School of Law Tsinghua University
IP Teatime Series No. 1
Transcript
Date:
April 27, 2016
Place:
The Multimedia Room in the 1st Floor of Tsinghua Law School
Interviewee: Hon. Randall R. Rader
Interviewer: Dr. HAO Yuan（郝元）
Audience:
Prof. CUI Guobin（崔国斌）, Prof. LIU Xiaochun（刘晓春）, Mr. WANG Bin（王斌）, Ms. LIN Xu（林旭）, Mr. LUO Ping（罗平）
Others: IP attorneys, scholars, experts and students (~40)
Record & Dictation: Ms. Jessie ZENG (曾潇)
Hao:
It is my great honor today to introduce to you, the former chief judge Randall R. Rader of CAFC. I think many of you may have known him on a personal basis. We are very fortunate to have Judge Rader here today with us, as the first guest speaker for the IP Teatime, because as we all know, for the past decades, he is not only the primary force of patent law jurisprudence in U.S., and many other countries including China, but also one of the top experts in patent damages area. As he served as chief judge in CAFC, he worked vigorously in wiping out these unqualified expert witnesses in damages, and also striking down baseless and excessive patent damages the jury gave. And also, he is the inventor of the so-called “Smallest Saleable Unit” theory, which has been quite often cited in recent high-profiled cases. Ever since 2013, Judge Rader has been teaching at Tsinghua for two courses each year. Personally speaking, he is the most enthusiastic, diligent and beloved teacher I have ever seen. I think our students here will agree with me on this, right? (Laugh)
(Introduction on house keeping rules of Tsinghua IP Teatime omitted.)
Issue 1: International Convergence & Harmonization of IP Law
Before we get to the topic of patent damages, maybe we can talk a bit about the Qiao Dan case. I heard that you went to the Qiao Dan hearing at the Supreme People’s Court yesterday, so can you introduce to us some of your impressions on the court proceedings of this case?
Rader:
Yes, I was very impressed with the professionalism of the Chinese court. I was also very impressed with the openness. They had a simultaneous internet broadcast of the entire proceeding that would not be possible in the United States. We are concerned about cameras altering the performance of litigants and judges, so we don’t allow cameras in our court rooms. However, I think it is a wonderful indication that China was opening its judicial process to the world. I found the professionalism be excellent, and I followed the arguments to a translator, and I thought they were making precisely the correct arguments and compelling terms. I was impressed with the proceeding. Now, I just hope the right side wins (Laugh). Of course, I am joking a bit. The important thing in the judicial proceeding is always the fairness and the impartiality of the court procedures. The outcome will vary from time to time, but I was impressed with the entire proceeding.
Hao:
In this case, you filed the first amicus brief, right?
Rader:
Yes, that’s one reason why I was there. Along with few of my colleagues from America, the former patent office director Kappos, I filed an amicus brief in this case, and I believe it was the first time in history that China has accepted the amicus brief in record. It was a new procedure for China. It was of course an old procedure in England and many other common law countries, but it was new here.
Hao:
Thank you. We are really making efforts, and we have made progress in China.
Rader:
Yes, I have always said that. Each time I come to China, I see excellent progress, both in its rule of law, and in its proficiency as a leading internet intellectual property nation. I see China as a great leader in intellectual property, and actually, I often would like to say that with leadership comes in responsibility. As you are becoming a leading nation, that carries the responsibility to ensure that your responsibility are correct on an international standard, something that other nations can follow. This is a long topic if I get started, but think about it in a minute, like your companies like Huawei, Lenovo, Xiaomi, or any other companies, they wish to be treated in foreign markets the same way they are in domestic markets. There is international cooperation, so you want to make sure that laws facilitate a world market rather than frustrate it. You can have frustration if rules of every nation are different, how can a company have different products and different policies for every nation? It is impossible. The rule of law needs to be at least fundamentally similar at one nation to the next.
Issue 2: Overall Framework for Patent Damages in China and U.S.
Hao:
I completely agree, and I think that is also true in patent damages, the topic we are going to discuss today, maybe about the harmonization or convergence regarding this patent damages with regard to various jurisdictions. We have been making great efforts in China to enforce the IP protection, in the meantime. We acknowledge that there are still many challenging areas we need to address. One of them is that, some patentees complained that although they won the case, they actually lost the market. A main reason is that the patent damages is usually very low. Statistics told us that the average damages of last year was roughly 80,000 RMB. So let’s get back to the topic of patent damages.
