Month: August 2022

Categories
FTC Patent Law Patents

FTC Chair and Commissioners Weigh in on SEP Litigation at the ITC

The following post comes from Jack Ring, a rising 2L at Scalia Law and a Research Assistant at C-IP2.

a gavel lying on a table in front of booksI. INTRODUCTION

In a previous blog post, we discussed the dispute surrounding standard essential patents (SEPs) between Philips and Thales. That dispute included an investigation before the United States International Trade Commission (ITC).[1] As part of that investigation, Chair Lina Khan and Commissioner Rebecca Slaughter of the Federal Trade Commission (FTC) submitted a public interest statement to the ITC (Public Interest Statement or Statement).[2] Commissioner Christine Wilson responded to the Statement in a speech at the “IP & Antitrust: Hot Issues” Conference Organized by Concurrences Review (Response or Remarks).[3]

These competing statements by FTC commissioners illustrate a point of contention regarding SEP policy. The Public Interest Statement, submitted by Chair Khan and Commissioner Slaughter, took a policy stance that an exclusion order against an SEP implementer unfairly favors the SEP holder. Meanwhile, Commissioner Wilson’s Response countered that this policy instead tips the balance heavily in favor of implementers, which in her opinion could stifle SEP-holder innovation. This dichotomy of policy goals underlays some of the decisions discussed in the previous blog post about the Philips v. Thales appeal. There, Chief Judge Colm Connolly of the United States District Court for the District of Delaware avoided making policy in his decision, explicitly reserving that for a higher court.[4] The ITC’s Commission opinion in the ITC Investigation took no position on many issues, potentially to avoid tackling these tough issues.[5] And finally, the Federal Circuit affirmed Chief Judge Connolly’s order on the narrowest grounds, likewise sidestepping the policy concerns debated in the Public Interest Statement and Response.[6]

Additionally, as Commissioner Wilson’s Remarks note, Apple and Ericsson are now involved in SEP litigation spanning U.S. courts, international courts, and the ITC.[7] This will once again provide ample opportunity for multiple jurisdictions, including the ITC, to weigh these policy and public interest concerns.

II. CHAIR KHAN AND COMMISSIONER SLAUGHTER’S PUBLIC INTEREST STATEMENT

Chair Khan and Commission Slaughter’s Statement advanced a broad policy argument through the lens of an “increasing[] concern that SEP holders . . .  are seeking exclusionary orders . . . for the purpose of gaining leverage.” Through that lens, the Public Interest Statement sought to answer the question, “Is it in the public interest to issue an ITC exclusion order based on a standard essential patent (SEP) where a United States district court has been asked to determine fair, reasonable, and non-discriminatory (FRAND) licensing terms?” Answering its own posed question, the Statement urged the ITC to consider the statutory public interest factors[8] with particular attention to the impact an exclusion order obtained by a SEP owner against an SEP implementer would have on competition and consumers in the United States.

Chair Khan and Commissioner Slaughter’s concern focuses heavily on misconduct—hold-up—by SEP owners. Hold-up refers to an SEP holder’s demand for a royalty rate in excess of a FRAND rate after an implementer is locked into the standard. Alternatively, hold-out refers to an implementer’s bad faith delaying of constructive licensing negotiations or unilaterally rejecting of a license.

The Public Interest Statement argues that an SEP owner seeking an exclusion order of SEPs at the ITC perpetuates an imbalance in bargaining power. Chair Khan and Commissioner Slaughter recognize that opportunism may arise from either side, but they view an exclusion order as granting unfair leverage for an SEP holder. This one-sided view was discussed by Commissioner Wilson in her Response and will be discussed below.

The Public Interest Statement further recognized the ITC’s enforcement role in intellectual property rights and the ITC’s view on that enforcement in footnote twelve. However, Chair Khan and Commissioner Slaughter argue that SEPs present different issues than other patents. In their opinion, a royalty negotiation under threat of an exclusion order tips the scale in favor of the SEP owner, who made a FRAND commitment—a commitment that may have helped them get the standardization in the first place. In their view, the exclusion of firms that are willing and able to take FRAND licenses discourages investment in standard driven products and technology.

