EPLaw Patent Congress in Brussels This Coming Friday

Information here and here, courtesy of IPKat (more about which, see below) and EPLaw.  I won't be at this one myself (though I will be in Amsterdam the following week, see here), but it looks like it will be a rewarding event, with sessions on the UPC, patent damages, the reimbursement or royalties following the invalidation of a licensed patent, and FRAND, among other matters.

Farewell and Thanks to IPKat's Jeremy Phillips

The latter part of last week was a holiday in the U.S. (Thanksgiving) so I have been a bit delinquent in keeping up with IP-related news for the past few days, but I see this morning that the IPKat Blog's Jeremy Phlilips announced his retirement from that blog last Thursday (see here, here, and here).  (The blog will continue on, rest assured.)  I would like to extent best wishes to Jeremy and to thank him for his management of a very rewarding resource for IP-related news, particularly in its coverage of Europe.  Happy retirement, Jeremy!

Update:  Jeremy is retiring from the PatLit and JIPLP Blogs as well, which like IPKat will continue on.  Great job with all these blogs, Jeremy.

TILEC Conference on Competition, Standardization, and Innovation

I mentioned a few weeks ago that I will be speaking at the Tilburg Law and Economics Center (TILEC) Conference on Competition, Standardization, and Innovation, which will be held on December 10-11 in Amsterdam.  The conference program is now available online, here.  Judging from the list of speakers and discussants, this should be a really interesting conference.  I'll be presenting my paper with Norman Siebrasse, The Value of the Standard, on the second day--right after Jean Tirole's keynote speech.  Talk about a hard act to follow . . .

Third Edition of "Patent Enforcement Worldwide" Is Now Out

Hart Publishing Company has now published Patent Enforcement Worldwide:  Writings in Honour of Dieter Stauder, Third Edition, edited by Christopher Heath.  Here is a link to the webpage for the book, and here is a link to the table of contents.  

The book description is as follows:

This book features 15 country reports on the patent enforcement practice of the world’s most litigated countries in Europe, Asia and the Americas. Litigation strategies for both right owners and alleged infringers are explained against the background of case law on: types of action, standing to sue, jurisdiction, obtaining evidence, provisional and final measures, trial practice, types of infringement, remedies and counterclaims, costs and issues of retrial, threats and wrongful enforcement. Special chapters cover the Trade-Related Aspects of Intellectual Property Agreement provisions on enforcement, enforcement issues in the European Community, international cross-border litigation and border measures.

The reports are written by patent practitioners or academic experts in the field, and the homogenous structure of the country reports allows for an easy identification of best practices and strategic considerations on the choice of jurisdiction.

I had the pleasure of working with Dr. Heath on coauthoring chapter 1, Comparative Overview and the TRIPs Enforcement Provisions, and I hope that readers will find this third edition as useful as I found the previous edition back when I was preparing my book on comparative patent remedies in 2011-12.  My only regret is that I was unable to attend the book's debut at the celebration for Professor Dieter Stauder in Munich on October 23.  Congratulations and thanks to the many contributors who have made this new edition possible.

Should Innocent Infringers Pay Lower Damages?

This is an issue I haven't really thought much about before, but I recently came across it in an op-ed by James Bessen and Michael Meurer about NPEs that was recently published in the Washington Post.  Most of the article presents the authors' views on the negative impact of NPEs on the economy, the need to improve the notice function of patents, and so on.  These are topics of great interest and importance, but I will skip over them here both because many readers of this blog are probably already familiar with the arguments and counterarguments relating to NPEs, and in any event these specific issues are not central to the matters normally discussed on this blog.  The very last sentence of the article, however, states: 

Finally, Congress should give courts discretion to reduce patent damages assessed against innocent infringers.

Maybe there has been some discussion of this proposal in the literature somewhere, but if so it hasn't caught my attention.  I'd like to think about it some more, but here are some initial thoughts:

1.  Whether innocent infringers should be liable for infringement at all is a subject that has been debated a good deal in the scholarly literature.  So far, I have always found the arguments in favor of the conventional strict liability approach more persuasive, but of course that doesn't necessarily mean that the same remedies should be applied to both knowing and innocent infringers.  In fact, I have argued that innocent infringement should be a factor (though not necessarily a dispositive one) weighing against awarding injunctive relief and against damages enhancements.  (There also may be a state of mind requirement regarding the liability of entities further down the chain of distribution from the initial infringing manufacturer, as in France, or for contributory or induced infringement, as in the U.S.)

2.  As for compensatory damages, in theory if a social planner knew how much of a reward would be necessary to induce the creation of the invention, and how much social value the invention generates, we could junk the idea of compensatory damages altogether and award damages that would be just enough to generate those benefits.  In reality, I strongly doubt that such a system could ever be implemented, and accordingly I have argued that as a practical matter damages law should (at least as a first approximation, and subject to some adjustments including the use of ex post information relevant to the value of the technology) restore the patent owner to the position it would have occupied, but for the infringement.

3.  But should we make an adjustment downward for innocent infringers?  I think the case for doing so is weak.  Perhaps it wouldn't affect patent incentives, but how would we know?  How much discretion should courts have, and to what extent would they be authorized to reduce damages?  Would such a rule discourage firms from obtaining knowledge of existing patents?  How would courts determine what level of knowledge (e.g., an employee having read a particular patent in the distant past) counts for purposes of determining innocence?  Of course, some of these issues come up in situations in which I do think it is appropriate to consider the infringer's innocence (i.e., injunctive relief and enhanced damages), though I suspect they might come up more often if innocence also could affect compensatory damages.

