Wednesday, August 26, 2015

Contreras on Empirical Literature on SSOs, SEPs, and FRAND

Jorge Contreras has posted on ssrn a draft titled Patents, Technical Standards, and Standards-Setting Organizations:  A Survey of the Empirical, Legal and Economics Literature, which will be one of the chapters in a forthcoming two-part edited volume titled Research Handbook on the Economics of Intellectual Property Law (Peter Menell, David Schwartz, and Ben Depoorter, eds., Edward Elgar Publishing).  Here is a link to the paper, and here is the abstract:
Despite their potential efficiency benefits, voluntary consensus standards have over the past decade become the subject of significant private litigation, regulatory enforcement and policy debate. Much of the controversy centers on the perceived proliferation of patents covering standardized technologies, potentially abusive enforcement of such patents against manufacturers and users of standardized products, and the terms on which patent holders may be required to license the use of those patents to others. This chapter offers a brief overview of the legal and economic literature concerning interoperability standards and standards-setting organizations, with a focus on empirical studies and contemporary patent and patent licensing concerns.
I may post information on other draft chapters relevant to patent remedies as they become available.  (John Golden and I are working on a chapter titled Empirical Studies Relating to Patents—Remedies, which should be ready soon.)  Professors Menell, Schwartz, and Depoorter held two conferences earlier this month at which contributors to the forthcoming edited volumes presented their work, and I feel very confident that IP scholars, policymakers, and practitioners will find this to be a very valuable resource.  Expected publication date is sometime next year.

Monday, August 24, 2015

Canada's Competition Bureau Issues Draft FRAND Guidelines

A few weeks ago I blogged about the Japan Fair Trade Commission's proposed FRAND policy (here), and also mentioned comments filed by Commissioner Wright and Judge Ginsburg (here).  In addition, J. Gregory Sidak has filed comments, available here, and I'm still interested in seeing any other comments that were filed prior to JFTC's deadline if readers are willing to share them.

