Federal Circuit to Judge Posner: eBay Analysis Is a Must

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The U.S. Court of Appeals for the Federal Circuit (in a case that attracted a dozen amici briefs) affirmed a district court ruling by Circuit Judge Posner (sitting by designation) that the holder of the FRAND-encumbered SEP patent in this case was not entitled to injunctive relief, but insisted that there is no per se rule covering such patents and that an eBay analysis is nevertheless required.

In Depth

In a closely watched case involving a high profile circuit court judge sitting (by designation) at trial and raising the hot button issue of whether the holder of a fair, reasonable and non-discriminatory terms, or FRAND-encumbered standard essential patent (SEP) was in essence barred from seeking injunctive relief, the U.S. Court of Appeals for the Federal Circuit (in a case that attracted a dozen amici briefs) affirmed Judge Posner’s ruling that the holder of the FRAND-encumbered patent in this case was not entitled to injunctive relief, but insisted that an eBay analysis is nevertheless required. Apple, Inc. et al. v. Motorola, Inc., et al., Case No. 12-1548; -1549 (Fed. Cir. April 25, 2014) (Reyna, J.) (Rader, C. J., dissenting in part) (Prost, J., concurring in part; dissenting in part).

Apple and Next Software (Apple) sued Motorola and Motorola Mobility (Motorola), asserting infringement of 15 patents. Motorola counterclaimed, asserting six of its own patents. Judge Posner, sitting by designation, short-circuited a jury trial by granting summary judgment as to all claims on grounds of non-infringement (in view of his construction of certain claim terms) and on grounds of insufficient evidence to show damages or the right to injunctive relief (the latter in view of his earlier decision to exclude the vast majority of both parties’ damages expert evidence). Judge Posner also suggested that Motorola was precluded from injunctive relief on its FRAND-encumbered SEP (IP Update, Vol. 15, No. 7).

Both parties appealed. On appeal, the Federal Circuit considered the issues of claim construction, the sufficiency of expert damage reports to show entitlement to a statutory “reasonable royalty” and whether the parties’ claims for injunctive relief were properly denied under eBay.

Means-Plus-Function Claim Element and “Inherent” Structure

With regard to one of the Apple patents in suit, the Federal Circuit explained that Judge Posner committed error as to certain means-plus-function claim limitations. The patent is directed to controlling a touchscreen device with finger gestures. The claims recited reading a user’s finger gestures using “heuristics” (rules) to determine commands for the device:

a vertical screen scrolling heuristic for determining that the one or more finger contacts correspond to a one-dimensional vertical screen scrolling command rather than a two-dimensional screen translation command based on an angle of initial movement of a finger contact with respect to the touch screen display.

Judge Posner determined that notwithstanding the absence of the term “means,” the claim limitation was nonetheless a “means-plus-function” claim element, the function of the heuristic being the “determining” term.

Writing for the majority, Judge Reyna disagreed, finding that Motorola had failed to rebut the “strong presumption” that, as here, claims are not means-plus-function claims when the term “means” is not used. Rather, Reyna explained that the term “heuristic” has an inherent structure and meaning to one of ordinary skill in the art that prevents its treatment as a means-plus-function claim term.

On this issue, Judge Prost, in dissent, argued that the majority wrongly conflated the two-step means-plus-function claim analysis into a single step. Rather than first determining whether the claimed “heuristic” term was a means-plus-function claim element, then determining whether there was sufficient corresponding structure for the claimed function, Prost argued that the majority simply looked for sufficient corresponding structure. In Prost’s opinion, the term “heuristic” is a “vague concept that does not connote known, physical structure.” Prost did however, disagree with Judge Posner’s identified corresponding structure to the claimed function, finding it too limiting given the abundance of disclosure in the specification regarding finger gestures and related “heuristics.”

The Bar for Admissibility of Damages Testimony

The Federal Circuit next addressed whether the parties’ damages experts’ testimony was sufficient to show a reasonable royalty. Judge Posner had excluded each parties’ expert on damages, and granted summary judgment against most of the parties’ claims, concluding that neither was entitled to receive any damages.

The Federal Circuit reversed, finding that insofar as certain Apple patents were concerned, Judge Posner’s erroneous claim construction “alone, would require reversal and remand because the erroneous claim construction tainted the district court’s damages analysis.”

The court also concluded that Judge Posner failed to consider the full scope of the expert opinions, explaining that rather than focusing on the reliability of the principles and methods used or the sufficiency of the facts and data relied upon, the district court substituted its own opinion. As an example, one of Apple’s experts isolated the value of finger gestures used in an Apple “Trackpad” product to estimate the value of the figure gesture heuristics, an analysis that the district court found inadequate: “The fact that many consumers will pay more for a Magic Trackpad than for a mouse tells one nothing about what they will pay to avoid occasionally swiping unsuccessfully because their swiping finger wasn’t actually vertical to the screen.”

The Federal Circuit explained that the district court erred when it focused on just the heuristic limitation because the “proper inquiry evaluates the expert’s methodology in view of the full scope of the infringed claims.” Here, the court found that the methodology used by Apple’s damages expert was “the product of reliable principles and methods.” The expert had attempted to isolate the value of the claimed features in an existing commercial product; relied on technical expert testimony; compared the computed reasonable royalty to related licenses; and addressed the possibility of removing the asserted features from the accused devices. The court concluded that such methodology and testimony was admissible. The Federal Circuit faulted Judge Posner for acting as both the gate-keeper and the fact-finder, when he should be only the gate-keeper:

Whether [Apple’s expert’s] testimony was the product of reliable principles and methods is the focus of admissibility; whether the testimony produced a correct degree of estimation of the value of the … patent is a factual consideration reserved for the fact finder. Here, the district court resolved admissibility based upon its own view on the correct estimate of value for the … patent, a question that should have been reserved for the jury.

