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

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
(Percentage of Mobile Phone’s Net Price)

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)

Last week, the Federal Circuit denied en banc review by the entire court of the three-judge panel decision in the Apple v. Samsung case that had revived the ability to obtain injunctive relief against multiple component products, such as smartphones (see our Sep. 17, 2015 post).  In doing so, the original three-judge panel (Prost, Moore and Reyna) issued an Order that withdrew their original opinion and issued a revised opinion that focuses on the patented feature being “one of several [features] that cause consumers to make their purchasing decision,” rather than the patented feature having to be “the exclusive or significant driver of customer demand” as prior decisions had intimated.

Continue Reading Federal Circuit revised injunction decision to emphasize patented feature being one of several that drive purchasing decision (Apple v. Samsung)

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

Background

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

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

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

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

Decision

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Today, a European Union high court issued a ruling that provides guidance on what steps the owner of a FRAND-encumbered patent that may be essential to a standard should take before seeking injunctive relief.  The court also ruled that a willing licensee should act without delay, provide a counter-offer, and actively pay royalties (in trust or otherwise) for past and on-going use of the patent while the parties negotiate toward a FRAND license.  The court further ruled that there was no specific pre-filing steps needed for the owner of a FRAND-encumbered patent to file suit seeking solely an accounting and monetary relief for past infringement (i.e., not injunctive).

Background

The case involves patent owner (“proprietor”) Huawei asserting a European patent alleged essential to the Long Term Evolution (LTE) standard against alleged infringer ZTE.  That patent was subject to a commitment to license the patent on fair, reasonable and non-discriminatory terms (FRAND) made to the European Telecommunications Standards Insitute (ETSI).

ETSI has intellectual property right (IPR) policies that concern patents that are essential to ETSI standards.  A patent is essential to the standard where it is not possible on technical grounds to make equipment that complies with the standard without infringing the patent.  ETSI’s IPR policy provides that patent owners should be adequeately and fairly rewarded for the use of their patented technology, but also seeks to guard against such patents making standardized technology unavailable.  Thus ETSI seeks a balance between the needs of standardization for public use and the rights of patent owners.

To this end, ETSI participants are required to timely disclose their patents that are essential to an ETSI standard.  In response to such disclosure, ETSI will ask the patent owner to give an irrevocable FRAND commitment.  ETSI is supposed to determine whether to suspend work on adopting the standard until such a commitment is received.  ETSI does not check whether the patent actually is essential or valid.  Further, ETSI does not define what would be a “license on FRAND terms.”

In April 2011, patent owner Huawei brought an action in German court against ZTE for infringing the LTE patent following failed negotiations.  The parties had been in negotiations from November 2010 until end of March 2011.  Huawei offered what it considered a FRAND royalty and ZTE responded with a cross-license offer.  No agreement was reached, though ZTE continued to sell LTE devices.  In its lawsuit, Huawei sought both injunctive and monetary relief.

The German court stayed its proceedings and referred specific issues to this European Union high court dealing with competition issues, based on the following questions:

(1) Does the proprietor of [an SEP] which informs a standardisation body that it is willing to grant any third party a license on [FRAND] terms abuse its dominant market position if it brings an action for an injunction against a patent infringer even though the infringer has declared that it is willing to negotiate concerning such a license? or

Is an abuse of the dominant market position to be presumed only where the infringer has submitted to the proprietor of the [SEP] an acceptable, unconditional offer to conclude a licensing agreement which the patentee cannot refuse without unfairly impeding the infringer or breaching the prohibition of discrimination, and the infringer fulfils its contractual obligations for acts of use already performed in anticipation of the license to be granted?

(2) If abuse of a dominant market position is already to be presumed as a consequence of the infringer’s willingness to negotiate:

Does Article 102 TFEU lay down particular qualitative and/or time requirements in relation to the willingness to negotiate?  In particular, can willingness to negotiate be presumed where the patent infringer has merely stated (orally) in a general way that it is prepared to enter into negotiations, or must the infringer already have entered into negotiations by, for example, submitting specific conditions upon which it is prepared to conclude a licensing agreement?

