This blog covers software patent news and issues with a particular focus on wireless, mobile devices (smartphones, tablet computers, connected cars) as well as select antitrust matters surrounding those devices.
Today the United States Court of Appeals for the Federal Circuit denied, without stating any particular reasons, Apple's petition for a rehearing of its mid-October opinion on the Galaxy Nexus preliminary injunction matter. Apple had asked for a rehearing by the panel of three judges who made the original decision or, preferably, a rehearing en banc (full-bench review). Such rehearings are rarely granted, but the question of whether patent holders would be able to bar direct competitors from continued infringement of patents without having to prove that the patented features drive consumer demand appeared important enough to warrant high-level attention.
Apple stressed the importance of the issue on a couple of other occasions as well. It warned that the costs to innovation would be profound if the "causal nexus" requirement (that a particular patented feature drives consumer demand, as opposed to the lower hurdle of proving that a competing product having, among other things, infringing features causes competitive harm) had to be satisfied by smartphone patent holders. For multifunctional products it's extremely hard, if not impossible, to show that a particular feature drives consumer demand. Apple also emphasized the importance of the question in a petition for an initial hearing by the full appeals court of Judge Koh's recent denial of a permanent injunction against Samsung despite a multiplicity of infringement findings by a California jury.
The appeal of that denial of a permanent injunction is now the next opportunity for Apple to improve its position vis-à-vis Android device makers such as Samsung. Despite today's denial of a rehearing I believe there is a chance that the Federal Circuit agrees with Apple, at least to a certain degree, that the de facto unavailability of injunctive relief in a large number of cases, including the highest-profile cases in the history of patent law, is not really reconcilable with the notion of intellectual property. While Judge Koh in the Northern District of California applied the "causal nexus" standard in just the same way to a preliminary (pre-trial) and permanent (post-trial) injunction analysis, the Federal Circuit could still set a different standard in connection with permanent injunctions.
At this stage it appears extremely difficult for patent holders like Apple to win meaningful remedies in U.S. federal court. Not only has the "causal nexus" requirement raised the bar for injunctive relief but it also isn't particularly hard for a defendant found liable for infringement of valid patents to avoid a finding of willful conduct: earlier this week Judge Koh held that even though a jury was convinced of Samsung's subjective infringement of several Apple patents, Samsung had sufficiently reasonable defenses so as not to have committed objectively willful acts of infringement. Injunctions and damages enhancements (potentially triple damages) for willful infringement are the two most impactful remedies capable of discouraging infringement. But if they aren't available to Apple in a dispute with its largest direct competitor, Samsung, who else is going to win such remedies in the United States in the foreseeable future?
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InterDigital's letter in response to Samsung's request does not dispute that Samsung was licensed to six of the seven patents asserted against it until the end of last year. The samples of allegedly unlawful imports that InterDigital purchased from U.S. retailers were bought in December. But InterDigital argues that a license-based defense does not defeat the ITC's jurisdiction: the ITC should institute an investigation anyway, especially in light of the fact that its patent enforcement is prospective (banning future importation as opposed to awarding damages for past infringement), and Samsung should then raise a license defense if it has any. Even Samsung does not claim to have a license defense for the future. But Samsung argues that InterDigital failed to meet the factual pleading standard, which requires it to show unlawful imports to the ITC.
InterDigital says that even if only one of the seven patents asserted against Samsung was not subject to the license agreement (even Samsung concedes this much), that should be enough of a basis to institute an investigation.
What's happening between InterDigital and Samsung is a legal game and pretty much detached from common sense. There's no question that Samsung continues to import 3G- and 4G-capable products into the United States even without a license from IDCC. But there's also no question that if it had not been licensed until the end of last year, IDCC would have disputed that claim in its letter. Now both just take a "show me" position, or more precisely, a "show to the ITC" position: Samsung wants IDCC to show to the ITC that it is now importing (or about to import) unlicensed products into the U.S. market, and IDCC wants Samsung to show its license agreement to the ITC during the course of an investigation, knowing that an expired license agreement is not going to be relevant once the investigation has been instituted.
The ITC now has to think about the further implications of whatever decision it makes. If it sides with IDCC and institutes the complaint, then its pleading standard for Section 337 complaints will hit a new low, and it will, as a result, receive an increasing number of complaints with similar shortcomings. If it sides with Samsung, patent holders who wish to take action against a former licensee right upon expiration of a license agreement will have to wait until they have evidence of importation of unlicensed, infringing products. In my opinion, the latter is far less of a problem, at least from a public interest point of view, than the former.
The FRAND issues raised by Huawei -- IDCC's asserted patents are standard-essential patents (SEPs) -- are of even greater importance. And having read IDCC's response I'm even more convinced of the merits of Huawei's proposal. IDCC's letter argues that Huawei could always inform the ITC of a FRAND rate determination by a district court, but openly says that this will take years and that the ITC should in the meantime ban Huawei's products. This is preposterous. IDCC wants to create a situation in which the FRAND determination is going to be rendered irrelevant by injunctive relief, which will give IDCC the leverage to be the "dictator of the royalties" (to quote a research paper written by Iowa Professor Herbert Hovenkamp). This possibility is an argument for, not against, Huawei's suggestion that the ITC delay institution of an investigation while a FRAND determination action is ongoing in district court. IDCC's proposal comes down to requesting that the ITC serve as the key enabler of SEP-based hold-up in the United States.
IDCC tells the ITC that Huawei's reference to its sister agencies' (FTC, DoJ, USPTO) positions on SEP enforcement is selective because those agencies do say in their official statements that injunctive relief over SEPs is appropriate under certain circumstances. In particular, InterDigital quotes a passage of the DoJ/USPTO position paper that I also criticized even though I wholeheartedly agree with at least 95% of what that document says. However, even the passage that IDCC quotes does not give any specific examples ("specific" as opposed to an open-ended remark that the list of exception is "not exhaustive") other than situations in which "a putative licensee refuses to pay what has been determined to be a F/RAND royalty, or refuses to engage in a negotiation to determine F/RAND terms" -- none of which applies to Huawei, which has brought a FRAND determination action in Delaware and has declared itself bound to its outcome. That said, I do believe that the FTC, DoJ and USPTO should look at IDCC's letter, considering that many other SEP holders are going to try to leverage those agencies' position papers and settlements in similar ways, and should draw the appropriate conclusions from it, especially in connection with the proposed SEP agreement between the FTC and Google, which can still be optimized (and in my opinion needs to be improved) in the coming months.
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At close of business on Tuesday, Judge Lucy Koh, the federal judge presiding over two Apple v. Samsung lawsuits in the Northern District of California, entered four more of her long-awaited post-trial orders. The short version is that
she reversed the finding that Samsung's acts of patent infringement were willful (because Samsung had reasons to believe that what it was doing was legal) and overruled the jury with respect to a patent exhaustion question (which has no effect because the related patent was not deemed infringed by Apple), but otherwise upheld the jury's liability findings against Samsung, denying further modifications as well as a new trial;
as a result of finding no objective willfulness she denied Apple any damages enhancements for willful infringement (which could have resulted in a tripling of parts of the award); she also denied enhancements of trade dress damages on other grounds;
with the exception of declaring two Samsung patent claims (which the jury didn't find infringed anyway) invalid, she declined to overrule the jury in Apple's favor or to order a new trial on issues on which Apple didn't prevail last summer; and
she also ruled against Samsung's claims that one of Apple's multitouch software patents and four of its design patents were indefinite (which is one invalidity theory).