Additionally, hidden in the first footnote, the Statement declined to address whether “seeking an exclusion order for FRAND-encumbered SEPs would violate Section 5 of the Federal Trade Commission Act.” Section 5 of the FTC act covers unfair acts and practices. If the FTC began enforcing Section 5 against SEP owners seeking exclusion orders in the ITC, that would have some of the most drastic short-term changes in SEP policy. Whether that short-term policy change would stand up to judicial review or be the best policy for cultivating innovation remains to be seen.

The Public Interest Statement ultimately moves on to a larger policy rejecting exclusion orders—the only remedy available from the ITC—whenever a court has been asked to set FRAND terms and can make SEP holders whole. (“As a general matter, exclusionary relief is incongruent and against the public interest where a court has been asked to resolve FRAND terms and can make the SEP holder whole.”) In closing, the Public Interest Statement urges the ITC to take its advice that “under no circumstances should Section 337 remedies . . . take effect” until a court asked to resolve the FRAND rate has rendered its decision.

III. COMMISSIONER WILSON’S RESPONSE

Shortly after Chair Khan and Commissioner Slaughter filed their Statement, Commissioner Wilson of the FTC responded with her own critiques. Her Response recognized the same issues but approached those issues from a balancing standpoint. The Response advocated for weighing the rights of SEP holders and implementers and considering both short- and long-term goals.

Commissioner Wilson expressed concern that Chair Khan and Commissioner Slaughter only view hold-up as an antitrust issue. (“In other words, the actions of SEP holders may be unlawful under the antitrust laws, but the actions of patent implementers are immune from scrutiny under those same laws.”) Commissioner Wilson’s Remarks generally pushed the FTC to embrace a balanced approach that favors neither innovators nor implementers but instead focused on incentivizing competition and innovation.

Responding directly to the Public Interest Statement’s call for the ITC to reject exclusion orders where a court has been asked to set FRAND rates, Commissioner Wilson reasoned that the ITC’s public interest analysis already accounts for this type of analysis. Quoting an article from former ITC commissioner and chair Deanna Tanner Okun, the Response explained that the ITC’s public interest factors and process allow allegedly infringing parties the opportunity to argue the SEP holder violated its commitments to the standard setting organization[9] (the point being, why set a blanket prohibition on exclusion orders when the ITC’s processes already account for considering multiple factors in its public interest analysis?).

Commissioner Wilson’s Remarks also touched on the Apple and Ericsson SEP litigation presently occurring in multiple venues, including the ITC. Those proceedings offer another chance for the ITC to consider the Statement and Response’s policy arguments. However, as Commissioner Wilson flagged, unlike in the Philips proceedings, Apple has not committed to accepting the District Court’s FRAND rate. Apple’s non-commitment could be evidence of hold-out, which Commissioner Wilson specifically raised in her Remarks. This change in the fact pattern from the Philips/Thales dispute illustrates how complex and fact-specific SEP proceedings can be.

At bottom, the Response is concerned that the Public Interest Statement’s proposal would tip the balance in favor of SEP implementers when—in Commissioner Wilson’s view—there should be no thumb on the scale. The Response expressed concern with adoption of a one-size-fits-all approach of denying exclusion orders at the ITC whenever a court has been asked to set a FRAND rate. Rather, she posits that the ITC’s public interest factors anticipated complex litigations like those discussed above. Therefore, by the time a case has reached the final stages at the ITC, the Commission or administrative law judge has the necessary information to evaluate the public interest.

IV. TAKEAWAYS

These two policy proposals from FTC commissioners illustrate the complexity of the SEP policy debate, particularly regarding exclusion orders at the ITC. Moving forward, the Apple and Ericsson disputes in multiple courts including the ITC will provide another opportunity for multiple forums to grapple with these competing policies.

[1] Certain UMTS & LTE Cellular Communications Modules & Products Containing the Same, Inv. No. 337-TA-1240 (USITC).