(3) If the submission  of an acceptable, unconditional offer to conclude a licensing agreement is a prerequisite for abuse of a dominant market position:

Does Article 102 TFEU lay down particular qualitative and/or time requirements in relation to that offer?  Must the offer contain all the provisions which are normally included in licensing agreements in the field of technology in question?  In particular, may the offer be made subject to the condition that the [SEP] is actually used and/or is shown to be valid?

(4) If the fulfilment of the infringer’s obligations arising from the licence that is to be granted is a prerequisite for the abuse of a dominant market position:

Does Article 102 TFEU lay down particular requirements with regard to those acts of fulfilment?  Is the infringer particularly required to render an account for past acts of use and/or to pay royalties?  May an obligation to pay royalties be dischared, if necessary, by depositing a security?

(5) Do the conditions under which the abuse of a dominant positoin by the proprietor of a[n SEP] is to be presumed apply also to an action on the ground of other claims (for rendering of accounts, recall of products, damages) arising from a patent infringement?

Article 102 of the Treaty on the Functioning of the European Union (TFEU), referenced above, states as follows:

Any abuse by one or more undertakings of a dominant position within the internal market or in a substantial part of it shall be prohibited as incompatible with the internal market in so far as it may affect trade between Member States.

Such abuse may, in particular, consist in:
(a) directly or indirectly imposing unfair purchase or selling prices or other unfair trading conditions;
(b) limiting production, markets or technical development to the prejudice of consumers;
(c) applying dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage;
(d) making the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such contracts.

 Decision

The European high court answered the questions above as follows:

1.  Article 102 TFEU must be interpreted as meaning that the proprietor of a patent essential to a standard established by a standardisation body, which has given an irrevocable undertaking to that body to grant a licence to third parties on fair, reasonable and non-discriminatory (‘FRAND’) terms, does not abuse its dominant position, within the meaning of that article, by bringing an action for infringement seeking an injunction prohibiting the infringement of its patent or seeking the recall of products for the manufacture of which that patent has been used, as long as:

prior to bringing an action, the proprietor has, first, alerted the alleged infringer of the infringement complained about by designating that patent and specifying the way in which it has been infringed, and, secondly, after the alleged infringer has expressed its willingness to conclude a licensing agreement on FRAND terms, presented to that infringer a specific, written offer for a licence on such terms, specifying, in particular, the royalty and the way in which it is to be calculated, and

where the alleged infringer continues to use the patent in question, the alleged infringer has not diligently responded to that offer, in accordance with recognised commercial practices in the field and in good faith, this being a matter which must be established on the basis of objective factors and which implies, in particular, that there are no delaying tactics.

2.  Article 102 TFEU must be interpreted as not prohibiting, in circumstances such as those in the main proceedings [i.e., the stayed German action], an undertaking in a dominant position and holding a patent essential to a standard established by a standardisation body, which has given an undertaking to the standardisation body to grant licenses for that patent on FRAND terms, from bringing an action for infringement against the alleged infringer of its patent and seeking the rendering of accounts in relation to past acts of use of that patent or an award of damages in respect of those acts of use.

The court started by noting the balance it must strike between “maintaining free competition” based on “Article 102 TFEU prohibit[ing] abuses of a dominate position” and “the requirement to safeguard th[e] proprietor’s intellectual-property rights and its right to judicial protection.”  The court further noted the limits of its ruling, stating that, in this case, “the existence of a dominant position has not been contested” and the questions to be addressed “relate only to the existence of an abuse”, thus “the analysis must be confined to the latter criterion.”

FRAND-Encumber SEPs Differ From Other Patents.  The court stated that filing a lawsuit for patent infringement “forms part of the rights of the proprietor of an intellectual-property right” and normally is not an abuse of a dominant position.  But there are “exceptional circumstances” when it may be an abuse.  This case presents two distinguishing features from most patents.  First, it involves a standard essential patent (SEP) that, unlike other patents, can preclude competitors from making standard compliant products.  Second, the patent “obtained SEP status only in return for the proprietor’s irrevocable undertaking … that it is prepared to grant licences on FRAND terms.”  Thus, a refusal to grant such a license “may, in principle, constitute an abuse within the meaning of Article 102 TFEU.”

