Thursday, February 23, 2017

Larouche & Zingales on Injunctive Relief in EU FRAND Disputes

Pierre Larouche and Nicolo Zingales have posted a paper on ssrn titled Injunctive Relief in FRAND Disputes in the EU--Intellectual Property and Competition Law at the Remedies StageHere is a link to the paper, and here is the abstract:
In dealing with applications for injunctive relief by the holders of FRAND-encumbered SEPs in the course of protracted licensing negotiations, any legal system faces the challenge of reaching the proper balance between predictability for stakeholders and differentiation between possible scenarios (tough negotiations, holdup, holdout or exclusion). In the EU, that challenge fell to be addressed first under the various national laws concerning remedies for intellectual property violations, as partially harmonized by Directive 2004/48. The outcome was not optimal. After German courts introduced competition law in the equation in Orange Book, the European Commission felt compelled to intervene with a different approach in Motorola and Samsung, leading to a reference to the CJEU in Huawei v ZTE. That ruling sets out an elaborate choreography that SEP holder and implementer must respect, in order to avoid breaching Article 102 TFEU or avert injunctive relief, respectively. Huawei represents a satisfactory compromise in practice, but its theoretical foundation in competition law is not solid. Subsequent case-law has unmoored Huawei from competition law and is turning it into a stand-alone lex specialis for injunctions in FRAND cases. In the longer run, legislative intervention might be preferable to de facto harmonization via competition law. 
I thought this was a very thoughtful and informative paper.  Descriptively, the paper provides a good overview of the law of injunctions and its application to FRAND disputes in England, Italy, France,Germany, and the Netherlands.  Much of the authors' analysis turns on their classification of disputes between implementers and owners of FRAND-committed SEPs into four scenarios:  (1) "negotiation," where  "[t]he parties are locked in difficult negotiations to conclude a FRAND-compliant license," but "have no obvious interest to derail the negotiations by having recourse to outside options"; (2) "holdup," where the SEP owner exploits its market power to obtain exorbitant royalties, but normally isn't interested in excluding the implementer from the market; (3) "holdout," where the implementer wants to use the technology without a license or for an unreasonably low rate; and (4) "exclusion," where the SEP owner competes in a downstream market and wants to exclude the implementer from it (pp. 3-4).  The authors note that Huawei itself fell within the fourth category, and that as others have noted some of the CJEU's language in that decision supports the theory that the Huawei framework applies only in cases involving exclusion.  At the same time, however, other portions of the decision "seems to envisage that its reasoning applies more generally than as between competitiors," and that "a larger number of cases . . . apply Huawei to cases that do not fall within an exclusionary theory of harm. . . . [I]n most post-Huawei cases, the plaintiff is a patent assertion entity, which is by definition not competing with the defendant.  The theory of harm cannot then be exclusionary," but rather must be scenario 2 (holdup) (pp. 21-22).  The authors also argue that Huawei's imposition of certain obligations on implementers, which is part of what they refer to as the Huawei "choreography," cannot be justified under competition law; and they express concern that the limitation of Huawei to FRAND-committed SEPs (but not to de facto SEPs or FRAND-unencumbered SEPs) "risks introducing distortions into the standardization process" (p.29).  In addition, they express the view (which I've also tried to emphasize in recent work) that "On difficult issues such as these disputes, the key challenge for any legal system is to find the proper balance between accuracy (the ability to correctly identify which of the four scenarios is unfolding in a given case), consistency/predictability (the ability to treat like cases alike and enable firms to plan their actions accordingly) and efficiency (the minimum expense of resources in solving these cases)" (p.33); and, like the authors of the recent JRC report on SEPs, they argue that "FRAND is better seen as a guide for parties to deal with one another," rather than "to find a mystical 'right' FRAND set of terms and conditions" (p.36).  Finally, in a conclusion that calls to mind some thoughts I've expressed on these issues over the past few years, to the effect that competition law may be (for now) an adequate though imperfect source of legal norms for addressing FRAND/SEP disputes in Europe, the authors write:
On balance, even if it cannot be justified in theory, the unmooring of Huawei from competition law provides clear practical benefits. Considering that it would have been impossible to provide a comparable approach to SEP-related disputes from within IP law in such a short time, maybe Huawei represents the optimal institutional response by the EU to the proliferation of these disputes. Nevertheless, many questions remain open, and there is a risk that, sooner or later, the theoretical shortcomings will catch up with the evolution of the case law spawned by Huawei. It might be advisable for the EU institutions to follow up on Huawei via a legislative instrument that would rest on a more solid and broader foundation and would carry more legitimacy (p.37).
Overall, the paper is definitely worth a read.

