Antitrust Law Daily Wrap Up, ANTITRUST—N.D. Cal.: ASUS required to arbitrate claims over FRAND commitments, (Sep 9, 2015)

By Peter Reap, J.D., LL.M.

ASUS Computer International and ASUSTek Computer Inc. (collectively, the “plaintiffs”) were required to arbitrate several of their claims brought against InterDigital Communications, Inc, InterDigital Technology Corporation, IPR Licensing, Inc., and InterDigital Patent Holdings, Inc. (collectively the “defendants”), including a Sherman Act antitrust claim, based on their allegations that the defendants failed to license standard essential patents at fair, reasonable, and non-discriminatory (FRAND) terms to the plaintiffs by virtue of an arbitration clause in the parties’ 2008 Patent License Agreement, the federal district court in San Jose has ruled (ASUS Computer International v. Interdigital, Inc., August 25, 2015, Freeman, B.).

However, the plaintiffs were not required to arbitrate their breach of contract claim based on unlicensed standard essential patents because the defendants’ assertion of arbitrability with respect to that claim was wholly groundless. Finally, the plaintiffs were denied a requested injunction to enjoin arbitration because they failed to show irreparable harm.

Background. The plaintiffs sell a variety of technology products in the United States, including mobile devices, PC components and peripherals, notebooks, tablets, and servers. The defendants develop and license patents covering technologies such as cellular and wireless communications.

The parties are members of standards setting organizations (SSOs). When SSOs adopt standards that include patented technology, these patents become “standard essential patents” and standard essential patent owners can demand potentially exorbitant licensing fees. To avoid these negative consequences, SSOs require an entity seeking to have its patented technology incorporated into a technical standard commit to licensing its patents on FRAND terms.

In 2008, the parties signed a Patent License Agreement (“2008 PLA”), under which the defendants licensed to the plaintiffs certain standard essential patents relating to cellular and wireless communication standards. The plaintiffs are also in negotiations with the defendants to license additional cellular and wireless communication standard essential patents. Through this lawsuit, the plaintiffs allege that the defendants are violating the law by not licensing its standard essential patents on FRAND terms.

Federal Arbitration Act. The Federal Arbitration Act (“FAA”) covers agreements evidencing a transaction involving commerce,” 9 U.S.C. §2, and reflects a federal policy favoring arbitration. The court’s role under the FAA is limited to determining two gateway issues: (1) whether there is an agreement to arbitrate between the parties; and (2) whether the agreement covers the dispute. These gateway issues, however, can be expressly delegated to an arbitrator, the court noted.

When an arbitration agreement is covered by the FAA, federal law governs by default the question of whether the parties agreed to arbitrate gateway questions of arbitrability. To overcome the default application of federal arbitrability law, parties to an arbitration agreement must clearly and unmistakably designate that nonfederal arbitrability law applies.

Federal law governs arbitrability of the 2008 PLA. The plaintiffs argued that federal arbitrability law applies because the 2008 PLA is covered by the FAA and does not explicitly state that Delaware arbitrability law applies. The defendants countered that Delaware arbitrability law applies because the 2008 PLA “designates Delaware law for both the agreement’s interpretation and conduct of the arbitration.”

Federal arbitrability law applies to the 2008 PLA, the court held. Here, federal arbitrability law applies presumptively because the 2008 PLA is covered by the FAA. The 2008 PLA does not expressly state that Delaware law governs the question of arbitrability and contrary to the defendants’ argument, the designation of Delaware law for both the 2008 PLA’s interpretation and conduct of the arbitration does not evince a clear and unmistakable intent to also use Delaware law for questions of arbitrability, the court explained.

The parties designated arbitrability to an arbitrator. The parties also disputed whether the court or an arbitrator should decide arbitrability. The plaintiffs argued that assigning arbitrability to an arbitrator “would be contrary to the parties’ intent.” The defendants argued that the 2008 PLA’s incorporation of the ICDR rules showed a clear and unmistakable intent to delegate arbitrability decisions to an arbitrator.

The court agreed with the defendants that the parties clearly and unmistakably delegated arbitrability to an arbitrator. The Ninth Circuit has clearly held that an agreement incorporating arbitration rules which include a rule giving an arbitrator the power to decide arbitrability is clear and unmistakable evidence of the parties’ intention to delegate arbitrability to the arbitrator. Here, the parties agreed to arbitration under the International Centre for Dispute Resolution (ICDR) rules, and these rules allowed an arbitrator to decide arbitrability.

The defendants’ claim of arbitrability is not wholly groundless. When the parties clearly and unmistakably delegate arbitrability to an arbitrator, the court’s only remaining inquiry is to determine whether the assertion of arbitrability is wholly groundless. Here, the defendants’ assertion of arbitrability is premised on the belief that the 2008 PLA’s arbitration clause is broad in scope and that all of Plaintiffs’ causes of actions “touch on” the parties’ contractual rights under the 2008 PLA.

