Sharp - not weak or late enforcement is required against recalcitrant SEP implementers

Public comments on SEPs and FRAND licensing sought for the US Department of Justice’s Draft Policy Statement and the UK Intellectual Property Office’s Call for Views.

It is vital that the fundamental sanction in patent law—of the temporary right to exclude—along with other remedies, including enhanced damages, are readily available against infringers when Fair, Reasonable and Non-Discriminatory (F/RAND) licensing has been offered, but is rejected, evaded or unreasonably delayed.

Technical standards confer enormous value to implementers and consumers. For example, cellular standard-essential technologies enable annual revenues exceeding a trillion dollars in operator services, several hundred billion dollars in smartphone sales and hundreds of billions more in over-the-top applications and services on those devices. Undermining the fundamental patent rights of organizations that commit large R&D resources to develop those technologies and contribute them to the standards would unfairly short-change those innovators and jeopardize ongoing investments in 5G and the Internet of Things (IoT). In addition to facilitating revenue growth and cost savings in those downstream markets, standard-essential technologies, for example, help save the planet by enabling us to fly and drive less—thus reducing our carbon footprints—and reduce deaths on the road with autonomous driving capabilities.

Innovative standard-essential technology developments result from high-value professional employment: for example, in US organizations including InterDigital, Nokia Bell Labs and Qualcomm. In contrast, most handset implementer jobs, such as those in manufacturing, are offshore.

Technology transfer from independent developers to implementers of cellular and other standards is flourishing and extensive. Intellectual Property Rights (IPR) policies—most notably including ETSI’s IPR Policy as applied to FRAND licensing of cellular Standard-Essential (SEPs)—have facilitated exceptional innovation, industry growth and vigorous competition including numerous new market entries with low barriers to entry in mobile phones (e.g. Apple in 2007, Xiaomi, Oppo and Vivo since 2011) and some notable major market participant exits (e.g. Nokia in 2013 and LG in 2021).

Aggregate royalty payments are small percentages of product costs and have declined while many implementers seek to significantly diminish, greatly delay or entirely avoid paying these altogether. This undermines competition and deprives the innovative companies—that develop the new technologies for all to share through their contributions to openly-available standards—from obtaining an adequate, fair, and timely return on their substantial R&D investments.

Increasing yet illegitimate attempts to weaken patent rights encourage free riding and unfairly advantage unscrupulously opportunistic implementers. Harm is mainly suffered in advanced nations, such as the US and in Europe, where most standard-essential technology developments occur and recompense for these patented contributions have been available, while implementers have largely taken unfair advantage elsewhere.

Patent piracy (i.e., theft) provides offenders with an unfair cost advantage over those implementers who comply by paying their dues in FRAND royalties. This disparity impairs a compliant implementer’s competitive position and has far more impact on the sales and profits it can make than any other input cost (e.g., manufacturing labor) that is paid uniformly by all implementers. It also deprives patent owners of fair and timely compensation from those free riders.

In absence of reasonable resort to injunctions and enhanced damages, it is also implementers wielding considerable market power from downstream product sales such as of smartphones that can misuse their negotiating strength, with delay tactics and brinkmanship to force down royalty charges paid on licensing renewals to below the FRAND rates they have already used to lower payments paid to various other licensors.

 
More consultations

While copious evidence shows the success in technology transfer from developers to implementers in cellular standards, there is ongoing conflict between some SEP owners and implementers in FRAND licensing. This is in markets where cellular standards already prevail, and in markets being developed based on new cellular-based technologies (e.g., IoT in smart cities, agriculture, manufacturing, healthcare and in the metaverse). Despite various consultations and the publication of policy documents over many years, authorities in the US, European Union, UK and elsewhere have repeatedly asked for comments and views on the same issues as policies are adjusted.

The Department of Justice (DoJ), Patent & Trademark Office (USPTO) and the National Institute of Standards and Technology (NIST) in the US seek public input on various questions with publication of the DoJ’s ‘Draft Policy Statement on Licensing Negotiations and Remedies for Standard-Essential Patents Subject to Voluntary F/RAND Licensing Commitments’ (“DoJ Draft Revised Statement”). It states that this seeks to promote good-faith licensing negotiations and addresses the scope of remedies available to patent owners that have agreed to license their essential technologies on F/RAND terms. However, it threatens to weaken fundamental patent rights emphasized in the DoJ’s 2019 statement on the very same issue.