Wednesday, February 22, 2017

R.I.P. Kenneth Arrow

Kenneth Arrow, recipient of the 1972 Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, has died at the age of 95.  Here's a link to his obituary in the New York Times.  He was one of the truly great minds of our era, and his contributions to economics, including but certainly not limited to the economics of intellectual property, will be long remembered.

Tuesday, February 21, 2017

"The Value of the Standard" Is Now Out

The Minnesota Law Review has now published my article, coauthored with Norman Siebrasse, titled The Value of the Standard.  Here is a link to the published version of the article, and here is the abstract:
Standard-setting organizations (SSOs) often require member firms to license their standard-essential patents (SEPs) on undefined “fair, reasonable, and nondiscriminatory” (FRAND) terms. Courts and commentators in turn have proposed various principles for calculating FRAND royalties, among them that the royalty should not reflect “the value of the standard.” As we show, however, this principle could be understood to mean any or all of three distinct concepts, namely that the royalty should not reflect the implementer’s sunk costs; that the patentee should not be able to extract any of the value resulting from network effects; or that the royalty should be proportionate to the patent’s contribution to the standard.
This Article proposes, as an alternative benchmark, that a FRAND royalty should reflect the incremental contribution of the patent to the value of the standard to the user. This principle combines two related ideas: first, that royalties should reflect the hypothetical bargain the parties would have struck ex ante (prior to incurring sunk costs) in view of the incremental value of the technology over unpatented alternatives as revealed ex post; and second, that multiple patents reading on a standard should be valued in proportion to their marginal contribution (“ex post Shapley pricing”). Our proposal would prevent patentees from extracting sunk costs or a disproportionate share of standard value, but (contrary to some approaches) it would enable them to draw some of the increased value resulting from network effects. We show that our approach is more consistent with sound innovation policy, and suggest some practical applications.
Our experience of publishing with the Minnesota Law Review, by the way, was quite positive.  The journal met all of its announced deadlines, and the editors' suggested edits improved the article.  This is not always the case with student-edited law reviews, but I'm happy to say that the one at my home institution appears to be doing a very good job.

Monday, February 20, 2017

IP Chat Channel Webinar on Enhanced Damages

On Thursday, February 23, 2017, at 2 p.m. Eastern Time the IP Chat Channel will broadcast a webinar titled Willfulness, Enhanced Damages, and Opinions of Counsel Since Halo.   Here is a link to the website, if you're interested in registering, and here is a description:  
It's been more than six months since the U.S. Supreme Court's Halo decision lowered the bar for proving willful infringement, and this boon for plaintiffs is quickly changing trial strategy. Our panel of experienced litigators will begin by examining how courts post-Halo have decided the sufficiency of pleading for enhanced damages at the motion-to-dismiss stage. Then the panel will consider the factors that have most strongly influenced recent district court decisions to enhance - or not enhance - damages, including notice by the patent owner (cases such as CH2O and Finjan), copying (Westerbeke, Imperium, and PPC),and opinions of counsel (Dominion, Presidio, and Boston University). A favorably timed opinion of counsel can prove successful in warding off a finding of willfulness, but defendants need to consider the effect of an opinion of counsel on attorney-client privilege. 
Panelists will be Natalie Hanlon Lee, Christopher Marchese, and Michael Zeliger.

Thursday, February 16, 2017

Stays Pending Design-Around in Germany?

