Tuesday, December 24, 2013

HTC v. Nokia: Would a Stay of a Permanent Injunction Pending Design-Around Be Permissible Under U.K. Law?

In HTC Corp. v. Nokia Corp., [2013] EWHC 3778 (Pat. Ct. Dec. 3, 2013), Justice Arnold of the Patents Court of England and Wales concluded that Nokia was entitled to an injunction for the infringement of European Patent (UK) No. 0 998 024.  This case has already been discussed by Scott Parker in EPLaw Patent Blog, here, and by Florian Mueller on Foss Patents, here.  For present purposes, I'll try not to be overly duplicative or exhaustive, but rather to focus on a few things in particular that struck my attention.  The full decision, which I commend to readers' attention, is available here

Justice Arnold recognized that, under applicable law, injunctions are discretionary.  Two of the leading cases addressing the court's discretion are Shelfer v. City of London Lighting Co. Ltd., [1895] 1 WLR 287, and Jaggard v. Sawyer, [1995] 1 W.L.R. 269.  (See also my book, pp. 179-82, and this blog post from June.)  As Justice Arnold notes, in Shelfer the court stated that the plaintiff has a prima facie entitlement to an injunction, and that a "good working rule" is that “(1) If the injury to the plaintiff ’s legal rights is small, (2) And is one which is capable of being estimated in money, (3) And is one which can be adequately compensated by a small money payment, (4) And the case is one in which it would be oppressive to the defendant to grant an injunction . . . then damages in substitution for an injunction may be given."   Moreover, in Jaggard, Sir Thomas Bingham stated that "the test is one of oppression, and the court should not slide into application of a general balance of convenience test."   

Justice Arnold also discusses other English case law (on injunctions for copyright infringement), articles 3(2) and 12 of the 2004 EC Enforcement Directive and TRIPs, before concluding in para. 32 that the effect of the practical effect of these latter two sources is little different from Justice Pumfrey's requirement, as stated that Navitaire Inc. v. EasyJet Airline CO. Ltd. (No. 2), [2005] EWHC 282 (Ch), [2006] RPC 4, that injunctive relief be granted unless, inter alia, it would be "oppressive" to the defendant in the sense of being "grossly disproportionate to the right protected."  

