1. 1 1 1 AIPLA Firm Logo American Intellectual Property Law Association FRAND – Standard Essential Patents Licensed for Fair, Reasonable, and Non-Discriminatory Terms Jeffrey I. D. Lewis Patterson Belknap Webb & Tyler, LLP March 2014 6707041 © 2014

2. 2 2 2 AIPLA Firm Logo What is FRAND? STANDARDS SETTING –Many technologies, such as smartphones and wireless networks –Examples: WiFi, 4G, LTE, WLAN Each standard may implicate 1,000’s of patents Only some are Standard-Essential Patents (SEPs) –Must be used to practice standards Once adopted, SEP owner could have outsized advantage –SEP in standard, so more valuable than pre-incorporation –SEP = major obstacle, if standard in widespread use

3. 3 3 3 AIPLA Firm Logo FRAND = Solution Created to address standards setting holdups Require SEP owners to agree in advance to license SEP License must be Fair, Reasonable, And Non-Discriminatory –Sometimes called RAND or F/RAND Facilitates widespread use of standard Ensures SEP owners obtain a benefit from use of patent But what is that?

4. 4 4 4 AIPLA Firm Logo Legal basis for a FRAND commitment? No statutory or regulatory basis Creation of private actors, so-called standard-setting organizations (SSOs) –European Telecommunications Standards Institute (ETSI) –Institute of Electrical and Electronics Engineers (IEEE) –International Telecommunication Union (ITU) Before adopting standard, SSO requires members to agree to license SEPs on FRAND terms to those practicing the standard –Patent is then “FRAND-encumbered” –Agree before standards set (so no market power yet)

5. 5 5 5 AIPLA Firm Logo What creates a FRAND commitment? Implicit: FRAND requirement stated in SSO bylaws –Compliance with commitment is a requirement of membership in SSO Explicit: Before adopting a standard, SSO may require any owners of SEPs to agree to abide by a FRAND requirement –Example: IEEE members declare patents standard essential through “letters of assurance” Whether implicit or explicit, FRAND commitment with SSO –not its members or the public –raises issue of who can enforce

6. 6 6 6 AIPLA Firm Logo Enforcing FRAND in the USA Primary approach: Third-party beneficiary enforcement –FRAND commitment = enforceable SEP-owner/SSO contract potential licensees are the third-party beneficiaries –No definitive rule on who may be considered third-party beneficiary Microsoft Corp. v. Motorola, Inc. “… Microsoft, as a member of both the IEEE and the ITU, is a third- party beneficiary of Motorola’s commitments to the IEEE and ITU.” 854 F. Supp. 2d 993, 999 (W.D. Wash. 2012)(internal citations omitted) Apple, Inc. v. Motorola Mobility, Inc. “As a potential user of the standards at issue and a prospective licensee of essential patents, Apple is a third party beneficiary of the agreements between Motorola and IEEE and Motorola and ETSI.” 886 F. Supp. 2d 1061, 1085 (W.D. Wash. 2012)

7. 7 7 7 AIPLA Firm Logo FRAND choice of law Choice of law issues: –law of SSO’s home jurisdiction may control interpretation So not standard –May not be enforceable contract E.g., lacks definitive terms, such as price –Venue may not recognize third-party beneficiary standing to sue See Samsung v. Apple, Inv. No. 33-TA-794

8. 8 8 8 AIPLA Firm Logo Other FRAND Enforcement Mechanisms Other possible enforcement avenues: –Promissory estoppel Licensee must show –knowledge of the FRAND commitment (the promise) –reliance –SEP owner had reason to know licensee would have expected to benefit from the FRAND commitment –Implied license SEP owner invited infringing use, e.g., by agreeing to FRAND commitment –Equitable estoppel Patentee’s misleading conduct + reliance + material prejudice –But FRAND commitment itself is not misleading

9. 9 9 9 AIPLA Firm Logo Which forum? District court v. ITC District Court –Authority to award both damages and injunctive relief Increasingly reluctant to issue injunctive relief when FRAND- encumbered patents are at issue ITC –No damages, but can grant exclude importation Ready and willing to grant such orders Subject to Presidential (US Trade Rep.) approval Dual track: File suit in both district court and ITC at same time –In light of USTR veto and Realtek, may be more difficult to obtain relief in ITC before FRAND rate has been determined by a district court (more on this later)