4.  The EC's Enforcement Directive, as well as law in Japan, Korea, and some other countries, formally require that the defendant have a requisite state of mind (intent, knowledge, negligence), as a precondition to the recovery of certain types of damages (see my book pp. 256-57, 307-09, 368-69); but as I understand it the requisite state of mind is usually presumed based on the fact that patents are public documents, and the presumption is hard to overcome. 

5.  In addition, patent marking laws in the U.S., the U.K., and some other countries also potentially reduce damages in cases in which the infringement was innocent (for example, there may be no damages liability for acts committed prior to date on which the defendant is on notice); but as I have written before, the U.S. system in particular is highly formalistic and deeply flawed.  Some innocent infringers pay full damages, while others who have knowledge but have not been put on actual or constructive notice do not.  As a result, I'm inclined to think that in practice patent marking laws provide few if any benefits--though perhaps something like the U.K. approach would make sense. The U.K. statute, if I understand it correctly, doesn't let any damages accrue until the defendant is aware of the patent or is put on actual or constructive notice of it.  It thus avoids some of the loopholes in the U.S. statute.  Still, a patent owner could produce some token goods, mark them, and even if no one ever saw them the defendant would be on constructive notice, so in the end the whole thing seems like something of a formality.  For further discussion, see my book pp. 94-95, 185-86, and here.

6.  Bessen and Meurer only mention in passing the issue of fee-shifting, describing as reasonable various reform proposals now before the U.S. Congress, including one that would "make it easier to recover costs for frivolous lawsuits."  As discussed in the recent paper by Love et al. that I have now blogged about twice (see here and here), routine fee-shifting may be the best deterrent to PAE suits--though it is potentially an imperfect solution as well, since it might discourage some meritorious suits or have other undesirable effects.         

Some Highlights of the Love, Helmers, Gaessler & Ernicke Paper on PAEs in Europe

Now that I've had time to read through Brian J. Love, Christian Helmers, Fabian Gaessler & Maximilian Ernicke's article Patent Assertion Entities in Europe, which I mentioned here on Monday and which will be a chapter in a forthcoming edited volume titled Patent Assertion Entities and Competition Policy (D. Daniel Sokol ed., Cambridge University Press, 2016), I can say that it's one of the more interesting papers I've read in a while.  The authors have compiled a database of "all patent suits filed between 2000 and 2008" in Mannheim, Düsseldorf, and Munich, "as well as all invalidity challenges filed with the Bundespategericht" (collectively accounting for about 90% of all German patent litigation during this period).  For the U.K., their database consists of all cases filed before the Patents Court from 2000-13 and all cases before the Patents County Court (now the Intellectual Property and Enterprise Court) from 2007-13, collectively accounting for over 90% of all U.K. cases.  They hand-coded the data to determine if the patent owner was an NPE and if so what type (IP licensing company, university, start-up or failed start-up, etc).  Principal findings:

* "NPEs and PAEs account for about 19 percent and 9 percent, respectively, of the patent suits in our database" (p.5).

* "[M]ore than half of all PAE actions filed in Germany and the U.K. during the period of our study were initiated by an accused infringer, not the patentee," either by way of revocation action (Germany) or a counterclaim for invalidity (U.K.)  (p.9).  Nevertheless, "despite their relative eagerness to initiate litigation, we also find that those accused of infringing in Germany and the U.K. are less likely than their U.S. counterparts to challenge the validity of patents asserted against them."  This seems to me to be consistent with the authors' conclusions (see below) regarding the role of fee shifting.  In the U.S., almost every accused infringer raises invalidity as a defense when sued for infringement, even though they may succeed only 40% of the time or so, because on balance it's probably worth it.  In the U.K. and Germany, you raise invalidity when there is a sufficiently good chance of winning, because otherwise you risk being on the hook for the other side's fees.

* "[L]ess than 70% of NPE cases in [the] database ended in settlement" (p.11), a much lower rate than in the U.S.  But "when cases did reach a decision on the merits, German and U.K. PAEs were reasonably successful in proving infringement."  The PAE win rate in the U.S. is much lower (pp.11-12).

* "NPE suits—and really all patent suits—filed in Germany and the U.K. have relatively little at stake by U.S. standards," with "the overwhelming majority estimated their case value below the equivalent of $1 million" (pp. 12-13).

*  Finally, the authors comb through various possible explanations for the lower rate of PAE activity in Europe, including stricter standards for software patents (not very convincing, in their view); a lower bar for proving invalidity (also not very convincing); higher enforcement costs due to fragmented jurisdictions (somewhat relevant); limits on the use of contingency fee agreements (ditto); and lower damages (ditto, though offset by the greater likelihood that the prevailing patent owner will get an injunction).  They conclude that mandatory fee-shifting is probably the most important factor, stating that "the high rate of infringer-filed actions and low rate settlement tend to suggest that fee-shifting acts to deter patent monetization by changing the behavior of both plaintiffs and defendants" (p.18).

Read the paper and see what you think--the analysis seems fairly persuasive to me.

Korea's Fair Trade Commission Alleges That Qualcomm's Licensing Practices Violate Korean Competition Law

Hat tip to Florian Mueller's FOSS Patents Blog, which links to this article from Bloomberg News on this recent development in South Korea (and also discusses the All Things FRAND and Fair Standards Alliance matters that I mentioned in yesterday's two posts).  For further discussion, here is a link to an article on the Qualcomm matter in the Wall Street Journal, and here is a link to Qualcomm's press release.