Let me put the Tuesday orders into context before elaborating on them. The jury rendered its verdict on August 24, 2012, and both parties filed a variety of motions to achieve improvements in their favor. A hearing on those motions, as well as on motions relating to remedies, was held on December 6, 2012. On December 17, 2012, Judge Koh adjudged two particularly important post-trial issues: she denied Apple a permanent injunction (a decision that Apple appealed that same week), and threw out Samsung's long-shot demand for a new trial because of alleged jury misconduct. Due to the complexity of this case and the overall caseload of the court it's not surprising that it took a while before any further decision came down, and with Tuesday's rulings we're still not done. The court still has to rule on Samsung's request for adjustments to the damages award (Samsung wants it tossed or reduced). Due to the denial of a permanent injunction, Apple will presumably move at some point for an award of ongoing royalties for future use of its patents by Samsung -- the denial of an injunction does not mean that Samsung is entitled to a freebie. And it's a given that either party will ultimately appeal (from the final district court ruling, to which we're now a lot closer) any unfavorable parts.
I previously assumed that Judge Koh was going to make only limited adjustments to the jury verdict. This prediction has so far been validated.
Now let's look at the Tuesday rulings on an item-by-item basis.
The most important part of this JMOL ruling is that Judge Koh, unlike the jury, did not find a willful patent infringement by Samsung. In order to prevail on this one, Apple needed to prove both objective and subjective willfulness. "Objective" and "subjective" relate to the likelihood that its actions constituted infringement of a valid patent. The likelihood is objectively high if someone knowing the patents and all other relevant facts (including all of the prior art that could be used to invalidate them) would think that there is an infringement; it's subjectively high if the infringer actually knew these facts or if they were so obvious that he should have known. This is all just about patents, not Apple's trade dress claims, which the JMOL ruling addressed separately. The jury had found that Samsung's infringement was subjectively willful for three multitouch software patents and two design patents (in other words, Samsung knowingly and willingly copied Apple's designs and technology), but on this basis Apple still needed to prove an objectively high likelihood, which is for the judge (not the jury) to decide. The jury's findings of subjective willfulness were not addressed because the court found that there was no objective willfulness (so technically the jury wasn't overruled because its findings were only about subjective willfulness, but the result was reversed nevertheless). The order says that "[i]f Samsung had an objectively reasonable defense to infringement, its infringement cannot be said to be objectively willful". The order then looks at each of the five patents the jury found willfully infringed, and finds an objectively reasonable defense in each case:
Rubber-banding ('381) patent: Judge Koh concluded that Samsung reasonably relied on its invalidity defense. The order mentions the USPTO's first Office action tentatively rejecting all claims of this patent only in a footnote that points out how unreliable first Office actions are, but it may nevertheless have influenced Judge Koh's thinking. In a preliminary injunction decision in December 2011 she had not found this patent likely to be invalid.
Tap-to-zoom-and-navigate ('163) patent: even though Judge Koh near-simultaneously denied Samsung's motion to find the asserted claims of this patent indefinite, she felt that this was a close question of law and Samsung was acting reasonably in its reliance on having an invalidity defense to this patent. In other words, the judge didn't find that Samsung was right on this, but it wasn't light years away from being right.
Pinch-to-zoom API ('915) patent: here again, Samsung had an invalidity theory (against the asserted claim 8) that failed so far (the jury didn't buy it and Judge Koh declined to overrule the jury in this regard), but the theory was good enough that Samsung could have relied on it when deciding to infringe the patent. Like the rubber-banding ('381) patent, this one has also been tentatively rejected by the patent office, a fact that Judge Koh mentions only in a footnote that references another footnote according to which such first Office actions are unreliable.
Design patents (D'677 and D'305): Judge Koh believes that infringement was a close question, so Samsung's infringement wasn't objectively willful. Apple would have had to show that Samsung's defenses were unreasonable, which is a higher standard than just being ultimately unsuccessful. Whether Judge Koh's requirements in this respect were too exacting is likely going to be a key issue on appeal.
Samsung achieved a partial improvement only in a formal sense with respect to its '516 patent, but not enough to win a liability finding (at least not prior to an appeal). The jury's finding of non-infringement was upheld, but its finding of exhaustion of the asserted claims (claims 15 and 16) of the '516 patent was tossed. Apple's patent exhaustion theory here was (in a simplified form) that Intel had a license to Samsung's patents and Apple's products implement the patented invention only by incorporating Intel baseband chips. Judge Koh agrees with the jury that Intel was licensed. She also concluded that "the authorized sales to Apple occurred in the United States", which is another requirement. But she saw a contradiction in the jury's finding of exhaustion and non-infringement, given that exhaustion would require Intel's baseband chips to substantially embody the patented invention: if Apple used Intel chips in the accused products (Apple's more recent products come with Qualcomm chips) and if those implement the patent, then Apple's products incorporating those Intel chips, by definition, also implement it. So there can only be a finding of exhaustion if there is also one of infringement. Again, this has no consequences: the non-infringement finding stands, and if it was overturned on appeal, then the question of exhaustion would have to be analyzed again.
According to Judge Koh, the jury reasonably found Apple's two phone design patents (D'087 and D'677) and its user interface design patent (D'305) to be valid and infringed. The jury finding was not against the clear weight of the evidence, the order says. I would agree with respect to the phone design patents. I do believe that the question of whether user interfaces -- as opposed to designs of physical objects -- can be claimed by design patents (which is what the D'305 start screen design patent is all about) could be a rather interesting one on appeal.
The registered iPhone trade dress and unregistered iPhone 3G trade dress were found protectable and diluted. Judge Koh found that there is substantial evidence in the record to support the jury's findings.
In connection with Apple's multitouch software patents, which were found valid and infringed (and which findings Judge Koh decided to uphold), the most interesting issue is that there was indeed an inconsistency in the jury verdict because the '915 patent was found infringed by multiple Samsung devices running Android 2.2.1 or 2.2.2, but not by the Galaxy Ace (Android 2.2.1), Intercept (2.2.2) and Replenish (2.2.2, too). Samsung argued that at least there should be a new trial as a result of such inconsistency. But under Ninth Circuit law, verdicts are vacated on grounds of inconsistency only if they cannot be "reconciled on any reasonable theory consistent with the evidence". One distinction that is made in this context is the one between two legal conclusions that cannot logically coexist and a "mere inconsistent view of facts". Here, Judge Koh concluded that there is an inconsistency, but it can and must stand.
The jury held not only two Samsung U.S. subsidiaries but also Samsung Electronics Corporation, a Korean entity, liable for direct infringement. The Korean parent company was also found liable for inducing infringement by its U.S. subsidiaries. Samsung wanted these findings overturned, but Judge Koh upheld the jury's findings, which makes sense: those U.S. subsidiaries are obviously controlled by the Korean company. They are formally separate legal entities, but for all practical intents and purposes they are just like local offices of the Korean organization, and actually refer to the Korean company as their "headquarters".
The jury verdict was a disappointment for Samsung not only because Apple prevailed on most of its claims but also because Samsung's infringement claims against Apple failed in their entirety. After the JMOL rulings (and before the appeal), Samsung still doesn't hold any offensive win against Apple (with respect to this case) in its hands. In fact, things got even worse for Samsung because Apple proved the asserted claims of its '941 patent invalid. Judge Koh declined to find any infringements with respect to the other four Samsung patents-in-suit.
The court also disagreed with Samsung's assertion that the trial was manifestly unfair. Samsung had argued that it was prejudiced by
the trial time limitation,
by Apple's references (permitted by the court) to witnesses Samsung did not call (suggesting that they weren't called because they had nothing useful to Samsung to say),
by court orders barring its witnesses from making certain arguments and not barring Apple's witnesses from making other arguments,
by a requirement to lay foundation for documents while Apple allegedly didn't have to meet such a requirement in some contexts,
by being barred from playing advertisements, which Apple was allowed to do, and
by not being allowed to use depositions to cross-examine Apple's witnesses while Apple was allowed to do so.