In China, we have four types of damages. The first type is lost profit, the second one is infringing profit, and the third one is based on reasonable royalties. If the first three types could not be proved by evidence, the last type we have is the statutory damages which in practice has been used in 99% of the cases. My first question goes like this: both China and U.S. are trying to achieve the same goal to find out how to adequately compensate the patentee once the infringement has been found. In your country, case law established that first you aim to prove the lost profits, and reasonable royalty is the floor. It seems to me that you don’t really have the infringement profits as a form of damages… I wonder why is that and how do you view our statute with regard to this?
Rader:
There is a lot in that question. Let me pick up a point that you started, that is “our objective is to have a system that adequately compensates the patent owner for the value of their intellectual property which has been compromised by the infringement. Therefore we should really be trying to set the value of intellectual property by whatever method is most effective according to the evidence of the case. That can be in some cases the infringer’s profits. That is a pretty easy thing to ascertain and prove. Yet still here in China they tend to follow the statutory damages, which by definition is not even an attempt to find out what the intellectual properties’ worth. Most Minimal patent is going to get the same valuation as a significant advance in technology. I think that will encourage us to all look instead at the value of the intellectual property, and that is what we are trying to compensate. A thing I would like to add is that China’s system is based on the German model, but even in Germany they does not put a heavy emphasis on the damages; they put the emphasis instead on injunction with the promise that if you enjoin the infringer, then there can be some kind of negotiation between the parties that will reach the proper evaluation. If that will work efficiently, I think you would have a better system of reaching the actual value of intellectual property. We want to properly value what is being protected.
Hao:
So to you, the benefit of infringing profit is easier and might be easier to prove, right? Compared with lost profit?
Rader:
Yes. Lost profit is always difficult to prove. In order to cover lost profits, you must prove that you will make every sale that the infringer has made. That is difficult to prove unless there are only two people in the market. And I cannot think of a very mini market where there are only two competitors. Once you go beyond two competitors, it is very difficult to prove that you would make all sales. While it is a very good compensatory model, it is very hard to prove.
Hao:
Yes. One reason I think we follow the statutory damages before was related with the fact that we don’t have a discovery system in China. It is often extremely difficult for the patentee to raise enough evidence. But we recognized that the new judicial interpretation from the SPC just provides that, kind of imposes a burden on the defendant that if the patentee is able to provide preliminary evidence to show the infringing profits, then it is now the defendant’s burden to give counter evidence, otherwise the court will just utilize the patentee’s arguments and evidence. I am looking forward to that and that will probably to some extent alleviate the problem.
Rader:
Remember that China is a signatory country of TRIPS. In TRIPS, it has a provision which in general terms allows the exchange of information as long as there is protection for trade secrets, so there is an agreement to some form of discovery that China has already made.
Issue 3: Hypothetical Negotiation in Assessing Royalty Rate & George-Pacific factors & Various Evaluation Theories
Hao:
Ok, thank you. Let’s outreach a little bit. The reasonable royalty has attracted vast attention. I think one reason might be coming from the SEP area. But this ex ante framework presumed imagined negotiation between parties before the infringement begins. This imagined framework always confuses me, like how to image a negotiation when there is actually not.
Rader:
I am just going to say, this is more of a construct to help the court to see what it is trying to achieve, what you are really doing to get the rental value of the technology. What would someone rent it for, license it for, obtain a promise that there will be no suit. That is something that we use the hypothetical negotiation as a way to reach that. That is our really objective to find the rental value.
Hao:
Ok. So in assessing reasonable royalties, the U.S. court has used these George-Pacific factors that were advanced in a 1971 case. Recently I noticed that some Chinese courts are also trying to argue or utilize these factors. Could you please just introduce a little bit about these factors and how do you use them? Do you think it is a strict test?
Rader:
There are 15 factors, George-Pacific factors. They start with the established royalty if there is already a royalty on the exact patent or the industry has acknowledged an established royalty rate on this kind of technology. Then you go to “comparable license”. There are 15 hypothetical negotiations in construct. But this was never meant to be a test. It is merely a list of all types of evidence that you might like to consult in trying to find out that the proper rental rate, the proper evaluation of the patent and technology. The George-Pacific factors have been pulled a little out of their contexts where it is now often used as a test in court, where experts will take their stands and say “there are 15 factors and 7 of them are in our favor and three of them are in the favor of our opponents, and the rest of them are neutral”. It is never intended to be used in that way. It is just a list of available evidence. The court should keep its eyes on the real objective, which is the proper value of technology.
