Showing posts with label Lexmark. Show all posts
Showing posts with label Lexmark. Show all posts

Friday, February 17, 2023

Patent exhaustion can be triggered by covenant to sue last: Germany's Federal Court of Justice creates legal uncertainty for wireless patent holders such as Qualcomm

The global ramifications for the patent licensing industry are huge:

Patent holders who enter(ed) into agreements with chipset makers and other suppliers while hoping to reserve the enforcement of their rights against downstream customers--particularly for the purpose of collecting royalties from end-product makers--can no longer rely on a covenant to sue last (sometimes also called covenant to exhaust remedies) as a means of sidestepping patent exhaustion.

I'm grateful to German IP litigator Oliver Loeffel ("Löffel" in German) for flagging the following decision to me:

The Bundesgerichtshof (Federal Court of Justice of Germany) today published (PDF) a judgment (dated January 24, 2023) according to which

  • a covenant not to sue is, as a matter of law, not capable of circumventing patent exhaustion; and

  • a covenant to sue last (which the court refers to as a "covenant to be sued last", a term that I can't find elsewhere and which doesn't make sense to me linguistically) is not, as a matter of law, certain to avoid exhaustion. Instead of focusing on what might theoretically happen (i.e., that there are hypothetical scenarios in which the beneficiary of the covenant to sue last might find itself on the receiving end of an infringement action), it depends on the answer to the following question of fact: whether the beneficiary of the covenant must realistically expect--in the ordinary course of events--to be held liable for infringement.

This may also have implications (in the sense of potentially persuasive authority) for other jurisdictions. With a view to the United States, the first part is merely consistent with TransCore, Quanta, and the spirit of Impression Products, but the second part touches on what would raise a question of first impression in the Supreme Court. So far, patent holders such as Qualcomm were pretty confident that a covenant to sue last would not entail patent exhaustion under U.S. patent law. While persuasive authority from a foreign jurisdiction is normally given limited weight, Germany's Federal Court of Justice actually has a reputation for being patentee-friendly, and its patent-specialized judges regularly meet with the judges of the United States Court of Appeals for the Federal Circuit.

The relevant case numbers are X ZR 123 (Federal Court of Justice), 6 U 104/18 (Karlsruhe Higher Regional Court, appellate opinion of November 25, 2020), and 7 O 165/16 (Mannheim Regional Court, judgment of September 28, 2018). The plaintiff (and appellee, at least in the Federal Court of Justice) is Japan's IP Bridge, the defendant is HTC, and the patent-in-suit is EP2294737 on "control channel signalling for triggering the independent transmission of a channel quality indicator", a patent that has been asserted against various defendants and over which IP Bridge won a famous German patent injunction against Ford last year.

The law firm of Kather Augenstein (which by the way represented Ericsson against Apple last year) published an English translastion of key passages of the Mannheim court's decision (PDF). I have not been able to find the appellate decision, though it has been referenced by IAM (as a key post-Sisvel v. Haier FRAND ruling) and even by this blog (because the Munich I Regional Court applied the Karlsruhe Higher Regional Court's claim construction in the Ford case, though it is not even in the Karlsruhe circuit).

Previously, no one paid much attention to the question of patent exhaustion. But the Federal Court of Justice--after siding with IP Bridge on the question of infringement--has now remanded the case to the Karlsruhe court (Presiding Judge: Andreas Voss ("Voß" in German)) because the patent-in-suit may have been exhausted by a covenant to sue last. As a result, it is now known that HTC--on top of technical defenses and a FRAND defense to injunctive relief--argued that the patent had been exhausted (maybe by IP Bridge, or maybe by Panasonic, which originally obtained this patent) through contracts with two chipset makers whose products were incorporated into the accused products (HTC smartphones).

This is a very special subject, so let me start with why such a thing as a covenant to sue last exists in the first place, and then discuss the holdings of the Federal Court of Justice in this case.

The instrument that is called covenant to sue last (or covenant to exhaust remedies) was borne out of necessity: Qualcomm and other patent holders (primarily wireless standard-essential patent (SEP) holders) have always preferred to license their patents to smartphone makers (and, more recently, automakers) over licensing them to upstream suppliers such as baseband chipset makers. But they'd also like to be able to enter into contractual arrangements with chipmakers so long as those dealings don't trigger patent exhaustion, which would make it impossible to enforce patent rights against the downstream, particularly the end-product maker.

