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CASE ANALYSIS ON IN RE INNOVATIO IP VENTURES, LLC PATENT LITIGATION BY: SAKSHI AGRAWAL & SATYAM SINGH
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CASE
ANALYSIS ON IN RE INNOVATIO IP VENTURES, LLC PATENT LITIGATION
AUTHORED BY: SAKSHI AGRAWAL &
SATYAM SINGH
LL.M (Intellectual Property and
Technology Laws)
Jindal
Global Law School
O.P. Jindal Global University
In
re Innovatio IP Ventures, LLC Patent Litigation
Decided
by James F. Holderman, Chief Judge
MDL
2303, 2013 WL 3874042 (N.D. Ill. July 26, 2013)
FACTS
·
Innovatio IP Ventures LLC (“Innovatio”) are the Plaintiffs
and patent-holders. Noel B. Whitley, founder of Innovation and Innovatio
Management LLC (“IM”), was a former intellectual property executive at Broadcom
Corporation (“Broadcom”) and founded the companies after
leaving Broadcom in February 2011.
·
A series of thirty-one patents were assigned by
Broadcom to Innovatio on February 28, 2011 (“Innovatio patents”). Although,
before making this assignment, through a letter, Broadcom, along with two other
prior owners, had assured the Institute of Electrical and Electronics Engineers
(“IEEE”) that they would license patents essential to the wireless local area
networking technology (Wi-Fi) for the “802.11 standards” on reasonable and
non-discriminatory terms (“RAND”) or royalty-free terms.
·
After Innovatio acquired these patents, instead of
bringing an action against manufacturers of devices [(like Cisco, Motorola, and
Netgear) “Manufacturers] it began a campaign against the end users of the Wi-Fi
technology and tried to enforce their patents by sending more than 8,000
letters against several hotels, coffee shops, restaurants, supermarkets, and
other commercial users of wireless internet technology (“Wireless Network Users”)
throughout the United States, alleging that by providing the customers with
wireless internet or using it for managing their internal processes, they have infringed
twenty-three Innovatio patents and asked them to pay for the license.
PROCEDURAL HISTORY
·
Innovatio sued Wireless Network Users for infringing
their patents in relation to the 802.11 standard.
·
Device manufacturers sought a declaratory judgment action
against Innovatios’ attempt for reaping money from Wireless Network Users in
which it claimed that their patents were getting infringed. They requested the
court to declare that their products and the networks or systems with these
products did not infringe on Innovatio patents.
·
All the claims by these parties were consolidated in
one Multidistrict Litigation (hereinafter referred to as “MDL”) [MDL case No.
2303. (Dkt No. 1)] by the Judicial Panel before the United States District
Court, Northern District of Illinois, Easter Division, being heard by Chief
Judge James F. Holderman.
·
On July 26, 2013, the trial bench determined that the Innovatio
patents were essential to the Wi-Fi standard and for the present case, a RAND
obligation shall be applicable on all of them.
·
Further, the trial bench in September, 2013, severed
all the issues regarding RAND with the Wireless Network Users and Innovatio and
the Manufactures agreed that a rate determined by the court further shall only
be applicable to the Manufacturers.
·
In the present trial the court had to decide on the
remaining issues regarding determination of RAND.
ISSUES
1.
Whether Methodology by Justice Robart be used to
calculate a RAND Royalty?
2.
Whether there is a correct method to determine a
royalty base?
3.
Whether Innovatio’s Patents were important to 802.11
Standard and whether any alternatives were available?
4.
Whether comparable licenses proposed by parties are
appropriate for determining a RAND rate?
5. Whether “Top Down” Approach can be
used to determine a RAND royalty?
6. How will the court determine the
value of the quantitative inputs to Dr. Leonard’s method?
ANALYSIS
Issue 1
The court had to find the best way to determine
RAND-licensing rate for standard essential patents. To do so, Justice Holderman
relied upon the methodology by Justice Robart in the case Microsoft v.
Motorola[1]
wherein it was found that the best way to determine RAND valuation was
through a hypothetical bilateral negotiation simulation and to that effect,
fifteen factors of Georgia-Pacific factors[2]
were adopted and modified by the court. Justice Holderman analyzed the
factors in detail and observed that there were mainly three steps that provide
a framework for the courts to determine a RAND licensing rate for a given
patent portfolio.
First, the importance of the patent portfolio to the
standard was to be determined, i.e. the essential and the technical
contribution, both were to be looked at towards the standard. Under this, the
court has to see if the patent in question is central to the standard in order
to determine, if the royalty rate that they seek could be higher than other
patents which are not as important in comparison.