Hao:
Yes, the proper value of technology. It seems to me that the U.S. courts, at least some of them, the courts seem to agree that these factors could work at least as a start. They modified some of these factors. Some of these factors are not applicable in SEP area, but some of them need to be modified to address the issue of reasonable royalties. I also noticed that in the Apple v. Motorola Case, Judge Posner refused to endorse these George-Pacific factors. Do you know why?
Rader:
Does anyone know why Judge Posner does anything? (Laugh) Probably guessing rather than accurate. Remember that the case you just mentioned, we are all in the standard area. Now standard evaluation is arguably a little different than the evaluation in a straight infringement case. The difference can be that you have two sources for valuating. You have the patented technology and it has created value by providing the world with technology it did not have before. The inventor who provides that deserves some return for its investment. That is an independent evaluation. There is also by virtue of that technology becomes a part of technology standard. It is the standard creates a certain amount of demand. It becomes the sole market usage that of course creates some demand as well. So you have to somehow separate the value of patented technology from the value created by the standard. As Judge Roberts pointed in the Microsoft v. Motorola case, you have to modify some of your usual test, although I don’t really agree with this reasoning. I think the best way that proceeds is to properly value the technology and then figure out on top of that what the enhancement is by virtue of standardization. In other words, I don’t think you can attach two problems together. It is better to look independently at the body of technology, what has it contributed to the field. That can be the value according to the typical theory of evaluation. There are basically three, by the way, there are cost base, cash base and market base evaluation. I will be honest that is a little of my own definition. If you really get deeply into the evaluation theory, you will find that every economist has his own secret about how he goes about it. Essentially, the cash based theories are the rental values turning largely on licenses, comparable licenses, and established licenses. The cost based theories are usually the value of substitutes for this impressive new technology. If you did not have that new technology, what would you use as a substitute? It usually is not as efficient in performing its function, and that is why the patent is new in value and it brings something more, but you try to value what that substitute would be. It is easier almost to give this to you in a medical field. Let’s say I invent a pill which allows you to heal very quickly after surgery, taking that pill saves you 3 days in hospital, so what the pill is worth substitute what you would have to do without the pill to take 3 days in hospital. So 3 days in hospital times 10,000 dollars a day means the pill is worth 30,000 dollars. Of course, I make this very simplistic, and there will be much involved in that. But you will see the type of reasoning you are looking at in cost based evaluation. The third one is market based evaluation and there you look at the demand created by the advancing technology. How much demand is driven, how many people buy the products incorporating the technology because of this patented invention. Thus, the market based evaluation is looking at the demand driver. That is a bit long answer.
Hao:
I like your answer. One thinking is that, hearing what you have said, the core issue is always to assess the proper value of the patent, and we want to assess the value as early as possible. Another thinking is the three approaches of evaluation, to me some of them overlaps with the George-Pacific factors. For example, the case based method also refers to the comparable license which is also a part of the George-Pacific factors.
Rader:
Remember, the George-Pacific factor is just a list of types of sources you go to as to do evaluation. Of course, you are expected to find those elements listed in George-Pacific factors that are used for various evaluation theories.
Hao:
Another thinking is that, talking about this cost value, it sounds a little bit similar to the incremental value model. It is similar compared with the next best non-infringing substitute, the patent has an incremental value and that value sets its value actually. And the reward it gets from the society could not exceed this value. Am I right?
Rader:
Thinking about his area in technology. He is with Huawei as you all may know. I introduced many of you to him as my dear friends. Let’s assume Huawei has a significant patent that contributes to the 4G technology. What is the substitute to 4G technology? Without 4G, you would have a 3G that does not work as well or as fast. What is the cost of providing 3G with enough enhancement to make up or what you need to achieve the functionality of 4G, what you would have to pay beyond 3G to get to 4G. Is that making a bit of a sense? It is a way of thinking of how we are going to give value to this hypothetic invention that I am talking about.
Issue 4: Standard, SEPs and FRAND
Hao:
Thank you, but I am still a little bit confused.
As I understand it, as we are already talking about SEPs, there are two important apportionments in the standard area. First, you have to separate the patented feature from the unpatented feature. Another one is that you have to separate the value of the patent itself from the standard. Going back to the cost-value rule, this incremental value rule, I am always a little bit confused because standard is multi-dimensional. Sometimes if we are looking at one particular patented technology, and we want to find a substitute, we take it out, but at the same time, we have to modify many other things in the standards as well. Under such circumstances, how can we separate the value of the patent from the value of the standard because under some circumstances they are interconnected? If you are referring to 3G and 4G, that is a different area, because there are a lot of patents, and they are complement technologies. But if we are evaluating one particular technology, you take it out and you have to modify its complements, so it is always difficult for me.
