Federal Circuit Affirms in Part and Reverses in Part Judge Posner's Decision in Apple v. Motorola

Here are my initial impressions of the Federal Circuit's decision today in Apple v. Motorola. 

1.  The initial portion of Judge Reyna's majority opinion is devoted to the review of Judge Posner's claim construction rulings.  The court affirms as to four of these rulings (on Apple's '647 and '263 Patents, and on Motorola's '559 and '712) and reverses as to one other (Apple's '949), with Judge Prost dissenting on '949 (in other words, she would affirm Judge Posner's claim construction rulings in their entirety).  I will focus, however, exclusively on the remedies issues.  The majority concludes that Judge Posner should not have excluded the testimony of Apple's damages expert Brian Napper (with Judge Prost dissenting with respect to Napper's testimony relating to the '949 Patent), and that he should not have excluded Motorola expert Carla Mulhern's testimony in its entirety.  The court affirms Judge Posner's exclusion of Motorola's other expert.  The majority also affirms his decision that Motorola would not be entitled to an injunction for the infringement of its FRAND-encumbered SEP (the '898 Patent), with Chief Judge Rader dissenting on this issue; and reverses and remands for further consideration his decision that Apple would not be entitled to an injunction for the infringement of its three patents in suit (with Judge Prost dissenting on this issue).    

2.  Overall—and again, for now, I'm focusing my attention only on the remedies issues—I think that Judge Reyna's majority opinion is pretty well-reasoned.  In particular, I'm not surprised that the court reversed Judge Posner's exclusion of Napper's testimony as it related to the '263 Patent. Napper was prepared to testify “that it would cost Motorola $29 to $31 million to add a chip to [each of] its smartphones that would replace the function performed by the invention that is the subject of the ′263 patent.”  Judge Posner viewed this testimony as unreliable because Napper “obtained the essential information, namely the identity of the chip that would avoid infringement, from an agent of the party rather than from a disinterested source. The agent in this case is Nathaniel Polish, Apple's principal technical expert.”  I had heard many practitioners express concern that, under Judge Posner’s rule, the damages expert would have to undertake the Herculean task of determining independently what the next-best noninfringing alternative would have been, as well as how much value the patented invention promised in comparison with that alternative; and that this is simply not a realistic expectation (or standard practice).  See opinion p.54 (“Overall, outside of litigation, it would be reasonable, and quite common, for Napper to rely on technical information provided by Apple or one of its experts in order to value the cost to design around Apple’s technology. Indeed, such an approach would carry the same intellectual rigor as the approach employed in the courtroom in this case.”).  The Federal Circuit’s reversal on this particular issue therefore was to be expected. 

3.  The majority’s reversal of Judge Posner’s exclusion of Napper’s testimony as it related to ‘949 was based in part on its reversal of Judge Posner’s claim construction of that patent, and also on its view that the product Napper used as a comparable from which to derive a damages estimate (Apple’s Magic Trackpad) was, contrary to Judge Posner, an appropriate comparable.  See opinion pp. 45-50 (stating, inter alia, that “Napper’s assertion that the Trackpad’s features are comparable to the asserted features is the result of reliable application”); contra Judge’s Prost dissent, pp. 11-12 (asserting that Apple concedes that the Trackpad “contains none of the function asserted from the ‘949 Patent”).  I need to think about this one a little more myself.

4.  Judge Posner had granted summary judgment to Motorola with regard to Apple’s ‘647 Patent, on the ground that Apple had not presented admissible evidence as to what a reasonable royalty would be for this patent.  The potential weakness is that 35 U.S.C. § 284 states that “Upon finding for the claimant the court shall award the claimant damages adequate to compensate for the infringement, but in no event less than a reasonable royalty for the use made of the invention by the infringer”, which might suggest that some reasonable royalty is due even if a party presents weak or no evidence as to amount.  Here, I think Judge Reyna finessed the issue pretty well (see pp. 63-69):

If a patentee’s evidence fails to support its specific royalty estimate, the fact finder is still required to determine what royalty is supported by the record. . . .  Indeed, if the record evidence does not fully support either party’s royalty estimate, the fact finder must still determine what constitutes a reasonable royalty from the record evidence. . . . Certainly, if the patentee’s proof is weak, the court is free to award a low, perhaps nominal, royalty, as long as that royalty is supported by the record. . . . 