They knew early on that a contractual provision would not be capable of preventing exhaustion when a straightforward license is granted. The concept of patent exhaustion is that patent rights are exhausted with the first sale (if the patent holder makes a product) or the first authorized (licensed) sale. The German decision published today also recalls that fact.

So the first "workaround" that lawyers came up with was to enter into a covenant not to sue instead of granting a license. For some time, there was widespread belief that this would do the trick. But over the years, the U.S. Supreme Court's patent exhaustion caselaw became more expansive. The 2008 decision in Quanta Computer v. LG Electronics clarified that patent exhaustion applies to method claims (as opposed to only product claims). In Impression Products v. Lexmark International, the top U.S. court held that post-sale restrictions may be enforceable under contract law but do nothing to avoid patent exhaustion. It also took an expansive view on whether a foreign first authorized sale will exhaust U.S. patent rights.

Between Quanta and Impression, the Federal Circuit equated, in its TransCore decision, a covenant not to sue to a license for exhaustion purposes, The instrument of a covenant to sue last became popular. This is how it works:

  • The beneficiary neither gets a license nor a 100% reliable commitment not to be sued.

  • But recovery will be sought from the beneficiary only if it cannot be obtained from the downstream.

Take automotive patent licensing, for example. If Nokia had (which I believe is not and was not the case) entered into a covenant to sue last vis-à-vis the chipmaker, it would only have been able to sue that company after seeking and failing to obtain recovery from Daimler (end-product maker), Continental (tier 1 supplier that makes telematics control units), and whatever tier 2 supplier supplied the Network Access Device (NAD) to Conti.

In the dispute between IP Bridge and HTC, the former succeeded in persuading the appeals court (Karlsruhe Higher Regional Court) that a covenant not to sue would already be sufficient to avoid patent exhaustion and, therefore, a covenant to sue last was even more certain to do the job.

HTC appealed, and the Federal Court of Justice (which is based in Karlsruhe like the court below) reversed and remanded with the following holdings and instructions:

  • The Federal Court of Justice said it was not merely an obiter dictum that the Karlsruhe Higher Regional Court said a covenant not to sue would not trigger exhaustion. Instead, it was the bedrock of the lower court's conclusion that a covenant to sue last could not result in patent exhaustion either.

  • The Federal Court of Justice says the focus must be on whether the patent holder has authorized the "release into commerce" ("Inverkehrbringen") of products that implement the patented invention. Typically, that will be the case if the patent holder entered into a covenant not to sue, and contractual provisions according to which the patentee reserves its rights against third parties are invalid.

  • As a result, the Karlsruhe Higher Regional Court's conclusion that a covenant to sue last does not exhaust patent rights because even a covenant not to sue would not trigger exhaustion has been reversed.

  • The Federal Court of Justice then turns to questions that the court below didn't have to reach:

  • On remand, the Karlsruhe Higher Regional Court will have to determine whether the patent-in-suit falls under the capture clause of the patentee's relevant contracts with the two chipmakers.

  • Patent exhaustion is not ruled out only because the chipmakers don't make phones and the patent claims-in-suit involve technical components that are not found in chips, but only in phones. The Federal Court of Justice acknowledges that patent exhaustion generally applies only to the particular product that was sold on an authorized basis. Exhaustion does not necessarily apply to downstream products that contain that product as one of multiple components. But that may be the net effect if the only meaningful way in which the chipsets in question can be used is to incorporate them into mobile end-user devices. In that case, the patentee's authorization of the sale of such chipsets may amount to tacit consent to the distribution of mobile devices that incorporate those chipsets. What could weigh against that conclusion, however, would be a disclaimer of liability in the agreements between the chipmakers and HTC.

  • Even if the relevant agreements were to be interpreted to the effect that the patentee did not consent to the incorporation of those chipsets into mobile phones, the patent could still be exhausted if the technical effects of the patent-in-suit are materially achieved by those chipsets, with all other components of those mobile phones not playing a determinative role.

  • Now comes the most important part:

    The Karlsruhe Higher Regional Court will have to determine whether the patentee gave its contractual partners (the chipmakers) an assurance that it would not assert the patent-in-suit against them--and such determination will have to focus on practical as opposed to exclusively theoretical considerations. The first and foremost question will be whether in the ordinarily expected course of events the chipmakers must fear to be sued over an infringement of the patent-in-suit.

