“With the benefit of hindsight, it is apparent to the Court that both sides played fast and loose with the FRAND issue before the jury for their own strategic reasons.” – Judge Rodney Gilstrap
On April 14, 2021, in a somewhat surprising about face, Judge Rodney Gilstrap ordered a new trial with respect to damages in Optis Wireless Technology, LLC et al. v. Apple Inc., Civil Action No. 2:19-cv-00066-JRG (E.D. Texas), despite previously ruling that no FRAND based claims remained in the case. This ruling adds even more silt to the already murky waters of damages for patents related to standardized technology.
The Continued Convergence of FRAND Rates and a Reasonable Royalty for Infringement
In a previous article, we discussed the confusing and problematic convergence of FRAND licensing rates and reasonable royalty damages for patent infringement, despite these two concepts having different origins and seeking to achieve different objectives: i.e., patent damages being a creature of statute and case law and seeking to compensate a patent owner for infringement, whereas FRAND commitments are rooted in contract and seek, amongst other things, to ensure that licenses can be obtained for standardized technology and that royalty stacking does not become an issue (e.g. as reflected in “top-down” approaches used to determine FRAND rates for standards essential patents). As noted in that article, one problem with this convergence is that it facilitates hold out. Why put money in the parking meter if the fine is no more that the fee? Especially if one has the chance of getting away without paying at all, including by making it economically unfeasible to enforce the fine. Further, this convergence ignores that licensing rates take into consideration uncertainties that no longer exist after infringement and validity are established, and that having to prove in court that licenses are required is inconsistent with the notion of a willing licensee.
FRAND as a Counterclaim / Affirmative Defense vs. an Inherent Limitation on Damages
In the Opinion and Order as to Bench Trial Together with Supporting Finds of Fact and Conclusions of Law (“Opinion and Order”) Judge Rodney Gilstrap found that “[a]s a consequence of Apple’s failure to seek affirmative FRAND relief, the only constraints of any FRAND obligation which were affirmatively presented in this case appeared via Optis’s Count VIII”. As such, when the court declined to exercise jurisdiction over Optis’s FRAND related Count VIII FRAND was no longer at issue in the case. See “What the Latest Optis Wireless v. Apple Ruling Means for Patent Infringement Damages for SEPs” for additional background on Count VIII.
With respect to Apple’s failure to seek affirmative FRAND relief, the Opinion and Order appeared consistent with other decisions finding the burden of proof regarding FRAND counterclaims and affirmative defenses is on the party raising such counterclaims or defenses (see Koninklijke KPN N.V. v. Sierra Wireless, Inc., No. 17-90-LPS, 2020 U.S. Dist. LEXIS 67016 (D. Del. Apr. 16, 2020) (D. Del. Apr. 16, 2020) and Certain Electronic Devices, Including Wireless Communication Devices, Portable Music and Data Processing Devices, and Tablet Computers, Inv. (US ITC Inv. No. 337-TA-794, 2012)). As is apparent from reviewing these decisions, one big reason alleged infringers of patents subject to licensing declarations are reluctant to raise such counterclaims and affirmative defenses is because the undertaking to license on FRAND terms is only to the extent the patents are “essential” to practicing the standard, and admitting a patent is essential can be used as evidence of infringement. But having now lost on infringement, there was no downside for Apple to go all in on FRAND, as part of what Judge Rodney Gilstrap described as a “post-trial epiphany regarding the absence of FRAND evidence” in the Order regarding Apple’s Motion for New Trial (“New Trial Order”).
What is most confusing about the New Trial Order is, despite reiterating that the court declined jurisdiction over Optis’s FRAND based claim (the only FRAND based claim in the case), and that “if Apple wanted to ensure its ability to introduce a FRAND-related damages analysis to the jury, it could (and should) have brought a counterclaim or even raised an affirmative defense to that effect”, Judge Rodney Gilstrap nonetheless ordered the new trial saying “…the Court is persuaded that the FRAND-compliance of the damages awarded by the jury has legitimately been called into question.” Judge Rodney Gilstrap further added that “[g]iven that the patents found to be infringed are FRAND-encumbered SEPs, any royalty awarded must be FRAND” (emphasis added).
