The following guest post is by Daniel Taskalos. After reading his 2013 Stanford Technology Law Review article on Metallizing Engineering post-AIA, I asked Mr. Taskalos to revisit those issues here in Patently-O. – DC
In Helsinn Healthcare S.A. v. Teva Pharmaceuticals USA, Inc., the Federal Circuit had its first opportunity to address the impact of the “or otherwise available to the public” clause contained in post-AIA 35 U.S.C. § 102. In finding that the AIA “did not change the statutory meaning of ‘on sale’ in the circumstances involved here,” the Federal Circuit provided insight into the continued relevance of the forfeiture doctrine of Metallizing Engineering v. Kenyon Bearing.
The critical issue in Helsinn was whether the post-AIA definition of prior art requires public disclosure of the details of an invention in order to trigger the on-sale bar. In the AIA, Congress revised § 102—otherwise known as the “novelty provision.” As revised, the new novelty provision states:
(a) NOVELTY; PRIOR ART. — A person shall be entitled to a patent unless—
(1) the claimed invention was patented, described in a printed publication, or in public use, on sale, or otherwise available to the public before the effective filing date of the claimed invention.
While the AIA maintained the pre-AIA language of “patented,” “described in a printed publication,” “in public use,” and “on sale,” it added the emphasized clause above (the “catch-all clause”). The AIA does not provide any elaboration on the import of the catch-all clause, leaving many to wonder exactly what its presence means for the interpretation of the other, well-known categories of prior art.
Since its enactment in 2011, scholars have debated the effect of the catch-all clause on the “public use” and “on sale” statutory bars.* Helsinn asserted that the catch-all clause modifies prior-art categories such that only disclosures that publicly disclose the details of the invention qualify as prior art. Advocates like Helsinn contend that the intention of Congress was to overrule “secret” use and sale decisions, like Metallizing Engineering.
Others, including Teva, argue that the addition of the catch-all clause does not invalidate the years of case law interpreting “public use” and “on sale.” These advocates contend that interpreting the catch-all clause to impose a “public” requirement would be a foundational change to the purpose and rationale for the public use and on sale bars support—in the absence of a clear repudiation by Congress of the pre-AIA law.
*The number of articles discussing both sides of the debate is far too numerous to provide a full list. You can find a few of these articles listed here.
The facts of Helsinn presented a unique situation in which to consider this important question. Helsinn sued Teva for allegedly infringing four patents directed to a formulation of palonosetron for reducing chemotherapy-induced nausea and vomiting (“CINV”). All the asserted claims covered a specific palonosetron amount in a solution—0.25 mg. The parties agreed that the critical date for all four patents was the same—but different laws were implicated by the patents. Three of the patents were governed by the pre-AIA patent laws, while the last patent fell under the AIA.
Teva alleged that Helsinn’s asserted patents were invalid under § 102. The conduct in question concerned an agreement entered into by Helsinn with another party to market and distribute Helsinn’s palonosetron formulation. Almost two years before the critical date, Helsinn agreed with MGI Pharma, Inc., that MGI would market and distribute one or more formulations of palonosetron, contingent on approval by the FDA. The agreement identified the 0.25 mg dosage as one of the potential formulations to be purchased and sold. Although the existence of the deal was made public (through a required SEC filing), the specific formulation details were redacted.
Thus, the district court faced analyzing the same conduct under two sets of laws: pre-AIA and post-AIA. Under either, however, the same two-prong framework explicated in Pfaff v. Wells Electronics applied: the on-sale bar is triggered where before the critical date (1) there is a sale or an offer for sale and (2) the claimed invention was ready for patenting. Under the Pfaff framework, the district court found that the distribution agreement constituted a sale with respect to the three pre-AIA patents. But the district court interpreted Congress’ addition of the catch-all clause as a modification to the “on sale” category that placed a public requirement on the disclosure itself. The district court found that under the AIA, a § 102-triggering sale must publicly disclose the details of the invention; a public sale that did not disclose the claim limitations was insufficient.