Canada's Competition Bureau also recently published Draft IP Enforcement Guidelines, available here.  Unfortunately, I found out about this only after the Competition Bureau's deadline for submitting public comments had lapsed on August 10, but I imagine that readers will be interested in seeing what the guidelines have to say about FRAND issues, among other things.  (The draft guidelines also address, among other matters, the hot topic of settlement of pharmaceutical patent disputes.)  The portions directly relevant to SEPs and FRAND can be found in section 7.3 ("Standard Essential Patents").  Interested readers will want to read the section in its entirety, but here is some of the most relevant language:
Another competitive concern that can arise in the context of standard setting is when a patentee makes a licensing commitment before its technology is adopted in a standard and then later seeks injunction orders against firms that are potentially willing to license the technology on terms and conditions meeting the commitment. By seeking an injunction against firms that are "locked‑in" to the standard and that face prohibitive costs to switch to alternative technologies, the patentee can "hold‑up" potential licensees and demand higher royalties than if it did not seek the injunction. The use of injunctions can be particularly problematic when the patentee’s patented technologies only comprise a small component of the standard but can nonetheless block a prospective licensee’s ability to manufacture and sell standard‑compliant products. Given the significant risk to its business, a prospective licensee that is threatened by an injunction may be compelled to pay a high royalty rate. Similar to the other cases involving patent hold‑up described above, the Bureau’s concern from the patentee’s conduct is that it will increase the cost of accessing the standard for firms that wish to develop products that incorporate the standard and thereby reduce their incentive to innovate or otherwise produce products that use the standard. The patentee’s conduct may result in complete foreclosure of rivals making standard‑compliant products. There is also concern that the increased cost of access will result in increased prices to consumers of standard‑compliant products. Finally, the Bureau would also have concerns that the conduct may weaken incentives for firms to participate in procompetitive standard setting activity generally.
The Bureau recognizes that a firm’s commitment to license on fair, reasonable and non-discriminatory (“FRAND”) terms does not mean that it is committing to license for excessively low royalties or on a royalty-free basis. Firms make large investments in research and development and are entitled to seek rewards to compensate them for their efforts. Potential licensees may seek to take advantage of FRAND commitments by “holding-out” for very low royalties or simply by not undertaking licensing negotiations in good faith. Because of this potential problem, in its inquiry to determine the underlying purpose for a patentee seeking an injunction (whether seeking the injunction was, or was part of, a practice of anti-competitive acts under paragraph 79(1)(b)), the Bureau would look for evidence to determine whether the potential licensee was willing to enter into negotiations and pay a FRAND rate. The Bureau accepts that in certain circumstances it may be appropriate for a firm that has made a FRAND licensing commitment to seek an injunction against an infringing party. Circumstances where the Bureau would conclude that the seeking of an injunction was appropriate include:
  • when a prospective licensee refuses to pay a royalty that is determined to be FRAND by a court or arbitrator; or
  • when the prospective licensee does not engage in licensing negotiations.
The Bureau would likely review conduct that could result in patent hold‑up under section 79 of the Act. The Bureau is of the view that conduct such as patent ambush, reneging on a license commitment or seeking an injunction after making a licensing commitment is "something more" than the mere exercise of patent rights. Accordingly, the Bureau would not consider the exception in 79(5) to apply nor would it review the conduct under section 32 of the Act.
In determining whether conduct that could result in patent hold‑up has had, is having or is likely to have the effect of preventing or lessening competition substantially in a market, the Bureau would look to identify whether, but for the patentee’s conduct, there would likely be substantially greater competition in the markets where it has a competitive concern. This exercise would, in part, have the Bureau examine whether the patentee’s conduct created, preserved or enhanced its market power in technology markets that included its patented technologies due to those patented technologies being necessary to implement the standard. Central to this examination, the Bureau would look to identify any alternative technical standards or technologies that firms could turn to as a substitute for the SDO standard. If such alternatives existed, the Bureau would seek evidence on the magnitude of the switching costs that firms would face to switch to these alternatives. If alternatives did not exist, or if switching costs were prohibitively high, the Bureau would likely conclude that the patentee increased its market power in the technology markets that include its patented technologies. The Bureau would also look to determine whether competition would be harmed in the market for products that implemented the SDO standard. This analysis would determine whether consumers of standard‑compliant products would likely pay higher prices due to manufacturers of these products facing increased costs of accessing the standard. The Bureau would seek evidence as to the effect that royalties had on standard‑compliant product prices and the options that consumers could turn to if faced with an increase in these prices.
Broadly speaking, the Competition Bureau's proposed approach seems consistent with the JFTC's and with the emerging trend within the E.U. (see my analysis of the CJEU's decision in Huawei v. ZTE here), though there may be differences at the margin in determining whether an implementer is a "willing"  licensee.  

Friday, August 21, 2015

Upcoming Event: IEEE Conference on Standardization

The IEEE-SIIT 2015 (9th Annual Conference on Standardization and Innovation in Information Technology) will be held October 6-8 in Sunnyvale, California (link to the conference webpage here, and to the full program here).  I'm pleased to say that Norman Siebrasse and I will both be presenting at a session on October 8.  Many of the leading people in the field will be speaking at what promises to be a rewarding event.  Registration information is available here.

Wednesday, August 19, 2015

Interesting Damages Issue in Michael Jordan Trademark Case

An article in this morning's Wall Street Journal discusses an interesting damages issue that has arisen in a trademark, false endorsement, and right of publicity action filed by former basketball superstar Michael Jordan against the (now-defunct) Chicago-area Dominick's supermarket chain.   I don't normally blog about non-patent cases, but the damages issue here is very interesting, and I can imagine (somewhat) analogous situations coming up in patent cases as well.

The facts of the case are these.  In 2009, Michael Jordan was inducted into the NBA Hall of Fame.  To commemorate Jordan's career, Time Inc., publisher of Sports Illustrated (SI) magazine, published a special issue on Jordan's career.  Prior to publication, Time approached various retailers and offered them free advertising space in return for the retailer's agreeing to stock and promote the magazine.  Two Chicago-area supermarket chains, Jewel and Dominick's, took up Time's offer, and the commemorative issue included ads by both stores congratulating Jordan on his induction.  Jordan filed separate actions against the two stores, claiming violations of Illinois state law (including Illinois's right of publicity statute) and the federal Lanham Act.  In the case against Jewel, the district court held that the ad was noncommercial speech (although the legal significance of this finding to the claims was a bit unclear), but the Seventh Circuit reversed.  See Jordan v. Jewel Food Stores, Inc., 743 F.3d 509 (7th Cir. 2014).  The case against Dominick's proceeded to trial and is, as of this morning, still pending.

