Federal Court Dismisses Claims Against NPE for Allegedly Fraudulently Enforcing Its Patents; Upholds Breach of Contract and Promissory Estoppel Claims

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1 FEBRUARY 4-8, 2013 WRITTEN BY KOREN W. WONG-ERVIN PATENTS Federal Court Dismisses Claims Against NPE for Allegedly Fraudulently Enforcing Its Patents; Upholds Breach of Contract and Promissory Estoppel Claims Last week, an Illinois federal court dismissed on Noerr-Pennington grounds claims brought by Cisco Systems, Inc., Motorola Solutions, Inc., and Netgear, Inc. against non-practicing entity (NPE) Innovatio IP Ventures, LLC, alleging that Innovatio is liable for fraudulently enforcing its patents against the plaintiffs customers. The plaintiffs, all manufacturers of the allegedly infringing products, sued Innovatio alleging fifty-five counts in total, including, as relevant to the motion to dismiss, violations of the Racketeer Influenced and Corrupt Organizations Act (RICO), the California Penal Code, the California Business & Professions Code 17200, civil conspiracy, breach of contract, promissory estoppel, unclean hands, and intentional interference with prospective economic advantage. The court granted Innovatio s motion to dismiss with the exception of the plaintiffs claims for breach of contract and promissory estoppel, which are based on allegations that Innovatio breached the contractual obligations of its predecessors in ownership to license the patents on RAND terms. The case is significant because PAEs fundamentally change the economics of litigation. Unlike traditional patent litigation plaintiffs, PAEs typically do not have to take into account indirect costs such as countersuits and reputation. This suit represents an attempt to level the playing field. According to the plaintiffs, Innovatio acquired patents covering technology that is necessary to implement the standards of the Institute of Electrical and Electronics Engineers (IEEE) for wireless local area networking technology. Shortly after acquiring the patents, Innovatio began a licensing campaign sending more than 8,000 letters largely directed at small businesses (such as bakeries, restaurants, cafes, and hotels) that do not make or sell devices that provide the accused Wi-Fi functionality. Instead, these small businesses make wireless Internet available to their customers or use it to manage Internet processes. The letters threaten protracted negotiations with onerous burdens on the end users, and offer supposed discounts for promptly paying Innovatio without engaging in such negotiations, while making it clear that Innovatio will initiate -1-

2 costly litigation with anyone that does not acquiesce. (Opinion at 4-5 (quoting the operative complaint).) Innovatio contended and the court agreed that its enforcement activity is protected by the Noerr-Pennington doctrine. The court first found that the Noerr-Pennington doctrine protects pre-suit demand letters, stating that, [o]f significance here is that Innovatio s letters were sent to enforce its patent rights, and [t]he Federal Circuit has held that sending pre-suit letters is a necessary component of enforcing patents rights. (Opinion at 10.) Next, the court considered whether the sham litigation exception applied, holding that the Federal Circuit s standard governed, which requires the plaintiffs to plead both that the statements were objectively false, and that Innovatio made the statements with knowledge of their incorrectness or falsity, or disregard for either. (Id. at (internal quotations and citations omitted).) First, the court rejected the plaintiffs contention that Innovatio s licensing campaign was a sham because it asserted infringement before offering a RAND license, offered licenses on terms less favorable than RAND, and failed to disclose its RAND obligations. The court reasoned that, although a RAND obligation may have some effect on the remedies available to a patent holder in an infringement action, [t]he existence of an obligation to license a patent on RAND terms, without more, is not an actual express license providing a defense to infringement. (Opinion at 17.) The court decided that it need not resolve the effect that Innovatio s alleged RAND commitments have on its infringement claims at this time, stating that [i]t is enough for now to determine that Innovatio at least has a plausible argument that its infringement claims are still viable despite its alleged RAND obligations. (Id. at 20.) Second, the court rejected the plaintiffs contention that Innovatio s infringement claims are a sham because the asserted patents are subject to a variety of licenses. The court reasoned that the plaintiffs alleged only that Innovatio knew that the licenses existed and that they could limit its recovery. The plaintiffs did not allege that Innovatio knew that any particular customer was using wireless products containing components subject to those licenses. Of course, were Innovatio to persist in pursuing its claims against a Target after discovering that the Target s wireless systems use only licensed products (and assuming Innovatio possessed no plausible argument that the licenses did not apply), Innovatio may then be considered to be pursuing a sham. But the [complaint] makes no such allegations, so the existence of the license does not make Innovatio s licensing campaign a sham. (Id. at 22.) Third, the court rejected the plaintiffs contention that Innovatio made material misrepresentations by alleging infringement while failing to disclose the existence of a possible license. The court concluded that, [h]ere, the context of Innovatio s alleged statements, a presuit demand letter to a potential adversary in litigation, make plain that Innovatio had no duty to disclose the licenses. (Id. at 23.) Fourth, the court rejected the plaintiffs contention that Innovatio s licensing campaign is a sham because it made numerous misrepresentations, including about the number of locations that Innovatio had licensed under the patents, the value of the patents, the number of patents that had been held to be valid in court or reexamination proceedings, and that the inventors to the patents are fathers of Wi-Fi. The court concluded that [n]one of those alleged misrepresentations is sufficiently central to Innovatio s infringement claims to make its entire licensing campaign a sham. (Id. at 27.) In so holding, the court relied on the Seventh Circuit s rule establishing that -2-

