Mannheim Court Grants Injunction for Infringement of FRAND-Encumbered SEP

OK, so officially I'm on a blogging break for the next few days, but Norman Siebrasse just called my attention to an EPLaw post and TaylorWessing write-up about a November 27 judgment of the Mannheim District Court granting an injunction against Deutsche Telekom for the infringement of a FRAND-encumbered SEP owned by a subsidiary of Acacia.  (I'm surprised I hadn't heard about this at the TILEC conference or elsewhere before now.)  This is the second post-Huawei case in which a German court has granted an injunction relating to an SEP; for my blog post on the first, see here.  I probably won't get around to reviewing the judgment itself for at least a few days (it is Christmas Eve, after all), but I hope to report back at some point in the near future.

Holiday Blogging Break

I plan to take a little break from blogging for the next week or so.  Best wishes to all of my readers for the holiday season!

Some New Papers on Remedies

1.  Janice Mueller has posted on ssrn a forthcoming update for Volume II of Mueller on Patent Law titled Enhanced Damages and Willful Patent Infringement.  Here is a link, and here is the abstract: 

The Federal Circuit's landmark 2007 decision in In re Seagate Tech., LLC, required that in order to prove willfulness a patentee must establish, inter alia, that the infringer acted in an objectively reckless manner. The Seagate standard significantly raised the bar on willfulness, making it more difficult for a patentee to establish than under the Federal Circuit’s previous standard. Whatever the actual impact of Seagate, the legal framework it established in 2007 may well be mooted or modified by the Supreme Court’s 2015 grant of certiorari in two more recent willfulness cases, Halo Elecs., Inc. v. Pulse Elecs., Inc., and Stryker Corp. v. Zimmer, Inc. Notably, the Federal Circuit appears to anticipate that the Supreme Court’s forthcoming decisions in Halo and Stryker may work a significant change in the law of enhancement; on November 17, 2015, the Circuit issued a rare order holding in abeyance, until the Supreme Court decides Halo and Stryker, a petition for rehearing en banc in Carnegie Mellon Univ. v. Marvell Tech. Grp., Ltd. This chapter excerpt analyzes these and other leading Federal Circuit and Supreme Court cases concerning enhancement of compensatory damages under 35 U.S.C. § 284, considering primarily enhancement based on a finding of willful infringement.

2.  Lance Wyatt has published a paper titled Keeping Up with the Game:  The Use of the Nash Bargaining Solution in Patent Infringement Cases, 31 Santa Clara High Tech. L.J. 427 (2015).  Here is a link to the paper, and here is the abstract:

Determining damages is an integral stage in the patent litigation process. Since 1970, reasonable royalty damages have been calculated using the factors set forth in the seminal decision Georgia-Pacific Corp. v. United States Plywood Corp. However, these factors are prone to manipulation and abuse by damages experts. To address this abuse, damages experts have utilized a solution to a two-person bargaining situation, the Nash Bargaining Solution (NBS), as a method to calculate reasonable royalty damages in patent infringement cases. Since the introduction of NBS in patent infringement cases, courts have been reluctant to admit the use of the NBS to calculate reasonable royalty damages because damages experts often fail to apply the specific facts of the case to their calculations or adequately explain the NBS.

This article argues that courts should allow the use of the NBS by damages experts as a viable method to calculate a reasonable royalty in patent infringement cases, despite recent backlash at the Federal Circuit Court of Appeals. First, the NBS, if properly used, adequately applies the facts of each specific case to its analysis. Second, the NBS is grounded in sound, unmanipulable economic theory that can be adequately explained. Finally, the NBS is more impartial than the Georgia-Pacific analysis.

3. Mengxi Zhang and Keith Hylton have posted a paper on ssrn titled Optimal Remedies for Patent Infringement.  Here is a link to the paper, and here is the abstract:

This paper derives optimal remedies for patent infringement, examining damages awards and injunctions. The fundamental optimality condition that applies to both awards and injunctions equates the marginal static cost of intellectual property protection with the marginal “dynamic” benefit from the innovation thereby induced. We find that the optimal damages award may be greater than (or less than) the standard “lost profits” measure, depending on the social value of the innovation. When the social value of the patent is sufficiently high, the optimal award induces socially efficient investment by giving the innovator the entire social value of her investment.

Siebrasse & Cotter, Sidak on the Use of Ex Post Information in Calculating Royalties

1.  Norman Siebrasse and I have posted on ssrn a revised version of our paper A New Framework for Determining Reasonable Royalties in Patent Litigation, which is forthcoming in the Florida Law Review.  Here is a link, and here is the abstract:

Conventional analysis often assumes that there are only two theoretical options for calculating a reasonable royalty in patent disputes: a “pure ex ante” approach, under which a court reconstructs the hypothetical bargain the parties would have struck prior to infringement, based on the information available to them at that time; and a “pure ex post” approach, under which the court considers the bargain the parties might have reached as of some later date such as the date of judgment. The first approach avoids patent holdup — basing the royalty partly on the infringer’s sunk costs — but cannot easily explain other longstanding features of how royalties are calculated, and can lead to awards that reflect the parties’ erroneous ex ante expectations. By contrast, the pure ex post approach uses more accurate information about the invention’s actual value, but it also enables the patentee to capture some of the patent’s ex post holdup value. In this Article, we show that a “contingent ex ante” framework, under which the court reconstructs the bargain the parties would have reached ex ante, based on all relevant information that is available ex post, is superior to both of the conventional approaches. More specifically, our framework enables courts to base the royalty on the most accurate information available of patent value while avoiding the holdup risk arising from the pure ex post approach. We analyze how courts can apply our approach in various settings, including cases involving SEPs, sequential infringement, regulatory uncertainty, and unexpected exogenous events.