Applying these standards here, the court noted that the patent has six years yet to run and is not standard-essential.  Justice Arnold expressed some discomfort with the idea of in effect crafting a compulsory license with six years yet to run.  See paras. 14 ("Should the defendant have a duty to account?  Should the claimant have the right to inspect the defendant's books?  What if the defendant becomes insolvent?  Such questions can easily be multiplied.  In the case of consensual patent licenses, these questions are generally addressed these days by licence agreements of considerable sophistication.  Is the court to include similar terms in its order?"), 34 ("a difficult task in futurology").  One of the more interesting aspects of the opinion, however, is the court's discussion of noninfringing alternatives:
  1. Counsel for HTC relied on the traditional analogy of a patented rivet (or sometimes it is a whistle) on a battleship. An injunction to restrain infringement of that patent by the battleship manufacturer (as opposed to the rivet supplier) would be disproportionate, he argued. But this depends on what the effect of the injunction actually is. If the battleship manufacturer has immediate access to a non-infringing alternative rivet, then the effect of the injunction on him will simply be the cost, if any, of switching from the patented rivet to the non-infringing one (both any one-off costs such as changing the production line and any ongoing cost differential in the component price). Of course, if the cost of switching from the patented rivet to a non-infringing rivet is prohibitive for some reason, then in practice the non-infringing rivet will not be a realistic alternative. Thus whether the injunction is disproportionate depends on the availability and cost of non-infringing alternatives. . . .
  1. Non-infringing alternatives. As I have said an important consideration, and perhaps the single most important consideration, in assessing whether the grant of an injunction to restrain patent infringement would be disproportionate is the availability and cost of non-infringing alternatives.
  1. The problem of "patent hold up" which has been much studied by economists generally arises either where there is no non-infringing alternative or where the cost of switching to the non-infringing alternative is prohibitive. The paradigm example of the former situation is the standard-essential patent. Because it is essential, there is no alternative for products which comply with the standard. That is why standards-setting organisations like ETSI (the European Telecommunications Standards Institute) require owners of standard-essential patents to undertake to grant licences on FRAND (fair, reasonable and non-discriminatory) terms. An example of the latter situation is where a manufacturer has invested a great deal of money in developing and marketing a complex product only to discover, to its surprise, that a vital component of the product infringes a patent, and by the time it discovers this it is too late to switch to a non-infringing alternative except at prohibitive cost. This was one reason why the former phenomenon of so-called "submarine" patents in the USA could be so dangerous.
  1. If non-infringing alternatives are available at non-prohibitive cost, however, then there is unlikely to be a problem of patent hold up. Accordingly, other things being equal, an injunction is unlikely to be disproportionate.  
The court concluded that, in the present case, a noninfringing alternative was available to HTC, and that it was "probable that, starting from scratch now, HTC could render all its phones non-infringing within 18 months."  As a result, "Taking all of the factors relied on by the parties into account, and in particular the ones discussed above, I am not persuaded that this is a case in which I should exercise my discretion to award damages in lieu of an injunction. Nokia has a legitimate interest in seeking a final injunction to prevent further exploitation of the patented invention by HTC without its consent. This is not a case in which the injury to the patent is small, capable of being estimated in money and adequately compensated by a relatively small money payment. If an injunction were refused, it would have to be on the basis of an order for a running royalty. In those circumstances, refusal of an injunction would be tantamount to imposing a compulsory licence on Nokia in circumstances where HTC could not obtain a compulsory licence by the proper route. Most importantly, the grant of a final injunction would not be disproportionate. The grant of an injunction will not deliver HTC over to Nokia "bound hand and foot, in order to be made subject to any extortionate demand" Nokia may make, because HTC already has some non-infringing alternatives available to it, could have had more non-infringing alternatives available to it by now if it had acted promptly when first sued by Nokia and will in any event have more non-infringing alternatives available to it in a period which is significantly shorter than the remaining term of the Patent" (para. 74).   

Nevertheless, the court decided to stay the injunction pending appeal with respect to one of HTC's phones, the "HTC One", but not with respect to other models, applying an approach set forth by Lord Justice Buckley in Minnesota Mining & Manufacturing Co. v. Johnson & Johnson Ltd. (No. 3), [1976] RPC 671.  An appeal is expected to be heard in "July or October 2014."    Shortly thereafter, as Florian Mueller reports, the appellate court stayed the order as to the HTC Mini as well..

Here's my question:  Could the court instead have stayed the injunction for 18 months, the period it would take HTC to complete the design-around?  That seems to me to be a more equitable resolution.  It avoids requiring the court to craft a six-years-in-duration compulsory license, but at the same time protects HTC from holdup during the design-around period.  Staying the matter pending appeal seems more arbitrary, in terms of duration.  Lemley & Shapiro have argued in favor of this approach in Patent Holdup and Royalty Stacking, 85 Tex. L. Rev. 1991, 2035-39 (2007), and it seems to me that it would sometimes be a more sensible approach to the either/or solution of injunction or no-injunction.  My question--and perhaps readers in the U.K. could enlighten me here--is this:  Does a court in the U.K. have discretion to stay an injunction or otherwise delay its entry, other than for the pendency of an appeal?  In other words, could Justice Arnold have stayed the injunction for 18 months, or is there something in the applicable U.K. law that would prohibit this?  

*                  *                 *

I will be taking a break from blogging over the Christmas holidays, and will resume shortly after the 1st of the year.  Happy holidays to my readers, and all the best in 2014.

Monday, December 23, 2013

Comments on Sidak, Part 4: Closing Thoughts (Cotter and Siebrasse)

Note:  I thought I published this post on Friday, and was dismayed to discover today that it wasn't up. Sorry for the technical glitch!  

Today, Professor Siebrasse and I offer some further comments to conclude this series on Gregory Sidak’s recent article on FRAND.   

Cotter:  I could probably write several more posts on various aspects of Professor Sidak's paper, but to wrap matters up I’ll focus on just one:  the use of appropriate heuristics as a proxy for the ex ante incremental value of a patent. 

