The Perils of Being ‘Half-Committed’ to FRAND
“[A]ffirmative defenses go to the issue of liability, whereas damages assume liability and consider appropriate compensation for such liability …. As such, considering FRAND-based defenses, if they were to exist, at the damages phase, is confusing.”
Earlier this year, a jury trial was held in the matter of G+ Communications, LLC v. Samsung Electronics Co., Samsung Electronics America, Inc., Case No: 2:22-CV-00078-JRG (E.D. Texas). Pursuant to the jury’s verdict, two of the three patents asserted were found to be infringed by Samsung, and compensation was awarded to G+ in the amount of $45 million for one patent and $22.5 million for the other. The verdict further indicated these amounts were running royalties as opposed to lump sum royalties. Additionally, the jury found G+ had not “breached its [fair, reasonable and non-discriminatory] FRAND obligation by failing to offer a license to the Asserted Patents to Samsung that was fair, reasonable, and non-discriminatory, and by failing to act in good faith regarding negotiations with Samsung as to a FRAND license covering the Asserted Patents.”
Following this outcome, Samsung sought a new trial on damages, which the District Court for the Eastern District of Texas ordered given the court had “material concerns about jury confusion regarding the form of the reasonable royalty awarded [therein] – i.e., that the jury may have awarded damages in the form of a running royalty when it intended to award them as a lump sum.” One factor influencing the court’s decision was the fact that, if the amounts awarded were running royalties, the effective per-unit royalty rate for one of the patents would exceed the per-unit amount G+ requested at trial.
G+’s Motion Prior to the New Trial on Damages
Prior to the new trial on damages, G+ brought a Motion to Enforce Issue and Claim Preclusion that G+’s Damages Request Does Not Violate FRAND and to Preclude Introduction of Settlement Offers. Specifically, G+’s motion sought to prohibit Samsung from the following:
- Arguing that G+’s damages request violates FRAND;
- Introducing the terms of G+’s settlement offers; and
- Alleging that a FRAND obligation attaches to the patents unless Samsung concedes the patents are essential.
A ruling on G+’s motion is set forth in a MEMORANDUM OPINION AND ORDER dated April 12, 2024.
With respect to the first aspect of its motion, G+ ’s wanted Samsung to be precluded from arguing G+’s damages request violates FRAND because of the jury’s finding that G+ had not breached its FRAND obligation. In denying G+’s motion, the court held that “[w]hether or not G+’s damages request in the re-trial is consistent with a FRAND royalty is a live issue…”, adding that “[t]he Court will not speculate that the jury’s answer…–related to Samsung’s cause of action for breach of contract–is also a silent determination that G+’s full damages request in this litigation is FRAND.”
One may wonder how, exactly, is FRAND a live issue when it comes to the issue of damages for patent infringement and why must G+’s damages request be FRAND? Recall, in the matter of Optis Wireless Technology, LLC et al. v. Apple Inc., Civil Action No. 2:19-cv-00066-JRG (E.D. Texas), Judge Rodney Gilstrap explained that the “Federal Rules of Civil Procedure 8(c)(1) identifies “license,” “release,” and “waiver” as affirmative defenses” (See Opinion and Order as to Bench Trial Together with Supporting Finds of Fact and Conclusions of Law). Assuming, for sake of argument, that Samsung’s rights under G+’s contract with the European Telecommunications Standards Institute (ETSI) somehow include the right to FRAND licenses, the unexercised rights of third-party beneficiaries of contractual obligations is no defense to infringement. A better way to look at the obligation owed to Samsung, however, as reflected in the verdict form presented to the jury, is that Samsung was entitled to receive a FRAND offer and have G+ negotiate in good faith. Given G+ did not breach its obligations, Samsung apparently did exercise its rights and, by choosing not to accept the offer, had no defense to infringement. Taking a step back, we note that affirmative defenses go to the issue of liability, whereas damages assume liability and consider appropriate compensation for such liability (as is reflected in the G+ v. Samsung verdict form which instructs the jury to only answer compensation questions regarding those patents found infringed). As such, considering FRAND-based defenses, if they were to exist, at the damages phase, is confusing.
Even if there had been a breach of such an obligation by G+, which there was not, shouldn’t damages for breach be assessed in accordance with contract law principles, as was done in Microsoft Corp. v. Motorola, Inc., 795 F.3d 1024, 1040 (9th Cir. 2015), instead of comingling with the issue of patent damages? For example, if a reasonable royalty for infringement in the absence of a license was found to be $1/unit, but the FRAND rates was $0.75/unit, a court could award the $1/unit in damages to the patent owner and, assuming the patent owner breached its contractual obligation by not making a FRAND offer or refusing to negotiate in good faith, and award $0.25/unit in contract damages to the infringer. Notably, the United States Court of Appeals for the Fifth Circuit in HTC Corp. et al. v. Telefonaktiebolaget LM et al. found that patent damages law was inapplicable to a breach-of-FRAND claim (as we wrote about here). Stands to reason the inverse should also be true (i.e. that a breach-of-FRAND claim is in applicable to patent damages law… especially when there is no breach). Coming back to G+ and Samsung, the MEMORANDUM OPINION AND ORDER notes Samsung’s contention that “G+ is improperly conflating the issue of G+’s alleged contractual breach of FRAND relating to prior licensing offers and negotiations (not at issue in the re-trial) with the issue of whether G+’s damages request in this litigation is non-FRAND.” Respectfully, in our view, Samsung is the one improperly conflating patent and contract law issues.
Judge Gilstrap also referenced Samsung’s argument that “because a FRAND obligation attaches to the Asserted Patents, ‘Samsung is entitled the opportunity to contrast [G+’s] damages ask at trial with FRAND rates in comparable licenses so that the jury can assess whether [G+’s] damages ask is consistent with its obligation to license on FRAND terms.’” This statement is hard to reconcile with the court’s prior rulings that Samsung’s irrevocability arguments were “untenable” and that “[i]t is both practical and logical that the obligations of a party acting in good faith be suspended when a counterparty to a negotiation for a FRAND license is acting in bad faith” (which we wrote about here). Shouldn’t Samsung’s refusal to obtain a license, in the absence of G+ breaching its obligations to make a FRAND offer and negotiate in good faith, warrant suspension of the obligation, at least with respect to past infringement? Speaking of which, we would be remiss to not point out that the declaration used by the ETSI refers to “licenses” (i.e. permission to do something in the future), not “releases” for past infringement in the absence of a license (as we explored in detail here). In any event, whether or not the obligation attaches to the patents, is irrevocable, and/or was not suspended, does not convert the ETSI contract into a defense to patent infringement.
With respect to the second aspect of the motion, Judge Gilstrap rejected G+’s contention that “because ‘[b]reach of FRAND is no longer in issue in this case…” the prior licensing offers of the parties “should not be admissible at the upcoming damages trial”, and agreed with Samsung that that the offers “serve a probative purpose” and could, therefore, be “presented in redacted form to show the practice in the industry in FRAND licensing negotiations, including the specific practices of the parties.” For example, such a purpose could include showing that G+ treated all its patents as being of equal value, and that “… Samsung seeks a lump sum structure in licensing patents and relies on a market comparables approach for valuation.”
Regarding the third aspect of the motion, Judge Gilstrap once again sided with Samsung and rejected G+’s contentions that “Samsung should not be allowed to argue that damages in this case should be limited by any FRAND obligation unless it concedes that the patents are essential” and that “[i]f Samsung is permitted to change course and argue the patents are essential, then G+ should be permitted to present damages for all Samsung 5G standard products, which will dramatically increase the damages base.” But given essentiality is a condition to the obligation set forth in the ETSI contract, one might wonder why Samsung should be entitled to FRAND treatment if not accepting the condition has been met (see here for additional color on this point).
Much like the court’s ruling on the first aspect of the motion, the rulings regarding the second and third aspects similarly rest on the problematic assumption that FRAND related contract issues are somehow relevant to patent damages, even in the absence of any breach by the patent owner (to justify offsetting patent damages with damages for breach of contract) or any acceptance of essentiality by the infringer.
Playing Fast and Loose with FRAND
Even though Judge Gilstrap found FRAND not to be in issue in the Optis Wireless Technology, LLC et al. v. Apple Inc. ruling referred to above (given Apple failed to raise a FRAND based counterclaim or affirmative defense), a new trial on damages was ordered on account of the court in that case being “persuaded that the FRAND-compliance of the damages awarded by the jury has legitimately been called into question.” As we noted in an article at the time, raising many of the same questions raised herein, one factor influencing court’s decision was, in Judge Gilstrap’s words, “both sides play[ing] fast and loose with the FRAND issue before the jury for their own strategic reasons.”
Reminiscent of that decision, Judge Gilstrap highlighted, with respect to third aspect of G+’s motion, that although G+ sought to argue FRAND was not at issue, “G+ fully embraced the essentiality of the Asserted Patents at trial, including the FRAND encumbrance associated with these patents.” Further, Judge Gilstrap noted that “the only damages models discussed at trial related to FRAND-based damages.” G+ seeking to increase the damages base by forcing Samsung to concede essentiality, notwithstanding it “dropped certain accused products on the eve of trial of its own volition”, seems to have particularly irked Judge Gilstrap who stated “[t]o allow G+ to reverse course and, for the very first time, now argue that it is entitled to seek non-FRAND damages would be wholly inappropriate and improper.”
While we have often written about implementers wanting their FRAND cake and to eat it too, this decision highlights the perils of patent owners being similarly half-committed to FRAND.
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