The UK Government’s Intellectual Property Office (IPO) has also launched a “Call for Views” to better understand whether the current SEP framework encourages innovation and effectively promotes competition in markets, or whether there are any barriers to innovation and competition. The IPO states that this will establish whether government intervention is required and to understand what intervention could look like.

Evidence-based analysis

Alleged opportunistic behaviors described in the DoJ Draft Revised Statement—that are commonly referred to as patent holdup and holdout—are examined in-depth in my full report on this topic. In this, I consider key issues including industrial and IPR policy, market power, and why sanctions such as injunctions and enhanced damages must be available for licensing to be widely and timely completed under FRAND terms and royalty rates.

This article was first published in RCR Wireless on 24th January 2022.

Over $100 million Patent Damages Decision

Back in October 21, 2021, the Court of Federal Claims decided to award over $100 million dollars concerning patent infringement against the United States Transportation Security Adminsitration (TSA) in SecurityPoint Holdings v. United States.  Independent claim 1 of the patent

discloses a method comprising: a. positioning a first tray cart containing trays at the proximate end of a scanning device through which objects may be passed, wherein said scanning device comprises a proximate end and a distal end, b. removing a tray from said first tray cart, c. passing said tray through said scanning device from said proximate end through to said distal end, d. providing a second tray cart at said distal end of said scanning device, e. receiving said tray passed through said scanning device in said second tray cart, and f. moving said second tray cart to said proximate end of said scanning device so that said trays in said second cart be passed through said scanning device at said proximate end. JX 1 col. 11 ls. 58-59, col. 12 ls. 1-14.

The court summarized its damages calculation as follows:

If we were to assess the royalty as of the date of this opinion, it would come to $103,685,510, derived as follows: 1) a royalty base of 7,660,935,659 passengers at Cat X and I airports from January 1, 2008 to April 30, 2020; 2) less 2,374,890,054 (31%) to account for TSA’s implied license; 3) less 101,770,092 (ASL passenger throughput); and 4) applying the per passenger royalty of two cents per passenger:

1)      Category X and I Passenger Throughput

Passenger Throughput 7,660,935,659

2) Implied License Deduction

31% Implied License Deduction

31% Passenger Throughput covered by Implied License 2,374,890,054

Remaining Passenger Throughput After Deduction for Implied License Remaining PAX (after 31% deduct) 5,286,045,605

3) ASL Passengers Passenger throughput related to ASL screening lanes that do not practice the patented methods and excludes overlapping passengers already deducted from the implied license

101,770,092 Royalty Base Calculated as Passenger Throughput Reduced by: 1) Implied License; and 2) ASL Throughput 5,184,275,513

4) Royalty Rate

Royalty Rate $0.02

Royalty Rate multiplied by the Royalty Base

Total Damages $103,685,510

This calculation, however, is based on a passenger throughput figure as of April 30, 2020. Plaintiff is correct that this number should be updated through the date of judgment, including appropriate reductions for implied licenses and ASL lanes. The same is true with respect to the application of interest, set out below. Accordingly, we leave to the parties the correct total judgment.

Damages for misuse of confidential information: some helpful guidance

The breach of confidence action in Vestergaard Frandsen A/S v Bestnet Europe Ltd and others [2014] EWHC 3159 (Ch)), a vigorously-contested dispute before the courts of England and Wales, has now reached an end, with the assessment by the Chancery Division of the quantum of damages arising from the misuse of information relating to the manufacture of insecticidal mosquito nets.

In short, in relation to nets made using an insecticide developed on the basis of Vestergaard's confidential information, Mrs Justice Rose awarded a lump sum quasi-consultancy fee for the use that Bestnet made of the information in order to arrive at their own subsequently-developed formula and then secure  World Health Organization (WHO) approval for it. No sum was however awarded to compensate Vestergaard in respect of Bestnet's accelerated entry into the market.  This was because, the WHO approval date -- without which there was little market for the product -- would have been the same even if the consultant had developed the later formula from scratch without the benefit of the confidential information.

For those who are interested in money, and issues such as whether the damages you get at the end of the litigation make it worth starting it in the first place, the calculation of damages is always a priority.  Here, damages were awarded for the sale of products the manufacture of which was derived from the misuse of confidential information, even though those products were not actually made using that information. While there was no authority directly on this point, Mrs Justice Rose felt that the principles that underpinned this approach were based on established case law.

What Kind of Damages Does an NPE Deserve?