Second, the importance of the patent portfolio was to be
considered as a whole in proportion to the products of the alleged infringer.
In this, the court has to look into the value which is being added to the
implementer. If the portion of a patent is not being used by the
implementer for the standard in question then it will have little value to the
implementer.
Third, the
court has to consider existing licenses for comparable inventions in order to
determine a RAND rate for licensing the patent portfolio. This decision will be
based on its conclusions about the portfolio’s importance to the standard and
the goods of the alleged infringer.
Justice Holderman made an observation that in the Microsoft
case, the infringement had not taken place and it was at an ex-ante
stage and hence, a RAND range was determined. However, in this case,
infringement had already taken place and the court has to calculate damages for
the infringement of standard essential patents for which, a single RAND rate
can only be made.
The importance of patent hold-up and hold-out in
determination of RAND was pointed it. The purpose of RAND determination is to
avoid situations like patent hold-up, hold-out and royalty stacking. Former is
a situation wherein the SEP holder demands a higher rate for its technology
once it has been included in the standard. While RAND rate is being determined
by the court, it must give back just the value of the fundamental technology
and not the hold-up value of standardization. Hold-out is a situation wherein
the implementers use the technologies wothou taking appropriate licenses.
Royalty stacking is also a concern as it is a situation wherein a cumulative
royalty payment is to be made to all the SEP holders which are involved in the
standard (there are hundreds of them), and this payment may become excessive
leading to unwillingness to adopt that standard. Hence, the court noted that
RAND commitments should be such that licenses are granted on objectively
commercial reasonable terms where the overall licensing situation along with
other necessary licenses from all other SEP holders involved in this standard
for the end product is done. In this case, hold-up and hold-out were determined
not be a considerable concern but royalty stacking was concluded to be a
concern while setting up a RAND rate as it can be used to check the accuracy of
the proposed RAND royalty’s technical value.
Therefore, applying the principles above, the court has
determined that the methodology taken by Justice Robart in the Microsoft case
was correct and there are three aspects that should be considered while
determining RAND rate, which are, the importance of the patent portfolio to the
standard, the importance of patent portfolio in relation to the products of
infringer and comparable licenses. The court it its earlier proceeding had
already determined that all the Innovatio patents were essential. Further in
this proceeding court took different families of Innovatio patents and
determined their importance to be moderate to moderate-high to the standard.
Hence, the steps adopted were correct and would aid in understanding and
determining RAND determination in future.
Issue 2
The court
had to determine a correct royalty base before it could proceed with RAND
analysis. Innovatio contended that the court should calculate the royalty as a
percentage of the selling price of end-products with these wireless
functionality and discount the final selling price of end-products (“Wi-Fi
feature factor”) which will then take the value of the end product into account
that is attributed to the 802.11 functionality (License Benchmark Rate).
However, the Manufactures contend that the royalty should be determined by the
court as a percentage of the cost of each wireless chip. The court adopted the Manufacturer’s
methods as Innovatio was unable to provide a sound and credible method to
determine a royalty base.
Innovatio
was unable to give sound reasoning and factually credible method to the court
by its Wi-Fi feature factor and License Benchmark Rate and due to the lack of
the same, it was correct on the part of the court to set royalty base with the manufacturer’s
methods.
Issue 3
The court
in its previous orders had already declared nineteen of the Innovatio patents
in question were essential. However, here, the court explained it further by
explaining Technical Background of the 802.11 standard by noting it as “The
802.11 standard establishes protocols for establishing wireless communications
among devices in a local area”[3]and
discussed if there were any alternative technologies available to the standard
setting organisation.
While
determining if there were alternative technologies available that could been
adopted into the standard, the Modified Georgia-Pacific factor number 9
was taken into account to consider the utility and advantages of the patented
property which could have been taken instead of the patented technology which was
taken.[4]
It was done to see if the royalty rate could be brought down if an alternate
technology is taken. There were various contentions from both sides on how the
court should evaluate potential alternatives to ultimately determine RAND
rates. The court stated that the even if there are other technologies available
in the public domain, it would not mean that Innovatio’s patents should be
discounted in value. An alternative was not considered by IEEE and they adopted
the best and most effective technology available into the standard and if IEEE
did not consider any other alternative, there was no reason to do so for the
court.
Innovatio’s
patents were divided into different categories, namely, “The Channel Sharing
Patent Family,” “Multi-Transceiver Family,” and, “Sleep Family.” The court
discussed in detail about all the categories and went through all the
alternatives which were proposed by the parties. After taking everything into
account, the court held that all of them were of moderate to high importance
and there were no alternatives available to Innovatio’s patents that provide
all the functionality and flexibility which it does to the 802.11 standard.