The Federal Circuit reversed this decision and provided an analysis may prove instructive in future cases concerning public uses and other non-informing disclosures. In its opinion, the Federal Circuit noted that the support for Helsinn’s argument that § 102’s requirements changed with Congress’ addition of the catch-all phrase rested outside of the text of the amended provision; Helsinn relied primarily on floor statements by a few individual members of Congress.
The Federal Circuit noted that those floor statements appeared to show “at most” an intent to do away with case precedent concerning “public use” cases, not “on sale” cases. According to the Court, the only “precedent” cited by the Congressmen were cases in which the invention was used in public, but that use did not disclose to the public the details of the claimed invention. E.g., Egbert v. Lippman; Beachcombers International v. Wildewood Creative Products; Jumpsport, Inc. v. Jumpking, Inc. Moreover, the Federal Circuit explained that even assuming the statements could be stretched to cover sale cases as well, the “secret sale” cases “were concerned entirely with whether the existence of the sale or offer was public,” not whether the details of the invention were disclosed. Thus, the Court found the floor statements were of little support for a different interpretation of the statutory meaning of “on sale” under the AIA.
The Federal Circuit further found Helsinn’s argument unpersuasive because imposing a publicity requirement would “work a foundational change in the theory or the statutory on-sale bar.” In fact, the Federal Circuit noted that the issue of whether to impose a publicity requirement was exactly the situation in Pennock v. Dialogue, in which Justice Story created the on-sale bar. In Pennock, Justice Story found that allowing a patent to stand after a sale that did not disclose the claim limitations “would materially retard the progress of science and the useful arts, and give a premium to those who should be least prompt to communicate their discoveries.” Relying heavily on its prior case law, the Court also explained why such a publicity requirement has never been considered necessary. The Federal Circuit concluded by hold that at most, the catch-all clause just requires that the sale must put the patented product in the hands of the public,* not that it must be informed of all the limitations of the claim.
*Of course, the Federal Circuit did not mean that the product must be explicitly in the hands of the public. As discussed in the opinion, “our prior cases have applied the on-sale bar even when there is no delivery, when delivery is set after the critical date, or, even when, upon delivery, members of the public could not ascertain the claimed invention.”
Looking at the Federal Court’s reasoning in Helsinn and The Medicines Co. v. Hospira, Inc., that Metallizing Engineering may remain good law under the AIA. As the Federal Circuit made clear, it does not view the floor statements in Congress as evidencing a clear intent to overturn the “on sale” precedent, instead “at most” supporting an argument that the intent was to overturn the “public use” case law. In The Medicines Co., the Federal Circuit referred to Metallizing as an “on sale” case: the conduct at issue in Metallizing was the sale of performing a particular claimed process for compensation before the critical date, i.e. activity triggering the on-sale bar. Thus, the Federal Circuit would likely find mere floor statements to be of little relevance to a factual situation similar to Metallizing. Moreover, as the Federal Circuit identified, the law regarding “secret sales” has always been concerned with whether the existence of the sale itself was publicly disclosed—not the details of the invention. There is no indication in Metallizing that the sales at issue were not publicly known, so the same rationale from Helsinn should apply.
In Helsinn, the Federal Circuit anchored its holding on the fact that imposing a requirement that a triggering sale disclose the details of the invention directly contradicts Justice Story’s reasoning in Pennock for creating the on-sale bar. As Justice Story saw it, to allow an inventor to exploit commercially his or her invention for an extended period and still maintain the ability to seek patent protection would undercut the “progress of science and the useful arts” and promote undesirable behavior. This principle has been consistently reiterated by the Federal Circuit. See The Medicines Co.; Atlanta Attachment Co. v. Leggett & Platt, Inc. (“The overriding concern of the on-sale bar is an inventor’s attempt to commercialize his invention beyond the statutory term.”). The aim of discouraging the inventor from improperly extending the monopoly was one of the underlying reasons behind Judge Learned Hand’s decision in Metallizing. Thus, it is possible that the Federal Circuit may find Metallizing to remain applicable after the AIA, despite the reduced ability for such conduct under the first-to-file concept of the AIA.*
*This is one argument raised in support of the view that the AIA explicitly overrules Metallizing. Under the first-to-invent approach, this type of secret commercialization provided a greater incentive because even if another filed a patent on the claimed invention prior to the commercial exploiter, the exploiter could, in theory, establish prior invention and obtain the patent. As prior invention is no longer a valid argument under first-to-file, the incentive to secretly exploit an invention is diminished. However, the fact that success may be more difficult does not, in and of itself, mean the forfeiture doctrine no longer has value or applicability. As long as one person is still able to commercially exploit his or her invention in a manner like that in Pennock or Metallizing, the reasoning for the doctrine would still apply.
