremental value of the patented technology, the jury was required to consider the following two factors in setting a FRAND royalty rate: (1) any royalty for the patented technology must be apportioned from the value of the standard as a whole; and (2) the FRAND royalty rate must be based on the value of the invention, not any value added by the standardization of that invention.
With respect to the royalty base, Apple requested that the court give an instruction requiring the jury to determine the royalty for the smallest saleable patentable unit. Again relying on Ericsson, Apple contended that, “‘as with all patents, the royalty rate for [standard essential patents] must be apportioned to the value of the patented invention.'” “‘In order to properly apportion the incremental value attributable to the patented technology, [the jury] must select the royalty base that reflects the value added by the patented feature, where the differentiation is possible.'” “In the case of multi-component products, like smartphones and tablet computers, where demand for the entire product is not attributable to the patented feature,'” the jury should not “base the royalty on the price or revenues of the entire product, but instead ‘must [use] a more realistic starting point for the royalty calculation . . . often, the smallest saleable unit and, at times, even less.'”
Core Wireless objected to this instruction as “inappropriate in this case.” According to Core Wireless, “[n]either party’s damages’ expert calculated damages based on smallest salable unit, and appropriate apportionment instructions are included elsewhere, and this is only one of many ways to ensure apportionment.”
Apple also requested that the court instruct the jury that it could calculate damages based on a one-time lump-sum royalty: “[o]ne way to calculate a royalty is to determine a one-time lump sum payment that the infringer would have paid at the time of the hypothetical negotiation for a license covering all sales of the licensed product both past and future.” “This differs from payment of an ongoing royalty where a royalty rate is applied against future sales as they occur.” “When a one-time lump sum is paid, the infringer pays a single price for a license covering both past and estimated future infringing sales.” “It is up to [the jury], based on the evidence, to decide what type of royalty (if any) is appropriate in this case.” Core Wireless objected “to the inclusion of a Lump Sum Royalty instruction as neither party’s damages expert offered any opinion on a lump sum and it is thus not relevant to the case.”
With respect to Core Wireless’ breach of contract claim, Apple disputed whether it had any contractual obligation to Core Wireless or ETSI and, in the alternative, that it did not breach any such obligation. With respect to Apple’s breach of contract claim, Core Wireless argued that Apple waived any such claim by failing to negotiate a FRAND rate and, further, that Core Wireless’s “alleged failure to comply with a FRAND obligation is excused if [the jury] find[s] Apple previously failed to comply with a material obligation of the same agreement.” Core Wireless also contended that Apple’s breach claim was barred by Apple’s anticipatory repudiation in the form of refusing to negotiate.
The jury subsequently determined that the accused Apple iPhone and iPad products did not infringe Core Wireless’ five asserted patents. As a result, the jury was not required to determine infringement damages.
The jury also determined that Core Wireless had not breached its obligation to license the patents-in-suit on FRAND terms.
Note that the verdict form provided that, if the jury did determine that Core Wireless had breached its FRAND obligations, Apple could only recover nominal damages between $.01 and $1.00. This is different from Microsoft’s recovery of damages from Motorola as a result of Motorola’s alleged breach of its obligations to license its alleged SEPs to Microsoft on RAND terms. In the Microsoft case, a jury awarded Microsoft approximately $11 million for certain costs incurred to relocate a distribution center as a result of the alleged breach as well as approximately $3 million in attorneys fees and litigation costs incurred to defend against Motorola’s infringement claims. Microsoft was able to collect the latter category of damages because Motorola sought injunctive relief for Microsoft’s alleged infringement. Core Wireless’ complaint, however, did not seek injunctive relief from Apple, which may be the reason that Apple did not seek its attorneys’ fees and litigation costs as damages for Core Wireless’ alleged breach.
The IEEE apparently is considering an unusual change to its intellectual property rights (“IPR”) policy that in many ways is contrary to developing U.S. law on determining a reasonable royalty rate and the availability of injunctive relief for standard essential patents (“SEPs”). The IEEE provides a link to the current draft of this proposed IPR policy change that shows the proposed redline revisions to the current IPR policy. The proposed IEEE revisions have even caught the attention of the popular press and others, such as Sen. Coons’ letter to the U.S. Attorney General Holder that calls the proposal an “unprecedented move by an international standards body to weaken the value and enforceability of patented technology.” (see Bloomberg article).
Below is a summary of some key issues raised in the proposed IEEE IPR policy amendment that we have touched on in our blog posts discussing developing case law.
