ITC Authorizes Limited Exclusion Order Targeting Apple Watch

This news came out toward the end of last week.  The case is In the Matter of Certain Light-Based Physiological Measurement Devices and Components Thereof, Investigation No. 337-TA-1276.  The complainants are Masimo Corp. and Cercacor Laboratories, Inc., and the respondent is Apple.  Long story short, the U.S. International Trade Commission concludes that the Apple Watch infringes claims of two of the five patents in suit relating to the measurement of blood oxygen saturation; and finds that the public interest does not preclude entry of a limited exclusion order (LEO).  That order will take effect 60 days from the decision unless the president, through U.S. Trade Representative Katherine Tai, decides to veto it. 

Here is a copy of the ITC's Notice.  Reportage can be found on, inter alia, Law360 and on Ars Technica, both of which note that Apple will try to convince the USTR that prohibiting importation of the device would have a negative effect on public health, and discuss other related litigation involving Apple and Masimo. 

Update:  Good coverage this morning on Bloomberg and on IP Watchdog as well.

Strict Liability for a Wrongly-Issued Preliminary Injunction

The EPLaw Blog recently published a post excerpting portions of the English-language version of the provisional text of Advocate General Szpunar’s opinion in the case of Mylan AB v. Gilead Sciences Finland Oy, Case C-473/22.  I’m not sure when to expect the CJEU’s decision, but this promises to be an important case.  The question presented is whether Finland’s strict liability regime—under which a firm that (1) launches at risk and (2) is preliminarily enjoined on the basis of a patent or SPC that subsequently is invalidated or found not to be infringed, is entitled to compensation for the losses suffered as a result of the injunction—is consistent with IPRED article 9(7).  Article 9(7) states that “Where the provisional measures are revoked or where they lapse due to any act or omission by the applicant, or where it is subsequently found that there has been no infringement or threat of infringement of an intellectual property right, the judicial authorities shall have the authority to order the applicant, upon request of the defendant, to provide the defendant appropriate compensation for any injury caused by those measures.”  Portions of the CJEU’s 2019 decision in Bayer v. Richter can be read as expressing the view that article 9(7) precludes a strict liability regime like Finland’s, although the operative part of the judgment states only that article 9(7) “must be interpreted as not precluding national legislation which provides that a party shall not be compensated for losses which he has suffered due to his not having acted as may generally be expected in order to avoid or mitigate his loss and which, in circumstances such as those in the main proceedings, results in the court not making an order for provisional measures against the applicant obliging him to provide compensation for losses caused by those measures even though the patent on the basis of which those had been requested and granted has subsequently been found to be invalid, to the extent that that legislation permits the court to take due account of all the objective circumstances of the case, including the conduct of the parties, in order, inter alia, to determine that the applicant has not abused those measures.”  In any event, the contours of Bayer v. Richter have been a matter of debate over the past four years, so presumably we will get some clarity on the matter before long.  For what it’s worth, I am inclined to think that a strict liability regime makes sense in this context; and I was a little taken aback by some of AG Szpunar’s characterizations of the at-risk firm’s conduct (see, e.g., para. 1, where he states that “Where the protection conferred on the holder of an intellectual property right, such as a patent or a right derived therefrom, expires or where that right is considered legally vulnerable and likely to be declared invalid, the holder’s competitors may be tempted to place on the market products infringing that right without waiting for it to lapse. By placing their products on the market prematurely, they obtain a competitive advantage which allows them to gain market share before other more scrupulous competitors arrive”) (emphasis added, and yes, the original (French) text of the opinion uses the corresponding terms “tentés” and “concurrents plus scrupuleux”).  I would think that if the patent or SPC is actually invalid, there is nothing unscrupulous about launching at risk.  On the other hand, the AG’s interpretation of Bayer seems consistent with statements the court made in that decision, so his recommended answers to the questions presented (para. 80) are not all that surprising:

(1) Article 9(7) of Directive 2004/48/EC of the European Parliament and of the Council of 29 April 2004 on the enforcement of intellectual property rights must be interpreted as precluding national legislation providing, in the situations referred to in that provision, for a liability regime for the applicant for provisional measures that does not allow the court hearing an action for compensation of the loss caused by those provisional measures to take into account – in addition to the premisses of that liability set out in that provision – other relevant circumstances of the case in order to assess whether or not to order such compensation.

 

(2) The court hearing an action for compensation for losses under Article 9(7) of Directive 2004/48 must take into account, in order to assess whether or not to order such compensation – in addition to the premisses of that liability set out in that provision – other relevant circumstances of the case, both before and after the application for the provisional measures at issue, which allow it to assess the justified nature of that application in the light of the risk of irreparable harm caused to the applicant in the absence of such measures.

 

If the CJEU does go along with this, I believe it will result in changes not only to Finnish law but also to some other countries’ laws, including Germany’s. For previous discussion on this blog, see, e.g., here.  Also of relevance to this topic, see Konstanze Richter's post on JUVE Patent titled Kühnen grapples with Mylan dura vs. Teva damages claim on final day of hearings, discussing Mylan dura's claim of €15 million to compensate for having been preliminarily excluded from the market for 15 months on the basis of a patent later declared invalid.  The post stated that a ruling would be forthcoming on October 12, so I'm hoping to hear something about this soon.  

 

Some Recent Papers on FRAND Issues

1. Justus Baron has posted on ssrn a paper titled The Commission’s Draft SEP Regulation—Focus on Proposed Mechanisms for the Determination of ‘Reasonable Aggregate Royalties”.  Here is a link to the paper, and here is the abstract:

 

This paper comments on the EU Commission's proposed Regulation on Standard-Essential Patents (SEP), focusing on the proposal that SEP holders should agree on a ‘reasonable aggregate royalty’ for a standard. I argue that the proposal is unnecessary, as there is no convincing evidence that 'royalty stacking' is a significant problem. Furthermore, the proposed mechanisms are unlikely to elicit meaningful notifications of aggregate royalties, and have no realistic prospect of producing the significant transaction cost savings predicted by the Commission's Impact Assessment Report. In the absence of alternative suggestions how to apportion the aggregate royalty, there is a clear prospect that the proposed "top-down" approach will encourage 'patent counting'. Thus, the proposal may generate incentives for companies to over-populate the Commission's proposed SEP Register, and undermine the important goal of producing greater transparency. Furthermore, any major regulatory intervention into the determination of FRAND rates is likely to increase the risk of a fragmentation in the global SEP licensing ecosystem; and would inject significant uncertainty. I would encourage the Commission and the legislative bodies of the EU to adopt a more incremental approach, and to focus on those important aspects of the proposed regulation that are more aligned with current SEP licensing practices.

2. Yi Chen has published a student note titled WIPO Arbitration:  A Promising Solution to the Injunction Chaos of FRAND Disputes, 100 Wash. U. L. Rev. 1199 (2023).  Here is a link to the paper, and here is an excerpt from the introduction:

 

This Note proposes developing the World Intellectual Property Organization (WIPO) arbitration mechanism to resolve the chaos. Part II summarizes the background of FRAND terms. Part III introduces the rationales of courts of different jurisdictions in granting ASIs and ruling on global FRAND terms, examining the most recent decisions by U.K courts and Chinese courts in 2022. Part IV analyzes how the latest issuance of an anti-ASI by the Eastern District of Texas adds complexity that will frustrate the purpose of FRAND, and it summarizes the rationales of courts of different jurisdictions in their recent anti-ASI decisions. Part V analyzes why current proposals fail and proposes a WIPO arbitration mechanism. This Note delves into courts’ detailed reasoning when issuing ASIs and anti-ASIs in different jurisdictions and proposes a dispute resolution mechanism outside the current territorial approach.

3. Bowman Heiden and Justus Baron have posted a paper on ssrn titled The Economic Impact of Patent Holdout.  Here is a link, and here is the abstract:

This paper has attempted a comprehensive investigation of the economic impact of patent holdout by (1) providing a theoretical foundation of patent holdout and its economic implications, (2) operationalizing this theory into several testable economic models, and (3) testing the models with empirical data.

As a starting point, we define patent holdout as a transactional phenomenon linked to the rational behavior of firms to willfully infringe rather than seek to obtain a license, based on the risks and rewards of the given patent regime. Identifying patent holdout requires a frame of reference that assesses the reasonableness of the infringer’s behavior in light of industry context and prevailing norms.