The recent Supreme Court decision in TC Heartland LLC v. Kraft Food Grp. Brands LLC also provides support for the continued relevance of Metallizing. See No. 16-341 (May 22, 2017). At issue in TC Heartland was the impact of Congressional amendment of the general venue statute (28 U.S.C. § 1391(c)) on the interpretation of the patent venue statute that was not amended (28 U.S.C. § 1400(b)). The patent venue statute has remained unchanged since the Supreme Court interpreted its scope, holding that a domestic corporation only “resides” for purposes of venue in a patent infringement action in its state of incorporation. See Fourco Glass Co. v. Transmirra Products Corp. (1957). However, after Congress amended the general venue statute in 1988, the Federal Circuit held that Congress’s amendment also changed the scope of where a corporation “resides” under § 1400(b) (although § 1400(b) remained unchanged). See VE Holding Corp. v. Johnson Gas Appliance Co. (1990). In TC Heartland, the Supreme Court reversed the Federal Circuit’s ruling in VE Holding, emphasizing that “[w]hen Congress intends to effect a change [to the statutory meaning of legal language], it ordinarily provides a relatively clear indication of its intent in the text of the amended provision.”
Accordingly, the TC Heartland decision can be interpreted as requiring clear congressional intent within the text of an amended provision itself to modify the settled meaning of statutory language. Such an interpretation would further undermine the persuasiveness of the minimal floor statements discussed in Helsinn, given that those statements were by individual senators, put forth their interpretations of post-AIA § 102, and are not included within the text of the AIA. Moreover, the Federal Circuit in Helsinn appears to have found the catch-all clause to not be a “clear indication if [Congress’s] intent in the text of the amended provision” to change the interpretation of “on sale” in the statute. In light of the large amount of scholarly debate on the meaning of the clause, it seems unlikely that the Supreme Court would disagree with the Federal Circuit’s apparent determination.
After Helsinn, it appears that on-sale bar precedent has survived the AIA. Applying the Court’s reasoning, and in view of other recent cases such as The Medicines Co. and TC Heartland, it appears the Metallizing Engineering precedent may also have survived the AIA, at least for now. However, there is still the possibility that the Federal Circuit may take the opportunity presented by the ambiguity caused by the catch-all clause to revisit the ultimate decision in Metallizing. Although the Federal Circuit may consider Metallizing to be an “on sale” case, Judge Hand’s opinion does rely on principles underlying both the “public use” and “on sale” bars. As such, the forfeiture doctrine of Metallizing would appear to be an extra-statutory bar, not falling within either the “public use” or “on sale” categories entirely. Because of this, some have questioned whether Judge Hand’s decision is actually correct. See Dimitri Karshtedt, Did Learned Hand Get It Wrong?: The Questionable Patent Forfeiture Rule of Metallizing Engineering, 51 Vill. L. Rev. 261 (2012). Moreover, although the Federal Circuit was not persuaded as to the “clear indication” of intent to change the meaning of “on sale” as advocated by Helsinn and others, that is not to say the Supreme Court would hold the same.
Daniel Taskalos is an intellectual property associate at Sheppard Mullin Richter & Hampton LLP. His practice covers a range of issues, including litigation and counseling.
Guest Post by Pamela Samuelson, Berkeley Law School. Professor Samuelson’s newest article Functionality and Expression in Computer Programs: Refining the Tests for Software Copyright Infringement, is forthcoming in the Berkeley Technology Law Journal.
“Neither the Copyright Statute nor any other says that because a thing is patentable it may not be copyrighted. We should not so hold.” So said the Supreme Court in Mazer v. Stein, 347 U.S. 201, 217 (1954).