All of this relates to decisions the court made at or before trial, and it's unsurprising that the court still stands by its orders. The JMOL ruling notes that Samsung would have had the option to put its own infringement claims against Apple on a separate track, and that Samsung had to simply manage its allotted time.
The only item on which Judge Koh overruled the jury in Apple's favor is the question of whether the asserted claims (claims 10 and 15) of Samsung's U.S. Patent No. 7,675,941 on a "method and apparatus for transmitting/receiving packet data using pre-defined length indicator in a mobile communication system" are invalid. The jury didn't find any of Apple or Samsung's patent claims invalid, and a few days after the jury verdict came down I described this as the single biggest issue with the verdict, given that a solid majority of all patent claims granted by patent offices ultimately turn out not to be valid as granted (some are entirely invalid while others survive only after being narrowed through amendments). It would be a statistical anomaly for all Apple and Samsung patents-in-suit to be valid as granted. Even though the hurdle is very high for a court to overrule a factual finding by a jury, Judge Koh has now concluded that U.S. Patent No. 6,819,658 on a "method and apparatus for segmentation, reassembly and inverse multiplexing of packets and ATM cells over satellite/wireless networks" anticipated (i.e., renders non-novel and thus invalid) the asserted claims of Samsung's '941 patent. Samsung argued that there were some differences between the two patents, but according to Judge Koh, "Apple has established anticipation by clear and convincing evidence".
All other items of Apple's JMOL motion, discussed in more detail below, were denied.
The jury found that Apple's unregistered iPad/iPad 2 trade dress was not protectable and not famous, and on that basis never addressed the questions of dilution and infringement. Judge Koh determined that the jury's related finding was not unreasonable, and just like the jury, she didn't reach the questions of infringement and dilution.
An item on which I once thought Apple had a relatively good chance of prevailing was the iPad design patent (U.S. Design Patent No. D504,889, given that Apple had won a preliminary injunction over that one. Apple wanted the court to find it infringed by the Galaxy Tab 10.1. But Judge Koh noted that the jury was not bound by the preliminary injunction decision and that certain evidence was considered by the jury that was not available at the preliminary injunction stage, including among other things Apple's concession that the original iPad did not implement this design patent.
The judge also denied all other request by Apple for additional liability findings, including among other things an inducement theory.
The other four Samsung patents-in-suit (than the invalidated '941 patent) were not ruled invalid.
Apple brought certain FRAND contract and antitrust counterclaims against Samsung, and the jury ruled against them. Judge Koh did not overrule the jury on those. It's important to consider that even if such counterclaims fail, as they did here (prior to an appeal, at least), FRAND defenses can still succeed. In another post-trial decision (which came down in mid-December) Judge Koh declined to rule on Apple's FRAND defenses because there is no need to address them as long as no standard-essential patent-in-suit is found both valid and infringed. Even after Tuesday's ruling on Samsung's JMOL motion there is no SEP-based liability finding, so the FRAND defenses won't come into play unless and until an appeals court lets Samsung prevail on at least one SEP claim.
Indefiniteness is an invalidity theory, but it's one for the court, not the jury, to decide, which is why Samsung's related motion attacking four Apple patents (the asserted claim of one software patent, and four design patents) is technically a separate motion from its JMOL ("overrule the jury") motion.
For the four design patents Samsung claimed to be indefinite (D'677, D'087, D'305, D'889) it faced a very high hurdle. It needed to show that a skilled designer would not be able to understand, from looking at the drawings in the patent documents, what kind of design was covered. Samsung failed to meet this high hurdle. Even Samsung's own expert witnesses gave testimony that allowed the court to infer that they had understood the scope of those design patents quite well (for example, if someone says a patent is obvious, he must understand the patent in the first place). There may have been some issues with dotted lines that appeared in one drawing but not another, or with only one of several drawings in one of the design patents having color, but none of this was enough to prove those design patents indefinite.
For the tap-to-zoom-and-navigate ('163) patent, indefiniteness was a closer question. The term that Samsung claimed to be indefinite (meaning that it's not amenable to construction and insolubly ambiguous) is "substantially centered". Without "substantially", the word "centered" would be mathematically precise. But "substantially" is a word of degree. Five pixels to the right of a center location on a screen that is 400 pixels wide is still "substantially centered" in most people's opinion, but how about 20 or 30 pixels? Where must the line be drawn? Samsung raised a legitimate question, but the answer is that a lack of precision does not necessarily render a patent invalid. Even one of Samsung's own witnesses talked about items being "substantially centered" on the screens of certain Samsung devices, suggesting that he was able to apply the term to a particular screen layout.
In a post-trial motion Apple had asked for the damages award to be increased on different grounds. On the basis of the jury's findings of willful patent infringement, Apple wanted parts of the award to be tripled. It also wanted enhancements for trade dress infringement and dilution. And it asked for supplemental damages relating to the period between the trial and the final ruling. The question of supplemental damages still has to be decided by the court. The requested enhancements for willful patent infringement and for trade dress infringement and dilution have, however, been denied in their entirety.
The part on enhancements for willful patent infringement was simplified by Judge Koh's finding that Samsung's patent infringement was not objectively willful.
The legal basis for enhancements of trade dress damages is the Lanham Act (U.S. trademark law). Judge Koh's order notes that "[t]his type of enhancement is intended only to compensate a plaintiff for additional losses not compensated by the existing award, not to punish a defendant". Simply put, Judge Koh saw no indication that the jury did not consider all of the damages Apple suffered when it determined, on a per-product basis, its damages award. Apple wanted a reasonably straightforward jury questionnaire with total damages per product as opposed to a complex matrix of damages per product and per intellectual property right. While the jury questionnaire still ended up being huge (roughly 700 questions), Apple's wish for reasonably simple damages awards was granted, but as a result, Apple was unable after the trial to disaggregate the jury awards in order to show to the court that the part attributable to trade dress infringement was insufficient to compensate Apple for any losses.
[Update] AppleInsider has uploaded all four orders summarized in this post (link #1, link #2). [/Update]
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Chinese telecommunications giant Huawei yesterday wrote a letter to the United States International Trade Commission (USITC, or just ITC) requesting that InterDigital's latest complaint, filed on January 2 (against a group of defendants also including Samsung, Nokia and ZTE), not be investigated until the FRAND issues surrounding InterDigital's asserted standard-essential patents (SEPs) have been resolved in federal court in Delaware or, as a fallback, at least until the ITC has concluded the investigation of InterDigital's July 2011 complaint against Huawei, ZTE and Nokia. The first suggestion -- that the ITC wait for a federal court to adjudge FRAND licensing issues -- is a very interesting proposal, particularly in light of concerns expressed by the Federal Trade Commission, the Department of Justice and the United States Patent and Trademark Office.
The way in which Huawei responded to InterDigital's latest request for a U.S. import ban over SEPs could serve as a model for other defendants to ensure that FRAND issues can be addressed in the appropriate forum -- a federal court -- before the ITC potentially orders an import ban. Huawei's letter argues that a "delay in institution of [an investigation of] InterDigital's complaint will significantly conserve Commission and party resources, as well as permit the Commission to implement the recommendation of its sister agencies [i.e., FTC, DoJ and USPTO] and federal district courts concerning exclusion orders applicable to FRAND-committed SEPs".
