At the same time that Judge Gilstrap recently entered his bench trial ruling that rejected Metaswitch’s standards-based equitable defenses (see our Oct. 2, 2016 post), he also entered an Order that rejected Metaswitch’s request to set aside a jury’s verdict that it infringed valid patent claims based on, among other things, SEP-related grounds.  The ruling is interesting mainly due to the procedural issues it raises.  Judge Gilstrap did make a substantive ruling that the CableLabs, IETF and ITU-T intellectual property rights (IPR) agreements at issue applied on a patent claim-by-claim basis and not on a patent-by-patent basis (i.e., some claims in a patent may be subject to the IPR agreement, but other claims within that same patent may not). Continue Reading Judge Gilstrap rejects SEP-based arguments to set aside jury infringement and damages verdict (Genband v. Metaswitch)

Judge Gilstrap recently entered an Order that rejected various defenses raised by Metaswitch based on the prior patent owner’s (Nortel) activities in standards organizations CableLabs, the Internet Engineering Task Force (“IETF”) and the International Telecommunication Union (“ITU”).  The decision highlights the importance of considering the specific language of the standard setting intellectual property rights (“IPR”) policy and patent owner commitment at issue as well as the importance of showing that the standard incorporates the patented technology and is implemented in the accused infringing products.

For example, under the wording of the specific CableLabs IPR Agreement at issue, Judge Gilstrap ruled that (1) an entities’ commitment only applied to intellectual property (e.g., patents or applications) it owned at the time the entity made the commitment and did not apply to intellectual property that the entity later acquired and (2) a subsidiary’s intellectual property commitment did not obligate its parent entity.  Thus, although one of Nortel’s subsidiary’s that owned no patents participated in the CableLabs standards process, Nortel could hold (and later sell) patents relevant to the CableLabs standard without those Nortel patents being subject to the royalty-free licensing obligation that CableLab’s otherwise required of participants.

Further, Judge Gilstrap ruled that the accused infringer failed to show one or more material parts of the alleged standard setting obligation, such as showing that (i) the standard setting document at issue was actually an adopted standard subject to an obligation (e.g., not an expired draft or request for comment), (ii) the patented technology was incorporated into the standard (e.g., the patent claims actually are “essential” to the standard), and (iii) the accused products actually implement the standard and patented technology.  The latter requirement — e.g., show that the accused products implement the patented technology within the standard — can be particularly problematic, because accused infringer’s generally deny infringement (usually a first line of defense) and are reluctant to undermine that defense by arguing that the claims read onto their product in order to support a lower priority defense, such as the standard essential patent defenses raised here.

The decision also provides incremental insight into common equitable defenses raised in standard essential patent cases: laches, equitable estoppel, implied waiver, and implied license.  In this case, the circumstances that lead to a failure to establish breach of an expressed standard setting commitment also doomed the equitable defenses as well.  Perhaps this is not too surprising, because equity generally does not step-in when there is an adequate remedy at law–e.g., enforcement of a contractual obligation that sets the rights, obligations and expectations of the parties.  This further bolsters the importance of the language used in the specific standard setting IPR policy and specific patent owner commitment at issue when determining rights and obligations under standard essential patents subject to a standard setting obligation. Continue Reading Judge Gilstrap rejects Metaswitch’s SEP defenses based on Nortel participation in CableLabs, IETF and ITU standards bodies (Genband v. Metaswitch)

Yesterday, a jury returned a verdict finding that Fujitsu had breached its standard-setting obligations to offer its declared ‘737 Patent (now expired) to Tellabs on reasoanble and non-discriminatory terms (RAND).  Judge Holderman then issued an order to show to cause why the patent should not be held unenforceable as to Tellabs.  This case presents many interesting standard essential patent (SEP) issues, including a RAND-obligation breach for a patent found essential to a standard but not infringed.


The filings in this long-running case span over six years and 1,400 docket entries, so please excuse our quick summary of salient points leading to the jury verdict and errors we may make in the process.  In short, this litigation started with Fujitsu suing Tellabs for infringing four patents and was whittled-down to this jury trial limited to whether Fujitsu breached an International Telecommunications Union (ITU) G.692 optical network standard setting obligation in asserting a patent against Tellabs without offering a RAND license.

In January 2008, Fujitsu sued Tellabs in the Eastern District of Texas for infringing four of Fujitsu’s patents, including U.S. Patent 5,521,737 (“the ‘737 Patent”) at issue here related to optical amplifiers used in optic fibre transmission networks.  Tellabs successfully moved the case to the Northern District of Illinois and the case was assigned to Judge Holderman (who issued the RAND-rate bench trial ruling last year in Innovatio — see our Oct. 1, 013 post).  During the course of litigation one patent was dropped based on a covenant not to sue granted to Tellabs and two other patents were held invalid, leaving just the ‘737 Patent.

