On Friday (November 1, 2013), the parties and several non-parties filed comments in the International Trade Commission (ITC) investigation of whether Realtek infringed LSI’s alleged 802.11 and H.264 standard essential patents (SEPs), where the ALJ’s initial determination found the patents were not infringed but otherwise rejected RAND-based defenses.  As discussed in our prior post, in deciding to review that initial determination in its entirety, the ITC requested party and public comment on various issues, including RAND obligations, the history of license negotiations among the parties, other licenses for the patents-in-suit, and industry practice for licensing similar technologies. 

Complainant LSI, respondent Realtek and the Funai respondents filed comments with the ITC, but these comments were filed under seal and the public versions are not yet available.  Non-party public comments were filed by Barnes & Noble, Intel and Cisco (jointly) and Interdigital, which comments are summarized below.

Non-Party Barnes & Noble

Barnes & Noble’s (“B&N”) comments focus on the potential remedy of an exclusion order (should the finding of non-infringement be reversed) and whether that remedy would be in the public interest.  According to B&N, an exclusion order would be against the public interest because LSI is a non-practicing, patent assertion entity:

 “Although there is a legitimate interest in protecting intellectual property rights, that interest does not extend to granting patent assertion entities like LSI the right to gain undue leverage by obtaining an exclusion order at the Commission.  It is not in the public interest to issue an exclusion order when monetary damages would be adequate compensation to complainants like the ones in this Investigation.”

B&N asserts further that “[t]he legislative history of Section 337 shows that it was designed to protect companies that are exploiting the asserted patent through manufacturing or through licensing directed to bringing products to market.”  Any remedial order issued by the ITC would not further Sections 337’s purpose because LSI’s “primary business involves seeking out potential licensees that manufacture and sell products that are already in the marketplace” which “is not the type of activity that Section 337’s legislative history contemplates.” 

After summarizing the history of the patent infringement litigation between B&N and LSI pending in the Northern District of California involving the same patents, B&N asserts that “LSI has very clearly adopted a business model that is predicated on extracting license fees from unsuspecting targets–often true innovators–that far exceed any reasonable value of the patents.”  “[E]xclusion of the accused products would be contrary to LSI’s financial interests but for the would-be ‘hold-up’ value the prospect of such exclusion provides.”  B&N argues that “[i]f an exclusion order were to issue, LSI could use that order to demand even more aggressive licensing terms–thereby permitting LSI to artificially and wrongfully inflate the value of its patents.”

B&N concludes that “the issuance of any remedial order would only buttress a business model that does nothing to encourage innovation and harms the true innovators that drive the U.S. economy.” 

Non-Parties Intel Corporation and Cisco Systems, Inc.

In their jointly submitted comments, Intel Corporation (Intel) and Cisco Systems, Inc. (Cisco) argue that the ITC should deny an exclusion order for RAND-encumbered patents like those at issue in the case absent “limited circumstances.”  One such “limited circumstance” is where a respondent rejects a RAND royalty established by a U.S. court in a final, non-appealable judgment prior to the patent holder initiating a Section 337 action before the ITC.  Other such circumstances justifying an exclusion order include: (1) “a determination in binding arbitration (prior to the institution of the Commission proceeding) establishing a RAND royalty that respondents rejected;” (2) “when respondents are unable to pay a RAND royalty;” or (3) when respondents “are not subject to the jurisdiction of U.S. courts and the Commission’s in rem authority is the only recourse.” 

Intel and Cisco argue that an exclusion order for products that infringe RAND-encumbered patents would be against the public interest, albeit a different public interest than that relied upon by the ITC previously in refusing to enter an exclusion order:

 “In the past, the Commission has refused to enter exclusion orders that would cause serious harm to the public.  That harm often took the form of depriving the public of products necessary for consumer welfare. … An exclusion order on the basis of RAND-encumbered SEPs in this case would result in a different, but also severe, public interest harm:  the exploitation of market power (which was created by an industry standard, not by the individual SEPs) to deny producers and consumers the benefits of industry standard-setting, after the patentee publicly relinquished that market power and waived its right to exclude prospective RAND licensees from practicing the SEPs in exchange for RAND royalties.”