Balance High Level of Protection Given Patent Rights.  The court noted that applicable law “provides for a range of legal remedies aimed at ensuring a high level of protection for intellectual-property rights in the internal market, and the right to effective judicial protection.”  This counsels not hindering a patent owner’s right to seek judicial relief and requiring a user to obtain a license before using the patented technology:

This need for a high level of protection for intellectual-property rights means that, in principle, the proprietor may not be deprived of the right to have recourse to legal proceedings to ensure effective enforcement of his exclusive rights, and that, in principle, the user of those rights, if he is not the proprietor, is required to obtain a licence prior to any use.

This is balanced with considerations for FRAND-encumbered SEPs, which “justif[ies] the imposition … of an obligation to comply with specific requirements when bringing actions against alleged infringers for a prohibitory injunction.”

First Step – Prior Notice to Infringer.  The court thus ruled that, before bringing suit for injunctive relief, an SEP owner must “first … alert the alleged infringer of the infringement complained about by designating that SEP and specifying the way in which it has been infringed.”  One reason for this is that, because there are a large number of patents that may be essential to a standard, the accused infringer may not “necessarily be aware that it is using the teaching of an SEP that is both valid and essential to a standard.”

Second Step – Written FRAND Terms.  If, after notice, the alleged infringer “expressed its willingness to conclude” a FRAND license, the SEP owner must then provide “a specific, written offer for a licence on FRAND terms … specifying, in particular, the amount of the royalty and the way in which that royalty is to be calculated.”  The court explained it was proper to have the SEP owner make such an offer, who may have nonpublic agreements with other licensees, since the patent owner “is better placed to check whether its offer complies with the condition of non-discrimination than is the alleged infringer.”

Accused Infringer’s Obligation.  An accused infringer has its own obligations before it can take advantage of a FRAND defense.

First, if an accused infringer objects to the proferred license offer, it must submit, “promptly and in writing, a specific counter-offer that corresponds to FRAND terms.”  This response must be in “good faith” with “no delaying tactics”:

[I]t is for the alleged infringer diligently to respond to that offer, in accordance with recognised commercial practices in the field and in good faith, a point which must be established on the basis of objective factors and which implies, in particular, that there are no delaying tactics.

Second, if its counter-offer is rejected, an accused infringer who already has been selling or otherwise using the technology before a license is entered must provide “appropriate security” for the past use of the technology and render an account of same:

The calculation of that security must include, inter alia, the number of the past acts of use of the SEP, and the alleged infringer must be able to render an account in respect of those acts of use.

Third-Party Royalty Determination.  If the parties do not reach agreement, they can seek a “royalty determined by an independent third party, by decision without delay.”

Can Challenge Patent.  The court ruled that, because the standard setting body did not determine essentiality or validity, the accused infringer should be allowed to challenge whether the patent is infringed, essential or valid during the negotiations or to reserve the right to do so in the future.

No Abuse If Seeking Past Money Damages.  The court ruled that “seeking the rendering of accounts in relation to past acts of use of [an] SEP or an award of damages in respect of those acts” are not an abuse of dominance, because such actions “do not have a direct impact on products complying with the standard … appearing or remaining on the market.”

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.

Injunctive Relief

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.

Today Judge Whyte issued his awaited post-trial rulings following the jury’s RAND determination on LSI’s IEEE 802.11 WiFi patents in which he (1) denied JMOL motions by  both Realtek and LSI, (2) ruled on Realtek’s injunction and declaratory relief requests by denying Realtek’s request to enjoin LSI from seeking to enforce RAND-obligated patents without first making a RAND offer, but granting modified declaratory judgment relief, and (3) entered final judgment.  The declaratory judgment ruling (discussed below) provides an interesting analysis on declaring patent owner LSI’s RAND obligation as well as equating the contractual RAND determination analysis in this case with a reasonable royalty analysis that a jury would use to assess past damages on the same patents.