2.  Taking a different view of matter is J. Gregory Sidak in his forthcoming article How Relevant Is Justice Cardozo’s “Book of Wisdom” to Patent Damages?, 16 Colum. Sci. & Tech. L. Rev. (forthcoming 2016).  Here is a link to the paper on ssrn, and here is the abstract:

Section 284 of the Patent Act specifies that damages for patent infringement must be “adequate to compensate for the infringement, but in no event less than a reasonable royalty.” To determine a reasonable royalty, courts often rely on the hypothetical-negotiation framework, which aims to determine a royalty upon which the infringer and patent holder would have agreed, had they negotiated a license for the use of the patented technology immediately before the infringement began. Determining a reasonable royalty requires a court to return in time — to the moment of the hypothetical negotiation — and account for the limited information available to the parties at that time. That limited information would have affected the parties’ negotiating positions and consequently the outcome of the hypothetical negotiation. Conversely, because the parties at the time of the hypothetical negotiation would not have known information that became available only after the infringement began, information that postdates the hypothetical negotiation would not have affected a hypothetically negotiated reasonable royalty. Some commentators have proposed, nonetheless, that courts should allow a reasonable royalty calculation to incorporate information that postdates the hypothetical negotiation. The proposition that one can use such information to inform a court’s determination of a reasonable royalty — called the “book of wisdom” doctrine — originated in Justice Benjamin Cardozo’s evocative but characteristically Delphic phrase in Sinclair Refining Co. v. Jenkins Petroleum Process Co. in 1933. When translated into plain English, Justice Cardozo’s reasoning is seen to rest on fallacious economic reasoning. Not surprisingly, the party that benefits the most from the facts discovered after the date on which the defendant incurred liability commonly invokes the book of wisdom. However, basing the determination of a reasonable royalty on information that postdates the hypothetical negotiation would violate fundamental legal and economic principles for calculating patent damages. The Federal Circuit has emphasized that courts should calculate a reasonable royalty on the basis of the parties’ expectations at the time of the hypothetical negotiation, not on post infringement facts. The Federal Circuit has allowed reliance on post-infringement data only when they are necessary to infer the parties’ bargaining position at the time of the hypothetical negotiation. Outside this exception, there is no valid legal or economic justification to rely on post infringement data when calculating a reasonable royalty. Rather the contrary: calculating a reasonable royalty based on post infringement data would give an infringer a free option to use the patent and later ask the court to determine a reasonable royalty on the basis of the infringer’s actual, rather than expected, use of the patent. Infringing the patent would carry no risk of overpaying for the use of the patent if the infringer’s actual sales were less than the initial expectations. Basing the calculation of a reasonable royalty on information that postdates the hypothetical negotiation would thus create a perverse incentive for the potential licensee to infringe the patent rather than to negotiate a license in a timely manner.

Complete Set of Briefs Filed Thus Far in Halo and Stryker Enhanced Damages Cases

Thanks to Professor Jason Rantanen, I now have what I believe is a complete set of all of the briefs filed thus far in Halo and Stryker, the pending U.S. Supreme Court decisions that will address the standard for awarding enhanced damages in patent infringement cases.  In addition to the briefs filed by the petitioners Halo and Stryker themselves, and the two amicus briefs I mentioned the other day (a brief filed by Public Knowledge, The Electronic Frontier Foundation, and Engine Advocacy in support of neither party, and a brief filed by Intellectual Property Professors (Professor Rantanen, Professor Chris Seaman, and Professor Tim Holbrook) in support of neither party), there are the following additional amicus briefs:

1.  Brief of the United States supporting petitioners.

2.  Brief of AIPLA in support of neither party.

3.  Brief of Askeladden LLC in support of neither party.

4.  Brief of Ericsson Inc. in support of neither party.

5.  Brief of Intellectual Property Owners Association in support of neither party.

6.  Brief of Innovention Toys, LLC in support of petitioners.

7.  Brief of Licensing Executives Society (U.S.A. and Canada) in support of no party.

8. Brief of Mentor Graphics Corp., Microsoft Corp., and SAP America, Inc. in support of neither party.

9. Brief of Professor Adam Mossoff in support of neither party.

10. Brief of Nokia Technologies Oy and Nokia USA Inc. in support of petitioners.

11. Brief of Small Inventors in support of petitioners.

I'll keep readers posted on other briefs as they come in.  It's going to take me a little while to work my way through all of these; so far I've only read the petitioners' briefs and the IP Professors' brief.  The petitioners argue that the current standard for awarding enhanced damages (requiring a showing, by  clear and convincing evidence, of "willfulness" consisting of both objective and subjective recklessness, with the objective prong labeled a question of law and subject to de novo review on appeal) is not consistent with the standard for awarding enhanced damages that prevailed up to the 1952 Patent Act; and that the latter is what Congress would have understood it was enacting into law.  Under that standard, they argue, a court could award enhanced damages, subject to a preponderance of the evidence standard and reviewable on appeal for abuse of discretion, under a "totality of the circumstances" approach in cases involving willful misconduct and certain other situations such as where the defendant has imposed an undue burden on the patent owner.  They also argue that such a standard is more consistent with the totality of the circumstances/discretionary review approach the Supreme Court adopted last year in the cases involving awards of attorneys' fees, Octane Fitness and Highmark.  The professors agree with much of this but argue that willfulness should be the one, single standard for awarding enhancements.

