09
May
By Eric Schweibenz
On May 5, 2011, ALJ E. James Gildea issued the public version of Order No. 25 (dated March 4, 2011) in Certain Electronic Devices with Image Processing Systems, Components Thereof, and Associated Software (Inv. No. 337-TA-724).  In the Order, ALJ Gildea (1) granted Complainants S3 Graphics Co., Ltd. and S3 Graphics, Inc.’s (collectively, “S3G”) motion to strike the expert report of Respondent Apple Inc.’s (“Apple”) expert Dr. Jerry A. Hausman regarding licensing and patent exhaustion and (2) granted-in-part S3G’s motion to strike Dr. Hausman’s expert report regarding remedy.

According to the Order, on February 7, 2011, S3G filed dual motions to strike two expert reports of Dr. Hausman.  S3G stated that Dr. Hausman had submitted three expert reports in the investigation:  one concerning the economic prong of the domestic industry requirement, one concerning licensing and patent exhaustion (the “Licensing Report”), and one concerning remedy (the “Remedy Report”).  S3G asserted that while it had no objection to Dr. Hausman testifying as an economic expert on the economic prong of the domestic industry requirement, it did take issue with the other two expert reports.

In particular, with respect to the Licensing Report, S3G contended that the report was nothing more than a legal brief containing “choice of law analyses, canons of contract construction, interpretation of contract language, analysis of legal opinions, and application of the doctrine of patent exhaustion.”  S3G further argued that Dr. Hausman was not qualified to opine on matters of contract law and patent law.

With respect to the Remedy Report, S3G contended that Dr. Hausman had improperly analyzed the factors in Certain Erasable Programmable Read-Only Memories, Components Thereof, Products Containing Such Memories, and Processes for Making Such Memories (“EPROMs”), Inv. No. 337-TA-276, Comm’n Op. at 125 (U.S.I.T.C. May 16, 1989) in offering his opinion on the potential effects of an exclusion order in the investigation.  S3G argued that the EPROMs factors are irrelevant because they concern downstream products, which are not at issue in the investigation.  S3G further argued that the Remedy Report offered an improper public interest analysis, in contravention of Commission Rule 210.50(b)(1).

Apple opposed the motions to strike.  With respect to the Licensing Report, Apple argued that Dr. Hausman would “succinctly summarize the complex agreements at issue, point the [ALJ] to the key provisions, and explain how the grant of a license in those agreements relates to the component products used in Apple’s Mac computers.”  Apple asserted that such testimony “will streamline the evidentiary hearing.”

With respect to the Remedy Report, Apple contended that “the Report discusses the value of the accused technology relative to the value of the accused products, the significance of the accused technology to the operation of the accused products, the economic value of the accused products, and the harm to Apple and third parties from an exclusion order.”  Apple acknowledged that these factors appear in the EPROMs opinion, and that the EPROMs investigation concerned downstream products.  Nevertheless, Apple argued that the EPROMs factors were “equally compelling” when considering a remedy that would only concern directly infringing products.  Apple further contended that the Remedy Report does not contain a public interest analysis, but rather “the Remedy Report bears directly on the risk of interfering with legitimate commerce if the [ALJ] were to recommend, and the Commission impose, remedial orders with a scope broader than necessary to remediate the claimed infringement.”  Apple asserted that such evidence may be considered by the ALJ when fashioning a remedy recommendation.

According to the Order, the Commission Investigative Staff (“OUII”) supported striking both the Licensing Report and the Remedy Report.  OUII contended that the Licensing Report should be stricken because it improperly renders legal opinions on contract and patent law.  OUII further argued that Dr. Hausman, an economist, was not qualified to testify as an expert in the legal matters discussed in the Licensing Report.  With respect to the Remedy Report, OUII argued that the investigation does not concern downstream products, and that therefore Dr. Hausman’s opinion on the EPROMs factors is irrelevant.  OUII also supported striking portions of the Remedy Report that discuss the potential effect of an exclusion order on third parties because the Commission had not authorized the ALJ to take evidence on the public interest issues in the investigation.