As I mentioned in my previous post, I agree with Sidak—and have stated elsewhere—that it is often impractical to quantify ex ante incremental value (that is, the value that a user would expect to derive from the use of patent X in comparison with the next-best available noninfringing alternative).  Litigation occurs months or years after the relevant date (typically the date on which infringement began, though in the SEP context the date just before the standard at issue was adopted is preferable).  It may be difficult to determine what the next-best alternative was; what it would have cost to acquire it (and here I agree with Sidak that this should be a relevant consideration, and have so stated in previous work); what its expected net benefits would have been; and so on.  Matters are only compounded if the value of the patent depends in large part on the adoption of other complementary technologies, as in the SEP context.  Nevertheless, I think it is important to recognize the ex ante incremental value (or, in the present context, the “ex ante contingent incremental value,” as discussed in the two previous posts) as the ideal starting point:  it is the standard that renders neither the patentee nor the infringer any better or worse off than they would have been, but for the infringement.  (Further modifications can then be made to provide for adequate deterrence or to satisfy other goals, if that is desirable.)  Recognizing that it may be difficult or impossible to meet the ideal, one can then try to find alternative measures that might be reasonable substitutes.  Here, the point is to use substitutes that come as close as we think we reasonably can to approximating ex ante contingent incremental value, and to avoid substitutes that would inflate FRAND (or reasonable) royalties to capture ex post value.

Oddly enough, then, I agree with much of what Sidak has to say about such substitute measures as comparable licenses (pages 1002-07) and (at pages 1011-14) Greg Leonard’s “top-down” approach as employed in the Innovatio IP Ventures LLC litigation (which I blogged about here).  I need to think more about Sidak’s endorsement of “approved contributions” as a better way of estimating the value accruing to an individual SEP owner, over a methodology that applies Marc Shankerman’s 1998 estimate that 10% of all electronics patents accounted for 84% of the value of all such patents.  I understand his objections to the latter (the study is relatively old and doesn’t involve SEPs), but I’m not sure I would sign off on the proposition that all of the patents contributed by a firm with a large number of approved contributions (e.g., Ericsson) should be classified as falling into the top 10%, rather than considering them individually (see p.1039).  On the other hand, Sidak’s critiques of some of the other possible approaches (e.g., Shapley values, reliance on patent pools that simply divide up royalties by counting patents rather than by estimating their strength) seem at first blush to be pretty sound.

Bottom line:  while I disagree strongly with much of Sidak’s theoretical analysis, I concur with a fair amount of his practical advice.  Perhaps that puts me in company with Judge Robart, whom Sidak castigates time and again for assuming that the ex ante approach is theoretically correct—only to concede (at p.986) that Judge Robart also concluded that the ex ante approach “lack[s] . . . real-world applicability.”  At the end of the day, I still don’t find a huge difference between what Judge Holderman (whom Sidak praises) and Judge Robart (whom he criticizes) were trying to do.  Compare In re Innovation IP Ventures LLC Patent Litig., 2013 WL 5593609, at *4-8 (N.D. Ill. Oct. 3, 2013) (adopting Judge Robart’s methodology, with modifications reflecting the differing postures of the two cases, i.e., breach of contract versus patent infringement), with Microsoft Corp. v. Motorola, Inc., 2013 WL 2111217, at *20 para. 113 (W.D. Wash Apr. 23, 2103) (“reasonable parties in search of a reasonable royalty rate under the RAND commitment would consider the fact that, to induce the creation of valuable standards, the RAND commitment must guarantee that holders of valuable intellectual property will receive reasonable royalties on that property”).

Siebrasse: I also agree with much of what Sidak says about specific heuristics, but in this final comment I will look at one point where I disagree with Sidak, and perhaps also with Professor Cotter. The question is whether the cost of the next-best alternative should be taken into account in determining a reasonable royalty.

Sidak says (936):

to measure a licensee’s willingness to pay for the patent accurately, the profit generated using A must be compared with the profit from using B, including the costs of acquiring the rights to technology B.

He provides the following example (937):

Suppose that, relative to using a non-patented alternative, the use of patent A leads to increased revenue of $300, patent B leads to increased revenue of $200, and patent C leads to increased revenue of $100 [but] the licensing cost of patent B is $150, whereas the licensing cost of patent C is only $25.