10. 10 10 AIPLA Firm Logo Other U.S. jurisdictional issues State v. federal court –If FRAND enforcement is contractual, may be no basis for federal court jurisdiction unless diverse parties or supplemental jurisdiction Federal Circuit v. regional Courts of Appeals –Where does appeal go? Microsoft Corp. v. Motorola, Inc. Not all cases involving a patent claim fall within the Federal Circuit’s jurisdiction.... Microsoft’s complaint sounds in contract and invokes the district court’s diversity jurisdiction. 696 F.3d 872 (9th Cir. 2012) (internal citations omitted) Microsoft later appealed the entire case to the Federal Circuit, perhaps hoping for a different outcome

11. 11 11 AIPLA Firm Logo Relief: Exclusion orders in the ITC Samsung v. Apple, Inv. No. 337-TA-794 –ALJ initial determination found no per se bar to exclusion order if FRAND-encumbered patent at issue; granted exclusion order –Commission also found no per se bar to exclusion order if FRAND- encumbered patent at issue; affirmed ALJ’s exclusion order FRAND obligation requires negotiate in good faith, not license –USTR blocks exclusion order first such veto since 1987 No per se bar to exclusion orders if FRAND-encumbered patent at issue, but ITC must consider DOJ/PTO policy statement Suggests exclusion order should only be granted where potential licensee refuses to accept a FRAND license or refuses to negotiate at all (i.e., reverse hold up) HUH???

12. 12 12 AIPLA Firm Logo Relief: Are there injunctions in the district courts Courts increasingly skeptical of injunctions involving FRAND-encumbered patents –Microsoft Corp. v. Motorola, Inc., 696 F.3d 872, 884 (9th Cir. 2012) (“Implicit in such a sweeping promise [to license a patent on FRAND terms] is, at least arguably, a guarantee that the patent- holder will not take steps to keep would-be users from using the patented material, such as seeking an injunction, but will instead proffer licenses consistent with the commitment made.”) Apple, Inc. v. Motorola, Inc., 869 F. Supp. 2d 901, 913-14 (N.D. Ill. 2012) (Posner, J.) (same)

13. 13 13 AIPLA Firm Logo Relief: District court injunction decisions –Microsoft Corp. v. Motorola, Inc. “First, the RAND commitment does not by itself bar SEP holders from ever, in any circumstance, seeking injunctive relief to enforce their patents. However, in some circumstances, it may be a breach of the duty of good faith and fair dealing for a SEP holder to seek injunctive relief against a SEP implementer.” No C10-1823JLR, 2013 U.S. Dist. LEXIS 113585, at *44 (W.D. Wash. Aug. 12, 2013) (Robart, J.) –But see Apple, Inc. v. Motorola Mobility, Inc. holding that the FRAND commitment did not deprive defendant of its right to seek injunctive relief No. 11-cv-178-bbc, 2012 U.S. Dist. LEXIS 181854 (W.D. Wash. Oct. 29, 2012)

14. 14 14 AIPLA Firm Logo Relief: District court permanent injunctions Permanent injunction requires showing no adequate remedy at law (i.e., money not enough) –Hard to do when FRAND license rate remains a possibility Post-eBay, cannot satisfy with a presumption of irreparable harm –Apple, Inc. v. Motorola, Inc. (Posner, J.) “The grant of an injunction is not an automatic or even a presumptive consequence of a finding of liability, either generally or in a patent case.... And that means, with immaterial exceptions, that the alternative of monetary relief must be inadequate.... A FRAND royalty would provide all the relief to which Motorola would be entitled if it proved infringement of the [patent], and thus it is not entitled to an injunction.” 869 F. Supp. 2d 901, 915 (N.D. Ill. 2012) (internal citations omitted).

15. 15 15 AIPLA Firm Logo Relief: District court statements –Microsoft Corp. v. Motorola, Inc. “Motorola has not shown it has suffered an irreparable injury or that remedies available at law are inadequate.” No. C10-1823JLR, 2012 U.S. Dist. LEXIS 170587 (W.D. Wash. Nov. 30, 2012) (Robart, J.) –Realtek Semiconductor Corp. v. LSI Corp. In promising to license on RAND terms, defendants here admit that monetary damages, namely a RAND royalty, would be adequate compensation for any injury it has suffered as a result of Realtek’s allegedly infringing conduct.” 946 F. Supp. 2d 998 (N.D. Cal. May 20, 2013) (Whyte, J.)

