Wednesday, October 7, 2015

Stern on FRAND

Richard Stern has published a paper in Issue 9 of the European Intellectual Property Review (2015), pp. 549-57, titled "What are Reasonable and Non-discriminatory Terms for licensing a Standard-essential Patent?"  Here is the abstract:
The Federal Circuit's recent Ericsson decision, and the IEEE's new, expanded policy of prescribing added specificity for the patent licensing assurances it requires before agreeing to embody patented technology into an IEEE standard, provide different ways to address the plague of litigation over what terms and conditions are reasonable and non-discriminatory in the licensing of patents essential to implementing a standard.  The Federal Circuit's after-the-fact patch-up of contract failure in the Ericsson case and the IEEE's pre-contract clarification efforts in its new policy have their limitations, however, and difficult problems still remain.  
Mr. Stern makes some interesting arguments, some of which I agree with, some not. 

First, On the issue of holdup, he takes issue with the Federal Circuit's statement in Ericsson that "Absent evidence that Ericsson used its SEPs to demand higher royalties from standard-compliant companies, we see no error in . . . refusal to instruct the jury on patent hold-up," arguing that the test should be whether "the rate is too high relative to what a license on comparables of analogous technology in the industry sells for?  In other words, hold-up is not properly judged only on the basis of the patentee's historical acts, but rather on the basis of the general practice in the industry.  The patentee's acts, such as raising rates after adoption of the standard, may be relevant as sufficient proof of hold-up, but proof of such acts is not necessary." (p.551 n.14).  In my view, the economic concept of holdup involves the extraction of a royalty that is based on the user's sunk costs and related switching costs, not the extraction of a royalty that is higher than industry standards (though I would accept that departure from "general practice in the industry" could be evidence of holdup properly defined).  See my recent paper with Norman Siebrasse, here.  (For my blog post on Ericsson, see here.)

Second, Mr. Stern takes issue with respect to the Ericsson court's handling of the question of royalty stacking.  (The court affirmed the district court's decision not to instruct the jury on royalty stacking, on the ground that the defendants "failed to provide evidence of patent hold-up and royalty stacking sufficient to warrant a jury instruction. . . .")  Mr. Stern argues that it is "quite unrealistic" to "expect[ ] evidentiary proof (which costs money) on a point where common sense tells us it is unlikely to be needed," and that "[i]t is virtually impossible for it not to occur."  (p.552)  Rather, he argues, there should be "at least . . . a rebuttable presumption that rouyalty stacking occurs at some SEP level, say 50 or 100 SEPS . . . . That would shift the burden to the patent holder to produce evidence of no stacking . . . ." (id.)  Nevertheless, he writes, "it is by no means clear what should be done about stacking.  How do you conclude that Ericsson has to bear all the financial impact of the stacking, if there is any, rather than those SEP patentees who came earlier to the table to collect royalties?"  (id.).

My own view, as I have expressed it before, is that stacking is a serious theoretical issue, and that an ideal system of patent damages would try to avoid it by ensuring that royalties are reasonably proportional to the patent's contribution to the value of the standard (see again the paper with Norman Siebrasse, above).  Put another way, if a royalty for a relatively minor aspect of the standard would (if multiplied by all of the other patents in the standard, including the more important ones) exceed the profit earned from sales of standard-compliant devices, something has gone wrong.  In other words, concerns about royalty stacking can act as a sort of "sanity check" against awarding a royalty that is disproportionately high in comparison with the value produced by the patent in suit.  Beyond that, I agree with Mr. Stern that there isn't much courts can do to about royalty stacking, given the constraints under which they operate.

Third, Mr. Stern makes an interesting argument regarding the U.S. rule that the royalty base should be the smallest salable patent-practicing unit.  The principal rationale for the rule is that a jury won't necessarily be able to correctly apportion the value of the patented invention if it hears testimony about the defendant's entire sales revenue, but Mr. Stern provides another possible reason, namely that "there is inherently a greater risk of error."  As an example, suppose that the correct royaltyis 5 cents, which is 5% of a $1 chip or 0.02% of the $500 price of the end product.  Mr. Stern argues that either a jury or judge could easily award 0.01% or 0.1% of $500, such that "the cash value of the error is multiplied greatly by starting out with an inflated royalty base" (p.544 n.26).  I'll have to think about that some more.

