On December 1, 2008, a unanimous panel for the U.S. Court of Appeals for the Federal Circuit censured a patent holder who concealed patents from a standards-setting organization (SSO) when that organization required their disclosure. See Qualcomm Inc. v. Broadcom Corp., 2008 WL 5047675 (Fed. Cir. Dec. 1, 2008).
This most recent decision is just one in a series involving an ongoing dispute between Qualcomm Inc. and Broadcom Corp. The other most recent decision, which we reported on September 30, 2008, held that the failure to obtain a non-infringement opinion from counsel could be circumstantial evidence of inducement. This latest decision holds that, as a matter of equity, if a patent holder fails to disclose a patent in the face of a duty to do so, then asserting that patent against the beneficiaries of that duty later could lead to its unenforceability.
In light of this decision, patent holders should be fully aware of their duties when participating in SSOs. Moreover, to protect their portfolios, they may want to err on the side of caution when evaluating their patents and determining what to disclose.
Trial Court: Qualcomm’s Patents Are “Unenforceable Against the World”
In 2001, two international SSOs joined forces to develop a fully interoperable video compression standard having a royalty-free baseline. To reach this goal, they chartered the Joint Video Team SSO (JVT SSO). Two years later, they reached it. This standard became known as the H.264 standard, and it was adopted and published by the parent organizations in May 2003. Qualcomm, as a member of both parent organizations, was a participant in the JVT SSO, but in that capacity, did not disclose to the JVT SSO that it owned any patents related to the H.264 standard. Broadcom, a competitor, began implementing the H.264 standard into its products shortly after it was released.
In October 2005, Qualcomm sued Broadcom alleging that by implementing the H.264 standard, Broadcom was infringing two of its patents: (1) U.S. Patent No. 5,452,104 (“the 104 patent”), and (2) U.S. Patent No. 5,576,767 (“the ‘767 patent”). After discovery and trial, a jury returned a verdict in favor of Broadcom, finding that none of Broadcom’s products infringed the patents. Moreover, the jury further found that Qualcomm had waived its right to assert the ‘104 and ‘767 patents because it failed to disclose those patents to the JVT SSO. Consequently, the jury recommended the court declare them unenforceable.
The trial court did so, but it went one step further. After finding that Qualcomm had acted in bad faith during trial by concealing its conduct before the JVT SSO, the trial court ordered their patents “unenforceable against the world.” See Qualcomm Inc. v. Broadcom Corp., 539 F. Supp. 2d 1214, 1248 (S.D. Cal. 2007). It then went on to award attorney fees to Broadcom relying on Qualcomm’s misconduct before the JVT SSO and its misconduct before the court as reasons for doing so. See Qualcomm Inc. v. Broadcom Corp., 2007 U.S. Dist. LEXIS 57122, at *7 (S.D. Cal. Aug. 6, 2007). Qualcomm appealed.
Federal Circuit: The Remedy of Unenforceability Must Be Proportional to the Harm
At the outset, the Federal Circuit described this case as one involving “the consequence of silence in the face of a duty to disclose patents in a standards-setting organization.” Qualcomm Inc., 2008 WL 5047675, at *6. As the court later noted, many SSOs impose a disclosure duty on their participants to avoid the “patent hold-up” problem. Id. at *8. Such a situation occurs when companies invest resources to implement a standard only to learn later, once it is too expensive to reverse course, that they must pay royalties to practice the standard because the standard incorporates U.S. patents. Id. at *8.
To analyze this issue, the panel turned to Rambus Inc. v. Infineon Technologies AG, 318 F.3d 1081 (Fed. Cir. 2006), where it had previously addressed the duty of disclosure in the context of an SSO. Using that case as a guide, the court broke the inquiry down into four parts: (1) determining if Qualcomm, as a member of the JVT SSO, had a duty to disclose patents prior to adoption of the H.264 standard; (2) if Qualcomm did have a duty, determining the scope of that duty; (3) determining if Qualcomm breached that duty when it did not disclose the ‘104 and ‘767 patents; and (4) if Qualcomm did breach its duty, determining the appropriate remedy.
Affirming the trial court in all respects except for the scope of the remedy, the Federal Circuit found (i) that Qualcomm had a duty, (ii) that the scope of that duty included disclosing the two patents, and (iii) that by not disclosing those patents, Qualcomm breached the duty.