[2] Written Submission on the Public Interest of Federal Trade Commission Chair Lina M. Khan and Commissioner Rebecca Kelly Slaughter, in the Matter of Certain UMTS and LTE Cellular Communication Modules and Products Containing the Same, Inv. No. 337-TA-1240 (USITC May 16, 2022),

https://www.ftc.gov/system/files/ftc_gov/pdf/Written_Submission_on_the_Public_Interest_if_Chair_Khan_and_Co mmissioner_Slaughter_to_ITC.pdf.

[3] Christine Wilson, Comm’r, Fed. Trade Comm’n, Remarks at “IP & Antitrust: Hot Issues” Conference Organized by Concurrences Review (June 8, 2022), https://www.ftc.gov/system/files/ftc_gov/pdf/Wilson-SEPs-speech_FINAL-06-13-2022.pdf.

[4] Koninklijke Philips N.V. v. Thales DIS AIS USA LLC, C.A. 20-1713 (D. Del. May 21, 2021).

[5] Certain UMTS & LTE Cellular Communications Modules & Products Containing the Same, Inv. No. 337-TA-1240, Comm’n Notice (USITC July 6, 2022) (EDIS No. 774681).

[6] Koninklijke Philips N.V. v. Thales DIS AIS USA LLC, No. 2021-2106 (Fed. Cir. July 13, 2022).

[7] Certain Mobile Telephones, Tablet Computers With Cellular Connectivity, & Smart Watches With Cellular Connectivity, Components Thereof, & Products Containing the Same, Inv. No. 337-TA-1299 (USITC).

[8] 19 U.S.C. §§ 1337(d)(1), (f)(1).

[9] Deanna Tanner Okun, Policy Shift Against SEP Rights Poses Risks for U.S. Innovation and Undermines Mandate of the ITC, IPWATCHDOG (May 18, 2022), https://www.ipwatchdog.com/2022/05/18/policy-shift-sep-rights-poses­risks-u-s-innovation-undermines-mandate-itc/id=149116/.

Categories
FTC ITC Patents

Philips and Thales’ Standard Essential Patent Fight at the Federal Circuit, District Court, and ITC

The following post comes from Jack Ring, a rising 2L at Scalia Law and a Research Assistant at C-IP2. Click here for a related post.

a gavel on a desk in front of booksI. INTRODUCTION

On July 13, 2022, the Federal Circuit affirmed the denial of Thales DIS AIS Deutschland GMBH’s (Thales) motion to enjoin Koninklijke Philips N.V. (Philips) from proceeding in a parallel investigation against Thales at the United States International Trade Commission (ITC).[1] This dispute, stemming from SEP licensing negotiations dating back to 2015, seemed poised to be a vehicle to set SEP policy. It offered an opportunity for the District Court and the Federal Circuit to prevent a party from seeking an exclusion order from the ITC when a court was asked to set FRAND rates. It further offered the ITC the opportunity to apply its public interest factors broadly to the same ends. However, all three courts that heard this dispute sidestepped the policy debate.

On the same day in 2020, Philips brought a district court case in Delaware[2] and an ITC investigation[3] against Thales asserting the same four essential patents. In response, Thales moved for a preliminary injunction to prevent Philips from proceeding at the ITC. Thales claimed inter alia that the ITC investigation was causing irreparable harm to its business by disrupting business and deterring customers. Chief Judge Colm F. Connolly, presiding in Delaware, denied Thales’ preliminary injunction, reasoning that Thales’ claims failed to illustrate irreparable harm.

While Thales’ motion sought to enjoin Philips, granting the preliminary injunction would have effectively stripped the ITC of its jurisdiction. This would have been at odds with the ITC’s statutory scheme. As Chief Judge Connolly acknowledged during his ruling on the motion, Congress authorized patentees to pursue ITC and district court proceedings on parallel tracks. Chief Judge Connolly noted the potential policy issues with granting SEP owners exclusion orders, but he reasoned that he was not the one who should make policy, instead deferring to Congress or a higher court.