Smallest Saleable Compliant Implementation
The proposed change to IEEE’s IPR policy injects a new term called the “smallest saleable Compliant Implementation”, where a “Compliant Implementation” means “any product (e.g., component, sub-assembly, or end-product) or service that conforms to any mandatory or optional portion of a normative clause of an IEEE Standard.” The specific langauge of the proposed IPR amendment is as follows:
“Reasonable Rate” shall mean appropriate compensation to the patent holder for the practice of an Essential Patent Claim excluding the value, if any, resulting from the inclusion of that Essential Patent Claim’s technology in the IEEE Standard. In addition, determination of such Reasonable Rates should include, but need not be limited to, the consideration of:
- The value that the functionality of the claimed invention or inventive feature within the Essential Patent Claim contributes to the value of the relevant functionality of the smallest saleable Compliant Implementation that practices the Essential Patent Claim.
- The value that the Essential Patent Claim contributes to the smallest saleable Compliant Implementation that practices that claim, in light of the value contributed by all Essential Patent Claims for the same IEEE Standard practiced in that Compliant Implementation.
- Existing licenses covering use of the Essential Patent Claim, where such licenses were not obtained under the explicit or implicit threat of a Prohibitive Order, and where the circumstances and resulting license are otherwise sufficiently comparable to the circumstances of the contemplated license.
This changed policy apparently was derived from the “smallest saleable patent practicing unit” concept for the entire market value theory in U.S. patent damages law. But IEEE’s proposed adoption of that concept into real-world arms length negotiations between sophisticated market players may be misplaced, because the “smallest saleable patent practicing unit” concept is an evidentiary principle for avoiding undue prejudice and confusion of lay jurors in U.S. jury trials under evidence Rule 403 (see our Aug. 30, 2013 LaserDynamics post and Dec. 5, 2014 Ericsson v. D-Link post).
In LaserDynamics, a case concerning patents generally, the Federal Circuit expressed concern about jury confusion “[w]here small elements of multi-component products are accused of infringement, calculating a royalty on the entire product carries a considerable risk that the patentee will be improperly compensated for non-infringing components of that product.” Further, “disclosure to the jury of the overall product revenues ‘cannot help but skew the damages horizon for the jury, regardless of the contribution of the patented component to this revenue” and may “make a patentee’s proffered damages amount appear modest by comparison [and] artificially inflate the jury’s damages calculation.” This jury confusion problem is not “avoided by the use of a very small royalty rate.” (See our Aug. 30, 2013 post for a more complete summary of the LaserDynamics decision)
Recently in Ericsson v. D-Link, a case concerning standard essential patents, the Federal Circuit explained that the entire market value rule (“EMVR”) has two considerations: (1) a “substantive legal rule” that the “ultimate reasonable royalty”–i.e., combination royalty rate and royalty base–“must be based on the … value that the patented invention adds to the end product” and (2) an “evidentiary principle” for selecting the royalty base that is intended “to help our jury system reliably implement” the substantive legal rule. As the Federal Circuit explained, the “smallest saleable patent practicing unit” is an application of the evidentiary principle in U.S. jury trials:
The principle, as applicable specifically to the choice of a royalty base, is that, where a multi-component product is at issue and the patented feature is not the item which imbues the combination of the other features with value, care must be taken to avoid misleading the jury by placing undue emphasis on the value of the entire product. It is not that an appropriately apportioned royalty award could never be fashioned by starting with the entire market value of a multi-component product–by, for instance, dramatically reducing the royalty rate to be applied in those cases–it is that reliance on the entire market value might mislead the jury, who may be less equipped to understand the extent to which the royalty rate would need to do the work in such instances. Thus, where the entire value of a machine as a marketable article is “properly and legally attributable to the patented feature,” the damages owed to the patentee may be calculated by reference to that value. Where it is not, however, courts must insist on a more realistic starting point for the royalty calculations by juries–often, the smallest salable unit and, at times, even less. (emphasis added)
(See our Dec. 5, 2014 post for a more complete summary of the Ericsson v. D-Link decision).
Thus, the “smallest saleable patent practicing unit” principle is an evidentiary rule to avoid jury confusion in U.S. jury trials that may not be appropriate for real-world arms length negotiations between sophisticated market participants, as IEEE’s amendment proposes. The Federal Circuit’s recent Ericsson decision recognized that “licenses are generally negotiated without consideration of the EMVR [i.e., entire market value rule with its smallest saleable patent practicing unit evidentiary principle].” The Federal Circuit ruled that the jury in that case could hear evidence about comparable licenses based on the ultimate end product, rather than the smallest saleable patent practicing unit, because, otherwise, “[m]aking real world, relevant licenses inadmissible … would often make it impossible for a patentee to resort to license-based evidence.” This follows the Federal Circuit’s rationale in Virnetix that differences between comparable licenses and the hypothetical negotiation for patent damages are circumstances a jury is “entitled to hear … and decide for itself what to accept or reject.” (see our Sep. 17, 2014 post).
