What the Latest Optis Wireless v. Apple Ruling Means for Patent Infringement Damages for SEPs

In a previous article, we considered the difference between a reasonable royalty for infringement of a U.S. patent and a fair, reasonable and non-discriminatory (FRAND) rate for licensing standards essential patents (SEPs). Among other points, the article discussed the then ongoing case between Optis Wireless Technology, LLC et al. v. Apple Inc., Civil Action No. 2:19-cv-00066-JRG (E.D. Texas, September 10, 2020). Most recently, Judge Rodney Gilstrap issued an Opinion and Order as to Bench Trial Together with Supporting Findings of Fact and Conclusions of Law (“Opinion and Order”) and ordered Final Judgment be entered. This Opinion and Order sheds a little more light on the issue of damages for SEPs, including the role of exemplary damages for willful infringement, but also leaves some key questions unanswered.

Complaint and Motions to Dismiss

In Optis’ First Amended Complaint, Optis sought, in “Count VIII” thereof, a declaratory judgment that the Plaintiffs have not violated FRAND or competition law (see Judge Gilstrap’s Findings of Fact (“FF”) [FF3] and [FF10]). Prior to answering, Apple filed a Motion to Dismiss Count VIII for Lack of Subject Matter Jurisdiction, which the Court granted to the extent Count VIII sought a declaration with respect to foreign laws, foreign patents or any FRAND defense Apple may raise in a foreign jurisdiction (see [FF11]), but denied with respect to U.S. patents and U.S. law. The Court noted, however, that “[w]hether or not Plaintiffs can prove these allegations in a manner sufficient to allow this Court to issue declaratory relief is a separate issue more appropriate analyzed under Rule 56 or at trial.” Foreshadowing the ultimate demise of Count VIII, the Court added that it “remains under a ‘continuing obligation to examine the basis of [its] jurisdiction’ and will not issue an advisory opinion if it becomes clear that there is no justiciable controversy before the Court.” (see [FF12]).

Apple brought another Motion to Dismiss Count VIII for Lack of Subject Matter Jurisdiction at a later date, the briefing for which is largely redacted, but instead of ruling on this motion, Judge Gilstrap ordered the patent infringement claims be tried before the jury without any reference being made to FRAND issues, and that FRAND issues be tried to the bench thereafter.

Jurisdiction to Decide FRAND Issues Declined, but Apple’s FRAND Challenge Also Waived

Because Optis only ever offered global licenses, and never made Apple an offer with respect to just its U.S. Patents, the Court concluded that it could not “issue a declaratory judgment to render an advisory opinion on what the law would be upon a hypothetical set of facts.” (see Judge Gilstrap’s Conclusions of Law (“CL”) [CL1], [CL4] and [CL7]). The Court further rejected Optis’ attempts to derive a U.S. rate from its global offers, characterizing such attempts as a “post hoc slight [sic] of hand”. As a result of the Court’s refusal to exercise jurisdiction, Optis’ argument that Apple could not raise a FRAND defense because of its conduct during negotiations, which was intertwined with Claim VIII, also died on the vine (regarding this argument see Apple Inc.’s Proposed Findings of Fact and Conclusions of Law, page 127, paragraph CL69).

In response to Apple’s objection that the jury verdict was not FRAND (see Apple Inc.’s Proposed Findings of Fact and Conclusions of Law, page 122, paragraph CL55: “The $506.2 million in damages awarded by the jury is not FRAND”), however, the Court ruled that Apple had waived its right to challenge the jury verdict as inconsistent with Optis’ FRAND obligations because Apple did not raise any counterclaim regarding Optis’ FRAND obligations, nor any affirmative FRAND based defenses (see Opinion and Order [CL8] – [CL11]). Specifically, the Court noted that because Apple did not raise any such counterclaims or affirmative defenses the only FRAND issue presented was in Optis’ Count VIII which the Court ruled, without objection by Apple, be tried to the bench. As such, the Court ruled that it would be unfair to allow Apple to now challenge the verdict on the basis that the jury was not made aware of any FRAND issues. In one of the more humorous legal footnotes the Court added the following: “Having silently watched the parade pass it by, Apple cannot now complain that the parade didn’t stop on its own to entertain them.” (see Opinion and Order [CL12] – [CL13]).