In other words, the merely hypothetical possibility of the immediate beneficiary of the covenant to sue last being sued is not enough to avoid exhaustion. If it's rather unlikely that the immediate beneficiary of the covenant ever gets sued, then the covenant to sue last will be treated like a covenant not to sue, which in turn is treated like a license.

How can the chipmaker have a reasonable apprehension of being sued in the ordinary course of events? The normal course of events is that if you hold a patent and sue a device maker (and your infringement allegations have merit), you get paid--unless that device maker goes bankrupt along the way.

The short version is: the Federal Court of Justice does not want to let patent holders circumvent exhaustion through a covenant to sue last, but unless there are special circumstances that suggest otherwise, will treat it like a covenant not to sue, which is treated like a license.

Is this a desirable outcome? This post is already long enough without discussing the policy implications, but I do want to mention one: there may be cases in which chipmakers want peace of mind and where it would be in the public interest to allow patentees to give it to them, but in which patent holders may now tell them that after IP Bridge v. HTC it's too risky for them to enter into a covenant to sue last because they may exhaust their patent rights.

Thursday, September 6, 2018

Apple, Foxconn et al. want to end Qualcomm's double-dipping practice (chips and patents) once and for all

The previous post was about a magistrate judge's annoyance at Qualcomm's gamesmanship. But what's sure to cause Qualcomm and its lawyers a lot more headache is the pressure from two important summary judgment motions: the FTC's motion in the Northern District of California seeking to clarify Qualcomm's self-imposed obligation to license rival chipset makers and--which is what this present post is about--a motion by Apple and four contract manufacturers (Foxconn, Compal, Wistron, and Pegatron) in the Southern District of California, leveraging the Supreme Court's 2017 Lexmark ruling against Qualcomm's double-dipping practice (this post continues below the document):

18-08-31 Apple Et Al. Motion for Partial Summary Judgment by Florian Mueller on Scribd

For a recap of something discussed in greater detail last year, Qualcomm's business model is basically like this:

  • As Judge Koh recalled in a recent order, "an analysis conducted by Qualcomm in 2015 showed that revenues from Qualcomm's licensing program were 'equivalent in size to the sum of ~12 companies with a form of technology licensing,' including leading cellular SEP licensors such as Ericsson, Nokia, and Interdigital."

  • Customers have to accept an out-of-this-world royalty rate in order to be able to buy Qualcomm's chips.

  • Those who don't want to buy Qualcomm's chips must still pay patent license fees and will sooner or later be "persuaded" to enter into exclusivity arrangements under which their total cost (the sum of chip supplies and patent royalties) is reduced (but apparently still very high).

The above sounds like a "great" (for Qualcomm, not for the economy at large or for society) deal. However, Apple and its four contract manufacturers say that "Lexmark forbids this double-dipping."

The doctrine of patent exhaustion, which the Supreme Court clarified, upheld and reinforced in Lexmark, is fundamentally irreconcilable with the notion of a company selling chipsets and collecting patent license fees from the customers buying its chips. But Qualcomm appears to have believed for a long time that it would get away with it. One, because no one would dare challenge it. Two, by virtue of three structural elements that the summary judgment motion addresses:

  • "Qualcomm divides the chipset sales and software license across two agreements"--one for the purchase of the chipsets and another one, named Master Software Agreement, for the software license.

  • Foreign sales (such as to Asia-based contract manufactures) don't help as Lexmark clear stated that "[a]n authorized sale outside the United States, just as one within the United States, exhausts all rights under the Patent Act."

  • The motion labels as "corporate shell games" a structure under which different Qualcomm entities sell certain products and technically own certain patents. More than six years ago I already reported and commented on a related restructuring.

The motion invites Judge Gonzalo Curiel to take a Lexmark attitude and focus on a simple commercial question: are we talking about authorized chipset sales or not? If authorized, there's exhaustion; if Qualcomm wants to argue that exhaustion doesn't kick in, it has to show that something was unauthorized about the sale.

The most technical question here ("technical" in a literal sense, not legally technical) is whether, as the motion says, "Qualcomm’s chipsets and software indisputably are a matched pair by design, each intended to be used with, and only with, the other." The moving parties describe this as an undisputed fact. It will be interesting to see whether (and if so, how) Qualcomm will seek to raise doubts about it, but absent a single reasonable use case for that software outside of Qualcomm's chipsets and for Qualcomm's chipsets without the related software license, I guess it just can't deny what matters here.

