Injunctive relief - is a re-assessment of Ebay on the way?

In its Ebay vs. MercExchange ruling of 2006 ("Ebay"), the US Supreme Court basically concluded that injunctive relief shouldn't be automatically granted for patent infringement. Monetary damages was ruled to always constitute adequate compensation unless the patent holder could demonstrate that a rigorous four-factor test was fulfilled on all points. As a practical consequence of Ebay, it became more complicated for a patent holder to obtain injunctive relief or exclusion orders against infringing products in US courts after 2006.

While the gist of Ebay may perhaps have been to minimize NPEs' possibilities of obtaining unreasonable compensation, it may well have been blunt enough to negatively affect also true innovators as well as true competitors.

In wireless SEP FRAND licensing for example, the reverse patent hold-up behaviour seen among infringers in recent times may at least partly have been fueled by Ebay. And for non-SEPs, we can look at Apple. Since launching its iPhone in 2007, the Ebay ruling arguably hasn't made Apple's struggle to protect its patented smartphone-related inventions any easier.

However, a potential re-assessment of injunctive relief in US patent cases may now be on its way, incidentally in relation to an Apple case. On September 17, 2015, the US Federal Circuit overturned a district court's denial of injunctive relief in Apple vs. Samsung.  The original request was for a feature-based injunction against multi-function products, to which mobile phones arguably belong, and the overturn could actually be seen as a slight softening of Ebay. The main point of discussion related to the first Ebay factor concerning "irreparable harm" and establishing a "causal nexus" between the patented feature and consumers' decision to purchase the multi-function product in question. 

Interestingly, on December 16, 2015, the Federal Circuit denied Samsung's request for an en banc revisit of the issue, and issued a revised opinion along with the order. This seems to indicate that the Federal Circuit's stance is becoming solidified. On the "causal nexus" requirement, it says:

"In short, the record establishes that the features claimed in [the patents] were important to product sales and that customers sought these features in the phones they purchased. While this evidence of irreparable harm is not as strong as proof that customers buy the infringing products only because of these particular features, it is still evidence of causal nexus for lost sales and thus irreparable harm. Apple loses sales because Samsung products contain Apple’s patented features.The district court therefore erred as a matter of law when it required Apple to show that the infringing features were the reason why consumers purchased the accused products. Apple does not need to establish that these features are the reason customers bought Samsung phones instead of Apple phones–it is enough that Apple has shown that these features were related to infringement and were important to customers when they were examining their phone choices." (emphasis in original),

and in the conclusion part of the opinion one can almost sense some underlying "frustration" with Ebay: 

"If an injunction were not to issue in this case, such a decision would virtually foreclose the possibility of injunctive relief in any multifaceted, multi-function technology.".

The Federal Circuit's stance seems quite reasonable to me. If a company invents a feature for a multi-function product that's attractive to consumers and implements that feature in its own multi-function products, shouldn't it have the legal right to, for a limited time-period, prevent others from implementing that very feature in their directly competing multi-function products? I don't really see such a right as being too far-fetched, given the definition of what a patent really is.

If Samsung wants to avoid an injunction, it now looks like a Supreme Court petition would be needed. This story will surely be interesting to follow.

Federal Circuit dismisses SSPPU "rule"

Readers of this blog will know that I've frequently questioned the idea that there's a "rule" mandating that royalty or damages for infringing multi-component products be calculated using a "Smallest Salable Patent-Practicing Unit" (SSPPU) as a value-base. The idea of this "rule" has attracted quite some powerful followers and in February 2015 it was even codified into the new IEEE patent policy (!).

Well, on December 3, 2015, in an appeal decision in the CSIRO vs. Cisco case, the US Federal Circuit made it crystal clear that no such "rule" exists.

The decision includes other interesting opinions too, but I'll limit this post to royalty-base aspects. 

This statement from the decision sums things up quite nicely:

"The rule Cisco advances — which would require all damages models to begin with the smallest salable patent-practicing unit — is untenable. It conflicts with our prior approvals of a methodology that values the asserted patent based on comparable licenses. ...Such a model begins with rates from comparable licenses and then “account[s]for differences in the technologies and economic circumstances of the contracting parties.” Finjan, 626 F.3d at 1211. Where the licenses employed are sufficiently comparable, this method is typically reliable because the parties are constrained by the market’s actual valuation of the patent."

