In a closely watched case that drew broad amicus interest from technology implementers and licensors, alike, the U.S. Court of Appeals for the Fifth Circuit addressed, once again, whether an upstream implementer had Article III standing to sue a group of standard-essential patent (“SEP”) holders and their licensing platform for not offering direct licenses at the component level.  Continental Automotive Systems, Inc. v. Avanci, L.L.C., No. 20-11032, 2022 WL 2205469, at *1 (5th Cir. June 21, 2022). ^[1]  In doing so, the Court modified its own February 2022 decision that had vacated and remanded the district court’s determination that an upstream implementer had such standing, but otherwise rejecting the claims asserted on their merits.  Id.  While the Fifth Circuit may have reversed course on Article III standing, that decision provided little comfort to the plaintiff because it reiterated the district court’s original holding that the upstream implementer failed to state claims under Sections 1 and 2 of the Sherman Act where the necessary SEP licenses are otherwise available at the end device level.  In the wake of this opinion, SEP holders and upstream implementers should consider the extent that standing plays in litigation resulting from FRAND licensing negotiations of SEPs.

Background

Auto-parts supplier Continental Automotive Systems, Inc. (“Continental”) is a provider of automotive components, including connectivity products that utilize 2G, 3G, and 4G cellular standards.  In particular, Continental provides a telematics control unit (“TCU”), which is a device that provides cellular connectivity to the vehicle.  The defendants were part of a licensing platform (Avanci) and claimed to own or license patents essential to the 2G, 3G, and 4G cellular standards set by standard-setting organizations (“SSOs”).  These patents are considered SEPs because suppliers like Continental could not create standard-conforming devices like TCUs without infringing them.  To address concerns over possible hold up, many SSOs require SEP holders to agree to license their patents on a fair, reasonable, and nondiscriminatory (“FRAND”) basis to be incorporated in a standard. Cont'l Auto. Sys., Inc. v. Avanci, L.L.C., 27 F.4th 326, 329–30 (5th Cir.).

In certain cases, as here with Avanci, a number of SEP holders may enter agreements with an entity to act as the licensing agent for the group, essentially a patent pool.  While Avanci is obligated to license the SEPs on FRAND terms, Avanci was only authorized by its members to sell licenses to automotive manufacturers (“OEMs”) under the patent pool agreement.  And, although Avanci was not authorized to license upstream suppliers like Continental, members of the pool were free to individually license their SEPs to upstream suppliers like Continental at FRAND rates.  Id. at 330–31.

According to Continental, it sought SEP licenses from Avanci and the individual SEP holder defendants, but they were unwilling to license Continental on FRAND terms.  Central to the defense position were the notions that licenses were available from the individual SEP holders, and that Continental did not need a direct license because Avanci licenses the downstream OEMs that use Continental’s products and Continental had never been sued for infringement or threatened with exclusion.  Continental then sued several of the SEP holders and Avanci, seeking declaratory and injunctive relief in the Northern District of California.  Specifically, Continental asserted that the SEP holders and Avanci's refusals to license SEPs to an upstream supplier on FRAND terms violated Sections 1 and 2 of the Sherman Act, as well as associated state law. Id. at 331.

After the case was transferred to the Northern District of Texas, the district court addressed Defendants’ motion to dismiss.  There, the Court accepted one of Continental's theories of injury—the denial of a contractual right to a FRAND license—as sufficient for purposes of Article III standing, but it dismissed with prejudice Continental's Sherman Act claims for lack of antitrust standing and, alternatively, for failure to plausibly plead certain elements.  It then declined to exercise supplemental jurisdiction over Continental's remaining claims pursuant to 28 U.S.C. § 1367(a).  Continental then appealed to the Fifth Circuit. On appeal, the Fifth Circuit initially vacated the district court’s determination that Continental had Article III standing to sue the SEP holders and Avanci, and thus, refused to consider the district court’s basis for dismissal.  Continental petitioned for rehearing by the Fifth Circuit, and it was granted. Cont'l Auto. Sys., Inc. v. Avanci, L.L.C., 2022 WL 2205469, at *1 (treated as a petition for panel rehearing).