Fourth, Mr. Stern argues that a patent pool would be a better solution to the problem of valuing SEPs, because it would take all or most of the relevant stakeholder interests into account such that the royalty stacking problem would probably evaporate" (p.555).  Professor Siebrasse and I make some similar observations about pools in our paper (noted above); for another take on pools and SEPs, see Jorge Contreras, Fixing FRAND:  A Pseudo-Pool Approach to Standards-Based Patent Licensing, 79 Antitrust Law Journal 47 (2013).

Another interesting paper in this issue of EIPR is by Nicholas Fox, Bas Berghuis, Ina vom Feld, and Laura Orlando, titled Accounting for Differences:  Damages and Profits in European Patent Infringement.  I'll be blogging about this one in the near future.

Tuesday, October 6, 2015

IEEE Conference on Standardization Starts Today

The IEEE-SIIT 2015 (9th Annual Conference on Standardization and Innovation in Information Technology) begins today in Sunnyvale, California, and runs through Thursday, when Norman Siebrasse and I will present some of our work on standards and holdup.  Here is a link to the conference agenda.  Looks like there will be loads of interesting content and speakers.  I'll only be there for the Thursday morning sessions myself, unfortunately, but as always I'd be glad to meet any readers and to get some feedback on my work.

Monday, October 5, 2015

Some Recent Papers on FRAND

1.  Carl Shapiro and Fiona Scott Morton have posted a paper on ssrn titled Patent Assertions: Are We Any Closer to Aligning Reward to Contribution?  Here is a link to the paper, and here is the abstract:
The 2011 America Invents Act was the most significant reform to the United States patent system in over fifty years. However, the AIA did not address a number of major problems associated with patent litigation in the United States. In this paper, we provide an economic analysis of post-AIA developments relating to Patent Assertion Entities (PAEs) and Standard-Essential Patents (SEPs). For PAEs and SEPs, we examine the alignment, or lack of alignment, between the rewards provided to patent holders and their social contributions. Our report is mixed. Regarding PAEs, we see significantly improved alignment between rewards and contributions, largely due to a series of rulings by the Supreme Court. Legislation currently under consideration in Congress would further limit certain litigation tactics used by PAEs that generate rewards unrelated to contribution. We also see some notable developments relating to SEPs, especially with the recent reform to the patent policies of the IEEE, a leading Standard-Setting Organization (SSO) and with several recent court decisions clarifying what constitutes a Fair, Reasonable and Non-Discriminatory (FRAND) royalty rate. However, other steps that could better align rewards with contributions on the SEP front have largely stalled out, particularly because other major SSOs do not seem poised to follow the lead of the IEEE. Antitrust enforcement in this area could further improve the alignment of rewards and contributions.
2.   Lizhi Ning, Shubha Ghosh, and Wei Zhou have published a paper in the Journal of Antitrust Enforcement titled Price discrimination in patent licensing and the application of FRANDHere is a link to the paper (behind a paywall, however), and here is the abstract:
With the increasing amount of global trade and the accelerating process of economic globalization, the economic entities of the world have reached a consensus on protecting equal trading opportunities—especially through pricing and other trading conditions—to achieve substantially fair global trade transactions. The arrival of the era of the knowledge economy increases the role of intellectual property in manufacture and trade and increases attention to the patent licence systems in many countries. In patent licence practice, licensors grant patent licences with many conditions attached. On the one hand, differential treatment will stimulate competition in the market and bring generous profits to the licensors; on the other hand, excessive differential treatment can seriously affect fair competition in the relevant market and undermine the normal operation of the market economy. Therefore, this article explores the issue of price differential treatment in the practice of patent licensing and reasonable royalty fees or rates under FRAND, in order to provide inspiration for further improvement and development of China’s patent licensing market. 
3.  Theo Bodewig has published an article in the July 2015 issue of GRUR Int. (pp. 626-34), titled Einige Überlegung zur Erschöpfung bei Zwangslizenzen an standardessentiellen Patenten ("Some Observations on the Exhaustion by Compulsory Licensing in Respect of Standard Essential Patents").  Here is my translation of the abstract:
In recent years, when the business sections of newspapers have discussed patent law, the military concept of "patent wars" frequently appeared.  It was and is a matter of complaints with values of over 100 million or even billions of euros in connection with patent infringement actions, with which the largest firms in the filed of information technology worldwide have been inundated.  In PCs, laptops, tablets, game consoles, smartphones, and other electronic devices hundreds of components are used, which incorporate protected patents, utility models, or design rights.  Insofar as these protected rights are incorporated into industrial standards (standard essential), one can scarcely avoid them.  As a rule, they also cannot be replaced with alternative technologies.  A single smartphone can include over 1000 protected inventions.  For component manufacturers or distributors it is however often difficult to clarify the scope of protection and to avoid infringing.
The author argues that a compulsory license accorded on competition grounds (e.g., under the Orange Book Standard) pursuant to national law will not exhaust the patent owner's rights outside the nation granting the license,  but that a compulsory license granted under EU law (e.g., under TFEU article 102) would exhaust those rights throughout the entire EU.