Background.  Our prior posts provide background about this case in which Realtek sought declaratory judgment relief for breach of RAND-obligation and declaration of a RAND-royalty rate based on LSI seeking an exclusion order in the U.S. International Trade Commission on RAND-encumbered IEEE 802.11 WiFi patents.  Judge Whyte had preliminarily enjoined LSI from seeking to enforce any exclusion order or other injunctive-type relief before making a RAND-offer to Realtek (see our May 21, 2013 post).  The ITC ultimately ruled that one of the patents was not infringed and the other patent had expired and, thus, dismissed that portion of the case because the ITC can only provide prospective relief (see our Mar. 27, 2014 post). The Ninth Circuit then dismissed LSI’s appeal of the preliminary injunction as having been mooted by the ITC’s dismissal of the investigation (see our Mar. 21, 2014 post). 

In the meantime, Judge Whyte issued evidentiary rulings to frame the RAND issues for the jury trial (see our Jan. 9, 2014 post).  The jury  verdict awarded Realtek over $3.8 million for damages caused to Realtek by LSI’s breach of the RAND obligation (based primarily on attorneys fees Realtek spent in the ITC investigation) and assessed a RAND royalty rate totaling 0.19% of the sales price of Realtek’s WiFi chips — i.e., 0.12% for one patent and 0.07% for the other patent (see our Feb. 27, 2014 post).  The parties then presented post-verdict motions (see our Mar. 13, 2014 post).

Order Denying Permanent Injunction.  Judge Whyte denied Realtek’s permanent injunction motion because irreparable harm was too speculative at this point.  Realtek moved for permanent injunctive relief similar to the preliminary injunction that was granted, asking the court to enjoin LSI from demanding royalties from Realtek on the patents-in-suit that were inconsistent with the jury’s RAND determination and to enjoin LSI from enforcing any alleged standard essential patents without first offering a RAND license.  Judge Whyte denied Realtek’s requested injunction because “the ITC’s Final Determination of no domestic industry, invalidity, and no infringement extinguishes the likelihood of immediate irreparable harm.”  Such harm would be too “speculative” at this point because, even though LSI is appealing the ITC’s ruling, “several events must align in LSI’s favor for the entry of an exclusion order to occur,” including Federal Circuit reversal on three issues, the ITC issuing an exclusion order on remand and the exclusion order surviving a possible presidential veto.  The injunction was denied without prejudice in case later events make an exclusion order threat more immediate.

Order Granting Declaratory Judgment.  In the same order that denied injunctive relief, Judge Whyte granted a modified version of the declaratory judgment relief sought by Realtek.  Realtek sought a declaration that the patents-in-suit would be unenforceable if LSI “fail[s] to offer Realtek an ongoing license on RAND terms and conditions, consistent with the jury’s February 26, 2014 verdict.”  Judge Whyte first ruled that the requested declaration sounded more like injunctive relief–e.g., it “would functionally require LSI to forbear from a specific action: enforcing its patent rights as to Realtek.”  He thus denied that requested declaratory relief for the same reason he denied the permanent injunction.

Nonetheless, the court had discretion “to craft its own appropriate declaratory judgment.”  Judge Whyte contrasted this case with Judge Robart’s decision in Microsoft v. Motorola that had dismissed claims seeking a declaration of RAND rates as being duplicative of Microsoft’s breach of contract claims.  In Judge Robart’s case, the breach claim was premised on Motorola offering licensing terms alleged not to be RAND-compliant that, thus, already  required the court to determine a RAND rate as part of the breach of contract claim.  In this case, however, the breach of contract claim was premised on LSI instituting the ITC suit prior to offering any license (i.e., it was not premised on the patent owner offering a non-RAND license).  Thus, separate declaratory judgment jurisdiction exists over the existing controversy of what constitutes a RAND royalty rate.

