Monday, March 28, 2022

Non-Standard Bifurcation in SEP Litigation

Wi-Lan Inc v Apple Canada Inc 2022 FC 276 Tabib CMJ

This decision raises an interesting procedural issue regarding SEP litigation, in particular the question of a non-standard bifurcation. (Coincidentally, last Friday’s post also dealt with a non-standard bifurcation, albeit along different lines.)

Wi-Lan, a non-practising entity (NPE) [1], is suing Apple for infringement of its 159 patent. (The full patent number is not given in the decision, but my guess is that it is 2,686,159.) While not stated in the decision, Wi-Lan appears to be a patent assertion entity (PAE), which is to say that its main business is monetizing patents through licensing to operating companies. Wi-Lan asserts that the 159 patent is a standard essential patent (SEP) which is essential to the 4G and 5G standards. Apple denies that is it an SEP, but argues that if it is, Wi-Lan is not entitled to an injunction, and its sole remedy is a reasonable royalty on FRAND (fair, reasonable and non-discriminatory) terms [8].

In this motion, Apple is seeking to bifurcate the proceedings. Bifurcation is common in patent actions. In the standard bifurcation, the first phase deals with validity and infringement, as well entitlement to an injunction and the election between an accounting and damage, though not quantification. The second stage is quantification of the monetary remedy. In this motion, Apple sought a bifurcation in which the entitlement to remedies, not just quantification, would be left to the second stage. More specifically, validity and infringement would be assessed in the first stage, but “Wi-Lan’s right to an injunction, right to delivery up of infringing devices, right to elect between profits and damages, and the calculation of profits or damages” would be left to the second stage” [2].

Why is Apple seeking this unusual bifurcation? It may be that Apple’s main objective was to put off the question of Wi-Lan’s entitlement to injunctive relief [2] (though that may be reading too much between the lines.) If so, why would Apple seek to defer the question of Wi-Lan’s entitlement to injunctive relief to the second stage?

Injunctive relief plays an outsized role in SEP litigation, and more broadly in litigation involving any ‘complex’ product which embodies a large number of patented technologies, each of which contributes only a small part of the overall value. This gives rise to the problem of ‘holdup’. As Shapiro explained in an early influential article, Navigating the Patent Thicket (2000) 1 Innovation Policy and the Economy 119, 125 consider a manufacturer of a complex product

who could, with ease, invent around a given patent, if that manufacturer were aware of the patent and afforded sufficient lead time. Clearly, in this case the patented technology contributes little if anything to the final product, and any reasonable royalty would be modest at best. But, oh, how the situation changes if the manufacturer has already designed its product and placed it into large scale production before the patent issues . . . . The patentee can credibly seek far greater royalties, very likely backed up with the threat of shutting down the manufacturer if the Court indeed finds the patent valid and infringed and grants injunctive relief. The manufacturer could go back and redesign its product, but to do so (a) could well require a major redesign effort and / or cause a significant disruption to production, (b) would still leave potential liability for any products sold after the patent issued before the redesigned products are available for sale, and (c) could present compatibility problems with other products or between different versions of this product. In other words, for all of these reasons, the manufacturer is highly susceptible to holdup by the patentee.

The problem of holdup, when it exists, means that a patentee armed with an injunction can extract a settlement that reflects not just the value of the patented technology, but some part of the sunk costs that have been incurred by the manufacturer. A very influential article on the problem is Lemley & Shapiro, “Patent Holdup and Royalty Stacking” (2007) 85 Tex L Rev 1991. I have also addressed it in a couple of co-authored pieces, namely Ch 4 Injunctive Relief in Patent Remedies and Complex Products: Towards a Global Consensus (2019) and Ch 7 reviewing the literature; and Cotter, Hovenkamp & Siebrasse, Demystifying Patent Holdup (2020) 76 Washington and Lee Law Review 1501-65.

