On April 7, 2020, the U.S. International Trade Commission issued its Notice of Opinion in Investigation No. 337-TA-1089, essentially reversing Chief Administrative Law Judge (“ALJ”) Bullock’s Initial Determination and declining to issue remedial orders blocking SK Hynix products from the sale in or import to the U.S. The ITC found that no remedy was warranted, as patent owner Netlist (complainant) failed to establish that Korean-based SK Hynix infringed the asserted patents and failed to meet the technical prong of the ITC’s domestic industry requirement. A redacted Public Version of Commission Opinion of the Commission Opinion was posted April 21, 2020.
The ITC did not address standard essential patent issues beyond finding that ALJ Bullock erred in ruling that the JEDEC Patent Policy was unenforceable because the terms “reasonable” and “nondiscriminatory” were too ambiguous under New York law:
[T]he Commission has determined to reverse the ALJ’s findings that the ‘907 patent is essential to a JEDEC standard and that the JEDEC Patent Policy is unenforceable, has determined to affirm the ALJ’s finding that the ‘623 patent is not shown to be essential to a JEDEC standard, and has determined to vacate all other finding relating to obligations to license on reasonable and nondiscrimatory terms.
Netlist filed its complaint with the ITC on October 31, 2017, alleging that certain memory modules of Korean-based Hynix infringed Netlist patents alleged to be essential to the Joint Electronic Device Engineering Council (“JEDEC”) DD4 LRDIMM standard. ALJ Bullock issued his Final Initial Determination on October 19, 2019 (broken into Part 1 and Part 2 due to file size) [LINK], recommending a limited exclusion order based on SK Hynix’s infringement of U.S. Patent No. 9,606,907, but allowing entry of an exclusion order should be delayed “by six to twelve months” to mitigate harms to the public interest.
ALJ Bullock previously issued an Initial Determination in a related case, ITC Investigation No. 337-TA-1023, finding that accused infringer Hynix (respondent) had not established that patent owner Netlist (complainant) had breached a RAND commitment to JEDEC concerning computer memory technology standards. He found that exclusionary relief would be proper and not against the public interest if the memory products infringe valid claims of the alleged standard essential patents (“SEPs”); but he found that the alleged SEPs were not infringed (see our December 7, 2017 post).
ALJ Bullock Decision
Addressing Netlist’s obligations to license patents on RAND terms, the ALJ determined that (1) the JEDEC Patent Policy was shown to be unenforceable and (2) the ‘907 patent was shown to be essential to a JEDEC standard. With respect to enforceability, ALJ Bullock referenced his decision in the prior 337-1023 investigation, which found “that the JEDEC Patent Policy is, by design, ambiguous about the meaning of reasonable license terms and conditions” such that it could not be determined what a RAND commitment entails in terms of acceptable licensing terms. Turning to the present investigation, ALJ Bullock held the JEDEC Patent Policy agreement to be unenforceable under New York law, because the terms “reasonable” and “non-discriminatory” are ambiguous.”
Regarding essentiality, ALJ Bullock found evidence of record would support the conclusion that the asserted claims of the asserted ‘907 patent is essential to a JEDEC standard “if the Commission determines that the ‘907 patent is infringed.” Here, the ALJ’s determination indicates that Netlist did not specifically address the issue of essentially, but rather respondents argued that Netlist’s patents, if found to be infringed, were essential to the JEDEC standards.
Comments on the Public Interest
Following the Initial Determination, the ITC solicited submissions from the public regarding potential public interest issues raised by ALJ Bullock’s recommendation to issue a limited exclusion order banning Hynix products from sale or import into the U.S. The ITC received submissions from the U.S. Federal Trade Commission; Congressmen Ted Budd, John Carter, Anna G. Eshoo, Henry C. Johnson and Katie Porter; Ericsson, Inc.; Dell, Inc.; Hewlett Packard Enterprise; JEDEC; ACT The App Association and several individuals.
The FTC Public Interest Statement express concern about ALJ Bullock’s statement that JEDEC RAND commitments are unenforceable because the terms “reasonable” and “nondiscriminatory” are not specifically defined by JEDEC. FTC noted that such ruling is dicta and was not an issue raised or argued by either party. The FTC expressed concern that adoption of such dicta is likely to have substantial negative effects on competition and innovation, reaching far beyond this investigation, given how common such language is found in intellectual property rights (IPR) policies adopted by many standards organizations. The ITC should take these negative effects into account if it considers whether to adopt the ALJ’s position
The JEDEC Public Interest Statement also argues initial determination regarding unenforceability of the JEDEC Patent Policy under New York law “is erroneous and recommends that the ITC either delete the discussion of enforceability, or withdraw the finding and leave open the proper conclusion” as “[f]ailing to do so may do great damage to United States competitiveness, consumers and innovation.”
The Dell Public Interest Statement argues that the “conclusion that Netlist’s RAND commitments are unenforceable departs from this precedent, and it threatens to undermine standardization efforts in the semiconductor industry by leaving implementers and their customers vulnerable to being held up by SEP holders.”
Similar to Dell, the HPE Public Interest Statement “submits that the Commission should not grant exclusion orders on RAND-committed patents absent a showing of extraordinary circumstances”
The ACT Public Interest Statement argues against the ITC issuing exclusion orders in investigations involving SEPs:
In this case, we strongly urge the USITC to act consistent with, and to build upon, existing global-consensus guidance providing clarity on what fair, reasonable, and non-discriminatory (FRAND) commitments made on SEPs mean, and the effects of FRAND abuse on competition and innovation … USITC should recognize that SEP licensing abuse is both a contract and competition law issue (and an analysis underlying any exclusion order decision with respect to an SEP should address both of these areas). Further, consistent with existing law and precedent exclusion orders pertaining to SEPs should only be issued in rare circumstances.
