Thursday, December 12, 2013

ITC decides to review preliminary ruling that held HTC to infringe two Nokia patents

At close of business on Wednesday, the United States International Trade Commission (USITC, or just ITC) announced its decision to grant HTC's petition for review of a preliminary ruling according to which the Taiwanese device maker infringed two Nokia hardware patents due to the incorporation of Qualcomm chips into its products. Initial determinations by Administrative Law Judges are routinely reviewed by the Commission, the six-member decision-making body at the top of the U.S. trade agency.

Nokia could have petitioned for a review of findings against a couple of other patents-in-suit but, for whatever reasons, elected not to do so.

In early October, shortly after the initial determination by the ALJ, HTC said it was working with Qualcomm on technical changes that would enable it to steer clear of infringement and to continue to import its products into the U.S. market even if the Commission adopted the preliminary ruling. It's impossible to know from the outside how costly those contemplated workarounds would be and whether they would come with degradations of performance or functionality. But since the asserted patents are not standard-essential, they can be worked around in principle (again, the question is just at what cost).

Should the final ITC ruling be more favorable to HTC on one or both of the patents found infringed, the workaround challenge would be reduced or even eliminated. The Commission has decided to review the relevant claim constructions. There could even be a situation in which a claim construction is modified in HTC's favor, but past infringements are still identified. A narrower claim construction would still be helpful with a view to workarounds.

The fifth question the Commission asked the parties to comment on represents an opportunity for HTC to avoid an import ban altogether because it could result in a successful patent exhaustion defense:

"5. Whether the Federal Circuit's decision in Lifescan Scotland, Ltd. v. Shasta Techs, LLC, 734 F.3d 1361 (Fed. Cir. 2013), or any other relevant court decisions, affects HTC's defense of patent exhaustion based on the transfer of rights under the Nokia-Qualcomm agreement."

In that case, the United States Court of Appeals for the Federal Circuit recently reversed a decision by the United States District Court for the Northern District of California in a medical device patent case and found that the defendant had a meritorious patent exhaustion defense. The fact that the Commission considers this decision (at least potentially) relevant to the Nokia-HTC case is good news for HTC, though Nokia will certainly seek to distinguish that other case from its own, and the devil is in the details (of license agreements and technical implementations) when a patent exhaustion defense is analyzed.

In May 2013, the ALJ had summarily tossed HTC's (and Google's) patent exhaustion defense. Both parties petitioned for a review: HTC wanted to prevail on its defense, and Nokia wanted an even better outcome with a view to the wider implications of this highly strategic issue. The Commission decided at the time that it would take a look at patent exhaustion only after the initial determination, but not at the summary judgment stage. And it's now delivering on that promise.

In another jurisdiction, the UK, Nokia just defeated a patent exhaustion defense by HTC relating to the Nokia-Qualcomm agreement and won an injunction. But patent exhaustion is jurisdiction-specific and an outcome in one country does not necessarily guarantee the same result in another venue.

The patent exhaustion part of this case is not only an opportunity for HTC to solve the whole problem based on a single defense but it's also going to be the most closely-watched issue as far as third parties are concerned. Various other Qualcomm customers may also have to work out license agreements with Nokia in the near term due to (mostly) expiration or (in some cases) the absence of existing agreements.

Despite its claims that it can, if necessary, work around Nokia's patents, HTC has mobilized various supporters who told the ITC that an import ban against HTC's Android devices would not be in the public interest (or that there should at least be a "grace period" for HTC to change its products).

HTC also tried (and still hopes) to benefit from the Microsoft-Nokia deal and brought a motion in September to stay this ITC investigation pending the closing of the transaction, arguing that Nokia had established a domestic industry for the asserted patents based on the sale of its own products but meanwhile agreed to sell the division that makes those domestic industry products to Microsoft. Judge Thomas Pender gave that transparent attempt to stall the case short shrift. The ITC does not appear to be too interested in it at this stage, but HTC will probably re-raise this issue at the enforcement stage should an import ban issue and be enforced after the closing of the Microsoft-Nokia deal. And I believe Nokia will then still be able to establish a domestic industry, but the ITC apparently wants to cross the bridge if and when it gets there, not now.

Last week the United States Department of Justice as well as the European Commission cleared the Microsoft-Nokia deal unconditionally without a need for an in-depth review. In a speech in which the EU's top antitrust enforcer, European Commission Vice President JoaquĆ­n Almunia, also expressed doubts about the adequacy of Samsung's antitrust settlement proposal regarding standard-essential patents (SEPs), it was stated clearly that the scope of a merger review is limited to the newly-combined entity and not to fears over what the seller (in this case, the remaining Nokia entity) might do after the deal. Mr. Almunia threatened antitrust action against Nokia should it distort competition by taking advantage of its future status as a non-practicing entity in connection with mobile devices. However, I don't think that warning means anything in practical terms. Nokia monetizes SEPs and non-SEPs. For SEPs, the European Commission should now prove in the Samsung and Motorola Mobility cases that it's still serious about defending the market. Whatever rules the EU establishes will then apply to everyone, including Nokia. For non-SEPs, it will be incredibly difficult to come up with a credible theory of antitrust violations. Nokia is, in principle, free to charge as much for its non-SEPs as it wants -- those who don't like the terms are free to work around them. That does not mean to say that there can never be an antitrust abuse theory with respect to non-SEPs, but it's far harder to develop one than in a SEP context.

In the weeks ahead, while Nokia and HTC will be working on their responses to the ITC's questions on review, three German Nokia v. HTC decisions are scheduled to come down. A decision scheduled for last Friday was postponed to December 20, and Nokia appeared to be on the winning track with regard to its patent-in-suit, a USB-related patent, at a recent trial. In October a different panel of judges of the same court -- the Munich I Regional Court -- also held a trial over two other Nokia v. HTC cases, which I did not attend, so I don't know what the outcome will be (the first hearings didn't look great for Nokia, but the hurdles it faced then weren't necessarily insurmountable in the further process). One ruling was scheduled for today but postponed to December 30, 2013. Another one was scheduled for January 9, 2014. There are also some Nokia v. HTC trials coming up soon in another German court, the Dusseldorf Regional Court.

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