It is injunctive relief which allows the patentee to extract sunk costs, thereby capturing a reward greater than the value of the patent. Consequently, an important part of the response to the holdup problem in US law has been to deny injunctive relief entirely to patent assertion entities, following eBay v MercExchange (2006) 547 US 388: see Seaman, “Permanent Injunctions in Patent Litigation After eBay: An Empirical Study” (2016) 101 Iowa L Rev 1949. (I’ll note that in Farmobile v Farmers Edge 2022 FC 22, [80] blogged last Friday, Farmers Edge argued that Farmobile should be denied injunctive relief because it was a non-practicing entity (NPE). NPEs include patent assertion entities, but the category also includes eg small R&D startups which invent new technology but then licence it to a larger entity for commercialization. Those types of NPEs do not practice the invention themselves, but they typically seek to assert their patent rights to secure market exclusivity, albeit for their licensee or future assignee, not for themselves. This is in contrast to PAEs, which exploit the patent by licensing, rather than by enforcing market exclusivity. The distinction between PAEs and NPEs more broadly is important when considering injunctive relief. PAEs are almost never granted injunctive relief in US law, but NPEs seeking market exclusivity are not disfavoured, or at least not as disfavoured.)

The problem of holdup also arises in the context of SEPs specifically, because standards normally embody hundreds or thousands of patented technologies, subject to a FRAND obligation to grant royalties on fair, reasonable and non-discriminatory terms. In US law, injunctive relief is rarely granted for infringement of an SEP, on the view that the patentee is contractually bound to accept a reasonable royalty.

While injunctive relief is routinely granted to a successful patentee, we have not yet had a case in Canada squarely raising the question of whether injunctive relief should be granted to a PAE in respect of an SEP [9]. This case may be the first, if it proceeds to trial, as Apple is seeking to argue that Wi-Lan should be denied injunctive relief as a matter of law if the 159 patent is determined to be an SEP [8].

With all that in mind, I can think of a two reasons Apple might have been seeking to use bifurcation to delay the question of entitlement to injunctive relief.

One reason a manufacturer of a complex product might seek bifurcation of this point is that it would operate as a kind of stay, so that the manufacturer would have time to design around the patent if it were found to infringe. The manufacturer would still be liable for reasonable royalty damages for infringement during the design around period, but this would avoid or at least mitigate the holdup problem. That is unlikely to be the motivation in this case because it is not possible to design around an SEP, unless the patented technology at issue can first be removed from the standard entirely. (I think this has happened, but it is very rare).

A more likely reason is simply to delay the date the injunction comes into force. If the patent can’t be designed around, the excess value that can be extracted by a patentee armed with an injunction depends on the value to the manufacturer of having its product on the market. The less time that the injunction holds the patent off the market, the less the excess value. If I’m right that the 159 patent is 2,686,159, it expires in 2027. If this takes a couple of years to get to the end of the first stage—say end of 2023, with four years left—and another year to the end of the second stage, the difference between the grant of the injunction at the end of the second stage instead of the first would be roughly a 25% reduction in Apple’s maximum willingness to pay.

Neither of these is a good reason in principle for bifurcation. Both of these amount to using bifurcation as a substitute for a stay of the injunctive relief. But the purpose of bifurcation is to ensure the most expeditious and least expensive determination of the outcome, and to use it as a substitute for a stay would detract from that purpose. To the extent that it is desirable to limit injunctive relief, it should be done directly, by the court refusing injunctive relief entirely on substantive grounds, or tailoring the injunction to allow a design around. And in this decision Tabib CMJ refused to bifurcate because she found that “Apple has not met its onus to show that bifurcation would result in the just, most expeditious and least expensive determination of the issues on the merits in the circumstances of this case” [20].

Another reason Apple might be seeking a stay is to avoid having to argue the law with respect to entitlement to injunctive relief. As noted above, injunctive relief is routinely granted to a successful patentee. However, we have never had a case addressing entitlement to injunctive relief in respect of an SEP, and particularly when asserted by a PAE. SEP cases are clearly distinguishable in principle because of the FRAND agreement. PAE cases are also distinguishable in principle, as the US eBay approach illustrates—it is pretty clear that Wi-Lan would be refused injunctive relief in US law. I am necessarily of the view that the US approach should be adopted, either broadly or in its specifics; whatever one might think of the practical outcome, the eBay court’s doctrinal analysis is very suspect: see Gergen, Golden & Smith. 2012. “The Supreme Court's Accidental Revolution” (2012) 112 Colum L Rev 203. (And see Ch 4 of Complex Products for a more detailed discussion.) Moreover, European law is more favourable to injunctive relief in SEP cases, following Huawei v ZTE (2015) Case C-170/13. But the split in approach between US and European law serves to emphasize the difficulty of the issue. In my view, this is a difficult and novel point of law. If Apple prevailed on the merits, then Wi-Lan’s entitlement to injunctive relief would not arise, and it would not be necessary to argue the point. It would be understandable for Apple to try to avoid making this novel legal argument if it didn’t have to, and in my view, that would be consistent with the purpose of bifurcation.