On appeal, the Federal Circuit agreed, ruling that Thales failed to present evidence of a likelihood of irreparable harm beyond conclusory customer concerns. The Federal Circuit’s opinion came just seven days after the ITC’s final determination finding no violation of Section 337 and multiple claims of the Asserted Patents invalid.

This appeal and the ITC investigation seemed poised to tackle those big policy issues Chief Judge Connolly declined to answer. However, the subsequent rulings avoided any policy decisions. The Federal Circuit’s narrow holding did not discuss any policy issues, solely focusing on the lack of irreparable harm. The ITC’s finding of no violation meant it needed not consider the statutory public interest factors. The Commission’s prior request for public interest statements request garnered a statement from Chair Lina Khan and Commissioner Rebecca Slaughter of the Federal Trade Commission (FTC), which lobbied the ITC to deny relief to any Complainants asserting patents that are subject to FRAND-setting litigation in other forums.

II. DISTRICT COURT ACTION

Philips brought two district court cases in Delaware and an ITC investigation against Thales and three of its customers on December 17, 2020.[4] The ITC investigation, Inv. No. 337-TA-1240 (the “ITC investigation”) and one of the Delaware cases, C.A. No. 20-1713 (the “District Court Action”) shared the same asserted patents, which Philips claimed are essential. Those patents are U.S. Patent Nos. 7,944,935, 7,554,943, 8,199,711, and 7,831,271 (collectively, the “Asserted Patents”). The second district court case brought by Philips asserted six additional, non-essential patents, against the same parties, C.A. No. 20-1709[5].

Philips’ complaint sought declaratory judgment setting worldwide FRAND licensing terms and alleged infringement of the Asserted Patents. Thales counterclaimed, alleging breach of contract of Philips’ contractual duties to the European Telecommunication Standards Institute (ETSI)[6] and seeking declaratory judgment setting FRAND terms.[7] Contemporaneous with its answer, on March 5, 2021, Thales filed a motion for a preliminary injunction to enjoin Philips from pursuing the ITC investigation. Thales claimed the ITC action divested the district court of its authority and was an attempt to extract a supra-FRAND royalty rate.

Thales argued it was likely to succeed on its breach of contract claim in addition to its declaratory judgment claim because both parties requested the same relief, a FRAND rate determination by the court. On irreparable harm, Thales claimed imminent risk of losing market share, customers, sales, and business opportunity, as well as business disruption, as a result of Philips’ seeking an ITC exclusion order. Thales clarified that the irreparable harm was “the uncertainty and the cloud hanging over our head from now until [the ITC rules].”

At the preliminary injunction hearing in May 2021,[8] Chief Judge Connolly, ruling from the bench, denied Thales’ motion. Chief Judge Connolly found the irreparable harm evidence conclusory and that litigating on parallel tracks in the ITC and District Court did not constitute irreparable harm. Chief Judge Connolly also ruled that Thales had not established likelihood of success. Following denial of the preliminary injunction on May 21, 2021, Thales noticed an appeal to the Federal Circuit on June 21, 2021. The Delaware Action was stayed and administratively closed on August 20, 2021, pending resolution of the ITC investigation.

III. ITC INVESTIGATION

While Thales and Philips litigated in Delaware, the ITC investigation proceeded at full pace. As discussed above, Philips filed its complaint at the ITC on December 17, 2020, the same day as the District Court Action. The complaint asserted the same four patents against Thales and the same three customers plus Telit Wireless Solutions, Inc. and Telit Communications PLC.[9] The Commission instituted the investigation on January 19, 2021.[10]

Following an evidentiary hearing in October 2021, Administrative Law Judge David Shaw found no violation in the Final Initial Determination (ID) on April 1, 2022. In addition to finding no violation, ALJ Shaw found multiple claims of the Asserted Patents invalid. On July 6, 2022, the Commission released a Notice of Determination reviewing certain findings, taking no position on many findings, and affirming portions of the ID. The Commission maintained the finding of no violation, and adopted only the following other findings:

(1) the asserted claims of the ’935 patent, the ’711 patent, the ’943 patent, and the ’271 patent are not infringed; (2) Philips did not satisfy the technical prong of the domestic industry requirement with respect to any of the four asserted patents; (3) claim 9 of the ’711 patent and claim 12 of the ’943 patent are invalid as indefinite; and (4) the asserted claims of the ’271 patent are invalid as indefinite and for lack of written description.