Judge Holderman denied Fujitsu’s summary judgment motion that Tellabs infringed claims 4, 5, 11 and 12 of the ‘737 Patent.  But Judge Holderman granted summary judgment that Tellabs did not infringe Claims 4 and 5 of  the ‘737 Patent (Fujitsu consented to noniinfringement due to claim construction ruling) and entered a Rule 54(b) final judgment of no infringement of those claims (we are not sure what happened with Claims 11 and 12, but speculate that Fujitsu dropped them to simplify case and immediately appeal the Rule 54(b) final judgment).  This thus left a jury trial on Tellabs allegation that Fujitsu breached its standard-setting commitment to offer Tellabs a license under the ‘737 Patent on reasonable and non-discriminatory terms.

Preliminary Jury Instructions.   Judge Holderman’s pre-trial evidentiary rulings and preliminary jury instructions framed the evidence and arguments to be presented at trial (see our July 18 post).  The ten-page preliminary jury instructions are worth reading to see how the issue was presented to the jury.

In summary, Tellabs argued that a May 27, 1996 letter and attached “Patent Statement” from Fujitsu to the ITU was an agreement to license the patent on RAND terms, the letter stating:

Fujitsu is willing to grant license under reasonable terms and conditions for the purpose of implementation of Q.25 – Q.27 recommendations, in compliance with ITU-T TSB patent policy 2.2 to any party which will comply with TSB patent policy 2.1 or 2.2.

The Patent Statement expressly identified the ‘737 Patent at issue here.  The referenced sections of the ITU-T TSB patent policy concern giving either a royalty-free license (Section 2.1) or a RAND license where “negotiations are left to the parties concerned” (Section 2.2), stating:

2.1: “The patent holder waives his rights; hence, the Recommendation is freely accessible to everybody, subject to no particular conditions, no royalties are due, etc.”

2.2: “The patent holder is willing to negotiate licenses with other parties on a non-discriminatory basis on reasonable terms and conditions.  Such negotiations are left to the parties concerned.”

The jury was instructed about Fujitsu’s “two aims” in submitting the Patent Statement:

In Fujitsu’s Patent Statement, Fujitsu expressed two aims: (1) “drawing the attention of SIG15/WP4 Q.25, Q26 and Q.27 to the existence of Fujitsu Patents that relate to work covered by these study areas” and (2) “clarifying the position of Fujitsu relative to the ITU patent policy.”  Fujitsu’s ‘737 Patent was among the patents to which Fujitsu expressly drew the ITU’s attention in Fujitsu’s May 27, 1996 Patent Statement.

Ultimately, Fujitsu communicated to the ITU in Fujitsu’s Patent Statement, that as to all the patents it drew the ITU’s attention to, including the ‘737 Patent, Fujitsu was “willing to grant license under reasonable terms and conditions for the purpose of implementation of Q.25 – Q.27 recommendations, in compliance with ITU-T TSB patent policy 2.2 to any party which will comply with TSB patent policy 2.1 or 2.2.”

With respect to the “essentiality” of the patent, the jury was instructed that Tellabs must prove the patent “might be reasonably necessary” to implement the standard, stating:

Tellabs must also prove that Fujitsu’s ‘737 Patent’s technology was included in, meaning its use might be reasonably necessary if someone were to try to implement certain of the standards recommended by ITU-T standard G.692 title, “Optical interfaces for multichannel systems with optical amplifiers.”

The jury was also instructed that Tellabs must prove that it was willing to negotiate a license on RAND terms.

The jury was instructed that Tellabs could prove that Fujitsu breached its RAND obligation (if there was one)  in one of six ways based on (1) not offering Tellabs a patent license on RAND terms or (2) filing an infringement lawsuit against Tellabs that (i) sought an injunction, (ii) sought a non-RAND royalty rate, (iii) sought lost profits, (iv) damaged Tellabs business or (v) “requir[ed] Tellabs to devote management attention and various resources to defending the lawsuit, such as attorney’s fees, expert fees, and related costs.”

For what its worth (meaning we readily may be wrong since not familiar with the record) some of those circumstances seem easily provable as having occurred or not occurred — e.g., did Tellabs file a lawsuit seeking an injunction, lost profits or requiring Tellabs to incur attorneys fees.  Although the parties stipulated facts were filed under seal, we believe from some filings that the jury may have been instructed that:

  • Fujitsu admits it never offered Tellabs any royalty rate, RAND or otherwise (see MIL Order Dkt. # 1289)
  • Fujitsu sought lost profits in its complaint against Telebs (see Amended Complaint Dkt. #91)
  • Fujitsu gave some kind of stipulation that it breached its RAND Agreement by Seeking a Non-RAND Royalty Rate” (see Tellabs’ JMOL Motion Dkt. #1409 at 21 referring to “Stipulation read into Record, Trial Tr. at 602:13-603:5 (7/21/14))”

