Enforcement Strategies to Meet Business Objectives

Go to: Litigating to Maintain Product Exclusivity and Market Share | Using for Licensing Purposes | Acquiring Patents for Defensive Purposes Current as of: 10/23/2019 by Brian O’Reilly, DLA Piper

A client’s business objectives are crucial when determining how best to enforce its patents. There are multiple aims when creating an enforcement strategy. For instance, a client may wish to use its patents to maintain or increase a product’s exclusivity and market share, to obtain revenue to fund research and development, to gain access to technologies through cross-licensing arrangements or patent pools, or to threaten suit as a defensive measure as an aid to settle ongoing patent litigation. This practice note discusses strategies that can be used to meet clients’ varying business objectives.

Litigating to Maintain Product Exclusivity and Market Share

To prevent copying by competitors and maintain market share, a client may assert its patents offensively to protect its most important products by filing lawsuits against suspected infringers. This is a standard strategy that is logical and important for many businesses.

Nevertheless, there is a recent trend of accumulating patents as stand-alone assets unconnected to the products and services sold by the patent owner.

Benefits and Risks of Litigation

When pursuing an offensive strategy, it is important to weigh the benefits and risks of litigation. Enforcing a patent through litigation often extracts the highest potential value from the patent. Patent damage awards can be significant, with the possibility of treble damages if the infringement is found to be willful. Successful litigation can also serve to make future patent enforcement easier. It lets competitors know that a client is prepared to enforce its patent rights, thus reducing the risk of future infringement and strengthening a client’s bargaining position in future licensing negotiations.

But litigation also carries high costs and high risks. Litigation is a lengthy, time-consuming process that may take years to complete, racking up significant legal fees and diverting both human and capital resources from your client’s business operations. Moreover, the alleged infringer will likely try to invalidate the patent by counterclaiming for a declaration of patent invalidity or by filing a post-grant proceeding before the Patent Trial and Appeal Board, such as a post-grant review (PGR) or inter partes review (IPR) proceeding. It is thus essential to thoroughly assess the validity and enforceability of your client’s patent prior to filing a lawsuit (e.g., is there additional material , or any basis for an inequitable conduct defense in the prosecution history?). For a more detailed discussion on assessing the strength of your client’s case, see Pre-litigation Opinion on and Validity. For a more detailed discussion on PGR and IPR, see Post-issuance Procedures for Challenging Patents: IPR, PGR, and CBM.

Injunctive Relief

Even if a client proves patent infringement, permanent injunctions are no longer obtained as a matter of course. See, eBay Inc. v. MercExchange, L.L.C., 547 U.S. 388 (2006). Patent Enforcement Strategies to Meet Business Objectives

Prior to eBay, the Federal Circuit generally “issue[d] permanent injunctions against patent infringement absent exceptional circumstances.” Id. In eBay, however, the Supreme Court decided that the traditional four-factor test for injunctive relief must be satisfied in patent infringement cases before a court can permanently enjoin an infringer. The test requires a patent owner to establish that: • It has suffered an irreparable injury. • Remedies available at law are inadequate to compensate for that injury. • Considering the balance of hardships between the plaintiff and defendant, a remedy in equity is warranted. • Public interest would not be disserved by a permanent injunction.

Since the Supreme Court’s decision in eBay, courts have drastically reduced the rate at which they awarded injunctive relief. Instead, many courts have ordered infringers to pay a royalty to the patent owner as compensation for ongoing infringement. See generally Chisum on Patents § 20.04.

Factors that have tended to weigh in favor of injunctive relief include the parties being competitors, the patent owner’s loss of market share or difficulty in accessing a nascent market for the patented technology, and the central importance of the patented product to the patent owner’s business. Another factor that may support an injunction is the patent owner’s use of the patent system to enforce its patents, as opposed to licensing its patent portfolio outside the context of resolving litigation or entering into cross licenses. The latter factor, unlike the previous factors, is uniquely within a client’s control.

Thus, if a client’s goal is to maintain product exclusivity and market share, it should ensure that it develops a coherent and consistent strategy of using its patents for this purpose, and that any licensing is not inconsistent with this strategy.