16. 16 16 AIPLA Firm Logo Relief: Are injunctions still available? Injunctive relief still available to prevent “reverse hold up” –User refuses FRAND rate or refuses to negotiate –Realtek Semiconductor Corp. v. LSI Corp. “[A]n injunction may be warranted where an accused infringer of a standard-essential patent outright refuses to accept a RAND license.”) 946 F. Supp. 2d 998 (N.D. Cal. May 20, 2013) (Whyte, J.) (citing Joint Policy Statement at 7 (For example, “if 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, an exclusion order could be appropriate”)). –Apple, Inc. v. Motorola, Inc. (Posner, J.) “By committing to license its patents on FRAND terms, Motorola committed to license the [patent] to anyone willing to pay a FRAND royalty and thus implicitly acknowledged that a royalty is adequate compensation for a license to use that patent.” 869 F. Supp. 2d 901, 913-14 (N.D. Ill. 2012)

17. 17 17 AIPLA Firm Logo FRAND rate ↔ Georgia Pacific Factors The Georgia-Pacific Factors –Well-accepted 1970 S.D.N.Y. decision on setting reasonable royalty for patent infringement damages Georgia-Pacific Corp. v. United States Plywood Corp., 318 F. Supp. 1116 (S.D. N.Y. 1970) –35 U.S.C.§284: “Upon finding for the claimant the court shall award the claimant damages adequate to compensate for the infringement, but in no event less than a reasonable royalty for the use made of the invention by the infringer, together with interest and costs as fixed by the court.” (emphasis added) –Sets out 15 factors to determine a “reasonable royalty rate”

18. 18 18 AIPLA Firm Logo FRAND rate –vs- Georgia Pacific Factors Microsoft Corp. v. Motorola, Inc. “However, the hypothetical negotiation under a RAND obligation must be different than the typical Georgia-Pacific analysis historically conducted by courts in a patent infringement action. This is so for at least two reasons. First, the owner of an SEP is under the obligation to license its patents on RAND terms, whereas the owner of a patent uncommitted to RAND has monopoly power over its patent and may choose to withhold licensing. Second, the hypothetical negotiation almost certainly will not take place in a vacuum: the implementer of a standard will understand that it must take a license from many SEP owners, not just one, before it will be in compliance with its licensing obligations and able to fully implement the standard.” No. C10-1823JLR, 2013 U.S. Dist. LEXIS 60233, at *53 (W.D. Wash. Apr. 25, 2013)

19. 19 19 AIPLA Firm Logo Other FRAND cases applying Georgia Pacific Ericsson Inc. v. D-Link Sys. –instructing jury with all 15 G-P factors without modification –Tacked on a 16 th factor: “Ericsson’s obligation to license its technology on RAND terms” No. 6:10-CV-473, 2013 U.S. Dist. LEXIS 110585 (E.D. Tex. Aug. 6, 2013) (Davis, J.) In re Innovatio IP Ventures, LLC –Judge Holderman adopted Judge Robart’s modification and synthesized the differences No. 11 C 9308, 2013 U.S. Dist. LEXIS 144061 (N.D. Ill. Oct. 3, 2013) (Holderman, J.)

20. 20 20 AIPLA Firm Logo Innovatio’s Factors (1-5) Georgia-PacificInnovatio (1) The royalties received by the patentee for the licensing of the patent in suit, proving or tending to prove an established royalty. (1) “The royalties received by the patentee for the licensing of the patent-in-suit in other circumstances comparable to RAND-licensing circumstances.” (2) The rates paid by the licensee for the use of other patents comparable to the patent in suit. (2) SAME. (3) The nature and scope of the license.(3) SAME. (4) The licensor’s established policy and marketing program to maintain his patent monopoly by not licensing others to use the invention or by granting licenses under special conditions designed to preserve that monopoly. (4) NOT APPLICABLE. Judge Robart reasoned that factor 4 “is inapplicable in the RAND context because the licensor has made a commitment to license on RAND terms and may no longer maintain a patent monopoly by no licensing to others.” (5) The commercial relationship between the licensor and licensee, such as, whether they are competitors in the same territory in the same line of business; or whether they are inventor and promoter. (5) NOT APPLICABLE. Judge Robart reasoned that Factor 5 is inapplicable “because having committed to license on RAND terms, the patentee no longer may discriminate against its competitors in terms of licensing agreements.”