For what it's worth, my own view--as a matter of policy, not necessarily statutory interpretation--is that an ideal rule would be to award compensatory damages, including in the typical case the prevailing party's attorneys' fees, with damages enhancements available only in certain discrete circumstances such as when the normal rule (1) would leave the plaintiff worse off than it would have been but for the infringement (maybe because certain harms are not susceptible to quantification), or (2) would leave the defendant in a better position than a willing licensee (maybe because the infringer avoids certain risks that a licensee would shoulder), or (3) would be necessary achieve adequate deterrence (maybe because the infringing act was of a type that often would go undetected, or the defendant has deliberately driven up litigation costs to discourage an impecunious patentee from filing suit).

Update:  Yesterday (Sunday) Dennis Crouch published a post summarizing the positions taken in the various amicus briefs, here.

Amicus briefs filed in Halo, Stryker enhanced damages cases

I mentioned last week the filing of the petitioners' briefs in Halo and Stryker, the cases presenting to the U.S. Supreme Court the issue of the appropriate standard for awarding enhanced damages in patent cases.  I'm aware of two amicus briefs that have been filed thus far, one by Public Knowledge, The Electronic Frontier Foundation, and Engine Advocacy in support of neither party (available here), and one by Intellectual Property Professors (also in support of neither party, and available here).  I'll probably blog sometime soon with my thoughts on the petitioners' briefs and these two amicus briefs, but for now  I'll just note the following passages from the amicus briefs' respective summaries of arguments, which provide a flavor of their very different perspectives on the issues.  First, from the brief filed by Public Knowledge et al.: 

Amici do not take a position on the correct interpretation of § 284, but do believe that any proper construction should limit enhanced damages in at least the following three ways: district court discretion should not be left unbounded, subjective bad faith should be required, and a reasonable belief in invalidity should avoid a finding of bad faith.

Second, from the brief filed by the IP Professors:

In lieu of the Federal Circuit’s inflexible approach, this Court should hold that district courts should determine willfulness—and thus eligibility for increased damages—by requiring the patentee to demonstrate that the infringer at least recklessly violated the patentee’s rights under a totality of the circumstances. In addition, because willfulness is a fact-intensive determination best suited for resolution by the trial court, this decision should be reviewed for abuse of discretion on appeal.

If anyone is willing to share with me any other amicus briefs that have been or will be filed in these cases, I would appreciate it!

Federal Circuit Denies Rehearing in Apple v. Samsung Injunction Appeal

In September, the Federal Circuit vacated Judge Koh's order denying Apple an injunction against Samsung in the case involving the "slide to unlock" patent (see my blog post, here).  Today, the court issued an order denying Samsung's petition for rehearing en banc, but withdrew the previous opinions and replaced them with these, which according to the order make the following changes:

Samsung’s petition for rehearing is granted by a majority of the panel for the limited purpose of modifying the previously filed majority opinion. Page 17 of the original opinion reads: “Apple did not establish that that these features were the exclusive or significant driver of customer demand, which certainly would have weighed more heavily in its favor. We conclude that this factor weighs in favor of granting Apple’s injunction.” The corrected opinion reads:

Apple did not establish that these features were the exclusive driver of customer demand, which certainly would have weighed more heavily in its favor. Apple did, however, show that “a patented feature is one of several features that cause consumers to make their purchasing decisions.” Apple III, 735 F.3d at 1364. We conclude that this factor weighs in favor of granting Apple’s injunction.

The dissenting opinion was also amended. Samsung’s petition is denied in all other respects.

Today is a busy day for me--I have this webinar coming up in a few hours, among other matters--but I'll try to find some time later today to see in what respects Judge Prost amended her dissenting opinion, and report back.  

Update:  As far as I can tell, all of the changes to Judge Prost's dissenting point are in Part B (pages 5-7 of the dissent).  Perhaps the most important passage is this:

Perhaps recognizing its error, the majority reissued its opinion in this case to remove the implication that even an insignificant connection might be enough to satisfy the causal nexus requirement.^2/  While this change is a more accurate reflection of our law, it does not obviate the central problem with the majority’s conclusion in this case. As we stated in Apple III, “[t]he question becomes one of degree, to be evaluated by the district court.” Apple III, 695 F.3d at 1368. Here, the district court weighed the evidence and found it lacking. Injunction Order at *13 (“[T]he weight of the evidence shows that Apple’s conjoint study fails to demonstrate that the features claimed in the ’647, ’721, and ’172 patents drive consumer demand for Samsung’s infringing products.”). The majority identifies no basis for overturning this finding with its conclusion—unsupported by the record—that “Apple did, however, show that ‘a patented feature is one of several features that cause consumers to make their purchasing decisions.’” Majority Op. at 17 (quoting Apple III, 735 F.3d at 1364).

^2/The majority’s original opinion stated that: “Apple did not establish that that [sic] these features were the exclusive or significant driver of customer demand, which certainly would have weighed more heavily in its favor.” Apple Inc. v. Samsung Elecs. Co., 801 F.3d 1352, 1363 (Fed. Cir. 2015), vacated, Order (Fed. Cir. Dec. 16, 2015) (emphasis added). The majority’s reissued opinion removes the words “or significant” from this sentence. Majority Op. at 17.

Samsung Petitions U.S. Supreme Court to Review Awards of Profits for Design Patent Infringement

Earlier today Samsung filed a petition for certiorari with the U.S. Supreme Court, asking the Court to consider the following two questions relating to design patents: 

"1. Where a design patent includes unprotected non-ornamental features, should a district court be required to limit that patent to its protected ornamental scope?
"2. Where a design patent is applied to only a component of a product, should an award of infringer’s profits be limited to those profits attributable to the component?"

The second question relates to an issue I have blogged about several times, most recently here, here, and here.  Here is a link to the cert. petition, which I haven't yet had a chance to review carefully myself.  I'm hoping the Supreme Court will seriously consider limiting the reach of section 289, which under the Federal Circuit's interpretation permits the owner of a design patent to recover all of the profits earned from the sale of an infringing product, even where the design makes up only a small part of the value of that product.

Kobayashi, Ginsburg, Wong-Ervin, and Wright on FRAND and Other Issues in Korea and China

I have previously mentioned on this blog the comments submitted by Professor (and former FTC Commissioner) Joshua Wright and Judge Douglas Ginsburg on the Japan Fair Trade Commission's draft partial amendments to its Guidelines for the Use of Intellectual Property Under the Antimonopoly Act (see here) and on the Canadian Competition Bureau's Draft IP Enforcement Guidelines (see here).  Both sets of comments addressed (among other matters, in the case of the Canadian draft guidelines) the question of whether competition law (antitrust) is the appropriate tool for addressing FRAND issues (the authors think not).  In recent weeks Commissioner  Wright and Judge Ginsburg, along with Professor Bruce Kobayashi and Koren Wong-Ervin, have published two more sets of comments.  

The first, titled Comment of the Global Antitrust Institute, George Mason University School of Law, on the National Development and Reform Commission's Questionnaire on Intellectual Property Misuse Antitrust Guidelines, is available on ssrn.  Here is a link, and here is the abstract:

This comment is submitted to China's National Development and Reform Commission (NDRC) by the Global Antitrust Institute (GAI) at George Mason University School of Law in response to the NDRC's Questionnaire on Intellectual Property Misuse Antitrust Guidelines. The GAI Competition Advocacy Program provides a wide-range of recommendations to facilitate adoption of economically sound competition policy, including how to analyze conduct involving standard-essential patents and non-practicing entities.

Consistent with the arguments made in the two comments noted above, the authors recommend, among other things, "against imposing a sanction under the AML [Antimonopoly Law] for seeking injunctive relief."

The second, titled Comment of the Global Antitrust Institute, George Mason University School of Law, on the Korea Fair Trade Commission's Revised Review Guidelines on Unfair Exercise of Intellectual Property Rights, also is available on ssrn here.  Here is the abstract: 

This comment is submitted to Korea's Fair Trade Commission ("KFTC") by the Global Antitrust Institute (GAI) at George Mason University School of Law in response to the KFTC's December 17, 2014 revisions to its Review Guidelines on Unfair Exercise of Intellectual Property Rights. The GAI Competition Advocacy Program provides a wide-range of recommendations to facilitate adoption of economically sound competition policy, including how to analyze conduct involving standard-essential patents.

The comment addresses several issues, but consistent with the above three comments argues "against imposing a competition law sanction for the mere breach of a FRAND commitment" and "against imposing a sanction under the competition law for seeking injunctive relief".

Petitioners' Briefs Filed in Halo, Stryker

Halo Electronics, Inc. v. Pulse Electronics, Inc. and Stryker Corp. v. Zimmer, Inc. are the two pending U.S. Supreme Court cases requesting the Court to review the standard for awarding enhanced damages for patent infringement.  On December 9 Halo and Stryker filed their merits briefs, available here and here.  I haven't had a chance to read these yet myself but hope to do so in the next few days and report back.  For previous blog posts on these two cases, see here, here, and here.

Upcoming Webinar on FRAND Damages

Next Wednesday (December 16) I'll be participating, along with Mark Snyder of Qualcomm and Timothy Syrett of WilmerHale, in an IPO Chat Channel webinar titled FRAND Damages:  Comparing the Four Leading Cases, Including CSIRO.  Here's some information about the event from the organization's website, from which interested listeners can register if they wish:
 

"Wednesday, Dec. 16, 2:00pm – 3:00pm ET

"This month the Federal Circuit issued its decision in CSIRO v. Cisco that agreed-in-part and disagreed-in-part with the district court’s damages award regarding a patent essential to a WiFi standard. Our panel will compare CSIRO with three key earlier opinions that give insight into proving and determining a reasonable royalty for a standard essential patent (SEP): the Federal Circuit’s earlier decision in Ericsson v. D-Link, the Ninth Circuit’s decision in Microsoft v. Motorola, and Judge Holderman’s Northern District of Illinois decision in In Re Innovatio IP Ventures.

"Our panel includes a patent counsel at a company that owns valuable SEPs, a law firm litigator who has represented technology implementers against owners of SEPs, and a law school professor who authors a blog on patent damages. They will discuss where the opinions converge and the nuances in how they differ, and how courts are likely to view these issues in the future.

"Speakers:

Prof. Thomas Cotter, University of Minnesota Law School
Mark Snyder, Qualcomm
Timothy Syrett, WilmerHale"

Contreras on SEP Assertions by NPEs

One of the speakers at the TILEC Conference on Competition, Standardization, and Innovation that is taking place later this week in Amsterdam (see my previous post, here) is Jorge Contreras, who will be presenting a paper titled Assertion of Standards-Essential Patents by Non-Practicing Entities.  The paper was just recently uploaded to ssrn.  Here is a link to the paper, and here is the abstract:

An extensive literature exists regarding the patent disclosure and licensing commitments made by participants in standard-setting organizations (SSOs), and how such commitments affect the assertion of standards-essential patents (SEPs) by these participants. But this literature largely ignores the assertion of SEPs by entities that do not participate in SSOs (Outsiders). This study is the first to collect and analyze data relating to SEP assertions by SSO Outsiders, a large number of which are so-called non-practicing entities (NPEs).

We present descriptive statistics regarding NPE and Producer assertions of SEPs pertaining to seven broadly-adopted standards in the telecommunications and networking sectors over a 16.5-year period. Twenty-six NPEs were identified as asserting SEPs pertaining to the standards studied. NPEs initiated 64% of all SEP cases and 77% of all unique patent-defendant assertion events involving these SEPs. NPEs initiated 82% of all defendant-assertion events relating to the five standards subject to FRAND licensing commitments, but only 25% of such events relating to the two standards subject to royalty-free (RF) licensing commitments. When NPEs asserted SEPs from FRAND-based SSOs, the large majority of these assertions (73%) were of unencumbered SEPs. Producers, however, generally asserted FRAND-encumbered SEPs. In the case of SEPs from RF SSOs, NPEs asserted only unencumbered SEPs, while Producers asserted both encumbered and unencumbered SEPs. And while NPE SEP assertions were resolved by settlement at approximately the same rate as Producer SEP assertions, Producer plaintiffs were almost five times as likely to prevail on the merits as NPE plaintiffs.

We conclude with a discussion of the implications of these findings on current debates regarding FRAND licensing and SSO policy limitations, particularly proposals to impose SSO-based licensing encumbrances on SEPs held by Outsider.

Belgian Think Tank Bruegel Sponsors Event on Royalty Stacking

Hat tip to Norman Siebrasse, who called this event which occurred on November 25 to my attention.  Here is a link to Dr. Jorge Padilla's presentation, titled Revisiting the Royalty Stacking Puzzle, in which he introduces a concept he calls the "inverse Cournot effect" as an explanation for why royalty stacking may not be the problem it is sometimes believed to be.  Briefly, if I am understanding Dr. Padilla's theory correctly, it is that the owners of weak patents will constrain themselves from charging too much, in order not to attract a validity challenge; while the owners of strong patents also will constrain themselves from charging too much lest they increase the bargaining power of the owners of the weak patents to charge more than they otherwise would (the "inverse Cournot effect").   I'm not sure I find this latter point entirely convincing, but it may be that I'm not fully grasping it and I'd like to see the paper on which the presentation is based when it becomes available.  Here is a link to the video of the event.

Damages Issues in CSIRO v. Cisco

As I mentioned earlier, the Federal Circuit today vacated and remanded Judge Davis's damages judgment in Commonwealth Scientific and Industrial Research Organization (CSIRO) v. Cisco Systems, Inc, opinion available here.  Chief Judge Prost wrote the opinion, joined by Judges Dyk and Hughes.  Bottom lines:  (1) use of the smallest salable patent-practicing unit is not necessary where the evidence shows that the parties proposed a different base in real-world negotiations; (2) damages for the infringement of an SEP should not reflect the additional value resulting from standardization.  As discussed below, I agree with the first but not second of these propositions.

As stated in the opinion, the patent in suit "discloses techniques directed to solving issues from wireless signals reflecting off objects and interfering with each other, commonly referred to as the 'multipath problem'" (p.3).  The patent was essential to the IEEE's 802.11 standard, as ratified in 1999, and CSIRO duly submitted a letter pledging to license the patent on RAND terms.  The "patent is also essential to various later iterations of 802.11 (802.11g, n, and ac)," but "despite the IEEE’s repeated requests . . . CSIRO refused to encumber the ’069 patent with a RAND commitment for these revisions" (pp. 3-4).