Enforcement at the International Trade Commission

A client may also offensively enforce its patent rights in administrative proceedings before the International Trade Commission (ITC) if infringing goods are imported from abroad and your client meets certain standing requirements. Such proceedings are referred to as Section 337 investigations or actions, as they are conducted pursuant to 19 U.S.C. § 1337.

Benefits of ITC Proceedings

There are many benefits to litigating at the ITC over a federal court. For one, ITC trials are relatively speedy— proceedings are typically concluded within 16 months, and the timetable for discovery is much more compressed than the typical federal court discovery schedule. An ITC complainant can also obtain broad injunctive relief without proving irreparable harm, as required by eBay. ITC injunctive relief includes exclusion orders (barring importation of infringing products from other parties as well) and cease and desist orders (barring sales of infringing products within the United States).

It is also easier to litigate against suspected foreign infringers at the ITC because: • The ITC itself serves complaints on respondents. • ITC rules facilitate foreign discovery. • The ITC is the sole venue for Section 337 actions (thus, respondents cannot challenge venue). • Violations of exclusion or cease and desist orders are enforced by the ITC and/or U.S. Customs and Border Protection. • An adverse ITC decision will not have preclusive effect in subsequent district court litigation.

Note also that the ITC, historically, has rarely granted stays where there are co-pending U.S. Patent and Trademark Office proceedings such as reexaminations—an advantage for an ITC complainant, as district courts routinely grant such stays. While many expected this trend to change with the post-grant proceedings established by the America

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Invents Act (AIA) in 2012 because these proceedings are faster than traditional reexaminations, this has not been the case. See Certain Microelectromechanical Systems (“MEMS Devices”), 2013 ITC LEXIS 802 (May 21, 2013).

Given these various advantages, Section 337 actions are attractive options for patent owners that wish to stop the importation of infringing products as quickly as possible—especially companies that sell products with short life cycles, such as fashion goods, toys, or electronic devices. But there are also certain disadvantages to litigating at the ITC.

Disadvantages of ITC Proceedings

The ITC’s pleading requirements are much stricter than district court requirements (even considering that Form 18 of the Federal Rules of Civil Procedure was abolished as of December 1, 2015). An ITC complainant must plead detailed facts of: • Specific instances of the alleged unlawful importations or sales • Infringement allegations (including claim charts) • The domestic industry affected (including domestic industry claim charts and facts showing significant investments in manufacturing facilities and equipment, labor or capital, or exploitation of the asserted patents through engineering, research and development, or licensing)

For many clients based outside of the United States, satisfying the domestic industry requirement is viewed as a hurdle to bringing an ITC action. Fortunately, the courts have recently made the domestic industry standard more permissible by allowing claimants to rely on the activities of its licensee to meet the standard. See Storage Drives, Inv. No. 337-TA-1097, Comm’n Op. (June 29, 2018).

It is important to note that the ITC’s jurisdiction is limited to unfair acts involving the importation of physical articles and does not encompass electronically imported data. See ClearCorrect Operating, LLC v. ITC, 810 F.3d 1283, 1289–90 (Fed. Cir. 2015).

Yet the ITC cannot award monetary damages; relief is limited to exclusion and cease and desist orders. However, as a practical matter, many respondents may choose to settle a Section 337 action, including monetary relief, to avoid high litigation costs and the imposition of a broad exclusion order.

Alternatively, an ITC complainant may file a concurrent action in federal district court to preserve its right to obtain monetary damages. Though district court actions are typically stayed during the pendency of a Section 337 proceeding, the prospect of a future damages award may further induce an early settlement.

For a more detailed discussion on the procedural aspects of ITC proceedings, see ITC Section 337 Investigations in Patent Infringement: Overview.

Litigating in Foreign Jurisdictions

If a client has an invention that is patented outside the United States, and if patent infringement is occurring abroad, as well as in the United States, filing an infringement suit in a foreign jurisdiction is an important consideration. While foreign actions may be filed during the pendency of a U.S. action, it may be more beneficial to file the foreign action before initiating a U.S. action because: • Litigating in a foreign jurisdiction may be substantially less expensive than in the United States (due in large part to the limited fact discovery allowed in many foreign countries). • A favorable outcome may provide leverage in worldwide settlement discussions (eliminating the need to incur additional litigation costs in other countries). • An earlier foreign action may force an adverse party to reveal litigation strategies or make damaging admissions.

