Relying on Motorola’s Commitment to License Its Worldwide Patents on RAND Terms, the Court of Appeals Upheld a Preliminary Injunction Barring Enforcement of a German Court’s Injunction Against the Continued Infringement by Microsoft of Motorola’s German Patents

SUMMARY

In Microsoft Corp. v. Motorola, Inc. (9th Cir. Sept. 28, 2012), a unanimous panel of the Court of Appeals for the Ninth Circuit (Circuit Judges Wallace, Thomas and Berzon) upheld a preliminary injunction barring Motorola from enforcing (by posting a security bond) a patent infringement injunction entered by a German court; the injunction would have prohibited Microsoft from offering or supplying key products in Germany. The Ninth Circuit found that Motorola’s promise to a standard-setting organization to license its standard-essential patents on reasonable and non-discriminatory ("RAND") terms1 created a contract enforceable by Microsoft as a third-party beneficiary. The Ninth Circuit further determined that the district court properly prohibited Motorola from enforcing the German court’s injunction because resolution of whether Motorola had breached its RAND commitment would resolve the German litigation, and because Motorola was not permitted to compromise the U.S. district court’s ability to decide the breach question by putting pressure on Microsoft to settle based on the German injunction.

The Microsoft decision may give a potential licensee or accused infringer of standards-essential patents a new tactic that could be used to avoid the entry of an injunction in a foreign patent action.

BACKGROUND

Motorola owns certain U.S. and foreign counterpart patents that it contends are essential to the H.264 video coding standard set by the International Telecommunications Union ("ITU"). Under the ITU’s Common Patent Policy, the owner of a patent essential to an ITU standard must submit a declaration stating that it is willing to "negotiate licenses with other parties on a non-discriminatory basis on reasonable terms and conditions." Microsoft, slip op. at 3-4. Pursuant to this policy, Motorola submitted numerous declarations to the ITU stating that it was willing to grant licenses for its H.264 essential patents on a "worldwide, non-discriminatory basis and on reasonable terms and conditions" to an "unrestricted number of applicants." Id. at 4.

In October 2010, Motorola wrote Microsoft offering to license Motorola’s worldwide H.264 patent portfolio (including both U.S. and German patents) for "a royalty of 2.25% per unit . . . based on the price of the end product" (Xbox, PC, smartphone, etc.). Id. at 6. Microsoft responded on November 9, 2010, by filing a breach of contract suit in the U.S. District Court for the Western District of Washington. Id. at 8. Microsoft asserted in its complaint that it was a third-party beneficiary of Motorola’s RAND agreement with the ITU, and that Motorola had breached that agreement by failing to offer reasonable terms to Microsoft. Other litigation subsequently proceeded in the U.S. and Germany according to the following chronology:

  • On November 10, 2010, Motorola filed suit against Microsoft in the Western District of Wisconsin alleging infringement of its H.264-essential U.S. patents. The Wisconsin suit was transferred to Washington, and the two actions were consolidated. Id.
  • In July 2011, Motorola sued Microsoft for infringement of Motorola’s German H.264-essential patents in the Mannheim Regional Court, seeking an injunction against continued infringement in Germany. Id. at 10.
  • In February 2012, the Washington district court granted partial summary judgment to Microsoft, finding that (1) Motorola had entered a binding contractual commitment with the ITU to license its H.264-essential patents on RAND terms, and (2) Microsoft was a third-party beneficiary of that commitment (a point which Motorola elected not to dispute). Id. at 8-9. Whether the license rate offered by Motorola breached its RAND commitment is set for trial in November 2012.
  • On April 12, 2012, the Washington district court granted a preliminary injunction barring Motorola from "enforcing any injunctive relief it may receive in the German Action with respect to the European Patents at issue therein." Microsoft was ordered to post a $100 million security bond as collateral for any damages to Motorola arising from the injunction. Id. at 13.
  • On May 2, 2012, the Mannheim Regional Court ruled that (1) Motorola’s commitment to the ITU was not enforceable by Microsoft, "because German law does not recognize third-party contract rights," and (2) Microsoft had infringed Motorola’s patents. Id. The court enjoined Microsoft from "offering or supplying" its Xbox 360, Windows 7, Internet Explorer 9 and Windows Media Player 12 products in Germany. Id. at 10-11.
  • The injunction granted in the German action was not self-enforcing and required Motorola to post a security bond. The injunction previously entered by the Washington district court prohibited Motorola from taking such action. Accordingly, the German injunction never took effect.

THE NINTH CIRCUIT’S DECISION

Judge Berzon, writing for the panel, began by finding that Motorola’s appeal had been properly directed to the Ninth Circuit, rather than the Federal Circuit that normally hears patent appeals, because "Microsoft’s complaint sounds in contract and invokes the district court’s diversity jurisdiction." Id. at 15. The court then considered the "foreign anti-suit injunction" entered by the district court under the standard adopted in E. & J. Gallo Winery v. Andina Licores S.A., 446 F.3d 984 (9th Cir. 2006). Under Gallo, a foreign anti-suit injunction may not be granted unless the court determines that (1) the parties in the foreign and local action are the same; (2) the issues are the same, such that "all the issues in the foreign action can be resolved in the local action"; (3) one of the considerations justifying a foreign anti-suit injunction, first set out by the Fifth Circuit in In re Unterweser Reederei GMBH, 428 F.2d 888, 896 (5th Cir. 1970), aff’d on reh’g, 446 F.2d 907 (5th Cir. 1971) (en banc), applies;2 and (4) the "impact" of the foreign anti-suit injunction "on comity" will be "tolerable." Microsoft, slip op. at 15-19.