In another footnote to the Opinion and Order [CL12], the Court speculated as to motivation for Apple’s strategy, namely keeping allegations of bad faith or holdout from the jury:

Although present and before the Court, Apple failed to object to this ruling. While the Court can only speculate as to Apple’s motivation for its failure to seek to put FRAND issues in front of the jury, it is worth noting that Optis’s Count VIII intertwined Optis’s own purported FRAND compliance with various allegations of bad acts and bad faith by Apple. Optis itself noted that “the issue of bad faith would only be tried to the jury if Apple said [Optis was] required to make a FRAND damages request and that [Optis’s] request is not FRAND damages. Other than that, it would not be tried to a jury. It’d be tried to the bench.” (Dkt. No. 435 at 54:12–16.) By acquiescing in Optis’s request that Count VIII be tried to the bench, the serious allegations of bad faith or holdout by Apple would not be presented to the jury. (Id. at 56:25–57:4, 62:8–13.) Apple’s strategic silence at this juncture effectively shielded them from any bad faith evidence being presented to the jury. In light of their silence and failure to oppose Optis’s bench trial request, it would be a particularly unfair, given the jury’s verdict for Optis, for Apple to now argue that FRAND issues should have been presented to the jury.

What Does This Mean with Respect to Damages for SEPs?

Even though the Court did not decide whether Apple could lose its rights to raise FRAND defenses on account of bad faith or holding out, the Court’s approach of keeping FRAND issues from the jury, coupled with its refusal to reconsider the jury’s verdict, resulted in supra-FRAND damages being awarded for the SEPs at issue (at least according to Apple). Presumably, this means that there is no inherent FRAND limitation on SEP damages, but rather that the burden is on those seeking the protections of FRAND declarations to raise related counterclaims or affirmative defenses if seeking to limit damages or other remedies. With respect the notion of FRAND placing “an additional contractual limitation on damages”, the Court noted the following in a footnote to [CL10]:

Any claim by Apple as to the protection of the FRAND commitment by Optis and its predecessors would require affirmative findings, including whether ETSI and Samsung, LG, and Panasonic intended for Apple to be a third-party beneficiary to the FRAND commitment. Cf. First Bank v. Brumitt, 519 S.W.3d 95, 102 (Tex. 2017) (“An exception to this general rule” that only a party to a contract can sue for breach “permits a person who is not a party to the contract to sue for damages caused by its breach if the person qualifies as a third-party beneficiary.”); TCT Mobile Europe, et al. v. Koninklijke Philips NV, 19/02085, 352J-W-B7DCPCIX (Civil Court of Paris) (Feb. 6, 2020) (noting that a FRAND commitment may be viewed as a “stipulation pour autrui,” a French law covenant benefiting a third party that could be enforced by the third party.). Without any affirmative claim for relief by Apple, neither the Court nor the jury performed any analysis as to the issues undergirding the FRAND commitment.

Notably, this result seems to be in direct conflict with Judge Bataillon’s statement in Godo Kaisha IP Bridge 1 v. TCL Communication Technology Holdings Limited et al., Civ. No. 15-634-JFB (Delaware, April 24, 2019) that “[a] SEP patent must be licensed at a fair, reasonable and nondiscriminatory rate” (emphasis added), which statement was made in response to IP Bridge’s argument that the jury’s verdict, and an award of ongoing royalties, should be tripled to account for TCL holding out.

The Texas Court took mercy on Apple in its Final Judgment Order, however, concluding that, despite the jury’s finding of willfulness, the damages award would not be enhanced. Specifically, the Court noted that enhancement of damages is generally reserved for “egregious cases of culpable behavior”. Unfortunately, given the redactions to the pleadings and motion materials in this case, it is impossible to determine what conduct of Apple’s the Court felt did not rise to the level of egregiousness.

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