Thursday, February 21, 2013

InterDigital wants Huawei and ZTE to pay license fees for invalid and non-infringed FRAND patents

The proceedings before the ITC and the United States District Court for the District of Delaware relating to InterDigital's early-January complaint against Samsung, Nokia, Huawei and ZTE are particularly interesting from a FRAND point of view because this is the first high-profile (and multi-party) FRAND dispute in which the defendants have the full opportunity to leverage the proposed FTC-Google standard-essential patents (SEP) settlement from the get-go. All four defendants are foreign companies while plaintiff is an American non-practicing entity (NPE), but the rules are the same for companies operating in the U.S. market regardless of where they are headquartered.

After Huawei asked the United States International Trade Commission (USITC, or just ITC) to postpone its decision on the institution of an investigation in order to let the parties resolve their dispute over FRAND licensing terms in district court, the U.S. trade agency went ahead at any rate and launched an investigation three weeks ago. At the time I said that the same FRAND licensing issues would come up again during the further proceedings. Over the past few weeks there has been some related activity in district court, and the FRAND issues will be re-raised at the ITC: in a February 11 filing Huawei announced its intent "to move the ITC to stay the most recently [launched] investigation".

Huawei and ZTE -- China's leading makers of telecommunications hardware -- are embroiled in an internal dispute over SEPs in several jurisdictions (particularly Germany), but their strategies in responding to InterDigital's enforcement efforts are increasingly aligned. On February 11, 2013 both defendants moved for expedited proceedings in Delaware, arguing that they need a FRAND determination to be made before the ITC may order its only remedy: a U.S. import ban.

I can see why Huawei and ZTE want the district court to look at the FRAND issues in their case first (before infringement and validity issues are put before a jury). What they propose as a model is the procedural course of action chosen by Judge James L. Robart, clearly a thought leader and pioneer among U.S. federal judges with respect to FRAND, in the Microsoft v. Motorola Mobility case in the Western District of Washington. But even in that litigation in Seattle, the schedule of the federal lawsuit was set independently of any ITC-related considerations. An accelerated adjudication of FRAND licensing issues in Delaware would probably be helpful to Huawei and ZTE. The outcome might indeed dissuade the ITC from ordering an import ban. But even if it worked here, it wouldn't be a reliable, universally-applicable solution to the problem of abusive SEP-based injunction requests. It would work only in those cases in which a district court agrees to schedule its own case according to the ITC-related needs of alleged infringers. And even if a district court sets an expedited schedule in the beginning, there could be delays as the process unfolds. It's extremely ambitious to ask district courts to engage in a race with the ITC in order to have their rulings dispose of ITC investigations.

A hard and fast no-injunction rule concerning SEPs (unless an infringer cannot be sued in federal court or refuses to pay a court-determined FRAND rate) such as the one in the FTC deal with Bosch would take care of the problem for good. Until such a rule is put in place, defendants have to get as much mileage as they can out of the current framework, while plaintiffs will try to benefit from actual or potential loopholes. Experts predicted that the structure of the envisioned FTC-Google settlement would invite "other standard essential patent holders to engage in opportunistic behavior to paint otherwise willing licensees as unwilling licensees". And that's precisely what InterDigital is trying in its latest filing filed yesterday) that is indirectly related to Huawei and ZTE's motions for expedited FRAND determinations in Delaware:

"The motions ask the Court to expedite ZTE's and Huawei's counterclaims asking this Court to set a FRAND royalty rate. However, although the issue is finessed in their briefing, these defendants do not unconditionally agree to pay a FRAND rate set by this Court. Instead, their position to date suggests they reserve the right to decline to pay a FRAND rate in any number of circumstances, including if they subsequently prevail on other issues – e.g.: nonessentiality, invalidity and non-infringement."

(emphasis in original)

The statement is open-ended ("any number ... including") but let's focus on what InterDigital is saying specifically. It's saying that Huawei and ZTE must agree to pay a FRAND royalty for InterDigital's declared-essential patents regardless of whether those are truly essential to the standard, actually infringed, and valid. What InterDigital is proposing here is consistent with the problematic approach of certain German courts to SEP licensing. I have consistently opposed the notion that even an invalid (or valid but not actually used) patent must have some commercial value. The rate of patents that are invalid as granted is very high, and so is the rate of patent suits that are dismissed for lack of infringement. Invalid patents and meritless infringement allegations harm the economy. While they are acceptable to some degree since there will never be a perfect patent system, the worst thing a court can do in a patent lawsuit is to provide an incentive for filing patents of dubious validity or bringing meritless infringement allegations (or making meritless essentiality declarations to standard-setting organizations).

The proposed FTC-Google settlement contains several references to a defendant's challenge to the validity of patent, its essentiality to a given standard, and/or its infringement. This is the first one:

"[II.]E. Nothing in this Order shall prohibit Respondents from seeking Covered Injunctive Relief for alleged Infringement of a FRAND Patent against a Potential Licensee who:


2. has stated in writing or in sworn testimony that it will not license the FRAND Patent on any terms; PROVIDED THAT for the purposes of this paragraph, challenging the validity, value, Infringement or Essentiality of an alleged infringing FRAND Patent does not constitute a statement that a Potential Licensee will not license such FRAND Patent;"

The above means that a patent holder cannot interpret a challenge to the validity, value, infringement or essentiality of a given patent as a wholesale refusal to take a license. InterDigital is saying that Huawei and ZTE won't license patents that are found to be invalid, non-essential, or not infringed. This is a typical example of a patent holder's attempt to paint an otherwise willing licensee as an unwilling one.

The proposed FTC-Google settlement also mentions validity, essentiality and infringement challenges in connection with a FRAND determination (in court or through binding arbitration):

"[III.]D. It is intended that the Request for a FRAND Determination or Binding Arbitration shall establish the Contested Terms, and [...] will form a binding license agreement. Except to the extent inconsistent with the preceding sentence, nothing herein shall restrict the ability of any party from presenting evidence or making arguments in Binding Arbitration or in the Request for a FRAND Determination, including without limitation arguments by Respondents that the District Court hearing the Request for a FRAND Determination cannot or should not hear the action on jurisdictional or justiciability grounds or because an alternative forum would be more appropriate, or arguments regarding validity, Essentiality, Infringement or the value of the patents included in the Relevant License Agreement;"

(emphasis added)

The above clause clarifies that an implementer of a standard can raise arguments relating to validity, essentiality and infringement in the FRAND rate-setting action (or arbitration). That clarification is reitered in clause IV.E.6 of the proposed agreement. What it does not say explicitly, however, is that a patent that isn't valid and actually used doesn't have to be licensed at all. InterDigital is now the first patent holder after the publication of the envisioned settlement to take the position in a U.S. litigation that even invalid (or non-infringed) declared-essential patents must be licensed. As a result, overdeclaration and bad-faith patent applications would be incentivized.

If you'd like to be updated on the smartphone patent disputes and other intellectual property matters I cover, please subscribe to my RSS feed (in the right-hand column) and/or follow me on Twitter @FOSSpatents and Google+.

Share with other professionals via LinkedIn: