Thursday, October 3, 2013

Judge Holderman's RAND ruling in In re Innovatio IP Ventures, LLC Patent Litigation

As reported at Foss Patents, Judge James Holderman (U.S. District Court, Northern District of Illinois) earlier today released the public version of his RAND decision in In re Innovatio Ventures, LLC.  Here is the opinion.

Innovatio Ventures is a patent assertion entity that filed suit against coffee shops and others for allegedly infringing various patents relating to wireless technology.  Cisco and other equipment manufacturers filed suit for declaratory judgments of invalidity and noninfringement. Innovatio counterclaimed against the manufacturers, and the cases were consolidated.  Apparently the parties all agreed that it would make sense to try the damages issues first, before trial on validity and infringement, in the hope that this would facilitate settlement.  (None of the parties has requested a jury.)  There are 19 (down from an initial 23) patents at issue, all allegedly essential to the practice of IEEE Standard 802.11; the initial patent owners committed to license them on RAND terms.  In September, Judge Holderman held a bench trial on the damages issues relating to the manufacturers only; as noted, he released a redacted version of his opinion today.  Here are the highlights:

First, at page 2 of the opinion, Judge Holderman states that "The prior owners of all of Innovatio's patents contractually agreed with the IEEE to license any patents that were essential to the operation of the 802.11 wireless standard on reasonable and non-discriminatory ('RAND') terms."  So apparently he agrees with Judges Robarts and Crabb that these sorts of commitments are contractually binding, though there is no further analysis of this issue in the opinion.

Second, the manufacturers agreed that many of the patents in suit were standard-essential.  Judge Holderman concluded that all of the remaining patent claims in suit were also standard-essential (p.3).

Third, the judge appears to agree with the manufacturers that "Innovatio's recovery in this case is . . . limited to a RAND licensing fee for the patents in suit," if Innovatio "shows that its patents are infringed" (pp. 2-3).

Fourth, "The parties agree that Judge Robart's methodology [in Microsoft v. Motorola] is appropriate for the court to use here to set a RAND rate in this case" (p.7).  Judge Holderman summarizes Judge Robart's framework as involving three steps:  "First, a court should consider the importance of the patent portfolio to the standard, considering both the proportion of all patents essential to the standard that are in the portfolio, and also the technical contribution of the patent portfolio as a whole to the standard. . . .  Second, a court should consider the importance of the patent portfolio as a whole to the alleged infringer's accused products. . . .  Third, the court should examine other licenses for comparable patents to determine a RAND rate to license the patent portfolio, using its conclusions about the importance of the portfolio to the standard and to the alleged infringer's products to determine whether a given license or set of licenses is comparable" (pp. 10-11).

Fifth, Judge Holderman thought it appropriate to modify Judge Robart's analysis in a few ways.  For one thing, because this is a patent infringement case, not a breach of contract suit in which the issue is whether the patentee acted in good faith, Judge Holderman would "determine a single RAND rate for the purpose of calculating damages, rather than a range" (p.11).  In addition, because the judge had determined that all of the patents in suit were essential, he would not adjust the rates downward to reflect any uncertainty regarding this issue, finding the issue analogous to the practice of assuming the hypothetical willing licensor and licensee believe the patent to be valid and infringed (pp. 11-13).  I think he's right on this issue. 

Sixth,the date on which the hypothetical negotiations are assumed to have taken place is sometime in 1997, around the time the standard was adopted and the parties started using the technology in suit (p.14).

Seventh, Judge Holderman concludes that both patent holdup and royalty stacking are real problems that the hypothetical negotiators would seek to avoid, and that reverse holdup is not (pp. 16-21).  No argument from me on these issues, which I've written about extensively by now.

Eighth, he states that he is not ruling one way or another on the issue of whether a RAND commitment completely bars a patent owner from getting an injunction (pp. 20-21).   

Ninth, he determines that the royalty base is the smallest salable unit on which "all of the features of the 802.11 standard are 'implemented'":  namely, a WiFi chip (pp. 25, 27).  He rejects Innovatio's argument that the appropriate unit would be (depending on the patent in suit and the accused device) the selling price of an end product such as a laptop, discounted by a "feature factor" that reflects the relative importance of WiFi to the device. 

Tenth, in calculating the royalty, it is appropriate to consider the alternatives that were presented to IEEE at the time the standard was adopted (pp. 37-39).  Weighing the evidence, Judge Holderman concludes that the alternatives were imperfect, so that the patents in suit are moderately important to the standard (pp. 50-58).

Eleventh, he rejected both sides' evidence of comparable licenses (pp. 58-72).

Twelfth, he rejected the manufacturers' expert's recommendation to calculate the royalty rate "from the bottom up" by considering the value of the patents compared to the alternatives, noting that Judge Robart had done likewise and that here there were no precise alternatives (p.72).  I'd say that the recommended approach  is correct as a matter of economics, but I can understand resorting to proxies instead if direct evidence on this issue is not available.

Thirteenth, he adopted a modified version of the expert (Greg Leonard)'s alternative recommendation to use a "top down" approach, consisting of the following:  (1) assume the negotiating parties would have used the expected average price of a chip for the duration of the patent terms ($14.85); (2) multiply that by the average profit margin of chip makers (12.1%), giving you a profit per chip of $1.80; (3) multiply that by the value attributable to the top10% of 802.11 standard-essential patents (84%); and (4) multiply that by 19/300, reflecting that are estimated to be 3000 SEPs per chip, of which 300 are in the top 10% and 19 of which are in suit and estimated to fall into that top 10%.  At the end of the day, you get 9.56 cents/chip, which must seem pretty good to the defendant manufacturers.

I need to some to digest all of this--and my apologies if, in my haste, I've gotten some detail wrong--but here's something I've been thinking about since this afternoon.  Is the 9.56 cents/chip based on the assumption that the patents in suit are valid and infringed (as well as essential)?  I think the answer is, or should be, yes--unlike in Microsoft v. Motorola, where the whole point was to determine what reasonable parties would have thought a RAND royalty was ex ante.  Here, I think we just have the damages portion of a patent infringement suit coming first, which is unusual, but I don't think we should expect the court to modify the royalty upwards if the case goes to trial and the patents are found valid and infringed.  Think about it this way:  if the patents are found invalid or not infringed, no damages will actually be awarded.  The damages calculation is premised on the assumption that this is what Innovatio gets if it wins on liability.  (What if Innovatio wins on some of the patents and loses on others?  I guess the judge will modify the damages down, by changing 19/300 in the above calculation to the appropriate fraction.)  The situation seems to me a little (though not perfectly) analogous to the German practice, where you have a decision on infringement, then damages, then maybe in a year or two or three in a separate proceeding, on validity.  In calculating a reasonable royalty, the assumption is that the patent is valid and infringed, see this post as modified by this one.  If it turns out the patent is invalid, the defendant gets the damages back.  Same here, in a sense.  There's been a (hypothetical) finding of infringement and the assumption (for now) is that the patents are valid, but if it turns out they aren't the defendants get their (hypothetical) damages back.              

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