Thus, the key dispute may be the threshold issue of what Fujitsu offered under what conditions in its statements to ITU and were those conditions met.  We do not know what exactly was argued and presented in the trial, but a high-level summary of Fujitsu’s contentions given in the jury instructions were as follows:

Fujitsu contends that to implement the ITU’s standards it is not necessary to use the technology of Fujitsu’s ‘737 Patent and Fujitsu therefore did not have to offer to license the technology of the ‘737 Patent on RAND terms.  Fujitsu asserts that the ITU did not accept Fujitsu’s offer to grant a license to Fujitsu’s ‘737 Patent’s technology on RAND terms, and Fujitsu also asserts that Fujitsu had no obligation to grant a license to Fujitsu’s ‘737 Patent’s technology on RAND terms to Tellabs.  Fujitsu also contends, even if it did breach a RAND obligation, the breach was not willful.

Further, from other briefing, we believe Fujitsu argued that Fujitsu was not required to grant Tellabs a license because Tellabs would not reciprocate a license to Fujitsu under Tellabs standard essential patents (a condition of Fujitsu’s Patent Statement quoted above).

The jury was not instructed or presented evidence as to damages if a breach occurred, the parties having stated in the Pre-Trial order that the jury need not quantify financial damages.

Pretrial Verdict Form Revisions.  Case dynamics and perhaps uncertainties in this developing area of law led to revisions in the pretrial verdict form, which is provided to the jury at the start of the trial so they know what questions they will be asked to answer at the end of trial.  For example, Question 2 of the Pretrial Verdict Form concerning the patent’s essentiality to the standard–an important issue as to whether a RAND obligation existed–was revised from whether the patented technology is “included” or “necessary” to implement the standard to a potentially broader view of whether the patent  “may be required” to implement the standard, as shown below:

  • Initial Preliminary Jury Verdict FormHas Tellabs proven that Fujitsu’s ‘737 Patent’s technology was included in the standardized technology recommended by ITU-T standard G.692 titled, “Optical interfaces for multichannel systems with optical amplifiers?”
  • First Revised Jury Verdict Form:  Has Tellabs proven that Fujitsu’s ‘737 Patent’s technology was included in, meaning necessary to implement, the standardized technology recommended by ITU-T standard G.692 titled, “Optical interfaces for multichannel systems with optical amplifiers?”
  • Second Revised Preliminary Jury Verdict FormHas Tellabs proven that Fujitsu’s ‘737 Patent’s technology was included in, meaning the ‘737 Patents’ technology reasonably might be necessary in order to implement, one of the specifications of standardized technology recommended by ITU-T standard G.692 titled, “Optical interfaces for multichannel systems with optical amplifiers”?
  • Adopted Revised Preliminary Jury Verdict FormHas Tellabs proven that Fujitsu’s ‘737 Patent’s technology was included in (meaning the ‘737 Patent’s technology may be required to implement) one or more of the necessary specifications of the standardized technology recommended by the ITU-T Recommendation G.692 titled, “Optical interfaces for multichannel systems with optical amplifiers?”

Judge Holderman explained that this latter version directed to technology that “may be required to implement” the standard was adopted to avoid “patent hold-up” and given the ITU’s Intellectual Property Rights (IPR) statement about patents that “may be required to implement this [ITU] Recommendation,” stating:

As is clear from the ITU-T’s Recommendation G.692, the purpose of its specifications, which address “multichannel optical line system interfaces,” was to provide “future transverse compatibility among such systems.”  Any patented technology that comes within G.692’s specifications that can be used to implement the Recommendations’ goal of standardization to provide compatibility should be subject to a RAND royalty commitment.  Otherwise, the owner of that patented technology could engage in “patent hold-up” by requiring implementers of the G.692 standard to conduct a work-around so as not to infringe that standard-compliant patented technology.

In the “Intellectual Property Rights” section of the ITU’s Recommendation G.692, the ITU states:
“The ITU draws attention to the possibility that the practice or implementation of this Recommendation may involve the use of a claimed Intellectual Property Right.  The ITU Takes no position concerning the evidence, validity or applicability of claimed Intellectual Property Rights, whether asserted by ITU members or others outside the Recommendation development process.  As of the date of approval of this Recommendation, the ITU had received notice of intellectual property, protected by patents, which may be required to implement this Recommendation.  However, implementors are cautioned that this may not represent the latest information and are therefore strongly urged to consult the TSB patent database. (emphasis added)”

By choosing the words “patents, which may be required to implement the Recommendation,” the ITU articulated its understanding of the patented technology that required a RAND commitment.  That phrase, “may be required to implement the Recommendation,” is now appropriately used in Question 2 for the jury to answer at this trial.

As shown below, the Final Verdict Form provided to the jury after trial was further amended so that the Question 2 essentiality issue was whether the patent “is one of the required ways to implement” the standard.