Exhaustion can only be determined on a patent-by-patent basis (even if certain key questions, particularly anything related to Lexmark, will overlap). It's not a portfolio question.

That's because it must be shown for each patent that it is practiced by Qualcomm's chipsets. It wouldn't be practical to have one or more courts make this determination for thousands of patents. And a motion for partial summary judgment is subject to rather strict page limits--the whole idea of summary judgment is that you raise an issue that the court can easily decide. Apple and the likes of Foxconn therefore picked three exemplary patents (from the ones Apple and the contract manufacturers tackled before). Footnote 1 says that "[a] favorable ruling on this motion would inform the parties as to the exhaustion issues for the other patents." In other words, the parties need some guidance, but then they should be able to figure out exhaustion for numerous other patents.

Footnote 6 explains, in other words, that the movants are simply in their right to present alternative claims: should they prevail on exhaustion, infringement won't be reached. While the motion doesn't say so, this would even apply in a case where the theories aren't just alternatives but where they would be contradictory. Here, however, it's technically still possible that Qualcomm's chips practice a patent (thereby triggering exhaustion, provided that a sale is authorized and a court is underwhelmed by an attempted end-run based on a separate software license and a nested corporate structure) while, for an example, Intel's chips don't. However, to the extent that a patent is truly standard-essential, it may be practiced by Qualcomm and infringed by everyone else--but who cares if it's exhausted?

The FTC's motion for partial summary judgment in San Jose has the potential to force a settlement of that entire antitrust matter. If the San Diego motion on exhaustion succeeds, there will still be a host of financially and strategically important issues to resolve, but the case would be streamlined in a highly important way and, in a best-case scenario, it's possible that no (alternatively, fewer) patent infringement questions would have to be taken to trial. And above all, either motion would have major impact on the market.

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Tuesday, May 30, 2017

Supreme Court rules against Lexmark on patent exhaustion, strengthening FTC/Apple cases against Qualcomm

The long-awaited Supreme Court ruling in Impression Products v. Lexmark International (PDF) has just been handed down. It deals with two questions related to patent exhaustion, and I was aware of it before but wanted to wait until the implications of that dispute on the smartphone cases I'm primarily interested in would be clearer. The good news is that the Supreme Court has once again overruled the Federal Circuit in a way that strengthens those defending themselves against attempts to gain excessive leverage and extract overcompensation from patents. The Supreme Court is staying its course with respect to patent matters, regardless of some patent troll lobbying groups suggesting that all those decisions would result in the demise of the American inventor (quite the opposite is the case).

Lexmark tried to leverage its patents on toner cartridges against various so-called remanufacturers (companies that buy up empty toner cartridges, refill them, and then sell the refilled cartridges). Impression Products was the last man standing at some point and took this to the Supreme Court after the Federal Circuit had decided completely in--surprise, surprise--the patent holder's favor. Of the three different levels of the federal court system, the Supreme Court took the strongest and clearest position against overleveraging/overcompensation of patents; the Federal Circuit took the very opposite position; and the district court (Southern District of Ohio) had agreed with Lexmark that exhaustion didn't apply to cartridges sold in other countries, but had sided with Impression at least with respect to cartridges Lexmark sold in the U.S. and on which it sought to impose certain restrictions.

As today's Supreme Court decision explains, the Federal Circuit "started from the premise that the exhaustion doctrine is an interpretation of the patent infringement statute, which prohibits anyone from using or selling a patented article 'without authority' from the patentee." In this statutory context, "without authority" just serves the purpose of clarification: if you have a license, you don't infringe. That's self-explanatory, if not tautological. But it's also the weakest basis on which the doctrine of patent exhaustion could stand: the Federal Circuit wanted to reduce exhaustion to merely a presumption of the patent holder granting customers and the entire downstream "authority" to use and resell a product. It would have been a weak basis for the all-important concept of patent exhaustion since patent holders could then navigate around it by just imposing some restrictions. Exhaustion would have worked in a similar way to promissory estoppel: if you don't say the wrong thing, or if you say the right thing to overcome a presumption, you're not estopped.

