Some New Articles, Posts on FRAND, Part 2

 1. Binxin Li and Chuanshu Chu published a post on the Kluwer Patent Blog titled Recent development on SEP disputes in China — anti-suit injunction.  The authors discuss the Xiaomi v. IDC and Huawei v. Conversant decisions, previously discussed on this blog here, and offer their comments on the potential for global SEP cases to cause problems with regard to international comity.

2.  Deputy Assistant Attorney General Alexander Okuliar delivered a talk in Washington, D.C. on October 28, titled From Edison to 'New Madison':  Division Activity at the Intersection of Innovation, Competition Law, and Technology.  Nothing new here regarding the division's views on FRAND and SEPs, though there are some interesting comments on China's antimonopoly enforcement and its standards development initiatives.

 

3.  Pier Luigi Parcu and David Silei have posted a paper on ssrn titled An Algorithm Approach to FRAND Contracts.  Here is a link, and here is the abstract:

 

In the context of standards development, the current mechanism of negotiation of FRAND royalties frequently brings to undesirable litigation. This is mainly due to the fact that a relevant part of the information concerning the standard, required to stipulate complete license contracts, is revealed only after the standard itself has spread in the market. In this respect, we propose a litigation-reducing algorithm to determine the FRAND level of the licensing royalty. Unlike the current negotiation mechanism, this algorithm can be defined ex-ante, so to increase contract completeness, because it includes a Bayesian-updating rule, able to address the presence of ex-ante uncertainty. We derive the algorithm from a generic oligopolistic-competition model, so to deliver characteristics of applicability to both price and quantity competition. Simulations in a linear-Cournot framework suggest the algorithm calculates FRAND royalties and may be usefully applied to real-life cases. 

 

4. David Teece has posted a paper on ssrn titled Patent Counting and the 'Top Down' Approach to Patent Valuations: An Economic and Public Policy Appraisal of Reasonable Royalties.  Here is a link, and here is the abstract:

 

In many circumstances it is helpful, and sometimes necessary, to assess (possibly even to quantify) the technological prowess of a business enterprise, either overall or with respect to particular fields of application, or possibly with respect to the firm’s relative position in an industry. In such circumstances, it is tempting to use as a measure the number of patents that has been granted to a firm. However, patent counts are an imperfect and unreliable metric. Using them may create an aura of accuracy, but it is false (scientific) accuracy for the reasons discussed in this article. In particular, the “top-down” approach to the valuation of standard-essential patents (SEPs), which relies heavily on patent counting, is a poor surrogate for the determination of the value of patented technologies.

 

I will start with some basics. In scientific inquiry, precision refers to how close the measurement of a variable is to what is being measured. Precision is, however, independent of accuracy. Indeed, it is possible to be precise but highly inaccurate. Accuracy is, of course, more important than precision. In this paper, I will show that patent counting, while having the possibility of being precise, does not always meet that criterion in part because of ambiguities as to scope. For instance, sometimes standards are at issue with patents “reading on” or being “essential” to one or more technical standards. However, there may be ambiguities around how many patents in a given portfolio are in fact essential, versus simply declared essential by the owner or some third party.

In this article, I make two suggestions. First, patent-count metrics are at best poor proxies of technological strength or value. This is not just because of inaccurate patent counts in the numerator or denominator of some index. It is also because there is at best only a weak connection between even well-specified patent indices and underlying economic value of a patent or patent portfolio. It is often the case that one will have to look downstream to the user to figure out the incremental value that the technology yields to the consumer.

Second, when it comes to valuing intellectual property that “reads on” a standard, the numerical proportionality of standard-essential patents (SEPs) is a bogus measure. It is unlikely to measure the relative value of patents, let alone the value of technology. The problem is compounded because numerical proportionality requires the determination of a “total value” associated with all patents that “read on” a standard, which has typically been arrived at arbitrarily.

 

My initial response to the paper is that, while Teece may be correct in theory, (1) are the methodologies for estimating SEP value at a more granular level reliable?, and (2) even if so, are they worth it?  In other words, do the benefits from marginally increasing accuracy outweigh the additional administrative and adjudicative cost?  I'm a bit skeptical, given the lack of evidence regarding the materiality of the patent incentive in this space.