Further, even in U.S. jury trials, the smallest saleable patent practicing unit evidentiary principle is not a blanket rule, the Federal Circuit in Ericsson explaining that, “where expert testimony explains to the jury the need to discount reliance on a given license to account only for the value attributed to the licensed technology, as it did here, the mere fact that licenses predicated on the value of a multi-component product are referenced in that analysis … is not reversible error.” The IEEE proposed language above, however, appears to limit consideration of existing licenses to those “where the circumstances and resulting license are otherwise sufficiently comparable to the circumstances of the contemplated license,” which relies to some unspecified extent on the smallest saleable Compliant Implementation. If the IEEE proposed IPR amendment is adopted, then lay jurors considering a hypothetical negotiation in litigation might be entrusted with more relevant real-world information than sophisticated market participants negotiating an actual license for a patent directed to an IEEE standard. Odd.
While the brightline drawn by a smallest patentable patent practicing unit principle may be appealing at first blush, real world negotiations may require more flexibility to fit the specific patented technology to the specific licensed product. Consider, for example, a wireless standard implemented within a microchip that is one of many components of an end product where functional benefits of the standard include (1) wireless connectivity and (2) low power consumption. What benefit a specific licensed product derives from a patent covering that standard may depend primarily on (A) what functionality the patent covers and (B) the importance of that functionality to the licensed product. A patent covering power savings may be important to the standard generally, but provide little, if any, benefit to a stationary end product that is powered from a wall outlet. The stationary end product does benefit from wireless connectivity functionality, which avoids the cost and problems of running wires. That end-product may include the power-saving functionality solely because it is built into the microchip supplied by the microchip vendor or because the end product must have that functionality in order to advertise that the product is fully compliant with the standard. On the other hand, the patented power-saving functionality may provide substantial benefit to a mobile device by permitting longer use time between charges, smaller battery and hence smaller and lighter device, etc..
So the benefit that a claimed invention provides to an end product–and hence what would be reasonable licensing terms–depends on the specific patent and product to be licensed and not necessarily the “smallest saleable patent practicing unit” (e.g., the microchip in this example). Thus, Judge Davis in CSIRO used the end product rather than microchip as the royalty base, because “[b]asing a royalty solely on chip price is like valuing a copyrighted book based only on the costs of the binding, paper, and ink needed to actually produce the physical product.” (see our July 28, 2014 post summarizing the CSIRO decision, currently on appeal to the Federal Circuit).
If adopted, the new IEEE IPR policy also may lead to patent owners drafting claims to expand what constitutes a “Compliant Implementation” by claiming, for example, “a mobile phone comprising …. a microchip” or including limitations present in typical implementations beyond a microchip, such as “a mobile phone comprising an antenna, a power supply, an input device, a microchip implementing standard functionality, etc …” And some may go bigger: “An automobile, comprising wheels, a motor, a microchip implementing standard functionality, etc.” So, to avoid putting form over substance, what may be deemed a “reasonable” royalty still may be better determined based on the specific patent and products at issue and not necessarily what is claimed to be the smallest saleable Compliant Implementation.
Given the fact-specific circumstances underlying a FRAND licensing negotiation, perhaps whatever issues the proposed IEEE IPR amendments are intended to address might be better served through continued case-by-case development of what is a “reasonable”, rather than directing sophisticated market participants to view their bilateral negotiations through the blinders of the smallest saleable patent practicing unit designed to limit evidence considered by a lay jury in U.S. litigation.
The proposed change to IEEE’s IPR Policy appears to make an extreme shift in policy by precluding an SEP patent holder from even seeking injunctive relief against an unwilling licensee until after a FRAND royalty is litigated and at least a first level of appeal exhausted, stating:
A statement that the Submitter will make available a license for Essential Patent Claims to an unrestricted number of Applicants on a worldwide basis without compensation or under Reasonable Rates, with other reasonable terms and conditions that are demonstrably free of any unfair discrimination to make, have made, use sell, offer to sell, or import any Compliant Implementation that practiced the Essential Patent Claims for use in conforming with the IEEE Standard. An Accepted LOA that contains such a statement signifies that reasonable terms and conditions, including without compensation or under Reasonable Rates, are sufficient compensation for a license to use those Essential Patent Claims and preclude seeking, or seeking to enforce, a Prohibitive Order except as provided in this policy.
The Submitter of an Accepted LOA who has committed to make available a license for one or more Essential Patent Claims agrees that it shall neither seek nor seek to enforce a Prohibitive Order based on such Essential Patent Claim(s) in a jurisdiction unless the implementer fails to participate in, or to comply with the outcome of, an adjudication, including an affirming first-level appellate review, if sought by any party within applicable deadlines, in that jurisdiction by one or more courts that have the authority to: determine Reasonable Rates and other reasonable terms and conditions; adjudicate patent validity, enforceability, essentiality, and infringement; award monetary damages; and resolve any defenses and counterclaims. In jurisdictions where the failure to request a Prohibitive Order in a pleading waives the right to seek a Prohibitive Order at a later time, a Submitter may conditionally plead the right to seek a Prohibitive Order to preserve its right to do so later, if and when this policy’s conditions for seeking, or seeking to enforce, a Prohibitive Order are met.