In Oracle Am. Inc. v. Google Inc., 750 F.3d 1339 (Fed. Cir. 2014), the Federal Circuit invoked this language in rejecting Google’s “policy” argument that application program interface (API) designs were more appropriately patent, not copyright, subject matter. Id. at 1380-81. The Oracle decision seemingly accepted as unobjectionable the possibility of overlapping utility patent and copyright protections in program interfaces, and perhaps even of copyright as a gap filler for interface designs for which patents had not been obtained.
Because the contours of copyright and patent protections for software innovations remain unclear notwithstanding more than 50 years of experience trying to apply these intellectual property (IP) regimes to these utilitarian writings and virtual machines, the question of whether or to what extent copyright and patent overlap or are mutually exclusive continues to bedevil the field. The Federal Circuit’s Oracle decision is unlikely to be the last word on this subject.
Recently, I rediscovered the 1991 study that the Patent & Trademark Office (PTO) and the Copyright Office wrote about the software IP overlap or exclusivity issue. The Patent-Copyright Laws Overlap Study (May 1991) was prepared at the behest of the House Subcommittee on Intellectual Property and the Administration of Justice. The Study is more than 90 pages in length and has more than 50 pages of appendices.
Among the most significant of the Study’s software findings is that there is “no overlap in subject matter: copyright protects the authorship in a set of statements that bring about a certain result in the operation of a computer, and patents cover novel and nonobvious computer processes.” Letter from Ralph Oman and Harry F. Manbeck to the Hon. William J. Hughes, July 17, 1991 (transmitting the Study to the then Chair of the House Subcommittee).
Another finding is that “[p]atent protection is not available for computer programs per se,” which supports the Study’s conclusion that copyright and utility patent for programs are not “coextensive.” Study at iii (emphasis in the original). The Study identifies the doctrinal rationale for this exclusivity: program innovations “consist of mental steps or printed matter.” Id. at vii. Copyright and patent could, however, protect “totally different aspects” of program innovations. Id. at 2. The Study cited to the Supreme Court’s decision in Baker v. Selden, 101 U.S. 99 (1879) as the “bedrock opinion for the view that patent and copyright are mutually exclusive.” Id. at 19.
As for user interface designs, the Study reports that “[t]he mere display on a screen of commands, menus, questions and answers, forms, or icons is not generally considered patentable subject matter for utility patents” because “it is generally considered to be merely printed matter.” Id. at 45-46. Yet processes to produce user interface displays might be eligible for utility patenting. Id. at 47. (The Study discusses the possibility of design patent protection for icons. Id. at 46-47.)
Insofar as user interface screen displays have original expressive elements (e.g., videogame graphics), they would be eligible for copyright protection. Id. at 60-67. However, many aspects of user interface designs are akin to blank forms and lack originality. Id. at 68-69. Some aspects of user interfaces, such as lists of commands, are uncopyrightable under the doctrines of merger and scenes a faire and the words and short phrases exclusion. Id. at 70-71.
The Study recognized that some commentators had raised concerns about overbroad copyright protection for programs; yet, others, it noted, think that expansive protection is needed. Id. at 86-87. The Study concluded that this debate notwithstanding, it would be “premature” to conclude that the risks of overbroad protections were significant as there is “no overlap in subject matter” between copyright and patent. Id. at 88-90. The Study urged Congress to wait and see how the law evolved. Id. at 89.
“At the bottom of this debate,” said the Study, “it appears is the question of protection of functionality….” Id. at 87. It would be contrary to the statutory exclusions set forth in 17 U.S.C. § 102(b) for copyright to protect program functionality. (“In no case does copyright protection for an original work of authorship extend to any idea, procedure, process, system, method of operation, principle, or discovery, regardless of the form in which it is described, explained, illustrated or embodied in such work.”) Study at 87. According to the Study, the protection of functionality “is assigned to patents where a much more rigorous test must be undergone and the barriers to entry in terms of time, cost, and complexity, are higher.” Id. at 88.
It is unfortunate that the Federal Circuit did not have access to this Study when deciding the copyrightability issue in the Oracle case, as its conclusions might have given the court pause about invoking the Mazer overlap-endorsing dicta in response to Google’s mutual exclusivity argument.
