Burdon on Global FRAND Rate-Setting

On the IPKat Blog yesterday, Rose Hughes published an analysis by Michael Burdon of the problems inherent to having courts in one country (say, the U.K.) determine the terms of a global FRAND license.  (This is also a topic that I recently talked about in Japan, and that Jorge Contreras and I plan to write something about in the near future.)  Anyone interested in the topic should take a look at Mr. Burdon's thoughtful analysis.  In brief, he concedes that proceeding on a country-by-country basis is inefficient, but argues that the fault here lies primarily with SSOs, which to date have declined to establish an effective dispute resolution system or provide much guidance on how FRAND terms should be determined.  (I tend to agree; though I worry that some of DOJ Antitrust Chief Makan Delrahim's recent statements about potential antitrust liability on the part of SSOs will only chill these organizations all the more from taking such steps.)  He also notes the arguable imbalance in having a country with relatively minimal contacts with the dispute set the terms of a global license  ("In ZTE’s case, UK sales were less than 0.07% of their global sales. It is difficult to think of any other field of intellectual property where the indirect consequence of infringement of a UK right has an effect, exponentially greater than the local direct effect of that right.").

Anyway, read the analysis in full.  But here are a few thoughts of my own in response to the post:

1.  Citing paragraphs 124-27 of the Court of Appeal's Unwired Planet decision, Mr. Burdon understands that case as standing for the proposition that, when both the SEP owner and the implementer make FRAND offers, the SEP owner's offer effectively controls, because if the implementer refuses the offer it stands to be either (1) enjoined from selling infringing products in the U.K., or (2) coerced into taking a global license.  I hadn't previously thought of the opinion in quite those terms; after all, in Unwired Planet the court itself ultimately determined what the terms of a global license would be, rather than simply accepting the terms proposed by Unwired Planet.  (Mr. Justice Birss also thought there could be only one single set of terms that would be FRAND, a matter on which the Court of Appeal disagreed.)  But this does present a thorny question:  if both offer and counteroffer are FRAND, is the appropriate response to have a court or other third party decide on the terms of a FRAND license (global or otherwise), or must the implementer accept the SEP owner's terms?  The latter option doesn't seem right.  On the other hand, if a FRAND license would be global in scope, as Mr. Justice Birss believed was the case on the facts of Unwired Planet itself, there is a certain logic to saying that the defendant has to accept a global license or risk being enjoined.  It just doesn't follow that all of the terms must be those dictated by the SEP owner.   (It also doesn't follow that a court in a country with relatively few contacts to the matter is the most appropriate forum to determine the terms of a FRAND license.  In both Unwired Planet and Conversant, the court rejected the defendant's request to stay the U.K. litigation under the doctrine of forum non conveniens, but as I suggested in my Japan talks I wonder if this doctrine could be more fruitfully employed in future cases to address such situations.)

2.  Whether a court in the U.S. would follow the lead of the English courts in setting a global FRAND rate over the objection of the implementer is still a bit unclear--though as Professor Contreras pointed out to me recently, last year the Eastern District of Texas rejected such a request in Optis v. Huawei, noting that under Federal Circuit precedent U.S. courts aren't permitted to adjudicate claims involving foreign patents.  (The Federal Circuit so held in Voda v. Cordis, assertedly on the basis of the Paris Convention, though as Professor Graeme Dinwoodie has noted the Paris Convention almost certainly does not compel this result.)  Doctrinally, one further problem might be that, even if (in a given case) a FRAND license would be global, under eBay that still doesn't necessarily lead to the conclusion that the defendant must be enjoined from practicing the patent in the U.S., even if it is unwilling to accept the court's determination of a global FRAND license.   (At least I don't think eBay would contemplate any such "automatic" rule.)  Further, I shudder to think how, if the matter were tried to a jury, a jury could be expected to set a global FRAND rate.  To say that that doesn't seem practical is an understatement.

3.  Mr. Burdon also cites a 2018 U.K. Supreme Court decision, Morris-Garner v One Step ([2018] UKSC 20, which (though a breach of contract decision) discusses, among other matters, the availability in some cases of "user damages" in lieu of an injunction (i.e., an ongoing royalty)--and thus could have considerable relevance in patent and other IP cases as well.  I confess that I wasn't aware of this decision before, and will need to study it and report back.