Huawei is reacting to InterDigital's latest enforcement activity with measures that have undoubtedly been inspired by the FTC's envisioned settlement with Google, which potentially enables a willing licensee to avoid an injunction (ITC import bans are one form of injunctive relief) by bringing a FRAND determination action in federal court and declaring himself bound to the outcome of such determination. Here's how Huawei describes its related initiative in yesterday's letter to the ITC:
At the same time that InterDigital filed its latest complaint with the Commission, InterDigital also filed complaints in the U.S. District Court of the District of Delaware against the proposed respondents alleging infringement of all of the patents asserted in the ITC. See Exhibit A (InterDigital Communications Corp. v. Huawei, Civ. Action No. 13-08, Complaint (D. Del. 2013)). Huawei does not intend to seek an automatic stay of the Delaware Action pursuant to 28 U.S.C. § 1659 [an article that provides for stays of federal companion (mirror) lawsuits while an ITC investigation of the same issues is ongoing]. Instead, Huawei has filed an answer asserting counterclaims, including for breach of contract and equitable estoppel, relating to InterDigital's FRAND commitments, as well as declaratory judgment counterclaims asking the district court to set FRAND terms for InterDigital's United States 3G and 4G LTE patents. See Exhibit B at Counts I-III, V, VI (Huawei Answer, Civ. Action No. 13-08 (Jan. 24, 2013)). Huawei will be bound by the district court's determination of a FRAND rate.
Count II: Breach of Contract -- Third Party Beneficiary
Count III: Equitable Estoppel
Count V: Declaratory Relief -- IDC Has Not Offered or Granted Huawei Licenses on FRAND Terms
Count VI: Declaratory Relief -- Determination of FRAND Terms
Count IV (waiver of right to enjoin) is also FRAND-related but Huawei did not consider it relevant in this context. The most important counterclaim now, against the background of the proposed FTC-Google settlement, is obviously Count VI -- Determination of FRAND Terms. Here's the full text of that claim (apart from general explanations provided elsewhere in the document and incorporated by reference, all of which you can find in the document itself):
79. There is an actual controversy between the parties concerning FRAND terms for IDC's patents that have been declared essential to a standard used by any of the products accused in the earlier filed case or this action.
80. The controversy is of sufficient immediacy and reality to warrant the issuance of a declaratory judgment.
81. Huawei is entitled to a declaratory judgment determining an appropriate FRAND royalty for IDC's United States 3G and LTE 4G patents that have been declared essential to a standard used by any of the products accused in the earlier filed case or this action.
The related prayer for relief requests "a declaratory judgment setting an appropriate FRAND royalty to license IDC's United States 3G and 4G LTE patents that have been declared essential to a standard used by any products accused in the earlier filed case or in this action".
Huawei's filing in Delaware does not say explicitly what its letter to the ITC now says: "Huawei will be bound by the district court's determination of a FRAND rate." And even this affirmative statement may fall short of what InterDigital's lawyers consider sufficient: being bound to a rate is not necessarily the same as saying affirmatively that one will take a license on court-ordered terms. Apple's FRAND case against Google's Motorola in the Western District of Wisconsin is an example where a similar distinction played a role. But this could always be clarified.
The ITC has the right to stay investigations, and it will particularly do so for efficiency considerations concerning parallel proceedings. And it can delay the institution of an investigation. Huawei notes that in addition to the Delaware counterclaims, it "has also initiated contract and antitrust lawsuits in China and asked a Chinese court to set a royalty rate for InterDigital's Chinese essential patents". According to Huawei, "InterDigital has opposed the setting of a royalty rate" because it's "far more interested in exploiting the hold-up power of the ITC process than complying with its FRAND obligations". There are certainly strong indications that this is what InterDigital is trying to do. As a result, there is now the challenge of how a "willing licensee" can prove that he is prepared to take a license.
It would certainly be much better if U.S. antitrust regulators and the ITC could simply rule out injunctive relief against an identifiable defendant whom the patent holder can always sue for damages in federal court. But the ITC appears reluctant to give up its jurisdiction over SEP-based complaints, and antitrust regulators don't appear to be determined to apply the simplicity and clarity of the SEP-related parts of the FTC agreement with Bosch to all other SEP cases. As a result, patent holders like InterDigital can continue to pursue injunctive relief by arguing that someone has somehow not done enough to qualify as a "willing licensee". Under the circumstances, Huawei's response to InterDigital's complaint is a possible way out of this mess. Even in disputes in which an ITC complaint is not mirrored by a federal companion lawsuit, respondents could implement this strategy by bringing a FRAND determination action as a standalone lawsuit (as opposed to counterclaims), and if this happens during the 30 days that it typically takes the ITC to decide on whether to institute an investigation, a delay in institution may be the most efficient choice for everyone involved.
At least this would work against non-practicing entities like InterDigital. In cases in which two operating companies are suing each other over patents, the "defensive use" clause in the FTC's proposed patent agreement with Google is a huge problem.
In the particular case of InterDigital's complaint, Samsung has also raised an issue that could delay institution of an investigation, but Samsung's insistence on compliance with the ITC's factual pleading standard would likely result in a delay of only a few months, while the FRAND determination in federal court that Huawei requests would probably take about two years (not counting appeals).
Huawei is not only a defendant in connection with SEPs. It is asserting some of its SEPs against another Chinese company, ZTE, in several countries, particlarly in Germany. In mid-December the Mannheim Regional Court held a Huawei v. ZTE trial, and two such trials will take place in another German city, Dusseldorf, on Thursday. Huawei is seeking injunctive relief against ZTE, but there are no signs so far of ZTE asking for a FRAND determination by a court.
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InterDigital's latest patent enforcement effort against the global market leader in mobile devices, Samsung, may be delayed due to a result of a hastily-prepared complaint, which was filed and announced on January 2, 2013. InterDigital (frequently referred to as IDCC, its stock ticker symbol) may have to refile its complaint with respect to Samsung, or the institution of an investigation against Samsung may be delayed with respect to six of the seven patents-in-suit. Any such delay would almost certainly also benefit Nokia, Huawei and ZTE, the other responds to the relevant complaint, given that the ITC would presumably be very reluctant to put InterDigital's assertions against Samsung, which have substantial overlaps with the ones against the other three defendants, on a separate schedule.
The parties previously raised FRAND issues with the ITC in public interest statements discouraging the institution of an investigation. There is also a new development concerning Huawei's FRAND licensing issues with InterDigital (which I'll discuss in my next post).
Yesterday one of Samsung's counsel spoke with Lisa Barton, the Acting Secretary to the Commission (the six-member decision-making body at the top of the ITC), and subsequently filed a letter reiterating Samsung's position that "the Complaint is deficient because it fails to include any evidence of unlawful importation by Samsung of articles alleged to infringe six of the seven asserted patents".
Samsung had a license agreement in place with InterDigital until the end of last year, i.e., until two days before InterDigital filed its latest ITC complaint. It covered six of the seven asserted patents (all but U.S. Patent No. 7,941,151). Indeed, that license agreement is also mentioned in InterDigital's complaint (click on the image to enlarge or read the text below the image):
"This settlement resulted in a license between InterDigital and Samsung, which expired on December 31, 2012."
So InterDigital saw that its licensing negotiations with Samsung had not resulted in a renewed agreement, and decided to seek a U.S. import ban against Samsung right upon expiration of the existing agreement. It also wanted to up the pressure on Nokia, Huawei and ZTE with yet another complaint, and added them as respondents. But there's a problem with this tight schedule: if you lodge a complaint with the ITC, you must provide examples of unlawful importation by obtaining infringing goods in the United States. A licensed product is, by definition, not an infringing one. If InterDigital had purchased any products the day it filed the complaint, any imported devices would realistically have been imported while the license agreement was in place: a product won't be imported and end up on a retail shelf on the same day. The samples of Samsung devices that InterDigital's counsel purchased were even purchased prior to expiration. Here's my quick summary of what Exhibit 52 to InterDigital's complaint says about the purchase of Samsung product samples:
purchased one Galaxy Tab II (10.1) (wireless edition), two Galaxy Note II phablets, two Galaxy S III smartphones and two Galaxy Stellar low-end smartphones from a Verizon store in San Diego, California on December 6, 2012 and another Galaxy Tab II the following day
purchased two Galaxy Tab II (10.1) wireless devices, two Galaxy Note phablets and two Galaxy S III smartphones from an AT&T store in Palo Alto, California on December 11, 2012
purchased two Galaxy Note II phablets from a T-Mobile store in Sunnyvale, California on December 14, 2012
purchased two Galaxy Note 10.1 tablets from the Walmart website on December 11, 2012
Samsung now argues that it's not sufficient for InterDigital to purchase undoubtedly licensed devices and then claim that because of Samsung's continued sale of these devices after expiration of the license agreement, it's engaging in acts of unlawful importation. While there can be no doubt in my view that Samsung is continuing to import such devices into the U.S. market, ITC Rule 210.12(a)(3) requires complainants to "describe specific instances of alleged unlawful importations or sales".
