Litigation over standard essential patents (SEPs) typically involves a variety of interrelated issues, including questions over whether the parties have acted as willing licensors/licensees, the essentiality of the asserted patents, infringement, and validity. Recently, though, the US federal court leg of one prominent, multijurisdictional SEP dispute took a relatively atypical detour into US state law. On August 13, Eastern District of North Carolina Magistrate Judge Robert T. Numbers, II resolved a discovery dispute partly in favor of defendant Lenovo in support of its counterclaim brought under the state’s bad-faith patent assertion law against SEP owner and plaintiff InterDigital, Inc. While the court declined to compel the production of licensing offers made to others (ruling that this information was beyond the scope of the statute), it granted Lenovo’s request to compel production of “demands” (communications alleging infringement, as broadly defined by the statute) sent to others.
The parties’ dispute stems from Lenovo’s alleged infringement of InterDigital patents declared essential to various 3G, 4G, and 5G cellular standards and, as noted above, has led to litigation in multiple countries, including the UK, US, Germany, and China. Perhaps the most widely covered has been the leg in the UK, which has become a top SEP venue due to UK courts’ willingness to set the terms of global fair, reasonable, and nondiscriminatory (FRAND) licenses. In March 2023, the London High Court of Justice issued the country’s second-ever FRAND determination in InterDigital’s case against Lenovo, imposing a $138.7M global fair, reasonable, and nondiscriminatory (FRAND) license against Lenovo after finding that neither party’s offers had been FRAND. The rate was closer to what Lenovo had sought (totaling $80M) than US-based InterDigital’s proposal ($337M). Notably, the court also found that Lenovo had behaved as a willing licensee during licensing negotiations, but that InterDigital had not acted as a willing licensor due having consistently offered supra-FRAND rates. The court also rejected InterDigital’s proposed rate-setting methodology. In late June 2023, the court then ordered Lenovo to pay 4% in interest on past sales; with the resulting $46.2M in interest, this brought the total award to $184.9M.
In early September, just over two months later, InterDigital brought the dispute to the US, filing the aforementioned complaint in the Eastern District of North Carolina as well as a parallel action before the International Trade Commission (ITC). Both actions focused solely on infringement, with neither asserting claims related to FRAND issues—as no US court (or adjudicative agency) has yet asserted the power to impose the terms of a global FRAND license, unlike in the UK.
Lenovo would subsequently characterize these US cases as an attempt to make up for the fact that the High Court had awarded far less than it had requested in the UK action. As Lenovo would later assert in its motion to compel, that lower award (albeit, one that would later get slightly boosted on appeal, as detailed further below) prompted this “pivot[]”, with the US “litigation merely another attempt by InterDigital to coerce Lenovo into making excessive, windfall payments to it”.
In response, Lenovo explains, it brought a counterclaim under the North Carolina Abusive Patent Assertions Act (N.C. Gen. Stat. § 75-143(a)) (NCAPAA), a 2014 statute that makes it unlawful in that state to “for a person to make a bad-faith assertion of patent infringement”. Lenovo alleged that InterDigital’s conduct implicates multiple factors that the statute considers evidence of bad-faith patent assertion: specifically, under factor 2, that InterDigital failed to conduct an adequate pre-suit investigation (“to conduct an analysis comparing the claims in the patent to the target’s products, services, and technology”); that under factor 5, it made a licensing offer not based on a “reasonable estimate” of the license’s value; that under factor 6, it made a meritless claim that it knew or should have known it was meritless; and that under factor 11, it made an “objectively unreasonable” request for injunctive relief because as an NPE it could not show irreparable harm. Crucially, Lenovo argued that InterDigital does not meet the definition of an “operating entity”, as would be exempted from the NCAPAA, alleging that InterDigital is not primarily engaged in product manufacturing or sales, citing the fact that the patent owner “relies on its licensing efforts and not manufacturing or the provision of goods or commercial services to satisfy the domestic industry requirement for [the asserted] patents in” the ITC proceeding.