3 a misrepresentation can render an adjudicative proceeding a sham under Noerr-Pennington only if the misrepresentation is material enough to actually alter the outcome of the proceeding. (Id. (citation omitted).) With respect to the breach of contract and promissory estoppel claims, Innovatio did not dispute that it was bound by the contractual obligations of its predecessors in ownership to license the patents on RAND terms, but rather contended that the manufacturer-plaintiffs lacked standing to bring the breach of contract claim. The court concluded that Cisco had standing to sue because it alleged that conduct of Innovatio s predecessors in ownership of the patents created a contract not only with IEEE, but also with its members, which includes Cisco. Innovatio s predecessors made a contractual promise to Cisco to offer licenses on RAND terms to all users of the relevant IEEE standards. If Innovatio fails to perform that obligation to any of those users, Cisco can sue Innovatio to recover all foreseeable damages it suffers because of that breach. (Id. at 31.) The court found that Motorola and Netgear, both non-ieee members, were third-party beneficiaries and thus lacked standing to assert the rights of other third-party beneficiaries. The court nonetheless allowed their contract claims to proceed based on the plaintiffs allegations that they were harmed not only by Innovatio s failure to offer a RAND license to the plaintiffs customers, but also by its failure to offer a RAND license to the plaintiffs themselves. The court, however, held that Motorola and Netgear may not pursue any damages based on Innovatio s failure to offer RAND licenses to others. Sources: Cisco Systems Inc. v. Innovatio IP Ventures, LLC (N.D. Ill.) (Opinion), available at (subscription required) Cisco Systems Inc. v. Innovatio IP Ventures, LLC (N.D. Ill.) (Amended Complaint), available at Ryan Davis, Patent Trolls Get Warning Shot With RICO Suit, Law360 (Feb. 8, 2013), available at (subscription required) DOJ s Renata Hesse Discusses Section 2 and F/RAND Commitments Speaking at a conference on February 8, Deputy Assistant Attorney General Renata B. Hesse discussed the role that Section 2 of the Sherman Act might play in protecting competition in high-technology industries from certain exclusionary practices involving patent licensing. According to Hesse, [c]ompetition advocacy can... only go so far. To stop owners of F/RAND-encumbered SEPs from harming consumers through arguably anticompetitive behavior, agencies and private parties may need to resort to judicial remedies. (Hesse Speech at 19.) Standard essential patent holders may seek to take advantage of the market power that standardization of their patented technology creates by engaging in hold-up. They may, for instance, exclude a competitor from the market or obtain an unjustifiably higher royalty than would have been possible ex ante. (Id. at 16.) Of significance, Hesse noted that [t]his type of -3-