Final Verdict Form.   Prior to jury deliberations, the Court adopted final jury instructions as well as a final verdict form which, on the issue of essentiality, instructed as follows:

Has Tellabs proven that Fujitsu’s ‘737 Patent’s technology is essential to (meaning the ‘737 Patent’s technology is one of the alternative ways required to implement) one or more of the necessary specifications of the standardized technology recommended by the ITU-T Recommendation G.692 titled, “Optical interfaces for multichannel systems with optical amplifiers?”

The general flow of the verdict form was:

  1. Did Fujitsu agree to license the patent on RAND terms?  If not, no need to go any further
  2. Is the patent essential to the standard?  If not, no need to go any further.
  3. Did Fujitsu breach its RAND agreement in one or more of six enumerated ways?  If not, no need to go any further.
  4. Would Tellabs have been willing to negotiate a RAND license if offered by Fujitsu?  If not, no need to go any further.
  5. Did Fujitsu willfully breach the agreement? (presumabley under a preponderance of the evidence burden of proof, which appears to distinguish this from the next question)
  6. Did Fujitsu willfully breach the agreement under a clear and convincing evidence burden of proof?

Yesterday’s Jury Verdict/Show Cause Order

Jury Verdict.  Yesterday, the jury returned a verdict (attached to the show to cause order)  in favor of Tellabs on every single question and subparts thereof, finding that Tellabs had shown that:

  1. Fujitsu agreed to license the ‘737 Patent on RAND terms;
  2. Fujitsu’s ‘737 Patent’s technology is essential to (meaning the ‘737 Patent’s technology is one of the alternative ways required to implement) one or more of the necessary specifications of the standardized technology recommended by the ITU-T Recommendation G.692 titled, “Optical interfaces for multichannel systems with optical amplifiers”;
  3. Fujitsu breached its agreement by:
    (a)  Not offering to grant Tellabs a license on RAND terms for its ‘737 Patent’s technology;
    (b) Filing a lawsuit against Tellabs seeking injunctive relief based upon the alleged infringement of Fujitsu’s ‘737 Patent;
    (c) Filing a lawsuit against Tellabs seeking a non-RAND royalty rate based on alleged infringement of Fujitsu’s ‘737 Patent;
    (d) Filing a lawsuit against Tellabs seeking damages in the form of lost profits based on alleged infringement of Fujitsu’s ‘737 Patent;
    (e) Filing a lawsuit against Tellabs alleging infringement of the ‘737 Patent that damaged Tellabs’ business; and
    (f) Filing a lawsuit against Tellabs alleging infringement of the ‘737 Patent that required Tellabs to devote management attention and time, as well as other resources to defending the lawsuit, such as attorney’s fees, expert fees, and related costs.
  4. Tellabs was willing to negotiate a RAND license “if Fujitsu had offered Tellabs RAND terms for such a license”
  5. Fujitsu’s breach was willful “in that Fujitsu’s breach was intentional, knowing and with conscious disregard for Tellabs’ rights, or alternatively, was done with reckless disregard for Tellabs’ obvious or known rights.”
  6. There was clear and convincing evidence that Fujitsu willfully breached the agreement.

Show Cause Order.  After the jury verdict, Judge Holderman issued an order requiring Fujitsu to “show cause why the ‘737 Patent should not be held by the court in the exercise of the court’s equitable powers to be unenforceable as to Tellabs.”  With the patent now expired, this issue may be limited to the patent’s enforceability against any infringement by Tellabs prior to Fujitsu offering a RAND license and may not touch on a patent’s enforceability after the patent owner cures a breach by offering a license on RAND terms.

Recall that, in the Realtek v. LSI litigation, Judge Whyte recently faced a similar (yet different) request to declare LSI’s patents (including an expired patent) unenforceable if LSI does not offer Realtek a license on RAND terms.  But Judge Whyte denied that request with respect to “unenforceability” because it sounded like injunctive relief that he had denied.  Judge Whyte did, however, declare that “upon Realtek’s request for a license, to be in compliance with its RAND commitment, LSI must offer Realtek a license … on RAND terms” consistent with the jury’s determined RAND rate (see our June 16, 2014 post).

What’s Next?  The briefing on the show cause order should shed more light on the unenforceability issue, which may be heard during a Septemer 23 status conference.  The parties post-verdict motions and Judge Holderman’s rulings thereon should provide more insight into what was argued and presented to the jury on the various RAND-breach issues.

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

FRAND Ruling

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

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

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

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

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

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

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

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

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

No “Patent Holdup” Concerns.  ALJ Essex concludes his FRAND analysis by rejecting arguments against exclusion orders for SEPs, which arguments were made by the U.S. Federal Trade Commission (“FTC”) and U.S. Patent & Trademark Office (“PTO”)/U.S. Department of Justice (“DOJ”). The FTC and PTO/DOJ essentially argued that FRAND license negotiations are tainted by the threat of an exclusion order, which creates the risk of patent holdup that allows the patent owner to secure an excessively high royalty rate on standard-essential IP. But ALJ Essex found no evidence that InterDigital had been negotiating in bad faith; rather, “it is the respondents that have taken advantage of the complainant and manufactured, marketed, and profited on good without taking a license to the IP at issue.” ALJ Essex further acknowledged the “hypothetical risk of holdup” in similar situations, but “we have evidence that it is not a threat in this case, or in this industry.” ALJ Essex cites TIA’s statement to the FTC that “TIA has never received any complaints regarding such ‘patent hold-up’ and does not agree that ‘patent holdup’ is plaguing the information and telecommunications technology standard development process.”