In other words, an SSPPU royalty-base "rule" would e.g. conflict with the use of comparable licenses as evidence of damages value. Given the importance placed on comparable license evidence in US law, an SSPPU royalty-base "rule" can therefore not exist.

Besides the square dismissal of the imaginary SSPPU "rule", the Federal Circuit also noted that:

"The choice of royalty base — which is often the focus of the apportionment analysis—is irrelevant to the district court’s analysis. The particular rates relied on by the district court were contemplated as cents per end unit sold by Cisco, but they could equally have represented cents per wireless chip without affecting the damages calculation.",

and:

"Because the parties’ discussions centered on a license rate for the ’069 patent, this starting point for
the district court’s analysis already built in apportionment. Put differently, the parties negotiated over the value of the asserted patent, “and no more."".

It's good to also see this point being made. People - oddly - seem to forget that payments for legitimate use of others' IPR are not made in "percent", but in real money, i.e. Dollars, Euros, Yuan etc. So what's ultimately relevant is the value - in real money - that a patent portfolio brings to the end-product. In this sense, a too strong focus on a specific model parameter such as a royalty-base is arguably irrational.

Hopefully, this Federal Circuit decision can bring any ongoing debate about SEP FRAND license value in line with actual law. 

Apple and Ericsson - a first look

On January 12, 2015, Apple filed a complaint in the US District Court for the Northern District of California asking for a declaratory judgment that i) seven Ericsson US patents are not essential to 4G nor infringed by Apple or alternatively, if found essential and infringed, ii) the court sets reasonable royalties using a royalty base of "at most, the component that substantially embodies the alleged invention". It also asked the court to prevent Ericsson from seeking injunctive relief or exclusion orders based on the patents-in-suit.

Shortly after, Ericsson filed a complaint in the US District Court for the Eastern District of Texas asking for a declaratory judgement that i) Ericsson's global license offers have "complied with its FRAND commitment" and ii) Ericsson has "complied with its contractual obligations under its FRAND commitment".

There's been more filings in this dispute since, and of course there could be more to come. But in this post I'll specifically examine certain aspects of this first filing by Apple. There are some parts that I find interesting and related to what I have touched upon in previous posts. Also in relation to both of these first filings, I'll revisit the issue of SEP portfolio license valuation.

The first point in Apple's complaint concerns the "royalty base". Basically, a "royalty base" is the value of "something" that a royalty rate percentage is multiplied by, to arrive at a payable royalty for a licensed product. In its complaint, Apple argues that "the law requires" that the royalty base be selected as "(at most) the smallest salable unit", and explains that such a unit would correspond to "(at most) the baseband processor chip" inside its products. Apple further implies that the "current technological and legal environment" is one where this particular Apple opinion prevails, and that Ericsson has refused to "adapt" to it.

Let's first look at the law. The fundamental basis for US patent damages can be found in 35 USC 284, "...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..." (emphasis added). Clearly, there are no limitations of the type advanced by Apple to be found there.

So how about the "smallest salable unit"? Well, the phrase is actually part of the Entire Market Value Rule (EMVR) concept in US patent damages law. But Apple has embraced it in a completely out-of-context manner. The concept, as clarified only recently by the US Federal Circuit in Ericsson vs. D-Link in 2013, is only an "evidentiary principle" to be used to specifically assist a US layman jury to arrive at a reasonable royalty when there is a risk of it being misled (biased) by a higher end-product value. Moreover, in the very same breath the Federal Circuit made it crystal clear that i) licenses are "generally negotiated without consideration of the EMVR" and ii) the "substantive legal rule" is that the “ultimate reasonable royalty”– e.g. the result of multiplying a royalty rate and a royalty base–”must be based on the value that the patented invention adds to the end product” (emphasis added).