The Ericsson Public Interest Statement largely departs from those submitted by Dell, HPE, ACT and the FTC. Ericsson states that it “agrees with the ALJ’s overarching evidence-based approach to the F/RAND issues raised in this investigation,” specifically supporting three principles: (1) that the ITC should consider whether an SEP owner’s failure to comply with a RAND obligation has harmed the public interest before determining whether an exclusion order should be withheld or modified; (2) that the burden to prove an affirmative defense based on breach of SEP owner’s RAND obligation lies with Respondents to an ITC investigation; and (3) that evidence that an exclusion order could lead to higher prices is not dispositive of the public interest in considering an exclusion order.
Members of Congress
Five members of the U.S. Congress submitted comments.
Congressman Ted Budd Statement, Congressman John Carter Statement, and Congresswoman Anna Eshoo Statement expressed concern that an exclusion order would distort supply chains and pricing and that the costs would be borne by U.S. manufacturers and consumers. The representatives note that SK Hynix supplies 30% of memory modules used by U.S. manufacturers and other producers would not be able to meet a shortfall caused by an exclusion order and added the subject memory modules are a key component of computers and servers made by U.S. tech companies, such as Dell and HPE.
Congressman Henry Johnson Statement expressed concern that the issuance of an exclusion order would undermine the USPTO’s patent review process, as the claims-at-issue in the Section 337 proceedings were invalidated in IPR proceedings.
In contrast to positions taken by the other members of Congress, Congresswoman Katie Porter Statement sided with Netlist. Congresswoman Porter notes “Netlist is a small publicly traded company based in my district in Irvine, California” and emphasizes the “strong public interest” in protecting the intellectual property of small businesses. Congresswoman Porter highlighted the six to twelve month delay that was proposed should an exclusion order be issued, noting that such a delay “should help alleviate concerns regarding public interest factors.”
The ITC Final Decision
On review of ALJ Bullock’s decision, the ITC revisited findings related to claim construction, infringement, invalidity, domestic industry, and “findings with respect to both of the ’623 and ’907 patents regarding whether SK Hynix showed that Netlist violated its obligations, if any, to offer a license on reasonable and non-discriminatory terms.” Specifically with respect to RAND issues:
[T]he Commission finds that the JEDEC Patent Policy was not shown to be unenforceable and that neither the ’907 patent nor the ’623 patent was shown to be essential to any JEDEC standard. The Commission discusses these findings below, reverses the Final ID’s determination that the JEDEC Patent Policy was shown to be unenforceable, reverses the Final ID’s determination that the ’907 patent was shown to be essential to a JEDEC standard, and vacates other findings on RAND in the Final ID.
Enforceability of the JEDEC Patent Policy
Reviewing ALJ Bullock’s determination that the JEDEC Patent Policy is unenforceable, the ITC noted that the numerous instances in which the terms “reasonable” and “non-discriminatory” have been used in similar agreements and decisions (specifically noting decisions in Microsoft v. Motorola, HTC v. Ericsson, Realtek v. LSI, and Apple v. Motorola) weighed against the “last resort” measure of declaring the Policy unenforceable:
The Final ID relied on Cobble Hill Nursing Home, Inc. v. Henry and Warren Corp., which stated that “before rejecting an agreement as indefinite, a court must be satisfied that the agreement cannot be rendered reasonably certain by reference to an extrinsic standard that makes its meaning clear,” such as “reference to an extrinsic event, commercial practice or trade usage.” 548 N.E.2d 203, 206 (N.Y. 1989). The Commission finds that the ALJ erred by not assessing whether the frequent use of “reasonable and nondiscriminatory” terms by standard-setting organizations shows that the phrase is reasonably certain in commercial practice or trade usage, particularly in light of the numerous court cases that have found such agreements enforceable. See, e.g, TCL Commc’n Tech. Holdings, Ltd. v. Telefonaktiebolaget LM Ericsson, 2018 WL 4488286 (C.D. Cal. Sept. 14, 2018). The use of these terms by numerous standard-setting organizations in similar agreements and the decisions of courts to interpret the provisions suggests that this agreement is enforceable, especially in light of Cobble Hill’s holding that a contract should be declared unenforceable only as “a last resort.” 548 N.E.2d at 206. Accordingly, the Commission finds that the record does not demonstrate that the JEDEC Patent Policy is unenforceable under New York law, and therefore reverses the ID’s finding that it is unenforceable
Essentiality of the Netlist Patents
In determining the asserted Netlist patents were not essential to the JEDEC standards at-issue, the ITC reasoned that the accused JEDEC-compliant Hynix products did not infringe either patent and that, accordingly, Netlist had failed to show that compliance with the JEDEC standards would necessarily infringe its patents.
The ITC went on to address the analysis in ALJ Bullock’s Final Initial Determination, emphasizing that in order to show essentiality, a party must show that (1) the standard-compliant product infringes the patent and (2) that “compliance with the mandatory portions of the standard necessarily requires infringement.” The ITC reasoned that because ALJ Bullock’s determination “did not address whether mandatory portions of the standard required infringement, the Final ID erred by finding essentiality.”
Further, the ITC noted that “Netlist purported to ‘admit’ that its patents are standard-essential to bolster its infringement case, but provided no evidence or argument in support of that admission” and that “SK Hynix too provided no evidence or argument that the asserted claims of the ’907 or ’623 patents are standard essential.”