Anyway, according to the Wall Street Journal article, Jordan is seeking damages in the millions of dollars, based on his claim that his standard fee for endorsing a product is $10 million.  The defendants contest this evidence, but let's assume for hypothetical purposes it's correct:  that Jordan would have refused an offer of less than $10 million, because he doesn't want to set a precedent of accepting a lower fee for his services.  If Dominick's is found liable, what should Jordan's damages be?

The answer, I suspect, is something well below $10 million.  I don't claim knowledge of the underlying facts, but let's assume that Dominick's would not have agreed to pay Jordan $10 million--it simply wouldn't have been worth $10 million to them to run the ad.  It seems to me that Jordan can't really claim $10 million in lost profits, because but for the infringement the defendant would not have run the ad at all.  (By contrast, in a typical patent case in which the value of the invention to the patent owner is greater than the expected value to a prospective user, the patent owner will refuse to license the invention and instead use the invention itself.  If the user infringes, it may deprive the patent owner of sales and hence the profit that would have been earned on those sales.  See Blair & Cotter, Intellectual Property:  Economic and Legal Dimensions of Rights and Remedies 52-54 (2005).  But here, it doesn't appear that the defendant's use cut into any sales that Jordan himself would have made.)  Similarly, a reasonable royalty (assuming that that remedy is available at all in trademark actions--my recollection is that in the Seventh Circuit it is) seems out of the question, at least if it is calculated according to the familiar hypothetical bargain, willing licensor-willing licensee framework.  On our hypothetical facts, the parties never would have reached an agreement at all.

That leaves restitution, and maybe that is the right remedy on these hypothetical facts:  the defendant should have to disgorge the profit it earned as a result of the infringement.  U.S. trademark law, unlike U.S. utility patent law, allows this remedy, though in most circuits (I'm not sure about the Seventh Circuit) the rule is that disgorgement is permitted only for willful infringement.  In any event, maybe disgorgement is the best fit here, because Dominick's (on our hypothetical facts) obtained the benefit of Jordan's services, and should compensate him for the profit earned as a result of the use.  But that profit would only be the marginal profit brought in by the SI ad, which I would have to assume is fairly low.

Perhaps the above analysis suggests a rationale for restitutionary recoveries in trademark and unfair competition cases that would be lacking in most patent cases, namely where the plaintiff would refuse to license its IP at a price the defendant would have been willing to pay, because it wants to maintain a degree of exclusivity, but lost profits are not available because the plaintiff didn't actually lose any profits from the defendant's use.  But is the defendant's conduct willful, assuming that's a requirement?  It was surely intentional, but the key may be the definition of willfulness.  Perhaps the defendant had a good faith, even if ultimately unsuccessful, defense (as did Jewel in the parallel case).  If so, permitting a restitutionary recovery risks overdeterring other actors from engaging in conduct that is in the gray area between clearly lawful and clearly unlawful, because if they guess wrong they are on the hook for the entire profit earned as a result of the undertaking.  In the long run, the scope of IP rights marginally expands as a result.  But maybe there's no better option on these unusual facts.

Now, for the possible patent parallel.  In recent papers, both Erik Hovenkamp (in a paper I mentioned here) and Jonathan Masur (in a paper I'll probably blog about soon; I haven't read it in its entirely yet) have noted that a patent owner may have an incentive not to license its patent to a prospective user, even when doing so would appear to be in both parties' mutual interest, if the value of the use to the user would be relatively low, because in licensing at a low rate the patent owner is potentially creating a precedent (in the form of a comparable license) that could be used in litigation against other firms who otherwise might have been willing to pay a higher fee.  That seems to be a parallel to our hypothetical version of the Jordan case:  the patent owner (if it's an NPE, let's say) cannot claim lost profits, but the parties also wouldn't have agreed to a royalty at a rate the patent owner would have accepted.  But under U.S. law the disgorgement of the defendant's profit is ruled out too.  Maybe the correct remedy is a reasonable royalty at a rate that would have been rational for the parties to accept aside from concerns over possibly diluting the value of the patent in other licensing transactions (unless the patent owner's interest lies in granting exclusive licenses, in which case the correct remedy might be the lost royalty income that the patent owner would have derived but for the infringement).  I'll have to think about this some more, and would welcome feedback from interested readers. 