The court
has correctly determined that there were no alternative technologies available
as various technologies available at that were examined and none of them
provided the flexibility which Innovatio’s patent provided. The flexibility of
interoperability is the most beneficial for the consumer as they can make a
choice in different available products in the market without being restricted
by one.
Issue 4
Under this
aspect, the court had to look into the modified Georgia-Pacific Factors
1 and 2 to make an evaluation of the licenses that the parties proposed as
comparable licenses to determine a RAND rate. The court stated that Innovatio’s
license to Broadcom cannot be used to ascertain the RAND rate as a comparable
license and the price at which Innovatio acquired the patents was to play no
role further. Innovatio relied on various licenses to compare such as Motorola
Mobility/Vtech License, Symbol License with Proxim and Terabeam, Symbol/LXE
License and Qualcomm/Netgear License but the court rejected all of them.
Similarly, the manufactures relied on licenses such as the Via Licensing Patent
Pool and non-RAND Comparable Licenses. However, court rejected these as well as
it was not satisfied and stated that they are unreliable indicators in case of
appropriate RAND rate.
As the
court felt that there was insufficient information to rely on the licenses that
the parties had relied upon, it was justified to not depend on any of these
licenses to determine the RAND rate in this case.
Issue 5
The court initially investigated the ‘Bottom-Up’
approach before accepting the ‘Top-Down’ approach as the experts of
manufacturers suggested but the court rejected it and found that this
methodology had several deficiencies in it. This methodology was based on the
premise of identifying viable alternatives to the patented technology and the cost
of implementing the alternatives, but the court found that there were no
alternatives to Innovatio’s 802.11 standards. There were many other
complexities like the practical challenges associated with implementing the ‘incremental
value’ approach because making an accurate analysis was too hard for courts to
perform and thus for the following reasons the court rejected the ‘bottom-up’
approach.
After that, Dr. Leonard came up with
another method for calculating RAND royalty called the “Top Down”
approach. This approach works by using the average price of a WI-FI chip from
which the average profit that the chipmaker earns on a single unit is
calculated. This profit margin represents the maximum amount available to pay
royalties on all standard-essential patents, as chipmakers cannot pay royalties
that would drive them out of business. Then this profit is multiplied by a
fraction of the number of 802.11 SEPs divided by the total number of 802.11
SEPs. This ensures the royalty rate
reflects only the intrinsic value of Innovatio’s patented technology, not the
hold-up value of standardization.
The court accepted the use of the
Top-Down approach method to calculate RAND royalty as it was the most suitable
method given the facts and circumstances of the case. The court gave the
following reasons for choosing this methodology:
Ø One major reason for choosing this
methodology was because this method ensures Fairness and Non-Discrimination. It
considers chip manufacturers’ profit margins as a core for royalty calculation
which ensures that the royalty does not exceed the profits that the chip
manufacturers expected.
Ø It also addresses the Royalty
stacking concerns by aligning with chipmakers’ profit margins. It foresees a
hypothetical negotiation in which high royalties can throw chipmakers out of
business and it prevents royalties from exceeding an amount that would make the
implementation of the standard economically infeasible.
Ø This method apportions the royalty
based on the technical contribution of Innovatio’s patents instead of relying
on potentially incomparable license agreements, making it a more practical
& suitable method for calculating the RAND rate.
Ø This method relies on verifiable data
points, such as chip prices and manufacturer profits for objective analysis
that provides a structured approach based on realistic hypotheses which
enhances the credibility of RAND determination.
Ø It allows for distinct consideration
of patented features that are important to the standard which keeps a balance
in determining the royalty rate and maintains the quantitative rigor and
objective verifiability.
Based on
the above reasons the court accepted Dr. Leonard’s Top Down approach to
calculate the royalty rate which the parties would’ve likely hypothetically
adopted in the 1997 negotiations.
The court’s
decision to adopt the Top-Down approach appears to be justified as it adheres
to the principles of fairness by considering the profit margins of chip
manufacturers. Furthermore, it provides a practical solution in situations
where there are no comparable licenses and guarantees objectivity through
structured analysis. By doing so, it establishes a fair, practical, and
unbiased method for determining royalty rates that considers the interests of
both patent holders and implementers.