With all of the media attention that has been given the $1.05 billion dollar verdict in the Apple suit against Samsung, it is a bit surprising that there has been relatively less coverage of the $1.17 billion dollar verdict given on December 26, 2012 in favour of Carnegie-Mellon University (CMU) in its patent infringement action against Marvell Technology Group. The jury verdict, if it stands (and not surprisingly Marvell has sought to overturn it), ranks as one of the largest such awards ever given.

The case is now back in the headlines, following the court filing made by CMU this week, requesting that the court award it up to three times the jury award (so-called treble damages) on the ground that Marvell was a willful infringer of the CMU patents here. Under U.S. law, a court may make an award of three times the amount of damages for infringement in such circumstances. Also, CMU is seeking $321 million in pre-judgment interest. The patents in question were issued in 2001 and 2002 and the case was filed only in 2009. The claim is that Marvell, a major chip maker, has sold without CMU's permission billion of chips that incorporate the patented technology.

The court award and CMU's most recent court filing raise once again several related questions in connection with the current state of patent litigation in the U.S. The first is how to calculate damages when the plaintiff is a non-practising entity (NPE). While few would call CMU a patent troll per se, it being a major university engaged in high level research and teaching, the fact remains that CMU is not primarily in the business of creating technology for purposes of tech transfer and commercialization. True, the school seeks commercial opportunities for such transfer and commercialization, but this is certainly ancillary to its educational function. Moreover, whatever the place of such commercial activities within CMU, they do not include manufacture of products made under the university's patents. And so the question—should a special standard be applied for assessing damages be applied when the plaintiff is an NPE of the CMU type?

Second, what should we make of CMU's request for treble damages? Even for a PE-type of plaintiff, the issue of treble damages raises policy issues. In particular, does an award of treble damages provide any realistic deterrent against "willful infringement"? After all, the award is made from one private party to another. In a sense, the private party plaintiff is awarded a windfall in the name of the public interest in future deterrence of patent infringement. Unless there is some good evidence that deterrence does in fact take place, the argument for treble damages seems flimsy. This is especially so, given the sometimes legal hyper-technical nature of what constitutes willful infringement.

A fortiori, should an award of treble damages to an NPE of the CMU type ever be justified? True, as a private university, CMU can use every dollar that it can in maintaining the university (who can't). Still, do we really want CMU (or indeed any NPE) fully engaged in the same manner as Apple and Samsung over the issue of treble damages?

Adieu 25% rule? At least in US litigation

Licensing and litigation experts are well acquainted with the 25% rule for calculating a reasonably royalty which a licensee might be prepared to pay to the patent proprietor when licensing a patent. The rule has had a long genesis and was apparently originally formulated by Robert Goldscheider's analysis of patent licensing rates made by a Swiss subsidiary of a US company to around 18 companies licensees throughout the world ("Use of the 25% rule in valuing IP", 37 les Nouvelles 123, 123 December 2002). A number of other empirical studies have appeared to confirm the general applicability of the rule - and many licensing executives use the rule when establishing their baseline for negotiations.

The underlying assumption is that a licensee should maintain a majority - say 75% - of the profits of a patented product because the licensee has undertaken substantial development, operational and commercialisation risks. The other 25% should go to the patent holder as a licence fee. The 25% rule can be used for calculating a reasonable, running royalty rate by first of all estimating the licensee's profits for the product incorporating the patent and then dividing the total profit by the total cost of sales. This gives a profit rate - of which 25% is the running royalty rate. This rate is then applied going forward for licensing deals - or backwards for calculating damages in litigation

The Court of Appeals for the Federal Circuit (CAFC) - the Appeals court in US patent cases - looked into the validity of the rule in a case Uniloc v Microsoft Corp. and concluded that the rule was - for the purposes of the calculation of damages in litigation - fundamentally flawed. The CAFC noted that the court (and lower courts) had accepted the rule in the past because it had never been effectively challenged. The CAFC noted that there had been a number of criticisms of the rule over the years:

• The rule failed to take into account the unique relationship between a patent and an accused (allegedly infringing) product
  
  
• The rule failed to take into account the unique relationship between the parties in the litigation
  
  
• The rule was essentially arbitrary

The CAFC pointed out that patent proprietor has to prove the level of damages and that any arguments regarding the level of damages must be tied to the facts of the case. Citing a whole raft of case law, the CAFC concluded that the 25% rule of thumb was an abstract and theoretical concept. The 25% rule failed to provide any basis for the hypothetical negotiation between the two parties regarding the level of the royalty or offer any evidence regarding usual royalty rates for a particular technology, industry or party. In other words - the CAFC was not prepared to accept a royalty rate which it considered purely arbitrary and wanted to see comparative figures produced.