Update (August 24, 2015):  I just heard that late last week the jury awarded Jordan $8.9 million.  Based on the analysis above, I'd like to believe this will be reduced either by post-trial motion or on appeal; I just don't see how an amount that large can be defended on a lost profits, reasonable royalty, or disgorgement basis.  (Regarding the latter, according to this story the benefit to Dominick's of using Jordan's name in the specific ad at issue was negligible.)  We'll see what happens . . .     

Monday, August 17, 2015

New Papers on FRAND in China and India

1.  Xiuting Yuan and Paul Kossof have published an article titled Developments in Chinese Anti-Monopoly Law:  Implications of Huawei v. InterDigital on Anti-Monopoly Law in Mainland China, 37 European Intellectual Property Review 438-41 (2015).  Here is the abstract:
Recent litigation between Huawei Technologies and InterDigital Group in the People's Republic of China has been closely followed by the international legal community owing to its relation to cases in the US and implications for intellectual proeprty holders and licensees.  This article analyses this important case and the potential effects on anti-monopoly litigation in China.
2. Natalie Yeung  has published a paper titled IP and Competition Law-The Chinese Perspective in the Journal of Antitrust Enforcement (available here, behind a paywall).  Here is the abstract:
Recent case law and enforcement activities in China have begun to shed light on the approach of Chinese courts and competition authorities towards the application of competition law to issues involving intellectual property rights. This article considers these developments against the backdrop of the prevailing European and US practices, with particular focus on standard essential patents and how they relate to the issues of: (i) compulsory licensing; (ii) use of injunctive relief to enforce standard essential patents; (iii) how a FRAND royalty rate should be determined; and (iv) tying or bundling of licences. Although some of the principles applied by the Chinese courts and authorities are broadly in line with those adopted in the European Union and the US, the lack of a clear approach in areas such as compulsory licensing, the concept of ‘willing licensee’ and the determination of FRAND rates serves as a reminder that the regulation of competition and intellectual property laws in China is a comparatively recent endeavour and continues to evolve. The article concludes with a summary of competition enforcement activities in other areas of intellectual property rights and the lessons that businesses should be aware of in China.
3. J. Gregory Sidak has published  an article titled FRAND in India: The Delhi High Court's emerging jurisprudence on royalties for standard-essential patents, 10 JIPLP 609 (2015).  Here is a link to the paper, and here is the abstract:
Indian jurisprudence on fair, reasonable, and nondiscriminatory (FRAND) licensing practices for standard-essential patents (SEPs) is at a relatively nascent stage. Unlike US and EU courts, which have dealt with cases concerning calculating a FRAND royalty for a considerable time, Indian courts and the Indian antitrust authority—the Competition Commission of India (CCI)—have only just begun to decide such cases.
In its initial orders in the first two antitrust complaints concerning SEPs, the CCI seemed to favour using the smallest salable patent-practising component (SSPPC) as the royalty base to determine a FRAND royalty. However, in the short time since the CCI's orders, the Delhi High Court has rendered contrary decisions in two SEP infringement suits. The Delhi High Court's decisions use the value of the downstream product as a royalty base and rely on comparable licences to determine a FRAND royalty. The Delhi High Court's decisions are not only consistent with sound economic principles, but also indicate that the court is responding to the judicial and industry trends in the rest of the world.
Because the CCI is still investigating the antitrust complaints with respect to the same SEPs, the CCI could benefit from considering the legal and economic arguments in the Delhi High Court's decisions. It would be counterproductive for the emerging FRAND jurisprudence in India if the judiciary and the competition authority take opposing views toward the rights of SEP holders and SEP implementers.