If the Commission agrees with Samsung, InterDigital will have to send its counsel on another shopping tour, and given the considerable delay between importation and sale of such products, I'm not sure this could happen immediately. InterDigital may have to wait until it's a safe assumption that any devices it obtains in the U.S. market were imported after expiration of the license agreement. Even if the term of the license agreement relates (as it presumably does) to the sale of already-imported goods rather than importation into the United States, the ITC would be the wrong forum to adjudge unlicensed sales. Its competence is to prevent unlawful imports.
For practical considerations, I don't think that products released in 2012, such as the Galaxy Tab II (10.1), Note, Note II, S III and Stellar, are going to be useful for the purpose of proving unlicensed imports that occurred after the year 2012. Even if InterDigital purchased, for example, an S III in June 2013, whatever units it obtains might have been imported last year. I believe InterDigital will be on the safe side only if it waits until Samsung releases new products into the U.S. market, unless the ITC decides to decline or delay the institution of an investigation only if Samsung provides assurances that it won't continue to import products with cellular connectivity into the U.S. market without a license from InterDigital. Samsung doesn't say that it isn't doing this -- because it certainly is. It just says that there's a factual pleading standard in place that InterDigital has to meet.
Samsung was really the primary target of InterDigital's latest complaint. I don't think it would make sense for InterDigital to drop its allegations against Samsung at this stage. At some point, InterDigital will want to go after Samsung. It it does so before the ITC has concluded the investigation of the remaining parts of the complaint (targeting Nokia, Huawei and ZTE), or at least until an evidentiary hearing (trial) has been held, the ITC would be highly likely to consolidate a refiled complaint against Samsung into the case involving Nokia, Huawei and ZTE.
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On Monday Judge James L. Robart will hold a Microsoft v. Motorola hearing to discuss with parties' counsel the bearing of a grant-back clause in Google's (i.e., Motorola's parent company's) patent license agreement with pool firm MPEG LA. If the entire Google group is found to have a grant-back obligation at the equivalent of the pool rate, a royalty demand that originally amounted to billions of dollars per year would be contracted to a few hundred thousand dollars. On Wednesday Microsoft submitted a declaration of MPEG LA chief executive Larry Horn that supports its related theory; Google submitted a declaration by one of its lawyers but apparently couldn't find anyone involved with MPEG LA and the contributors to its AVC/H.264 pool to support the claim that the grant-back clause is meaningless.
On Friday Microsoft submitted an additional declaration that shows how the grant-back clause in the MPEG LA AVC/H.264 license agreement evolved during the first quarter of 2004. The related emails already formed part of the evidentiary record but Microsoft's declaration now draws the court's attention to those documents and, as a side effect, enables the rest of us to see how the key passage "and its Affiliates, if any," was added -- and such additions always have a purpose. The license agreement explicitly defines "Affiliates" as including companies acquired after the date of the agreement.
What lends even more significance to the evolution of the clause is the fact that the recipients of those draft contracts included an executive of General Instrument Corporation, then a wholly-owned Motorola subsidiary and now a wholly-owned Google subsidiary. Motorola/GI walked out on the deal, but at any rate, today's Google-Motorola group as a whole knew exactly what reciprocal-licensing obligations it entered into because of Google's conclusion of a license agreement with MPEG LA and its subsequent acquisition of General Instrument as part of Motorola. If Google doesn't like the effects of the grant-back clause now, it should probably blame those who conducted due diligence on the Motorola acquisition: they should have checked on whether any of Google's existing agreements were going to be affected by the merger.
Knowing that the upcoming FRAND rate-setting decision in Seattle is going to be one of the key events in this year's patent-related disputes (this will be the first time, at least in a high-profile case, for a federal court to set a FRAND rate), I try to ensure that those researching the matter have access to the most important facts, including the key parts of what Microsoft filed yesterday.
Here's the header of a January 22, 2004 email by MPEG LA's Larry Horn to the AVCGroup mailing list (click on the image to enlarge):
And here's the grant-back clause in the draft license that was attached to that email (click on the image to enlarge or read the text below the image):
8.3 Licensee Grant. Upon full execution of this Agreement, Licensee agrees to grant a worldwide, nonexclusive license and/or sublicense (commensurate to the scope of the licenses which Licensee has selected hereunder) under any and all AVC Essential Patent(s) that Licensee has the right to license and/or sublicense, to any Licensor or any sublicensee of the Licensing Administrator desiring such a license and/or sublicense on fair and reasonable terms and conditions. For purposes of this Section 8.3 only, the Licensors' per patent share of royalties which are payable pursuant to Article 3 of this Agreement shall be presumed to be a fair and reasonable royalty rate for the aforementioned license and/or sublicense to be granted by the Licensee.
At that stage, there was no reference to Affiliates, as you can see above. But this changed over the next couple of months. Here's the header of an email from MPEG LA's Larry Horn to the AVCGroup mailing list, dated March 26, 2004 (click on the image to enlarge):
The purpose of that email was to send out a redlined (i.e., edits were marked up) version the "final draft" he sent out to the prospective contributors. And this is where, finally, "and its Affiliates, if any," was added to the grant-back clause (there had been a version in between the January 22 and March 26 drafts that said "or" instead of "and"). Here's the grant-back clause (click on the image to enlarge or read the text below the image):
8.3 Licensee Grant. Upon full execution of this Agreement, Licensee agrees to grant a worldwide, nonexclusive license and/or sublicense (commensurate to the scope of the licenses which Licensee has selected hereunder) under any and all AVC Essential Patent(s) that Licensee <or>and its Affiliates, if any, ha<s>ve the right to license and/or sublicense, to any Licensor or any sublicensee of the Licensing Administrator desiring such a license and/or sublicense on fair and reasonable terms and conditions. For purposes of this Section 8.3 only, the Licensor's per patent share of royalties which are payable pursuant to Article 3 of this Agreement shall be presumed to be a fair and [...]
I hope some Seattle-based reporters will find the time to attend the Monday hearing and report.
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A new round of legal maneuvering between Apple and Google's Motorola Mobility could, as one potential outcome, have the parties meet before Judge Richard Posner again. Last year Judge Posner dismissed both parties' claims against each other in the Northern District of Illinois, where he was sitting by designation though he is a circuit judge who usually hears appeals. Next time he may see Apple and Google (Motorola Mobility) in his primary capacity.
The latest procedural dispute between Apple and Google (Motorola) is over which U.S. appeals court -- the Federal Circuit or the Seventh Circuit -- should hear the parties' cross-appeal of a FRAND contract ruling handed down in November 2012 by the United States District Court for the Western District of Wisconsin. The Federal Circuit, to which Apple appealed certain parts of the ruling earlier this month, is the circuit for all cases arising under U.S. patent law, while contract cases brought in the Western District of Wisconsin would usually be appealed to the Seventh Circuit. Judge Posner is a Seventh Circuit judge, and used to be this appeals court's Chief Judge.