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Determining where to file depends on a number of factors, including the countries in which your client has a patent covering the invention, the extent of the patent coverage (which may vary depending on each country’s patent law and the particular prior art cited during prosecution), the extent of the infringement occurring in each country, the market size for the patented product in each country, the likely cost of litigation, and the likelihood of obtaining an injunction and damages.

However, in practice, a larger number of patent cases are filed in certain countries. Two of these countries, China and Germany, are discussed in greater detail below, along with Brexit and Europe’s impending unitary patent system.

Before initiating enforcement in any foreign country, it is important to consult with foreign counsel, as litigation costs and procedures vary considerably from country to country.

China

There are recent reports of U.S. companies having difficulty navigating the Chinese court system. Some commentators suggest these difficulties are related to trade disputes between the U.S. and China. This is a rapidly developing issue and warrants consultation with knowledgeable counsel to assess current conditions before making recommendations regarding bringing suit in China.

China’s is one of the world’s most active in terms of filings. China has also become an increasingly important venue for patent infringement litigation, especially given its greater emphasis on patent protection and increased commercial ties with the United States. Litigating in China is substantially less expensive and faster than U.S. litigation, with final decisions typically rendered within 6 to 12 months.

However, there are important legal and cultural differences that U.S. companies should consider before commencing litigation in China, including the following:

Civil law system. Unlike the U.S. common law system, China’s legal system is a civil law system. As such, Chinese court decisions generally do not have any precedential value (except those issued by the Supreme People’s Court, which lower courts follow in practice), making outcomes in a given case difficult to predict. There are also no jury trials in China.

Specialized IP courts. China is transitioning to specialized courts for patent infringement disputes. Traditionally, judicial local protectionism—the idea that some courts improperly favor individuals or companies that reside or do business in their districts—has greatly influenced IP litigation in China, making the choice of venue extremely important. Patent plaintiffs were able to bring cases in one of 76 courts, located in major Chinese cities and in the provincial capitals. Many believe that local protectionism among these various courts led to inconsistent and unpredictable outcomes.

However, on August 31, 2014, China passed legislation establishing three specialized IP courts, in Shanghai, Beijing, and Guangzhou. These courts have exclusive jurisdiction in their respective areas over civil and administrative cases relating to patents, plant varieties, integrated circuit layout designs, and technological know- how. In addition, the Supreme People’s Court has established 15 provincial IP tribunals, which operate within the existing structure of provincial courts. Many hope that the creation of these courts will enhance the outcome predictability of patent disputes in the future.

No formal discovery procedures. In contrast to the U.S.’s robust discovery system, China lacks formal discovery procedures. While Chinese courts do have discretion to preserve evidence, such orders are rarely issued absent exceptional circumstances. Plaintiffs therefore need to conduct a more extensive and thorough pre-suit investigation than for cases filed in the United States. Common tactics include hiring private investigators to collect relevant evidence, and/or obtaining a favorable infringement opinion from the State Intellectual Property Office (SIPO) (which provides an “official report” for a fee), prior to filing suit.

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Stricter evidentiary rules. China’s evidentiary rules are much stricter and more complex than U.S. rules of evidence. Greater emphasis is placed on documentary and physical evidence than on oral testimony. Documentary and physical evidence must be notarized, and foreign documents must also be translated and legalized (a process that can take more than a month to complete). The parties may agree on experts from a court-sanctioned list (and absent agreement, experts may be appointed by the court), but the parties’ own expert evidence is generally given little weight.

Less transparency. Chinese courts are less transparent than U.S. courts due to frequent ex parte communications between judges and the parties. Thus, while it is always important to retain experienced local counsel when litigating in a foreign jurisdiction, it is even more crucial to do so in China, as some attorneys may have better relationships and track records with certain judges.

Injunctive relief. Permanent injunctions are easier to obtain in China than in the United States, as they are typically automatically ordered upon a finding of infringement. It is also possible (though rare) for a plaintiff to obtain a preliminary injunction (specifically, a pre-suit or in-suit injunction) if it clearly proves infringement and irreparable harm. In practice, however, this standard is hard to satisfy given China’s strict evidentiary requirements and lack of discovery. Thus, preliminary injunctions are rarely granted. Note also that any type of injunction may be difficult to enforce because there are no contempt proceedings in China.