And if that's not enough, also the market has rejected Apple's position. It's an indisputable fact that the end-product selling price has been used as a royalty base in cellular SEP licensing for more than 20 years. That is, since more than a decade before Apple even got into the mobile phone business. During all those years, several hundreds, if not thousands, of cellular SEP license agreements were signed using precisely that royalty base.

If those hundreds of licenses would have been so clearly wrong, how could the world's legal systems - including the US legal system - have let such practices flourish for decades? Not to mention the tremendous global growth in the mobile phone business during those 20 years, from virtually zero to 7 billion mobile subscriptions and 2.5 billion devices sold annually today? All that, based on something that's basically against the law? I'm afraid I find that quite hard to believe.

Clearly, Apple's opinions about what "the law requires" and the "current legal environment" on the subject of royalty base do seem quite odd to say the least.

Moving now to the question about injunctive relief. Here Apple asked the court for "a ruling that Ericsson cannot seek injunctive relief or exclusion orders against Apple" based on any of the patents-in-suit found to be infringed and essential.

As I've mentioned before, there's no legal support whatsoever for banning the seeking of injunctive relief for infringement of SEPs. In fact, the US Federal Circuit in Apple vs. Motorola in 2014 could not have been clearer on this point: "To the extent that the district court applied a per se rule that injunctions are unavailable for SEPs, it erred." Indeed, "an injunction may be justified where an infringer unilaterally refuses a FRAND royalty or unreasonably delays negotiations to the same effect." Clearly, an SEP holder does have the right to seek an injunction and it's up to the court to decide on a case by case basis whether an injunction is warranted, based on e.g. whether the infringer is deemed to have engaged in patent hold-out. An actual hold-out situation can be very damaging to the SEP holder and especially to other willing and existing licensees, as I discussed in a specific post on that subject. This is presumably why the US Federal Circuit believes that an injunction may be appropriate in such cases.

So, like the royalty base issue, Apple's request about injunctions also seems out of touch with US law.

The last aspect I'll examine here is that of SEP portfolio license valuation, looking at both Apple's and Ericsson's filings.

Apple seems to view the entire issue from a patent-by-patent aspect, and asked the court for declaratory judgements on seven particular Ericsson patents in terms of essentiality and infringement, and assuming those are fulfilled, value.

Ericsson on the other hand appears to treat the issue as a SEP portfolio licensing effort, and asked the court to determine whether its terms for its entire worldwide alleged SEP portfolio as a whole - i.e. not just seven US patents - are to be considered FRAND.

So essentially we have two approaches pitted against each other; i) patent-by-patent license value adjudication and ii) global patent portfolio license value adjudication.

The patent-by-patent approach requested by Apple may be suitable when the matter at hand is a license to a limited explicit set of patents granted in the US. But that's really not the case here at all. The majority of Apple's sales are outside the US, and it sells tremendous volumes on every continent. And an SEP-holder like Ericsson surely has granted SEPs on every continent too. In addition, major standards-contributors tend to obtain new SEPs over time, adding to their portfolios. For at least these reasons, the license scope of the Apple-Ericsson negotiation preceding these court filings must have concerned a global SEP portfolio license. Anything else would have been highly inefficient if not irrational for companies such as these.

As I elaborated in an earlier post, when it comes to a license to a large global SEP portfolio, a  patent-by-patent, country-by-country approach to adjudication can never be a complete solution, and when pursued by an infringer it may in practice amount to a patent hold-out situation. Patent hold-out can in turn lead to the unreasonable result that the SEP-holder cannot efficiently enforce its SEP portfolio simply because it's so large.

Looking now at the "one-stop shopping" approach requested by Ericsson. It does have an obvious attraction point; it directly focuses on the very topic of the actual negotiation between the parties - the value of a license to a global SEP portfolio. And in cases where significant databases of existing license agreements to the very same global SEP portfolio are available as references, this approach should have the potential to be both efficient and fair. In particular if the vast majority of those existing license agreements have been negotiated in good-faith without litigation, something we know is generally true for SEP portfolio licensing. So if Ericsson's public statements about having "more than 100 patent-licensing agreements in place" are to be believed, this case should surely qualify for this approach.