Another issue is that one of the patents (the ‘867 Patent) recently expired.  But declaratory judgment jurisdiction still exists as long as there is a case or controversy over the RAND royalty rate for the patent.  Such a controversy exists “because Realtek has reasonable apprehension of LSI bringing suit for past infringement of the ‘867 Patent, thereby implicating LSI’s RAND obligations.”  Interestingly, Judge Whyte equated the reasonable royalty methodology for a patent infringement suit on these patents with the contractual RAND determination made in this case, stating:

In the RAND context, determining damages for patent infringement is equivalent to declaring the parties’ rights under the RAND contract.  The court here was tasked with declaring the parties’ rights under the RAND contract, but it drew from case law on patent infringement damages for its methodology.  In its instructions to the jury, the court applied the hypothetical negotiation framework to instruct the jury on arriving at an appropriate RAND royalty rate.  While this court altered some of the details of the Microsoft [Judge Robart decision] and the Innovatio [Judge Holderman decision] framework, it followed the same general approach.  The reasonable royalty methodology in a patent infringement suit between Realtek and LSI would be identical to the methodology given to the jury to declare the parties’ rights under the RAND contract.  Therefore, even though the patent has expired, the RAND commitment would still inform the hypothetical negotiation over a reasonable royalty, so the court retains jurisdiction to declare the parties’ rights under that commitment.

 Judge Whyte thus entered declaratory judgment (but without the “unenforceab[ility]” language that Realtek sought) by declaring that “upon Realtek’s request for a license, to be in compliance with its RAND commitment, LSI must offer Realtek a license to the ‘958 Patent [or ‘867 Patent] on RAND terms, including a royalty rate of 0.12% [or 0.07% for the ‘867 Patent] on the total sales of Realtek’s products.”

Order Denying JMOL Motions.  Judge Whyte also denied motions by both parties seeking judgment as a matter of law notwithstanding the jury verdict. 

First, Judge Whyte declined to overturn the jury verdict damages award to Realtek for LSI’s breach of contract claim, which turned on procedural issues regarding burdens of proof and the such in establishing Realtek’s attorneys fees for defending itself in the ITC investigation.

Second, Judge Whyte declined to overturn the jury’s verdict on the RAND royalty rate.  Among other things, Realtek challenged LSI’s profferd damages rate because LSI’s damages expert’s used an erroneous estimation of the number of SEPs subject to an alleged comparable license as part of her royalty analysis.  The expert had arrived at a per-patent royalty rate from an alleged  comparable license by dividing the comparable license’s royalty rate by an estimated number of standard essential patents licensed therein.  But the expert later admitted in cross-examination that that number may have been off by one, five or so patents and her calculation may need adjustment.  Judge Whyte sustained the jury verdict because, even with that discrepancy, the jury still could have returned a royalty rate higher than they found — and higher than the amount Realtek argued.  Further, Judge Whyte would not exclude the testimony under Daubert because the expert’s calculations were reliable, testable and subject to critique.  This was true even though the expert adjusted her calculations based on cross-examination, because courts should encourage honest adjustments by experts of minor estimation errors.

Yesterday, the European Commission issued decisions in two antitrust proceedings centered around the enforcement of standard essential patents (SEPs). The decisions, one involving Samsung and the other Motorola, essentially create a “safe harbour” for willing licensees of FRAND-encumbered SEPs to avoid an injunction and address the circumstances under which an SEP holder may seek injunctive relief against a potential infringer.

Commission Vice President Joaquín Almunia stated that the decisions will provide “clarity to the industry on what constitutes an appropriate framework to settle disputes over ‘FRAND’ terms in line with EU antitrust rules” and encouraged other industry players to consider establishing dispute resolution mechanisms in line with yesterday’s decisions. These decisions significant as they will affect future analyses of whether various SEP enforcement strategies run afoul of EU antitrust rules.

The Motorola Mobility Decision

The first decision arises from Motorola Mobility’s efforts to enforce FRAND-committed SEPs related to the ETSI GPRS mobile communications standard (a part of the GSM standard) against Apple in Germany. According to the Commission’s press release regarding the Motorola decision, Apple had agreed to take a license and be bound by the German court’s FRAND determination. After receiving a complaint from Apple, the Commission opened an investigation in April 2012 and issued a Statement of Objections to Motorola’s actions in May 2013.

