MICROSOFT CORPORATION, a Washington corporation, Plaintiff-Appellee,
MOTOROLA, INC.; MOTOROLA MOBILITY, INC.; GENERAL INSTRUMENT CORPORATION, Defendants-Appellants
Argued and Submitted, April 8, 2015, San Francisco, California
Appeal from the United States District Court for the Western District of Washington. D.C. Nos. 2:10-cv-01823-JLR, 2:11-cv-00343-JLR. James L. Robart, District Judge, Presiding.
The panel affirmed the district court's judgment in favor of Microsoft Corporation in an action brought by Microsoft, a third-party beneficiary to Motorola, Inc.'s reasonable and non-discriminatory (" RAND" ) commitments, alleging Motorola breached its obligation to offer RAND licenses to certain of its patents in good faith.
At issue in the appeal were two patent portfolios, formerly owned by Motorola, both of which were subject to RAND agreements. The court previously upheld, in an interlocutory appeal, an anti-suit injunction preventing Motorola from enforcing in a German action any injunction it might obtain against Microsoft's use of certain contested patents. Microsoft Corp. v. Motorola, Inc., 696 F.3d 872 (9th Cir. 2012). Following that prior decision, a jury determined that Motorola had breached its RAND good faith and fair dealing obligations in its dealings with Microsoft.
The district court conducted a bench trial to determine a RAND rate and range for Motorola's patents. The case then proceeded to a jury trial on the breach of contract claim, and the jury returned a verdict for Microsoft in the amount of $14.52 million. The district court denied Motorola's motions for judgment as a matter of law.
The panel held that this court had jurisdiction. The panel held that this court's exercise of jurisdiction over the case in the prior interlocutory appeal, and the Federal Circuit's decision to transfer the instant appeal to this court because this court had jurisdiction, were both law of the case. The panel further held that the earlier jurisdictional determinations were not clearly erroneous.
The panel rejected Motorola's two merits challenges to the RAND bench trial, specifically, that the district court lacked the legal authority to decide the RAND rate issue in a bench trial, and that the RAND rate analysis was contrary to Federal Circuit precedent. First, the panel did not consider whether, absent consent, a jury should have made the RAND determination, because Motorola was aware that the RAND determination was being made to set the stage for the breach of contract jury trial, nor did Motorola ever withdraw its affirmative stipulation to a bench trial for that purpose. Second, the panel held that the district court's RAND analysis did not violate Federal Circuit patent damages law because this was not a patent law action. The panel held, however, that the district court's analysis properly adapted the Federal Circuit's patent law methodology as guidance in this contract case concerning the questions of patent valuation. The panel concluded that the district court's RAND determination was not based on a legal error or on a clearly erroneous view of the facts in light of the evidence.
Concerning the jury trial and verdict, the panel held that the record provided a substantial basis on which the jury could have based a verdict favoring Microsoft.
Concerning the motion for judgment as a matter of law, the panel rejected Motorola's two challenges to the damages sought for attorneys' fees and litigation costs incurred in defending the injunctive actions. First, Motorola raised the Noerr-Pennington doctrine, which shields individuals from, inter alia, liability for engaging in litigation. The panel noted that the doctrine does not immunize a party from actions that amount to a breach of contract. The panel held that enforcing a contractual commitment to refrain from litigation does not violate the First Amendment. The panel further noted that the jury concluded that seeking injunctive relief violated Motorola's contractual RAND obligations. The panel concluded that the Noerr-Pennington doctrine did not immunize Motorola from liability for that breach of its promise. Second, Motorola alleged that Microsoft was not entitled to attorneys' fees as damages under Washington law. The panel held that where a party's injunctive actions to enforce a RAND-encumbered patent violated the duty of good faith and fair dealing, Washington courts would allow the damages awarded to include the attorneys' fees and costs expended to defend against the injunction action.
Finally, the panel rejected Motorola's allegations that the district court abused its discretion in making two evidentiary rulings. First, concerning RAND rates and ranges submitted to the jury, the panel held that Motorola consented to admission of the facts underlying the RAND rates and ranges to the jury. The panel agreed with the district court that Motorola's consent to the RAND bench trial encompassed introducing the court's findings of fact to the jury in the breach of contract trial. Second, Motorola objected to the admission of evidence of a Federal Trade Commission investigation into Motorola's enforcement policies, including its seeking of injunctions. The panel held that the district court did not abuse its discretion in admitting the evidence because the danger of prejudice in admitting limited testimony about the FTC investigation did not so manifestly outweigh the testimony's probative value.
Kathleen M. Sullivan (argued), Quinn Emanuel Urquhart & Sullivan, LLP, New York, New York; Brian C. Cannon, Quinn Emanuel Urquhart & Sullivan, LLP, Redwood Shores, California, for Defendants-Appellants.
Carter G. Phillips (argued), Sidley Austin LLP, Washington, D.C.; David T. Pritikin, Sidley Austin LLP, Chicago, Illinois; Arthur W. Harrigan, Jr., Calfo Harrigan Leyh & Eykes LLP, Seattle, Washington; T. Andrew Culbert, Microsoft Corporation, Redmond, Washington, for Plaintiff-Appellee.
Wayne P. Sobon, Arlington, Virginia, and and for Amicus Curiae American Intellectual Property Law Association.
Richard S. Taffet, Bingham McCutchen LLP, New York, New York; Patrick Strawbridge, Bingham McCutchen LLP, Boston, Massachusetts; Stephanie Schuster, Bingham McCutchen LLP, Washington, D.C., for Amicus Curiae Qaulcomm Incorporated.
Xavier M. Brandwajn, Alston and Bird LLP, East Palo Alto, California, for Amici Curiae Nokia Corporation and Nokia USA Inc.
Charles Duan, Washington, D.C., as and for Amicus Curiae Public Knowledge.
Mark S. Davies, Orrick, Herrington & Sutcliffe LLP, Washington, D.C.; Christopher J. Cariello, Orrick, Herrington & Sutcliffe LLP, New York, New York, for Amicus Curiae Apple Inc.
Lauren B. Fletcher, William F. Lee, Joseph J. Mueller, Timothy D. Syrett, Wilmer Cutler Pickering Hale and Dorr LLP, Boston, Massachusetts; James L. Quarles III, Brittany Blueitt Amadi, Wilmer Cutler Pickering Hale and Dorr LLP, Washington, D.C.; Matthew R. Hulse, Intel Corporation, Santa Clara, California, for Amici Curiae Intel Corporation, Aruba Networks Inc., Dell Inc., Hewlett-Packard Company, Newegg Inc., SAS Institute Inc., VIZIO, Inc., and Xilinx, Inc.
Robert F. Krebs, Ronald F. Lopez, Karl Belgum, Nixon Peabody, LLP, San Francisco, California, for Amicus Curiae Sierra Wireless Inc.
Christy G. Lea, Knobbe, Martens, Olson & Bear, LLP, Irvine, California; Christopher C. Kennedy, Knobbe, Martens, Olson & Bear, LLP, Washington, D.C.; Mauricio A. Uribe, Knobbe, Martens, Olson & Bear, LLP, Seattle, Washington; Alice C. Garber, John J. Murphy, T-Mobile USA, Inc., Bellevue, Washington, for Amicus Curiae T-Mobile USA, Inc.
Before: Sidney R. Thomas, Chief Judge, and J. Clifford Wallace and Marsha S. Berzon, Circuit Judges.
BERZON, Circuit Judge
We live in an age in which the interconnectivity of a wide range of modern technological products is vital. To achieve that interconnection, patent-holders often join together in compacts requiring licensing certain patents on reasonable and non-discriminatory (" RAND" ) terms. Such contracts are subject to the common-law obligations of good faith and fair dealing.
At issue in this appeal are two patent portfolios, formerly owned by Appellants Motorola, Inc., Motorola Mobility, Inc., and General Instrument Corp., (" Motorola" ), both of which are subject to RAND agreements. Appellee Microsoft, a third-party beneficiary to Motorola's RAND commitments, sued Motorola for breach of its obligation to offer RAND licenses to its patents in good faith. Motorola, meanwhile, brought infringement actions in a variety of fora to enjoin Microsoft from using its patents without a license.
We previously upheld, in an interlocutory appeal, an anti-suit injunction preventing Motorola from enforcing in a German action any injunction it might obtain against Microsoft's use of certain contested patents. Microsoft Corp. v. Motorola, Inc., 696 F.3d 872 (9th Cir. 2012) (" Microsoft I " ). We did so after determining that there was, in the " sweeping promise" of Motorola's RAND agreements, " at least arguably a guarantee that the patent-holder will not take steps to keep would-be users from using the patented material, such as seeking an injunction, but will instead proffer licenses consistent with the commitment made." Id. at 884.
After our decision, a jury determined that Motorola had indeed breached its RAND good faith and fair dealing obligations in its dealings with Microsoft. In this appeal, we address (1) whether the district court overstepped its bounds by determining, at a bench trial preceding the jury trial on breach of contract, a reasonable and non-discriminatory rate, as well as a range of rates, for Motorola's patents; (2) whether the court erred in denying Motorola's motions for judgment as a matter of law on the breach of contract issue; (3) whether the court erred in awarding Microsoft attorneys' fees as damages in connection with Motorola's pursuit of injunctions against infringement; and (4) whether the district court abused its discretion in two contested evidentiary rulings.
A. Standard-Setting Organizations and Standard-Essential Patents
When we connect to WiFi in a coffee shop, plug a hairdryer into an outlet, or place a phone call, we owe thanks to standard-setting organizations (" SSOs" ). See generally Mark A. Lemley, Intellectual Property Rights and Standard-Setting Organizations, 90 Cal. L.Rev. 1889 (2002). SSOs set technical specifications that ensure that a variety of products from different manufacturers operate compatibly. Without standards, there would be no guarantee that a particular set of headphones, for example, would work with one's personal music player. See id. at 1896.
Standardization provides enormous value to both consumers and manufacturers. It increases competition by lowering barriers to entry and adds value to manufacturers' products by encouraging production by other manufacturers of devices compatible with them. See id. at 1896-97; Amicus Br. of American Intellectual Property Law Ass'n (" IPLA" ) at 6; Amicus Br. of Apple Inc. at 2. But because SSO standards often incorporate patented technology, all manufacturers who implement a standard must obtain a license to use those standard-essential patents (" SEPs" ).
The development of standards thereby creates an opportunity for companies to engage in anti-competitive behavior. Most notably, once a standard becomes widely adopted, SEP holders obtain substantial leverage over new product developers, who have little choice but to incorporate SEP technologies into their products. Using that standard-development leverage, the SEP holders are in a position to demand more for a license than the patented technology, had it not been adopted by the SSO, would be worth. The tactic of withholding a license unless and until a manufacturer agrees to pay an unduly high royalty rate for an SEP is referred to as " hold-up." Ericsson, Inc. v. D-Link Sys., Inc., 773 F.3d 1201, 1209 (Fed. Cir. 2014). " Royalty stacking" refers to the risk that many holders of SEPs will engage in this behavior, resulting in excessive royalty payments such that (1) the cumulative royalties paid for patents incorporated into a standard exceed the value of the feature implementing the standard, and (2) the aggregate royalties obtained for the various features of a product exceed the value of the product itself. Id.; see also Mark A. Lemley & Carl Shapiro, Patent Holdup and Royalty Stacking, 85 Tex. L.Rev. 1991, 2010-13 (2007); Amicus Br. of Public Knowledge at 11-20.
To mitigate the risk that a SEP holder will extract more than the fair value of its patented technology, many SSOs require SEP holders to agree to license their patents on " reasonable and nondiscriminatory" or " RAND" terms. Under these agreements, an SEP holder cannot refuse a license to a manufacturer who commits to paying the RAND rate.
For example, International Telecommunications Union (" ITU" ), one of the SSOs at issue in this case, has established a Common Patent Policy. That Policy provides that " a patent embodied fully or partly in a [standard] must be accessible to everybody without undue constraints." ITU, Common Patent Policy for ITU-T/ITU-R/ISO/IEC, http://www.itu.int/en/ITU-T/ipr/Pages/policy.aspx (last visited June 15, 2015) [hereinafter ITU, Common Patent Policy]. Any holder of a patent under consideration for incorporation into an ITU standard is required to submit a declaration of its commitment to " negotiate licenses with other parties on a non-discriminatory basis on reasonable terms and conditions." Id.; see also Microsoft I, 696 F.3d at 876. " If a 'patent holder is not willing to comply' with the requirement to negotiate licenses with all seekers, then the standard 'shall not include provisions depending on the patent.'" Microsoft I, 696 F.3d at 876 (quoting ITU, Common Patent Policy).