4 hold-up raises particular competition concerns when alternative technologies that could have been included in the standard were instead excluded from it. (Id. at 17.) Hesse went on to explain that some commentators have rejected the application of antitrust law to disputes involving F/RAND commitments on the grounds that F/RAND commitments are contracts and that contract law is sufficient to enable prospective licensees to obtain the promised F/RAND royalty rates. While the FTC has looked beyond contract law to enjoin SEP hold-up in several recent decisions, the FTC based its authority to issue consent orders on Section 5 of the FTC Act. (Id. at ) Hesse also noted that others have suggested that Section 2 continues to retain validity in this space even in the absence of deception during the standard setting process. According to Hesse, regardless of whether a patent holder intentionally deceives an SSO while it designed the standard or honestly promises to encumber its patents with F/RAND commitments, but later intentionally violates its F/RAND commitments after the standard is set, [c]ompetition and consumers appear to suffer either way. (Id. at 21.) This is an issue that we continue to look at and encourage members of the bar and academia to do so as well. (Id.) Hesse also discussed the joint DOJ-FTC workshop on the potential effects on competition that patent-assertion entity (PAE) activity may generate, stating that [t]he workshop is an example of our efforts to further the discussion on the impact PAE activities may have on competition and innovation and the role antitrust law should play. (Id. at 14.) Lastly, Hesse discussed the division s participation in the PTO s roundtable on its proposed regulations requiring periodic and timely recordation of a patent s real-party-in-interest, stating that requiring such disclosure will help improve the efficiency of the IP licensing marketplace. Recordation will help reduce risk, increase transparency, and facilitate bilateral licensing. (Id. at 15.) Source: Renata Hesse Speech, IP, Antitrust and Looking Back on the Last Four Years, available at Mexico Antitrust Authority Fines Telmex for Refusing to Allow a Competitor Access to Its Network Last week, Mexico s antitrust agency, the Federal Competition Commission, fined America Movil SAB de CV unit Telmex $51.6 million for allegedly refusing to allow a competitor access to its network. The fine relates to dedicated links that are necessary to provide telecommunications services to end users. According to the Commission, because of its market power, Telmex is required to lease access to third parties, but refused to allow Axtel access to dedicated links from August 2009 to June The Commission characterized Telmex s conduct as serious and intentional, noting that the company is a repeat offender. Telmex has 30 days to appeal. Source: Ben James, Mexico Fines Telmex $52M For Denying Rival Network Access, Law360 (Feb. 7, 2013), available at -4-

5 c26c14eb19db&utm_source=newsletter&utm_medium= &utm_campaign=competiti on (subscription required) FTC Extends Public Comment Period on Proposed Settlement Order Concerning Google and Motorola SEPs At the request of members of the public, the FTC has extended the time to submit public comments on the proposed settlement order concerning Google Inc. and Motorola Mobility LLC through February 22, Under the proposed consent package, Google has agreed not to seek injunctive relief based on infringement of a FRAND-encumbered standard essential patent unless certain conditions are met or except under limited exceptions. Source: FTC Press Release, available at PHARMACEUTICALS Senators Introduce Bipartisan Bill Aimed at Ending Reverse Payment Settlements On February 5, Senators Amy Klobuchar (D-MN), Chuck Grassley (R-IA), Richard Durbin (D- IL), and Al Franken (D-MN) introduced a bipartisan bill, the Preserve Access to Affordable Generics Act, aimed at enhancing competition in the pharmaceutical market by stopping anticompetitive agreements between brand name and generic drug manufacturers that limit, delay, or otherwise prevent competition from generic drugs. (Bill 28(b)(1).) Under the bill, an agreement shall be presumed to have anticompetitive effects and be unlawful if (i) an ANDA filer receives anything of value; and (ii) the ANDA filer agrees to limit or forego research, development, manufacturing, marketing, or sales of the ANDA product for any period of time. (Id. 28(a)(2).) The bill provides an exception to the presumption if the parties to the agreement can demonstrate by clear and convincing evidence that the procompetitive benefits of the agreement outweigh the anticompetitive effects of the agreement. (Id. 28(a)(2)(B).) The bill explicitly excludes settlements including only one or more of the following: (1) the right to market the ANDA product in the United States prior to the expiration of any patent that is the basis of the patent infringement claim or any patent right or other statutory exclusivity that would prevent the marketing of such drug; (2) a payment for reasonable litigation expenses not to exceed $7,500,000 ; and (3) a covenant not to sue on any claim that the ANDA product infringes a United States patent. (Id. 28(d).) According to Klobuchar, the [l]egislation would help put an end to pay-offs by brand-name drug manufacturers to keep cheaper generic equivalents off the market and help make sure consumers have access to cost-saving generic drugs they need. (Klobuchar Press Release at 1.) The press release cites a recent FTC report that indicated a significant increase in the number of potential pay-for-delay settlements over the past year. Klobuchar and Grassley introduced similar legislation in