Late on Friday (January 25, 2013), Google filed with the Federal Circuit a "motion to dismiss for lack of jurisdiction", which includes a request that the Apple-Google cross-appeal be transferred to the Seventh Circuit. Google already announced its intent to bring such a motion when it gave notice (in Wisconsin) of its appeal of the parts of Judge Barbara Crabb's FRAND ruling that are unfavorable to it, particularly certain contract-related summary judgment decisions in Apple's favor and the fact that Apple's claims were dismissed only without prejudice (contrary to Judge Crabb's original intention). Yesterday the Federal Circuit consolidated the two appeals into a single cross-appeal, and a few hours later Google's Motorola brought this motion.
Venue fights occur all the time, though they are much more common in district court (East Texas or Northern California? Delaware or Massachusetts?) than on appeal, where in most cases there is clarity as to the competent circuit. In a run-of-the-mill patent infringement case there would be no debate over the Federal Circuit's competency (regardless of geography), and in most contract cases the appeals court would simply be the one to whose circuit the district court belongs. There was no debate over the competency of the Ninth Circuit in the FRAND contract dispute between Microsoft and Motorola after the latter appealed an anti-enforcement injunction won by Microsoft (which the Ninth Circuit upheld). But there's an important difference between the Microsoft and Apple FRAND cases: Microsoft brought its FRAND contract action in November 2010 pre-emptively (before Motorola's assertions), while Apple raised FRAND contract and (unlike Microsoft) antitrust issues in the form of counterclaims to Motorola's earlier-filed ITC complaint. Counterclaims brought in an ITC investigation must be immediately severed and transferred to a district court, and Apple elected the Western District of Wisconsin.
Google's motion cites the relevant paragraph that establishes the Federal Circuit's US-wide jurisdiction over patent cases, 28 U.S.C. 1295(a)(1):
"The United States Court of Appeals for the Federal Circuit shall have exclusive jurisdiction—(1) of an appeal from a final decision of a district court of the United States…in any civil action arising under, or in any civil action in which a party has asserted a compulsory counterclaim arising under, any Act of Congress relating to patents or [...]" (emphasis mine)
Google argues that Apple's Wisconsin case was based on contract and antitrust law, not patent law. Oddly, the word "counterclaim", which I highlighted in the above quote, appears only this once in Google's motion. But the Wisconsin case constitutes the removal of counterclaims from an ITC investigation, and no one would ever doubt that an ITC decision must be appealed to the Federal Circuit. It's also my understanding that at least some (if not all) of Apple's claims are compulsory counterclaims to Motorola's infringement claims involving standard-essential patents. But I'm more of a business and tech guy and just watching what Apple and Google's experts on civil procedures are saying. Still I am of the opinion that Google's argument for a transfer misses the point unless and until Google explains why the Federal Circuit should not have jurisdiction over (compulsory) counterclaims to an ITC complaint.
As always, the question is what the moving party hopes to gain. There are three possible motives here:
Google might hope that a Seventh Circuit decision would likely be more favorable than a Federal Circuit decision.
Additionally or alternatively, Google might prefer the Seventh Circuit because if it loses there, the impact of its defeat will be more limited. A Federal Circuit decision would affect all patent infringement cases U.S.-wide in which such claims might be brought as counterclaims, and all ITC investigations. A Seventh Circuit decision would become the law within that circuit and would have significant persuasive value outside it, but it wouldn't have the U.S.-wide direct impact of a Federal Circuit opinion.
Another potential consideration is that the Federal Circuit is already hearing the parties' cross-appeal of Judge Posner's ruling. It's possible that the Federal Circuit would consolidate both Apple-Motorola FRAND cases. For whatever reason Google might not want that to happen.
As for the first item, I don't see an obvious reason for which the Seventh Circuit would be more likely to rule in Google's favor than the generally patentee-friendly Federal Circuit. It's Motorola's home circuit, but I doubt that such high-level judges are influenced by that fact in any way (and now it's just a subsidiary of a Silicon Valley company). Judge Crabb is likely a well-respected judge within that circuit, but if she erred, they'll overrule here.
The most interesting question here is whether Judge Posner would become involved with this appeal. He obviously can't hear an appeal of his own district court decision, but that one has been appealed to the Federal Circuit anyway. Technically, the Wisconsin case is a separate case, though there is an overlap with respect to the FRAND issues. At some point, the case that Judge Posner adjudicated in the Northern District of Illinois was also pending in Wisconsin -- until Judge Crabb gladly passed it on to Judge Posner, who had volunteered to handle it.
Assuming for the sake of the argument that Google's motion succeeds and that Judge Posner forms part of the panel ultimately hearing this case, what would this mean for the likely outcome? It's hard to tell. On the one hand, Judge Posner is definitely as FRAND-friendly as it gets, and Google has been quite negative on the FRAND part of his ruling. On the other hand, he's also a judge who wants private parties to respect the courts and the judicial process, and if Apple had taken its famous "$1 max." position in front of him, I don't think he would have accepted it.
Google's motion mentions that Apple will oppose it, and I'm quite sure Apple's argument will stress the fact that the Wisconsin case is just the result of a mandatory removal of counterclaims from the ITC. The resolution of key FRAND issues by U.S. appeals courts is a very important matter. The industry needs legal certainty, and it needs more of it than the FTC appears to be willing to provide through its settlement with Google.
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Today the United States International Trade Commission (USITC, or just ITC), a government agency with quasijudicial powers to ban infringing products from importation into the U.S. market, announced its decision to investigate Samsung's December 21 complaint against Ericsson. I have yet to see a case involving such major players that the ITC would decline to investigate.
The ITC is already investigating Ericsson's earlier-filed complaint against Samsung. An Administrative Law Judge (ALJ) earlier this week set a target date for the final ruling on that matter: April 8, 2014, which would be 15 months after institution of the investigation and two months earlier than the ITC staff, which participates in certain investigations as a third party, recommended (Ericsson proposed 14 months, Samsung suggested 20 months due to the size and complexity of the case).
The two investigations will proceed separately from each other, with different schedules, just like Apple and Samsung's complaints against each other are being investigated independently. Unlike U.S. federal courts, the ITC does not allow defendants to raise counterclaims, and it does not consolidate investigations of cross-complaints (though it does consolidate investigations in which different defendants have to defend themselves against the same patents).
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This morning Judge Andreas Voss ("Voß" in German) of the Mannheim Regional Court announced an order to stay a German Samsung v. Apple lawsuit over EP1720373 on a "method and apparatus for reporting inter-frequency measurement using RACH message in a communication system", which Samsung believes to be essential to the third-generation cellular telecommunications standard (UMTS). The case will be adjudicated only after the validity of this patent, which Apple is challenging in a nullity (invalidation) action pending in the Munich-based Federal Patent Court, has been established, which will likely take years. German courts stay infringement actions only if they identify an infringement but consider the patent-in-suit likely to be invalid. [Correction on February 1, 2013] Originally this post said that the patent would have to be considered "highly probable to be invalid" (emphasis added now). That is the standard in German patent infringement cases in which injunctive relief is sought. Here, Samsung withdrew its requests for sales bans (as explained further below), and as a result, the court saw less of an urgent need for adjudging the case, which considerably lowered the bar for a stay. Invalidation only had to be a likely outcome under these changed circumstances. German courts usually do not publish their decisions, but I have been able to find out from a confidential, reliable source. [/Correction]
While Judge Voss did not elaborate on the infringement finding and on the reasons for which his court ordered a stay, I remember from the trial that the key prior art reference cited by Apple was a version of the UMTS specifications that predated the filing of Samsung's patent application. Apple also argued that even if that document had not anticipated Samsung's claimed invention, it would render the patent obvious if combined with a Nortel change request submitted as part of the standard-setting process. At the trial Judge Voss had suggested that patent examiners make more use of standardization documents when deciding on whether to grant a patent.
