On October 9, 2012, ALJ Theodore R. Essex issued the public version of Order No. 73 (dated September 18, 2012) granting-in-part complainant Tessera, Inc.’s (“Tessera”) renewed motion for summary determination that respondent Freescale Semiconductor, Inc. (“Freescale) forfeit the bonds posted pursuant to the cease and desist order and limited exclusion order entered in Certain Semiconductor Chips With Minimized Chip Package Size and Products Containing Same (Inv. No. 337-TA-605).
By way of background, this investigation was instituted in May 2007 based on Tessera’s complaint against respondents Spansion, Inc., Spansion, LLC, Qualcomm, Inc., ATI Technologies, Motorola, Inc., STMicroelectronics N.V., and Freescale alleging violation of Section 337 by reason of infringement of U.S. Patent Nos. 5,852,326 and 6,433,419. On May 20, 2009, the Commission issued its final disposition of the investigation, finding a violation of Section 337 and issuing a limited exclusion order against the respondents and cease and desist orders against several domestic respondents. See our May 22, 2009 and June 11, 2009 and May 28, 2010 posts for more details. On December 30, 2009, ALJ Essex previously denied Tessera’s motion for forfeiture of respondents’ bonds, limited discovery, and an evidentiary hearing. See our July 1, 2010 post for more details.
According to Order No. 73, Tessera argued that Freescale should forfeit all, or at least 81.8%, of the bonds it posted, as well as pre-judgment interest, since Freescale conceded that all of the bonded products imported and sold during the Presidential Review Period (“PRP”) are covered products, and because (1) the issuance of a bond indicates that at least some injury to Tessera would occur with the importation of infringing products during the PRP; (2) Freescale’s sales during the PRP would have gone to Tessera’s licensees who make up 81.8% of the market; and (3) Freescale’s products are not “unique” such that the products of Tessera’s licensees could not have been acceptable substitutes. Freescale responded that Tessera is not entitled to forfeiture of bonds for products not covered by the Commission’s orders, and that Freescale posted bonds for numerous products that were not covered by the Commission’s orders. Freescale also argued that Tessera failed to show damages for any sales during the bonding period because Tessera admitted (1) that Freescale’s products are not interchangeable with its licensee’s products and any necessary redesign to use Tessera’s licensee’s products could not have been complete within the PRP, (2) that non-infringing alternatives existed, and (3) that Tessera failed to prove any lost royalties. Freescale further asserted that Tessera attempted to shift the burden of proof of damages to Freescale, and that Tessera failed to show on a product-by-product basis which of Tessera’s licensee’s chips could have replaced Freescale’s chips.
With respect to the four Panduit factors for lost-profits damages, ALJ Essex found that Tessera satisfied the first factor (demand for the patented products, as evidenced by Freescale’s admission that it imported and sold the covered products during the PRP), the second factor (absence of acceptable non-infringing substitutes, as evidenced by Freescale repeatedly stating that its main competitors in the relevant market are Tessera’s licensees), and the third factor (manufacturing and marketing capability to exploit the demand, which was shown by evidence demonstrating that Tessera’s licensees could have supplied the market with the requisite covered products). However, ALJ Essex determined that Tessera used an incorrect adjusted market share number of 81.8% in connection with the fourth factor (amount of profit that would have been made). Specifically, the ALJ agreed with Freescale that Tessera’s methodology in arriving at the 81.8% figure was flawed in that (1) it makes the false presumption that non-infringing alternatives were unavailable, and (2) Tessera’s proportional division of the unidentified manufacturers is incorrect. ALJ Essex determined that the correct combined market share figure was 62.1%.
Freescale also disputed the actual bond amount that is subject to the lost profits analysis (i.e., the amount that is multiplied by the market share to determine lost profits), arguing that it posted bonds for any shipment it had reason to believe contained any covered product, but that its own investigation showed that only 35.2 % of the bond was for products actually covered by the exclusion order. ALJ Essex rejected Freescale’s argument, noting that Freescale on its own accord decided not to use the certification provision and post bond amounts for imported shipments that may have contained both covered and non-covered products, and that its decision not to verify the quantity of covered products was made at Freescale’s own risk. The ALJ also observed that rather than immediately seeking to adjust the bond amount and present the basis for doing so to Customs and Border Patrol and the Commission, Freescale waited nearly three years to sort the matter out, and essentially asked the ALJ, the Commission, and Tessera to “trust” its explanation. Thus, ALJ Essex determined that Freescale’s entire posted bond amount was subject to forfeiture.
Finally, ALJ Essex rejected Freescale’s argument that Tessera did not show damages because it failed to establish that its licensees would have made sales but for Freescale’s sales. In particular, the ALJ found no authority for requiring that Tessera’s licensees’ products be “interchangeable” with Freescale’s products, or that any redesign efforts must have been completed and made available during the PRP. ALJ Essex further found that Freescale only established that non-infringing products were available, not that they were “acceptable non-infringing substitutes” for its customers as set forth in Panduit. In addition, the ALJ rejected Freescale’s unsupported methodology for calculating lost royalties based on the number of electrical connections or “billable pins.”