The two standards underlying this case are the H.264 video-coding standard set by the ITU and the 802.11 wireless local area network standard set by the Institute of Electrical and Electronics Engineers (" IEEE" ). The H.264 standard pertains to an efficient method of video compression. The 802.11 standard regards the wireless transfer of information using radio frequencies, commonly referred to as " WiFi." The H.264 standard is incorporated into Microsoft's Windows operating system and into its Xbox video game console. The 802.11 WiFi network standard is incorporated into Xbox.
B. History of the Present Dispute
In October 2010, Microsoft sued Motorola in both the U.S. International Trade Commission (" ITC" ) and the Western District of Washington for alleged infringement of certain smartphone patents. The parties thereupon engaged in a series of discussions concerning, among other matters, the possibility of a cross-licensing agreement granting Motorola licenses to Microsoft's smartphone patents in exchange for licenses to any of Motorola's patents Microsoft's products may have been infringing.
On October 21st and 29th, Motorola sent Microsoft two letters offering to license its 802.11 and H.264 SEP portfolios at 2.25% of the price of the end product--no matter the manufacturer--incorporating the patents. In other words, Microsoft would pay Motorola 2.25% of the selling price of an Xbox game console or of any computer running Microsoft Windows. The two offer letters, identical in all material terms, represented that the offer was in keeping with Motorola's RAND commitments.
Soon after receiving Motorola's letters, in November 2010, Microsoft filed a diversity action in the Western District of Washington, alleging that Motorola had breached its RAND commitments to the IEEE and ITU. Microsoft alleged that Motorola's offer letters constituted a refusal to license Motorola's SEPs on RAND terms. The next day, Motorola filed suit against Microsoft in the Western District of Wisconsin seeking to enjoin Microsoft from using its H.264 patents. The cases were consolidated before Judge James Robart in the Western District of Washington.
Motorola also filed patent-enforcement suits with the ITC, seeking an exclusion order against importing Microsoft's Xbox products into the United States, and with a German court, seeking an injunction against sales of Microsoft's H.264-compliant products. The German action was particularly threatening to Microsoft, as its European distribution center for all Windows and Xbox products was in Germany. To guard against the economic loss that would result if an injunction against use of Motorola's two German H.264 patents were granted, Microsoft swiftly relocated its distribution center to the Netherlands. At the same time, Microsoft sought and obtained from the district court, in April 2012, an " anti-suit injunction" barring Motorola from enforcing any injunction it might obtain in a German court against Microsoft's use of Motorola's H.264 SEPs until the district court could " determine whether injunctive relief is an appropriate remedy for Motorola to seek." Microsoft I, 696 F.3d at 880. We affirmed the anti-suit injunction order in September 2012. Id. at 889. Meanwhile, the German court had ruled that Motorola was entitled to an injunction. Id. at 879.
Proceedings in the district court continued apace. Microsoft amended its complaint to allege that Motorola's filing of injunctive actions constituted a breach of contract, because the obligation to offer RAND licenses to all seekers prohibited Motorola from seeking injunctions for violations of patents subject to that obligation. The court granted a joint motion to stay all the patent-infringement claims in the consolidated cases pending the outcome on the RAND issues.
In a series of orders, Judge Robart held that (1) " RAND commitments create enforceable contracts between Motorola and the respective SSO" ; (2) " Microsoft--as a standard-user--can enforce these contracts as a third-party beneficiary" ; (3) " Motorola's commitments to the ITU and IEEE . . . requir[e] initial offers by Motorola to license its SEPs to be made in good faith," but that " initial offers do not have to be on RAND terms so long as a RAND license eventually issues" ; and (4) Motorola was not entitled to injunctive relief on its H.264 or 802.11 patents.
In November 2012, Judge Robart conducted a bench trial to determine a RAND rate and range for Motorola's H.264 and 802.11 patents. Such determination was necessary, the court reasoned, because " [w]ithout a clear understanding of what RAND means, it would be difficult or impossible to figure out if Motorola breached its obligation to license its patents on RAND terms." After taking testimony from eighteen witnesses, the court issued a 207-page order setting forth its findings of fact and conclusions of law on RAND-rate-related issues. The court concluded that the RAND royalty for Motorola's H.264 portfolio was .555 cents per end-product unit, with an upper bound of 16.389 cents per unit, and that the rate for Motorola's 802.11 portfolio was 3.71 cents per unit, with a range of .8 cents to 19.5 cents.