Fair Standards Alliance Launches in Brussels

In addition to the All Things FRAND website mentioned in the post below, another organization that appears to have similar views and that just came to my attention this morning is something called the Fair Standards Alliance, which is based on Brussels and launched last week.  Members include Intel, Dell, and Cisco, among others.  Here is a link to their website, and here is a link to their position paper on FRAND issues.  

ACT/The App Association Launches New Website "All Things FRAND"

Here's a link to their site, which describes itself as "a repository for judicial cases, administrative cases, and agency guidance on FRAND related issues, academic articles that are generally in line with the FRAND principles listed on the About web page, and other authoritative writings about standards and FRAND licensing." 

Federal Circuit Restores $45 Million Lost Profits Award to Akamai

Suppose that a patented method comprises four steps A, B, C, and D; and that Party X carries out steps A, B, and C, and instructs Party Y to carry out step D.  In such cases, is anyone liable for patent infringement?  In 2012 in Akamai Technologies, Inc. v. Limelight Networks, Inc., the Federal Circuit held that Party X could be liable for inducing infringement, even if no one was liable for direct infringement because no one person was carrying out all of the steps.  In 2014 the U.S. Supreme Court reversed, holding that a defendant cannot be liable for indirect infringement of a patent under 35 U.S.C. section 271(b) absent someone being liable for direct infringement under section 271(a) (see here).  This past August an en banc panel of the Federal Circuit held, however, that Limelight (corresponding to Party X in my illustration above) could be liable for direct infringement of the method patent in suit (involving a method for "delivering electronic data using a 'content delivery network'"), based on its carrying out of some of the steps and its "direction or control" over consumers (Party Y) to carry out the remaining step.  Yesterday a panel of the court disposed of the remaining issues on appeal, including an affirmance of the jury's $45 million lost profits damages award, and remanded back to the district court (opinion by Judge Linn here).

The basis for challenging the award was that Akamai's expert did show a causal connection between the infringement and Akamai's loss of profits, due to the price disparity between the parties' products.  Specifically:

Limelight originally sold a different, non-infringing service than the one at issue in this case.  Limelight’s infringing service was released in April of 2005. Dr. Ugone testified that in 2005 Akamai had a market share of 79.8% and Limelight had a market share of 5% and in 2006 Akamai had a market share of 74.7% and Limelight had a market share of 10.7%. Dr. Ugone then calculated an adjusted market share for the years when Limelight’s infringing service was on the market and concluded that, assuming Limelight only sold its earlier software, Akamai’s market share would have been 81% in 2005 and 79.9% in 2006. Because he did not have sufficient data to determine the market share for 2007, he assumed it would be the same as the market share for 2006. For the sake of “conservatism,” Dr. Ugone reduced Akamai’s share by 3% and excluded the lowest earning 25% of Limelight’s customers who he categorized as particularly price sensitive consumers, who may be unlikely to purchase a higher-priced alternative without Limelight’s infringing products in the market. Subject to these assumptions and modifications, Dr. Ugone opined that Limelight’s infringing sales totaled approximately $87.5 million.

The lost profit analysis was complicated by the fact that Limelight sold its product for half the price of Akamai’s. This affected Dr. Ugone’s calculations in two ways. First, he assumed that in the but-for world where Limelight did not sell an infringing product, Akamai would sell its product to some of those customers for twice as much as Limelight had. Second, because of the difference in price between Akamai’s product and Limelight’s product, Dr. Ugone assumed that the demand for Akamai’s product would be 25% less than the demand for Limelight’s infringing products. Dr. Ugone explained that, in economics, how a change in price affects a change in demand is described as “elasticity.” The more elastic the demand, the more sensitive it is to change. A demand is described as “inelastic” if, when the price changes by a certain percentage, the demand changes by a smaller percentage. As Dr. Ugone explained, “if you change prices by 10 percent and quantity demanded changes by only 5 percent . . . that’s an example of something we call inelastic.”

Dr. Ugone opined that the demand for Akamai’s products was relatively inelastic (i.e. relatively price insensitive) and provided two justifications for calculating that 75% of Limelight’s sales would potentially have been made by Akamai. First, because Akamai’s costs were “revenue-generating costs,” customers would be more willing to expend money to buy Akamai’s product. Second, though there would be some “price sensitivity” such that some of Limelight’s customers would not purchase the higher-priced Akamai product, the demand was relatively inelastic – meaning the quantity demanded would not change as much as the price changed. The relative inelasticity of demand was supported by Akamai’s evidence that Akamai and Limelight were direct competitors, including statements by Limelight that 1) Akamai was its largest competitor; 2) “Limelight and Akamai are, from a scale and quality standpoint, head and shoulders above the rest of . . . Limelight’s competition”; 3) demand was driven by end-users not customers; and 4) Akamai maintained a dominant market share despite Limelight’s infringing service and lower price. Dr. Ugone conceded that in picking 75% he “had to make a judgment call based on the attributes and come to a conclusion what the adjustments would be” (pp. 18-20).

