FRAND Papers from the Berkeley Technology Law Journal

1.  Jorge Contreras, Fabian Gaessler, Christian Helmers, and Brian J. Love, have posed a paper on ssrn titled Litigation of Standards-Essential Patents in Europe:  A Comparative Analysis, which is forthcoming in the Berkeley Technology Law Journal.  Here is a link to the paper, and here is the abstract:

Despite the significance of patent litigation in the EU and the looming structural overhaul of the European patent litigation system, there has been comparatively little empirical or statistical analysis of European patent cases across member states. This absence has largely been due to the lack of harmonized case-level data across European jurisdictions. Over the past few years, however, researchers in Europe have developed patent litigation databases that have enabled robust quantitative analysis. As a result, comparative empirical studies have recently been published concerning European patent litigation overall, as well as litigation by so-called non-practicing entities (NPEs). The present study extends this work to the important area of litigation relating to standards-essential patents (SEPs) in the EU. We find that that the assertion of SEPs has occurring in Europe at significant levels, and that PAEs are playing a large role in this activity.  

2.  Richard Epstein and Kayvan B. Noroozi has posted a paper on ssrn titled Why Incentives for "Patent Holdout" Threaten to Dismantle FRAND, and Why It Matters, also forthcoming in the Berkeley Technology Law Journal.  Here is a link to the paper, and here is the abstract:

An increasing number of judges, legislators and scholars wrongly believe that the FRAND commitment was principally created to advance the interests of technology implementers, and should be interpreted by giving a presumptive preference toward those interests. That premise has led courts to take a categorically hostile view toward awarding injunctions against implementers under all circumstances. Some courts have even allowed implementers to sue innovators for making an opening licensing offer that is “too high,” without making any counteroffer. An implementer-centric view of FRAND has also caused courts to conclude that innovators are not entitled to any share of the commercial benefits arising from the standardization of their technologies.

We demonstrate that an implementer-centric view of FRAND’s origins and purposes is false. FRAND is a contractual agreement that reflects a voluntary reciprocal exchange of benefits and obligations driven by the need to solve significant coordination problems in the face of otherwise prohibitive transaction costs. As part of that bargain, innovators agree to disclose their latest, confidential discoveries to standard-development organizations, and to waive their injunction rights as to eventual patents on those discoveries, in exchange for contractual protection against patent holdout by implementers who in turn are permitted to use standard-essential patents only on their willingness to pay fair and adequate royalties for that use.

Accordingly, we stress that implementers owe a significant duty to negotiate FRAND licenses in good faith, which courts have largely overlooked and under-enforced. We demonstrate that implementers’ good faith obligations are a critical component of basic FRAND architecture that is strictly necessary to the development of innovation-driven standards. We further observe that the FRAND bargain gives implementers access to otherwise confidential discoveries — inventions too recent to be disclosed in patents or published applications. In this way, FRAND supplies a solution to an iteration of Kenneth Arrow’s paradox of information, enabling the standards development effort to yield commercial benefits that would not exist absent innovators’ voluntary participation. We show both theoretically and empirically that courts’ failure to appreciate these aspects of the FRAND bargain, combined with their over-reliance on liability rules, i.e., damages over injunctions, incentivizes the very patent holdout problem FRAND was intended to avoid. That outcome, in turn, has motivated innovators to reduce their participation in FRAND bargains, threatening to unravel a massive innovation-commercialization marketplace, and its innumerable positive externalities to all parties.

To reverse these harms, we recommend that courts automatically issue an injunction where an implementer is found to infringe FRAND-committed patents that it did not attempt to license in good faith. We also recommend that a proper FRAND licensing rate should include some portion of the benefits achieved through standardization of the innovation(s) in question.

More broadly, we suggest that courts, policymakers, and academic commentators have wrongly favored implementation over innovation — “things” over ideas — unwisely frustrating the emergence of an “ideas economy” that correctly assigns profits to upstream innovators, and not to the low-margin firms that specialize in developing their commercial embodiments.

