Thursday, October 17, 2013

Patent trolls' favorite court takes all-or-nothing approach to HTC's FRAND defense

Compared to the FRAND rate-setting opinions by Judges Robart and Holderman, last week's Wi-LAN v. HTC pretrial order in the Eastern District of Texas is going to have very limited influence outside its own district, but there's so much litigation going on there, not only but mostly by patent trolls, that an awful lot of standard-essential patent infringement actions could be affected by this precedent over time. And that's why I wanted to take a quick look at it here.

The pre-trial order by Judge Gilstrap of the Marshall division denies HTC the right to make any FRAND argument whatsoever in this case, not even as part of its own damages theories under the Georgia-Pacific framework, after dropping its FRAND-based counterclaims and affirmative defenses:

"III. Counterclaims and Affirmative Defenses of FRAND

Defendants have voluntarily elected to drop their counterclaims and affirmative defenses as to the issue of FRAND. Nonetheless, the parties continue to dispute the impact of such, namely whether Defendants may continue to assert FRAND as a non-affirmative defense in their reasonable royalty analysis or as a 'business' defense in the hypothetical negotiation scenario in response to Plaintiff's evidence on damages.

As announced on the record, the Court finds that Defendants have the affirmative burden of proof in this regard and FRAND is not a purely defensive response to Plaintiff's damages case. Accordingly, the Court finds that the issue of FRAND is an affirmative defense which, in light of Defendants having voluntarily dropped their counterclaims and affirmative defenses as to FRAND, is now out of this case for all purposes [emphasis in original]. Defendants may not raise the issue of FRAND in response to Wi-LAN's damages case or for any other purpose in this trial."

The FRAND determinations mentioned further above applied a modified set of Georgia-Pacific factors, and I didn't see anything in those opinions that made the presence of a FRAND-based affirmative defense or counterclaim a requirement. The whole idea of Georgia-Pacific is to simulate a real-world negotiation for the purpose of arriving at a reasonable royalty rate. The R in FRAND stands for "reasonable". FRAND is inherent, not external, to Georgia-Pacific. In my view, there's no way that a reasonableness analysis in the damages context can ignore a FRAND licensing obligation because, as Judges Robart and Holderman stated, both parties to a hypothetical negotiation would always bear FRAND in mind when discussing percentages and dollar amounts.

The whole idea of an affirmative defense is that it decides the case in the defendant's favor even if the plaintiff's claim and all of the related allegations are true. If HTC argued (which it does not appear to) that Wi-LAN is not entitled to any damages at all because of some FRAND-related misconduct, then that would be, very clearly, an affirmative defense.

Determining a damages amount, however, is not a binary legal decision like liability. It involves a multifactorial economic analysis, and a court that really wants to produce just results should be very careful not to exclude a relevant and legitimate factor, or set of factors, from such analysis.

I also disagree that a defendant to a SEP infringement claim has the "affirmative burden of proof in this regard". In the damages context, it's the plaintiff who wants something -- money -- and has to prove an entitlement to it. I can't see why other Georgia-Pacific considerations would be different from FRAND in this context. For example, if a defendant argues in the Georgia-Pacific context that a patented feature is not a significant driver of demand, this also has a limiting effect on the amount, but it does not require an affirmative defense, though it's typically harder to prove or disprove a causal nexus between a feature and consumer demand than the existence of a FRAND licensing pledge that parties would have considered when negotiating a reasonable royalty.

Defendants will now be more careful not to drop their FRAND-based affirmative defenses if they want to rely on FRAND in the damages context.

HTC should never have abandoned a FRAND defense that was worded in a way that actually is consistent with Judge Gilstrap's position. This was the last sentence of the last pararaph of HTC's later-abandoned affirmative defense no. 19:

"Wi-LAN's FRAND obligations limit the damages, if any, available to Wi-LAN in this action."

Despite my general disagreement with Judge Gilstrap's all-or-nothing approach to FRAND, it's a fact that HTC elected to abandon a defense that contained the above sentence. In the end, this shouldn't have mattered, because that sentence was superfluous and, as we know now, counterproductive. But this way HTC itself suggested that the damage-limiting effect of FRAND is part of an affirmative defense, and when it dropped the affirmative defense, it technically also dropped the sentence quoted above. If it dropped a superfluous sentence, it shouldn't matter. But the fact that HTC mentioned it suggests that HTC did not consider it superfluous earlier in the process...

I'd like to see this clarified by the Federal Circuit at some point.

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