Düsseldorf Court Refers SEP Questions to CJEU

In what may prove to be the most consequential SEP/FRAND decision yet, the Düsseldorf Landgericht yesterday in Nokia v. Daimler referred a lengthy series of questions to the CJEU, relating to whether European Union competition law requires component-level licensing, and also requesting clarification of several issues concerning interpretation of the CJEU's 2015 decision in Huawei v. ZTE.  I will probably have more to say about this in due time, but today (the day after Thanksgiving) is a quasi-holiday in the U.S.  For now, I refer readers to informative posts by Florian Mueller on FOSS Patents and Léon Dijkman on IPKat, and to a briefer write-up on Bloomberg Law.

Some New Articles, Posts on FRAND, Part 1

1. Marco Botta has posted a paper on ssrn titled Unfair Pricing and Standard Essential Patents.  Here is a link to the paper, and here is the abstract:

 

Technical standards that are agreed within a Standard Development Organization (SDO) often cover several ‘essential’ patents for the implementation of a standard (i.e., Standard Essential Patents, SEPs). In order to allow for the standard implementation, the SEP holder commits to license its patents to any potential licensee on the basis of Fair and Reasonable and Non-Discriminatory (FRAND) conditions. In view of the recent ruling of the UK Supreme Court in Unwired Planet and the judgement of the German Bundesgerichtshof in Sisvel v. Haier, the paper assumes that the FRAND commitment implies a ‘range’ rather than a ‘single’ royalty rate. On the other hand, a royalty rate ‘beyond the outer boundary of the range’ should be considered ‘unfair’, and thus incompatible with the FRAND commitment. Besides representing a breach of the FRAND commitment, an ‘unfair’ royalty rate might also be considered an abuse of a dominant position by the SEP holder, in breach of Art. 102(a) TFEU. This paper analyses whether, and under what circumstances, Art. 102(a) TFEU can be relied upon by a competition authority in Europe to sanction a case where an ‘unfair’ royalty rate has been set by the SEP holder. To this regard, the paper provides a detailed analysis of the EU Court of Justice’s jurisprudence on Art. 102(a) TFEU. In particular, the latter jurisprudence is relied as a ‘yardstick’ to assess ‘when’ competition policy should sanction a request of unfair royalty rate by the SEP holder, ‘how’ a competition agency should assess the case and, eventually, ‘what’ remedies the competition authority might adopt.

 

Economists have elaborated a number of ‘filters’ to define ‘when’ EU competition policy should sanction unfair pricing cases. In particular, antitrust intervention would be justified only in markets that are characterized by high and stable entry barriers, in which a firm enjoys a super-dominant position. Due to the phenomenon of over-declaration, not every SEP is indeed ‘essential’; the market power of the SEP holder thus requires a case-by-case analysis of the ‘essentiality’ of every SEP. A number of authors have also argued that excessive pricing cases should not be sanctioned in industries characterized by dynamic efficiencies. The paper argues that innovation considerations could be considered as efficiency defences in the context of antitrust investigations, rather than in excluding a priori competition policy enforcement in this field.

 

The paper argues that a competition agency should rely on the case law of the Court of Justice of the European Union (CJEU) on Art. 102(a) TFEU to analyse a case of unfair royalty rate. In particular, United Brands cost/price test is not suitable for assessing an unfair royalty rate requested by the SEP holder, since it is de facto impossible to determine the ‘costs of production’ of individual SEPs. On the other hand, in accordance with the CJEU case law, the competition agency might rely on a number of benchmark methods with which to assess the alleged unfairness of the rate. In particular, the agency should verify its findings under multiple benchmark tests, in order to minimize the risk of false negative errors. Finally, the SEP holder could argue that the requested royalty rate is justified by its past R&D investments.

 

In terms of remedies, the paper argues that a competition agency could require the SEP holder to license its ‘essential’ patent; such behavioral remedy is well established in the practice of the European Commission. In light of the recent Broadcom interim decision, if the competition authority was confident about its preliminary findings of unfair pricing, the agency might require the SEP holder to license its ‘essential’ patents via an interim decision; the scope, duration and exact obligations of such a duty would later be refined in the final commitment decision.