Friday, October 2, 2015

Three New Papers on Holdup, Standards

1.  Rudi Bekkers has posted a paper on ssrn titled Concerns and Evidence for Ex-Post Hold-Up with Essential PatentsHere is a link to the paper, and here is the abstract:
Patented technologies may add significant value to technical standards. But the owners of patents that are necessary required in order to implement a standard (“essential patents”) obtain a particularly powerful position. One of the widely recognized risks here is patent holdup, where the patent owner demands inflated prices, much beyond the value of their specific patented technology, knowing that implementers are locked in and have no other choice than to obtain a license. Many standard setting organisations have “FRAND” patent policies in place that aim to avoid hold-up, among other things. 
While it has been argued that hold-up is a theoretical risk only, and does not manifest itself in 'real world' scenarios, this paper discusses a number of recent, seminal court cases in which the judge determined that for essential patents, fees were demanded that wildly exceeded what the court ultimately deemed to be a FRAND royalty rate. In other cases, competition authorities have issued decision in which they ruled that for a patent owner, seeking injunctive relief for essential patents can be an illegal act as such, considering that such conduct further increases the risk for hold-up.
The risk for hold-up is recognised by standard setting bodies, witnessed by the many discussions taken place in these organisations, in the past but especially over the last two years. Yet, possible policy changes are often hard to agree upon, given the strongly divergent interests of the members of such organisations. IEEE is the first standard setting body to make significant changes to its policy, aiming to mitigate hold up risks. As pointed out by the US Department of Justice in their review, IEEE’s new policy has some significant potential benefits.
2.  Taking a rather different view is this paper by Alexander Galetovic, Stephen Haber, and Ross Levine, titled An Empirical Examination of Patent Holdup.  Here is the abstract:
A large theoretical literature asserts that standard-essential patents (SEPs) allow their owners to “hold up” innovation by charging fees that exceed their incremental contribution to a final product. We evaluate two central, interrelated predictions of this SEP holdup hypothesis: (1) SEP-reliant industries should experience more stagnant quality-adjusted prices than non-SEP-reliant industries; and (2) court decisions that reduce the excessive power of SEP holders should accelerate innovation in SEP-reliant industries. We find no empirical support for either prediction. Indeed, SEP-reliant industries have the fastest quality-adjusted price declines in the U.S. economy.
(Hat tip to Danny Sokol, who mentioned this paper recently on his antitrust blog.)  For an earlier paper by the same three authors, titled Patent Holdup:  Do Patent Holders Hold Up Innovation?, Hoover IP2 Working Paper Series No. 14011 (May 2014), see here; for my reservations regarding the conclusion expressed in that paper, see here