In a forthcoming article, Functionality and Expression in Computer Programs: Refining the Tests for Software Copyright Infringement, I challenge the Federal Circuit’s conclusion that copyright and utility patent can provide overlapping IP protections for software innovations. The article notes that the Mazer dicta was made in the context of a real, if partial, overlap in copyright and design patent subject matters. Stein’s statuette qualified as a work of art under U.S. copyright law. However, used as the base of a lamp, the design was also eligible for design patent protection as an ornamental design of an article of manufacture.
The Court in Mazer was unequivocal about copyright and utility patents having separate domains. It cited approvingly to two of Baker’s progeny that had held “that the Mechanical Patent Law and Copyright Laws are mutually exclusive,” Mazer, 201 U.S at 215, n.33 (emphasis added). See Taylor Instrument Co. v. Fawley-Brost Co., 139 F.2d 98 (7th Cir. 1943) (no copyright in temperature recording charts because they were integral parts of previously patented machines) and Brown Instrument Co. v. Warner, 161 F.2d 910 (D.C. Cir. 1947) (accord). Overlaps in design patent and copyright subject matters had, by contrast, long been accepted. Mazer, 201 U.S. at 215, n.33.
The exact contours of utility patent and copyright protections for software innovations may not shimmer with clarity, but the 1991 Study adheres to the Supreme Court’s long-standing pronouncements in Baker and Mazer that copyright and utility patent are and should be mutually exclusive. Now if only the Federal Circuit can be made to understand this.
Trade secrets are important to cybersecurity because many data breaches involve trade secret theft. The Defend Trade Secrets Act of 2016 (DTSA) amended the Espionage Act of 1996 to provide a federal private right of action for trade secret misappropriation. Some commentators opposed the DTSA in part because it seems redundant in light of state trade secret law and could lead to unnecessary litigation and restrictions on innovation. Now that the DTSA has been in effect for nearly a year, I conducted an empirical study of cases asserting DTSA claims (with the able help of my research assistant, Zach Hansen). This post summarizes the results of that study.
We ran keyword searches in the Bloomberg Law federal docket database to identify cases asserting DTSA claims in federal courts. It is not possible to search only on the Civil Cover Sheet because there is no discrete code for DTSA claims. Our search ran from the effective date of the DTSA (May 26, 2016) through April 21, 2017 (just prior to our symposium on the DTSA at Seton Hall Law School). After de-duping, we identified 280 unique Complaints, which we coded for a variety of descriptive information. Our raw data is available online.
This chart shows the number of filings by district:
We were not surprised to see that the Northern and Central Districts of California, Southern District of New York, or District of Massachusetts were among the top five. We were surprised, however, to see the Northern District of Illinois tied for first. This could reflect the influence of the financial services industry in Chicago, but further research is required.
The next chart shows the number of filings by month:
It is interesting to note the decline in filings following the initial uptick after the May 26, 2016 effective date. Perhaps this reflects a slight lull during the summer months. Filings then remained relatively steady until March, 2017, when they increased significantly. This could have something to do with the quarterly business cycle or bonus season, since many of the cases (as discussed below) involve employment issues. Or, it could reflect a random variation given the relatively small sample size.
We next examined other claims filed along with the DTSA counts in these Complaints:
We excluded from this chart related state law trade secret claims. Not surprisingly, nearly all the cases included claims for breach of contract. As noted above, trade secret claims often arise in the employment context in connection with allegations of breach of a confidentiality agreement or covenant not to compete. Another finding of note was that a fair number of cases assert Computer Fraud and Abuse Act claims, although the number is not as high as expected. Most trade secret cases today involve exfiltration of electronic information, but perhaps many cases do not involve hacking or other access techniques that could run afoul of the CFAA.
We also noted a smaller but not insignificant number of cases asserting other intellectual property claims, including trademark, copyright and patent infringement. Since many documents taken in alleged trade secret thefts are subject to other forms of intellectual property — particularly copyright — this may show that some lawyers are catching on to the benefit of asserting such claims along with DTSA claims.