In the 1990s, an Australian company called Radiata was formed to sell wireless chips in the U.S.  CSIRO  and Radiata thereafter entered into a technology license agreement (TLA) for the '069 patent.  In 2001, Cisco acquired Radiata, and the TLA was amended twice.  Cisco paid royalties under the TLA until 2007, when it "ceased using Radiata-based chips in its products" (pp. 4-5).  Meanwhile, CSIRO developed a form license offer (the "Rate Card") which it offered to prospective licensees beginning in 2004 (p.5).  CSIRO offered Cisco a license based on the Rate Card rates, which Cisco declined, though 

the district court found that in subsequent discussions in 2005, Dan Lang, Cisco’s Vice President of Intellectual Property, informally suggested to CSIRO that a $0.90 per unit rate may be more appropriate. . . .  This rate was not much lower than what Cisco was already paying CSIRO under the TLA, though over time the TLA rates declined dramatically due to rapidly decreasing chip prices. Despite both parties’ apparent willingness to negotiate a license, CSIRO and Cisco failed to agree on terms (pp. 5-6).

CSIRO filed suit against Cisco in 2011.  Cisco did not contest validity or infringement, and a bench trial on damages was held before Judge Leonard Davis in the E.D. Texas in 2014.  

At trial, CSIRO's expert testified that 

the benefits of 802.11 products that practice the ’069 patent over 802.11 products that do not practice the ’069 patent “are primarily attributable to the technology of the ’069 Patent.” Id. at *5. “Based on this claim, CSIRO contend[ed] that the difference in profit Cisco captured between accused 802.11a and 802.11g products and unaccused 802.11b products largely represents the value attributable to the ’069 Patent” (p.6).

The court rejected this damages model "for, among other reasons, performing 'arbitrary' final apportionment and having broad profit premium ranges" (p.7).  The court also rejected Cisco's model, which was based on the TLA, finding

that the TLA was not comparable to the license Cisco and CSIRO would negotiate in a hypothetical negotiation. Significantly, the district court determined that “the primary problem with Cisco’s damages model is the fact that it bases royalties on chip prices.” Commonwealth Sci., 2014 WL 3805817, at *11. According to the district court, “[t]he benefit of the patent lies in the idea, not in the small amount of silicon that happens to be where that idea is physically implemented.” Id. The district court reasoned that “[b]asing a royalty solely on chip price is like valuing a copyrighted book based only on the costs of the binding, paper, and ink needed to actually produce the physical product. While such a calculation captures the cost of the physical product, it provides no indication of its actual value.” Id. (p.7)

The court then proceeded to conduct its own analysis 

based on CSIRO’s 2004 Rate Card offer and the informal rate suggestion made in October 2005 by Cisco’s Mr. Lang.  The district court noted that both data points were near the hypothetical negotiation dates of May 2002 for Linksys-branded products and October 2003 for Cisco products. “Based on these data points,” the district court found, “a range of $0.90 to $1.90 is a reasonable starting point for negotiations between the parties in 2002 and 2003” (pp. 7-8).

The court then considered the Georgia-Pacific factors, concluding that because some of these factors suggested an increase while others suggested a decrease there would be "no overall adjustment" to the $0.90 to $1.90 range (except for certain Linksys-branded products that had a lower profit margin and for which the royalty range was calculated to be $0.65 to $1.38).    

On appeal, Cisco argues that

(1) the district court erred in not beginning its damages analysis with the wireless chip, which it found to be the smallest salable patent-practicing unit; [and] (2) the district court did not adjust the Georgia-Pacific factors to account for the asserted patent being essential to the 802.11 standard. Cisco also argues that the district court clearly erred in not crediting the TLA evidence (p.9).

On the first issue, the court reiterates its holding in Ericsson, Inc. v. D-Link Sys., Inc., 773 F.3d 1201 (Fed. Cir. 2014), that the "smallest salable patent-practicing unit" is an outgrowth of the apportionment principle:

Recognizing that each case presents unique facts, we have developed certain principles to aid courts in determining when an expert’s apportionment model is reliable. For example, the smallest salable patent-practicing unit principle provides that, where a damages model apportions from a royalty base, the model should use the smallest salable patent-practicing unit as the base (p.12).

Nevertheless:

Fundamentally, the smallest salable patent-practicing unit principle states that a damages model cannot reliably apportion from a royalty base without that base being the smallest salable patent-practicing unit. That principle is inapplicable here, however, as the district court did not apportion from a royalty base at all. Instead, the district court began with the parties’ negotiations. At trial, the district court heard evidence that, around the time of the hypothetical negotiations, the parties themselves had brief discussions regarding Cisco taking a license to the ’069 patent. According to the district court’s factual finding—which is supported by the testimony at trial—Cisco informally suggested $0.90 per unit as a possible royalty for the ’069 patent. The district court used this rate as a lower bound on a reasonable royalty. For the upper bound, the district court looked to the $1.90 per unit rate requested by CSIRO in its public Rate Card license offer. Because the parties’ discussions centered on a license rate for the ’069 patent, this starting point for the district court’s analysis already built in apportionment. Put differently, the parties negotiated over the value of the asserted patent, “and no more.” Ericsson, 773 F.3d at 1226. The district court still may need to adjust the negotiated royalty rates to account for other factors (see infra Section II.B), but the district court did not err in valuing the asserted patent with reference to end product licensing negotiations . . . .

The rule Cisco advances—which would require all damages models to begin with the smallest salable patent-practicing unit—is untenable. It conflicts with our prior approvals of a methodology that values the asserted patent based on comparable licenses (pp.13-14).