The court concludes that the evidence "sufficiently support[ed] the district court's decision to allow Dr. Ugone's adjusted lost-profits analysis," and rejects Limelight's argument that the price disparity "necessarily created a market segmentation in which Akamai was separate from Limelight" (p.20):

In conclusion, Dr. Ugone’s 25% adjustment for market elasticity was sufficiently grounded in economic principles for the district court to allow it. Though Limelight is correct that its customers expressed a clear preference for lower-priced products — as evidenced by their buying Limelight’s significantly cheaper product — and therefore would have been less likely to buy Akamai’s products than the average consumer, Dr. Ugone’s testimony took this consideration into account both in excluding the lowest 25% of Limelight’s customers from his lost profits analysis, and for discounting the potential award for price elasticity. Whether this discount was sufficient is not a legal challenge to the availability of lost profits, but as to the amount of lost profits, which Limelight failed to address in its panel briefing (p.21).

My initial reaction is that the court is probably right to reject the argument that the price disparity necessarily meant that none of Limelight's customers would have purchased the higher-priced product from Akamai, absent the infringement.  It seems conceivable to me that some of them might have, depending on the circumstances.  On the other hand, the evidence in support of the expert's 75% figure, as recounted by the court, doesn't strike me as being overwhelming, though perhaps there is more detail in the record to support it.

German Court Awards NPE an Injunction for Infringement of FRAND-Encumbered SEP

Several outlets are reporting that on November 3 the Landgericht Düsseldorf  issued an injunction to nonpracticing entity Sisvel for the infringement of certain FRAND-encumbered SEPs.  Here are reports from IAM Media and EPLaw, both of which are based on this press release.  I'll see if I can get more information about this matter this coming week and report back when I do. 

Meanwhile, see post below for a new paper on NPEs in Germany and the UK.

Update:  Here are links to the two judgments (4aO 93/14 and 4aO 144/14), in German.  I haven't read them yet myself.

New Paper on PAEs in Europe

Brian J. Love, Christian Helmers, Fabian Gaesller, and Maximilian Ernicke have posted a paper on ssrn titled Patent Assertion Entities in Europe, which will be a chapter in a forthcoming edited volume titled Patent Assertion Entities and Competition Policy (D. Daniel Sokol ed., Cambridge University Press, 2016).  Here is a link to the paper, and here is the abstract:

This book chapter presents the findings of an empirical study of U.K. and German patent litigation involving patent assertion entities (PAEs). Overall, we find that PAEs account for roughly ten percent of patent suits filed in these countries during the time periods covered by our study: 2000-2013 for the UK and 2000-2008 for Germany. We also present a variety of additional data on the characteristics of European PAE suits and PAE-asserted patents and, finally, consider what our findings suggest are the most important reasons PAEs tend to avoid European courts. We conclude that, while many factors likely contribute to the relative scarcity of PAEs in Europe, the continent’s fee-shifting regimes stand out as a key deterrent to patent monetization.

Federal Circuit Affirms $6 Million Sanction for Violation of ITC Consent Order

This morning the Federal Circuit issued an opinion in DeLorme Publishing Co. v. ITC, affirming a decision by the U.S. International Trade Commission finding that DeLorme Publishing Company, Inc. and DeLorme InReach LLC (collectively, "DeLorme") violated a consent order prohibiting the sales of two devices that include certain imported components, and imposing a civil penalty of $6,242,500.  The majority opinion is by Judge Moore, with a partial dissent by Judge Taranto.

1.  Following an ITC investigation initiated in 2012, DeLorme agreed to a consent order stating that:

Upon entry of the proposed Consent Order, DeLorme shall not import into the United States, sell for importation into the United States, or sell or offer for sale within the United States after importation any two-way global satellite communication devices, system, and components thereof, that infringe claims 1, 2, 5, 10–12, and 34 of the ’380 Patent after April 1, 2013, until the expiration, invalidation, and/or unenforceability of the ’380 Patent. 

In 2013, the patent owner (BriarTek) alleged that DeLorme was in violation of the order.  In particular, DeLorme had removed the infringing components from some of its existing devices and replaced them with noninfringing (imported) components, but according to BriarTek (and the ITC) DeLorme instructed purchasers how to use the remade devices in a way that infringe two claims of BriarTek's patent.  The court agreed that this violated the consent order:

DeLorme argues that even if the devices infringed the claims, the Consent Order did not preclude DeLorme from selling domestically manufactured devices containing imported, noninfringing components. It argues that the terms of the Consent Order instead prohibited DeLorme from using imported components only if the components themselves infringed. It argues that the Commission “rewrote” the Consent Order to “prohibit not just the use of imported, infringing, components, but also the use of any imported components.” Appellants’ Br. 23. It argues that the Commission’s interpretation of the Consent Order exceeded its authority to block importation of only “articles that . . . infringe.” 19 U.S.C. § 1337(a)(1)(B)(i). 

We agree with the Commission that DeLorme violated the Consent Order by selling InReach 1.5 and SE devices containing imported components with instructions for its customers to use the devices in an infringing manner.The Consent Order provided that DeLorme could not import, sell for importation, or sell or offer for sale after importation “any two-way global satellite communication devices, system, and components thereof, that infringe claims 1, 2, 5, 10–12, and 34 of the ’380 Patent.” Consent Order ¶ 1. Under these terms, DeLorme was precluded from selling infringing devices containing imported  components with instructions to infringe.

