IP Law Daily, PATENT—E.D. Tex.: G+ not liable for ZTE's past conduct in a patent case involving Samsung, (Jan 9, 2024)

By Saurabh Kashyap, B.A., LL.B.

A successor in patent ownership cannot be held accountable for the FRAND-related conduct of its predecessor, court rules.

A federal district court in Texas dismissed the defendant Samsung Electronics Co. Ltd. and Samsung Electronics America, Inc.’s (Samsung) motion to impute the plaintiff G+ Communications, LLC (G+) for breach of Fair, Reasonable, and Nondiscriminatory (FRAND) licensing obligations by its predecessor ZTE Corporation (ZTE) in a patent infringement lawsuit. The court found that under applicable French law, which governs the European Telecommunication Standards Institute (ETSI) contract establishing FRAND obligations, a successor in interest is not automatically bound by the contracts or breaches of contract by the transferor in relation to the transferred property. The court also rejected Samsung’s argument that G+ should be considered an alter ego of ZTE, as there was no sufficient legal or factual basis to support this claim under French law (G+ Communications, LLC v. Samsung Electronics Co. Ltd., January 8, 2024, Gilstrap, R.).

Background. ZTE transferred ETSI-compliant U.S. Patent Nos. 8,761,776, 9,184,881, 10,594,443, and 10,736,130 (Asserted Patents) to G+. Before transferring these patents to G+, ZTE engaged in negotiations with Samsung to secure a license for its entire Standard Essential Patent (SEP) portfolio, including the Asserted Patents. These negotiations began in 2019 and culminated in a licensing agreement on July 9, 2021. However, this agreement specifically excluded the Asserted Patents, which ZTE had already transferred to G+ in a strategic move.

On September 26, 2020, G+ acquired the Asserted Patents through a purchase agreement. This transfer took place without explicit notification to Samsung, despite ongoing negotiations. Furthermore, Apple Inc. (Apple) obtained a license for these patents in October 2020. Moreover, ZTE retained a 20% net royalty from G+'s licensing and “whitelisted” Samsung, implying that there were no restrictions on enforcing the patents against Samsung. The instant lawsuit centered on whether G+ would be liable for violating Fair, Reasonable, and Nondiscriminatory (FRAND) licensing obligations.

Court’s analysis. Samsung presented evidence of ZTE's failure to include the Asserted Patents in their license, concealment of the transfer to G+, and differential treatment of Apple. Furthermore, Samsung contended that ZTE's actions were attributable to G+. Grounding its argument in the concept that patents, as property, carry encumbrances with them, Samsung cited multiple precedents, including the Conversant Wireless case from the Northern District of California and the High Point decision from the Federal Circuit, to reinforce its stance. Additionally, Samsung cited the Entropic Communications case to argue that a predecessor's actions could be imputed to the plaintiff for equitable defense. However, the court ruled that these precedents did not conclusively establish that a predecessor’s actions impose an encumbrance on patents, especially concerning the breach of the FRAND commitments.

In response, G+ argued against this imputation, citing inconsistencies with French law and alleged that Samsung had waived its argument. Under French law, which governs the ETSI contract related to the FRAND obligation, a new patent owner is not bound by the contracts of the transferor. Samsung countered, suggesting that G+ is not merely a successor-in-interest but effectively an alter ego of ZTE, thus bound by ZTE's conduct. However, G+ refuted this, highlighting the lack of evidence or French legal basis for Samsung's theory. The court scrutinized these arguments, finding Samsung's alter ego theory unsupported by French law and insufficiently substantiated by facts. Furthermore, the court acknowledged Samsung's failure to adequately disclose this theory in its counterclaim and discovery responses, concluding that Samsung did not effectively communicate its imputation theories.

The court ultimately ruled that ZTE's conduct could not be attributed to G+ for breach of FRAND purposes, adhering to French law's principles. However, it acknowledged the relevance of Samsung's identified facts in defending against G+'s charge of willful infringement. The court determined that these facts, including Samsung's prior negotiations with ZTE and the latter's conduct, could be presented to the jury but only in the context of the willfulness inquiry. The court stressed that while these facts were inadmissible for the breach of FRAND counterclaim, they remained pertinent to Samsung's defense narrative. As a result, the court ordered specific guidelines for presenting this evidence, emphasizing that it should be considered solely for the issue of willfulness and not in relation to Samsung's breach of the FRAND counterclaim.

The Case is No. 2:22-cv-00078-JRG.

Attorneys: Alexis Ritzer (Carter Arnett PLLC) for G+ Communications, LLC. Ruffin B. Cordell (Fish & Richardson PC) for Samsung Electronics Co Ltd. and Samsung Electronics America, Inc.

Companies: G+ Communications, LLC; Samsung Electronics Co Ltd.; Samsung Electronics America, Inc.

Cases: Patent TexasNews