3.  Nuno Pires de Carvalho has published a paper titled Technical standards, intellectual property, and competition--a holistic view, 47 Washington University Journal of Law & Policy 61 (2015).  Here is the abstract:
Until now, most of the literature that regards the interaction between intellectual property and both mandatory and voluntary technical standards has been limited to a particular area of intellectual property. This Article examines the interaction from a holistic perspective, involving the main intellectual property disciplines: patents, trademarks, and copyrights. Most generally, a tension exists between intellectual property and technical standards due to their differing—and somewhat opposing—objectives and public policies. Further, the interaction between technical standards and intellectual property typically depends on the categorization of the technical standard as mandatory or voluntary. Because the public policies that inform technical standards are oriented towards reducing product and service differentiation, they reduce market freedom. The reduction in market freedom is limited, however, because technical standards are frequently adopted for technical and economic efficiency, which may have a downstream, positive effect on competition.

Thursday, October 1, 2015

Microsoft, Google/Motorola, Settle Patent Disputes

Readers may have seen this news already, but if not here are stories in Bloomberg NewsReuters, and The Wall Street Journal. According to Reuters, "The companies said they have been cooperating on such issues as the development of a unified patent court for the European Union, and on royalty-free technology for speeding up video on the Internet," and Bloomberg News reports that "the two companies are lobbying to ensure" that PAE suits "don’t become as prevalent in Europe as they are in the U.S."

Update:  Florian Mueller's analysis on FOSS Patents is available here.

Wednesday, September 30, 2015

Federal Circuit Upholds Disgorgement Rule for Design Patent Infringement

In an opinion handed down yesterday, Nordock, Inc. v. Systems Inc., the U.S. Court of Appeals for the Federal Circuit affirmed a judgment of infringement and validity of a design patent, but vacated a  jury award of $46,825 in reasonable royalty damages and remanded for a new trial on damages.  I'll focus on the damages issues.

The design patent in suit "claims the ornamental design of a lip and hinge plate for a dock leveler" (p.2).  As the court notes (pp. 11-12):
In the case of design patent infringement, a patentee can recover damages under § 284 or under 35 U.S.C. § 289, which is entitled “[a]dditional remedy for infringement of design patent.” See Catalina Lighting, Inc. v. Lamps Plus, Inc., 295 F.3d 1277, 1290 (Fed. Cir. 2002). Section 289 provides as follows: 
Whoever during the term of a patent for a design, without license of the owner, (1) applies the patented design, or any colorable imitation thereof, to any article of manufacture for the purpose of sale, or (2) sells or exposes for sale any article of manufacture to which such design or colorable imitation has been applied shall be liable to the owner to the extent of his total profit, but not less than $250, recoverable in any United States district court having jurisdiction of the parties. 
Nothing in this section shall prevent, lessen, or impeach any other remedy which an owner of an infringed patent has under the provisions of this title, but he shall not twice recover the profit made from the infringement.
35 U.S.C. § 289. Therefore, the plain language of the statute permits design patentees to claim either $250 or the infringer’s “total profit” on sales of “any article of manufacture” to which the patented design was applied.
We have recognized that where, as here, “only a design patent is at issue, a patentee may not recover both infringer profits and additional damages under” Catalina Lighting, 295 F.3d at 1291 . . . . ; see also Robert Bosch, LLC v. Pylon Mfg. Corp., 719 F.3d 1305, 1310 n.1 (Fed. Cir. 2013) (en banc) (“An infringer’s profits are, of course, no longer an available remedy for the infringement of a utility patent. See 35 U.S.C. § 284. Such profits, however, remain available in cases of design patent infringement. See 35 U.S.C. § 289.”); Signode Corp. v. Weld-Loc Sys., Inc., 700 F.2d 1108, 1113 n.6 (7th Cir. 1983) (“An infringer of a design patent is liable to the patent owner to the extent of his total profit or $250, whichever is greater, under 35 U.S.C. § 289.”). Accordingly, a design patentee can recover either (1) total profits from the infringer’s sales under § 289, or (2) damages in the form of the patentee’s lost profits or a reasonable royalty under § 284, or (3) $250 in statutory damages under § 289, whichever is greater. See Catalina Lighting, 295 F.3d at 1291. 
The district judge instructed the jury that "If you find infringement, and do not find the ’754 Design Patent is invalid, you are to award Nordock Systems’ total profit attributable to the infringement. Systems’ “total profit” means the entire profit on the sale of the article to which the patented design is applied, or with which it is used and not just the portion of profit attributable to the design or ornamental aspects of the patent" (p.12).  The jury came back with a reasonable royalty award of $46,825, and "found that Systems' profits were $0" (p.12).  The district judge denied a motion for new trial.