In yesterday’s decision, the Commission found that it was abusive for Motorola to both seek and enforce injunctive relief against Apple on the basis of FRAND-encumbered SEPs where Apple had agreed to be bound by the FRAND terms determined by a German court. The Commission also found Motorola’s insistence that Apple relinquish any potential infringement or invalidity challenges to be a violation of the EU’s antitrust regulations, particularly as Motorola’s demands were made under the threat of injunction:

Implementers of standards and ultimately consumers should not have to pay for invalid or non-infringed patents. Implementers should therefore be able to ascertain the validity of patents and contest alleged infringements.

Although Motorola was found to be engaged in anticompetitive behavior, the Commission declined to impose a corresponding fine, reasoning that (i) there is an absence of case-law by EU courts dealing with the legality of SEP-based injunctions under pertinent antitrust law prohibiting abusing a dominant position and (ii) European national courts have issued diverging opinions on the issue.

The European Commission commented in the FAQ memo that the decision “provides a “safe harbour” for standard implementers who are willing to take a licence on FRAND terms”, noting that such implementers may avoid getting hit with an SEP-based injunction if they are able to “demonstrate that they are a willing licensee by agreeing that a court or a mutually agreed arbitrator adjudicates the FRAND terms.”

The Samsung Electronics Decision

The second case arises from Samsung Electronic’s bid for injunctive relief against Apple based on FRAND-committed SEPs related to ETSI 3G UMTS mobile communication standards. According to the press release regarding the Samsung decision, Samsung began seeking injunctive relief for patent infringement in April 2011. The Commission opened an investigation of Samsung’s SEP enforcement in January 2012. In December 2012, the Commission issued a Statement of Objections, informing Samsung that it considered Apple to be a willing licensee of Samsung’s SEPs and expressing concern that Samsung’s SEP enforcement constituted an abuse of a dominant position under EU law. In response to the Commission’s concerns, Samsung offered a series of commitments regarding SEP enforcement and licensing.

Specifically, Samsung committed to not pursue any injunctions in the European Economic Area (made up of the EU plus Iceland, Liechtenstein, and Norway) for a period of five years based on any SEPs related to smartphone/tablet technologies against companies that agree to a licensing framework that provides for (i) a 12-month negotiation period and (ii) a third party FRAND determination if no agreement can be reached within the 12-month negotiation period (see our Oct. 18, 2013 post).

The Commission’s decision renders the commitments offered by Samsung  legally binding under EU antitrust laws. Similar to the statement issued in the Motorola decision, the Commission further commented in its FAQ memo:

Samsung’s commitments implement in this case the “safe harbour” concept established in the Motorola decision in practical terms. They provide for a “safe harbour” available to all potential licensees of the relevant Samsung SEPs. Potential licensees are protected against injunctions sought by Samsung on the basis of such SEPs if they submit to the licensing framework provided for by the commitments.

Other European Commission Statements on SEP/FRAND Issues

The European Commission also released a FAQ-style memorandum regarding antitrust decisions on SEPs, which it claimed “strike a fair balance between the interests of SEP holders to be appropriately remunerated for their IP and the interests of implementers of standards to get access to standardised technology on FRAND terms.” The FAQ summarized the Motorola and Samsung decisions as follows:

Today’s action by the Commission clarifies that it is anti-competitive to use injunctions in relation to SEPs in the following circumstances: when in a standardisation context, a SEP holder has committed to license the SEP on FRAND terms and the licensee is willing to take a licence on such terms. In these circumstances, the seeking of injunctions can distort licensing negotiations and lead to licensing terms with a negative impact on consumer choice and prices.

The FAQ-style memorandum addresses several other topics relevant to European patent disputes.

Injunctive Relief Reaffirmed. The Commission emphasized that it is not questioning the use or pursuit of injunctions by patent holders, noting that recourse to injunctive relief is generally a legitimate remedy for patent holders in infringement cases. The Commission further clarified that SEP-based injunctions should be available against unwilling licensees and that the Samsung and Motorola cases do not stand for the elimination of injunctive relief in view of anticompetitive concerns:

Rather, in the specific circumstances where the holder of a SEP has given a commitment to license on FRAND terms and where the company against which an injunction is sought is willing to enter into a FRAND licence agreement, the seeking of an injunction on the basis of SEPs can constitute an abuse of a dominant position.