In late March 2024, District Judge Louise W. Flanagan denied InterDigital’s Rule 12 motion to dismiss Lenovo’s counterclaim, agreeing with Lenovo that it is not required to plead facts to support its contention that InterDigital is not an operating entity. In the alternative, the court found that Lenovo had stated a plausible claim that InterDigital is not an operating entity, in particular that its research and development is not directed toward “commercialization” as required by the statute, as it is InterDigital’s licensees, not InterDigital itself, that perform the necessary steps “to create, test, qualify, modify, or validate technologies or processes” claimed in its patents. The court also found that it must construe any disputes over the facts that InterDigital cites about its business model from one of its own 10-Ks in favor of Lenovo, as the moving party, and that at any rate such disputes cannot be resolved at the motion to dismiss stage. In addition, the court declined to strike the counterclaim.
Its counterclaim thus left unscathed, Lenovo then sought additional discovery from InterDigital on certain aspects of its counterclaim—but after, as the court later put it, “InterDigital balked at providing that discovery”, Lenovo filed a motion to compel.
Magistrate Judge Numbers ruled on the motion on August 13, beginning with the parties’ dispute over requested materials related to license offers not based on a “reasonable estimate” of value under factor 5—in particular, their dispute over whether this factor is limited to offers made to the accused infringer or whether it includes offers made to anyone else. Here, Magistrate Judge Numbers found that the structure of the NCAPAA makes it clear “that when the North Carolina General Assembly wished for a court to consider conduct that goes beyond the parties before the court, it knew how to do so”, citing additional factors that explicitly contemplate other demand recipients or prior enforcement efforts. As a result, Magistrate Judge Numbers found that “offers that InterDigital has made to others to license its patents are not relevant to the claims and defenses here” and denied the motion on this point.
However, Magistrate Judge Numbers reached the opposite result with respect to Lenovo’s request for all “documents showing any communication in which it accused another person of infringing the asserted patents”—here as relevant to factor 9, which again contemplates the sending of the same demand to multiple recipients without accounting for relevant differences in the accused products. InterDigital argued that it never sent a demand to Lenovo, but the court rejected this contention: “[G]iven the broad definition of the term ‘demand’ [covering ‘[a] letter, e-mail, or other communication asserting or claiming that a target has engaged in patent infringement or should obtain a license to a patent’] and the substantial litigation that has occurred between the parties, the court finds it impossible to believe that InterDigital never sent correspondence to Lenovo accusing it of patent infringement or suggesting that it needed to obtain a license to the asserted patents”. The court also rejected InterDigital’s argument that certain executed licenses and claim charts it had already provided were sufficient here, remarking that it was “not persuaded . . . [that this] satisfies its obligation”.
This case is far from the first time that a patent owner has pushed back against the application of a bad-faith patent assertion statute, versions of which have been passed in more than 30 states—all of which build on the premise that while federal patent law governs patent infringement claims made in good faith, those in bad faith are left to the states to regulate. Now, the question of whether these statutes properly avoid treading on federal law is heating up before the Federal Circuit: An ongoing appeal filed by monetization firm Longhorn IP LLC and affiliate Katana Silicon Technologies LLC argues that one such law in Idaho is unconstitutional as preempted by federal patent law, also challenging the first-of-its-kind imposition of a bond (totaling $8M) under the Idaho statute. In late May, defendant-appellant Micron and Idaho received support from 27 other states and the District of Columbia, which sought leave to file an amicus brief in support of upholding Idaho’s law, as did two industry associations as well. Oral argument in that appeal, in which briefing by the parties has since continued, has yet to be scheduled.
A deep dive on those appellate briefs can be found at “Other States Rally Behind Idaho’s Bad-Faith Patent Assertion Law” (June 2024).
Finally, as mentioned above, the UK High Court’s March 2023 judgment in InterDigital v. Lenovo has not been the last word in that litigation. In mid-July, the UK Court of Appeal issued its long-awaited appellate judgment, ruling in part that the lower court applied flawed reasoning in its rate-setting analysis—as a result, increasing the per-unit rate for defendant Lenovo from $0.175 to $0.225 and the total lump sum awarded to plaintiff InterDigital, Inc. from $138.7M to $178.3M. However, as was the case for the lower court’s ruling, the final rate here was far closer to the one sought by Lenovo.
For more on that ruling, see “UK Court Increases Global FRAND Rate in Closely Watched Appeal” (July 2024).