2.  As for the penalty, 19 U.S.C. section 1337(f)(2) provides that:

Any person who violates an order issued by the Commission under paragraph (1) after it has become final shall forfeit and pay to the United States a civil penalty for each day on which an importation of articles, or their sale, occurs in violation of the order of not more than the greater of $100,000 or  twice the domestic value of the articles entered or sold on such day in violation of the order. Such penalty shall accrue to the United States and may be recovered for the United States in a civil action brought by the Commission in the Federal District Court for the District of Columbia or for the district in which the violation occurs. . . .

The court notes that the amount of the penalty is determined in light of six factors:

The Commission based its penalty determination in this case on the six “EPROM factors” adopted by this court: (1) the good or bad faith of the respondent, (2) the injury to the public, (3) the respondent’s ability to pay, (4) the extent to which the respondent has benefited from its violations, (5) the need to vindicate the authority of the Commission, and (6) the public interest. Comm’n Op. at 27, 42–50 (citing, e.g., Certain Erasable Programmable Read Only Memories (EPROMs), Inv. No. 337-TA-276 (Enforcement), Comm’n Opinion (July 19, 1991)); see also San Huan, 161 F.3d at 1362. The Commission noted that the penalty was slightly more than a quarter of the statutory maximum of $100,000 per day. See 19 U.S.C. § 1337(f)(2). It found that the penalty was “appropriately proportionate to the value that the violative InReach devices bring to DeLorme” and consistent with the Commission’s policy of deterring future violations while not driving DeLorme out of business. Comm’n Op. at 50 (citing, e.g., San Huan, 161 F.3d at 1364). . . .

The Commission did not abuse its discretion in imposing a civil penalty of $6,242,500. The penalty—which amounted to $27,500 per day for 227 violation days—was substantially less than the statutory ceiling of $100,000 per violation per day. See 19 U.S.C. § 1337(f)(2). The Commission took into account the EPROM factors and we see no clear error in its fact findings or error in its  application of the law. DeLorme has not shown, for example, that there was clear error in the Commission’s findings regarding DeLorme’s bad faith or that the violative sales greatly benefited DeLorme. We conclude that the Commission did not abuse its discretion in its penalty determination.

3.  One final wrinkle:  while the ITC matter was pending, DeLorme filed a declaratory judgment  action against BriarTek in the Eastern District of Virginia, arguing that certain claims of BriarTek's patent were invalid.  The district court agreed, and in a separate opinion today the Federal Circuit summarily affirmed.  Nevertheless, DeLorme is not off the hook for the civil penalty:

We conclude that the Consent Order unambiguously resolves the question of the impact of an invalidity decision on the enforcement of the Consent Order. The Consent Order bars certain sales and importations “until” one of three events occurs: “expiration, invalidation, and/or unenforceability of the ’380 Patent.” Consent Order ¶ 1. Additionally, it explains that the Consent Order ceases to apply when the patent claim at issue has “expired or been found or adjudicated invalid or  unenforceable . . . provided that such finding or judgment has become final and non-reviewable.” Consent Order ¶ 4. Thus, the Consent Order identifies three events which will cause it to no longer apply. When one of these events occurs the Consent Order will no longer apply, and DeLorme will no longer be constrained by its terms. Until one of these events occurs, however, the Consent Order is binding upon DeLorme.

In this case, the Consent Order applied to DeLorme at the time it committed the acts found to violate the order. The Consent Order applied to DeLorme even at the time the enforcement decision with the civil penalty issued. . . . DeLorme argues in its supplemental briefing that the subsequent district court invalidation of the claims retroactively eliminates the Consent Order such that we can no longer affirm the civil penalty properly adjudicated by the Commission. This argument is inconsistent with the plain language of the Consent Order itself. . . .

Finally, DeLorme argues that our recent decision in ePlus, Inc. v. Lawson Software, Inc., 789 F.3d 1349 (Fed. Cir. 2015) requires that the Commission’s civil penalty in this case be reversed. In ePlus, we (1) vacated an injunction after the U.S. Patent and Trademark Office cancelled the only patent claim on which the injunction was based, id. at 1355–56, and (2) set aside the civil contempt sanction imposed for violation of the vacated injunction, id. at 1361.

DeLorme’s argument that ePlus controls this case is incorrect. ePlus held that a civil contempt  sanction can be set aside when the underlying injunction, upon which the sanction is based, is still itself non-final or reviewable. As we explained in ePlus, “The rule for civil contempt for violating a provision of an injunction that is not final, i.e., that is still subject to litigation over the propriety of its issuance, is that ‘[t]he right to remedial relief falls with an injunction which events prove was erroneously issued.’” 789 F.3d at 1356 (quoting United States v. United Mine Workers of Am., 330 U.S. 258, 295 (1947)). In ePlus, we determined that the injunction was not final (it was still subject to appellate review) at the time we were reviewing the civil contempt sanction and thus when the patent claims were cancelled, both the injunction and civil contempt sanction had to be vacated. Id. at 1361. In this case, in contrast, there is no question that the underlying Consent Order was final and not appealable. The Consent Order itself states that “DeLorme shall be precluded from seeking judicial review or otherwise challenging or contesting [its] validity.” Consent Order ¶ 2. Neither party has argued that the Consent Order in this case, like the injunction in ePlus, was not final or appealable.

4.  Judge Taranto dissents on this last point, writing that he "would remand this matter to the Commission for it to consider the effect of the invalidation on enforcement of the civil penalty for pre-invalidation violations of the Consent Order."