Damages. Actual damages (e.g., lost profits, the infringer’s illegal gains, or a reasonable royalty) are difficult to obtain in practice given China’s strict evidentiary rules and lack of discovery, which impede the collection of evidence necessary to prove damages. A plaintiff may obtain default statutory damages, though such damages are capped at 1 million RMB (approximately $150,000) per infringement. Even where damages are awarded, in practice it can be quite challenging to collect a judgment in China. For example, a small Chinese company that is ordered to pay damages may simply shut down and reopen under a new name, making it difficult, if not impossible, to locate the owners and collect damages.

Invalidity not a defense. Unlike the United States, invalidity is not a defense to patent infringement in China. The validity of a patent may only be challenged through reexamination at the Patent Re-examination Board (PRB) of SIPO. While a defendant may request reexamination, Chinese courts rarely stay litigation pending the outcome of a reexamination. Note, however, that courts will stay litigation if the PRB finds the asserted patent(s) invalid—which, given the speed of reexamination, could occur during the course of the litigation.

Utility model patents. China has three types of patents: • Invention patents with a 20-year term (similar to U.S. patents). • Design patents with a 10-year term (similar to U.S. design patents, except that they are not substantively examined). • Utility model patents with a 10-year term (no U.S. equivalent; not substantively examined).

A utility model patent covers a new technical solution relating to a product’s shape or structure, or a combination of its shape and structure, which is fit for practical use. U.S. companies should consider adding these patents to their portfolios because they are easy and fast to obtain (generally issued in less than a year versus two to five years for invention patents).

Note, however, that utility model patents, due to the lack of substantive examination, may be more susceptible to validity challenges and harder to enforce than invention patents. It is also impermissible to have both an invention patent and a utility model patent for the same invention. A common strategy, therefore, is to simultaneously file a utility model application and an invention application for the same invention, and to abandon the utility model patent before the invention patent issues. This strategy allows the patent owner to enforce its rights while the invention application is still undergoing examination, and to then obtain the longer period of protection once the invention patent issues.

Germany

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Germany is another popular venue for patent enforcement, accounting for approximately 60% of all European patent litigation. There are numerous reasons for this trend, including: • The large size of the German market • German courts’ experience in patent matters and the perception that they are pro-patent owner • Comparatively low litigation costs • Speed of litigation (final decisions are typically rendered in 7 to 16 months)

Key aspects of German patent litigation include the following:

Civil law system. Germany, like China, has a civil law system, with no jury trials. But German courts do carefully consider rulings in previous cases, especially of higher courts and the Federal Supreme Court. There is an ample body of precedent given the high volume of patent litigation in Germany, and thus litigation is generally more predictable than in China.

Bifurcated validity and infringement proceedings. Germany also, like China, has bifurcated validity and infringement proceedings. Thus, invalidity cannot be asserted as a defense to infringement; it must be separately challenged via an before the European Patent Office (EPO) or a nullity proceeding before the Federal Patent Court. Stays are rarely granted if there is a co-pending opposition or nullity proceeding, and infringement proceedings are generally much faster. Thus, it is often possible to obtain an injunction long before a ruling on validity, giving plaintiffs additional leverage in settlement discussions.

Exclusive jurisdiction in 12 district courts. 12 district courts have exclusive jurisdiction over patent infringement cases. The most popular court is the District Court Düsseldorf, followed by the District Courts in Mannheim, Munich, and Hamburg. There is a court of appeals for each district court, and second appeals can be filed to the Federal Supreme Court.

Limited discovery. Discovery is more limited in Germany than the United States, and like China, greater emphasis is placed on documentary evidence than oral testimony. Courts may appoint experts, but do not frequently do so.

Injunctive relief. It is easier to obtain a permanent injunction in Germany than the United States, as German courts normally grant an injunction following a finding of infringement. Plaintiffs may also obtain an interim (pretrial) injunction, within a matter of days, if the infringement is clear and the patent is likely to be found valid (while validity is not determined in an infringement proceeding, it is a factor for an interim injunction). Historically, interim injunctions have been hard to obtain in patent cases, and if they are later revoked, the plaintiff must compensate the alleged infringer.