6 Sources: Bill, available at enerics pdf Amy Klobuchar Press Release, Klobuchar, Grassley Reintroduce Legislation to Crack Down on Anti- Competitive Pay-for-Delay Deals, available at Walgreen, Safeway, and Others Sue Warner Chilcott for Product Hopping On February 5, Walgreen Co., Safeway Inc., Supervalu Inc., and HEB Grocery Co. brought an antitrust action against Warner Chilcott and others alleging that the defendants unlawfully excluded competition from the market for Doryx and its AB-rated generic equivalents by making numerous changes to its product that offered no medical or therapeutic benefit over the prior versions. The changes included changing the formula of the product from capsules to tablets, changing the drug s label, and changing the dosage. According to the complaint, Defendants knew or believed that these successive changes to branded Doryx... would require any would be generic competitor to reformulate its product to match the change.... in each case Warner Chilcott did not expect the change to result in additional sales, lower costs, or increased efficiency. But the real purpose of the change delaying generic entry was achieved. (Complaint 7.) Plaintiffs further contend that they paid prices that were substantially greater than the prices they would have paid absent the illegal conduct because: (1) they were deprived of the opportunity to purchase lower-priced generic Doryx in place of higher-priced brand-name Doryx, or to do so in the quantities that would have prevailed absent Defendants scheme ; (2) they paid artificially inflated prices for generic Doryx, and/or (3) the price of branded Doryx was artificially inflated by Defendants illegal conduct. (Id. 95.) Sources: Walgreen Co. v. Warner Chilcott Public Limited Co. (E.D. Pa.) (Complaint), available at Vin Gurrieri, Warner Chilcott Faces Fresh Suit Over Doryx Generic Ploy, Law360 (Feb. 6, 2013), available at c26c14eb19db&utm_source=newsletter&utm_medium= &utm_campaign=competiti on (subscription required) -6-

7 COPYRIGHT EU Launches Licenses for Europe Initiative Last week, Vice-President of the European Commission responsible for the Digital Agenda Neelie Kroes announced the launch of the Licenses for Europe initiative aimed at developing new licensing approaches for protected content. According to Kroes, old practices need to adapt to new digital realities. That calls for a real change and legal and practical solutions: competition tools are not enough for that. (Kroes Speech at 1.) We are launching this initiative to show technology and copyright can go together, stated Kroes. I am not too keen on heavy-handed legislative measures. They aren t always needed; and sometimes, pragmatic and easy-toimplement solutions are just as valid. The goal is to adjust current practices or get rid of costly inefficiencies. (Id. at 2.) Source: Neelie Kroes Speech, Digital technology and copyright can fit together, available at The FTC-Google Settlement February 13, :15 PM Eastern UPCOMING PROGRAMS Panelists will discuss the FTC s investigation into certain of Google s business practices, including those related to its search, search advertising, and mobile businesses. Panelists include the lead Staff Attorney at the FTC and co-lead counsel to Google on the investigation. IP Fundamentals for Antitrust Attorneys February 22, 2013 Noon-1:15 PM Eastern In this first of a two-part series of joint programs hosted by the ABA Section of Antitrust Law and the ABA Section of Intellectual Property Law panelists will cover the fundamentals of intellectual property law for antitrust attorneys. Panelists will explore such matters as the basics of patent, copyright, and trademark law, including how you determine the bounds of a patent right, what is claim construction, what is functional language and why are software patents so controversial, what rights do copyrights and trademarks provide, and what is the difference -7-

8 between the ITC and federal court. Panelists will also discuss the implications for antitrust law, including reverse payments, sham litigation, and standard-setting. The Fundamentals of Hot Topics in Antitrust-IP March 13, 2013 Noon-1:15 PM Eastern Panelists will explore the fundamentals of current hot topics at the intersection of antitrust and intellectual property law. Topics will include the new joint DOJ and USPTO Policy Statement on remedies for FRAND-encumbered standards-essential patents, reverse payments, patentassertion entities, and the FTC s recent consent decrees in Bosch and Google. Patent Injunctions for Standardized Technology: Update on Antitrust Debate March 20, 2013 Noon-1:15 PM Eastern The patent wars among tech companies, especially in the smartphone industry, has led to a debate about whether antitrust law should prohibit owners of standard-essential patents (SEPs) from seeking injunctions where those owners commit to license their SEPs on fair, reasonable and nondiscriminatory terms or FRAND terms. Should antitrust law impose a no injunction rule and, if so, on what basis? Are injunctions ever justified? International Licensing Issues April 23, :00-1:15 PM Eastern In this third program of a series of joint programs hosted by the Intellectual Property and International Committees, panelists will explore licensing issues in Brazil, Canada, the EU, and the U.S. Panelists from the FTC, the EC, and private practice, including a former enforcer from CADA, will provide an overview of existing law and discuss new developments such as the EC s current review of its Technology Transfer Block Exemption Regulation and Guidelines. The program will also include hypothetical questions aimed at providing a comparative analysis of the different jurisdictions. -8-

9 A special thanks to Debbie Bellinger and Ian Horkley for their weekly contributions to tidbits. -9-