Rader:
Of course, the problem we are having here is that you really cannot discuss these things theoretically. You always have to see facts and numbers, and see how much value is associated with each feature. And in theory if there are a hundred patents that lifted our 3G technology to 4G technology, and Huawei has invented 20 patents of those 100 patents, it is not accurate, although it is always the courts generally done, to just say Huawei gets 1/5 of the enhanced value created by the 4G system; that is just counting the numbers of numbers and dividing it by the total enhance value. The truth is Huawei may have the 20 most important patents, and the other 80 may be details. So you really need to grapple with the actual value created by each technology advance. That is where we should start is by evaluating the technology and then turn to standards, and whether there should be some difference in value because a part of the market captured by technology is due to the standard.
Audience:
By standardizing the patent, we put some value to this patent, but we are talking about deciding a reasonable royalty rate about a patent. But as we can see, the value of a patent equals patent rate multiply by patent base, which means how many people are using your technology, so by standardizing a patent, we definitely increase the royalty base of the patent, but does that mean we have to decrease the royalty rate of a single licensee. I think when the courts are determining the reasonable royalty rate of SEP, we are not only looking at the value that the standardization has given to the patent, we are also looking at the responsibility that the process of standardizing that has given to the patent, that is the FRAND rule. The reasonable royalty has to be fair, reasonable….So if I have a patent, and it is not a standard, I can ask for a very high royalty rate, and you cannot hold me back. But if I have a standardized patent, I cannot ask for too high a royalty, so what I am trying to say is that maybe we cannot separate standard from patent, because if we add standard into determine the reasonable royalty rate, then we may have to decrease the royalty rate in a single case.
Rader:
You are making an excellent point. In my impression, the SEPs have been undervalued by virtue of their presence in standards. Logically, it should exactly be the other way. They were selected for the standard, precisely because they are the best technology. They perhaps should have been valued higher than comparable technology outside the standard, so I like the point you are making in that sense. Courts have not done well with this at all. While I have the utmost respect for Judge Robart and Judge Posner and etc., many of whom have been involved in this works, courts have not done a good job, mostly because I think they have over emphasized for these standards, FRAND responsibility. They have seen these as a rate-lowering obligation. But we should have to keep the same focus to get the proper value of the technology that can be discounted for the standard setting.
Liu:
I think this issue may lead us to the FRAND commitment. The decision is made by the patentee himself. If there is no FRAND commitment, like you said, a single license, they can ask for unreasonable royalty. That is ok, because if the licensees are happy, unreasonable royalty is ok. But in the FRAND commitment occasion, the patentees have the ability to see or to make decision of that in the future they may be well compensated.
Rader:
Nothing gives me more delight than to argue with Xiao Chun. I have done this for many years, and I have never won an argument, but I enjoyed it very much. My comment would be: “reasonable royalties” are just that they can be reasonably higher as well as reasonably lower, whereas I think because we are in a FRAND setting, “reasonable” has always been referred to as “reasonably lower and lower and lower” to the extent that I don’t think the courts have their eye on the value of the technology at all. They are simply trying to get a minimum amount which they do not apportion according to the strength and the contribution of the technology. They have just divided it equally on a numerical base among the contributors to the standard. By the way, many patent pools work that way. That is kind of a standard technology (unclear). But what I prefer to see is properly valued technology which I simply have the tools and ability to do. It is just difficult.
Wang：（Video Omitted）
Rader:
The courts and their mechanisms are really used to dealing one patent at a time, or maybe two or three, but for standard, you are looking at hundreds or thousands of patents. I am involved in a major arbitration, probably the biggest one in the world right now, between two major corporations over FRAND obligation, involving over 700 patents. We will make an effort to value those 700 patents, but that is because we have the time to devote to that enterprise. At court we find it difficult to do one patent. If it has 700 patents, it simply cannot take the time to really effectively value the technology. I don’t think they have to go patent after patent, and get how much each one is worth; that would be too difficult task. But I do think there are ways to value the technological contribution of groups of patents that would be a better way at approximating the value of the invented contribution, and we have done so far. I think it can be done, but the courts have struggles, they don’t have the time and ability to do this work. It is too big a test for them.