As part of its review, the Commission requested public interest statements from the public. One submission, from Chair Khan and Commissioner Slaughter of the FTC urged the ITC to utilize its Public Interest statute to deny relief to any Complainants asserting patents that are subject to FRAND-setting litigation in other forums.[11] In light of the finding of no violation, the Commission did not need to consider the effect of the proposed remedy on the public interest as required by statute.[12]

IV. APPEAL AT THE FEDERAL CIRCUIT

On July 13, 2022, one week after the ITC released its Final Notice, the Federal Circuit affirmed the District Court’s denial of Thales’ preliminary injunction and awarded costs to Philips. Chief Judge Kimberly Moore’s opinion focused exclusively on Thales’ failure to show it was likely to suffer irreparable harm from Philips’ ITC action. Like Chief Judge Connolly, Chief Judge Moore found the evidence presented conclusory. Thales did not meet its burden because it failed to present evidence that it lost customers, had customers delay purchase, or struggled to acquire new business because of the ongoing ITC proceedings. Rather, the ITC investigation caused customers to voice concerns or express doubt. The Court reasoned that “This type of speculative harm does not justify the rare and extraordinary relief of a preliminary injunction.”

V. TAKEAWAYS

While this dispute seemed prepared to make policy waves in the SEP space, there will be future cases that give rise to similar issues. Even now, Apple and Ericsson are litigating SEPs at the ITC and in District Court.[13] That dispute may reach some of the policy questions raised in this case and specifically in Chair Khan and Commissioner Slaughter’s Public Interest Statement from this investigation.

[1] Koninklijke Philips N.V. v. Thales DIS AIS USA LLC, No. 2021-2106 (Fed. Cir. July 13, 2022).

[2] Koninklijke Philips N.V. v. Thales DIS AIS USA LLC, C.A. 20-1713 (D. Del.).

[3] Certain UMTS & LTE Cellular Communications Modules & Products Containing the Same, Inv. No. 337-TA-1240 (USITC).

[4] The customers include CalAmp Corp., Xirgo Technologies, LLC, and Laird Connectivity, Inc.

[5] Koninklijke Philips N.V. v. Thales DIS AIS USA LLC, C.A. 20-1713 (D. Del.).

[6] Both Philips and Thales are members of ETSI, a standard setting organization for digital cellular communications.

[7] Thales USA answered separately on April 5th and did not include counterclaims. Thales USA moved to be severed and dismissed as misjoined party under Fed. R. Civ. P. 21 on April 5, 2021.

[8] The transcript of the May 21, 2021, hearing can be found attached to Philips’ Opening Brief to the Federal Circuit.

[9] Philips also asserted the four essential patents against Telit in Delaware District Court, Koninklijke Philips N.V. v Telit Wireless Sols., Inc., C.A. 20-1711 (CFC) (D. Del.).

[10] 86 FR 7305 (Jan. 19, 2021).

[11] https://www.ftc.gov/system/files/ftc_gov/pdf/Written_Submission_on_the_Public_Interest_if_Chair_Khan_and_
Commissioner_Slaughter_to_ITC.pdf.

[12] 19 U.S.C. §§ 1337(d)(1), (f)(1).

[13] Certain Mobile Telephones, Tablet Computers With Cellular Connectivity, & Smart Watches With Cellular Connectivity, Components Thereof, & Products Containing Same, Inv. No. 1299 (USITC); Ericsson Inc. v. Apple, Inc., C.A. 6:22-cv-60 (W.D. Tex.).