Friday, August 7, 2015

Wright & Ginsburg's Comments on the Japan Fair Trade Commission's Draft FRAND Guidelines

I mentioned a couple of weeks ago (link here) that the Japan Fair Trade Commission was soliciting comments on its draft partial amendments to its Guidelines for the Use of Intellectual Property Under the Antimonopoly Act.  (Submission deadline was yesterday.)  As reported earlier this week on the Antitrust & Competition Policy Blog, U.S. Federal Trade Commissioner Joshua Wright and U.S. Court of Appeals Judge Douglas Ginsburg have submitted comments (available here).  They argue against the proposed amendments.  I would be interested in seeing and possibly linking to other comments that have been submitted, if readers are willing to share them with me.

Aside from the above, I will be taking a blogging break from now until Monday, August 17.  Until then, feel free to read any of the over 400 posts archived on this blog, all available for your entertainment and erudition.

Tuesday, August 4, 2015

Carnegie-Mellon v. Marvell: Analysis

As I mentioned this morning, the Federal Circuit affirmed in part and reversed in part the $1.5 billion judgment against Marvell for the infringement of two patents relating to hard-disk drives (opinion here).  The basic facts are that Marvell allegedly used the patented technology during a sales cycle that occurred in the United States, and that the sales cycle allegedly resulted in a "design win", i.e,, resulted in customers buying Marvell's semiconductor chips.  Carnegie Mellon sought reasonable royalties for Marvell's sales of those chips, and enhanced damages for Marvell's alleged willful infringement.  The district court entered judgment for Carnegie Mellon in the amount of $1.54 billion, which included $287 million in enhanced damages for willful infringement.  I'll focus on the damages issues.   (The Federal Circuit affirmed on validity and infringement, and also on the district court's rejection of Marvell's laches defense.)    

First, on willful infringement, the Federal Circuit reversed, holding that Marvell's invalidity defense was objectively reasonable (p.28):
The court also relied on the proposition that it mattered whether Marvell developed its invalidity defense when undertaking its infringing activity. It said: “[I]n order for Marvell to have a ‘reasonable defense’ to infringement for the time period of 2001–2009, there needs to be some proof that the basis for such invalidity defense was known to the infringers or even the person having ordinary skill in the art.” Id. at 630. The court stated that “Marvell proffered no evidence that anyone at Marvell knew of the [allegedly anticipating] Worstell Patent from 2001 until this litigation began in 2009,” adding: “Even if the Court concluded that Marvell has now put forth a reasonable defense to infringement that has been developed during litigation, such a determination would not be dispositive.” Id. But our precedent is to the contrary. “The state of mind of the accused infringer is not relevant to th[e] objective inquiry” into the risk of liability to the defendant necessary for a finding of recklessness. Seagate, 497 F.3d at 1371. On that basis we have repeatedly assessed objective reasonableness of a defense without requiring that the infringer had the defense in mind before the litigation. See Halo, 769 F.3d at 1381–83; Bard Peripheral Vascular, Inc. v. W.L. Gore & Assocs., Inc., 682 F.3d 1003, 1008 (Fed. Cir. 2012); iLOR, LLC v. Google, Inc., 631 F.3d 1372, 1377 (Fed. Cir. 2011); DePuy Spine, Inc. v. Medtronic Sofamor Danek, Inc., 567 F.3d 1314, 1336 (Fed. Cir. 2009).
As I've suggested in the past, from an economic perspective I would award enhanced damages only when there is reason to believe that compensatory damages will not suffice to deter, and we can be reasonably confident we will not be overdeterring lawful conduct on the part of persons accused of infringement.  Requiring a showing of objectively unreasonableness reduces the risk of overdeterrence and therefore probably makes sense, even when (as the district court may have thought was the case here) the objectively reasonable defense was not apparent to the defendant during the time it was infringing.  People who think that enhanced damages (always or sometimes) should be conditioned on the defendant's subjective state of mind alone will disagree with me here.

The Federal Circuit also affirmed the 50 cent per chip royalty rate and rejected Marvell's argument that the district court should have given more weight to Marvell's proffered comparable licenses (pp. 33-35).