The parties really should be doing this on their own. This really is the job that various contributors to the standard really should be allocating amongst themselves. They know the contribution better than a court about who is contributing value to the standard; they should be able to break down the allocations among themselves. Now, our only test would be to try to put some value on the difference between 3G and 4G or whatever the standard is, and what is contributed to our technological advances. I have seen that in academic papers, so this is possible, we just haven’t had quite the right methodology to do that again.
Frankly, if I am king of the world for one day, I would try to accumulate a large patent pool type organization and relationship, where indeed the contributors to the technology, by the way they are the same people who are making the standards, as they are adopting the standard, they can allocate amongst themselves the value. Then, you only need to make one further calculation that is how much economic value has been created by the standard advance. With those things in hand, this could all be done by industry in private settlement, or negotiation, as the way you do most deals. That is the way it should be done. And I would like to see better mechanism to make that happen instead of resorting to the courts that don’t have the tools to do it. Sometimes I think the resort to courts is simply a way for those who wish to escape the true value of technology, and to get it cheaper than it really worth. This is their strategy.
Issue 5：FRAND
Dr. Hao:
Moving to my nest question. FRAND is always giving me headache, and there are a lot of questions in my mind. I just pick one. Do you think the courts or?
Judge Rader:
Remember what FRAND is. I am talking about it at a different level. If a relationship is a contractual relationship, but it is an agreement to agree. We are not really agreeing on what the reasonable rate is or how it should be allocated. But we are agreeing that when we do start using the standard, then we will agree on the reasonable royalties. So it is an agreement to agree which, frankly if we are enforcing the law very strictly, that is not a contract at all. You said this on another occasion, Professor Cui? Explain what you mean.
Prof. CUI Guobin:
I think sometimes it could be. In special industries, they already have this contract to agree to get a license first and then you agree on special terms for the licenses. Maybe the corporate in that area can.
Judge Rader:
Yes, but as to the amount which is all this about, there is no agreement. They have the contract that we are going to have a contract, and that does not bother me at all. We are going to agree, but the problem is where the box on the amount we are going to agree to is blank, and that is the issue.
Prof. Cui:
But it is still possible if there is no specific term of the royalty rate. Both parties agree, if we could not agree to that specific royalty rate, we can rely on the third party to determine. Then, I think it is still acceptable in contracts even if the price is not certain.
Judge Rader:
If that is what they said. But it is not what is said. They don’t say we agree what we agree and we agree to set the rate according to the following terms in the following way at the following time in the following form; that would be specific and enforceable. None of these do that.
Prof. Cui:
But many organizations have this kind of pre-arrangement in United States, right?
Judge Rader:
No… I mean, yes in general terms again, professor, in general terms we are going to agree and we will work it out latter, but in order to have the enforceable contract, you really need to have specific terms I have suggested. They are not available in the current form.
Prof. Cui:
Yes, that depends on the specific situation. For example, I tell you, now you could use my technology, and later on I will negotiate the terms with you. I think after you heard my first sentence, it means you already get a license, right? You could use it without infringing my patent, right?
Judge Rader:
I am not sure that is what they agree to. I think again we have to, we have to look at the specific terms but, I think what they said is that you can use my technology here after we have agreed to the reasonable royalty. And then you said, oh, I agree to that too. Now, you think the reasonable royalty is one cent, but I think it is one dollar. We don’t have an agreement. There is no enforceable agreement in either way. You can see what I am saying, and I also see what you are saying. There is an industry practice that the FRAND obligation is an obligation to reach an amount, but the problem is that we do not have a mechanism to do that. You have heard me recommend that the best mechanism would be a private one rather than what we have done so far which is the public resorted force.
Issue 6：“Smallest Saleable Unit”theory
Dr. Hao:
In my view probably that is the charm of the FRAND. It deliberately leaves some space for the market players to work things out, so to me, it is quite closely related to how we define the role between the market players and government actually. If two market players decided the license terms are FRAND, is the court in proper position to step in and say that’s not. I will talk it a little bit more specifically. For example, you are the inventor of the “Smallest Saleable Unit theory”, but in real practice….
Judge Rader:
I am not sure if it is true. I did articulate it, but I am not sure if I invented it.
Dr. Hao:
Ok, I correct it. You are the first to articulate this theory, in 2009, this Cornell Univ. v. Hewlett-Packard Co. case right? But I notice that in real practice, people often just licensed a whole portfolio. They usually base on the whole product, instead of the smallest saleable unit. And to me, they might have some legitimate reasons to this because a portfolio by its very nature is comprised of many patents, and they may feature different components. At least for efficiency reason, they may think it is fair and reasonable to base the whole product instead of the smallest saleable unit.