Following our definition, patent holdout only arises in situations where the patent owner is prepared to make licenses available on reasonable terms. Patent owners that commonly offer their patents for license, such as universities and other innovation specialists, and owners of patents subject to licensing commitments, such as declared Standard-Essential Patents, are at higher risk of holdout than companies relying on their patents to protect their own exclusive use of their patented technology. Thus, patent holdout can impact Hybrid Operating Companies (HOPCOs), Non-Practicing Entities (NPEs), and Patent Assertion Entities (PAEs), leading to different business responses, including litigation, licensing or settling on inadequate terms, and abstaining from licensing. Thus, much of the impact of patent holdout is not easy to observe directly.

We operationalize and test for evidence of the impact of systematic patent holdout through several methods, including (1) evidence of a royalty gap in cellular standards, (2) evidence from previous PAE studies, and (3) evidence from indicators of patent value. These investigations produced the following results:

• The royalty gap analysis in cellular licensing produced a patent holdout range of $7-28 billion per year in 2021.

• An analysis of the institutionalization of patent holdout in the aggregate royalty base resulted in a total revenue base of $1,603 per year in comparison to the average smartphone cost of $392 per phone, suggesting a 4x higher royalty base in 2017.

• An analysis of the missing SEP market segments (i.e. the indemnification effect) whereby small implementers go unlicensed and small SEP holders are unable to collect royalties. The former effect was estimated between $600-1200 million per year in 2015.

• The evidence of patent holdout based on previous PAE studies was estimated at approximately $500 billion over the timeframe of 1990-2010.

• The analysis of systemic patent holdout from patent renewal data showed that while declared SEPs have historically been more valuable to their owners than other patents, more than half of this historical advantage has dissipated between 2006 and 2022. Over the same time period, patents first assigned to universities have similarly lost value compared to patents assigned to other organizations.

To the authors’ knowledge, this is the first study of the economic impact of patent holdout, which is crucial to understanding the empirical reality, not only the theoretical potentiality. Continued research in this field will be helpful to provide companies and policymakers with better information on the direction and extent of patent holdout and holdup in support of policies that create more efficient markets for technology and greater social welfare from innovation.

 

I may have more to say about this one in a future post.

4. Jack Lu has published an article titled Introducing the LES Build-up Method to Determine Royalty Rates in the September 13 issue of IAM Magazine.  The article is behind a paywall, here.  The abstract (below) is on ssrn, and I understand that the paper will be too after October 13:

Royalty rate determination has been studied extensively over the years. Still, there are no quick answers for some of the questions encountered frequently in IP licensing and litigation. These include:

 

- When converting a nonexclusive license to an exclusive license, or vice versa, how should the royalty rate be adjusted accordingly?

 

- How can you determine a royalty rate for a patent license with mature technology based on the royalty rate in a previous license with early-stage technology in the same field?

 

- How much should you increase a royalty rate by when a patent licensee asks for additional IP such as trade secrets, know-how, designs or drawings?

 

This article introduces the build-up method for royalty rate determination developed by License Executives Society (LES) USA and Canada and illustrates how this method can be used to answer such pressing, critical questions in licensing and litigation.

 

Specifically, it will present the premiums or discounts associated with certain license features or parameters such as exclusivity, technology development stage, and IP types licensed, among others. It will then demonstrate how to apply the premiums or discounts in royalty rate determination when negotiating license agreements with or without certain parameters.

 

The analysis will also describe the steps that employ the LES build-up method to decompose a royalty rate from a “good, yet imperfect, comparable” (in the words of the IRS) license to identify and quantify the value contributions of various parameters of the license. The quantified value contribution of each parameter will then be used to calculate a comparable royalty rate for the license agreement to be negotiated based on the specific parameters.

 

Finally, the article will discuss further adjustments needed to conclude a reasonable royalty rate.

5.  Victor Vaibhav Tandon and Ashwini Siwal have published a paper titled SEP Litigations & Issues in Determining FRAND License, 28 J. Intell. Prop. Rts. 438 (2023).  Here is a link, and here is the abstract: 

Lately, there have been several multi-jurisdiction litigations involving SEPs. In large part this is because of the complexity of executing FRAND licenses for SEP portfolios. This work focuses on, and explains, some of the issues that arise in the context of FRAND licensing- including, the problem of over-declaration by SEP holders, the possibility of patent hold-out, difficulties associated in court determination of terms of a global FRAND license for SEP portfolios, lack of awareness regarding the nuances of SEP/FRAND space, and the intrinsic informational imbalances that exist in any FRAND negotiation. The issues discussed here are by no means exhaustive and many of them do not have easy answers.