Cotter, Hovenkamp, and Siebrasse on Patent Holdup

Erik Hovenkamp, Norman Siebrasse, and I have posted a paper on ssrn titled Demystifying Patent Holdup, 76 Washington & Lee Law Review __ (forthcoming 2019).  Here is a link to the paper, and here is the abstract: 

Patent holdup can arise when circumstances enable a patent owner to extract a larger royalty ex post than it could have obtained in an arm's length transaction ex ante. While the concept of patent holdup is familiar to scholars and practitioners—particularly in the context of standard-essential patent (SEP) disputes—the economic details are frequently misunderstood. For example, the popular assumption that switching costs (those required to switch from the infringing technology to an alternative) necessarily contribute to holdup is false in general, and will tend to overstate the potential for extracting excessive royalties. On the other hand, some commentaries mistakenly presume that large fixed costs are an essential ingredient of patent holdup, which understates the scope of the problem. 

In this article, we clarify and distinguish the most basic economic factors that contribute to patent holdup. This casts light on various points of confusion arising in many commentaries on the subject. Path dependence—which can act to inflate the value of a technology simply because it was adopted first—is a useful concept for understanding the problem. In particular, patent holdup can be viewed as opportunistic exploitation of path dependence effects serving to inflate the value of a patented technology (relative to the alternatives) after it is adopted. This clarifies that factors contributing to holdup are not static, but rather consist in changes in economic circumstances over time. By breaking down the problem into its most basic parts, our analysis provides a useful blueprint for applying patent holdup theory in complex cases.

Damages for Extraterritorial Injuries in Japanese Patent Law

When an act of domestic infringement causes the patent owner to suffer an extraterritorial loss, is the patent owner entitled to recover damages for that extraterritorial loss?  Last year the U.S. Supreme Court in WesternGeco held that the answer is yes, at least in cases arising under section 271(f) of the U.S. Patent Act, though questions remain whether the Coutrt's reasoning applies to infringement under other provisions of the act.  I think it does, but opinions differ.  For previous coverage on this blog, see, e.g., here and here, with the latter noting a Canadian patent case, and U.S. and German copyright case law, permitting monetary recoveries for extraterritorial harm.

Anyway, while I was in Japan two weeks ago, I learned from Professor Masabumi Suzuki that there are at least two cases in which Japanese courts have awarded damages for extraterritorial injuries caused by domestic infringement:  the Judgment of the Osaka District Court, Jan. 28, 2010, 2007 (Wa) 2076, and the Judgment of the Tokyo District Court, Sept. 25, 2013, 2010 (Wa) 17810, aff'd in part, Judgment of the IP High Court, Dec. 4, 2014, 2013 (Ne) 10103.  Summaries of all three can be found on the IP High Court's IP Judgments Database:   of the Osaka District Court decision here, of the Tokyo District Court decision here, and of the IP High Court decision here.  The second of the two--the Tokyo District Court/IP High Court case--requires a bit of explanation to understand.  There were two plaintiffs, the patentee/exclusive licensor and its exclusive licensee.  The defendant made infringing products in Japan, and exported and sold some of them outside Japan.  On these facts, the court permitted the exclusive licensee to recover damages under Japan Patent Act article 102(1) based on the exclusive licensee's profit margin multiplied by the defendant's sales, which included sales from products the defendant sold outside of Japan.  (This amount is presumed to be the exclusive licensee's lost profit under article 102(1).)  The patentee/exclusive licensor in turn sought to recover its own lost royalty, that is, the royalty the exclusive licensee would have paid the exclusive licensor, but-for the infringement, including royalties the exclusive licensee would have paid on the foreign sales.  Under Japanese law, however, when there is an exclusive license that has been registered with the Japan Patent Office, the license excludes even the patent owner from practicing the patent (see, e.g., my book p. 294 n.25), and the patent owner therefore cannot recover a reasonable royalty under Patent Act article 102(3).  Instead, it must prove its damages (if any) under the more rigorous requirements of article 709 of the Civil Code.  Here, the IP High Court held that the patentee/exclusive licensor was unable to prove that its licensee would have made those foreign sales, and thus it could not recover a lost royalty based on those sales.  In other words, for purposes of assessing the exclusive licensee's damages, the court presumes that the licensee would have made the defendant's sales (including the foreign sales), absent the infringement, while for purposes of assessing the licensor's damages, the licensor has to prove that the licensee would have made the alleged lost sales (and in this case, at least as for the foreign sales, it wasn't able to).  The overall result may seem odd, but the court concludes that it follows from the differing burdens of proof under the applicable statutes.  Nevertheless, both this case and the Osaka case provide examples of Japanese courts' apparent willingness to award damages for extraterritorial harms, under appropriate circumstances.  