On appeal, the Federal Circuit vacates, stating that the district court's decision "was erroneous because it relied upon [defense expert] Bero's so-called 'cost savings methodology.'"  More specifically, Bero had testified that an appropriate award of profits would be the profit "Systems earned on its lip and hinge plate ornamental design. And the cost savings that Systems received as a result of using that design are something again less than $15 per unit. So on that lip and hinge plate design the profitability attributable that Systems earned—this is defendant’s profits—was something less than $15 per unit. It’s the same number as the royalty damages. It’s actually less than that" (pp. 13-14).  The problem is that Bero is right as a matter of economics but wrong as a matter of the Federal Circuit's interpretation of § 289, under which the infringer of a design patent can be required to pay the entire profit earned from the sale of the infringing article (as the Federal Circuit recently held in Apple v. Samsung, see blog post here).  

From an economic standpoint, of course, the rule that the court applies is stark raving mad:  there is no principled reason why the infringer of a design patent (or any IP right) should be required to disgorge the entire profit earned from sales of an infringing article, unless all of those profits are actually attributable to the infringing subject matter.  But such is the state of current U.S. design patent damages law:  even when the patented design accounts for only a portion of the defendant's profit on the sale of an article of manufacture, the defendant is required to disgorge the entire profit.  There is no allocation or apportionment.  To be fair, the Federal Circuit's interpretation of § 289 is one possible reading of the statute (though not necessarily the only one), and the court is following its own precedent in this regard.  But I really do hope that someday Congress considers correcting the statute to avoid what I predict is going to be an increasingly problematic remedy in years to come, as the number of design patents increases.  

In addition, the court held that "the manifest weight of the evidence shows that Systems' profits were over $600,000 for its infringing LHP/LHD levelers," so the verdict must be vacated and remanded for calculation of the infringer's profit.  Finally, the court held that the district court erred "[t]o the extent [it] believed that the jury could simply choose between awarding damages under § 284 or § 289 . . . . Only where § 289 damages are not sought, or are less than would be recoverable under § 284, is an award of § 284 damages appropriate. " (pp. 20-21).  So on remand it looks like Nordock will be entitled to a § 289 recovery in excess of $600,000.  Oy vey.

Tuesday, September 29, 2015

Does the E.C. Enforcement Directive Permit Supracompensatory Damages?

Interesting post on IPKat today on three cases now pending before the Court of Justice for the European Union on the subject of supracompensatory damages for the infringement of IP rights.  I have previously blogged on the first of them (see here), Case C-481/14 (Jørn Hansson), which was referred by the Oberlandesgericht Düsseldorf and involves Community Plant Variety Rights.  The other two, Case No. C-99/15 (Liffers) and Case No. C-367/15 (Stowarzyszenie Oławska Telewizja Kablowa) involve copyright matters and I was not previously aware of them.  No hearing dates or opinions are scheduled yet in any of these, so it could be quite a while before the court issues any judgments.  For general discussion of enhanced or punitive damages for IP infringement in my book, see pp. 72-73, 275-76.