3.  Benjamin C. Li has published a student note titled The Global Convergence of FRAND Licensing Practices:  Towards "Interoperable" Legal Standards, 31 Berkeley Tech. L.J. 429 (2016).  Here is a link to the paper, and here is a portion of the introduction:

This Note summarizes recent FRAND developments in the most important patent jurisdictions and explains how these developments address the three major issues discussed above. Part I provides a brief background on standard setting organizations (SSOs), SEPs, and FRAND licensing. Section II.A addresses the legal and policy bases for regulating FRAND licenses, using the Rambus case to highlight the importance of a functional FRAND licensing system. Section II.B explains the three key issues of patent hold-up, license hold-out, and royalty pricing in greater detail. Sections III.A and III.B provide analysis of international cases implicating FRAND using the hold-up/hold-out and royalty pricing frameworks. Section III.C discusses the nationalistic issue of governments favoring domestic companies in FRAND disputes. Section III.D discusses the Institute of Electrical and Electronic Engineers’ (IEEE’s) new FRAND policy. Part IV concludes with a summary of recent FRAND trends across international jurisdictions and predicts convergence in international FRAND licensing practices. 

Stays Pending Design-Around in Germany, Part 2

A couple of months ago I blogged on the May 2016 German Federal Supreme Court decision in Wärmetauscher, in which the court denied a request for an Aufbrauchfrist--a transition period, or stay of an injunction pending a design-around.  (I had only recently come across Jochen Buehling's discussion of this case on the Kluwer IP Blog, and then read the relevant portions of the judgment itself.)  According to the court, the legal commentary on the subject suggested that a court should engage in a case-by-case analysis, taking into account all of the participants' interests; the infringer's good or bad faith; whether the patented invention formed just a small but functionally necessary component of a complex product; and whether an unpatented or licensed product could be substituted within a reasonable time.  Applying those considerations here, the court denied the stay.

Anyway, more recently as I was going through some back issues of some German law journals I came across a copy of the judgment in the October 2016 issue of GRUR (p.1031), along with a brief commentary by Dr. Anette Gärtner (pp. 1037-38).  As Dr. Gärtner notes, in the Wärmetauscher case itself the accused heat element was just one component of a complex product (a convertible), but (unlike, say, a component installed in a mobile phone) it was not essential and only was included in special models; moreover, the court wasn't persuaded by the fact that the lower courts had both ruled (erroneously, as it turns out) in favor of the defendant on the question of infringement.  Dr. Gärtner concludes by noting that the court didn't decided whether an infringer would have to pay damages in a case in which it received the benefit of a stay.  (In the U.S., when a court stays an injunction pending design around it requires the defendant to pay an interim or "sunset" royalty, and some might view this procedure as a reasonable halfway measure in between granting an injunction and denying one outright.)  Dr. Gärtner nonetheless is of the view that, in Germany, such a question would be of an academic nature only, since in her view it is scarcely conceivable that a showing of disproportionality sufficiently strong to merit such a stay would ever be forthcoming.

Resources on the Use of Conjoint Analysis in Patent Cases

Back in 2013 I published a short post about an article by S. Christian Platt & Bob Chen titled Recent Trends and Approaches in Calculating Patent Damages: Nash Bargaining Solution and Conjoint Surveys, Bloomberg BNA Pat., Trademark & Copyright L. Daily (Aug. 30, 2013), in which the authors discussed the use in IP litigation of conjoint analysis--a technique originally developed by marketing researchers to "measur[e] consumer preferences for specific product features" by "break[ing] a product down into bundles of attributes, and then test[ing] various combinations . . . to determine customer preferences."  In theory, conjoint surveys could help determine the relative importance to consumers of (say) a specific patented feature embodied in a complex product, and thus might be useful in calculating damages (based on the premise that a willing licensee would be willing to pay as much as, but not more than, the value the feature promises to deliver in comparison with other alternatives).  As Chen & Platt noted, as of 2013 there were only a small number of cases in which litigants had tried to employ conjoint analysis to this end, and the results were mixed.  (Judge Alsup rejected the use of conjoint analysis in the Oracle v. Google copyright case, for example.)  The authors concluding by stating that for conjoint analysis to be accepted in court, an expert "must be able to provide a principled basis" for why he or she focused on certain product features and not others. 

To my knowledge, conjoint surveys still are not exactly a staple of U.S. IP litigation, but a quick Westlaw search discloses that since 2013 there have been several more cases in which litigants have used or attempted to use conjoint analysis, though the results are still mixed.  The only time the Federal Circuit has addressed the matter in a patent case was in Apple Inc. v. Samsung Elecs. Co., 735 F.3d 1352, 1367-68 (Fed. Cir. 2013), in which the court vacated and remanded an order denying Apple a permanent injunction, on the ground that Judge Koh erred in considering the conjoint survey irrelevant to the question of whether there was a causal nexus between the infringement and Apple’s alleged harm.  Nonetheless, on remand Judge Koh concluded that the proffered conjoint analysis did not prove causal nexus, because (1) it "does not provide a way to directly compare consumers' willingness to pay for particular features to the overall value of the infringing devices"; (2) Dr. Hauser's results showed that "substantial portions" of the "price premiums" consumers were willing to pay were "attributable to features other than the patented features"; (3) "the survey appears to have failed to adequately account for noninfringing alternatives to the patented features"; and (4) the survey appeared to give "undue emphasis" to the patented features.   Apple Inc. v. Samsung Elecs. Co., Case No.: 11–CV–01846–LHK, 2014 WL 976898 (N.D. Cal. Mar. 6, 2014).   