Broad claim construction. Claims are more broadly construed by German courts than in other jurisdictions, such as the United States or the United Kingdom, making it easier to prove infringement.

Damages. Damages awards for patent infringement are usually lower in Germany than the U.S. (Germany, unlike the U.S., does not award treble damages for willful infringement). However, the losing party must pay the statutory attorney’s fees for the prevailing party, as well as court fees, which may help to offset a low damages award.

Utility model patents. Like China, the German patent system includes utility model patents. Such patents may be obtained quickly (generally, within two to four months) for a low cost, as they are not substantively examined, and, like China, have a 10-year term. Utility model patents may only protect product claims, not method or process claims. Because such patents are unexamined, a plaintiff must prove that the unexamined claims are patentable in an infringement proceeding.

European Unitary Patent System

Europe is moving towards a unitary patent system. Implementation of the system has been delayed by Brexit and a constitutional challenge in Germany. The two components of the new system are:

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• The availability of a new type of patent, a European Patent with Unitary Effect (i.e., a unitary patent), which will be issued by the European Patent Office. • The creation of a Unified Patent Court (UPC), with local and regional divisions, as well as central divisions in Paris, London, and Munich, and an appellate court in Luxembourg.

In contrast to the existing European patent—which must be validated in each country in which protection is sought and enforced separately in each country—the unitary patent will provide uniform patent protection in all participating EU Member States, without requiring separate validation or enforcement in each country. The unitary patent will exist alongside the current European patent, which companies may still obtain going forward.

The UPC will have exclusive jurisdiction over enforcement of unitary patents in all the participating Member States. It will also have jurisdiction over standard European patents and Supplementary Protection Certificates (subject to transitional provisions), to the extent that they designate contracting Member States—but, significantly, such patent holders can opt out of the UPC’s jurisdiction.

While the UPC can hear both infringement and validity claims, bifurcation is possible. For instance, if an infringement action is brought in a local or regional division and a counterclaim for invalidity is asserted, the judge may refer all or part of the action to the applicable central division of the UPC, which is equipped to decide invalidity issues (invalidity may only be decided in a local or regional division if a technically qualified judge is assigned to the case). If the judge refers only the invalidity portion, he or she then has discretion on whether to suspend or proceed with the infringement action, which could thus result in bifurcation. Alternatively, the judge may transfer both the infringement action and invalidity counterclaim to the applicable central division.

Once it launches, the new unitary patent system has the potential to greatly simplify and lower the costs of obtaining and enforcing patents in Europe, making it an attractive global enforcement option for U.S. companies. Many U.S. companies are expected to apply for unitary patents in Europe and take advantage of these cost savings. If successful, the unitary patent system may make Europe the venue of first choice for U.S. companies embarking on global enforcement of their patent rights.

Using Patents for Licensing Purposes

Some companies have a strategic focus and generate a significant portion of their revenues from licensing patents. Even companies that view patents primarily as a means to protect product exclusivity and market share often generate significant revenue from licensing their patents.

A good licensing strategy includes some or all of the following approaches: • “Carrot” strategy • “Stick” strategy • Cross-licenses • Patent pools • Licenses of standard essential patents (SEPs)

The strategy that your client ultimately chooses will depend on the types of technologies covered by its patents and its business objectives in any given case.

“Carrot” Strategy

A “carrot” strategy relies on a client convincing a potential licensee that the client’s patents and associated technology are valuable from a research and development standpoint. A client should focus on showing potential licensees that it possess significant technology that the licensee should incorporate into its product line. In contrast to a “stick” strategy, which focuses on companies currently infringing the client’s patents, the carrot strategies relies

Page 7 of 11 Patent Enforcement Strategies to Meet Business Objectives on identifying targets currently not using the patented technology and convincing them to adopt the technology. For this reason, it is often best to integrate a client’s business development or partnerships team into a carrot approach so that targets are approached collaboratively.

“Stick” Strategy

A “stick” strategy involves identifying suspected infringers and offering them licenses under direct or implied threat of litigation or after initiating litigation.