 

2. On the Kluwer Patent Blog, Matthieu Dhenne published a post titled Overview of FRAND litigation in France: is a new era coming?  The post discusses the TCL v. Philips, Vringo v. ZTE, and Conversant v. LG.

 

3. On IP Watchdog, Curtis Dodd and Chris Dubuc have published three related posts titled Cellular Wireless Standard Essential Patents:  A Survey of FRAND-Related Statements, Analyzing FRAND-Related Statements for Cellular Wireless SEPs, and FRAND Royalty Base Statements and Cellular Wireless Standard Essential Patents. The authors state that there is at least one more on the way.

 

4.  Eli Greenbaum has published an article titled A Million Unlicensed Pieces:  Nondiscrimination Commitments in the Supply Chain, 2020 U. Ill. L. Rev. Online 275.  From the introduction:

 

Rarely must patent infringers demand their right to pay royalties. But several multinational manufacturers have gone to court to insist that they – and not other participants in the supply chain–make payment of any patent royalties. From a contractual perspective, judicial analysis of such claims has focused on the non-discrimination prong of the fair, reasonable, and non-discriminatory (“FRAND”) patent licensing commitment. In other words, some manufacturers have argued, and some courts and administrative agencies have agreed, that a patentee’s refusal to provide FRAND licenses at all levels of the supply chain constitutes discrimination and, as such, violates the patentee’s contractual obligation to license their patents in a nondiscriminatory manner. This Essay argues that such claims are misplaced – the principle of nondiscrimination provides no easy framework for analyzing such selective licensing of the supply chain. Rather, such questions must be examined through the more complex empirical, legal, and economic factors in specific circumstances.

Some Recent Works on Injunctions and Related Issues

1.  Tomas Gomez-Arostegui and Sean Bottomley have posted a paper on ssrn titled The Traditional Burdens for Final Injunctions in Patent Cases c.1789 and Some Modern Implications, __ Case Western Reserve Law Review __ (forthcoming).  Here is a link to the paper, and here is the abstract:

 

This Article reassesses the first two eBay factors for final injunctions—irreparable injury and the inadequacy of legal remedies—in light of traditional equitable principles. Tracking most closely with tradition would require the Federal Circuit to recognize that: (1) an injury it seeks to redress with a final injunction is future infringement itself, not just follow-on harms caused by future infringement; (2) it can presume future infringement from past infringement; (3) it can presume that legal remedies are inadequate to remedy future infringement; and (4) it need not require a plaintiff to show that alternative equitable remedies, like ongoing royalties, would inadequately redress future infringement. Moreover, the Federal Circuit can recognize, without relying on presumptions, that the burden on the first two eBay factors is not onerous. A patentee can satisfy them by showing that a defendant is likely to infringe again and that any legal damages awarded at trial did not fully compensate the patentee for the life of the patent.

2. Rik Lambers published a post on the Kluwer Patent Blog titled The Dutch Cross-Border Still Going Strong: Novartis v Mylan, discussing a Dutch court's recent grant of a cross-border injunction as previously noted here (para. 2).

3.   On IP Watchdog, Judge Paul Michel (Ret.) and John Battaglia published an article titled The Price of Paice and Complexity:  Rules, Standards and Facts for Post-Judgment Royalty Consideration.  The authors discuss the factors that courts currently are applying in deciding the appropriate amount of a postjudgment, ongoing royalty in lieu of an injunction.  They argue that there should be no presumption that the postjudgment rate should be the same as the prejudgment rate, a thesis which in my view makes no economic sense.  See, e.g., here.

4.  Norman Siebrasse published a post on Sufficient Description titled Variation of Injunction Refused, discussing a recent decision of Canada's Federal Court in Bombardier Recreational Products Inc. v. Arctic Cat, Inc., 2020 FC 946.  The post argues that Canadian courts should be more willing than this decision suggests they currently are to consider staying (or tailoring) permanent injunctions for a period of time, for example to enable the defendant to design around.  (This option is, as some readers may be aware, also at issue in the context of a proposed amendment to Germany's patent law.)  Professor Siebrasse also mentions a forthcoming edited volume on the comparative law of tailored injunctions, which should be out sometime in the spring.