Judge Rader:
Markets almost always want to deal with products, not patents. It is we lawyers who get excited about patents. The markets only worry about products, about how much they sell. And you are right, any product is a function of many patents, and in fact, many portfolios and family patents.
Dr. Hao:
My understanding is that although the smallest saleable unit is a very important theory in trying to assess the royalty of one particular patent in a litigation case, trying to determine in one patent instead of portfolio. But maybe it is not necessarily the only proper approach.
Judge Rader:
Oh I would absolute agree with that. It is not the only proper approach, particularly when you go to a portfolio.
Dr. Hao:
Despite the fact some authority has ruled in this Qualcomm case last year, and also they have this IEEE new policy, and other authorities, they all suggested to use the “smallest patent practicing unit” as royalty base. But as the first articulator of this theory, you don’t think it is the only proper approach? And not using it may be proper in practice actually?
Judge Rader:
Yes. Like any other legal doctrine, you have to apply in proper context.
Audience:
The smallest saleable unite rule is only applicable when the royalty is in a form of a percentage? My question is like that.
Judge Rader:
What the saleable unit is actually doing? I would like to go back to Bin. He is pointing out to us that the royalty is the royalty base times the royalty rate. And the royalty rate is really the rental value. The royalty base is what the product dimension that we are renting is. And that is all the saleable unit is doing. It is addressing part of the reasonable royalty test. It is saying instead of trying to guess how important one chip is to the whole phone, we are guessing what percentage of $300 is attributable to this invention. Let’s instead look at sale price of the smallest saleable unit, the chip itself, which may be worth $20. Thus, we have a better way to calculate what the royalty base is. Then of course we can multiply that by the rate to get our reasonable royalty. Again it’s back again to the proper context for the test but … it is ensuring we are looking at the proper reference point for our reasonable royalty test. And again it works pretty well when you have a single patent, a single patent on a chip. It is a little harder when you are looking at 40, 50, 500 patents, and their application across a whole field of technology.
Remember we started out by talking about various evaluation theories, cash base, cost base and market base. Smallest saleable unit is only a corollary of the market base, goes nowhere to the others. So there is a great variety of ways that proper value technology.
Issue 7：The Once Popular View of SEPs As “Public Goods”
Dr. Hao:
My another thought is about this overall impression of what a FRAND rate should be. Many people held the view, I think they still do today, as a patent is incorporated into standard it becomes a kind of so-called “public good” (whatever its original meaning is in economics), so people should be able to assess this, you know, at near minimal cost, so called “near zero cost”. That was in 2010, I forget the specific year, there was a jurisdiction interpretation from the SPC that was based on this theory actually. If the implementer wants to use the technology, they only need to pay minimal license fee. But later, they changed this attitude quickly. At the same time, I also…
Judge Rader:
Think about the implication in that. If indeed every patent became a public good forfeited to the public by virtual of its incorporation in a standard would any inventor participate in the … in standard setting? Remember … how many billion dollars did Huawei spend in R&D each year? Fifty billion … well the point is that is vast investment, and they must have some return on that investment or they won’t continue to make that investment. So if we just collectivize all property, which is called “property” because it is owned by someone or some entities, if we take it away from those entities to the standard setting process, the answer is no one will participate in the standards and the public will lose great value it gets from standardization, and we will lose the great value that we get from the investment in IP. It is just that … somebody did not think it through before they come up with that idea.
Issue 8：IEEE Policy
Liu:
Talking about the IEEE policy, it is also included in the smallest saleable unit doctrine. I just want to move it back and get some characterization from the first articulator. You just talked that it is not the only test, and it seems that it is up to the judge to pick what type of test they are going to use in different cases and situations. But I am a bit confused and look for more guidance. When should we use this test and when we should not use it?
Rader:
Good questions. The first place is that it is usually the judge to choose the methodology. In U.S., it is the parties who present their evaluation theories to the judge. The judges adopt it, reject it, or change them as I did in the Cornell case, but the evidence of particular case really suggest the best evaluation method. In some areas, you really do have an established royalty rate. This is the royalty given across the whole industry as a customary way. In other instances, you have some very credible comparable license on nearly the same technology, or maybe you even have instances where this patent has been licensed before given a credible royalty rate. It is the evidence that puts it in context as how is the best evaluation for a technology. Frankly, this is again the responsibility of the parties who are trying to set the value for their technology, they really have to spend a lot more time thinking about the proper evaluation method. I commanded again Huawei, because I see them work on things of this nature, and they have given great care to their theories of evaluation of inventions.