Anyway, I thought I would mention here a few more resources on conjoint analysis and its cousin, discrete choice analysis, that readers might find useful.  I think it's likely that we'll see more attempts to use these techniques in IP litigation, both in complex products litigation and (as Pam Samuelson suggested at a recent conference) in U.S. design patent cases (where, post Samsung v. Apple, the court now has to figure out the profit attributable to the relevant design patent infringing component).

First, there's an article I mentioned in a post back in 2015, Greg M. Allenby, Jeff Brazell, John R. Howell & Peter E. Rossi, Valuation of Patented Product Features, 57 J. L. & Econ. 629 (2014).  Here is the abstract:

Ultimately, patents have value to the extent to which the product features enabled by the patents have economic value in the marketplace. Products that are enhanced by inclusion of patented features should generate incremental profits. Incremental profits can be assessed by considering demand for products with patented features and contrasting that demand with demand for the same product without the patented features. Profit calculations must be based on valid estimates of demand as well as assumptions about how competitive forces affect demand via computation of market equilibria. A conjoint survey can be used to estimate demand. Recently, conjoint methods have been applied in the patent setting, but the measures of value used are purely demand based and do not involve equilibrium profit calculations. We illustrate our method using the market for digital cameras and show that current methods can overstate the value of a patent.

Second, J. Gregory Sidak and Jeremy O. Skog recently published an article titled Using Conjoint Analysis to Apportion Patent Damages, 25 Fed. Cir. B.J. 581 (2016).  Here is the abstract:

Expert economic witnesses increasingly present survey evidence to support their calculations of reasonable-royalty damages in patent-infringement cases. In this article, we assess developments in the case law on the admissibility of expert testimony based on conjoint analysis, which is a particular type of survey analysis commonly used in market research to measure the tradeoffs that consumers make among salient features of a product. In a growing number of cases, experts have used conjoint analysis to estimate consumers’ average willingness to pay for a patented technology. That estimate informs the implementer’s maximum willingness to pay to license the patented technology, which is the upper bound on the bargaining range for a reasonable royalty in a hypothetical negotiation. We identify and analyze the factors that courts have considered when determining whether evidence from an expert’s conjoint survey is admissible. Further, one can use conjoint analysis to argue whether an infringing feature in a multicomponent product drives the demand for that product, which is relevant to the legal test in the United States for determining whether the patent holder may obtain an injunction and for identifying the appropriate royalty base for calculating damages. Decisions by the Federal Circuit and district courts in several disputes between Apple and Samsung indicate that the Federal Circuit has not yet provided comprehensive guidance on how to determine whether a patented feature drives demand for a downstream product for purposes of deciding whether a patent holder may obtain an injunction. Other Federal Circuit decisions indicate that, for purposes of identifying the appropriate royalty base, only evidence that a patented feature motivates consumers to purchase the product at issue will suffice to show that the patented feature drives demand for that downstream product.

Third, Professor Samuelson directed me to an article by Rohit Verma, Gerhard Plaschka, and Jordan J. Louviere titled Understanding Customer Choices: A Key to Successful Management of Hospitality Services, Cornell Hotel & Restaurant Admin. Q. 15 (2002), which (though not directly relevant to the topic of IP litigation) provides an accessible discussion of discrete choice analysis.  Here is the abstract:

We know that hospitality customers usually make purchases by simultaneously evaluating several criteria. A typical buying decision might take into account service quality, delivery speed, price, and any special buying incentives, for instance. It is imperative that businesses take into account customer preferences and choices when making decisions regarding product and service attributes. Managers need to understand how customers integrate, value, and trade off different product and service attributes. By the same token, information about customer demands and preferences must be incorporated into the design and day-to-day management of service-delivery processes.

In this paper we describe a particularly effective way to determine those customer preferences and to assess the tradeoffs that customers make in considering various product and service bundles. The methodology we describe is discrete-choice analysis (DCA). After explaining DCA, we provide guidelines for incorporating customer-preference information into the design and management of business processes. The DCA approach provides a robust and systematic way to identify the implied relative weights and attribute trade-offs revealed by decision makers' choices (whether customers or managers).