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

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

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

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

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

Judge Richard Andrews of the District Court of Delaware dismissed Nokia and ZTE’s amended FRAND counterclaims against InterDigital on Wednesday, ruling that the amended declaratory judgment actions would not serve a useful purpose in the context of the parties’ ongoing litigation. Nokia and ZTE’s FRAND counterclaims involve around 500 patents identified to ETSI as possibly reading on the UMTS 3G and/or LTE 4G standards and an additional set of patents related to the ITU’s CDMA2000 3G standard. The counterclaims further allege that, pursuant to the ETSI, ITU, and TIA IPR Policies, InterDigital has declared a large portion its patent portfolio as essential or potentially essential to these cellular telecommunications standards and has voluntarily entered into binding and enforceable FRAND-licensing commitments for these patents. Wednesday’s decision marks the second time that the Court has dismissed a set of FRAND-related counterclaims in these actions, having previously dismissed Nokia and ZTE’s FRAND counterclaims against InterDigital last July.

Following the Court’s July 2013 dismissal, ZTE filed amended counterclaims seeking a declaration that InterDigital had failed to provide offers to ZTE on FRAND terms and requesting that the court determine an appropriate FRAND rate. Nokia similarly amended its counterclaims, requesting that the court declare that InterDigital did not offer a FRAND rate and determine what the terms of a FRAND license would be. InterDigital then moved to dismiss on the grounds that, even if the Court were able to determine a FRAND rate, the determination would be of no practical help or utility because of the remaining disputes regarding whether the various patents-at-issue are essential to the underlying standards.

Considering InterDigital’s Motion to Dismiss, Judge Andrews reviewed the extensive litigation and negotiation histories between InterDigital and ZTE and Nokia, providing a high-level overview of the offers, counteroffers, and resulting lawsuits between the companies and InterDigital.  Judge Andrews considered the Third Circuit’s analysis of whether declaratory judgment subject matter jurisdiction exists based on three basic principles: “(1) ‘adversity of the interest of the parties,’ (2) ‘conclusiveness of the judicial judgment,’ and (3) ‘the practical help, or utility, of that judgment.'”  Judge Andrews assumed that the first two princples were met — that there is adversity of interest and that “the Court could conclusively decide a FRAND rate.”  Thus Judge Andrews focused the subject matter jurisdiction analysis on the third principle of whether the declaratory judgment would provide “practical help, or utility” so as to provide the Court with subject matter jurisdiction over the counterclaims.

Assuming, arguendo, that the Court could conclusively determine a FRAND rate in an efficient manner — an assumption that the Court found “highly dubious considering that there are 500 or so possibly relevant patents” — Judge Andrews wrote that he was “far from convinced that the trial that would be necessitated by the declaratory judgment would serve any useful purpose.” The Court reasoned that, even if a FRAND rate were determined, it is not clear as to how such a ruling could be enforced, finding that neither Nokia nor ZTE had obliged themselves to be bound by the Court’s potential determination and expressing concern for how declaratory relief would be utilized by the parties:

While both Nokia, and to a greater extent ZTE, have indicated their “willingness” to accept a license, there has been no sworn affidavit by either company that they would sign a license. Companies can change or sell their product lines. They can enter and withdraw from markets. They can appeal district court decisions, and initiate other litigation, which would either delay or derail a final judgment. All the Court’s determination of a FRAND rate would accomplish would be to give a data point from which the parties could continue negotiations.

Judge Andrews further reasoned that determining a FRAND rate would not lead directly to a patent license because of the plethora of other licensing issues, including warranties, indemnification, cross-licensing, trademarks and attribution, insurance, and so on, that would need to be negotiated between the parties, noting that on multiple occasions he has seen agreed upon term sheets fail to turn into a final agreement.

The Court also found that the declaratory judgment actions seeking a determination of whether InterDigital had in fact offered a FRAND rate would serve little to no useful purpose as such an undertaking would only serve “to alter the current negotiating power between the parties” and “any impact that this determination would have on the patents-in-suit is encompassed within the multitude of affirmative defenses that both Nokia and ZTE assert”, noting that FRAND issues are captured by ZTE’s affirmative defenses for patent misuse, breach of contract, unclean hands, and existence of an express or implied license.