In recent times the "one-stop-shopping" approach has indeed gained support from courts and agencies worldwide. In Microsoft vs Motorola in the US District Court for the Western District of Washington, although some dubious calculation methodology was used as I've mentioned earlier, the court did in fact determine a global FRAND rate to Motorola's SEP portfolio. And the “Request for a FRAND Determination” process endorsed by the US Federal Trade Commission in the consent degree of Motorola vs Google also expressly concerned a global SEP portfolio license. Even the Chinese National Development and Reform Commission (NDRC) in 2014 imposed a similar process on InterDigital for a global SEP portfolio license.

Concluding this review of the initial filings of Apple and Ericsson, I find the argumentation coming from Apple surprisingly unconvincing so far. Its arguments about royalty base and injunctions seem to be at odds not only with US law - including recent US Federal Circuit opinion - but also with decades of regular SEP-portfolio licensing. So for Apple's sake, one would hope that it comes up with some better argumentation as the case continues. Furthermore, the global license value adjudication sought by Ericsson seems to be rather more appropriate for the case at hand - a global SEP portfolio license - as compared to the patent-by-patent approach initiated by Apple.

On the draft IEEE patent policy

IPR policies of telecoms Standardization Setting Organizations (SSOs) mainly define how patents that become part of the standard should be treated, typically through the principle of a (F)RAND ((Fair), Reasonable And Non-Discriminatory) licensing commitment. These policies have been in place for many years, decades even, but are quite naturally subject to reviews from time to time. In spite of such reviews and occasional calls for more regulatory content though, the policies are more often than not left largely unchanged.

This likely demonstrates that the original policies continue to serve the market rather well. Quite some wide-ranging thought and foresightedness have gone into them in order to carefully accommodate the diverse and complex interests of users and innovators of advanced communication technologies in the marketplace. And ultimately, to make the standards commercially successful in the long-term.

However, a radical IPR policy change is now underway within the Institute of Electrical and Electronics Engineers (IEEE), an SSO responsible for numerous standards including "WiFi", or IEEE 802.11 as it's formally known. Since last year, a proposal for an update of the patent policy of the IEEE Standards Board Bylaws is being worked on by the IEEE-SA (IEEE Standards Association), a body within the IEEE responsible for standards. Compared to previous IPR policies of telecoms SSOs, this proposal is very detailed and far-reaching. At least to me it also gives the impression of being aimed at significantly changing how wireless SEP licensing will work in the future. Let's take a detailed look.

To begin with, the policy states that the determination of a "reasonable rate" for a SEP "should" consider (emphasis added):

a) "the value that the functionality of the claimed invention or inventive feature within the Essential Patent Claim contributes to the value of the relevant functionality of the smallest saleable Compliant Implementation that practices the Essential Patent Claim" (emphasis added),

b) "the value that the Essential Patent Claim contributes to the smallest saleable Compliant Implementation that practices that claim, in light of the value contributed by all Essential Patent Claims for the same IEEE Standard practiced in that Compliant Implementation" (emphasis added)

[and]

c) "existing licenses covering use of the Essential Patent Claim, where such licenses were not obtained under the explicit or implicit threat of a Prohibitive Order, and where the circumstances and resulting licenses are otherwise sufficiently comparable to the circumstances of the contemplated license" (emphasis added).

Requirements a) and b) appear to mandate how the apportionment of the invention's value should be done. The phrase "smallest saleable compliant implementation" must reasonably mean a component or sub-assembly within the end-product, and in my mind the so-called "chip-set" might well be a likely candidate for this. The invention's value to such a component only is all that shall be considered. As I touched upon in my previous post on cellular FRAND royalty levels, this is actually not in line with how damages for patent infringement are, or should be, judged by courts. Indeed, as the US Federal Circuit recently clarified in the D-Link case, it's the value of the patented invention to the end-product that is the yardstick. In clarifying the "Entire Market Value Rule", it stated that according to the “substantive legal rule”, the “ultimate reasonable royalty award” – that is, the result of e.g. multiplying a royalty rate with a royalty base – ”must be based on the incremental value that the patented invention adds to the end product” (emphasis added). Thus, mandating SEP value apportionment to consider only a component within the end-product is not the law.