A patent owner who employs this strategy must be prepared, however, for the other party to challenge the validity, enforceability, or noninfringement of the patent. The alleged infringer may, for instance, proactively file a complaint for a declaratory judgment in district court, or initiate a post-grant proceeding before the Patent Trial and Appeal Board (PTAB). Or the alleged infringer may wait for the patent owner to file suit and vigorously defend itself through trial.

One of the early important decisions for a client is to decide whether to approach a suspected infringer about licensing a patent without filing a suit or to file a suit and then approach the suspected infringer. The benefit to approaching a suspected infringer before filing a lawsuit is the ability to approach multiple parties without the cost of filing multiple litigations. The benefit of filing a lawsuit first is that it prevents the other party from filing a declaratory judgment action.

Avoiding a declaratory judgment action is often important in a patent litigation strategy. A declaratory judgment action deprives a client of choosing a favorable forum—often an important strategy in patent litigation. Some venues are generally more patent owner friendly than others, as evidenced by various litigation statistics (e.g., patentee winning percentages, the average speed of disposition, damage award patterns, and transfer statistics) or other considerations (e.g., local patent rules in a given district). One notable example is the widely considered patent friendly venue of the Eastern District of Texas. While you could file a motion to transfer the case to another venue on the grounds that the chosen venue is not convenient for the parties and witnesses (forum non conveniens), district courts have wide discretion in deciding such motions, and deference may be given to the plaintiff’s (the alleged infringer’s in this case) initial choice of forum.

The alleged infringer may also file a PTAB proceeding to challenge patent validity. For more information on PTAB proceedings, see Post-issuance Procedures for Challenging Patents: IPR, PGR, and CBM.

Cross-Licenses

A cross-license is a particularly attractive option in the following two situations: • When a competitor that is infringing a client’s patent also has a patent that a client is interested in practicing • When a client and a competitor have blocking patents (i.e., neither can practice its patent without infringing the other’s patent)

A cross-license typically includes field of use and geographic restrictions, and may include both issued patents and pending patent applications. Such licenses can be royalty-free or based on a running royalty or a one-time up-front payment. A royalty-free or one-time up-front payment alleviates the need to conduct royalty audits of each other’s sales. For a more detailed discussion on license royalty payments, see Patent Licenses: Key Provisions — Patent License Payment & Royalty Provisions.

Patent Pools

In fields such as mobile technology and e-commerce, different companies may own multiple patents that read on products or services that the companies and their competitors want to make or sell. In these circumstances—and especially where products made by multiple companies must be technically compatible to promote interoperability— a patent pool should be considered.

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In a patent pool, two or more patent owners generally agree to license each other’s patents and to license the pooled patents jointly to others. It is common for the patent owners in a patent pool to create a new entity (a licensing administrator) to administer the patent pool, and to grant a license of the patents to the licensing administrator so that the administrator may grant sublicenses. While the licensing administrator is typically responsible for the collection and distribution of royalties, as well as for monitoring potential infringement and identifying potential licensees, the patent owners remain responsible for any litigation that may be necessary to enforce their patents.

Note, however, that patent pools may raise antitrust concerns, particularly if patents directed to competing technologies are included in the pool. Accordingly, antitrust counsel should be consulted regarding any proposed patent pool. The U.S. Department of Justice (DOJ) also has a procedure called a business review, which allows companies to seek review of proposed agreements that raise potential antitrust concerns. See 28 C.F.R. § 50.6 and the DOJ’s website.

Licensing Standard Essential Patents

To ensure the compatibility between different devices in various fields of technology, a standard setting organization (SSO) or standards development organization (SDO) may publish certain industry standards (i.e., lists of technical requirements that can be widely adopted by industry participants on a voluntary basis).

A prominent SSO is the Institute of Electrical and Electronics Engineers, Inc. (IEEE), which developed the 802.11 standard, commonly known as "Wi-Fi." The 802.11 standard has been widely adopted, and consequently, all 802.11-compliant devices (e.g., laptops and routers) are interoperable. Other examples of SSOs include the Audio Engineering Society, Inc.’s Standards Committee (AESSC), which has developed standards for analog and digital audio recording and transmission, and the Consumer Electronics Association (CEA), which develops standards for consumer electronics.