According to Rambus, a duty to disclose can exist in either an SSO’s disclosure policies or in the SSO’s participants’ interpretation of those policies. See Rambus, 318 F.3d at 1098. Relying on Rambus, the Qualcomm district court found a duty in both places. The policies, for example, stated that when a standard was being considered, the members of the JVT SSO were encouraged to use their best efforts “to disclose as soon as possible IPR [intellectual property rights] information” associated with that standard.1 The policies of the parent SSOs required the same, albeit its disclosure requirements were triggered at the approval stage.2 Consequently, the JVT SSO participants testified at trial that they understood these policies to impose a disclosure duty on them, which led the trial court to find that they did. The Federal Circuit, after reviewing this evidence related to duty, found sufficient support for the trial court’s conclusion and affirmed it. See Qualcomm, 2008 WL 5047675, at *11-*12.
Next, having determined that Qualcomm had a duty to disclose, the panel went on to analyze the scope of that duty by construing the language in the policy. As previously described, the JVT SSO’s policy required disclosure of “possible IPR information . . . associated with any standardization proposal.” The trial court construed this language to include patents that might be “reasonably necessary” to practice the H.264 standard. See Qualcomm Inc. v. Broadcom Corp., No. 05-CV-1958, 2007 U.S. Dist. LEXIS 28211, at *27 (S.D. Cal. Mar. 21, 2007). On appeal, Qualcomm argued that such a construction was nonsensical. The Federal Circuit disagreed.
The Federal Circuit classified this interpretation as an appropriately “objective standard” that applies “when a reasonable competitor would expect to practice the H.264 standard without a license under the undisclosed claims.” See Qualcomm, 2008 WL 5047675, at *13. What is more, the Federal Circuit found this standard was breached, partly on Qualcomm’s own admission. In particular, the panel was not persuaded by Qualcomm’s arguments that the patents were not “reasonably necessary” for practicing the standard. Especially since, having asserted the two patents against Broadcom, Qualcomm had already essentially admitted otherwise.
The final issue for the court was determining the proper remedy. For the Federal Circuit, the issue of remedy began with determining whether or not Qualcomm waived its ability to assert its patents in the future by not disclosing them to the JVT SSO.3 At trial, the district court found that Qualcomm had waived its assertion rights using the equitable doctrine of implied waiver. Under that doctrine, rights are waived when a party, with full knowledge of the consequences, engages in conduct that induces a reasonable belief that it is relinquishing its rights. See Qualcomm Inc., 2007 U.S. Dist. LEXIS 28211, at *32-33 (paraphrasing the trial court’s jury instruction regarding implied waiver).
Pointing to evidence of intentional concealment before the JVT SSO when there was full awareness of a duty to disclose, the trial court found that Qualcomm had sufficient knowledge of the relevant circumstances to support invoking the doctrine of implied waiver. The Federal Circuit affirmed, but made an interesting side point. It noted that even if Qualcomm did not have full knowledge of the potential implications of its conduct—that its patents would be ordered unenforceable—this was not enough to escape the doctrine of implied waiver when there was evidence of intentional concealment. See Qualcomm, 2008 WL 5047675, at *16. As a consequence, the issue appears open as to whether this same doctrine could be applied equitably in a case with different facts, that is, in a case where there was no evidence of intentional concealment.
With sufficient basis for applying the doctrine of waiver, the court turned to determining its scope. The patents emerged from the Southern District of California branded as “unenforceable against the world” after the trial court determined the scope of the waiver was necessarily this broad. The Federal Circuit did not go as far. While it did affirm a trial court’s ability to “order patents unenforceable as a result of silence in the face of an SSO disclosure duty,” the panel underscored that the remedy must be proportional to the underlying breach. Qualcomm Inc., 2008 WL 5047675, at *20. In other words, because the breach was of a duty to members of the JVT SSO in the context of the H.264 standard, Qualcomm’s patents could be held unenforceable only against those who practice that standard. To order them unenforceable against the world was an abuse of discretion.
Qualcomm’s Message for the Future
The Federal Circuit’s most recent Qualcomm decision makes clear that the duty of disclosure imposed by an SSO is a serious matter. In the future, patent holders should heed the message this case communicates.
This message is that when patent holders take part in an SSO to develop an industrial standard, they must understand their duties and the consequences of a breach. This includes knowing whether a duty exists, and the scope of that duty when it does. To answer these questions, patent holders have two resources—the organization’s policies and the interpretation of those policies by their peers. Should patent holders breach their duty, their ability to assert their patents against parties practicing the SSO’s adopted standards will be put at risk. Patent holders should proceed accordingly.