The Fifth Circuit’s Standing Analysis

In the Fifth Circuit’s modified opinion, the court analyzed only whether Continental had antitrust standing under Sections 1 and 2 of the Sherman Act.  In two short paragraphs, the Fifth Circuit explained what Sections 1 and 2 of the Sherman Act prohibit and what Continental pleaded under each of those sections.  The Fifth Circuit, however, supplied no additional antitrust analysis to the district court’s order, explaining only that, “[h]aving reviewed the district court's detailed order, and considered the oral arguments and briefs filed by the parties and amicus curiae, we AFFIRM the judgment of the district court that Continental failed to state claims under Sections 1 and 2 of the Sherman Act.” Id. at *1.^[2]

Curiously, the Fifth Circuit left out any analysis of Continental’s Article III standing, which had been the focal point of the Fifth Circuit’s original opinion.  There, the Fifth Circuit gave three reasons for why Continental lacked Article III standing:  (1) it found that Continental could not satisfy Article III standing as a third-party beneficiary of the FRAND licensing commitment because it did not “claim membership in the relevant SSOs and, crucially, it does not need SEP licenses from Defendants-Appellees to operate;”  (2) that even assuming third-party beneficiary status, Continental suffered no cognizable injury because “the SEP holders have fulfilled their obligations to the SSOs with respect to Continental” by licensing the OEMs, and (3) there were no allegations that the SEP holders in question have sued or threatened to sue Continental for infringing their SEPs. Cont'l Auto. Sys., Inc. v. Avanci, L.L.C., 27 F.4th at 333–35.

Reading Between the Lines

With no more rehearing possibilities to consider, the Fifth Circuit’s modified opinion can be read to have affirmed the district court’s decision that Continental, an upstream implementer, had Article III standing to pursue claims based on alleged failure to offer a direct FRAND license, although it rejected Continental’s ability to state a claim under the antitrust laws based on that theory.   Further complicating the issue for future litigants, the Fifth Circuit’s modified opinion did not expressly endorse the district court's analysis of Continental’s Article III standing and, pursuant to Fifth Circuit Rule 47.5, the Court determined that the opinion should not be published and is not precedent except under limited circumstances.

As a result, one must read between the lines of the Fifth Circuit’s modified opinion to determine the current state of the law for SEP implementer standing in the Fifth Circuit.  The best place to look for guidance is the original decision of the Northern District of Texas.  And according to that decision, Continental pleaded “a sufficient injury . . . based on its alleged inability to obtain from Defendants, on FRAND terms, SEP licenses needed for its TCUs.”  The district court explained that “[t]he denial of property to which a plaintiff is entitled causes injury in fact.”^[3] According to the district court, because of Avanci’s and the SEP holders’ alleged refusal to license Continental directly, Continental had only “three options: 1) rely on the OEMs to which it sells TCUs to obtain licenses which cover the TCUs; 2) violate the law by infringing the SEPs; or 3) abandon production of products using the standards, and forego associated profits.”  The district court found that these are allegedly “imminent and actual harms creating an injury in fact for general standing purposes.” Cont'l Auto. Sys., Inc. v. Avanci, LLC, 485 F. Supp. 3d 712, 725–27 (N.D. Tex. 2020).

Implications for Upstream Implementers and SEP Holders

Two of the busiest district court patent dockets sit in the Fifth Circuit—the Eastern and Western Districts of Texas—making the ground rules associated with Article III standing of utmost relevance.  While SEP holders have traditionally considered these districts as favorable venues to enforce their SEPs, these districts may also come to be viewed as viable (if somewhat inhospitable) venues for  upstream implementers seeking to assert claims based on alleged breaches of FRAND obligations.   Nevertheless, without a clear decision from the Fifth Circuit on the contours of Article III standing, both upstream implementers and SEP holders may need to go back to the future in considering the Northern District of Texas’s original decision that found Article III standing satisfied.

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