Intel and Cisco cite to the United States Trade Representative’s (USTR) decision disapproving an exclusion order in Samsung v. Apple (Investigation No. 337-TR-794) to argue that, as part of the public interest analysis, the Commission should “‘review…the various policy considerations … as they relate to the effect on competitive conditions in the U.S. economy and the effect on U.S. consumers.”  They also rely upon a joint policy statement by the U.S. Department of Justice and U.S. Patent and Trademark Office providing that, “in cases where an exclusion order based on a F/RAND-encumbered patent appears to be incompatible with the terms of a patent holder’s existing F/RAND licensing commitment to [a standards-developing organization],” the remedy “of an injunction or exclusion order may be inconsistent with the public interest.” 

Intel and Cisco argue that competition and consumers will benefit from enforcing RAND obligations: 

“Because of the commercial infeasibility of designing around standards, allowing an SEP holder to obtain an injunction against a party willing to pay RAND royalties would empower SEP holders to extract a disproportionate share of the value of accused products, making an unreasonably high settlement the only plausible outcome, and thereby raising prices to consumers.  An exclusion order would force respondents to choose between withdrawing products from the market or potentially paying far more than a RAND royalty.  Competition and consumers would be harmed in either event.” 

Intel and Cisco further argue that the standard-setting process, which “is so vital to U.S. innovation, economic growth, and consumer welfare,” would be undermined if an exclusion order issues “in the face of unfulfilled RAND commitments.”  Companies will be reluctant to “to agree on standards and to incorporate them into their products if SEP holders can unfairly exploit the resulting standard-derived market power through exclusion orders.”

Intel and Cisco argue that the actual negotiations between the parties are irrelevant to the determination of whether to enter an exclusion order, because LSI first initiated the ITC proceeding seeking an exclusion order “before any U.S. court with competent jurisdiction or a binding arbitrator had determined (prior to the institution of the Commission investigation) in a final, non-appealable judgment both RAND licensing terms and that respondents failed to accept those terms after their determination.”  Intel and Cisco point to the parallel district court litigation between LSI and Realtek where the judge found that LSI violated its RAND obligations by initiating the ITC proceeding and seeking an exclusion order “before offering a license to respondents on RAND terms.”  According to the district court, seeking an exclusion order before offering a license on RAND terms is “inherently inconsistent” with LSI’s contractual RAND obligations.  Therefore, according to Intel and Cisco, “there is no need for the Commission to examine the parties’ license negotiations before concluding that an exclusion order would be contrary to the public interest.” 

Non-Party InterDigital

InterDigital’s comments discuss how RAND obligations can differ across standard setting organizations (SSOs), industry practice for licensing similar technologies, and the issue of constructive refusal to license and reverse hold-up.   

RAND.  Interdigital states that the specific standard-setting organization’s (SSO’s) intellectual property rights (IPR) policy and patent owner’s declarations thereto defines the patent holder’s RAND obligations, and these policies and obligations differ across SSOs.  The RAND “obligations imposed by standard-setting organizations are derived from the actual language of the policies and declarations of the particular SSO of which the patent holder is a member.”  The patent holder’s declaration to the SSO “defines the scope of the commitment made by the patent holder.”  Interdigital states that “[i]t would not be proper to add or infer additional obligations beyond what the patent holder actually stated in a declaration.”  Interdigital cautions that, as a result of the different obligations imposed by different SSOs, “there is no ‘one-size-fits-all’ definition of ‘RAND-encumbered’ that is applicable to all SSOs.”  Rather, “[e]ach SSO’s policy has its own language and history that informs the nature and boundaries of the commitment that patent holders understood themselves to be making when submitting a declaration.”  “Retroactively changing the settled expectations of standard participants would be inequitable and counterproductive to the standard-setting process.”