Fourth, Romain de Nijs has published an article titled Sondages et évaluation des préjudices économiques en matière de propriété intellectuelle ("Surveys and the evaluation of economic harm in regard to intellectual property") in the February 2017 issue of Propriété Industrielle (pp. 18-21). Here is the abstract (my translation from the French):

This article presents a panorama of the utilization of surveys for characterizing and quantifying economic harm in regard to intellectual property (trademark infringement, patent infringement, and online piracy of protected content).

Page 20 discusses the use of surveys in patent cases in particular, and cites some of the economic literature on conjoint analysis (as well as some articles on the use of conjoint analysis in antitrust law).  The article also alerted me to two more articles discussing the possible use of conjoint analysis in patent infringement cases:  a 2013 AIPLA White Paper by Joel Steckel, Rene Befurt & Rebecca Kirk Fair titled Is It Worth Anything? Using Surveys in Intellectual Property Cases, and a 2011 paper by Christopher K. Larus & Bryan J. Mechell titled Using Consumer Surveys to Prove Patent Infringement Damages at Trial, from the December 2011 issue of The Intellectual Property Strategist.

Farewell, Eastern District of Texas?

I've been away all day, so I just now got around to reading the U.S. Supreme Court's 8-0 decision this morning in TC Heartland LLC v. Kraft Foods Group Brands LLC.  (Opinion by Justice Thomas.)  Without going into too many of the technical details, the Court overruled Federal Circuit precedent and reinstated the rule, which the Supreme Court had previously announced in 1957, that the appropriate venue for a civil action for patent infringement filed against a domestic U.S. corporation can be either (1) the district corresponding to the state in which the defendant is incorporated, or (2) the district corresponding to the state in which "the defendant has committed acts of infringement and has a regular and established place of business."  Under the Federal Circuit's now-overruled interpretation of the federal venue statute (the meaning of which that court believed Congress had implicitly modified in 1988) a patent suit could be filed in any district in which the court could assert personal jurisdiction over the defendant--essentially meaning that a big company like Samsung could be sued just about anywhere.  Seizing this opportunity, patentees (particularly patent assertion entities) in recent years had taken to filing a disproportionate share of patent infringement suits (over 40% in 2015) in the Eastern District of Texas, which was known for its more plaintiff-friendly procedures, a comparatively high overall success rate for patent owners, and comparatively high median damages awards (though not as high as some districts; see p.22 of PwC's recent Patent Litigation Study).  Prospectively, it seems likely that the holding in TC Heartland will lead to many fewer cases being filed in the U.S. District Court for the Eastern District of Texas, though it remains to be seen how the holding will affect pending cases; whether it will mollify Congress's long-standing concerns over PAE litigation; and whether it will motivate more lawsuits against end users (e.g., retailers who may have "a regular and established place of business" in the Eastern District of Texas).  For some of my thoughts on end user suits, see here.  

IPO Chat Channel's Global FRAND Update (Europe)

The IPO IP Chat Channel will be presenting a webinar titled Global FRAND Update:  Europe next Wednesday, May 24, at 2 pm Eastern time.  Here is a link, for those who might be interested in registering, and here is a description:

This webinar will consider the impact of recent important judicial decisions and institutional initiatives in Europe concerning SEPs. The past decade has demonstrated that traditional patent jurisprudence is ill-suited for disputes involving standard-essential patents (SEPs) and the promise to license them at rates that are fair, reasonable, and non-discriminatory (FRAND). Yet the technological future, including the Internet of Things and 5G mobile networks, can only be built using standards and patent licenses. Courts and governments worldwide are straining to adapt.

Our panel includes a senior competition lawyer at both an owner of SEPs and an implementer, as well as a leading academic authority on standards. They will discuss: 

Unwired Planet v. Huawei, the recent decision of the U.K. High Court that determined the value of a worldwide FRAND portfolio license to Unwired Planet's patent portfolio, and decreed that Huawei must license it at that rate or face an injunction; 

The outcome of numerous SEP cases that have followed Huawei v. ZTE, the 2015 ruling from the European Court of Justice that spelled out conditions under which a SEP holder can ask for an injunction without infringing competition law; 

The April announcement by the European Union that it is preparing a "roadmap" to provide a framework for licensors and licensees of SEPs, and an early leak of its contents.

Panelists will include Professor Jorge Contreras, James Harlan (InterDigital), and Gil Ohana (Cisco).