21. 21 21 AIPLA Firm Logo Innovatio’s Factors (6-8) Georgia-PacificInnovatio (6) The effect of selling the patented specialty in promoting sales of other products of the licensee; the existing value of the invention to the licensor as a generator of sales of his non-patented items; and the extent of such derivative or convoyed sales. (6) “The effect of the patented invention in promoting sales of other products of the licensee and the licensor, taking into account only the value of the patented technology and not the value associated with incorporating the patented technology into the standard.” (7) The duration of the patent and the term of the license. (7) NOT APPLICABLE. “The analysis concerning Factor 7 is greatly simplified in the context of a dispute over a reasonable royalty for a RAND- committed patent because the term of the license would equate to the duration of the patent. In many circumstances, this factor will have little influence on what constitutes a reasonable royalty under the RAND Commitment.” (8) The established profitability of the product made under the patent; its commercial success; and its current popularity. (8) “The established profitability of the product made under the patent, its commercial success, and its current popularity, taking into account only the value of the patented technology and not the value associated with incorporating the patented technology into the standard.”

22. 22 22 AIPLA Firm Logo Innovatio’s Factors (9-12) Georgia-PacificInnovatio (9) The utility and advantages of the patent property over the old modes or devices, if any, that had been used for working out similar results. (9) “The utility and advantages of the patent property over alternatives that could have been written into the standard instead of the patented technology in the period before the standard was adopted.” (10) The nature of the patented invention; the character of the commercial embodiment of it as owned and produced by the licensor; and the benefits to those who have used the invention. (11) The extent to which the infringer has made use of the invention; and any evidence probative of the value of that use. (10-11) “The contribution of the patent to the technical capabilities of the standard and also the contribution of those relevant technical capabilities to the licensee and the licensee’s products, taking into account only the value of the patented technology and not the value associated with incorporating the patented technology into the standard.” (12) The portion of the profit or of the selling price that may be customary in the particular business or in comparable businesses to allow for the use of the invention or analogous inventions. (12) “The portion of the profit or of the selling price that may be customary in the particular business or in comparable businesses to allow for the use of the invention or analogous inventions that are also covered by RAND-committed patents.”

23. 23 23 AIPLA Firm Logo Innovatio’s Factors (13-15) Georgia-PacificInnovatio (13) The portion of the realizable profit that should be credited to the invention as distinguished from non-patented elements, the manufacturing process, business risks, or significant features or improvements added by the infringer. (13) “The portion of the realizable profit that should be credited to the invention as distinguished from non-patented elements, the manufacturing process, business risks, significant features or improvements added by the infringer, or the value of the patent’s incorporation into the standard.” (14) The opinion testimony of qualified experts.(14) SAME. (15) The amount that a licensor and a licensee would have agreed upon (at the time the infringement began) if both had been reasonably and voluntarily trying to reach an agreement. (15) “The amount that a licensor and a licensee would have agreed upon (at the time infringement began) if both were considering the RAND commitment and its purposes, and had been reasonably and voluntarily trying to reach an agreement.”

24. 24 24 AIPLA Firm Logo Damages: Setting a FRAND rate Innovatio noted case-specific modifications, such as: –Whether court is setting a range for a jury or an actual FRAND rate –Whether court already determined patents at issue are essential and/or infringed prior to determining FRAND rate If not already determine, the implementer in a hypothetical negotiation would view the allegedly standard-essential’ patents with skepticism If already determined, no need to adjust the RAND rate in light of pre- litigation uncertainty about the essentiality of a given patent Date of hypothetical negotiation: “the appropriate date for the hypothetical negotiation is... the time of the initial adoption of [the standard], and therefore approximately the time when the manufacturers began selling the [standard-]compliant products that allegedly infringed the patents”

25. 25 25 AIPLA Firm Logo Damages: Setting a FRAND rate Which comes first? –Infringement –Setting of FRAND rate? –As suggested above, no need to determine one before the other Realtek Semiconductor Corp. v. LSI Corp. “This court already determined that Realtek can simultaneously pursue a determination of the RAND royalty rate while denying infringement or asserting invalidity, even though those issues may ultimately obviate the need for a license and that there is no reason the RAND royalty rate cannot be determined first.” 946 F. Supp. 2d 998, 1007 (N.D. Cal. May 20, 2013) (Whyte, J.)(internal citations omitted).