Federal Circuit Affirms Use of Comparable License Using Entire Value of End Product

The decision is Vectura Ltd. v. GlaxoSmithKline LLC, precedential opinion by Judge Bryson, joined by Chief Judge Prost and Judge Wallach.  The patent in suit "concerns the production of 'composite active particles' for use in pulmonary administration, such as in dry-powder inhalers" (p.2).  Vectura sued GSK for selling three types of allegedly infringing inhalers.  Vectura prevailed at trial, and "[t]he jury awarded Vectura a royalty of 3% on a royalty base of $2.99 billion in sales for the accused inhalers, which resulted in an award of $89,712,069 in damages for the period of infringement ending in December 2018" (p.5).  The Federal Circuit affirms on infringement and claim construction, as well as damages.  

 

On the damages issues in particular, Vectura's expert witness testified that an earlier agreement between the parties was comparable to the hypothetical license the parties would have entered into. The Federal Circuit affirms notwithstanding that the earlier license used the entire market value of the inhalers as a royalty base, noting among other things that apportionment was "baked into" the earlier license; and that presumption of validity and infringement as of the date of the hypothetical negotiation presents a change of circumstances supporting the omission of one feature of the earlier license, a royalty cap:  

 

Vectura’s damages expert, Kimberly J. Schenk, adopted the 2010 license’s first-tier royalty rate (3%) as a flat royalty rate and the 2010 license’s royalty base (total sales of the licensed products) as her royalty base. Ms. Schenk declined to adopt the royalty cap from the 2010 license, citing changed circumstances by the time of the hypothetical negotiation, which would have occurred in July 2016 when the 2010 license expired. GSK presented an alternative theory, also based on the total revenue produced by the licensed products. Under GSK’s theory, however, the royalty rate would have been much lower, only 0.0187%.

GSK argues that Vectura’s evidence was insufficient to support the jury’s damages award. GSK first attacks Ms. Schenk’s use of the total sales of the accused inhalers as her royalty base. GSK argues that, under this court’s precedents, Ms. Schenk needed to show that the patented vilanterol and umeclidinium mixtures drove consumer demand for the accused inhalers before presenting a damages theory based on the entire market value of the accused inhalers. GSK contends that Ms. Schenk did not make such a showing and, as a result, she needed to apportion her royalty base to account for the non-infringing components in the accused inhalers, such as the fluticasone blister in the Breo inhaler. Appellants’ 2014)).

The damages theories tried in this case present a rather unusual circumstance. Ordinarily, an entire-market-value royalty base is appropriate only when the patented feature creates the basis for customer demand or substantially creates the value of the component parts, and apportionment is required when an entire-market-value royalty base is inappropriate. Virnetx, Inc. v. Cisco Sys., Inc., 767 F.3d 1308, 1326 (Fed. Cir. 2014). However, this court has explained that when a sufficiently comparable license is used as the basis for determining the appropriate royalty, further apportionment may not necessarily be required. See, e.g., Bio-Rad Labs., Inc. v. 10X Genomics Inc., 967 F.3d 1353 (Fed. Cir. 2020); Elbit Sys. Land & C4I Ltd. v. Hughes Network Sys., LLC, 927 F.3d 1292 (Fed. Cir. 2019); Commonwealth Sci. & Indus. Rsch. Organisation v. Cisco Sys., Inc., 809 F.3d 1295 (Fed. Cir. 2015). That is because a damages theory that is dependent on a comparable license (or a comparable negotiation) may in some cases have “built-in apportionment.” See, e.g., Commonwealth, 809 F.3d at 1303.

This is one such case. Although GSK refers to the 2010 license as being “purportedly comparable,” the evidence clearly supports Vectura’s contention that the 2010 license was sufficiently comparable for use in its damages calculation. Indeed, GSK’s own damages expert, Dr. William Kerr, testified that the 2010 license was “a very close comparable, much closer than you ever find in a patent case.” J.A. 1857–60.