The question of whether, in a case in which the patent owner prevails on liability, the court should consider "staying" an injunction for a period of time, rather than denying the injunction altogether, to enable the infringer to design around the patented invention is one that has received some attention in the U.S. scholarship and case law.  In some respects it's an attractive option, since it reduces the risk that an infringer under threat of an injunction will agree to a royalty that reflects holdup value, while also reducing the potential harm to the patent incentive scheme that may result if the court were to enter a permanent ongoing royalty that inaccurately reflects the value of the invention.  (When U.S. courts choose this option, they typically award a temporary or "sunset" ongoing royalty that lasts only for the design-around period.  Unfortunately, the rate for these ongoing royalties is frequently higher than the prejudgment royalty rate--which makes little economic sense, see discussion here--but at least when the court is only staying the injunction the impact of such an error is temporary.)

For the most part, courts outside the United States still tend to view awards of injunctive relief to the prevailing patent owner as more-or-less automatic (as did U.S. law, prior to eBay) other than in SEP/FRAND cases.  Moreover, a May 2016 decision of the German Bundesgerichtshof (BGH, or Federal Supreme Court) suggests that German courts aren't very receptive to  the stay-pending-design-around idea either.  (Hat tip to Norman Siebrasse, who called to my attention Jochen Buehling's discussion of this case last month on the Kluwer IP Blog.)  The case is the Judgment of 10 May 2016, X ZR 114/13 (W├Ąrmetauscher, or "Heat Exchanger"), available in the original German here.  The patent in suit claims a heating system for vehicles, and the principal issue before the BGH was whether the defendants' products infringed.  The courts of first and second instance held that they did not, but the BGH reversed, and most of the decision discusses the appropriate principles of claim construction leading to this result.

Of interest to remedies mavens, however, is the court's discussion of the defendants' alternative request for an Aufbrauchfrist (a term that Dr. Buehling nicely translates as "transition period") to enable them to sell off their stock and fill orders that had been placed up until the reversal on appeal.  If I'm understanding this correctly, the BGH holds that the granting of such a transition period can only be granted when, in consideration of the interests of the patent owner and the infringer, the immediate enforcement of the injunction would result in a disproportionate and undue hardhip and thus would be in bad faith (para. 41a).  The court further states that the issue of whether such a transition period would ever be available in a patent case hadn't come before the high court before, but that the legal literature had proposed that a court could consider granting such a transition period on a case-by-case basis, taking into account all of the participants' interests; the infringer's good or bad faith; whether the patented invention formed just a small but functionally necessary component of a complex product; and whether an unpatented or licensed product could be substituted within a reasonable time. The court also doesn't see anything in TRIPs article 30 (which permits "limited exceptions to the exclusive rights conferred by a patent, provided that such exceptions do not unreasonably conflict with a normal exploitation of the patent and do not unreasonably prejudice the legitimate interests of the patent owner, taking account of the legitimate interests of third parties"), or in article 3 of the EC Enforcement Directive ("Member States shall provide for the measures, procedures and remedies necessary to ensure the enforcement of the intellectual property rights covered by this Directive. Those measures, procedures and remedies shall be fair and equitable and shall not be unnecessarily complicated or costly, or entail unreasonable time-limits or unwarranted delays. . . .  Those measures, procedures and remedies shall also be effective, proportionate and dissuasive and shall be applied in such a manner as to avoid the creation of barriers to legitimate trade and to provide for safeguards against their abuse."), that would require the more liberal granting of transition periods.

Applying these rules here, although the infringing subject matter comprised only a single element of a component (a vehicle seat) in a complex product (a vehicle), it wasn't an essential feature, and it wasn't shown that the defendants lacked alternatives or that an injunction would cause undue hardship.  Nor did it matter that the courts of first and second instance though the products were noninfringing.  

Based on the above discussion, as I understand it the court doesn't contemplate that a transition period could be accompanied by an interim royalty.  Rather, it would simply be an exception to the patent owner's exclusive rights, and barring some exceptional circumstances a German court won't grant it.  