So far, so good, but I think the court stumbles in its second holding, namely that "the district court legally erred under Ericsson because it failed to account for any extra value accruing to the ’069 patent from the fact that it is essential to the 802.11 standard" (p.15).  In other words, according to Chief Judge Prost, the court should have reduced the damages award to eliminate any portion that is attributable to the fact that the technology was part of a standard.  In support of this proposition, the court cites its opinion in Ericsson, which states:

When dealing with SEPs, there are two special apportionment issues that arise. First, the patented feature must be apportioned from all of the unpatented features reflected in the standard. Second, the patentee’s royalty must be premised on the value of the patented feature, not any value added by the standard’s adoption of the patented technology. These steps are necessary to ensure that the royalty award is based on the incremental value that the patented invention adds to the product, not any value added by the standardization of that technology. . . .

[T]he royalty for SEPs should reflect the approximate value of that technological contribution, not the value of its widespread adoption due to standardization (p.16).

Significantly, the court rejects CSIRO's argument that these statements from Ericsson apply only to RAND-encumbered SEPs, appearing to hold that they apply to all SEPs.  In particular:

. . . a reasonable royalty calculation under § 284 attempts to measure the value of the patented invention. Id. at 1232. This value—the value of the technology—is distinct from any value that artificially accrues to the patent due to the standard’s adoption. Id. Without this rule, patentees would receive all of the benefit created by standardization—benefit that would otherwise flow to consumers and businesses practicing the standard. We therefore reaffirm that reasonable royalties for SEPs generally—and not only those subject to a RAND commitment—must not include any value flowing to the patent from the standard’s adoption (p.17).

Applying this understanding to the facts of the case:

This error impacted the district court’s analysis on all three factors that it weighed in favor of CSIRO. With respect to factor 8—“[t]he established profitability of the product made under the patent; its commercial success; and its current popularity,” Georgia-Pacific, 318 F. Supp. at 1120—the district court found that “[a]t the time of the hypothetical negotiations, the market for wireless products was growing rapidly, indicating increased commercial success.” Commonwealth Sci., 2014 WL 3805817, at *13. As to factors 9 and 10—which relate to the advantages of the patented invention—the district court concluded that “[a]lternative technologies in the wireless industry, such as PBCC, MBCK, and PPM, failed to achieve commercial success.” Id. However, the district court never considered the standard’s role in causing commercial success. Ericsson calls out factors 8, 9, and 10 as all being irrelevant or misleading in cases involving SEPs. Ericsson, 773 F.3d at 1231. We therefore conclude that the district court erred in failing to account for standardization when it evaluated the Georgia-Pacific factors.

Additionally, the district court failed to account for the possibility that the $0.90 and $1.90 per unit rates that it used as a starting point may themselves be impacted by standardization (pp. 18-19).

With all due respect, for the reasons Norman Siebrasse and I explain in our paper The Value of the Standard, I think that Judge Davis got this second issue right and that the Federal Circuit got it wrong.  As we argue in the paper, the principle that a royalty should not reflect the value of the standard can mean three distinct things:  that the award should not be based on the patent's holdup value; that the award should be proportionate to the value of the technology in comparison with other patented technologies also embodied in the standard; and that the award should not reflect any added value resulting from network effects.  We argue that the first two interpretations are sound but that the last one is not.  Indeed, in both SEP and non-SEP cases, the award often will reflect the value of widespread use to the extent the damages take the form of a "running royalty" consisting of an ex ante rate multiplied by an ex post base.  In this sense, the patent owner benefits from widespread ex post use (or loses out if the use isn't as great as expected), and that's the way it should be if we want an award that is roughly commensurate with the value of the technology.  A technology adopted into a standard necessarily is more valuable to users than one that isn't. 

Finally, the court holds that the district court erred in rejecting the TLA as a possible comparator (pp. 20-22), and remands for a recalculation.

Breaking News: Federal Circuit Vacates and Remands for Recalculation of SEP Royalty in CSIRO v. Cisco

Here is the opinion.  I'll be back later with some analysis. 

Some Recent Papers on Injunctions, Royalties

1. Bernard Chao has posted a paper on ssrn titled Causation and Harm in a Multicomponent World, forthcoming in the University of Pennsylvania Law Review Online.  Here is a link to the paper, and here is the abstract:

On September 17, 2015, the Federal Circuit issued another decision in the epic Apple v. Samsung smartphone war. This was the fourth court decision in the ongoing saga to deal with injunctions. Apple IV explained the level of proof necessary to satisfy the "causal nexus" requirement. This requirement had emerged as a response to patent litigations involving products with thousands of features, the vast majority of which are unrelated to the asserted patent. To prove a causal nexus, patentees seeking an injunction have to do more than just show that the infringing product caused the patentee irreparable harm. The harm must be specifically attributable to the infringing feature. In Apple IV, the Federal Circuit noted that proving causation was "nearly impossible" in these multicomponent cases. So it decided to water down the causal nexus requirement saying that it was enough for Apple to show that the infringing features were "important" and customer sought these particular features.