SSOs aim to ensure that manufacturers that adopt the standard can obtain reasonable licenses for the use of any patented technology that is required to implement the standard. Patents that cover technology included in a standard are referred to as “standard essential patents” (SEPs), as adherence to the standard without a license would necessarily infringe certain claims of those patents. To address this issue, prior to publishing a standard, SSOs typically require participants to: • Disclose any relevant patents • Promise to license any SEPs on reasonable and nondiscriminatory (RAND) terms or on fair, reasonable, and nondiscriminatory (FRAND) terms

When SEPs are owned by different entities, a patent pool is often the best way to administer RAND or FRAND licenses.

The purpose of RAND or FRAND licensing terms is to prevent so-called patent “hold-up” and “royalty stacking.” Hold-up occurs where the owner of an SEP uses the patent to extract higher royalties from a company after it has adopted the standard, at which point the cost of switching to an alternative standard might be prohibitive. In many situations, the inability to implement a standard may make a product inoperative. Royalty stacking occurs where a standard implicates numerous patents and the payment of royalties to all SEP owners would, in the aggregate, make the manufacture of a product implementing a standard unprofitable.

Notwithstanding the obligation to license SEPs on RAND or FRAND terms, there are obvious benefits to a patent owner to include its technology in a standard. When a technology is incorporated in a standard, it is usually chosen from amongst several competing technologies. If the standard becomes widely adopted, the patent owner will benefit from wide exposure and gain an advantage over its competitors. Even if the royalty rate is low, due to the RAND or FRAND commitment, the number of units sold could make participating in the standard very beneficial.

On the other hand, SEPs come with certain disadvantages, namely: • The difficulty of obtaining injunctive relief in the event of litigation

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• Potential disagreements over what constitutes “reasonable” license terms

These disadvantages are discussed in further detail below.

SEPs and Injunctions

An SEP owner is unlikely to obtain an injunction against an infringer because its acknowledged willingness to license the patent undercuts the showing of irreparable harm and the inadequacy of monetary damages that is required for an injunction in federal court. The Federal Circuit has explained that the existence of prior license agreements “strongly suggest[s] that money damages are adequate to fully compensate [a SEP owner] for any infringement” and, similarly, that adding one more users would not cause irreparable harm. Apple Inc. v. Motorola, Inc., 757 F.3d 1286 (Fed. Cir. 2014).

Obtaining an exclusion order in an ITC proceeding could be equally daunting. For example, in a case between Samsung and Apple, the ITC had issued an exclusion order based on Apple’s infringement of a Samsung SEP. See, Certain Electronic Devices, Including Wireless Communication Devices, Portable Music and Data Processing Devices, and Tablet Computers, Inv. No. 337-TA-794. However, the U.S. Trade Representative, vetoed the exclusion order on public policy grounds. While the veto did not prohibit SEP owners from obtaining exclusion orders, it cautioned that such orders should only be issued in appropriate circumstances (e.g., where the accused infringer refuses to pay a FRAND royalty or is not subject to the jurisdiction of a district court that can award damages).

Calculating a Reasonable Royalty for SEPs

While some SSOs require, or at least encourage, SEP owners to disclose standard royalty rates or maximum royalty rates, SSOs do not set royalty rates for RAND or FRAND licenses. The royalty rate and appropriate royalty base is negotiated between the parties. If the parties cannot agree on a “reasonable” or “fair” license, litigation may ensue. See, e.g., Microsoft Corp. v. Motorola, Inc., 2013 U.S. Dist. LEXIS 161762 (W.D. Wash. Nov. 12, 2013) (breach of contract claim involving SEP).

The Federal Circuit provided guidance on this issue in Ericsson, Inc. v. D-Link Sys., Inc., 773 F.3d 1201 (Fed. Cir. 2014), a case in which Ericsson sued D-Link for infringement of SEPs included in the IEEE’s 802.11 wifi standard. In letters of assurance to the IEEE, Ericsson had agreed to "grant a license under reasonable rates to an unrestricted number of applicants on a worldwide basis with reasonable terms and conditions that are demonstrably free of unfair discrimination."

The Federal Circuit affirmed the jury’s finding of infringement, but vacated the $10 million damages award (at a royalty rate of $0.15 per product, based on comparable license agreements).