5.  Putting the legal doctrine to one side, I can certainly sympathize with DeLorme.  The analogous issue of whether one should be obligated to pay damages (or, alternatively, should be entitled to get back damages already paid) if the patent in suit is later declared to be invalid, is one that divides the world's major patent systems, as I have written about before (see here).  Arguably a case like this also highlights the oddity of having two separate forums in the U.S.--the ITC and a federal district court--in which the same patent and the same parties can fight parallel actions (something that few other countries' patent systems contemplate).

6.  In other news, in Align Technology, Inc. v. ITC, a case related to the ClearCorrect case the court decided the other day, the Federal Circuit summarily "vacated and remanded for further proceedings in light of our decision in ClearCorrect Operating, LLC v. International Trade Commission, No. 2014-1527."

Kovacic and Hansen on the IP-Antitrust Interface

This coming Friday, November 13, from 12:00 to 1:30 p.m. Central Time John Marshall Law School's Center for Intellectual Property, Information & Privacy Law will be hosting a conversation between Professor (and former FTC Chair) William Kovacic and Professor Hugh Hansen on the IP-Antitrust Interface.  The event is free and open to the public and also will be live-streamed.  Information available here.  Since the likely topics include"Recent U.S. Developments in Tech and Pharma" and "Comparative Analyses with EU and China," I'm guessing that FRAND will be one of the topics of discussion. 

U.S. Tariff Act Section 337 Does Not Prevent Electronic Transmission of Data Into U.S.

Section 337 of the U.S. Tariff Act renders unlawful the importation of infringing "articles" into the United States, subject to certain conditions.  This morning in ClearCorrect Operating, LLC v. International Trade Commission, the Federal Circuit held that digital data are not "articles," and thus that section 337 does not confer jurisdiction on the U.S. International Trade Commission (ITC) to issue a cease and desist order directed against the electronic transmission of such data into the United States.  

The patents in suit claim methods for fabricating dental appliances based on digital data sets representing a patient's initial and repositioned tooth arrangements.  The ITC had previously held, first, that ClearCorrect US directly infringed one of the patented methods by its conduct in the U.S., but that such purely domestic conduct does not implicate section 337; and second, that ClearCorrect Pakistan practiced the steps of another patented method abroad and contributed to ClearCorrect US's conduct in the U.S. by exporting the digital data sets into the U.S., and that the importation of the digital data into the U.S. violated section 337.  On appeal, Judge Prost, applying administrative law's Chevron doctrine, concludes that the ITC's interpretation of the term "articles" is contrary to the literal text of the statute and thus not entitled to deference; rather, section 337 comes into play only when "articles" in the sense of "material things" are imported into the U.S.  In so ruling, the court distinguished the Federal Circuit's en banc ruling from this past August in Suprema, Inc. v. ITC, 796 F.3d 1338 (Fed. Cir. 2015)--a case in which the court upheld the ITC's interpretation of a different statutory term under Chevron--stating that in Suprema

the respondent violated 19 U.S.C. § 1337 by inducing a direct patent infringement that did not occur until after a tangible item was imported into the United States. Our opinion turned exclusively on the term “infringe” as used in 19 U.S.C. § 1337(a)(1)(B)(1). Conversely, here we are exclusively looking to the meaning of the term “articles.” Furthermore, the “articles” in question in Suprema were physical objects, and thus do not inform the question now before the court. Indeed the analysis in Suprema supports the decision here, as discussed infra. 

 Judge O'Malley concurs and Judge Newman dissents. 

For discussion of the oral argument in this case from last August, see this post by Professor Sapna Kumar on Patently-O.  Professor Kumar's article pointed to a misquotation of the 1922 Tariff Act in the ITC's opinion, which Judge Prost now notes in the Federal Circuit majority opinion at pp. 33-34 (referring to the ITC's "omission of the phrase 'in the importation of goods'" as "highly misleading"). 

Loads of New Papers on FRAND, Holdup, and Related Topics, Part 3

1.  Daryl Lim has posted a paper on ssrn titled Patent Holdups, which will be a chapter in a forthcoming edited volume titled Antitrust Intellectual Property and High Tech Handbook (Daniel D. Sokol & Roger D. Blair eds., Cambridge University Press, forthcoming).  Here is a link to the paper, and here is the abstract:

Holdups have gained infamy from the image of knuckled-under implementers forced to pay patentees a premium because they are locked-in. Like shark attacks, holdups are real but their actual occurrence is sporadic enough to be treated as aberrations rather than a systematic failure in the patent system. A higher price may also reflect the premium associated with calculated convenience and certainty, a premium anyone who choses Uber’s taxi service rather than the public bus system knows. At the same time while holdups, like crimes, are not widespread, laws must still exist to deter them before they occur and address them when they do.

Patent ambushes are rare, less because of disclosure obligations and more due to the sting of possible antitrust enforcement. With FRAND disputes, patentees know injunctions are hard to come by and courts will likely map reward to technical contribution. Evidence showing intent can be useful here, as is direct or circumstantial evidence of harm. In the event negotiations fail, agreeing to submit the dispute to third party adjudication would be the clearest evidence of good faith. Harmful PAE conduct stems from features of the patent system, so the solution is to raise the bar of software patents, make it harder to initiate a suit, and punish those who bring frivolous suits.