The Supreme Court has now made it clear that exhaustion is much stronger and much more comprehensive:

"The problem with the Federal Circuit's logic is that the exhaustion doctrine is not a presumption about the authority that comes along with a sale; it is a limit on the scope of the patentee's rights. The Patent Act gives patentees a limited exclusionary power, and exhaustion extinguishes that power. A purchaser has the right to use, sell or import an item because those are the rights that come along with ownership, not because it purchased authority to engage in those practices from the patentee."

On that basis, the Supreme Court basically held that Lexmark couldn't impose the restrictions it relied upon in this litigation, and that this wouldn't work for Lexmark even if the first sale occurred outside the United States (the one scenario of the two in which the district court sided with Lexmark). The Supreme Court's disagreement with the Federal Circuit is very visible in this passage, too:

"The Patent Act promotes innovation by allowing inventors to secure the financial rewards for their inventions. Once a patentee sells an item, it has secured that reward, and the patent laws provide no basis for restraining the use and enjoyment of the product."

No overcompensation. No overleveraging. No double-dipping. No restrictions that go beyond what the Patent Act allows. That's the message here.

Presumably, some people in another Washington DC building are now reading the Supreme Court decision: the lawyers working on the FTC's case against Qualcomm. The FTC argued in its January complaint, under a headline that describes Qualcomm's "no license-no chips" policy as "anomalous among component suppliers," that "when one of Qualcomm's competitors sells a baseband processor to an OEM, the OEM can use or resell the processor without obtaining a separate patent license from the competitor—just as a consumer buying a smartphone does not have to obtain a separate patent license from the seller of the smartphone." The FTC went on to explain that "Qualcomm is unique in requiring an OEM, as a condition of sale, to secure a separate patent license requiring royalty payments for handsets that use a competitor's components." For example, this would apply to a situation in which a device maker is a customer of Qualcomm and, say, Intel or Samsung's component business.

The FTC still has to make an antitrust argument here (tying), which includes that it has to prove Qualcomm's monopoly-like power in the baseband chipset business, but at least Qualcomm can't just point to the (now-reversed) Federal Circuit decision in disputing the FTC's exhaustion argument.

Patent exhaustion as a concept has been strengthened today, and its profile in certain other cases will likely be even higher now. While Apple takes certain positions when it enforces its own patents (and would rather avoid Supreme Court review of a highly controversial Federal Circuit decision in its favor), exhaustion is not an issue in Apple v. Samsung but it does play a role in Apple v. Qualcomm: Count XXIII of Apple's antitrust complaint against Qualcomm is a request for judicial "declaration of unenforceability [of Qualcomm's patents in certain contexts] due to exhaustion." Apple alleged in its January complaint that "Qualcomm has sought, and continues to seek, separate patent license fees from Apple's [contract manufacturers] for patents embodied in the chipsets Qualcomm sells to Apple's CMs, a practice that is prohibited under the patent exhaustion doctrine." In the past, Apple had to pay those license fees indirectly (via its contract manufacturers), which it is no longer prepared to do, and that's why Qualcomm is now suing four Apple contract manufacturers and seeking a preliminary injunction against them.

Apple also wrote that "[b]y requiring Apple's CMs to take a separate patent license for the same components that they purchase, Qualcomm is double-dipping." That term is an accusation against Qualcomm that I previously heard from other industry players, so I wasn't surprised to also find it in Apple's complaint. If the Federal Circuit ruling in Lexmark had been affirmed, Qualcomm might have been able to defeat that particular count of Apple's complaint. Apple's complaint already anticipated that Qualcomm would point to its corporate structure: "Qualcomm has attempted to evade the patent exhaustion doctrine by selling baseband processor chipsets to Apple's [contract manufacturers] through QTC, which is operated by QTI, which is in turn a wholly owned subsidiary of Qualcomm." Apple then points to Qualcomm's 2012 restructuring, which I already blogged about back then with a focus on open-source licensing issues. The Supreme Court's broad and inclusive approach to exhaustion simply doesn't allow any kind of end-run around the exhaustion doctrine through a first sale outside the United States as in one of the two issues relevant in the Lexmark case. Philosophically, this also makes it hard to imagine that an end-run could be achieved through a sophisticated corporate structure.

As the district court cases in Northern (FTC v. Qualcomm) and Southern (Apple v. Qualcomm) California unfold, patent exhaustion is going to be a very interesting part of the debate. And in many other cases, though the Qualcomm cases are currently the highest-profile smartphone-related cases in which exhaustion plays a role.

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