We previously discussed the comments filed by third-parties in the International Trade Commission (ITC) investigation of whether Realtek infringes LSI’s alleged 802.11 and H.264 standard essential patents (SEPs).  The ALJ’s initial determination found the SEP patents were not infringed but otherwise rejected RAND-based defenses.  The Commission then decided to review the ALJ’s determination in its entirety and, as part of the review, requested comments from the parties and third-parties 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.

As we noted in our prior post, the initial comments filed by the parties – complainant LSI, the Funai respondents and  respondent Realtek – were filed under seal.  Last Monday, the redacted (and very lengthy) public versions of these party comments were made available by the ITC.  Below is a summary of Complainant LSI’s comments.  A summary of the comments filed by respondents Funai and Realtek will be the subject of a separate post.

LSI filed two sets of comments, one addressing the ALJ’s ruling on the merits and the other addressing potential remedies and the public interest. 

LSI Comments on the Merits

The majority of LSI’s merits comments focus on issues that are not unique to standard-essential patents.  However, LSI does raise standard-essential patent issues in response to three questions posed by the Commission. 

    Question Regarding Priority Date of one Alleged SEP

The Commission asked the parties to comment on the evidence, if any, that supports or does not support the conclusion that the ‘958 patent is entitled to the July 30, 1996 priority date of U.S. Patent No. 5,862,182 (“the ‘182 patent”)?

LSI argued that all of the claims at issue in the ‘958 patent were disclosed in the ‘182 patent.  With respect to one claim limitation, LSI argued that the ‘182 patent was “identical” to a portion of the 802.11 standard and, because the subsequent ‘958 patent incorporated this limitation and is essential to the 802.11 standard, the ‘958 patent was entitled to the priority date of the ‘182 patent.

Question Regarding Evidence on Essentiality

            The ‘663 patent

LSI asserts that the subject matter claimed in the ‘663 Patent represents the only commercially feasible way to comply with the H.264 standard.  “Specifically, the lack of a feasible commercial alternative is proven by a comprehensive review of the theoretical alternatives to the asserted claims of the ‘663 Patent.”  Absent any feasible commercial alternatives, the ‘663 patent is essential to the H.264 standard.  

Further, “[t]he practice of the asserted ‘663 Patent claims by the H.264.2 Reference software provided with the H.264 Standard itself corroborates the standard essential nature of the asserted claims.”   

            The ‘958 and ‘867 patents

 With respect to the ‘958 patent, LSI contends that “the detailed findings by the ALJ showing that each and every element of each asserted claim of the ‘958 Patent is met by an aspect of the 802.11 Standard under [LSI’s] proposed [claim] constructions” demonstrates that “the ‘958 Patent is essential to practice the 802.11 Standard.”  Similarly, with respect to the ‘867 patent, LSI argues that “[t]he evidence in the record showing that the ‘867 patent is essential to practice the 802.11 Standard includes the detailed findings by the ALJ that nearly every element of each asserted claim of the ‘867 Patent is met by an aspect of the 802.11 Standard under [LSI’s] proposed [claim] constructions.” 

With respect to the ‘958 patent, LSI also contends that, in adopting the 802.11 standard, the Institute of Electrical and Electronics Engineers (IEEE) specifically adopted the method proposed to IEEE by the inventor of the ‘958 patent, said method being subsequently claimed in the ‘958 patent.

     Question Regarding Whether a Domestic Industry Exists

 The last question posed by the Commission that prompted an answer relating to a standard-essential patent issue is “whether establishing a domestic industry based on licensing . . . requires proof of ‘articles protected by the patent’ (i.e., a technical prong).”   

LSI argues that one of its licensees researches, develops, markets and sells devices in the United States that are in compliance or interoperable with any of the IEEE 802.11b, 802.11g, or 802.111n standards and which, according to LSI’s expert, are highly likely to practice the claims of the ‘958 and ‘867 patents.  Therefore, a domestic industry for products that practice the patents at issue exist.