Paris Court of Appeals Holds That Patentees Are Not Entitled to Disgorgement of Profits

Since France enacted legislation implementing the 2004 EC Enforcement Directive, French courts have been authorized to take into account the benefits to the infringer when awarding damages.  More specifically, the version of the relevant statute, article 615-7 of the Intellectual Property Code, in effect from October 29, 2007 to March 14, 2014, stated that  

For assessing damages and interest, the court takes into account the negative economic consequences, including loss of profit, suffered by the injured party, the profits realized by the infringer and the moral prejudice caused to the rightholder by the infringement.

However, the court may, alternatively, upon request by the injured party, award damages as a lump sum that shall not be less than the amount of royalties or fees that would have been due if the infringer had requested authorization for the use of the right infringed. 

(Translation courtesy of Margaret Wade and me.)  The version in effect since March 14, 2014, states (in my translation) that: 

For assessing damages and interest, the court takes into account distinctly:

the negative economic consequences, including loss of profit and the loss sustained by the injured party;

the moral prejudice incurred by the latter;

and the profits realized by the infringer, including the savings of intellectual, material, and promotional investments which the latter has derived from the the infringement. 

However, the court may, alternatively, upon request by the injured party, award damages as a lump sum.  This amount is higher than the royalties or fees that would have been due if the infringer had requested authorization for the use of the right infringed.  This amount is not exclusive of the compensation for the moral prejudice suffered by the injured party.

Whether either of these provisions permit French courts to award the prevailing plaintiff the infringer's profits from the infringement, or instead only to take those profits into account in crafting an award of compensatory damages, is a matter of some debate, though from what I've read the latter view seems to be dominant for now.  For previous discussion on this blog, see, e.g., here, here, and here.

Anyway, a recent judgment of the Cour d'appel de Paris, Carrera SARL et Texas de France SAS v. Muller et Cie, PIBD No. 1067, III, 170 (Dec. 9, 2016), appears to take the latter view, namely that IP owners are entitled to recover damages for their own losses but not an award of the infringer's profits as such.  If I'm reading the facts correctly, Muller (owner of European Patent 1,067,822 for a "Heating element manufacturing process for heating or cooking apparatus, such heating element and apparatus incorporating it") is a patent holding company that had licensed the patent, royalty-free, to six affiliated companies.  Muller prevailed on liability, but sought to recover an award of the defendants' profits rather than a reasonable royalty.  The district court awarded damages in the amounts of  €327,733 and €280,130, respectively, as well as damages for moral prejudice in the amount of €100,000.  Both parties appealed.  The Court of Appeals, however, rejected Muller's argument that  it could opt for an award of profits, stating (my translation):

Moreover, while it is true that the Law of October 29, 2007, implementing Directive 2004/48, invites the judge to take into account "the benefits realized by the infringer," it does not  authorize the confiscation of those benefits; and this taking into account is limited only to the portion relating to the losses suffered as a result of the exploitation, in order to attain a complete reparation for the loss." 

Furthermore, if I'm reading this correctly, since Muller disavowed any reliance on a reasonable royalties theory, the court also threw out that award; and it also disallowed the award for moral prejudice, concluding that there was no evidence that the infringement caused any harm to Muller's reputation.

I thank Pierre Véron for a productive discussion of this case, prior to my publishing this post.

Update (June 12, 2017):  This decision also appears at pp. 35-37 of the May 2017 issue of Propriété Industrielle, along with a short commentary by Professor Jacques Raynard.

Two More Upcoming Events on FRAND, SEPs, and Remedies

1.  As noted on Patently-O recently, the Université de Liège's Competition and Innovation Institute will be putting on a Conference on Innovation, Research and Competition in Brussels May 29-30, under the direction of Professor Nicolas Petit.  Here is a link to the program, which will focus on issues relating to standard-essential patents.  Speakers will include, among others, German Federal Supreme Court Judge Klaus Grabinski and economists Joseph Farrell and Stephen Haber (who have very different views on patent holdup).  Looks fascinating--wish I could attend.

2.  The Centre of Innovation, Intellectual Property and Competition (CIIPC) at National Law University, Delhi, is putting on the Second Annual Roundtable on Innovation, Intellectual Property and Competition Law in Bengaluru (Bangalore) India, on July 1-2.  Here is a link.  The program is not up yet, but I understand that the topics will include IP and competition law, FRAND, and remedies, among other things, and that speakers will include Arvind Subramanian (Chief Economic Advisor to the Government of India)  and Antony Taubman, the Director of the WTO's Intellectual Property Division.  This one also sounds great.