Judge Andrews also indicated that any agreement between the parties would involve business considerations not suitable to litigation, and suggested arbitration might be a better route to resolution:

It seems to me likely that the parties do in fact want to reach an agreement.  Negotiating such an agreement involves mostly business considerations.  It does not seem to me that litigation by itself is a very effective means to make an agreement between willing parties.  I understand that the parties cannot agree on the scope of arbitration.  If they could, or they could decide to have the arbitrator decide the scope, that would appear to be a possible way to proceed.

Last Friday, several cable operators filed a Complaint against Rockstar in D. Del. alleging that Rockstar’s assertion against them of patents breached obligations owed to various standard setting organizations (“SSOs”) based on prior owner Nortel’s commitment to license patents on RAND, FRAND or royalty-free terms.  Our Jan. 2 and Nov. 1 posts discussed Rockstar’s purchase of Nortel’s patents from bankruptcy and recent Rockstar lawsuits against other cable operators as well as Google, Andriod device manufacturers and Cisco.

The Complaint accuses Rockstar–alleged to own over 4,000 patents acquired from Nortel–of “misuse and attempt[ing] to obtain exorbitant royalties” based on several acts:

Rockstar has misused and attempted to obtain exorbitant royalties from licensing the patents it purchased from Nortel by:
(a) refusing to identify to potential licensees the patents it seeks to enforce and instead broadly accusing companies of infringing the portfolio as a whole;
(b) requiring all potential licensees to sign non-disclosure agreements as a precondition to negotiating licensing agreements for the purpose of obtaining royalties in excess of its FRAND obligations;
(c) refusing to identify patents already licensed to vendors in an attempt to avoid exhaustion and extort multiple royalties; and
(d) once requests are made to license standard essential patents, transferring those patents to third parties in an attempt to obtain increased royalties and avoid its FRAND licensing obligations.

You may find here the Complaint with exhibits, which include Rockstar demand letters to the cable operators (but without the attached patents to reduce file size).

Last week (Thu. Oct. 17, 2013), the International Trade Commission (ITC) issued a Notice that it will review “in its entirety” Administrative Law Judge Shaw’s initial determination (ID) that found no infringement of LSI’s 802.11 and H.264 standard essential patents (SEPs), but otherwise rejected RAND-based defenses, as discussed in our prior post.

The ITC notice includes requests that the parties provide additional information about specific issues in the final ID, such as evidence of indirect infringement as well as “any record evidence of the standard essential nature of the ‘663, the ‘958 and the ‘867 patents.”  Because the review could find a violation based on alleged SEPs and any remedy thereon must consider “public interest factors”, the ITC further seeks written submissions addressing the public interest factors (including additional sworn testimony) based on the following list of RAND-related issues:

1.  Please discuss and cite any record evidence of the allegedly RAND-encumbered nature of the declared standard essential ‘663, ‘958, and ‘867 patents.  With regard to the ‘958 patent and the ‘867 patent, what specific contract rights and/or obligations exist betwen the patentee and the applicable standard-setting organization, i.e., the Insitute of Electrical and Electronic Engineers, Inc. (IEEE)?  With regard to the ‘663 patent, what specific contract rights and/or obligations exist between the patentee and the applicasble standard-setting organization, i.e., the International Telecommunication Union (ITU)?

2.  Please summarize the history to date of negotiations between LSI and Funai and between LSI and Realtek concerning any potential license to the ‘663, the ‘958, and the ‘867 patents, either alone, in conjunction with each other and/or the ‘087 patent, and/or in conjunction with non-asserted patents.  Please provide copies of, or cite to their location in the record evidence, all offers and communications related to the negotiations including any offer or counteroffer made by Funai and Realtek.

3.  Please summarize all licenses to the ‘663, the ‘958, and the ‘867 patents granted by LSI to any entity including evidence of the value of each patent if such patent was licensed as part of a patent portfolio.  Please provide copies of, or cite to their location in the record evidence, all agreements wherein LSI grants any entity a license to these patents.  Please also provide a comparison of the offers made to Funai and/or Realtek with offers made to these other entities.

4.  If applicable, please discuss the industry practice for licensing patents involving technologies similar to the technologies in the ‘663, the ‘958, and the ‘867 patents individually or as part of a patent portfolio.

5.  Please identify the forums in which you have sought and/or obtained a determination of a RAND rate for the ‘663, the ‘958, and the ‘867 patents.  LSI, Funai and Realtek are each requested to submit specific licensing terms for the ‘663, the ‘958, and the ‘867 patents that each believes are reasonable and non-discriminatory.

6.  Please discuss and cite any record evidence of any party attempting to gain undue leverage, or constructively refusing to negotate a license, with respect to the ‘663, the ‘958, and the ‘867 patents.  Please specify how that evidence is relevant to whether section 337 remedies with respect to such patents woudl be detrimental to competitive conditions in the U.S. economy and any other statutory public interest factor.