Who are “willing licensees”? The Commission expressed the view that whether a company can be considered a “willing licensee” should be determined on a case by case basis. The Commission noted that while yesterday’s decisions provide a “safe harbour” for willing licensees, no findings have been made regarding the willingness of licensees that are not willing to have binding FRAND terms determined by a third party in the event of a dispute. The Commission also clarified that potential licensees who challenge validity, essentiality, or infringement are not unwilling, per se:

Potential licensees of SEPs should remain free to challenge the validity, essentiality or infringement of SEPs. It is in the public interest that potentially invalid patents can be challenged in court and that companies, and ultimately consumers, are not obliged to pay for patents that are not infringed.

What about FRAND calculations? Without providing specific guidance or input on how FRAND rates ought to be calculated, the Commission indicated that courts and arbitrators are well-placed to set FRAND rates in cases of disputes and encouraged national courts may seek guidance from the Commission on the interpretation of EU competition law. The Commission noted that Germany’s Mannheim Regional Court sought guidance on setting FRAND rates in the Motorola v. Apple SEP dispute in November 2013 and that the Commission’s responses to this inquiry would be posted on the Commission website at some point in the future.

Today the Federal Circuit issued its long-awaited decision in the appeal from Judge Posner’s ruling that denied both Motorola and Apple damages and injunctive relief in Apple v. Motorola.  Among other things, the Federal Circuit ruled that there is no per se rule that prohibits a party from seeking injunctive relief on a standard essential patent (SEP) that is subject to an agreement to license the patent on fair, reasonable, and non-discriminatory terms (RAND), stating:

To the extent that the district court applied a per se rule that injunctions are unavailable for SEPs, it erred.  While Motorola’s FRAND commitments are certainly criteria relevant to its entitlement to an injunction, we see no reason to create, as some amici urge, a separate rule or analytical framework for addressing injunctions for FRAND-committed patents.  The framework laid out by the Supreme Court in eBay, as interpreted by subsequent decisions of this court, provides ample strength and flexibility for addressing the unique aspects of FRAND committed patents and industry standards in general.  A patentee subject to FRAND commitments may have difficulty establishing irreparable harm.  On the other hand, an injunction may be justified where an infringer unilaterally refuses a FRAND royalty or unreasonably delays negotiations to the same effect.  To be clear, this does not mean that an alleged infringer’s refusal to accept any license offer necessarily justifies issuing an injunction.  For example, the license offered may not be on FRAND terms.  In addition, the public has an interest in encouraging participation in standard-setting organizations but also in ensuring that SEPs are not overvalued.  While these are important concerns, the district courts are more than capable of considering these factual issues when deciding whether to issue an injunction under the principles in eBay.

 Nevertheless, the Federal Circuit affirmed the denial of injunctive relief on Motorola’s SEP given not only the FRAND commitment, but the large number of licensed industry participants that demonstrates that money damages adequately compensate for the infringement and that Motorola was not irreparably harmed by Apple’s infringement, stating:

Applying those principles [quoted above] here, we agree with the district court that Motorola is not entitled to an injunction for infringement of the ‘898 patent [an SEP].  Motorola’s FRAND commitments, which have yielded many license agreements encompassing the ‘898 patent, strongly suggest that money damages are adequate to fully compensate Motorola for any infringement.  Similarly, Motorola has not demonstrated that Apple’s infringement has caused it irreparable harm.  Considering the large number of industry participants that are already using the system claimed in the ‘898 patent, including competitors, Motorola has not provided any evidence that adding one more user would create such harm.  Again, Motorola has agreed to add as many market participants as are willing to pay a FRAND royalty.  Motorola argues that Apple has refused to accept its initial licensing offer and stalled negotiations.  However, the record reflects that negotiations have been ongoing, and there is no evidence that Apple has been, for example, unilaterally refusing to agree to a deal.  Consequently, we affirm the district court’s grant of summary judgment that Motorola is not entitled to an injunction for infringement of the ‘898 patent.