While Judge Prost concurred with the majority’s reversal of the exclusion of Apple’s expert’s testimony, she agreed with the district court that use of the Magic Trackpad to calculate the value of the claimed functionality was unreliable because that product was not a sufficiently comparable benchmark, “as even Apple concedes, the Trackpad contains none of the function asserted from the … patent.” According to Prost, this established a “highly questionable” starting point for a damages analysis—one that was properly excluded.

In connection with a different Apple patent, the district court excluded Apple’s damages expert’s testimony because that expert had relied on the testimony of Apple’s technical expert in forming his opinions. The district court’s concern was that one Apple expert relying on another Apple expert created unfair bias. The Federal Circuit reversed, finding that, “[e]xperts routinely rely upon other experts hired by the party they represent for expertise outside of their field.” Any bias in the damages calculations should be addressed by the jury, i.e., deciding what weight should be given to such testimony and the testimony of the other expert relied on. “To the extent bias exists, cross-examination and the testimony of an opposing expert may be used to expose it. … The issue is one of evidentiary weight and not admissibility.”

For another of Apple’s patents, the district court excluded Apple’s damages testimony, and granted summary judgment that Apple was not entitled to any damages (not even a nominal reasonable royalty) for lack of evidence—even though Motorola had conceded infringement.

The Federal Circuit reversed, explaining that under 35 U.S. C. § 284, unless the evidence shows otherwise, the damages amount cannot be zero: “Finding that a royalty estimate may suffer from factual flaws does not, by itself, support the legal conclusion that zero is a reasonable royalty.” Rather, a court must award damages “in no event less than a reasonable royalty.” Thus, where infringement is found, the jury is required to determine what royalty is supported by the record, even if the amount is nominal. As the court explained, an award of zero damages is appropriate only when the record in fact supports a zero royalty award. But here, the court explained, Apple had presented evidence that the patent features held value because it showed consumer demand for the claimed features that would have taken Motorola months to design around.

As for Motorola’s patent damage position, after the district court excluded all of Motorola’s proposed damages testimony, it granted Apple’s motion for summary judgment that Motorola was entitled to no damages. While the Federal Circuit affirmed the exclusion of one of Motorola’s experts, a licensing expert who admitted he “knew nothing” about the patent and that he had chosen an arbitrary licensing rate not tied to the claimed invention, it reversed as to the remainder of Motorola’s damages testimony.

That remaining testimony included a reasonable royalty analysis of license agreements between Motorola and “all of the major” cellular phone makers in the United States, except for Apple. All of the license agreements treated the patent as an SEP—one of many such patents in Motorola’s standard-essential patent portfolio. The expert’s approach was to separate the value of the patent in issue from the total value of the portfolio and then analyze the design around value for not using certain cellular network types covered by the patent. This methodology was found sufficiently reliable to be admitted. The Federal Circuit explained that the district court “failed to recognize that [Motorola’s expert] did construct a cost estimate typically relied upon when calculating patent damages—the cost to license the technology.” Whether the “licenses are sufficiently comparable such that Motorola’s calculation is a reasonable royalty goes to the weight of the evidence, not its admissibility.”

Injunctions: It’s All About eBay

The court next addressed whether Apple was entitled to an injunction for any of its patents, and whether Motorola was entitled to an injunction for its patent, even though it was standard essential.

The Federal Circuit first vacated the district court’s grant of summary judgment against Apple’s request for an injunction on the basis of its reversal of the claim constructions for those patents.

On this issue Judge Prost dissented, arguing that the first eBay injunction factor—irreparable harm—was sufficiently dispositive, and so, would have affirmed the district court’s grant of summary judgment, denying Apple an injunction. In Prost’s opinion, Apple failed to show sufficient evidence to establish a causal nexus between consumer demand and infringement of the claimed features, which was required to meet the “irreparable harm” prong of the eBay test.

Turning to Motorola’s request for injunction, the Federal Circuit affirmed the district court’s grant of summary judgment against Motorola. However, the court noted that the district court erred to the extent it applied a per se rule finding no injunction would lie for any FRAND-encumbered SEP. As the court explained, such a rule ignores the analysis mandated by eBay, explaining that even a FRAND-encumbered SEP may possibly be the basis for an injunction under eBay, such as where the “infringer unilaterally refuses a FRAND royalty or unreasonably delays negotiations to the same effect.” However, the court recognized that such occurrences would likely be rare.

Judge Rader, dissenting on this issue, argued that there was enough evidence in the record to support the conclusion that Apple was unwilling to license Motorola’s SEP patents and that Motorola should have been afforded an opportunity to prove that at trial.

Judge Prost, while concurring in the judgment, dissented as to the circumstances under which an injunction might be appropriate when a FRAND-encumbered SEP is at issue. Rather than look to when an “infringer unilaterally refuses a FRAND royalty or unreasonably delays negotiations to the same effect,” in Prost’s view “an injunction might be appropriate where, although monetary damages could compensate for the patentee’s injuries, the patentee is unable to collect the damages to which it is entitled.”

Practice Note: eBay remains the test for injunctive relief and any request for an injunction must include an eBay analysis, even for FRAND-encumbered SEPs. In other words, there is no per se rule. But to prevail in a request for injunctive relief, an SEP owner will be required to prove that the alleged “infringer unilaterally refuses a FRAND royalty or unreasonably delays negotiations to the same effect.” It may be possible to address the issue as suggested by Judge Prost, i.e., by establishing that “although monetary damages could compensate for the patentee’s injuries, the patentee is unable to collect the damages to which it is entitled,” but whether that will ultimately attract a panel majority is an issue for another day.