After considering the arguments, ALJ Gildea determined to grant S3G’s motion to strike the Licensing Report and grant-in-part S3G’s motion to strike the Remedy Report.

As to the Licensing Report, ALJ Gildea found that Dr. Hausman’s opinions on the provisions of the S3G licenses should be stricken because it was legal error for an expert witness to give an opinion as to the legal obligations of the parties under a contract.  ALJ Gildea further found that Dr. Hausman’s opinions on contract law and the law of patent exhaustion should be stricken because “[i]t is the role of the [ALJ], not an economic witness, to interpret the applicable law in this Investigation.”  ALJ Gildea also found that the Licensing Report appeared to apply legal principles to facts to arrive at a legal opinion, and that this constituted the improper practice of law by Dr. Hausman, who is not an attorney.  Accordingly, the ALJ held that “Dr. Hausman will not be permitted to testify at the evidentiary hearing in this Investigation concerning the scope, interpretation, or effect of any license or contract; nor shall he be permitted to offer an opinion as to whether S3G’s patent rights have been exhausted.”  ALJ Gildea also found that “Dr. Hausman shall not be permitted to testify that an exclusion order or a cease and desist order involving Apple products would be economically inefficient” because such testimony would necessarily rely on a legal conclusion — which Dr. Hausman is not qualified to give — that S3G’s patent rights had been exhausted.

As to the Remedy Report, ALJ Gildea first determined to strike paragraph IV.A of the report because it expressed an incorrect legal standard, namely that “the Commission’s remedial authority is in the nature of an injunction and as a rule, injunctive relief is guided by principles of equity.”  On this point, ALJ Gildea stated that “the Federal Circuit has recently clarified that the Commission’s remedies are based on specific statutory criteria and are not based on principles of equity,” citing Spansion, Inc. v. Int’l Trade Comm’n, 629 F.3d 1331, 1359 (Fed. Cir. 2010).  Accordingly, the ALJ ordered that the paragraph setting forth this incorrect legal standard be stricken from the Remedy Report.

ALJ Gildea also determined that since the Commission had not ordered him to take evidence on the public interest, the relevance of Dr. Hausman’s opinions relating to the public interest was doubtful.  Nevertheless, “in an abundance of caution,” the ALJ determined not to strike those opinions and instead stated that “S3G may object to testimony from Dr. Hausman at the evidentiary hearing if S3G believes that the testimony, in context, is wholly irrelevant to the issues to be decided by the [ALJ].”

As to Dr. Hausman’s discussion of the EPROMs factors in the Remedy Report, ALJ Gildea determined that this testimony was irrelevant to the investigation because no downstream products were at issue — according to the order, S3G was only seeking a remedy with respect to the Apple products that are specifically accused in the investigation.  Moreover, the ALJ found that the EPROMs factors had been conceived to act as a safeguard against undue harm to importers of “products which were not themselves the subject of a finding of violation,” and that “[t]his concern which contributed to the conception of the EPROMs balancing test has been substantially, if not entirely, obviated by the Federal Circuit’s 2008 opinion in [Kyocera Wireless Corp. v. Int’l Trade Comm’n, 545 F.3d 1340, 1356 (Fed. Cir. 2008)].  Accordingly, ALJ Gildea stated that he “expects that Dr. Hausman will not engage in an EPROMs analysis at the hearing.”  However, ALJ Gildea determined not to strike Dr. Hausman’s report in its entirety because “it is possible that some opinions in the Remedy Report could be marginally informative with respect to other issues properly before the [ALJ]” and, moreover, “S3G has not undertaken the task of identifying the specific testimony that is objectionable, and the [ALJ] should not assume that responsibility for S3G.”  Thus, ALJ Gildea determined that “the only paragraph that should be stricken from the Remedy Report at this point in the Investigation is paragraph IV.A, because, as noted above, it contains an incorrect legal standard.”