On this point,

[19] Apple submits that delay in the determination of Wi-Lan’s entitlement to an injunction is just, because it would not be in the public interest to grant an injunction at all. Such an argument presupposes the ultimate favourable determination of Apple’s arguments on the merits. They require the Court to assess the merits and conclude that Wi-Lan’s claim to injunctive relief is most likely to fail. These arguments are, as discussed above, not factors that the Court should consider on a motion to bifurcate.

If, as this passage indicates, Apple’s argument turns on the point that injunctive relief should not be granted at all, then I agree that this is not a point that can be decided on a motion to bifurcate, without the benefit of full argument on a difficult legal point.

But it is a different matter if the argument is that there will be a saving by not having to argue the point at all if Apple prevails at the first stage. This brings us to the arguments “discussed above,” which evidently refer to this paragraph:

[12] It is untenable at law to take into account, in considering whether a bifurcation might result in substantial savings, that the cost of determining remedies would be entirely saved if the plaintiff were to fail to establish liability. If one is to consider significant or substantial savings as a reason to bifurcate, then those savings must come from the likelihood that the determination of the first phase issues would inherently lead to a narrowing of the issues in the second phase, whatever that determination may be.

I have to say I don’t find this persuasive. Suppose that the first phase will not lead to any narrowing of the second phase issues at all. There are no doubt some additional expenses inherent in bifurcation, so that if exactly the same issues will have to be litigated whether or not the case is bifurcated, the costs will be higher. This is a thumb on the scales against bifurcation.

But on the other hand, we know as a practical matter that many litigated patents are held to be invalid. This is not happenstance—parties will settle rather than litigate if both sides are confident as to liability, one way or other. Parties only choose the expense of litigation if there is a real dispute as to validity or infringement. Only the hard cases get litigated, so we expect to see, and what we do see, is that success more or less equally divided, overall. There will be a very substantial cost savings in all of those cases that don’t have to proceed to the liability phase at all. Moreover, there are often significant cost savings even in cases in which the patentee prevails, as the parties often settle before the second phase. Thus, on average bifurcation leads to substantial cost savings even if the issues are not narrowed at all. While it is true that a motions judge can’t predict in advance whether the particular case before her will be one of those in which there are substantial cost savings, I don’t see any reason to ignore the reality that bifurcation is likely to lead to costs savings on average.

The argument against seems to be that taking into account the cost savings that would result if there is no need to go to the liability phase would require an assessment of the merits, which is inappropriate at the very early stage where bifurcation is normally ordered [19]. That would be a strong objection if the bifurcation decision rests on a mathematical balancing of the expected costs of proceeding one way or the other. But that is not done, and it is not required. As Tabib CMJ noted, the combination of Rule 3 and Rule 107 means the basic question whether “is it more likely than not that a bifurcation order would result in the just, expeditious and least expensive determination of the proceeding on its merits, so as to justify depriving the Plaintiff from its basic right to have all its issues resolved in one trial” [4]. The Prothonotaries have considerable discretion of make such orders in light of their extensive experience in managing complex litigation. I see no reason that an appreciation of the practical cost savings should be a thumb on the scales in favour of bifurcation, on the other side. Against this is the idea that the patentee has a “basic right” to a single proceeding. This was articulated in Elcano v Richmond (1986), 55 OR(2nd) 56, 59, quoted with approval in Bristol-Myers Squibb v Apotex 2003 FCA 263 [7]; but in Bristol-Myers Squibb v Apotex the FCA went on to say that “When an experienced specialist bar like the intellectual property bar commonly consents to the making of a bifurcation order, it is open to a judge to infer that, in general, such an order may well advance the just and expeditious resolution of claims” [9]. As I read it, this statement acknowledges that bifurcation results in costs savings on average, and holds that it is permissible for the motions judge to take this into account.

This is not to say that Tabib CMJ should have granted the motion for bifurcation in this case. Her decision turned on a number of other considerations specific to the motion, which I have not touched on. But it does seem to me that the fact that bifurcation can reduce costs by eliminating the need for a second stage if the alleged infringer prevails at the first stage, or if the parties settle, is a legitimate consideration in deciding whether bifurcation should be ordered.

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