The withdrawal of Samsung's injunction requests greatly reduced the threat to Apple's business but didn't render those lawsuits entirely irrelevant. Samsung is still pursuing infringement damages. Many of the initial reports on Samsung's withdrawal said or suggested that it had withdrawn "lawsuits" against Apple, but the withdrawal was limited to Samsung's prayers for injunctive relief (and only with respect to SEPs).
So far, neither Apple nor Samsung have prevailed in any of their Mannheim cases against each other (though other parties have been quite successful with their Mannheim complaints). Samsung sued Apple over three SEPs in April 2011 but couldn't show infringement for any of them. In December 2011, Samsung sued Apple over four more patents: two SEPs and two non-SEPs. In December 2012, the Mannheim court stayed one of the non-SEP cases (over a smiley input method patent). Some Apple cases against Samsung were stayed while others ended in a finding of non-infringement. Both parties appealed all final Mannheim rulings against them to the Karlsruhe Higher Regional Court. A higher regional court in Germany is the equivalent of a U.S. appeals court for a given circuit. All appeals of Mannheim rulings go to Karlsruhe, where various appeals hearings on wireless patent lawsuits are going to take place this year.
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On Monday (January 28, 2013), Microsoft and wholly-owned Google subsidiary Motorola Mobility will square off in federal court in Seattle to discuss the implications of a grant-back clause in a license agreement Google signed with patent pool firm MPEG LA for the rate-setting part of the FRAND contract case in the Western District of Washington. Yesterday (Wednesday, January 23, 2013) was the deadline for the parties' briefing and submissions of extrinsic evidence that might assist the court in the interpretation of the relevant contract.
Microsoft argues that, as a contributor to the MPEG LA pool, it is entitled to a reciprocal license to Google's H.264 declared-essential patents at the equivalent of the pool rate, and that the MPEG LA-Google contract (which is the same contract numerous other licensees signed with MPEG LA) also relates to patents held by companies acquired by Google subsequently to the conclusion of that agreement, such as Motorola Mobility in this particular case. Microsoft also took this position in the ITC investigation of Motorola's Xbox complaint, but its related motion has meanwhile been denied as moot (i.e., a non-issue) because the Google subsidiary withdrew its H.264-related claims earlier this month. Unlike a federal court, the ITC can't determine royalties or award damages; it can only ban the importation of infringing products into the U.S. market.
Google (Motorola) tries to prevent this by taking the position that Google's H.264 license has a different "scope" than the grant-back license demanded by Microsoft, and that, in any case, the license agreement "extends only to Affiliates identified to MPEG LA by Google in writing".
In my opinion, the language of any license agreement always has room for improvement, but I think this one is clear enough that someone who signed it knew he was going to have a grant-back obligation even with respect to companies that become subsidiaries after the conclusion of the agreement, which the contract in fact states expressis verbis. But Judge Robart wanted to look at this from all angles and asked the parties for briefing on extrinsic evidence. Google argues that this is unnecessary and that the agreement must be interpreted in the light most favorable to the party that didn't draft it, arguing that this is a non-negotiable "take it or leave it" agreement. I don't know about MPEG LA's flexibility in negotiations, but even if MPEG LA itself never negotiated the terms, there still wouldn't be a Hobson's Choice situation: MPEG LA does not have exclusive rights to the patents in the pool, and Google could always have chosen to freely negotiate direct license agreements with any of the contributors rather than go through MPEG LA as an optional one-stop shop.
While the declaration attached to Google's brief was signed by one of its outside counsel, Microsoft provided a declaration of Lawrence (Larry) Horn, the president and CEO of MPEG LA. I'm sure that if Google had been able to find support for its theory from anyone in the industry, it would also have relied on a declaration by an external witness, but the theory flies in the face of everything professionals in this industry know about standard-essential patent licensing.
Larry Horn's declaration strongly supports Microsoft. I have uploaded it to Docstock. Here's the PDF version, and below that one you can find the full text of the declaration because I thought this would be useful reference material for anyone researching this matter (and I think that affidavit speaks for itself):
1. I am the President and CEO of MPEG LA, LLC. Before assuming my current role, I was in charge of Licensing and Business Development from approximately July 1997 to March 2006. MPEG LA is a world-leading packager of patent pools for standards and other technology platforms used in the consumer electronics industry.
2. Among other technologies, MPEG LA administers patent pools associated with certain video compression standards, including the MPEG-2, MPEG-4 Visual, AVC/H.264, and VC-1 standards.
3. I understand that the above-captioned matter [Case No. C10-1823-JLR, W.D. of Wash.] involves a dispute regarding various patents claimed by Motorola Mobility LLC and/or [Google/Motorola subsidiary] General Instrument Corporation to be essential to the AVC/H.264 video compression standard. The term "AVC" (or "Advanced Video Coding") and "H.264," being materially synonymous, are used interchangeably here.
4. From approximately Fall 2002 to Summer 2004, I was actively involved in the formation of MPEG LA's AVC/H.264 patent pool. On behalf of MPEG LA, I facilitated a series of meetings among potential licensors that led to the formation of the AVC/H.264 patent pool, including development of standard terms on which licensors joining the pool agreed to license their standard essential patents (SEPs) (following a determination that such patents are in fact essential). Since formation of the pool in 2004, MPEG LA has administered it.
There are currently 30 Licensors in the MPEG LA AVC/H.264 pool, who collectively have contributed hundreds of SEPs. Microsoft is one. There are currently more than 1,500 Licensees to the pool, including Microsoft and Google, Inc.
6. I understand that a true and correct copy of the January 24, 2005 AVC Patent Portfolio License Agreement between MPEG LA and Google, attached hereto as Exhibit 1 (the "Google License"), has previously been filed as part of the public record in the above-captioned matter. The Google License is a representative example of MPEG LA's standard AVC Patent Portfolio License Agreement (the "AVC/H.264 License"), which has been available to interested licensees since approximately July 2004, subject to updates, expansions and renewals.
7. MPEG LA's standard AVC/H.264 License includes the following "grant-back" provision:
8.3 Licensee Grant. Upon full execution of this Agreement, Licensee agrees to grant a worldwide, nonexclusive license and/or sublicense (commensurate to the scope of the licenses which Licensee has selected hereunder) under any and all AVC Essential Patent(s) that Licensee and its Affiliates, if any, have the right to licensor and/or sublicense, to any Licensor or any sublicensee of the Licensing Administrator desiring such a license and/or sublicense on fair and reasonable terms and conditions. For purposes of this Section 8.3 only, the Licensors' per patent share of royalties which are payable pursuant to Article 3 of this Agreement shall be presumed to be a fair and reasonable royalty rate for the aforementioned license and/or sublicense to be granted by the Licensee.
Exhibit 1 (underlining and italics added).
8. Section 8.3 of the AVC/H.264 License is identical to Section 8.3 of a prior license agreement for an earlier video compression standard -- MPEG LA's original MPEG-4 Visual Patent Portfolio License (the "MPEG-4 License") -- except that the phrase "and its Affiliates, if any" (underlined and italicized above) was added for the AVC/H.264 License. I understand that a true and correct copy of the original MPEG-4 License (without attachments) executed by General Instrument in September 2002 (attached hereto as Exhibit 2), was produced by Defendants in the above-captioned matter.
9. "Affiliate" is defined in the AVC/H.264 License to include any Legal Entity controlled by the Licensee, including those entities owned "more than 50%" by the Licensee:
1.1 Affiliate - Shall mean a Legal Entity which now or hereinafter, directly or indirectly, controls, is controlled by or is under common control with Licensee. The term "control" as used in this Section 1.1 shall mean (a) ownership of more than 50% of the outstanding shares representing the right to vote for directors or other managing officers of Licensee or such Legal Entity; or (b) a relationship similar to that described in Subsection 1.1(a) deemed by the Licensing Administrator in its sole discretion to represent "control." An entity shall be deemed an Affiliate only so long as such "control" exists.