We spend a lot of time on standard which I think it is an overdone issue. I realize it is the hot topic of the day, so people get excited about it. But there are many other issues in this area, maybe people have other things to talk about too?
Issue 9：Comparable License & Burden of Proof
Audience:
I have been working with the damages. I am trying to find those expert records of the U.S. courts, but they are always under seal, and there is no disclosure of the experts records on the internet. So what do you suggest to me to find some of them for my reference? I have found some papers, but most of them are irrelevant.
Rader:
What I am going to suggest to you is that if you look at some academic papers, they will help you. Many of the economist’s specific calculation in a case are elaborations on things that they have written in a general term in an article for economic magazine. That is where I would start. I have seen these reports, and I can tell you, they can be 100 or 200 pages long with specific evaluation of each step.
You are right, it is heavily and prudently involved with trade secrets, so it is not going to be disclosed.
Audience:
Where are these papers?
Rader:
The experts are preparing to present something to the courts. They will go hundreds of pages evaluating in details about some of the things we have talked about in general terms.
Audience:
I mean where to find those papers?
Rader:
You are not going to find them. As a judge, I can see them. Now for parties that I am working to help. But I cannot get access to a sealed record any better than you can. I did see them before because they were prepared for me, so they were available.
Hao:
I think that is one difficulty with this comparable license approach, especially in China. Do you think it is a good idea for the court to create a burden for the party to generate this usually trade-secret protected evidence?
Judge Rader:
They are not going to disclose in the trade secrets. I think what the court is talking about is more general information about we tend to license in this ranges on this type of technology?
Hao:
But how do they prove it? They just claim these are comparable licenses.
Rader:
I don’t think anyone is going to perjure themselves. I think if you say this is what you are doing, you will have some evidence to prove.
Hao:
Maybe we just talk a little bit more about the details of these cases, because you were working vigorously as the gate keeper in keeping many expert opinions out from the jury. In some cases you excluded these opinions, while in some others probably, you accepted them. So could you give us some basic clues of what kind of evidence is acceptable?
Rader:
Yes, you simply ask the questions of an expert to see if they have some bases for their guessing or using information that is irrelevant. You say that is not a proper methodology.
Hao:
How can you tell?
Rader:
I am not an economic genius. But even with my rudimentary understanding of economics, there are times when I can tell very easily that they are either using irrelevant information or they are guessing.
Hao:
But they don’t have to generate by detailed proof of their comparable licenses, right?
Rader:
Comparable license? Oh yes, you do. If you are coming up with comparable licenses, you have to identify which licenses are comparable and why they are comparable. Generally, there is a difficulty, because as you say, most of the licenses are kept confidential, so what they are relying on these confidential license as comparable licenses are often not comparable at all. The licenses which are general enough, they can be disclosed, so they cannot be comparable licenses, and then you exclude.
Issue 10：Royalty Stacking
Hao:
Especially for standard area, it is even more difficult to argue that these are comparable, because by its very nature, this kind of technology provides some utilities that other technologies could not.
Rader:
Yes there is truth to that (nodding).
Hao:
Maybe one last question.
Rader:
OK! You want to ask me how my tennis is going?
Hao:
OK that first: how is it?
Rader:
That’ll be before I sprained my ankle… Sorry I interrupted you. Please continue.
Hao:
Sorry you sprained your ankle… Sorry we have to talk about patent holdup and royalty stacking.
Rader:
Royalty stacking is a myth, and let me tell you how I know it is. If there were royalty stacking, which means … what is the item which would be most likely subject to royalty stacking? It would be this thing that I have in my pocket, and you have it in your pocket too (cellphone). Sorry I left my HW phone in my office. What do you know about this? Is the price of this thing going up and up, and consumers cannot buy the product because the price is so high, because the royalty is stacked on consumers and they pass on and where the innovation is drying up, because the high value of the technology means it is not reasonable to continue to innovate in this area? No! You walk into a store probably three blocks from here and find 50 different varieties for this, and the prices are going down constantly. You can even get them for free, (laugh) if you agree to a service to 10 years or something. There isn’t royalty stacking. By the way, if somebody says there is, then you ask a very simple question, “can you provide me an empirical proof?” They have been studying, after studying, after studying, and trying to find evidence of royalty stacking in market place, but no success yet. It is a nice theory, and we intuitively understand it: oh yes, there are 1000 patents and each one will ask for a 1% royalty and that will be 1000% and it drives up the price! The theory is good, but it just doesn’t happen.