Finally, our review of case status revealed the following:
- 198 cases in various pre-trial stages
- 61 cases dismissed
- 5 preliminary injunctions
- 4 final judgments, including 2 permanent injunctions
- 3 default judgments
- 1 case sent to compulsory arbitration
- 8 undetermined / miscellaneous
At first blush, the number of cases dismissed seems high, given that none of the cases have been pending for more than a year. We assume the vast majority of these cases settled, though further investigation is required. In contrast, the number of preliminary injunctions granted seems very low. Again, further investigation is required, but so far it does not seem that the DTSA is resulting in the kind of preliminary injunction practice we expected to see under a federal trade secret statute.
When Can a Company That Hires its Competitor’s Former Employee Be Sued in Federal Court?
Guest post by Maxwell Goss. Dr. Goss is a business litigator with Rossman Saxe, P.C. in Troy, Michigan. His practice focuses on non-compete, trade secret, intellectual property, and shareholder law and litigation.
The Defend Trade Secrets Act (DTSA) was enacted a year ago, on May 11, 2016. One of the most sweeping changes in intellectual property law in recent years, the statute creates a private cause of action for trade secret misappropriation under federal law.
For trade secret owners, the advantages of the DTSA include access to nationwide discovery and enhanced remedies such as ex parte seizure of property to prevent propagation of stolen trade secrets. For those accused of trade secret theft, the DTSA provides substantial protections including strict limitations on the injunctive relief available and entitlement to a hearing no later than seven days after a property seizure.
An open question has been the status of the controversial “inevitable disclosure” doctrine under the DTSA. Under state law in some jurisdictions, courts will enjoin a company’s former employee from working for a competitor if the company establishes that the employee would “inevitably” use its trade secrets in his or her new position. Trade secret owners like the doctrine of inevitable disclosure because actual misappropriation can be hard to prove. At the same time, the doctrine has been criticized as effectively allowing courts to impose a non-compete on someone who never signed a non-compete agreement.
How does inevitable disclosure fare under the DTSA? The statute provides that an injunction to prevent misappropriation may not “prevent a person from entering into an employment relationship,” and that any conditions placed on a person’s employment in an injunction must be based on “evidence of threatened misappropriation and not merely on the information the person knows.” In light of this language, some have concluded that the inevitable disclosure doctrine is a dead letter under the DTSA.
But a recent court opinion indicates otherwise. Interestingly, the opinion was issued on May 11, 2017, the one-year anniversary of the DTSA, by the United States District Court for the Northern District of Illinois, a federal court in the Seventh Circuit, where inevitable disclosure was first definitively recognized. In Molon Motor and Coil Corp. v. Nidec Motor Corp., the plaintiff, a maker of bespoke motors and gearmotors, sued a competitor after an employee who had allegedly downloaded the plaintiff’s designs and technical data went to work for the competitor.
The defendant moved to dismiss the case, arguing (among other things) that the DTSA did not apply because the alleged acts at issue occurred before the DTSA was enacted in May 2016. The court rejected this argument. Noting that the “key question is whether the inference of inevitable disclosure reasonably extends to continued use beyond the Act’s effective date,” the Court reasoned:
At least on the limited record—the Third Amended Complaint—the alleged trade secrets are not of the nature that would necessarily go stale in the course of a couple of years. A motor design, and the quality control data associated with it, plausibly would retain its trade secret value well into the future. If it is plausible that some of the alleged trade secrets maintain their value today, then it is also plausible that Nidec would be continuing to use them. Of course, further discovery could upend any or all of this, but at this stage, continued use beyond the May 2016 effective date is plausible.
In short, even though the plaintiff company’s former employee had allegedly downloaded the files and gone to work for the competitor before the DTSA went into effect, the court found it plausible that there was a “continuing use” of the information by the competitor after the statute went into effect. Based on this finding, the court allowed the plaintiff to go forward on its DTSA claim.