Built-in apportionment effectively assumes that the negotiators of a comparable license settled on a royalty rate and royalty base combination embodying the value of the asserted patent. Id. As the district court noted, a party relying on a sufficiently comparable license can adopt the comparable license’s royalty rate and royalty base without further apportionment and without proving that the infringing feature was responsible for the entire market value of the accused product. Vectura, 397 F. Supp. 3d at 593 (citing Commonwealth, 809 F.3d at 1301–04).

That is what Ms. Schenk did when she adopted the royalty rate and royalty base that was used in the 2010 license. To support Ms. Schenk’s damages theory, Vectura offered evidence that the circumstances of the 2010 license and the hypothetical negotiation in 2016 were highly comparable and that principles of apportionment were effectively baked into the 2010 license. J.A. 1447–48; see Bio-Rad, 967 F.3d at 1373.

We have cautioned that “district courts performing reasonable royalty calculations [must] exercise vigilance when considering past licenses to technologies other than the patent in suit” and “must account for differences in the technologies and economic circumstances of the contracting parties.” Virnetx, 767 F.3d at 1330. Here, GSK argues that even if the 2010 license is superficially comparable, Ms. Schenk failed to account for the technical and economic differences between the 2010 license and the hypothetical negotiation that would have occurred when the 2010 license expired in 2016. GSK notes that the 2010 license encompassed rights to more than 400 patents and that the royalty established in that license was subject to a cap for sales above a certain amount.

Vectura introduced evidence, however, that the key component of the 2010 license was permitting GSK to use Vectura’s invention of coating lactose particles with magnesium stearate. The 2010 license and the hypothetical negotiation thus cover “roughly very similar technologies,” as Ms. Schenk testified. J.A. 1448. Similarity of scope is confirmed by the fact that the mixtures Vectura points to as infringing the ’991 patent would have been the very same mixtures covered by the 2010 license. On appeal, GSK has offered nothing to undermine that conclusion. Accordingly,the fact that other patents were included in the 2010 license does not fatally undermine Ms. Schenk’s theory of comparability.

Ms. Schenk also considered and rejected the argument that there were meaningful economic differences between the benefits of coating the lactose particles and coating the active ingredients. J.A. 1481–82. She also considered and rejected the suggestion that there were other technical or economic distinctions between the 2010 license and the 2016 hypothetical negotiation that rendered them not comparable. J.A. 1465–85. GSK cross-examined Ms. Schenk on those matters, and the disputes over that evidence were properly left for the jury to resolve. See Bio-Rad, 967 F.3d at 1374.

GSK’s second line of attack focuses on the absence of a royalty cap in Vectura’s damages theory. GSK argues that if the 2010 license is truly a comparable license, it was improper for Ms. Schenk to discard the royalty cap while simultaneously retaining the royalty rate and royalty base used in the 2010 license. For support, GSK asserts that the royalty cap was an integral part of the 2010 negotiations and that in 2016 Vectura had proposed an extension of the 2010 license that would have retained the royalty cap.

Ms. Schenk testified that the assumption of validity and infringement in a hypothetical negotiation, among other changed circumstances, supported not including a cap on her proposed royalty. J.A. 1458, 1484. The jury was entitled to credit that testimony and to note that by 2016 the accused inhalers had already become hugely successful, which would have increased Vectura’s leverage in the hypothetical negotiation. It was therefore permissible for the jury to credit Ms. Schenk’s testimony and to award damages without applying a royalty cap. In sum, the district court did not abuse its discretion in denying GSK’s motion for a new trial on damages (pp. 16-19).

 

The court also rejects the defendants' argument that the district court abused its discretion in not ordering a new trial based on Vectura's references at trial to GSK's sales revenue, noting among other things that "it was necessary for Vectura to reference GSK’s total sales, either directly or indirectly, considering that Vectura’s damages theory asked the jury to multiply the three-percent royalty rate by the royalty base, i.e., GSK’s total sales" (p.23).