Why doesn’t it happen? Because the market works, and it requires these guys to reach agreements. Remember, they are on both sides of the equation, as is every other player in the field. There are technologies they are licensing out, and technologies they are licensing in. Therefore, they must set the prices at a level which permits the production of products at a price that the consumers will buy, and they have done it. This is the most vibrant market in the world. It is not a market so encumbered with royalty stacking that consumers are burdened beyond their ability to follow. Again, ask for proof. Can’t find any.
Hao:
I see that is why in some most recent cases, the U.S. court they really needed implementers to provide real evidence to prove royalty stacking if they claim so. If they claim so, they need to generate evidence.
Rader:
Yes, exactly. It is an interesting theory, but just does not happen.
Now, let me go one step further. It can happen, in limited circumstances. In limited circumstances of negotiations, someone may be asking for royalties beyond the value of the technology, but it always evens out in the marketplace. The market works.
Cui:
But I think in theory, there is still this kind of possibility, for example, some patent owners are bad guys and they want to protect this kind of stretches?
Rader:
Yes. But here is the problem, Guobin. There are always possibilities that the market will fail, but we don’t make policy decisions based on possibilities that have not been proven and have not happened. And the market has not failed. Frankly, the market has been working for as long as we are doing commerce. It’ss not going to fail, and it has never filed.
Cui:
But someone may argue that in practice, a lot of small companies are trying to do this….
Rader:
You sound like an anti-trust lawyer (laugh). Antitrust lawyers are the conspiracy theorist of the legal world. They are sure everybody is doing evil things, and the only way that we stop them from doing evil things is to throw them in jail. Frankly, the market prevents the evil things, even when they try to take advantages, they can’t do it. That is why nobody can prove… But I will listen to you for a minute.
Cui:
I think in general, we should rely on the property rule, and only in very exceptional situations we don’t. But I think we still keep the possibility for the court to use the so-called liability rule. Right?
Rader:
Yes, the possibility can be there, and I don’t object to that at all. But it is interesting that the court almost never needs to use it because the market generally works well.
For “Hold Up”, I think there is an equal and opposite force called “Hold Out”. “Hold Up” means that the patent owner is trying to get more value than the technology is worth; “Hold Out” is when purchasers are trying to pay less than the property is really worth. Those are almost equal forces, and they have always been there. You would happily pay less for any property you buy, but ultimately, the price is set by the collective market place, and we buy it at a rate that serves the entire world market.
Xiaochun, what am I wrong about?
Issue 11：“Hold Up”v. “Hold Out”
Liu: I am just thinking if Your Honor would allow me to ask another “standard” related question. (Laugh)
When it comes to the injunction, it is also a very interesting issue here also about your discussion, what did I promise by making an FRAND commitment. Is there a license already or there is no license? That may lead us to mean that the patentee has the right to ask for an injunction?
Rader:
If there is actually “hold out”, let’s say, we will make Apple evil, they only want to pay 1 cent for something that is worth $1. It is a very valuable invention, but they don’t want to pay for it. They want to pay one cent, and they refuse to reach an agreement. At some point, I think the court would be justified in saying “no, we are going to impose some kind of injunction.”
Liu:
But are there some occasions, like the ECJ case about Huawei and ZTE, when there is indication that the patentee refused to, record there is no evidence showing there is good faith willing to negotiate, then the court may say, “no, you are bound by your FRAND commitment, and we will refuse to give the injunction, since you are not really want to make negotiation.
Rader:
It can go both ways. Well I don’t want to talk about HW and ZTE. But you can have “hold up” where the patent owner is asking for more money than the technology is worth, in that case, the injunction may go against the patent owner, that you are enjoined to insist on that amount, and must accept something less. Or it can be the other way, Apple is refusing to pay what the technology is worth, and the injunction will go against that. But you have to have some enforcement mechanism, because there is nothing in the contract, and the contract does not say anything. The contract just says that we are going to agree in the future. Yes, there can be a good legal argument back and forth about the meaning of that, about how binding that is. That is legitimate argument. But there does have to be some enforcement mechanism one way or the other.
Cui:
I think in the future … (unclear) maybe we can have a new regime that works just like the contract.
Rader:
Yes. It really is not a contract, but we are going to treat it just like one.
Do I get some kind of break?
//END