Now to the heart of the matter.  According to Carnegie Mellon, Marvell stimulated demand for its semiconductor chips as a result of infringing conduct that occurred in the United States during Marvell's sales cycle.  For any such chips that were made or sold in the U.S., or were imported into the U.S., Carnegie Mellon is entitled to a 50 cent royalty.  But what about the chips that were made and sold abroad and not imported into the U.S.?  Does Carnegie Mellon get a 50 cent royalty on these, because they were caused by Marvell's infringing conduct in the United States during the sales cycle?  Or not, because this would undermine the rule that U.S. patent law is not applicable extraterritorially?  In Power Integrations Inc. v. Fairchild Semiconductor Int’l, Inc., 711 F.3d 1348 (Fed. Cir. 2013), the Federal Circuit held that a U.S. patent owner is not entitled to lost profits for sales made abroad even if those sales were caused by infringing conduct that occurred in the United States.  But maybe reasonable royalties are different, because (as the court says at p.32) "A key inquiry in the analysis is what it would have been worth to the defendant, as it saw things at the time, to obtain the authority to use the patented technology,considering the benefits it would expect to receive from using the technology and the alternatives it might have pursued. See AstraZeneca AB v. Apotex Corp., 782 F.3d 1324, 1334–35 (Fed. Cir. 2015)."  If Carnegie Mellon and Marvell had sat down to negotiate a license before the alleged infringement began, wouldn't they have taken into account the value Marvell expected to derive from the use of the patent during the sales cycle, even if some of that value derived from foreign sales?  Or would that undermine the rule against extraterritoriality?

I've been conflicted on this one all along, and even now I'm not entirely sure which side has the better of the policy argument.  But the legal issue now appears to be settled, with the Federal Circuit concluding that the portion of the royalty based on the products made and sold abroad and not imported into the U.S. could not stand (pp. 37-38):
For the present context, we think that § 271(a) provides the basis for drawing the needed line. It states a clear definition of what conduct Congress intended to reach—making or using or selling in the United States or importing into the United States, even if one or more of those activities also occur abroad. . . . Where a physical product is being employed to measure damages for the infringing use of patented methods, we conclude, territoriality is satisfied when and only when any one of those domestic actions for that unit (e.g., sale) is proved to be present, even if others of the listed activities for that unit (e.g., making, using) take place abroad. Significantly, once one extends the extraterritoriality principle to confining how damages are calculated, it makes no sense to insist that the action respecting the product being used for measurement itself be an infringing action. Thus, here the claim is a method claim, but the damages measuring product practices the method in its normal intended use, cf. Quanta Computer, Inc. v. LG Electronics, Inc., 553 U.S. 617 (2008) (applying exhaustion to sale of unit that sufficiently embodies a method claim); and the hypothetical negotiation would have employed the number of units sold to measure the value of the method’s domestic use (before production and after), as discussed above. In these circumstances, the inquiry is whether any of the § 271(a)-listed activities with respect to that product occur domestically. . . .
There are significant conceptual differences between different measures of monetary compensation for infringement—including between what agreement the parties would have reached to value a defendant’s use of the patentee’s technology (reasonable royalty) and what amount of otherwise-made profits, based on sales at certain prices, the patentee lost as a result of the defendant’s use of the patentee’s technology (lost profits). See AstraZeneca, 782 F.3d at 1334–35; Warsaw Orthopedic, Inc. v. NuVasive, Inc., 778 F.3d 1365, 1377 (Fed. Cir. 2015). But in the respect that is crucial here, we think that there is a related constraint. In the lost-profits context, this court indicated in Power Integrations that, where the direct measure of damages was foreign activity (i.e., making, using, selling outside § 271(a)), it was not enough, given the required strength of the presumption against extraterritoriality, that the damages-measuring foreign activity have been factually caused, in the ordinary sense, by domestic activity constituting infringement under § 271(a). 711 F.3d at 1371–72. We think that the presumption against extraterritoriality, to be given its due, requires something similar in the present royalty setting. Although all of Marvell’s sales are strongly enough tied to its domestic infringement as a causation matter to have been part of the hypothetical-negotiation agreement, that conclusion is not enough to use the sales as a direct measure of the royalty except as to sales that are domestic (where there is no domestic making or using and no importing). As a practical matter, given the ease of finding cross-border causal connections, anything less would make too little of the presumption against extraterritoriality that must inform our application of the patent laws to damages.
The court then remanded for recalculation of the compensatory damages, to exclude any royalty for chips that were made and sold abroad and not imported into the United States.