This lower standard is an ill-advised mistake that leaves multicomponent product manufacturers more susceptible to patent holdup. My critique takes two parts. First, I argue that a single infringing feature rarely, if ever, "causes" consumers to buy the infringer’s multicomponent products. The minor features at issue in Apple IV illustrate this point vividly. Thus, the new causal nexus standard does not accurately reflect how causation and harm operate in a multicomponent world. Second, I explain why the court was so willing to accept such little evidence of real injury. It improperly applied notions of traditional property law to patents. Specifically, the court viewed patent infringement as harmful regardless of any concrete consequences. This view may resonate for other forms of property where an owner's rights are paramount and a trespass is considered offensive in and of itself. But the same concepts do not apply to patent law where the Supreme Court has consistently said that private interests must take a back seat to the public good. Based on these principles, the courts should restore the "causal nexus" requirement and not presume causation.

2.  Jay Pil Choi and Heiko A. Gerlach have posted a paper on ssrn titled A Model of Patent Trolls, CESifo working Paper No. 5536.  Here is a link to the paper, and here is the abstract:

This paper develops a model of patent trolls to understand various litigation strategies employed by nonpracticing entities (NPE). We show that when a NPE faces multiple potential infringers who use related technologies, it can gain a credible threat to litigate even when it has no such credibility vis-à-vis any single potential infringer in isolation. This is due to an information externality generated by an early litigation outcome for subsequent litigation. Successful litigation creates an option value against future potential infringers through Bayesian updating. This renders a credible litigation threat against the initial defendant and allows the NPE to extract more rents. We discuss policy implications including the adoption of the British system of “loser-pays” fee shifting and the use of injunctive relief.

3.  Layne Keele has posted a paper on ssrn titled Enhanced Ongoing Royalties: The (Sometimes) Inequitable Equitable Remedy.  Here is a link to the article, and here is the abstract:

Since the Supreme Court’s 2006 decision in eBay v. MercExchange, courts in patent infringement cases have haphazardly assessed ongoing royalties after denying injunctive relief. Some courts have concluded that ongoing royalties should be set at compensatory levels, and others have set ongoing royalties at supracompensatory levels. In large part, this inconsistency stems from courts’ failures to evaluate traditional remedial principles, resulting in a disagreement about whether ongoing royalties should account for the defendant’s switching costs or the willfulness of the defendant’s future infringement.

This article attempts to answer these questions. In doing so, it first examines the reasons that courts typically deny injunctive relief, looking to cases both in patent law and in other property contexts. It suggests that, in many cases, concerns for patentee opportunism underlie the denial of injunctive relief. The article then evaluates courts’ reasons for preferring ongoing royalties over other solutions, such as lump-sum damages or leaving the patentee to file another lawsuit after the defendant’s future infringement. Using insights gleaned from these rationales, this article argues that switching cost considerations and willfulness enhancements are usually improper components of an ongoing royalty, especially where opportunism concerns prompt the denial of the injunction.

4.  P. Andrew Riley and Scott A. Allen have published a paper titled The Public Interest Inquiry for Permanent Injunctions or Exclusion Orders: Shedding the Myopic Lens, 17 Vanderbilt Journal of Entertainment & Technology Law 751 (2015).  Here is a link to the paper, and here is the abstract: 

President Obama’s 2013 veto of a US International Trade Commission (ITC) exclusion order, issued to address Apple Inc.’s infringement of a patent owned by Samsung, thrust the ITC’s public interest inquiry into the spotlight. Historically, however, these factors rarely weighed against a remedy at the ITC. Likewise, US district courts have rarely declined to issue a permanent injunction after finding a patent valid and infringed due solely to the public interest factor—the last of the four factors that the Supreme Court put in place in eBay Inc. v. MercExchange, L.L.C. More recent decisions addressing the public interest in both forums, however, show a willingness by the adjudicators to weigh both traditional public interest issues, such as health and well-being, and non-traditional arguments, such as public reliance and environmental concerns, against a patent owner’s right to exclude. In this Article, we examine some of the successful traditional and non-traditional public interest arguments, both at the ITC and in US district courts. From this analysis, the Article outlines how parties involved in high stakes patent litigation in either forum can craft public interest arguments to combat the threat of a permanent injunction or an ITC exclusion order.

The Vanderbilt Journal of Entertainment & Technology Law also hosts a blog, which recently published a short post by Danielle Dudding titled Patent Litigation:  Damages, Patent Trolls, and Jury Confusion, available here.

5.  James Young Hurt has posted a paper on ssrn titled Reasonable Royalty for Patent Infringement of Non-Direct Revenue Producing Products, forthcoming in IDEA.  Here is a link to the paper, and here is the abstract:

In today’s information age, data is immensely valuable. Data is so valuable that many companies are willing to give away products and services in order to generate that data. Once these companies have this data, they are able to monetize it typically via advertising or licensing access to their vast database. But, what if the products or services these companies give away infringe upon a valid patent? What is the correct remedy to an injured patentee against a defendant whose accused product or service generates no direct revenue? A royalty that reaches through to the final product enabled by the patented technology, analogous to the reach-through royalty used in the biotechnology and pharmaceutical industries seems applicable in these cases and can be supported by a correct application of the Georgia-Pacific reasonable royalty factors. Valuing this enabling technology as a building block and analogous to the basic research tools of the biotechnology industry in constructing damage remedies will achieve an equitable result while still maintaining the incentives of the patent system.