Issue 6
To determine the price of a Wi-Fi
chip, Dr. Leonard asked the court to rely upon a 2010 report from a market
research company named ABI Research. This report had data on the average
selling price of WI-FI chips in each year from 2000-2015 and information about
the number of units sold every year. The court agreed to use this report to
determine the price, but it declined to take the data of weighted average
discounts as the numbers are not accurate due to the significant sale of Wi-Fi
chips in recent years because of its increased demands. Moreover, the available
report does not include the data from 1997-2000, thus the court will take $37
as the average price of the chip for the years 1997-2000. After taking into
consideration these numbers the court calculated the average chip price for the
years 1997-2013 to be $14.85
The court examined the operating
profit for Broadcom’s sale of Wi-Fi chips from the year 2000-2013 in which the
average profit margin was 12.1%. After considering the other supporting
evidence, the court decided to use 12.1% as the profit margin.
For determining the total number of
802.11 Standard Essential Patents, Dr. Leonard relied on a July 2013 report by
a management consulting firm named PA Consulting Group. The court finds that
there are approximately 3000 potentially standard-essential patents, but not
all of them may be essential. Innovatio’s confirmed standard-essential patents
are more valuable to the 802.11 standard compared to the potentially essential
patents that have not been confirmed. Therefore, the court decided to use Dr. Leonard’s
suggested number of 3000, 802.11 standard-essential patents as total but will
also keep in mind that many of these patents are less valuable to the standard.
Dr. Leonard provided three
calculations for the court’s consideration, depending on whether Innovatio’s
patents were in the top 50%, top 20%, or top 10% of the 3000 802.11 patents. The
court found that Innovatio’s patents are in the top 10% and adopted Dr. Leonard’s
Top Down method, which came down to a RAND rate of 9.56 cents per Wi-Fi chip
for licensing Innovatio’s 802.11 patent portfolio.
At the last stage of the analysis the
court compared the present RAND rate of 9.56 cents per Wi-Fi chip with rates
which were calculated in other case laws.
·
In
Microsoft v. Motorola, the RAND rate for eleven of Motorola’s
patents would be 3.471 cents per unit for the Xbox, with a reasonable range
between 0.8 cents to 19.5 cents per unit. The current RAND rate of Innovatio’s
patent falls within the reasonable range that Judge Robart has set in the
Motorola case.
·
In Ericsson v. D-Link, the court
calculated a RAND rate of 15 cents per unit for the infringement and awarded it
as an ongoing future royalty to Ericsson. The basis on which this rate was
determined was not explained but the court in the present case notes that the
15 cents per unit rate in Ericsson is close to the court’s 9.56 cent RAND rate,
providing some supportive confirmation of the court’s determination.
Therefore,
the court was correct in determining the RAND rate of 9.56 cents per Wi-Fi chip
by adopting Dr. Leonard’s Top Down method as it considers all the necessary
data for accurate calculations such as the price of a Wi-Fi chip, the chipmaker’s
profit, the total number of 802.11 standard-essential patents, etc. The court
also corroborated its reasoning by comparing the present calculated rate with
the rates determined in other case laws so that the defendant could not
question the fairness and biasness of the court.
CONCLUSION
After
analysing the reasons mentioned above, the court has decided that the RAND rate
to be paid to Innovatio for licensing their portfolio of nineteen 802.11
standard-essential patents is 9.56 cents for each Wi-Fi chip used or sold by
the manufacturers in the United States. This rate is subject to the terms
of the patents, the applicable statute of limitations, and a finding of
infringement. In conclusion, the court was correct in adopting Justice Robart’s
methodology from the Microsoft case to determine the RAND rates. The court
focused on three crucial aspects to determine the RAND rate i.e. the importance
of patent portfolio to the standard, its importance related to the infringing products
and consideration of comparable licenses. The court has made a solid framework for
its determination by affirming the moderate-to-moderate high importance of Innovatio’s
patents to the standard. The determination of RAND rate was made much easier
when the court found that there are no other alternative available.The Top-Down
approach was adopted by the court which ensured fairness, practicality and objectivity
in determining the RAND rate and the court’s determination of 9.56 cents per Wi-Fi
chip using Top-Down method, along with comparisons to rates in other case laws,
supported a fair and unbiased decision.
Article Information
CASE ANALYSIS ON IN RE INNOVATIO IP VENTURES, LLC PATENT LITIGATION BY: SAKSHI AGRAWAL & SATYAM SINGH
Authors: SAKSHI AGRAWAL, SATYAM SINGH
- Journal IJLRA
- ISSN 2582-6433
- Published 2024/05/22
- Issue 7
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International Journal for Legal Research and Analysis
- Abbreviation IJLRA
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