The case then proceeded to a jury trial on the breach of contract claim. Over Motorola's objection, Microsoft was permitted to introduce the RAND rates determined at the bench trial through witness testimony. Microsoft also introduced, again over Motorola's objection, testimony that the FTC had previously investigated Motorola and its then-parent company, Google Inc., for failing to license patents relating to smartphones, tablets, and video gaming systems on RAND terms. As damages for the asserted breach of contract, Microsoft sought its attorneys' fees and costs in defending the injunctive actions Motorola had brought. Microsoft also sought as damages the cost of relocating its distribution facility from Germany to the Netherlands.
In September 2013, the jury returned a verdict for Microsoft in the amount of $14.52 million: $11.49 million for relocating its distribution center and $3.03 million in attorneys' fees and litigation costs. The verdict form asked both the general question whether Motorola " breached its contractual commitment[s]" to the IEEE and ITU and, specifically, for the purpose of damages, whether Motorola's " conduct in seeking injunctive relief, apart from Motorola's general course of conduct, violated Motorola's dut[ies] of good faith and fair dealing with respect to Motorola's contractual commitment[s]." The jury answered " yes" to all questions, unanimously.
Motorola moved for judgment as a matter of law both at the close of evidence and at the close of Microsoft's case-in-chief. See Fed.R.Civ.P. 50(a). After the jury's verdict, the court denied Motorola's motions in a joint order, concluding that (1) the evidence was sufficient for the jury reasonably to conclude that Motorola breached its duty of good faith and fair dealing by making offers far above the RAND rates and by seeking injunctions against Microsoft, and (2) the damages award was proper. The court granted Microsoft's motion for entry of final judgment on the breach of contract jury verdict. See Fed.R.Civ.P. 54(b).
Motorola then appealed from the judgment on the breach of contract claim to the Federal Circuit. On Microsoft's motion, the Federal Circuit transferred the appeal to this court. Microsoft Corp. v. Motorola, Inc., 564 F.Appx. 586 (Fed. Cir. 2014).
In 2012, Motorola appealed to this court to review the district court's grant of a preliminary anti-suit injunction. See Microsoft I, 696 F.3d 872. In that appeal, Motorola maintained that this court, not the Federal Circuit, had jurisdiction, " [b]ecause Microsoft's complaint is pleaded in terms of contractual rather than patent rights." Opening Br. of Defs.-Appellants, Microsoft I, 696 F.3d 872, No. 12-35352, 2012 WL 2132503, at *2. Upon entry of judgment in the district court on the breach of contract claim, however, Motorola switched gears and appealed to the Federal Circuit, which has jurisdiction over cases " arising under" federal patent law--that is, " those cases in which a well-pleaded complaint establishes either that federal patent law creates the cause of action or . . . that patent law is a necessary element of one of the well-pleaded claims." Christianson v. Colt Indus. Operating Corp., 486 U.S. 800, 808-09, 108 S.Ct. 2166, 100 L.Ed.2d 811 (1988) (citing 28 U.S.C. § 1338(a)). The Federal Circuit then transferred the case here. See Microsoft, 564 F.Appx. 586.
Our exercise of jurisdiction over this very case on an interlocutory appeal, and the Federal Circuit's decision to transfer the instant appeal to this circuit because we have jurisdiction, are both the law of the case. See Christianson, 486 U.S. at 817. Accordingly, we may now decline jurisdiction only if " (1) the [earlier] decision[s] w[ere] clearly erroneous; (2) there has been an intervening change in the law; (3) the evidence on remand is substantially different; (4) other changed circumstances exist; or (5) a manifest injustice would otherwise result." United States v. Renteria, 557 F.3d 1003, 1006 (9th Cir. 2009). Motorola's argument that the district court " constructively amended" the complaint by holding a bench trial on the RAND rate tacitly invokes the " changed circumstances" exception, although Motorola does not so specify. But because our jurisdictional determination on the interlocutory appeal was made knowing the RAND bench trial would occur and the Federal ...