The questions above appear directed to information found lacking by U.S. Trade Representative Froman when he disapproved the ITC’s prior Samsung-Apple exclusion order.  Recall that USTR Froman requested that, in future ITC cases dealing with FRAND-encumbered SEPs, the ITC should  “proactively … have the parties develop a comprehensive factual record” to include “information on the standards-essential nature of the patent at issue if contested by the patent holder and the presence or absence of patent hold-up or reverse hold-up” with the ITC making “explicit findings on these issues to the maximum extent possible.”

Written submissions from the parties and “interested parties” are due Friday November 1, and reply submissions are due Tuesday, November 12 (per Corrected Notice).

Yesterday, Judge Robart issued an Order that denied Motorola’s motion to overturn the jury’s verdict that Motorola breached its RAND obligations in dealing with Microsoft on standard essential patents (SEPs) for IEEE 802.11 WiFi standards and ITU H.264 video compression standards. Judge Robart’s ruling here indicates that assessing compliance with a RAND obligation is a case-sensitive, fact-specific inquiry, stating that “there was enough evidence on each side for the jury to decide for either party.”

Microsoft had argued to the jury that Motorola breached its RAND obligations on several grounds:

  • Offering a royalty rate that was not RAND (offered 2.25% of end product price)
  • Seeking injunctive relief against Microsoft on the SEPs
  • Not licensing Microsoft’s 802.11 chip supplier, Marvell

The jury unanimously found that Motorola breached its contractual commitment to IEEE and ITU and awarded over $14.5 million in damages. Motorola moved for judgment as a matter of law to set-aside the jury’s verdict.

In considering the JMOL motions, Judge Robart found the essence of the various RAND-breach theories to be “whether Motorola’s conduct violated the duty of good faith and fair dealing.” His jury instructions on that duty under Washington law was “the operative standard” for weighing the evidence in this case, the text of which is provided on pages 9-11 of the Order and is reproduced below (without internal citations) given its importance to Judge Robart’s decision:

     A duty of good faith and fair dealing is implied in every contract. This duty requires the parties to a contract to cooperate with each other so that each may obtain the full benefit of performance, even if the parties have different requirements under the contract. However, this duty does not require a party to accept a material change in the terms of its contract. The implied duty of good faith and fair dealings arises out of the obligations created by a contract and only exists in relation to the performance of specific contract terms. Thus, a party’s obligation is only to perform the obligations imposed by the contract in good faith. There is no “free-floating” duty of good faith and fair dealing that injects substantive terms into the parties’ contract.

There is no one-size-fits-all definition of good faith and fair dealing. Rather, the duty varies somewhat with the context in which it arises. It may violate the duty of good faith and fair dealing to, for example, (1) evade the spirit of a bargain; (2) willfully render imperfect performance; (3) interfere with or fail to cooperate in the other party’s performance; (4) abuse discretion granted under the contract; or (5) perform the contract without diligence. This list is in no way exhaustive, and indeed it would be nearly impossible to create a complete catalogue of conduct that violates the duty of good faith and fair dealing.

It is the fact finder’s job–in this case the jury–to determine whether a party breached its duty of good faith and fair dealing. Good faith performance of a contract requires being faithful to the agreed common purpose of the contract and performing consistently with the justified expectations of the other parties. On the other hand, bad faith performance involves conduct that violates community standards of decency, fairness, or reasonableness.

Washington law establishes that numerous considerations may inform a fact-finder’s determination of whether the defendant’s conduct violated the covenant of good faith and fair dealing. In particular, a review of state and federal case law reveals that a fact finder may consider: (1) whether the defendant’s actions were contrary to the reasonable and justified expectations of other parties to the contract; (2) whether the defendant’s conduct would frustrate the purpose of the contract; (3) whether the defendant’s conduct was commercially reasonable; (4) whether and to what extent the defendant’s conduct conformed with ordinary customer or practice in the industry; (5) to the extent the contract vested the defendant with discretion in deciding how to act, whether that discretion was exercised reasonably; and (6) subjective factors such as the defendant’s intent and motive.

The last consideration, subjective intent, is a subject of frequent dispute between the parties and so requires some elaboration. Several Washington cases have considered subjective factors in determining whether a party violated its duty of good faith and fair dealing. Thus, the court concludes that, under Washington law, these factors are relevant to the good faith inquiry. However, other cases have made it clear that bad motive does not equate to bad faith and good motive does not equate to good faith. To be more specific, bad motive or intent does not necessarily imply bad faith, and good motive or intent does not necessarily imply good faith. Likewise, bad motive or intent is not a prerequisite to bad faith, nor is good motive or intent a prerequisite to good faith.

Offer Letters. Motorola argued there was insufficient evidence of breach based on its initial offer letters (2.25% of end product price) because (1) Motorola followed industry custom of making an opening offer to be further negotiated; (2) the contractual purpose of the RAND obligation was not frustrated because there is no evidence that “hold up” is a problem in the “real world”; and (3) Motorola acted in accordance with the parties’ reasonable expectations. But Judge Robart found that, under the applicable JMOL standard, Microsoft presented sufficient evidence to the contrary, such as “evidence presented by Microsoft that hold up took place in this case.” Further, because “the good faith standard articulated above is multi-faceted and no single factor is dispositive,” the jury could have found breach based on other factors.