Protagonists and antagonists exist on a spectrum that can appear flipped, depending on one ideological point of view, much like how one man’s terrorist and is another man’s freedom fighter. As with many things in life, the truth can be complicated and each choice come with its own set of tradeoffs. Deterring brinkmanship could deter innovators who would otherwise invest more heavily in new technologies or participate as intermediaries in facilitating licensing. Despite this complexity, the law must set down the ground rules for engagement. Those whose everyday lives depend on the law finding a proper balance between competing interests deserve no less.

2.  Okay, so this paper isn't exactly new, but it just recently came to my attention:  Anne Layne-Farrar and Koren W. Wong-Ervin have posted a paper on ssrn titled Methodologies for Calculating FRAND Royalty Rates and Damages: An Analysis of Existing Case Law, which appears to have been published in Law360 in October 2014.  Here is a link to the papers, and here is the abstract:

Several federal district courts, as well as the Federal Trade Commission (FTC), have weighed in on the appropriate methodology for calculating either a reasonable royalty rate or reasonable royalty damages on a standard-essential patent (SEP) encumbered by a commitment to license on fair, reasonable and non-discriminatory (FRAND) terms. Included in these decisions are determinations about hold-up, royalty stacking, the incremental value rule, the use of comparable licenses, and the appropriate base for royalty calculations. These issues have received a lot of attention not just in the patent law community, but also by foreign antitrust regulators in China and India, which have been pursing theories based on alleged “excessive” or “unreasonable” prices based on a patent holder’s practice of charging royalties as a percentage of the end-user product as opposed to a component product such as the chipset.

While the additional clarity on the appropriate method for calculating FRAND royalties that decisions like these can provide is welcome, likely to benefit industry stakeholders and consumers alike, we are still it the early days and the decisions are far from providing a consensus on FRAND licensing. Decisions to date include: Judge Posner in Apple v. Motorola; Judge Robart in Microsoft v. Motorola; Judge Holderman in In re Innovatio IP Ventures; Judge Davis in Ericsson v. D-Link, Wi-Lan v. Alcatel-Lucent, and CSIRO v. Cisco; Judge Whyte in Realtek v. LSI; Judge Koh in GPNE Corp. v. Apple, Inc.; and Magistrate Judge Grewal in Golden Bridge Techn. v. Apple Inc. These rulings exhibit a number of differences, as we discuss, but some common principles have emerged as well:

• FRAND royalties must provide the patent holder with reasonable compensation;

• FRAND royalties should limit the patent holder to a reasonable royalty on the economic value of the patented technology itself, apart from the value associated with the patent’s incorporation into an industry standard; and

• In determining a FRAND royalty rate, courts should consider comparable licenses.
The primary disputed and open issues include questions regarding:

• Whether methodologies for determining FRAND royalty rates or damages must take into account concerns about patent hold-up and royalty stacking or whether implementers must provide proof of actual hold-up or royalty stacking;

• Whether courts should apply the incremental value rule in determining FRAND rates and damages;

• What constitutes a “comparable license” for benchmarking purposes; and

• Whether the appropriate royalty base is limited to the “smallest salable patent practicing unit,” and what that actually means (i.e., whether a patent is fully implemented by the end-user device such as the handset or a component part, such as the chipset).

In this three-part series, we focus on these issues of FRAND royalty rates and damages in the context of patent infringement or contract litigation within the United States. We review the case law to date and discuss its implications. In this first installment, we focus on two of the most prominent debates over FRAND: the potential for market power abuses that lead to hold-up and royalty stacking. In part two, we turn to appropriate benchmarks and methods for determining FRAND terms. Finally, in part three, we analyze an issue that permeates the spectrum of FRAND issues: the appropriate base for royalty calculations.

3.  Elizabeth Rivera has published an article titled Old Rivals Becoming FRANDs: Using Antitrust Law to Determine Remedies in Cases Dealing with SEPs in 24 Federal Circuit Bar Journal 677 (2015).  From the introduction:

The Federal Circuit has not yet had the opportunity to definitively state the extent to which companies can use FRAND agreements against SEP holders to prevent the imposition of cease-and-desist orders, how SEP holders can assert their rights over their patents, and what redress they are allowed upon infringement.  Part I of this Article provides an overview of ITC § 337, codified at 19 U.S.C. § 1337, with particular emphasis on 19 U.S.C. § 1337(j)(2), its legislative history, and background information regarding SEPs and FRAND agreements. It will also discuss the few instances in which the presidential veto has been used, provided by 19 U.S.C. § 1337(j)(2), and the reason given for each use. Additionally, it will show that there has been a trend, in district and circuit courts, towards diluting the rights that an SEP holder has over its patents. It introduces the cross-section between antitrust law and patent law. Part II discusses the similarities between patent and antitrust law and why theses regimes should be compared. It describes how doctrines derived from antitrust law could be used to protect SEP holders' rights to continue encouraging innovation in patents while not allowing those same patent holders to force unreasonable terms on others in their industry. Maintaining SEP holders' rights while not conferring on them market power to impose high prices on their competitors is possible by determining what remedies should be imposed upon infringement and calculating damages with methods used in dominant firm antitrust cases. Making litigation in the area of SEPs more standardized would allow SEP holders to know the extent to which their patents are protected rather than having to depend on uncertainty. This Article recommends that the Federal Circuit adopt the method of calculating a fair and reasonable price for FRAND governed SEPs in litigation from antitrust law doctrines. Adopting the alternate method for calculating “damages” will allow the Federal Circuit to more easily determine whether FRAND agreements are reasonable and to what extent they should be enforced in any given situation.