The Ninth Circuit found that the first two prongs of the Gallo test—whether the parties and issues are the same—were met. First, there was no dispute that the same parties were involved. Second, it was undisputed that Motorola’s declarations to the ITU created a contract enforceable by Microsoft as a third-party beneficiary, including with respect to Motorola’s German patents. The court held that "implicit [in Motorola’s] promise is, at least arguably, a guarantee that the patent-holder will not take steps to keep would-be users from using the patented material . . . such as seeking an injunction . . . ." Id. at 23. In these circumstances, the Ninth Circuit held, resolution of "Microsoft’s contract-based claims . . . would, if decided in favor of Microsoft, determine the propriety of the enforcement by Motorola of the injunctive relief obtained in Germany." Id. at 26.

The third prong of the test—the presence of one of the Unterweser factors—was also met. The Ninth Circuit held that the district court properly found that the German litigation was "vexatious or oppressive" and would "prejudice equitable considerations." Id. at 27. Primarily, "the timing of the German litigation raise[d] concerns of forum shopping and duplicative and vexatious litigation" because Motorola chose to sue in only one European forum on two of its dozens of H.264-essential patents. Id. The fact that the German court found in Motorola’s favor did not negate this consideration, because "litigation can have merit and still be ‘vexatious’." Id. at 28. Ultimately, the court found, Motorola’s German litigation was vexatious and inequitable because it "compromis[ed] the [district] court’s ability to reach a just result in the case before it free of external pressure on Microsoft to enter into a ‘holdup’ settlement before the litigation is complete." Id. at 27-28.

The fourth and final prong—whether the injunction’s impact on comity is tolerable—was also met. First, "while not dispositive," the U.S. litigation was filed before the German action was brought, and where parties have made a commitment to resolve a contractual dispute in one forum, enjoining litigation in some other forum is unlikely to implicate comity concerns. Id. at 30. Second, comity concerns were minimized because the injunction "swept ‘no broader than necessary’": It did not bar Motorola from pursuing the German action (and obtaining damages or other non-injunctive remedies), but only prohibited Motorola from posting the bond required to enforce the German injunction. Id. at 32. Finally, as "a private dispute under Washington state contract law between two U.S. corporations," the matter did not raise any "public international issue." Id. The mere fact that the German court might answer the contract question differently "does not generate an intolerable comity problem." Id. at 33.

IMPLICATIONS

Although the decision in Microsoft is binding only in the Ninth Circuit, it is likely to be considered persuasive authority by other courts. Therefore, the Microsoft decision must be considered in any patent action where RAND commitments and foreign counterpart patents may be at issue. The decision also adds to the growing body of law and commentary on whether an injunction may issue on patents subject to a RAND commitment. See, e.g., Apple, Inc. v. Motorola, Inc., (N.D. Ill. June 22, 2012). Recent comments by the Federal Trade Commission, the European Commission and the International Trade Commission have raised concerns over whether an injunction may ever be appropriate for RAND patents. On the other hand, the German Supreme Court has outlined the circumstances under which an injunction may be issued to prevent infringement of such patents.

Where RAND promises have been made to a standard-setting organization, the Ninth Circuit’s decision gives a potential licensee or accused infringer a new tool to avoid pressure arising from the threat of non-U.S. injunctions by the patent owner. The accused infringer may be able to avoid an unreasonable license demand or infringement claim by the patent owner by bringing a contract claim that can be used, in some circumstances, to blunt the patentee’s ability to enforce an injunction obtained in a forum outside the U.S. Thus, the Microsoft decision may lead many accused infringers of standards-essential patents to file a breach of contract action in the Ninth Circuit at an early stage of license negotiations, for example, following receipt of a license demand the licensee believes is unreasonable.

On the other hand, there are potential tactical steps that a patentee may employ to reduce the likelihood that a foreign anti-suit injunction will be granted. First, a patentee concerned about a potential contract claim in a U.S. court might consider earlier initiation of a foreign action ( i.e., before it files any U.S. patent infringement action or a potential infringer can assert third-party contract claims in a U.S. court) to increase the possibility that the court will find that an anti-suit injunction would raise comity concerns. Second, a patentee may be able to avoid a finding that the issues in the U.S. contract and foreign patent actions are the same by, for example, suing on non-standard-essential patents in the foreign forum (i.e., those that are not subject to RAND commitments). Third, a patentee might attempt to sue in a forum where, unlike the German injunction at issue in Microsoft, any injunction against infringement would be self-enforcing, such that no action by the patentee that might be enjoined by a U.S. court would be required. The Microsoft decision did not address whether a district court may properly bar a patentee from merely requesting injunctive relief in a foreign patent infringement action.