Injunctive Relief.  Motorola argued that its RAND obligation did not waive Motorola’s right to injunctive relief.  Judge Robart “recognized” the “jurisprudential debate” on whether injunctions are available for SEPs.  So he had not instructed the jury that there was such a waiver of injunctive relief, but left it to the jury to decide the ultimate issue whether Motorola breached its duty of good faith and fair dealing.  He found that Microsoft presented sufficient evidence to support the verdict, and the court could not reweigh the evidence in a JMOL motion.

Marvell.  Motorola argued that Microsoft had no standing to seek relief based on Motorola not  licensing WiFi chip maker Marvell (and instead going after Microsoft for using Marvell’s chip).  Judge Robart, however, stated that “Microsoft is not asserting Marvell’s rights and interests, it is merely presenting evidence that tends to show Motorola’s bad faith.”  He allowed the Marvell argument in order to “reflect[] the fact that Motorola’s course of conduct in marching toward a RAND license (i.e., the course of conduct subject to the good faith duty) may be complicated and multi-faceted and may involve third parties like Marvell.”  Thus the jury was not asked to find a breach “based on the Marvell evidence alone” and “Microsoft presented so much evidence with respect to opening offers, injunctive relief, and Motorola’s overall course of conduct” that the jury could find a breach “without considering any Marvell evidence at all.”

Judge Robart also rejected Motorola’s challenges as to the damages award.

Yesterday marked the start of the long-awaited Microsoft-Motorola RAND breach of contract jury trial, taking place before Judge James L. Robart in the Western District of Washington.  Over the next week or so, the jury will hear testimony on whether Motorola breached its IEEE- and ITU-related RAND obligations through its licensing negotiations and course of dealing with Microsoft, as well as whether Motorola owes damages to Microsoft (Microsoft is apparently seeking $23M stemming from a move of its European distribution center to avoid a German patent injunction, plus $6M in attorneys’ fees incurred in defending injunction claims).  We’ll try to keep you apprised of any interesting rulings or nuggets that come to light during the trial.  In the meantime…

  • Even on the first day, there were already some reporters tweeting live updates from the courtroom, including Janet Tu of The Seattle Times (Twitter feed @janettu) and Todd Bishop of Geekwire (Twitter feed @toddbishop).  You can read Janet’s recap of the first day here, and check out Todd’s recap here.  For those of you who are interested in following live updates on Twitter, check out the hashtag #motosoft.
  • Last week we dove a little bit into the issues raised by Motorola’s dealings with Marvell — Microsoft’s 802.11 chip supplier — and the parties’ arguments regarding whether the jury should be allowed to consider Motorola’s conduct toward Marvell as part of its breach of contract analysis, and also whether a hypothetical license between Motorola and Marvell would have exhausted Motorola’s patent rights with respect to Microsoft.  Yesterday, Judge Robart issued an order excluding Microsoft’s efforts to argue that patent exhaustion would apply.  However, Judge Robart will allow Microsoft to introduce evidence relating to Motorola’s conduct with Marvell, finding that such evidence could be relevant to Microsoft’s claim that Motorola violated its RAND-based duty of good faith and fair dealing.
  • Tim Worstall of Forbes also brings us a preview of the trial.
  • Over at AllThingsD, John Paczkowski wonders what if any effect the outcome of this trial could have on BlackBerry, speculating that a jury verdict of breach might lead BlackBerry to file a similar RAND breach of contract suit against Motorola (the parties were previously involved in a wide-ranging patent dispute from 2008-2010).
  • Lastly, FOSS Patents’ Florian Mueller argues that this jury trial wouldn’t be taking place if not for what he calls [Motorola parent company] Google’s “patent schizophrenia.”

A month ago, we alerted you to ALJ David P. Shaw’s Initial Determination finding no violation of Section 337 in In the Matter of Certain Wireless Devices with 3G Capabilities and Components ThereofInv. No. 337-TA-800 — the ITC’s investigation into InterDigital’s accusations that Huawei, Nokia, and ZTE infringed several 3G-essential InterDigital patents.  Yesterday, the ITC finally released the public version of the ~450 page Initial Determination.

[337-TA-800 Initial Determination (PUBLIC)]

As we noted in our post on the parties’ respective petitions for review, while the ALJ found no infringement of any valid patent claims (and therefore no violation of Section 337), he did address the Respondents’ FRAND-related defenses — and made some interesting findings.  After the jump, we’ll take a quick look at these findings, which begin on page 417 of the Initial Determination.

Continue Reading ITC releases public version of ALJ’s Initial Determination in InterDigital 3G patent case (Inv. No. 337-TA-800)