But how does one square that statement with the Opinion and Order, which clearly stated that no findings were made with respect to any FRAND commitment (see footnote 2):
Any claim by Apple as to the protection of the FRAND commitment by Optis and its predecessors would require affirmative findings, including whether ETSI and Samsung, LG, and Panasonic intended for Apple to be a third-party beneficiary to the FRAND commitment… Without any affirmative claim for relief by Apple, neither the Court nor the jury performed any analysis as to the issues undergirding the FRAND commitment.
Ericsson v. D-Link
In support of the court’s conclusion that any royalty awarded for FRAND-encumbered SEPs “must be FRAND”, the New Trial Order cites Ericsson, Inc. v. D-Link Sys., Inc., (Fed. Cir., December 4, 2014), but without further explanation. According to the Ericsson v. D-Link decision, however, “Ericsson has asserted that all of the patents at issue are SEPs for IEEE’s 802.11(n) standard” and “[t]he parties agree that this commitment [to the IEEE] is binding on Ericsson” (emphases added). Similarly, in In Re Innovatio IP Ventures, LLC Patent Litigation, which also dealt with damages for SEPs, “[t]he parties agreed that many of Innovatio’s asserted patent claims were essential to practice the 802.11 standard…”. (emphasis added). Further worth noting is that both the Ericsson v. D-Link and In Re Innovatio cases dealt with patents subject to a licensing commitment made to the IEEE, not to ETSI as in the Optis case.
Even if one were to assume, arguendo, that the contracts between the former owners of the patents being asserted by Optis and ETSI were somehow at issue, and were in fact breached by Optis, how is that relevant to patent damages? According to the “Opinion and Order”, the “Federal Rules of Civil Procedure 8(c)(1) identifies “license,” “release,” and “waiver” as affirmative defenses”. The contracts in questions are not, however, licenses (or releases or waivers), but rather commitments to being “prepared to grant irrevocable licenses” (emphasis added). Accordingly, if damages for infringement were assessed at $1 per unit, but the FRAND rate to which Apple was entitled to was $0.50 per unit, why not award Optis patent damages in the amount of $1 per unit and award Apple breach of contract damages in the amount of $0.50 per unit? This seems to make more sense than shoehorning FRAND considerations into patent damages law. Of course, in the case of Optis and Apple, it makes even less sense given the applicability of the FRAND commitment was not established and because Apple argued against the need to obtain licenses, previously saying that Optis has “no legal right under U.S. law to impose on Apple an obligation to negotiate a license to Plaintiffs’ portfolios of declared-essential patents or forfeit any defenses for failing to do so” (see Apple Inc.’s Motion to Dismiss Count VIII for Lack of Subject Matter Jurisdiction, Optis Wireless Technology, LLC, Optis Cellular Technology, LLC, Unwired Planet, LLC, Unwired Planet International Limited, and PanOptis Patent Management, LLC v. Apple Inc., Civil Action No. 2:19-cv-00066-JRG (E.D. Texas, June 22, 2020)).
Playing Fast and Loose
Notwithstanding Apple’s failure to raise a FRAND based counterclaim or affirmative defense, Optis’s First Amended Complaint, according to the New Trial Order, “set forth that the Asserted Patents were SEPs…” and made multiple references to Optis’s patents as being “essential patents”. Further, in response to Apple’s motion for a new trial, Optis tacitly acknowledge the FRAND limitation by arguing “that the jury’s verdict is FRAND-compliant, despite the lack of any mention of FRAND principles or obligations before the jury.” One thing Judge Rodney Gilstrap was clearly unhappy about was “Optis’s attempt to have it both ways – i.e., to use FRAND as both a sword (in the jury trial against Apple) and a shield (in a subsequent bench trial as to Optis’s own conduct).” According to the New Trial Order “…Optis intentionally placed itself in a position to tell the jury only about Apple’s bad acts without telling them of their own obligations to act in good faith” and “[f]ree from telling the jury of its affirmative FRAND duties and obligations, Optis attempted to leverage its willfulness claim to introduce evidence before the jury of bad faith and bad acts by Apple during pre-suit licensing negotiations.”
Nor was the court happy with Apple acquiescing to trying the FRAND issue before the bench and benefiting from that decision by keeping evidence of “bad faith conduct or holdout” from the jury, but then seeking to overturn the jury verdict because the jury was not made aware of any FRAND issues.
Perhaps most illuminating as to the court’s motivation for order a new trial comes in footnote 2:
With the benefit of hindsight, it is apparent to the Court that both sides played fast and loose with the FRAND issue before the jury for their own strategic reasons. (emphasis added)