Thus, a fact finder may award no damages only when the record supports a zero royalty award. For example, in a case completely lacking any evidence on which to base a damages award, the record may well support a zero royalty award. Also, a record could demonstrate that, at the time of infringement, the defendant considered the patent valueless and the patentee would have accepted no payment for the defendant’s infringement. Of course, it seems unlikely that a willing licensor and willing licensee would agree to a zero royalty payment in a hypothetical negotiation, where both infringement and validity are assumed.

At summary judgment, as is the case here, a judge may only award a zero royalty for infringement if there is no genuine issue of material fact that zero is the only reasonable royalty. Thus, if a patentee raises a factual issue regarding whether it is due any non-zero royalty, summary judgment must be denied. In any event, simply because a patentee fails to show that its royalty estimate is correct does not, by itself, justify awarding a royalty of zero at summary judgment, as the district court did here. . . .

The record before us does not support granting summary judgment of no damages. Motorola has not met its burden of demonstrating, as the party who moved for summary judgment, that the record is uncontroverted that zero is the only reasonable royalty.

5.  As for Motorola’s damages evidence, Carla Mulhern testified that SEPs are usually licensed in portfolios, not separately, and that if Motorola were forced to license a subset of its SEPs these would capture a nonlinear (disproportionate) share of the portfolio rate—specifically, about 40-50%.  The court affirmed the exclusion of this testimony on the ground that it was not sufficiently tied to the facts of the case.  It reversed the exclusion of Mulhern’s alternative estimate based on comparable licenses, however, which Judge Posner had excluded because in his view it didn’t sufficiently take into account the noninfringing alternative of Apple designing around the patent by contracting with Verizon, which did not use the GMS/UTMS networks (see pp. 57-61):

This approach is generally reliable because the royalty that a similarly-situated party pays inherently accounts for market conditions at the time of the hypothetical negotiation, including a number of factors that are difficult to value, such as the cost of available, non-infringing alternatives. . . . For example, in this case, Motorola’s other licensees would have had the option of only releasing a phone on the Verizon network. Thus, the royalty rate agreed to in these licenses, assuming the overall licensing situation is factually comparable, would necessarily account for the cost of this non-infringing alternative.

Here, whether these licenses are sufficiently comparable such that Motorola’s calculation is a reasonable royalty goes to the weight of the evidence, not its admissibility.

6.  As to injunctive relief, the majority reversed and remanded Judge Posner’s decision that Apple would not be entitled to an injunction, due to its reversal of his claim construction of ‘949. Importantly, though it affirmed his decision that Motorola is not entitled an injunction for the infringement of its SEP.  This may be the most important part of the case in terms of precedent.  From Judge Reyna’s opinion (pp. 71-73):

To the extent that the district court applied a per se rule that injunctions are unavailable for SEPs, it erred. While Motorola’s FRAND commitments are certainly criteria relevant to its entitlement to an injunction, we see no reason to create, as some amici urge, a separate rule or analytical framework for addressing injunctions for FRAND-committed patents. The framework laid out

by the Supreme Court in eBay, as interpreted by subsequent decisions of this court, provides ample strength and flexibility for addressing the unique aspects of FRAND committed patents and industry standards in general. 547 U.S. at 391-94. A patentee subject to FRAND commitments may have difficulty establishing irreparable harm. On the other hand, an injunction may be justified where an infringer unilaterally refuses a FRAND royalty or unreasonably delays negotiations to the same effect. See, e.g., U.S. Dep’t of Justice and U.S. Patent and Trademark Office, Policy Statement on Remedies for Standard-Essential Patents Subject to Voluntary

F/RAND Commitments, at 7-8 (Jan. 8, 2013). To be clear, this does not mean that an alleged infringer’s refusal to accept any license offer necessarily justifies issuing an injunction. For example, the license offered may not be on FRAND terms. In addition, the public has an interest in encouraging participation in standard-setting organizations but also in ensuring that SEPs are not overvalued. While these are important concerns, the district courts are more than capable of considering these factual issues when deciding whether to issue an injunction under the principles in eBay.