Tuesday, February 14, 2017

New Dutch FRAND Case

On the EPLaw Blog today, Maurits Westerik has a write-up on a judgment published last Friday by the District Court of the Hague in Archos S.A. v. Koninklijke Philips N.V.  According to the post, the court concluded that the evidence did not show that the offer made by Philips was non-FRAND and that Archos's own offer was.  In particular, the court rejected Archos's arguments that Philips acted improperly by seeking to license its UMTS and LTE patent portfolios together, and that Philips's offer overestimated the share and quality of Philips's patents to the UMTS standard.  The post also links to the judgment itself, but most of it is in Dutch, which I can't read.  It would be great to have a translation into English, to help in better understanding some of the specifics.  

Monday, February 13, 2017

Canada's Federal Court of Appeal Reaffirms Relevance of Noninfringing Alternatives

The decision is Apotex Inc. v. ADIR, 2017 FCA 23 (Feb. 2, 2017).  Norman Siebrasse, who brought the case to my attention, has two more comprehensive write-ups on Sufficient Description, here and here.  The basic story is that in 2008 the district court found Apotex liable for the infringing manufacture and sale of perindropil tablets covered by Canadian Patent No. 1,341,196 (a finding later affirmed on appeal); and in 2016 it awarded an accounting (disgorgement) of the defendant's profits earned attributable to (1) sales in the domestic Canadian market and (2) sales to Apotex's U.K. and Australian affiliates for distribution in the U.K. and Australia.  Apotex didn't dispute that there were no noninfringing alternatives available for supply in the Canadian market, and thus that it was liable for all of the profit derived from domestic sales of the drug.  But it argued that there were noninfringing alternatives available for the export market--namely, that it could have arranged to have perindropil manufactured by companies in countries other than Canada in which the drug is not patented or the patent has been invalidated, and then distributed to the U.K. and Australian affiliates.  In 2015, the Federal Court (trial court) held, however, that the existence of such noninfringing alternatives was legally irrelevant--distinguishing the Canadian Supreme Court's decision in Monsanto Canada Inc. v. Schmeiser, 2004 SCC 34, on its facts--and that in any event the evidence did not show that Apotex could have arranged for the supply of noninfringing perindropil to the export market.  

On the legal issue, the Federal Court of Appeals reversed, reading Schmeiser (correctly, in my view) as standing for the proposition that noninfringing alternatives are indeed relevant.  In this regard, the court noted the Supreme Court's extensive discussion in Schmeiser of Professor Siebrasse's article A Remedial Benefit-Based Approach to the Innocent-User Problem in the Patenting of Higher Life Forms (2003) 20 C.I.P.R. 79, which argues in favor of the relevance of noninfringing alternatives.  (I'm happy to say that the appellate court also cited my book as persuasive authority that this rule makes sense as an economic proposition.)  Canadian therefore appears to be consistent with the long-standing U.S. recognition of the relevance of noninfringing alternatives, and at odds with the British approach as evidenced in cases such as United Horse-Shoe and Celanese.  On the facts, the court remands the case for the trial court to consider whether certain foreign companies could have supplied sufficient quantities of noninfringing perindropil to Apotex affiliates in the U.K. and Australian markets.  The court rejects Apotex's argument, however, that some of the profits it earned on foreign sales were for indemnity and legal services provided to its affiliates and not attributable to the drug itself.

It's an interesting question whether, in the U.S., the patent owner would be entitled to damages relating to products supplied to a foreign market under these circumstances, assuming there were no noninfringing alternative.  Probably not, I'd think; see, e.g, some of my previous blog posts and the sources cited therein, here, here, and here.  Would the availability of the disgorgement remedy, which U.S. patent law doesn't make available other than for design patent infringement, make a difference?

Finally, for another recent Canadian case addressing the topic of noninfringing alterantives (finding that there weren't any during the period in question), see Professor Siebrasse's February 3 blog post on Frac Shack Inc. v. AFD Petroleum Ltd.