Loads of New Papers on FRAND, Holdup, and Related Topics, Part 2

1.  Jorge Contreras has posted on ssrn a document titled European Commission - DG Enterprise and Industry - Public Consultation on Patents and Standards - Responses submitted by Prof. Jorge L. Contreras, described as "a response to the Public Consultation on Patents and Standards issued by the European Commission Directorate-General for Enterprise and Industry."  Here is a link.

2.  Reto M. Hilty and Peter R. Slowinski have published a paper in the September 2015 issue of GRUR Int. (pp. 781-92) titled Standardessentielle Patente--Perspectiken außerhalb des Kartellrechts ("Standard Essential Patents:  Perspectives Beyond Competition Law").  Here is the abstract (my translation, with the usual caveats):

Standard setting is a phenomenon that is not limited to the field of information technology.  To the contrary, one of the foundational decisions of the German Federal Supreme Court in this area, the Standardspundfass decision, concerns the field of mechanics.  The greater necessity for interoperability in the field of IT-based markets, however, makes the question of the legal treatment of standards (or rather of patents which relate to standards) a matter of particular relevance and controversy.  This arises not only on account of the sheer mass of standards which play a role in his field for reasons of compatibility, but also on the condition that IP rights which pertain to standards are deployed in the IT-sector to a great extent for strategic considerations.

As a result, at present a range of fundamental questions are being contested within the framework of the so-called Patent Wars.  In particular, American and German courts, as well as the EU Commission and the U.S. Federal Trade Commission, have addressed the problem, and as a consequence of the preliminary questions submitted by the LG-Dußeldorf the CJEU will now also take up the matter.  To be sure, this last-named proceeding sounds firmly within competition law, and thus generally focuses the discussion in Europe heavily on this particular compensating mechanism outside the bounds of patent law.  

The present essay identifies the essential questions, illuminates the underlying economic conditions and interests which lie behind standards or rather patents pertaining to standards, and evaluates the approaches proposed up to now. Above all, however, the analysis of both present and possible future law focuses on aspects internal to patent law as well as approaches grounded in contract law. 

(The reference to the questions submitted to the CJEU, of course, is to the Huawei v. ZTE  judgment, which came out in July.  No fault to the authors here, by the way--I have a paper coming out soon that refers to the CJEU's decision in the future tense too, because the substantive editing on the piece was completed before the judgment was handed down.)  The authors ultimately propose that the EU adopt a regulation that would interpret FRAND commitments made to SSOs as contracts for the benefit of third parties.

3.  J. Gregory Sidak has a new paper titled Tournaments and FRAND Royalties.  Here is a link to the paper.  From the introduction:

. . . Some economists testify in litigation over FRAND royalties that, if two inventors each develop a similar substitute technology, and the two technologies would generate an equal amount of value to a manufacturer, the manufacturer would need to pay only a nominal FRAND royalty for the technology chosen for adoption into the standard, because the two inventors would compete to sell their respective technologies and would enable the manufacturer to bid down the FRAND royalty to nearly zero. For example, in Innovatio, Judge Holderman wrote in 2013 that a respected economist, Dr. Gregory Leonard, “testified that . . . if two patented and equally effective alternatives both cost the same amount . . . the two patent holders would negotiate the price down to effectively zero.” Economists testifying to this effect next assert—on the basis of the theoretical arguments that Carl Shapiro, Joseph Farrell, Mark Lemley, and others advanced in 2007—that any increment of royalty that the SEP holder receives beyond that near-zero amount constitutes “holdup value,” which Shapiro, Farrell, Lemley, and others argue the SEP holder has wrongly extracted from the implementer solely by virtue of the SSO’s having chosen the SEP holder’s technology for the standard. . . .

The argument that a FRAND royalty is “effectively zero” implicitly depends on modeling competition between the technologies in standard setting as a static Bertrand pricing game without capacity restraints. However, the argument that a price war between SEP holders would drive down a FRAND royalty nearly to zero requires assuming (1) that there is no differentiation between the competing (substitute) technologies, and (2) that the inventors lack any outside option for monetizing their technologies. What empirical evidence exists that an SSO could choose from many substitute technologies for each and every facet of a standard, and that those substitute technologies are all homogeneous in terms of price and quality? None. If all substitute technologies were homogeneous, then standard setting would essentially be a lottery—and a most peculiar lottery at that, whose winner receives only a penny for his troubles.

If an inventor could receive only a pittance for his investment in developing his technology and in contributing it to a standard, he would cease contributing proprietary technologies to collective standards and instead pursue more profitable outside options. That reasoning is even more compelling if the inventor is a publicly traded firm, answerable to its shareholders. Therefore, modeling standard setting as a static Bertrand pricing game without any differentiation among the competing technologies and without any outside option for the inventors would predict that every inventor loses—that is, no inventor could possibly recoup his investment in innovation and therefore would quickly exit the market. Standard setting would be a sucker’s game for inventors. As Nobel laureate Milton Friedman famously wrote, “Viewed as a body of substantive hypotheses, theory is to be judged by its predictive power for the class of phenomena which it is intended to ‘explain.’” The observed fact that many SSOs continue to set standards and that many innovators continue to contribute their technologies to those collective standards strongly suggests that a different economic model than static Bertrand competition would better predict how standard setting works in the real world.

In this essay, I explain how, in economic terms, collective standard setting resembles a tournament, and I show how the economic scholarship on tournaments can inform legal analysis of FRAND royalties.