Interdigital provides an example of disputes that can arise when a potential licensee attempts to modify the patent holder’s RAND obligations.  Specifically, the International Telecommunications Union (ITU) requires a declaration that the patent holder “is prepared to grant a license on a ‘world-wide’ non-discriminatory basis.”  Interditigal argues that “prospective licensees who say they require single-country licenses, even when they have global operations and sales in many countries, are not reasonably interpreting the RAND commitment made by the patent holder, given the express expectation that licenses will be on a ‘worldwide’ basis.” 

Industry Licensing Practice.  Interdigital asserts that it generally licenses “on a worldwide portfolio basis, and not on an individual-patent basis” for its patents that are essential to certain wireless standards.  Interdigital states that “[l]icenses also commonly include technology generations,” citing license summaries publicly filed in the Apple v. Samsung case in the Northern District of California “that indicated that licenses considered in that case were almost exclusively worldwide licenses that included portfolios of patents covering particular products and/or standards.” 

Interdigital argues that “[t]here are many reasons why parties prefer worldwide portfolio licenses in the context of agreements negotiated in the ordinary course of conducting the business.”  These are: (1) provision of the broadest coverage to licensees “who wish to achieve ‘patent peace’ from the licensor;” and (2) efficiency in negotiating a license for a broad portfolio rather than piecemeal negotiation of “multiple, individual licenses” for individual patents.  “In the absence of worldwide portfolio licensing, licensors would have no effective means of obtaining compensation for the use of their patents, and would be forced to pursue individual actions for patent infringement on each patent owned by the licensor in each jurisdiction where the patents were issued” and, “[f]or licensors with large global portfolios, this would be prohibitively inefficient.”  

Quoting Nokia’s recently-filed amicus brief in Apple v. Motorola, Interdigital cautions that, in the absence of injunctive relief for patent infringement, “‘[e]ach manufacturer could simply infringe until litigation was brought, allowing the court to set the royalty rate for them several years after the commencement of the litigation, and in some cases potentially escape responsibility by making enforcement prohibitively difficult… .’”  This could “‘threaten the standardization process as a whole, as patent holders would be forced to consider the likely difficulties in obtaining fair compensation for the use of their patents before making FRAND commitments concerning them.’”

Constructive Refusal To License/Reverse Hold-Up.  Interdigital comments that “[t]he actions of prospective licensees in seeking individual licenses only for patents on which lawsuits have been filed … can be an obstructionist tactic designed to accomplish reverse hold-up, in which the licensor’s R&D investments are held hostage with no path to a return on their investments.” 

Interdigital asserts that constructive refusal to license and reverse hold-up “are real and significant concerns for industry participants that license their innovative patented technologies that are the result of their sizeable investments in research and development.”  For example, “[o]ne common tactic is the simple strategy of delay, where the prospective licensee engages in correspondence and meetings with the patent holder over an extended period of time, without actually intending to move the license discussions forward.” 

Another example of constructive refusal to license occurs when prospective licensees “demand to know the terms of confidential licenses between the patent holder and other licensees as a condition of negotiating – even where the other licensees may be competitors of the prospective licensee.”  Interdigtal asserts that “[n]othing about SSO RAND policies obliges a patent holder to ignore, violate, or dispense with ordinary confidentiality provisions that businesses typically employ.”

Interdigital concludes by arguing that “[w]hen reverse hold-up tactics force a patent holder to settle for licenses providing substantially less than fair and adequate compensation, this reduces incentives for innovators to develop and contribute technology for standards” which, in turn, deprives consumers and the public “of technological advances that would otherwise have been developed and commercialized.” 

What’s Next?

What’s Next?  We await posting of the public version of the parties’ comments.  And reply comments are due on or before Tuesday, November 12, 2013.