Requirement c) is even more remarkable. This is because ever since the patent system was created, all licenses - including (F)RAND SEP licenses - have by definition been obtained "under the explicit or implicit threat of a prohibitive order". I say "by definition" because this is quite simply the basic legal right of a patent holder, a right to exclude. And as I elaborated in an earlier post, (F)RAND doesn't change this per se. So in other words, c) simply says that none of the WiFi licenses in existence at the time of adoption of this new IPR policy may be used as a reference for any new WiFi licenses. This "purging" of the historical record of WiFi licenses seems intended to "cement" the component value apportionment mandated by a) and b). Presumably because the royalty considerations of those preexisting licenses may have been based on the value that the SEP portfolio brings to the end-product rather than to a component within. 

Interestingly, in the above-mentioned D-Link case, the defendant argued for disqualification of existing license evidence on those very grounds, but the Federal Circuit rejected this: "In short, where expert testimony explains to the jury the need to discount reliance on a given license to account only for the value attributed to the licensed technology, as it did here, the mere fact that licenses predicated on the value of a multi-component product are referenced in that analysis—and the district court exercises its discretion not to exclude such evidence—is not reversible error."  In fact, licenses "predicated on the value of a multi-component product" are perfectly normal in practical wireless SEP licensing. And incidentally, they're also in harmony with the law.

To me, a), b) and c) seem to be specifically designed to usher in a brand new era of very low royalty rates for WiFi. Clause c) makes all old licenses irrelevant as references. And clauses a) and b), while not necessitating it, certainly encourage a significant lowering of the absolute royalty rate by mandating consideration of the SEP's value to (at most) the chip-set only, thus creating a low-product-value bias with regards to the absolute royalty. I'm not sure how much support there will be for such a change, but it's not in line with what the US Federal Circuit has said about the law.  

However, there's more of interest in the proposed new IEEE patent policy, relating to prohibitive orders:

"An accepted ...[RAND licensing commitment] ... precludes seeking, or seeking to enforce, a prohibitive order except as provided in this policy." (emphasis added),

where "as provided in this policy" means:

"The submitter of ... [a RAND licensing commitment]... agrees that it shall neither seek nor seek to enforce a prohibitive order ...unless the implementer fails to participate in, or to comply with the outcome of an adjudication, including an affirming first-level appellate review, if sought by any party within applicable deadlines..." (emphasis added).

At first glance, this actually looks a bit similar to the process used e.g. in the US Federal Trade Commission's Consent Order in the Google/Motorola case. As a potential "softer" means to combat the very destructive"patent-holdout" behaviour, I myself saw that as a quite interesting path. However, when looking more in detail at the wording, it doesn't look like that's the purpose here. The phrase "an adjudication, including an affirming first-level appellate review" gives the distinct impression that an affirming first-level appellate review is actually a requirement. This makes it quite a different story from the quoted US FTC process. Unless I misunderstood the phrase, the whole thing looks like an attempt to in practice ban prohibitive orders altogether in SEP portfolio cases. Of course, also this is something that the Federal Circuit has clearly declared an error, as I mentioned in my earlier post on portfolio licensing and patent hold-out.

So overall I'd say that the patent policy changes proposed by IEEE-SA represent large steps in wrong, unmotivated and even unsupportable directions. What appears to be a ban on prohibitive orders is not in line with US Federal Circuit precedent and would only worsen the patent hold-out problem and put artificial downwards pressure on royalty rates. The mandating of value apportionment based on only a component and the explicit disqualification of old license agreements as references also don't align themselves with Federal Circuit precedent. When stripped down to its bare essentials, the proposal looks rather like a path-clearing for a drastic cut of the absolute SEP royalty level for WiFi.

