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

FRAND Ruling

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Yesterday a jury returned a verdict finding that Apple does not infringe Golden Bridge’s patent alleged to be essential to the WCDMA standard.  The verdict thus did not reach the royalty-rate issue that was interesting for a few reasons.

Excluded FRAND Expert Testimony.  As discussed in our May 30, 2014 post, Magistrate Judge Grewal had excluded patent owner Golden Bridge’s damages expert testimony because it represented a flawed methodology for computing a fair, reasonable and non-discriminatory (FRAND) royalty rate.  He gave Golden Bridge a week to submit a revised damages report.  But during trial he excluded that revised testimony as well. 

The damages expert had abandoned his first entire market value theory and tried to focus on Apple’s license agreements with Ericsson and Nokia to support a per-unit royalty of $0.0869.  But Judge Grewal found this new theory was flawed as well, because the damages expert improperly “allocated the entire value of Apple’s portfolio licenses with Ericsson and Nokia to a tiny subset of a subset of a subset of a subset of the patents and standards in those portfolios.”  The licenses considered cover “all standard essential patents” to include technologies beyond WCDMA, such as Wi-Fi, GSM and LTE.  But the expert attributed no value to patents covering other standards and he did not address — as the patentee’s attorney tried to explained later — that WCDMA was the focus of the alleged comparable licenses because that’s what the Apple products practiced at the time.  The expert’s testimony was thus excluded for not accounting for differences between the alleged comparable licensed technology and the patents-in-suit:

Under established Federal Circuit law, an expert may not rely on broad licenses that cover technologies far beyond the patents-in-suit without accounting for the differences in his calculations.  That is precisely what [the patent owner’s damages expert] did not do here, resulting in a fundamentally unsound calculation.  That the entire dollar value of the Apple-Ericsson and Apple-Nokia agreements stemmed entirely from the actually-essential (not just declared essential) WCDMA patents (not those related to other active standards) relating to terminal devices is an implausible assumption to begin with, and [the expert] does not even attempt to justify this assumption.

Jury Instructions.  Another interesting aspect of this case is that one may miss that this is a standard essential patent case when simply reading the Final Jury Instructions.  The damages instructions (Instruction Nos. 17-21) read like a typical instruction for determining a Georgia-Pacific reasonable royalty without any modification (such as the modified Georgia-Pacific analysis applied to determine a RAND-rate by Judge Robart in Microsoft v. Motorola or by Judge Holderman in Innovatio, or the RAND-specific instructions given by Judge Whyte in Realtek v. LSI).  The only hint of a standard-setting issue in the jury instructions is found in one phrase of the last sentence of Instruction No. 20 “Damages–Noninfringing Alternatives”:

You may also consider the impact of any available noninfringing alternatives to the asserted claim on the royalty negotiated in the hypothetical negotiation.  In doing so, you may consider the value of any differences in benefits and costs between the noninfringing alternatives and the asserted claim.  You may also consider any alternatives that were available to a standard-setting body or to a third-party component supplier, whether the alternatives are marketed or not. [emphasis added]

 Thus, the jury instructions basically left it to the parties to argue any standard-setting obligation’s impact on the reasonable royalty analysis.

Magistrate Judge Grewal in N.D. Cal. recently issued an Order excluding the testimony of Golden Bridge Technology’s damages expert because it was based on a flawed methodology for determing a fair, reasonable and non-discriminatory (FRAND) royalty rate for the asserted patent alleged to be essential to the 3GPP WCDMA standard.  The primary problem appears to be the expert’s failure to allocate value to the specific patent apart from non-patented product features and failure to rely on real-world industry practices (as opposed to theoretical or asperational practices):

In calculating the royalty base, Schulze did not even try to link demand for the accused product to the patented feature, and failed to apportion value between the patented feature and the vast number of non-patented features in the accused products.  Schulze [the damages expert] had no basis to ignore the fundamental teaching of the entire market value rule, which permits a royalty based on the entire market value of an accused product only where “the patent-related feature is the basis for customer demand.”  In calculating the royalty rate, Schulze impermissibly relied on licenses without any showing of comparability, relied on a maximum, cumulative royalty rate without any showing that anyone had committed to such a notion and failed to allocate particular value to the invention claimed in the ‘793 patent[in-suit].

Judge Grewal stated that, in this case, the typical reasonable royalty analysis involved additional consideration of FRAND licensing terms resulting in a modified Georgia-Pacific hypothetical negotiation that seeks to prevent “patent holdup” or “royalty stacking” by ensuring that “a FRAND license should compensate a patentee for their technical contribution to the technology embodied in a standard, but should not compensate them for mere inclusion in the standard.”  Judge Grewal thus focused on ensuring that the royalty was based on the technical contribution of the patent (without further discussing or giving weight to concerns about “patent holdup” or “royalty stacking”).

