The Court of Appeals for the Federal Circuit recently issued its decision in INVT SPE LLC v International Trade Commission and HTC America, Inc. In this case, the International Trade Commission (ITC) held that there was no violation, which means that INVT could not prevent the respondents from importing various cellular communication devices (e.g., phones) into the United States. Respondents Apple and ZTE settled out of the case after INVT appealed, and the only respondent left when the Federal Circuit decided the appeal was HTC.

A Strange Stipulation

The Federal Circuit affirmed the ITC on the infringement question, which is not surprising given the standard of review. What may be surprising, however, is the court’s brief take on the domestic-industry requirement:

In addition, because the parties agree that the domestic industry findings fall with the noninfringement findings, Appellant’s Reply Br. 35, we affirm the Commission on finding no domestic industry.

The respondents didn’t dispute the question of domestic industry, at least on appeal. Instead, they agreed with INVT that the domestic-industry requirement rose and fell with infringement.

This stipulation is atypical because, historically, the complainant has to show a domestic industry exists based on its own activity, not infringement. So what’s going on?

INVT is a patent assertion entity (PAE); its business is acquiring and asserting patents. Here, it acquired a patent designated as a standard essential patent (SEP), which is a patent that a standard-setting organization (SSO) accepts as necessary to practice a particular standard. The patent, among other asserted patents that dropped out of the case, was initially assigned to Panasonic Corporation. In 2013, Panasonic assigned the asserted patents to Inventergy. The agency’s initial determination redacts from the public some of what happened next, but it’s clear that Inventergy received funding from Fortress Investment Group, a hedge fund that invests in PAEs. Things probably did not go great because, in 2017, Inventergy assigned the patent to INVT, which appears to be controlled by Fortress.

As to infringement, INVT argued that its patent was essential to practicing the long-term evolution (LTE) standard for wireless communication. If so, it could show infringement by showing that the accused devices practiced the standard. But the initial determination held, and the Federal Circuit affirmed, that the asserted claims were not standard essential. The mere fact that the accused devices practiced the standard did not demonstrate infringement.

Similarly, INVT attempted to satisfy the domestic-industry requirement by showing that the products of its licensee, Samsung, practice the standard. But the fact that Samsung’s Galaxy S9 complied with the LTE standard was not enough to demonstrate the claims covered the S9.

All this explains the parties’ agreement. If the claims had covered the standard, then the imported products would have infringed because they practiced the standard. Likewise, the claims would have covered the licensed products used to show a domestic industry because those products also practiced the standard. So it was not unreasonable to agree that the domestic-industry requirement rose and fell with infringement.

But, having explained that oddity, we’re still left with one particularly troubling question: Should standard essential patents be litigated in front of the ITC, regardless of who holds them? More simply, we wonder how fair, reasonable and non-discriminatory (FRAND) terms fit into the equation.

What About FRAND?

Those familiar with SEP practice know that SSOs typically require SEP holders to license their patents to manufacturers who make products using the standard. In simple terms, when a patent becomes an SEP, the owner promises to license the patent on FRAND terms.

The parties in INVT v. ITC negotiated but couldn’t settle on a license. The parties also disagreed on whether FRAND obligations mean that the SEP holder must merely negotiate in good faith toward FRAND terms or is required to conclude a license on FRAND terms. Here, the SSO policy requires that the patent holder be “prepared to grant irrevocable licenses on fair, reasonable, and non-discriminatory (‘FRAND’) terms and conditions.” Therefore, it would seem that a license on FRAND terms would be the natural remedy for infringement, and an injunction would not be available.

The ITC is not suited to decide what financial terms would meet the FRAND requirement. First, it never sets patent damages, license fees or reasonable royalties under patent law. Second, and more importantly, the ITC has no power to force SEP holders or respondents to accept FRAND terms. The ITC has only the ability to exclude imports. Should the ITC bar imports based on an SEP, it would undermine the FRAND commitment. An exclusion order would give the SEP holder undue leverage. It could charge a license fee based on the value of access to the U.S. market, not the value of the technology disclosed in the patent.

INVT failed to prove its main case because it could not show that its patents were SEPs. But INVT’s approach is replicable by other PAEs that acquire SEPs subject to FRAND obligations. Without a change in the law, PAEs will continue to take this approach. 

Image credit: Ashley Blackwell