A divided Federal Circuit has reversed key portions of a Central District of California jury’s January 2020 verdict for the California Institute of Technology (Caltech) against Apple and Broadcom. In a February 4 precedential decision, a majority of the appellate court overturned the jury’s finding of infringement as to one of the three tried Wi-Fi networking patents and remanded for a new trial, ruling that the lower court erred by failing to instruct the jury on the proper construction of a key claim term. The majority also unwound the jury’s $1.1B damages award, concluding that the district court was wrong to allow a “legally erroneous” two-tiered damages theory that applied separate hypothetical negotiations to the sale of the same chips.

The Litigation Below

Caltech sued Apple, Broadcom (along with subsidiary Avago), and Cypress Semiconductor in May 2016 (2:16-cv-03714), with Broadcom and Cypress alleged to infringe the three patents just tried (7,116,710; 7,421,032; 7,916,781) along with one other (8,284,833) through the provision of certain Wi-Fi chipsets. Apple was alleged to infringe the same patents through mobile devices, smartwatches, laptops, and desktops incorporating those chipsets. In January 2018, after the court resolved a dispute over the selection of claims for adjudication in the defendants’ favor, Caltech withdrew all claims asserting the ‘833 patent from the case. Cypress was then dismissed from the lawsuit with prejudice and by joint stipulation that September.

A series of validity challenges followed in both the district court case and before the Patent Trial and Appeal Board (PTAB). In 2019, the court rejected the defendants’ Alice motion against the ‘781 patent and granted Caltech’s motion for summary judgment of validity under Section 101 as to the ‘710 and ‘032 patents on a similar basis. A set of inter partes reviews (IPRs) filed by Apple led the PTAB to cancel claims from the ‘781 patent, but the Board declined to cancel claims from the ‘710 and ‘032 patents in the IPRs for which trial was instituted. Those IPRs later led the court to conclude, based on a motion from Caltech, that Apple was estopped from bringing Section 103 invalidity claims in district court as to most of its asserted prior art combinations. The following month, Caltech withdrew all asserted claims apart from the six claims held by the court to be subject to IPR estoppel—claims 11 and 18 from the ‘032 patent, claims 13 and 22 from the ‘781 patent, and claims 20 and 22 from the ‘710 patent—stating that the “upcoming trial will be significantly streamlined” by the defendants’ inability to raise Section 103 defenses at trial.

The case then went to trial as to those six claims starting on January 13, 2020. On January 29, the jury returned a verdict of infringement as to every claim but found that neither Apple nor Broadcom had willfully infringed the asserted patents. The verdict included a damages award of $270.2M against Broadcom and $837.8M against Apple, both as a running royalty. Apple and Broadcom appealed several of the court’s post-trial rulings on infringement and damages (detailed below) and the resulting final judgment in August 2020 (2020-2222), filing a separate appeal over the court’s bill of costs in January 2021 (2021-1527).

The Federal Circuit’s Majority Decision

- The ‘710 and ‘032 Patents: Judgment of Infringement Affirmed

The Federal Circuit’s majority decision on appeal first addressed Apple and Broadcom’s challenge of rulings concerning the ’710 and ’032 patents. Apple and Broadcom argued in part that the court erred by revisiting its earlier construction of the term “repeat”, found in both patents, and instructing the jury that the term means “generation of additional bits, where generation can include, for example, duplication or reuse of bits”. The defendants argued that this construction was not consistent with the claim language, the specification, and the construction from another Caltech case against Hughes Communications. However, the majority agreed with Caltech that “the plain claim language requiring repeating information bits does not require generating new, distinct bits and that the district court was correct in construing the term to not exclude the reuse of bits”.

The defendants also argued that the record supported only a verdict of noninfringement. As summarized by the majority, they contended that the AND gates and multiplexers found in the accused Broadcom chips allegedly “do not generate bits ‘irregularly,’ asserting that they output the same number of bits for every information bit” (emphasis in original). Yet the majority found that substantial evidence supported the infringement verdict as to the ‘710 and ‘032 patents, agreeing with Caltech that the jury properly relied upon expert testimony “explaining that in the RU devices every bit in the stream of information bits is fed by wire simultaneously to the information inputs of all 972 AND gates and that at any time, at least 3 and up to 12 of those AND gates will be enabled to repeat that bit at the output of the AND gates” (emphasis in original). As a result, the majority affirmed the lower court’s denial of judgment as a matter of law (JMOL) of noninfringement for those patents.