Flawed Royalty Base.  Judge Grewal ruled that the expert failed to show an industry practice in using the entire unit price — e.g., price of Apple’s iPad or iPhone — as the royalty base, failed to apportion the royalty base among patented and non-patented features and failed to show that the patented feature drove demand for the entire unit as required under the entire market value rule.  This conflicted with the Federal Circuit’s Lucent decision that “stands for the proposition that, in the absence of evidence that the infringing feature drives demand, the royalty base must be somehow apportioned to reflect the value of the patent-related feature in the absence of the non-infringing features.”  The expert’s attempt to rely on industry practice in using a per unit price relied on aspirational papers of a per unit price without showing “actual practice in the field.”  Further, the entire unit is not the smallest saleable unit, because “throughout this litigation, GBT [the patentee] has taken the position that the entire infringing functionality lies in the baseband processor, not the accused product as a whole.”  Even if the entire unit were the smallest saleable unit, that would “not relieve a patentee of the burden of apportioning the base,” which the damages expert failed to do here.

Flawed Royalty Rate.  Judge Grewal also found that the damages expert’s royalty rate analysis was flawed.  First, the expert erroneously relied on portfolio licenses that the patentee secured in settling several infringement cases that did not involve the patent at issue here.  The expert did not assess the comparability of those licenses by comparing (1) the value of those portfolio patents to those accused products or (2) the value of the patent-in-suit to the accused products in this case.  Further, the expert did not account for the lump-sum settlement payment in those licenses as having included future sales.

Second, the expert erroneously relied on there being some maximum, cumulative royalty rate for all WCDMA patents even though “he identifies no evidence that any party ever agreed to such a [maximum, cumulative] rate.”

Third, the expert erroneously treated the value of the ‘793 Patent-in-suit to be the same as the value of all other patents essential to the WCDMA standard.  The expert appears to have done this by doing a straight division of the number of SEPs into an assumed estimated cumulative royalty rate for all SEPs, thus giving each SEP the same value:

The heart of Schulze’s rate analysis dealt with [Georgia-Pacific] factor 12.  Based on his study of the 1999 UMTS Intellectual Property Association proposed maximum global royalty rate, and various academic studies regarding cumulative rates for standard-essential patents, Schulze opined that the participants in the market for 3G technology would have settled on a certain cumulative royalty rate for all 3G standard-essential patents.  He then calculated a royalty for the ‘793 patent[in-suit] alone as follows.  Looking to the declared WCDMA standard essential patent families provided by Sipro Lab Telecom, and Sipro’s classificaton of those families, he determined the percentage of the families related to terminals like the accused products.  Schulze then multiplied the nuimber of WCDMA standard essential patents identifed in one article by the percentage to determine the number of patent famlies, including the ‘793 patent, that read on terminals.  Dividing his estimated cumulative royalty rate by number of terminal-related eseential patents, he arrived at a rate for the ‘793 patent.  Regarding factor thirteen, Schulze assumed that each standard essential patent shares an equivalent value to each other standard essential patent within the overall standard.

Judge Grewal found such methodology flawed, stating that “the case law is clear that mere patent counting and dividing is not enough”, which does not account for the particular value (vel non) of the patent-in-suit:

Third, Schulze erred in assuming the value of the ‘793 patent was no different than the value of each of the other WCDMA standard-essential patents considered.  GBT identifies no case law supporting the notion that a claimed standard-essential patent gets a free pass on the fundamental notion that a patent damages methodology must be tied to the relevant facts and circumstances of the case at issue.  If anything, the case law is clear that mere patent counting and dividing is not enough.

Judge Grewal, therefore, excluded the patentee’s damages expert opinions “in their current form”, but allowed the expert “another shot” to tender a new report with opinions consistent with the court’s ruling.

Recently Apple explained to the ITC that many of the standard-essential patents asserted by Samsung against Apple have failed under the scrutiny of litigation, resulting in a finding of non-infringement or invalidity.  Well, Apple can now chalk up another SEP win on the board, although one that has nothing to do with Samsung.  Yesterday, Judge Sue Robinson of the U.S. District Court for the District of Delaware ruled on summary judgment that Apple does not infringe two patents alleged by Golden Bridge Technology to be essential to the 3G W-CDMA wireless telecommunications standard.

Golden Bridge is a noted non-practicing entity whose “primary business is the creation, licensing, and enforcement of Wideband CDMA technology and intellectual property.”  The company is involved in several lawsuits over its allegedly-essential cellular technology, and even brought (and lost) an antitrust case against several mobile device makers a few years back, where it had accused the mobile device companies of excluding Golden Bridge’s technology from the standard-setting process. Continue Reading Delaware court says Apple does not infringe Golden Bridge W-CDMA patents