The implications for litigation are tremendous. Calculation of damages will rely on the ability to produce comparable figures from other sources - such as stock exchange filings or the annual LES royalty surveys. Licensing executives may not need to be so worried. The concept of the reasonable royalty based on a negotiation between parties is generally one that is practiced in reality. The 25% rule is often used as a starting point for the negotiation and is just one data point. Other data points include similar licensing agreements made with other companies and also publicly available data from sources such as SEC filings. It is unlikely that a court would attempt to change royalty rates in an agreement made entered into freely by two parties, merely because the royalty rate calculation was based on the (unapproved) 25% rule. Only in the unlikely event that one of the parties was put under duress to accept the royalty rate based on the 25% rule would a court be likely to overrule the calculation.

Copy of Goldscheider's article is available here.

Description of Route 25 here

Technorati Tags:
Royalty, Microsoft, Uniloc

Damages in Mexico: a helpful explanation

"How to claim damages for IP violations", by Juan Carlos Amaro Alvarado and Carlos Hernandez (Becerril, Coca & Becerril SC), originally published in IAM magazine, has now been posted here on International Law Office. This article describes and explains the remarkably complicated position regarding infringement damages in Mexico, as well as what seems to me to be the apparently superfluous and intrusive involvement of the Mexican Institute of Industrial Property in infringement proceedings. I wonder whether there exist any figures relating to the extra cost of claiming damages there.

How do you quantify loss of goodwill in the right to use a generic term?

What happens when the owner of a well-established brand (SMIRNOFF) as used in relation to a generic product (vodka) succeeds in an 'extended passing-off'' action against a defendant whose product is branded (VODKAT) in such a way as to cause confusion with and erode the distinctiveness of the generic product? How are damages to be assessed? We may soon find out, now that Mr Justice Arnold has held this morning in Diageo v Intercontinental Brands [2010] EWHC 17 (Ch) that Diageo had indeed suffered such a loss. Said the judge (at paras 231-235):

"The third main issue I have to decide is whether Diageo have suffered, or are likely to suffer, damage as a result of the misrepresentation. Diageo contend that they have suffered, or are likely to suffer, damage under two heads. The first is loss of sales of SMIRNOFF. The second is erosion of the distinctiveness of the term "vodka".

Loss of sales

Diageo accept that: (i) sales lost due to mere competition between VODKAT and vodka, as opposed to sales lost due to confusion, are irrelevant; (ii) most sales lost due to confusion will be sales of brands of vodka other than SMIRNOFF; and (iii) Diageo cannot rely upon lost sales of other brands. Nevertheless, Diageo contend that they have lost some sales of SMIRNOFF to VODKAT due to confusion.

In the on-trade something like 85% of the vodka sold on Optics is SMIRNOFF. ... VODKAT could have a significant effect on the sales of SMIRNOFF in this sector. The majority of these losses must be discounted as being due merely to competition from a cheaper product. Nevertheless, I am satisfied that there will have been some sales lost due to confusion. What I have in mind in particular is the scenario where a pub or bar stocks SMIRNOFF as its main vodka and VODKAT as the "house double" vodka. A customer who is confused will accept the VODKAT, whereas a customer who is not confused may well insist on the real thing.

As to sales through off-licences, no doubt most lost sales will be of other brands. Nevertheless in 2007 A.C. Nielsen estimated that 3% of VODKAT sales were made at the expense of SMIRNOFF. Again, some of these will be due to mere competition, but I am satisfied that others will be due to confusion. This is particularly so in convenience stores where the price differential is often much less than in supermarkets. Even where there is a price differential, ... consumers may decide to buy two bottles of VODKAT rather than one bottle of SMIRNOFF. This is particularly likely in the case of consumers who are under the impression that VODKAT is a weaker version of vodka.

Erosion of distinctiveness

Even if there was no evidence of lost sales, I consider that it is clear that ICB's marketing of VODKAT is likely to erode the distinctiveness of the term "vodka". It will cease to be a term reserved for 37.5% ABV spirits, and will come to be seen as a term applicable to lower strength products which include fermented alcohol. Indeed, I think there is some evidence that this is already starting to happen. The advent of the me-too products like VODKOVA is likely to accelerate this trend if it is not checked".