News on Patent Remedies in China

1.  Nie Huiquan has published an article titled New Development in Chinese Practice on Calculation of Patent Damages Awards in the Nov.-Dec. 2018 issue of China IP Magazine (available here, but behind a paywall).  The author discusses the general framework for awarding patent damages in China; summarizes some descriptive statistics on damages awards; and discusses three cases, Watchdata v. Hengbao (for previous discussion on this blog, see here (guest post by Jill Ge), here and here); Siemens v. "SIEMIVES", a trademark case "which can also be used to guide the trial of patent infringement cases," in which the court awarded RMB 1 million as statutory damages; and the Quangzhou court's decision in Huawei v. Samsung (very briefly discussed on this blog here).  The author notes, among other matters, an increased willingness on the part of the Chinese courts to include attorneys' fees as compensable costs.

2.  Mark Cohen published a post on the China IPR Blog titled On Avoiding "Rounding Up the Usual Suspects" in the Patent Law Amendments . . ."  Professor Cohen notes that the recently released draft amendments to China's patent law "would enhance patent administrative enforcement" and "would also provide for punitive damages upon a judicial finding of willful patent infringement (Art. 72), with a maximum of 5x damages" (for previous mention, see here).  Mr. Cohen argues that "[u]sing remedies that are not at the core of a healthy IP system based on private rights (administrative remedies/punitive damages) are not a substitute for predictable, compensatory private remedies," a sentiment with which I fully agree. 

3.  Expressing somewhat analogous concerns, albeit in the context of a copyright matter, Tian Lu published a post on IP Kat titled The CNY 260 million fine on QVOD is final!  The post discusses the recent affirmance of a decision of the Market Supervision Administration of Shenzhen Municipality imposing a fine of RMB 260.148 million (about US $39 million) against QVOD, "a peer-to-peer video streaming and sharing platform."  And in a not-entirely-dissimilar vein, albeit involving a different country, is Hans Eriksson's post on IPKat titled Swedish Supreme Court finds hypothetical licence fee too hypothetical, involving a fine leveled against a streaming site.  All of which is beginning to make me think I ought to resume writing about copyright damages one of these days . . .

Slides from my recent talks in Tokyo and Nagoya

As I mentioned recently, I was invited to speak at events held last week at Waseda and Nagoya Universities in Japan.  I am very grateful to Professors Masabumi Suzuki and Christoph Rademacher for their hospitality.  I received some excellent feedback on the project I am working on, on territoriality and patent remedies, and I learned a great deal from the other speakers about patent and other IP issues (including remedies issues) in Japan, Taiwan, and China.  

For readers who may be interested, the slides for my talk ("Is Territoriality Dead?") are available here.

Lincoln, Darwin, and Invention

The following is a reprint of a post I originally published on February 12, 2014.

Because today (February 12, 2014) is the 205th anniversary of the birth of both the sixteenth United States President, Abraham Lincoln, and the great naturalist Charles Darwin, I thought it might be worthwhile to say a few words about Lincoln, Darwin, and their relevance to contemporary issues of patent law.  I will return to my normal subject of patent remedies later this week.

Lincoln was the first, and so far only, U.S. president to obtain a patent--specifically, U.S. Patent No. 6,469, dated May 22, 1849, titled "Buoying Vessels over Shoals."  Here is a link to the patent, and another to a write-up about it by Cherise LaPine on the "How Stuff Works" website.  Lincoln's model of his invention is on display in the Smithsonian Institution in Washington, see here, but apparently the invention was never built or commercialized. 

In the late 1850s, Lincoln also delivered a lecture on "Discoveries and Inventions," which according to the website Abraham Lincoln Online was not a big hit either.  (It is also distressing to see, in a few parts, how the Great Emancipator was capable of making disparaging comments about other peoples, but the historical record is what it is.)  But the last paragraph has become well-known and is still cited in contemporary debates over patent policy:   

Next came the Patent laws. These began in England in 1624; and, in this country, with the adoption of our constitution. Before then any man might instantly use what another had invented; so that the inventor had no special advantage from his own invention. The patent system changed this; secured to the inventor, for a limited time, the exclusive use of his invention; and thereby added the fuel of interest to the fire of genius, in the discovery and production of new and useful things.

From a comparative standpoint, it would be interesting to know whether any other heads of state have ever obtained patents.  Angela Merkel is a physicist and Margaret Thatcher was a chemist, but I’m not aware if either of them (or any other head of state) ever received a patent.  For an interesting discussion titled “Chemists and Engineers Who Were Heads of State,” see this link.   