Exhibit 1.
10. The words "now or hereinafter" in Section 1.1 of the AVC/H.264 License ensure that entities over which the Licensee acquires control after execution of the license agreement are also treated as Affiliates.
11. The final terms of the AVC/H.264 License were developed through a process of negotiation among the initial group of H.264 essential patent holders responsible for forming the H.264 patent pool, many of whom are now also Licensees.
12. The phrase "and its Affiliates, if any" was added to Section 8.3 as a result of discussions that I initiated. These discussions consisted primarily of emails among me and the participants in the pool formation discussions (members of the "AVCGroup" identified in the emails). Attached as Exhibits 3 and 4 are true and correct copies of email exchanges from March and April 2004, concerning the proposed addition of the "and its Affiliates, if any" language to the grant-back provision that I understand were produced by Microsoft in the above-captioned matter. Paul Bawel represented General Instrument/Motorola at the MPEG LA AVC/H.264 pool formation meetings and was among those who received emails sent to the AVCGroup at the time these emails were exchanged. Garrett Glanz was Microsoft's representatives, and also received emails sent to the AVCGroup.
13. The email string from March 2004 (Ex. 3) includes my response to comments by Sony's representative, in which I described the purpose of the proposed addition to Section 8.3:
We will address your other comments in due course, but I want to comment here on Section 8.3. The proposed change makes this like the grantback in other licenses. It is in the interest of fairness both to other Licensees as well as Licensors because it assures that an affiliate of a Licensee that owns an essential patent cannot decline to license the essential patent on fair and reasonable terms.
14. As reflected in the emails, although Sony expressed concern that the proposed change might dissuade some potential licensees from taking a license, Sony indicated that it was "fine with the revised language of 8.3" if others found it acceptable. Ex. 3.
15. In April 2004, Sony again expressed its concerns, preferring to kep the language in the original MPEG-4 License or, at a minimum, to re-define "Affiliates":
Our preference would be to drop Affiliates completely from the AVC license, in accordance with the scope of the MPEG4 Video license. If there is consensus against this, however, we must change the definition of Affiliates to be "more than 50%." (Ex. 4)
16. In response, I recommended that the term "Affiliates" should be defined to apply only where a Licensee's control was "more than 50%" (rather than "50% or more"). I also stated that the grant-back provision would apply to those Affiliates meeting the "more than 50%" ownership requirement:
[T]he grant back obligations of a Licensee would apply in the normal course only to a "more than 50%" Affiliate (not a "50% or more" Affiliate and not to a less than 50% Affiliate). (Ex. 4)
17. As reflected in the final version of the standard AVC/H.264 License adopted in approximately July 2004, the AVCGroup ultimately reached consensus and approved inclusion of the phrase "and its Affiliates, if any," in Section 8.3. As with all other AVC/H.264 Licenses, this language is included in Section 8.3 of the Google License. Ex. 1. The Google License also includes, in Section 1.1, the standard "more than 50%" language that had been under discussion. Ex. 1.
18. In the course of discussions regarding the purpose of Section 8.3 and related definitions, it was agreed that all Affiliates of a Licensee (rather than, for example, only the Affiliates of an Enterprise Licensee that are expressly identified by the Enterprise Licensee) needed to be included in the grant back obligation under Section 8.3. Based on my involvement in developing the terms of the standard AVC/H.264 License, the purpose of including the phrase "and its Affiliates, if any" in Section 8.3 was to eliminate any distinction between the H.264 standard essential patents of a Licensee and those of its Affiliates -- both are subject to the same grant-back terms. This prevents a Licensee from avoiding its grant-back obligations by holding patents indirectly, for example, via a subsidiary that it controls. Where a Licensee owns only 50% of a related company (but not more), the requisite control may be lacking. My understanding from various exchanges regarding the "more than 50%" language was that some companies were concerned that they would be unable to comply with the grant-back provision if they owned only 50% of the related company -- for example, where a licensee was engaged in a 50/50 joint venture. This is one reason why "more than 50%" ownership is required in the definition of Affiliate.
19. The first AVC/H.264 Licensees were issued in July 2004. At approximately the same time, I initiated separate negotiations among the group of MPEG-4 Licensors (many of whom were also Licensees) that led to inclusion of similar "Affiliates" language in an updated version of the MPEG-4 license. Attached as Exhibit 5 is a true and correct copy of an email string from July 2004 reflecting these discussions that I understand was produced by Microsoft in the above-captioned matter.
20. As referenced in emails included in Exhibit 5, at least two MPEG-4 Licensors, Toshiba and Fujitsu (both also Licensees), expressed concerns about the proposed change to the grant-back provision in the original MPEG-4 License. I explained the purpose of adding the proposed "Affiliates" clause as follows:
"Licensee or its Affiliates" is standard in the grant-back clauses of MPEG LA's MPEG-2, 1394, DVB-T and AVC Patent Portfolio Licenses (in the AVC License, Licensees also do not have the right to extend sublicenses to Affiliates). The purpose of this language is to prevent a Licensee from avoiding its grant back obligations through its affiliates (who then have the opportunity to hold licenses and licensors hostage to their essential patent claims for failure of the grant-back clause to apply to them) while the Licensee takes advantage of a license under all of the Licensors' essential patents. We believe this is a matter of fairness, and it has caused no problem in other licenses. Therefore, the suggestion was made to revisit this issue here, and we recommend including this language because it is in the interest of all Licensors and Licensees to do so.
Ex. 5. This explanation accurately describes the purpose of the similar "and its Affiliates, if any" clause in Section 8.3 of the AVC/H.264 License.
21. In further response to an email from Fujitsu, I proposed that the definition of "Affiliates" in Section 1.1 of the original MPEG-4 License be revised to clarify that it would apply only where a Licensee owns "more than 50%" of another entity. Ex. 5.
22. The proposed changes to Section 8.3 and Section 1.1 were adopted by the MPEG-4 Licensors, resulting in provisions that are virtually identical to their counterparts in the AVC/H.264 License. Attached hereto as Exhibit 6 is a true and correct copy of the updated version of the MPEG-4 License (without attachments) with these changes executed by General Instrument in August 2005, which I understand was produced by Defendants in the above-captioned matter. It replaces the original version of the MPEG-4 License that General Instrument executed in September 2002 (see Ex. 2), whose grant-back provision did not cover "Affiliates," as explained above.
23. From the beginning of my tenure at MPEG LA, I have been involved in marketing the patent pools that MPEG LA administers and have periodically engaged in discussions with potential licensees regarding the scope and meaning of various standard license terms. Whenever a potential licensee has asked about operation of the "Affiliates" clause in the grant-back provisions discussed above, I have explained that the grant-back obligation applies to the SEPs of both the Licensee and all of its Affiliates, without exception. As a matter of policy, and to ensure delivery of consistent information on this topic, other MPEG LA personnel also provide the same response when fielding similar inquiries.
24. I understand that Motorola Mobility LLC and General Instrument Corporation are wholly-owned subsidiaries of Google. As wholly-owned subsidiaries, both companies would be treated as Google's Affiliates under the terms of the Google License. I am also aware that Microsoft is a Licensor and a Licensee to MPEG LA's AVC/H.264 patent pool. Accordingly, I understand that the grant-back provision of the Google License provides Microsoft with the right to license any AVC/H.264 SEPs held by Google, Motorola Mobility LLC, or General Instrument Corporation, all as provided in Section 8.3. This application of Section 8.3 is consistent with the purpose of the "and its Affiliates" language, as reflected in the discussions among the Licensor participants during the formation of the AVC/H.264 pool, described above.
I declare under penalty of perjury under the laws of the United States of America, that the foregoing was true and correct.
DATED this 21st day of January, 2013, in Chevy Chase, Maryland
LAWRENCE A. HORN
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