This proposed IEEE IPR policy appears contrary to case law and administrative actions that have considered the availability of injunctive relief for standard essential patents and universally agree that injunctive relief should be available against unwilling licensees. For example, in ruling that there was no per se rule against injunctive relief for standard essential patents, the Federal Circuit in Motorola v. Apple recognized that “an injunction may be justified where an infringer unilaterally refuses a FRAND royalty or unreasonably delays negotiations to the same effect.” (see our April 25, 2014 post for a summary of the Motorola v. Apple decision). The Federal Circuit ruled that a party may seek an injunction, and the FRAND obligation and other circumstances are what “the district courts are more than capable of considering … when deciding whether to issue an injunction under the principles in eBay.” But the proposed amended IEEE IPR Policy appears to preclude even seeking an injunction against an unwilling licensee without first filing suit and going through appeals to enforce adjudicated FRAND terms.
In LSI v. Realtek, Judge Whyte held that LSI had breached its FRAND obligation by “instigating an ITC Section 337 action naming Realtek as a respondent prior to offering a RAND license to Realtek.” (see our May 21, 2013 post on LSI v. Realtek). But Judge Whyte also recognized that “an injunction may be warranted where an accused infringer of a standard-essential patent outright refuses to accept a RAND license” that has been offered (in that case “there is no indication that Realtek is not willing to accept a RAND license.”). (emphasis in original).
When U.S. Trade Representative Froman disapproved of the exclusion order entered by the ITC in the Apple v. Samsung investigation, he noted that injunctive relief may be warranted for an unwilling licensee given concerns about harm caused by “reverse hold-up” or “hold-out” such as “constructive refusal to negotiate a FRAND license.” (see our Aug. 3, 2013 post summarizing USTR Froman’s decision). In doing so, he quoted favorably from a joint policy statement by the U.S. Department of Justice and U.S. Patent and Trademark Office, 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. For example, if a putative licensee refuses to pay what has been determined to be a FRAND royalty, or refuses to engage in a negotiation to determine F/RAND terms, an exclusion order could be appropriate. Such a refusal could take the form of a constructive refusal to negotiate, such as by insisting on terms outside the bounds of what could reasonably be considered to be F/RAND terms in an attempt to evade the putative licensee’s obligation to fairly compensate the patent holder.
Judge Essex’s decision in ITC Inv. No. 337-TA-868 also recognized that a FRAND commitment has obligations going both ways and a prospective licensee should seek a license as part of satisfying its obligations under the FRAND commitment (see our July 2, 2014 post for a summary of that decision). Judge Essex echoed concerns of U.S. Trade Representative Froman as well as other agencies about “patent hold-out”:
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 involved in 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 get 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.
The U.S. Federal Trade Commission’s consent decree settlement with Google/Motorola also recognized that injunctive relief should be available against unwilling licensees. (See our July 24, 2013 post summarizing of the FTC/Google Consent decree settlement).
In sum, the proposed amendments to the IEEE IPR Policy, if adopted, would contravene how injunctive relief for standard essential patents has been treated by U.S. courts and other governmental entities and could give rise to concerns about “patent hold-out” by unwilling licensees. The balanced approach discussed by the Federal Circuit in Motorola v. Apple may be a better approach, where applying the general eBay factors typically will preclude injunctive relief in the usual course for FRAND-obligated standard essential patents, but such relief remains available for the parties to raise and a court to consider in exercising its discretion in extreme circumstances such as actual patent hold-out.
We understand that these are just proposed amendments to the IEEE IPR policy. We will look for and post any relevant developments brought to our attention.
This coming Thursday, October 30, 2014, Law Seminars International will be hosting in Seattle (and over webcast) a one-day seminar on FRAND Obligations from 8:30 am to 5pm Pacific. Here is a link to the program: FRAND Obligations. Topics to be discussed include the following, including a topic presented by our own David Long:
- When FRAND Obligations Arise: Are You Bound by FRAND? What is Covered and When is It Covered?
- Complying with FRAND Obligations: Guidance from Recent Cases for Setting FRAND Terms
- Economic Analysis for FRAND
- International Approaches to FRAND Issues and How They Affect Strategies for Companies in the U.S.
- Enforcement: Litigation Strategies Including Choice of Forum and Remedies
- Adapting Your Playbook to Fit the Circumstances