Sidak concludes that Patent C, not B, is the next-based alternative to A, because C is more profitable net of acquisition costs, and “[i]f one neglects to include the costs of acquiring the lawful rights to use the next-best alternative in the calculation of the incremental value, then the analysis could understate or overstate the prospective licensee’s actual willingness to pay” (937-38).

But why is B asking $150? Suppose A does not exist, and the choice is between B and C. B asks $150, and the licensee (L) says no because C is more profitable net of the acquisition costs of B. But that means A walks away, and B gets $0. In principle, B would revise its offer downwards to incrementally less than $125, so that L would licence from B rather than C, making both L and B better off than if B licensed from C for $25. C would presumably respond by lowering its price, but in the end C would not be able to match B, and L would licence from B for $100. More fundamentally, the point of considering the non-infringing alternative is to capture the economic value of the patented invention, which is the economic value of the invention over the next best alternative. This requires ignoring the cost of licensing the alternative in determining which technology is the alternative.

Consequently, my view is that in principle the cost of acquiring the next-best alternative is irrelevant in assessing the patentee’s willingness to pay. But what difference does this make to the reasonable royalty determination? As Sidak points out, it affects the licensee’s maximum willingness to pay, which sets the upper bound on the bargaining range in the hypothetical negotiation. If the reasonable royalty determination turns on a mechanical split between the maximum willingness to pay and the minimum willingness to accept, as in a 50/50 split proposed as a Nash bargaining solution by some experts post-Uniloc, then whether the cost of the non-infringing alternative is included does directly impact the reasonable royalty. But a Nash bargaining solution is very artificial (and has been rejected for that reason by at least some courts). There is no particular reason, other than the lack of better evidence, for any particular split between the licensee’s maximum willingness to pay and the licensor’s minimum willingness to accept. It may be that on the facts, B charged $150 for transaction cost reasons, the costs of negotiating an individual royalty with L are greater than the benefits (if L is using only a small volume), so that in fact L’s next-best alternative is to licence from C – and yet A has little bargaining power, so that in fact A would have ended up with a royalty of only $30, and L would have captured the vast majority of the incremental value of the patent. For example, perhaps it is clear that A routinely licensed to all comers for $30. That would be the reasonable royalty, regardless of L’s theoretical maximum willingness to pay, and regardless of what a licence from B or C might have cost.

The larger point is that there is an important difference between principles, heuristics and facts. If we have little or no factual evidence, and must decide a reasonable royalty on the basis of principles alone, then my view is that the cost in fact of the next-best alternative should not be taken into account, because in principle, that cost might be bargained down. On the other hand, if we have a rich set of facts, then the principles become little more than a sanity check, and it probably doesn’t matter whether or we take the cost of the non-infringing alternative into account.

Wednesday, December 18, 2013

Comments on Sidak, Part 3: Should a FRAND Royalty Be Higher than a Reasonable Royalty? (Cotter)

Is there a difference between a reasonable royalty and a FRAND royalty? Put another way, should a reasonable royalty awarded for the infringement of an SEP owned by a non-SSO member be different from a FRAND royalty awarded for the infringement of the same SEP if it were owned by an SSO member that had made a FRAND commitment?

At the outset, I’d like to thank Professor Norman Siebrasse for his two previous posts, which have set the stage for this question. My own views are largely in accord with Professor Siebrasse’s, and therefore somewhat at odds with Professor Gregory Sidak’s concerns, as expressed in his recent article, that the ex ante valuation framework threatens to undercompensate owners of standard essential patents (SEPs).  Nevertheless, Professor Sidak’s point about the interdependent value of SEPs is an important one that until now has not received adequate attention in the literature. 