To my knowledge Darwin had no patents either, though of course the principle of evolution by natural selection is one of the key scientific insights of all time, and our understanding of it has certainly laid the groundwork for a huge amount of further discovery and invention.  In my I.P. courses, however, I often use Darwin’s race with Alfred Russel Wallace to be the first to publish the theory an example of the independent, near-simultaneous discovery of scientific principles or inventions by two or more persons.   Here's something I've written about the matter in the past:

The principle of evolution by natural selection traces its origin, of course, to the writings of Charles Darwin and (less familiarly to many readers) his contemporaries Alfred Russel Wallace, Patrick Matthew, and William Charles Wells.  See Charles Darwin, The Origin of Species by Means of Natural Selection or the Preservation of Favored Races in the Struggle for Life (1859); Charles Darwin, The Descent of Man and Selection in Relation to Sex (1871); Alfred Russel Wallace, On the Tendency of Varieties to Depart Indefinitely from the Original Type, 3 J. Proceedings of the Linnean Soc'y (Zoology) 53 (1858); see also Daniel C. Dennett, Darwin's Dangerous Idea:  Evolution and the Meanings of Life 49 (1995) (discussing Matthew’s articulation of the principle of natural selection); Stephen Jay Gould, The Structure of Evolutionary Theory 137-38  n.* (2002) (discussing Matthew and Wells); Michael Shermer, In Darwin's Shadow:  The Life and Science of Alfred Russel Wallace 147-48 (2002).  Darwin’s race to complete publication of The Origin of Species, upon learning that Wallace had independently discovered the principle of natural selection, is recounted in, among other sources, Shermer, supra, at 118-21, 128-50; Robert Wright, The Moral Animal 301-10 (1994).

Neither Darwin nor Wallace wrote upon a completely blank slate.  On the basis of fossil evidence and observation of existing species, a few naturalists before Darwin and Wallace had grasped the basic idea that species evolve; but no one had previously articulated with much precision the mechanism by which evolution occurs.  See Gould, supra, at 64-66, 137-39; Ernst Mayr, What Evolution Is 5, 23-25, 80-81 (2001); Mark Ridley, Evolution 7-9 (1993).  Perhaps the most notable attempt to articulate a pre-Darwinian theory of changes within species was that of the French naturalist Jean-Baptiste Lamarck, who proposed, incorrectly, in his 1809 work Philosophie Zoologique that species could pass on acquired characteristics to their offspring.  See Gould, supra, at 170-97 (providing a sympathetic overview of Lamarck’s life and work, while noting his errors); Mayr, supra, at 81; Ridley, supra, at 8-9 (noting that Lamarck did not invent the theory of inheritance of acquired characteristics, which can be traced at least as far as back as Plato). 

The fact that even landmark scientific discoveries (like the principle of evolution by natural selection, or Newton’s and Leibniz’s near-simultaneous invention of calculus), to say nothing of lesser discoveries and inventions, are not only based on earlier contributions (as Newton said, “If I have seen further it is by standing on the shoulders of giants”) but also often are arrived at roughly the same time by different individuals working independently is also of potential relevance in crafting an optimal patent policy.  For an interesting discussion, see, e.g., Mark A. Lemley, The Myth of the Sole Inventor, 110 Mich. L. Rev. 709 (2012) (arguing that the principal public benefit of the patent system may reside less in its role in stimulating invention than in stimulating patent races). 

Remedies News from Canada

1.  Norman Siebrasse published a post last month on Sufficient Description titled Legal Fees Not a Deductible Expense in an Accounting.  The case, Human Care Canada Inc. v. Evolution Techs. Inc. 2018 FC 1302 supplementary reasons 2018 FC 1304.  The case holds, among other matters, that the defendant is not entitled to deduct its litigation expenses from an award of profits (which makes sense).  It also quotes a 2011 case for the proposition that courts should decline to enter permanent injunctions in favor of prevailing patent owners "only in very rare circumstances," and denies compound interest. 

2.  Steven Brachmann recently published a post on IP Watchdog titled Canada Patent Law Changes Are Bad News for Patent Owners.  From the title, you might think that Canada was thinking of reintroducing compulsory licensing of pharmaceuticals, or maybe of abolishing patents altogether, but in fact the changes are the (in my view, rather modest) ones I've blogged about a couple of times (here and here).  Specifically, Canada recently enacted amending its Patent Act to include a provision stating that FRAND commitments are binding on subsequent assignees.  The legislation also permits use of prosecution history "[i]n any action or proceeding respecting a patent" (as the U.S. does); authorizes the regulation of demand letters (something many states in the U.S. now permit, though to my knowledge these laws haven't been used much); establishes a statutory experimental use defense (like many countries have, and which I believe Canada previously had under common law); and extends the prior user defense a bit.  Ah, but the sky is falling . . . 

*                     *                     *

In other news, the Federal Circuit last week affirmed a district court decision that a case was exceptional, and that fees amounting to $600,000 were merited, in Drop Stop LLC v. Zhu; and it (1) affirmed a contempt order relating to a press release the publication of which violated a protective order, and (2) remanded an order awarding litigation sanctions to allow the district court to vacate that order, in  Codexis, Inc. v. EnzymeWorks, Inc.   Both cases are nonprecedential and quite fact-specific.