 Judge Rader dissented on this point, asserting that there was a genuine factual dispute whether Apple was an unwilling licensee, stating:

To my eyes, the record contains sufficient evidence to create a genuine dispute of material fact on Apple’s posture as an unwilling licensee whose continued infringement of the ‘898 patent caused irreparable harm.  Because of the unique and intensely factual circumstances surrounding patents adopted as industry standards, I believe the district court improperly granted summary judgment.  Therefore, on this narrow point, I respectfully dissent in part.

Judge Rader found that untangling the value of the patent from the value of being in a standard as well as issues of patent “holdup” versus “hold out” were complex factual issues not likely susceptible to summary judgment, stating:

    At the outset, a patent adopted as a standard undoubtedly gains value by virtues of that adoption.  This enhancement complicates the evaluation of the technology independent of the standardization.  By the same token, the standardization decision may also simply reflect and validate the inherent value of the technology advance accomplished by the patent.  Untangling these value components (at the heart of deciding whether a putative licensee was “unwilling” to license, and thus irreparable harm and other injunction factors) requires intense economic analysis of complex facts.  In sum, right from the theoretical outset, this question is not likely to be susceptible to summary adjudication.

***
    Market analysts will no doubt observe that a “hold out” (i.e., an unwilling licensee of an SEP seeking to avoid a license based on the value that the technological advance contributed to the prior art) is equally as likely and disruptive as a “hold up” (i.e., an SEP owner demanding unjustified royalties based solely on value contributed by the standardization).  These same complex factual questions regarding “hold up” and “hold out” are highly relevant to an injunction request.  In sum, differentiating “hold up” from “hold out” requires some factual analysis of the sources of value–the inventive advance or the standardization.

     The record in this case shows evidence that Apple may have been a hold out.  This evidence alone would create a dispute of material fact.

    More important, the district court made no effort to differentiate the value due to inventive contribution from the value due to standardization.  Without some attention to that perhaps dispositive question, the trial court was adrift without a map, let alone a compass or GPS system.  In fact, without that critical inquiry, the district court could not have properly applied the eBay test as it should have.

     Instead of a proper injunction analysis, the district court effectively considered Motorola’s FRAND commitment as dispositive by itself: “Motorola committed to license the ‘898 to anyone willing to pay a FRAND royalty and thus implicitly acknowledged that a royalty is adequate compensation for a license to use that patent.  How could it do otherwise?”  To the contrary, Motorola committed to offer a FRAND license, which begs the question: What is a “fair” and “reasonable” royalty?  If Motorola was offering a fair and reasonable royalty, then Apple was likely “refus[ing] a FRAND royalty or unreasonably delay[ing] negotiations.  In sum, the district court could not duck the question that it did not address; was Motorola’s FRAND offer actually FRAND?

 Judge Rader, therefore, would have allowed Motorola to prove that Apple was an unwilling licensee and entitled to injunctive relief.

Well that didn’t take long — yesterday the Ninth Circuit dismissed LSI’s appeal from Judge Whyte’s preliminary injunction that enjoined LSI from seeking to enforce any exclusion order entered by the ITC on the standard essential patents at issue in the district court litigation before LSI first offered a RAND license to Realtek.  Our March 13, 2014 post summarized this appeal issue and the pending post-trial motion by Realtek that seeks to essentially convert the preliminary injunction into a permanent injunction (hearing scheduled May 9, 2014). 

Recall that both parties agreed that, although the ITC did not find a Section 337 infringement violation so no exclusion order issued, the issues presented in the Ninth Circuit appeal of the preliminary injunction were not moot because, for example, LSI could appeal the ITC’s decision and revive the prospect of an exclusion order.

The Ninth Circuit disagreed.  The Ninth Circuit ruled that, by its own terms, the preliminary injunction would be “moot” if the ITC did not find an infringement violation.  Thus “the preliminary injunction itself is no longer operative by virtue of the initial decision of the ITC that there was no Section 337 violation.” So the appeal was dismissed.

The Ninth Circuit’s dismissal of the preliminary injunction appeal puts the ball squarely in Judge Whyte’s court — without guidance from this Ninth Circuit appeal — to decide whether and to what extent LSI should be permanently enjoined from enforcing any exclusion order or injunctive relief prior to offering RAND licensing terms on the WiFi SEPs at issue.