26. 26 26 AIPLA Firm Logo Damages: Attorney’s fees? Microsoft Corp. v. Motorola, Inc. court awarded attorney’s fees as part of damages available to a licensee who sought a FRAND license from an SEP owner –SEP owner’s attempt to seek an injunction violated its duty of good faith and fair dealing to negotiate a FRAND rate “[I]n certain circumstances it may violate the duty of good faith and fair dealing for a SEP holder to seek an injunction to enforce a RAND- committed patent. Under those circumstances, the SEP holder has effectively agreed not to sue implementers for injunctive relief. Thus, under those circumstances and those circumstances only, the RAND commitment is analogous to a covenant not to sue for injunctive relief, and the implementer may recover attorney’s fees as an element of damages in the bad faith action.” No C10-1823JLR, 2013 U.S. Dist. LEXIS 113585, at *53 (W.D. Wash. Aug. 12, 2013)

27. 27 27 AIPLA Firm Logo Obscure issue: The Noerr-Pennington doctrine Noerr-Pennington shields litigants from claims related to filing litigation as part of a 1 st Amendment right to petition the government for a redress of grievances In FRAND context, two courts have held it does not apply because the FRAND commitment is considered a waiver of the defense –Microsoft Corp. v. Motorola, Inc. “[H]aving waived its right to seek injunctive relief, Motorola cannot now rely on Noerr-Pennington to nullify that waiver.... Here... Motorola’s RAND commitment is analogous to a covenant not to seek injunctive relief in circumstances that would amount to a breach of the duty of good faith and fair dealing. Thus, Motorola has limited, by contract, its right to seek injunctive relief. As Judge Crabb ruled [in Apple], it would be improper to use the Noerr-Pennington doctrine to bar Microsoft from enforcing that contract.” No C10-1823JLR, 2013 U.S. Dist. LEXIS 113585, at *53, 60 (W.D. Wash. Aug. 12, 2013) –Apple, Inc. v. Motorola Mobility, Inc. 886 F. Supp. 2d 1061, 1078 (W.D. Wash. 2012) (Crabb, J.) (same)

28. 28 28 AIPLA Firm Logo Example case: Microsoft v. Motorola (facts) Motorola owns patents necessary to practice two standards and committed to license them on FRAND terms –SSOs at issue: IEEE and ITU (Microsoft and Motorola members) –Two standards for WiFi and video coding technology: Motorola reached out to Microsoft and offered to license its patents at a rate of 2.25% of the price of Microsoft end products that used the standard 1 month later – Microsoft sued Motorola for breach of FRAND contract in W.D. Wash. –Motorola then sued in Germany seeking injunction –Microsoft sought W.D. Wash. anti-suit injunction preventing Motorola from continuing with the action in Germany; granted by district court and affirmed by 9th Circuit

29. 29 29 AIPLA Firm Logo Example case: Microsoft v. Motorola (case) Over the course of the litigation, court held: –FRAND commitments to IEEE and ITU created enforceable contracts between Motorola and the respective SSO –Microsoft, a standard user and member of SSOs, is a third-party beneficiary so can enforce the contracts as –FRAND commitment = initial SEP license offers must be good faith Initial offers do not have to be on FRAND terms, so long as a FRAND license eventually issues –Injunctions could be sought based upon underlying facts

30. 30 30 AIPLA Firm Logo Example case: Microsoft v. Motorola (injunction) –The “[FRAND] commitment does not by itself bar SEP holders from ever, in any circumstances, seeking injunctive relief to enforce their patents. However, in some circumstances, it may be a breach of the duty of good faith and fair dealing for a SEP holder to seek injunctive relief against a SEP implementer” –Where “violate[s] the duty of good faith and fair dealing for a SEP holder to seek an injunction … the SEP holder has effectively agreed not to sue implementers for injunctive relief. Thus, under those circumstances and those circumstances only, the RAND commitment is analogous to a covenant not to sue for injunctive relief, and the implementer may recover attorney’s fees as an element of damages in the bad faith action” –“Having waived its right to seek injunctive relief, [the FRAND- encumbered SEP owner] cannot [then] rely on Noerr-Pennington to nullify that waiver”

31. 31 31 AIPLA Firm Logo Example case: Microsoft v. Motorola (trial) Microsoft lost all claims at trial –Jury awarded over $3 million in attorney’s fees –Jury also awarded $11 million in damages Microsoft’s claimed losses for moving a distribution center out of Germany due to Motorola’s actions to seek an injunction in Germany Motorola is currently appealing to the Federal Circuit –Why Federal Circuit, if contract action? To be decided …

32. 32 32 AIPLA Firm Logo Thanks for your attention! Questions? Jeffrey I. D. Lewis, Esq. Patterson Belknap Webb & Tyler LLP 1133 Avenue of the Americas New York, NY 10036-6710 Tel. (212) 336-2549 Fax (212) 336-2544 jidlewis@pbwt.com www.pbwt.com Name