Applying those principles here, we agree with the district court that Motorola is not entitled to an injunction for infringement of the ’898 patent. Motorola’s FRAND commitments, which have yielded many license agreements encompassing the ’898 patent, strongly suggest that money damages are adequate to fully compensate Motorola for any infringement. Similarly, Motorola has not demonstrated that Apple’s infringement has caused it irreparable harm. Considering the large number of industry participants that are already using the system claimed in the ’898 patent, including competitors, Motorola has not provided any evidence that adding one more user would create such harm. Again, Motorola has agreed to add as many market participants as are willing to pay a FRAND royalty. Motorola argues that Apple has refused to accept its initial licensing offer and stalled negotiations. However, the record reflects that negotiations have been ongoing, and there is no evidence that Apple has been, for example, unilaterally refusing to

agree to a deal.

Chief Judge Rader dissented, stating (Rader dissent pp. 1-3):

To my eyes, the record contains sufficient evidence to create a genuine dispute of material

fact on Apple’s posture as an unwilling licensee whose continued infringement of the ’898 patent caused irreparable harm. Because of the unique and intensely factual circumstances surrounding patents adopted as industry standards, I believe the district court improperly granted summary judgment. . . .

Market analysts will no doubt observe that a “hold out” (i.e., an unwilling licensee of an SEP seeking to avoid a license based on the value that the technological advance contributed to the prior art) is equally as likely and disruptive as a “hold up” (i.e., an SEP owner demanding unjustified royalties based solely on value contributed by the standardization). These same complex factual questions regarding “hold up” and “hold out” are highly relevant to an injunction request. In sum, differentiating “hold up” from “hold out” requires some factual analysis of the sources of value—the inventive advance or the standardization.

The record in this case shows evidence that Apple may have been a hold out. . . . This evidence alone would create a dispute of material fact.

More important, the district court made no effort to differentiate the value due to inventive contribution from the value due to standardization. . . .

Instead of a proper injunction analysis, the district court effectively considered Motorola’s FRAND commitment as dispositive by itself . . . .

Furthermore, the district court acknowledged the conflicting evidence about Apple’s willingness to license the ’898 patent . . .

I wonder where Chief Judge Rader gets his empirical assertion that “hold out” (otherwise known as “reverse holdup”) is “equally as likely . . . as ‘hold up’”?

Finally Judge Prost, while agreeing with Judge Reyna’s resolution of this issue and with the broader statement that “there is no need to create a categorical rule that a patentee can never obtain an injunction on a FRAND-committed patent,” would nevertheless go somewhat farther than Judge Reyna:

I disagee that an alleged infringer’s refusal to enter into a licensing agreement justifies entering an injunction against its conduct, for several reasons. First, as Apple points out, an alleged infringer is fully entitled to challenge the validity of a FRAND-committed patent before agreeing to pay a license on that patent, and so should not necessarily be punished for less than eager negotiations. Second, there are many reasons an alleged infringer might prefer to pay a FRAND license rather than undergoing extensive litigation, including litigation expenses, the possibility of paying treble damages or attorney’s fees if they are found liable for willful infringement, and the risk that the fact-finder may award damages in an amount higher than the FRAND rates. Indeed, as Motorola itself pointed out, we have previously acknowledged that a trial court may award an amount of damages greater than a reasonable royalty if necessary “to compensate for the infringement.” Stickle v. Heublein, Inc., 716 F.2d 1550, 1563 (Fed. Cir. 1983). Thus, if a trial court believes that an infringer previously engaged in bad faith negotiations, it is entitled to increase the damages to account for any harm to the patentee as a result of that behavior.

But regardless, none of these considerations alters the fact that monetary damages are likely adequate to compensate for a FRAND patentee’s injuries. I see no reason, therefore, why a party’s pre-litigation conduct in license negotiations should affect the availability of injunctive

relief.

7.  To sum up, my impressions are still preliminary but overall I think the court did a reasonable job here, particularly as it relates to the question of injunctions and SEPs. I'm particularly happy that the court affirmed Judge Posner's decision on this issue made pretrial, rather than saying he should have waited until the end of trial to weigh the equities.

I would also note that the majority did not address this passage from Judge Posner's opinion:  “The proper method of computing a FRAND royalty starts with what the cost to the licensee would have been of obtaining, just before the patented invention was declared essential to compliance with the industry standard, a license for the function performed by the patent. That cost would be a measure of the value of the patent qua patent."  I've expressed the view before that this is the correct time frame in SEP cases, rather than the more conventional "as of the date of infringement" time frame, because in the SEP context the date of infringement may be post-lock-in.  I'm glad the majority didn't disturb this, though of course they didn't embrace it either.