- The ’780 Patent: Not Patent-Ineligible, but There Must Be a New Trial on Infringement

The majority next turned to the ‘780 patent, beginning by briefly rejecting the defendants’ argument that the asserted claims are ineligible under Alice because it employs a mathematical formula. This does not render the claims patent-ineligible under Diamond v. Diehr, the majority held. Moreover, the majority determined that the claims were directed not to a formula alone, but rather to an “efficient, improved method of encoding data that relies in part on irregular repetition”.

However, the majority faulted the district court for its handling of a key claim term. While the lower court construed the term “variable number of subsets” to require “irregular information bit repetition” (as summarized on appeal), it exercised its discretion not to instruct the jury on that determination so as not to “confuse the record on this issue”. “This was error and requires remand for a new trial on infringement”, the majority ruled—explaining that “[o]n remand, the district court must instruct the jury as to the proper construction of the term ‘variable number of subsets’”.

- The Lower Court’s Estoppel Ruling: Under SAS Institute, Prior Caselaw Must Be Overturned

The majority also affirmed the district court’s ruling on IPR statutory estoppel—in the process, addressing changes in the law since 2016, when the Federal Circuit last addressed the issue in Shaw Industries Group v. Automated Creel Systems. In Shaw, the appellate court ruled that estoppel under 35 USC Section 315(e) only applies to grounds for which the PTAB instituted trial, because an “IPR does not begin until it is instituted”. Yet the district court noted that the US Supreme Court eliminated partial institution decisions for America Invents Act reviews altogether in its 2018 decision in SAS Institute v. Iancu. While SAS did not explicitly overrule Shaw, other courts have subsequently held that since SAS effectively eliminated the circumstance where there are noninstituted grounds in an otherwise instituted IPR, the estoppel provision must refer to grounds not included in the IPR petition “for the words ‘reasonable could have raised’ to have any meaning at all”, as noted by the district court (citation omitted).

The majority agreed with that interpretation, taking the “opportunity to overrule Shaw and clarify that estoppel applies not just to claims and grounds asserted in the petition and instituted for consideration by the Board, but to all claims and grounds not in the IPR but which reasonably could have been included in the petition”.

- Damages: No Error on Extraterritoriality, but Caltech’s Two-Tier Damages Theory Is “Legally Unsupportable”

The majority then turned to damages, after briefly affirming the lower court’s grant of summary judgment of no inequitable conduct with respect to Caltech’s alleged failure to disclose a certain reference during prosecution.

The majority began by addressing the defendants’ argument that the damages verdict improperly included extraterritorial sales from Broadcom’s international affiliates, allegedly based on two errors in the court’s jury instructions. First, the defendants asserted that the lower court erred by not instructing the jury about the presumption against the extraterritorial application of US laws. Yet the majority held that whether US law applies only domestically is not the issue, but rather “whether the relevant transactions here were domestic or extraterritorial in nature. The presumption against extraterritorial application is thus inapplicable”. As a result, the majority decided that the district court’s jury instruction “that Caltech had the burden of proving that infringement occurred in the United States” was “proper and sufficient” on this issue.

Second, the defendants argued that the lower court erred by instructing the jury that a “sales cycle leading to design wins”—wherein a product is designed in the US, and a buyer selects that design in the US—could trigger a US sale. This was allegedly an error under the Supreme Court’s Halo Electronics v. Pulse Electronics decision, which they interpreted as recognizing a “categorical prohibition against treating such a sales cycle as a domestic sale” (as summarized on appeal). However, the majority held that Halo does not establish “a blanket holding that design wins arising out of a sales cycle can never be domestic transactions”, and noted that the jury instructions explicitly acknowledged that when “substantial activities of a sales transaction . . . occurs entirely outside the United States”, this “would not constitute a sale within the United States”. As such, the majority found no error on the court’s instructions on extraterritoriality.