With respect to the scope of the 2008 PLA’s arbitration clause, the defendants’ assertion that it is broad in scope easily surpassed the wholly groundless threshold, the court decided. The arbitration agreement expressly designates that Delaware law shall govern its interpretation and under Delaware law, the “arising under” language in the arbitration clause is interpreted as being broad, according to the court. Accordingly, for purposes of this inquiry, the arbitration clause is broad in scope.

After determining the scope of the arbitration clause, the court is required to examine each cause of action to determine if the assertion of arbitrability is wholly groundless. With respect to the plaintiffs’ first two causes of action, the defendants’ assertions of arbitrability are not wholly groundless, the court held. The plaintiffs’ first cause of action alleges a violation of section 2 of the Sherman Act and the plaintiffs’ second cause of action alleges a violation of California’s Unfair Competition Law which is premised on the defendants’ alleged violation of the Sherman Act. Although the complaint ostensibly attacks the defendants’ purported failure to honor its FRAND commitments, the complaint relies heavily on the 2008 PLA for evidence of this failure. As a result, the plaintiffs’ first two causes of action involve the 2008 PLA. Thus, the defendants’ assertions of arbitrability with respect to the first and second causes of action are not “wholly groundless.”

With respect to the third cause of action, the defendants’ assertion of arbitrability is wholly groundless, the court reasoned. The third cause of action alleges a breach of contract based on the defendants’ refusal to offer currently unlicensed standard essential patents to the plaintiffs on FRAND terms. These unlicensed patents are not addressed in the 2008 PLA. The parties’ negotiation for unlicensed patents involves a separate business transaction and the defendants’ assertion of arbitrability is wholly groundless.

Plaintiffs’ fourth, fifth, and seventh causes of action involved a similar analysis and the court discussed them together. The fourth cause of action alleges a breach of contract based on the defendants’ failure to abide by its FRAND licensing obligations in the 2008 PLA. The fifth cause of action is for promissory estoppel and alleges that the defendants’ induced the plaintiffs to adopt standard essential patents but failed to provide them with FRAND licensing terms in the 2008 PLA and in ongoing negotiations. The seventh cause of action alleges that the defendants fraudulently induced the plaintiffs to enter into the 2008 PLA by promising FRAND licensing terms. These three causes of action involved an examination of the 2008 PLA to determine if its terms violate the defendants’ FRAND commitment. Thus, the defendants’ presented a plausible argument that these causes of action arise under the 2008 PLA and the assertions of arbitrability are not wholly groundless.

With respect to the plaintiffs’ sixth cause of action, the assertion of arbitrability is not wholly groundless. The sixth cause of action alleges that the defendants’ waived its right to obtain compensation for standard essential patents addressed in the 2008 PLA and in ongoing negotiations between the parties at rates other than on FRAND terms. Since the allegations involved the 2008 PLA, the assertion of arbitrability is not wholly groundless.

Accordingly, the court granted the defendants’ motion to compel arbitration with respect to the plaintiffs’ first, second, fourth, fifth, sixth, and seventh causes of actions. The court denied the defendants’ motion to compel arbitration with respect to the third cause of action. In accordance with Section 3 of the FAA, the proceedings were stayed pending a decision of arbitrability by the arbitrator.

Preliminary injunction. On June 16, 2015, the plaintiffs filed a motion for a preliminary injunction to enjoin the defendants from proceeding with arbitration. The defendants filed a statement of claim against the plaintiffs before the ICDR on June 3, 2015. The statement of claim includes one breach of contract claim alleging that the plaintiffs failed to follow the dispute resolution procedures outlined in the 2008 PLA and seven claims for declaratory relief, each of which corresponds to one of the seven causes of action asserted by Plaintiffs in this case. On June 22, 2015, the parties stipulated to stay the arbitration proceeding until the court ruled on the motion to compel arbitration.

The plaintiffs argued that they are irreparably harmed because the defendants instituted arbitration proceedings. The parties, however, stipulated to “stay, suspend, and place in abeyance the Arbitration” until the court ruled on the motion to compel arbitration, the court observed. Further, the stipulation provides that the defendants “may resume prosecuting the arbitration with respect to any claim as to which the Court grants” in the motion to compel. The arbitration is currently stayed, and the defendants could only proceed with arbitration on those causes of actions which the court granted the motion to compel arbitration. Thus, the plaintiffs did not show irreparable harm and the court denied the plaintiffs’ motion for a preliminary injunction.

The case is No. 15-cv-01716-BLF.

Attorneys: Anna Mayergoyz Weinberg (Sidley Austin, LLP) for ASUS Computer International and ASUSTeK Computer Inc. David Sidney Steuer (Wilson Sonsini Goodrich & Rosati) for InterDigital, Inc., InterDigital Communications, Inc., InterDigital Tech Corp., IPR Licensing, Inc. and InterDigital Patent Holdings, Inc.

Companies: ASUS Computer International; ASUSTeK Computer Inc.; InterDigital, Inc.; InterDigital Communications, Inc.; InterDigital Tech Corp.; IPR Licensing, Inc.; InterDigital Patent Holdings, Inc.

Cases: Antitrust CaliforniaNews