How does this ruling square with the DTSA, which requires that an injunction be based on “evidence of threatened misappropriation and not merely on the information the person knows”? Though the Molon opinion does not connect the dots, the answer, in part, seems to be that the opinion was addressing a motion to dismiss, not a motion for injunction. A court may not be able to enjoin someone based on inevitable disclosure under the DTSA, but this does not mean a plaintiff may not sue someone based on inevitable disclosure under the DTSA. That is, even where injunctive relief may not be available as an initial matter, a trade secret owner might nevertheless file a claim and move forward with discovery—which could ultimately turn up the evidence necessary to fully substantiate a claim.
Molon represents a significant development in the body of law unfolding under the DTSA. In jurisdictions where inevitable disclosure is recognized, the ruling could help trade secret owners get a case off the ground even where information obtainable in a pre-suit investigation is necessarily limited. On the other hand, defendants will be quick to point out that Molon does not alter the specific allegations needed to plead a trade secret claim premised on an inevitable disclosure theory. Moreover, where an injunction is sought, it should be emphasized that any conditions placed on employment under the statute must be based on evidence of threatened misappropriation and not merely information the person knows.
Guest Post by Professor Jorge L. Contreras
In the latest decision by the UK High Court of Justice (Patents) in Unwired Planet v. Huawei ( EWHC 711 (Pat), 5 Apr. 2017], Mister Justice Colin Birss has issued a detailed and illuminating opinion regarding the assessment of royalties on standards-essential patents (SEPs) that are subject to FRAND (fair, reasonable and non-discriminatory) licensing commitments. Among the important and potentially controversial rulings in the case are:
- Single Royalty: there is but a single FRAND royalty rate applicable to any given set of SEPs and circumstances,
- Significance of Overstep: neither a breach of contract nor a competition claim for abuse of dominance will succeed unless a SEP holder’s offer is significantly above the true FRAND rate,
- Global License: FRAND licenses for global market players are necessarily global licenses and should not be limited to a single jurisdiction, and
- Soft-Edge: the “non-discrimination” (ND) prong of the FRAND commitment does not imply a “hard-edged” test in which a licensee may challenge the FRAND license that it has been granted on the basis that another similarly situated licensee has been granted a lower rate, so long as the difference does not distort competition between the two licensees.
This case began in 2014 when Unwired Planet, a U.S.-based patent assertion entity, sued Google, Samsung and Huawei for infringement under six UK patents (corresponding actions were filed in Germany). Unwired Planet claimed that five of the asserted patents, which it acquired from Ericsson in 2013 as part of a portfolio comprising approximately 2000 patents, were essential to the 2G, 3G and 4G wireless telecommunications standards developed under the auspices of the European Telecommunications Standards Institute (ETSI). Because Ericsson participated in development of the standards at ETSI, any patents shown to be SEPs would necessarily be encumbered by Ericsson’s FRAND commitment to ETSI.
The UK proceedings involved numerous stages, including five scheduled “technical trials” which would determine whether each of the asserted patents was valid, infringed and essential to the ETSI standards. During these proceedings Google and Samsung settled with Unwired Planet and Ericsson (which receives a portion of the licensing and settlement revenue earned by Unwired Planet from the patents), leaving Huawei as the sole UK defendant. By April 2016 three of the technical trials had been completed, resulting in findings that two of the asserted patents were invalid and that two were both valid and essential to the standards. These findings are currently under appeal. The parties then agreed to suspend further technical trials. In October 2016 a “non-technical” trial began regarding issues of competition law, FRAND, injunction and damages. Hearings were concluded in December 2016, and the court’s opinion and judgment were issued on April 5, 2017.
A. The High Court’s Decision – Overview
The principal questions before the court were (1) the level of the FRAND royalty for Unwired Planet’s SEPs, (2) whether Unwired Planet abused a dominant position in violation of Section 102 of the Treaty for the Formation of the European Union (TFEU) by failing to adhere to the procedural requirements for FRAND negotiations outlined by the European Court of Justice (CJEU) in Huawei v. ZTE (2014), and (3) whether an injunction should issue in the case. In the below discussion, Paragraph numbers (¶) correspond to the numbered paragraphs in the High Court’s April 2017 opinion.
B. FRAND Commitments – General Observations
Justice Birss begins his opinion with some general observations and background about the standard-setting process and FRAND commitments. A few notable points emerge from this discussion. (more…)