However, the majority took issue with Caltech’s damages theory, which was based on testimony from two experts that the university “would have engaged in two simultaneous hypothetical negotiations, one with Broadcom at the ‘chip level’ and one with Apple at the ‘device level’”. As recounted on appeal, “[t]hose negotiations would have excluded from Broadcom’s hypothetical chip license any Broadcom chips incorporated into Apple products sold in the United States and treated those identical chips as being subject to Apple’s separate hypothetical device license at a vastly different royalty rate”. According to Caltech’s experts, these separate negotiations would have been proper because Apple and Broadcom were separate infringers, and therefore no “cross-talk” would occur between them. The lower court presented this testimony to the jury over the defendants’ objection, holding that plaintiffs may seek damages from different points in the supply chain as long as they do not seek double recovery in violation of patent exhaustion doctrine. Moreover, the court rejected such concerns of double recovery because the defendants were “different companies and because the experts’ opinions carved out of the Broadcom hypothetical negotiation chips sold to Apple”.

The problem with this approach, countered the majority, was that Apple and Broadcom being separate infringers is not enough to present a two-tiered damages award to a jury without evidence that they would “engage in such separate negotiations[,] and in the absence of additional facts that might justify separate and different treatment of the same chips at different levels of the supply chain”. Rather, under the Federal Circuit’s 2012 LaserDynamics v. Quanta Computer decision, the general principle is that “a direct infringer or someone who induced infringement should pay the same reasonable royalty based on a single hypothetical negotiation analysis”.

The district court had justified its contrary conclusion because the Apple and Broadcom products were different and had different values merely because the two defendants were “different companies at different levels in the supply chain”. However, the majority repeated that more is required to depart from the governing precedent, which establishes that without “compelling” evidence showing otherwise, “a higher royalty is not available for the same device at a different point in the supply chain”.

Rather, under the Federal Circuit’s 1983 decision in Stickle v. Hublein, full recovery from one infringer generally allows only nominal damages to be awarded against another infringer for the same device. Moreover, under the court’s 2006 ruling in Glenayre Electronics v. Jackson, a party is barred from seeking direct infringement damages from a “buyer and seller” when “actual damages covering that very use have already been collected from the maker and seller of that product”. The majority held that the district court was wrong to distinguish those cases as “only applying to damages calculations against two defendants involving overlapping royalty bases”. Such a conclusion was “wholly contrived, lacks any basis of fact and is contrary to the customary way patent infringement disputes are ordinarily resolved. It is well settled that a reasonable royalty is what a willing licensor and a willing licensee would have agreed to at a hypothetical negotiation just before infringement began” (citation omitted).

The majority then concluded that “Caltech’s two-tier damages theory is legally unsupportable on this record”, vacating the damages award and remanding for a new trial on that issue.

Judge Dyk’s Concurrence-in-Part and Dissent-in-Part

Circuit Judge Timothy B. Dyk concurred with the majority’s conclusions as the patent eligibility of the ‘781 patent, IPR estoppel, and inequitable conduct. However, he dissented from its holding that substantial evidence supported the finding of infringement as to the ‘710 and ‘032 patents and argued that the court should have reversed the denial of JMOL of no infringement. Judge Dyk also asserted that the court should have reversed the denial of JMOL of no infringement as to the ‘781 patent instead of granting a new trial.

The Federal Circuit’s WiLAN Opinion: Another Large Damages Award Reversed

The Federal Circuit’s decision in this case was accompanied by another precedential ruling on damages that also came down in Apple’s favor. That same day, the court overturned an $85.2M damages award against the company in its ongoing litigation with Quarterhill Inc. subsidiary Wi-LAN Inc. (WiLAN), concluding that WiLAN’s damages expert in a January 2020 damages retrial used a flawed methodology that was “untethered to the facts of this case”.

Coverage of that decision can be found here: “WiLAN’s $85.2M Damages Verdict From Second Apple Trial Cannot Stand, Rules Federal Circuit” (February 2022).