Key aspects of the decision include:

Georgia-Pacific factors. The district court erred in including all 15 Georgia-Pacific factors in the jury instruction and stating that the jury “may” consider Ericsson’s RAND obligations. The Federal Circuit reasoned that many of the Georgia-Pacific factors are irrelevant to RAND-encumbered patents, misleading, and/or contrary to RAND principles. It emphasized that jury instructions should be based on the evidence presented in a given case and the actual RAND commitment at issue, not “rote reference to any particular damages formula.”

Apportionment. The royalty rate for an SEP must be apportioned to the value of the patented feature, “not the value of the standard as a whole or any increased value the patented feature gains from its inclusion in the standard.”

Patent hold-up and royalty stacking. A district court need not instruct the jury on patent hold-up and royalty stacking unless the alleged infringer submits actual evidence of hold-up or stacking, in relation to both the RAND commitment at issue and the specific technology referenced therein. There was no such evidence in this case. For instance, there was no evidence that Ericsson requested higher royalty rates after D-Link adopted the standard, or that D-Link had entered into numerous other license agreements to use the standard.

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For further examples of how courts have calculated FRAND royalty rates for SEP patents, see TCL Commun. Tech. Holdings, Ltd. v. Telefonaktiebolaget LM Ericsson, 2017 U.S. Dist. LEXIS 214003 (C.D. Cal. Nov. 8, 2017); In re Innovatio IP Ventures, LLC Patent Litig., 2013 U.S. Dist. LEXIS 144061 (N.D. Ill. Oct. 3, 2013).

IEEE’s Revised Patent (FRAND) Policy

On February 8, 2015, a prominent SSO, the Institute of Electrical and Electronics Engineers, Inc. (IEEE), approved its updated patent policy for licensing SEPs on FRAND terms, after receiving a favorable business review letter from the Antitrust Division of the U.S. Department of Justice (DOJ). The policy applies to SEP owners who submit a letter of assurance to the IEEE and agree to license their patents on FRAND terms.

The updated policy includes four key changes: 1 An SEP owner may not seek an injunction unless the alleged infringer “fails to participate in, or to comply with the outcome of, an adjudication, including an affirming first-level appellate review.” 2 A “reasonable rate” cannot include the value resulting from the patent’s inclusion in the standard. While the policy does not mandate a specific royalty rate or calculation method, it lists three nonexclusive factors that the parties may consider in determining a reasonable royalty: a) The value that the SEP’s functionality contributes to the value of the relevant functionality of the smallest saleable compliant implementation that practices the SEP. Per the policy, “compliant implementation” means any product (e.g., component, subassembly, or end product) or service that conforms to any mandatory or optional portion of a normative clause of an IEEE Standard. b) The value that the SEP contributes to the smallest saleable compliant implementation that practices the SEP, in light of the value contributed by all essential patent claims for the same standard. c) Prior licenses of the SEP, if (1) the licenses were not obtained under the explicit or implicit threat of a prohibitive order and (2) the circumstances of the prior and contemplated licenses are sufficiently comparable. 3 An SEP owner must license its patent for any compliant implementation, and therefore, may not discriminate based on a potential licensee’s level in the supply chain. 4 An SEP owner may require a grant back, or cross-license, of a potential licensee’s own patents that are essential to the same standard. While the SEP owner may not demand a cross license for patents that are not essential to the same standard, the parties may voluntarily negotiate such terms.

Other SSOs may adopt similar policies. If your client owns a SEP, you should ensure that it complies with the terms and conditions of the particular SSO’s patent policy. You should also regularly monitor any updates to such policies.

Acquiring Patents for Defensive Purposes

Patent litigation often settles with the parties agreeing to cross-license each other’s patents. Your client may therefore wish to expand its patent portfolio for defensive purposes, that is, to use as a bargaining chip in potential litigation. If your client is a frequent target of patent infringement suits by competitors, your client should consider acquiring patents that it could potentially assert as the basis for a counterclaim. Some companies have accumulated a patent portfolio specifically for this purpose. But if your client is primarily targeted by nonpracticing entities, which do not engage in any business other than acquiring and asserting patents, the patent portfolio of your client would not be an effective bargaining chip in such litigation.

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