But isn't that good? Well if it had been shown that there was a clear problem with royalties being too high, affecting the market in negative ways, then the IPR policy could definitely be in need of a review and as a consequence possibly even an update. But evidence of concrete problems to that effect yet remain to be demonstrated. We can again look at the D-Link case, a case that was specifically about SEP licensing for the IEEE standard 802.11 ("WiFi") and which involved several prominent implementers of that standard. The Federal Circuit confirmed that no evidence of royalty stacking or patent hold-up - two phenomena sometimes claimed to create 'too high' SEP royalties - was presented and that they should never be presumed to exist just because they are theoretical possibilities: "The district court need not instruct the jury on hold-up or stacking unless the accused infringer presents actual evidence of hold-up or stacking. Certainly something more than a general argument that these phenomena are possibilities is necessary. Indeed,“a court should not instruct on a proposition of law about which there is no competent evidence.""

There are others who have questioned the purpose of this new proposed policy. For example, the IEEE USA board (!) recently sent a letter to the IEEE board, straightforwardly asking for an explanation of exactly what's wrong with the existing patent policy and what concrete problems the new policy proposed by IEEE-SA is supposed to solve.

The SSO IPR policies set the delicate basis for achieving a long-term balance between incentive for innovation and incentive for implementation. This balance is for the common good of technological innovation, a healthy marketplace for implementers, and ultimately consumer choice. However, it seems to me that in the new draft patent policy for IEEE, shorter-term business interests of implementers may have been allowed to take on rather more weight than they should have. To my knowledge, no obvious market need has been demonstrated for any of the changes proposed. Nor is there any legal mandate for them and in fact, some changes even tend to run contrary with US Federal Circuit opinion.

To the extent that there's an actual need for an update of its patent policy, hopefully the IEEE will eventually come up with a more balanced proposal than the present one.

Clarifications from the Federal Circuit

On December 4, a much anticipated opinion was delivered by the US Court of Appeals for the Federal Circuit ("Federal Circuit") in the Ericsson vs. D-Link et. al. case, concerning a WiFi (IEEE 802.11) SEP portfolio license. I'm pleased to note that the Federal Circuit in several aspects aligned itself with what I've myself been expressing in recent posts under this blog.

Firstly, on the issue of "royalty stacking", the Federal Circuit rejected jury instructions on royalty stacking because the defendants failed to present evidence that there was a royalty stacking problem: “A jury, moreover, need not be instructed regarding royalty stacking unless there is actual evidence of stacking. The mere fact that thousands of patents are declared to be essential to a standard does not mean that a standard-compliant company will necessarily have to pay a royalty to each SEP holder. In this case, D-Link’s expert "never even attempted to determine the actual amount of royalties Defendants are currently paying for 802.11 patents."” This is what I opined in my earlier post on royalty stacking, i.e. damaging royalty stacking shouldn't be assumed to exist per se, but instead clear evidence to that effect needs to be presented in each case. Once again we need to remember that royalty stacking occurs per definition in wireless SEP portfolio licensing. That doesn't mean that it's automatically harmful to the market nor to any given OEM.

Secondly, on "Patent hold-up", again no evidence of such was presented: “Absent evidence that Ericsson used its SEPs to demand higher royalties from standard-compliant companies, we see no error in the district court’s refusal to instruct the jury on patent hold-up or to adjust the instructions expressly to take patent hold-up into account.” As I wrote in my post on portfolio licensing and patent hold-out, evidence of "patent hold-up" is hard to find in reality. But the key point from the Federal Circuit again being that clear evidence must be presented in each case, it should not simply be presumed to exist just because it's a theoretical possibility.

Thirdly, on the topic of "Royalty base", which I touched upon in my post on cellular FRAND royalty levels, the Federal Circuit made another good clarification. On apportionment and the "Entire Market Value Rule", it stated that according to the “substantive legal rule”, the “ultimate reasonable royalty award” – that is, the result of e.g. multiplying a royalty rate with a royalty base – ”must be based on the incremental value that the patented invention adds to the end product”. The Federal Circuit confirmed that to determine a (F)RAND royalty in the wireless industry, you are definitely not mandated to use the smallest salable component such as a chipset as a royalty base. There's nothing wrong with using the entire end-user product as royalty base, as long as reasonable apportionment of value of the patented invention to the end-user product is done.

The Federal Circuit's practical approach to SEP licensing and damages is encouraging. Hopefully other courts and agencies, including those in other jurisdictions, will follow suit and move away from theoretical calculations towards a focus on real world practices and evidence.