First, a brief recap of what I believe the correct approach to be, having read Sidak’s paper and Siebrasse’s initial comments on it.  Suppose that an SSO is just about to decide which of two competing standards to adopt, X or Y.  X will incorporate patents A, B, C, D, and E; Y will incorporate a different bundle of patents.  The “ex ante incremental value” of A to Implementer Z is the expected incremental contribution of A to Z’s use of Standard X (which might not get adopted at all).  The “ex ante contingent incremental value” is the expected contribution of A to Z's use of standard X, on the assumption that standard X is adopted.  Now let's assume the SSO does indeed adopt standard X.  The more realistic ex ante state of the world is the one in which Z and the owner of patent A bargain to a license that is contingent on standard X actually being adopted.  If so, then the theoretically correct FRAND royalty is the one based on ex ante contingent incremental value.  This royalty allows the patentee to benefit from the fact that the patent has been incorporated into the standard, which is a necessary contingency for any royalty to be owing; but it is still an ex ante measure, not ex post Sidak proposes.  The problems with ex post valuations—that they make the patentee better off than it would have been but for the infringement, and exacerbate holdup and royalty stacking risks—remain and should be avoided. 

Sidak’s proposal appears to rest on his characterization of the SSO as a joint venture, and his concern that if the FRAND royalty is not based on ex post value there will be an insufficient incentive for firms to join the venture.  That would be true, however, only if the patentee could expect to recover higher royalties if it was not a member of the SSO and thus not subject to a FRAND commitment; but I don’t see why that should be the case.  In other words, I don’t see any reason why a reasonable royalty awarded for the infringement of an SEP owned by a non-SSO member should be any higher than a FRAND royalty awarded for the infringement of an SEP owned by an SSO member; both amounts should be calculated on the basis of ex ante contingent incremental value and therefore should be the same.  (That should apply both for royalties awarded for past infringement and for ongoing royalties awarded in lieu of an injunction, but that’s a subject for another post.)  In both cases, the correct royalty is the ex ante contingent incremental value:  what the parties would have agreed to ex ante, on the assumption that the patent would be incorporated into standard X.  On this interpretation, the only thing a FRAND commitment adds to the mix is that it is a commitment and therefore may give rise to some sort of contractual or equitable duty to bargain toward and accept a reasonable royalty.  Additionally, being a member of an SSO may confer other benefits, among them the ability to participate in setting the standard and a commitment from other SSO members to license their patents on a FRAND basis (the latter being of concern to operating companies, though not to NPEs).   (Sidak mentions, at p.990, that an SEP holder also must take into account “the fixed costs of participation in the SSO,” which might include, for example, the possibility that “failure to disclose a potentially essential patent may subject a firm to antitrust scrutiny, and the costs of defending a potential suit.”  Based on the outcome of the Rambus case in the U.S., this may be a fairly remote risk, however.  And non-SSO members may get hit with low-probability-of-success antitrust suits for any number of reasons too.)  But the basic point is that it should not be necessary to equate FRAND royalties with ex post values in order to induce participation in the SSO.  

Going back to the initial hypothetical, another point to note is that the parties could agree ex ante to a license (1) that is contingent on standard X being adopted, and (2) the amount of which is contingent on how much Z actually uses the invention.  This second condition is the very definition of a running royalty, as Siebrasse points out, where the rate and the definition of the base are fixed but the value of the base depends on use. I suppose we could call this the “ex ante double contingent incremental value,” though that’s a bit wordy.  In theory, it's a matter of no difference whether you use the ex ante contingent incremental value or the ex ante double contingent incremental value.  (Although I had long forgotten it, it appears that Roger Blair and I, citing a paper by Sherry and Teece, made something like this point in Rethinking Patent Damages, 10 Tex. Intell. Prop. L.J. at 41-42 & n.203 (2001).)  In reality, however, parties often prefer to use running royalties because of the difficulty of accurately predicting the amount of use ex ante.  Moreover, as Blair and I discussed in another paper (The Elusive Logic of Standing Doctrine in Intellectual Property Law, 74 Tulane L. Rev. 1323, 1397-1401 (2000)), there may be some consequences in terms of efficiency of production as well.
A final observation is that, as Sidak notes, it is often unrealistic in practice to actually apply an ante framework--too many variables are unquantifiable in reality--and that we need to resort to appropriate heuristics.  Based on my initial reading, I think that much of Sidak's analysis of what those heuristics should be makes sense.  I plan to reread this portion of his article, however, and may address the matter a little more thoughtfully in my next post.