LSI Comments on Remedy

LSI contends that an exclusion order covering respondent Funai’s downstream products is appropriate without conducting an analysis under the Commission’s ruling in Certain Erasable Programmable Read Only Memories, Components Thereof, Products Containing Such Memories, And Processes for Making Such Memories, Inv. No. 337-TA-276, Comm’n Op. (May 19, 1989) (EPROM).  To the extent that the Commission determines that EPROM applies, LSI asserts that the alleged essentiality of its patents weighs in favor of a limited exclusion order barring Funai’s downstream products.  For example, under EPROM factor 1, the Commission “considers the quantitative value and functional or qualitative importance of the infringing articles to the downstream products.”  LSI contends that, under the qualitative prong, the ALJ “correctly [found] that the asserted patents are of ‘great value.’”  “Complainants’ technical experts testified [that] the asserted ‘958, ‘867 and ‘663 patents are standards-essential patents that are required in order for the accused downstream products to perform the 802.11 IEEE WiFi standard and H.264 ITU-T standard, respectively.” 

    Alleged RAND-Encumbered Nature of LSI’s Patents

 LSI asserts that the patents-in-suit “have been declared to be standard-essential patents” that are subject to LSI’s commitments to the IEEE with respect to the ‘958 and ‘867 patents and the ITU-T with respect to the ‘663 patents.  According to LSI, “[t]here are no contractual limits in LSI’s Letters of Assurance [to the SSOs] that prevent a patent holder from seeking injunctive relief.”  Specifically, “the IEEE only requires that a patentee make available a license, not that it do so before seeking injunctive relief.”

History of Negotiations Between LSI and Funai and LSI and Realtek

 Most of LSI’s negotiations summary is redacted, but what can be gleaned from them is that, according to LSI, its predecessor attempted to negotiate a license with Realtek to all “patents that are essential to practice the IEEE 802.11b standard” but was unsuccessful.  LSI contends that Realtek never provided “a substantive response to [LSI’s predecessor’s] licensing overtures” and that “[i]n view of Realtek’s continued refusal to engage in licensing negotiations during [redacted], Realtek cannot be considered a ‘willing license.’”

LSI also argues that it met several times with Funai and Realtek to discuss LSI’s patents, the accused products and a potential license to LSI’s SEPs.  The parties exchanged correspondence many times, but were unable to reach agreement.  With respect to Realtek,  “instead of negotiating in good faith (or even negotiating at all), Realtek filed four lawsuits against LSI.” 

LSI’s Licenses to the Patents-in-Suit and the Patents’ Purported Value to Licensees

LSI provided a summary chart of all licenses to the ‘663, ‘958 and ‘867 patents, but that chart is redacted.   

Relying on its expert declaration, LSI asserts that “the ‘867 patent describes and claims a highly valuable technological advancement for … any product that is compliant with any of the IEEE 802.11 family of standards” and is “‘amongst the very few most valuable patents infringed by most, if not all, products that interoperate with 802.11 standards.’”  LSI also contends that the ‘958 patent “provides great value” because a portion of its functionality was incorporated into the 802.11b standard which, in turn, “‘caused exponential growth in sales of WiFi compatible products.”

 LSI similarly argues that the ‘663 patent provides “tremendous value” to a licensee because the technology was incorporated into the H.264 standard.  According to LSI, “[d]ue to [the] inclusion of the disclosure of the ‘663 patent in the H.264 Standard, there is no commercially feasible way to practice the H.264 Standard without practicing the asserted claims of the ‘663 patent.” 

     Industry-Practice for Licensing

 LSI argues that “[t]here are no uniform or universally established industry practices for forming licenses involving” the technology covered by LSI’s patents.  “Although these patents were deemed by LSI’s predecessors-in-interest as potentially SEPs, neither relevant standard organization [i.e., the IEEE and the ITU-T] has established RAND rates or procedures.”  “Instead, the organizations have relied on the common sense of their members and those adhering to their standards to arrive at mutually-satisfactory, negotiated agreements.”  According to LSI, “[i]n the absence of any express requirements or defined characteristics for a RAND license or the negotiation of a RAND license . . . common practices and principles have arisen which typically have informed the shape and formation of such agreements.” 

 The first principle is that a one-size-fits-all or take-it-or-leave-it approach “is typically unworkable.”  Citing the recent decisions in Microsoft Corp. v. Motorola, Inc. and In re Innovatio IP Ventures, LLC, LSI argues that “[v]ery recently, as courts have been called upon to interpret RAND obligations, they have uniformly recognized that the practice of RAND licensing contemplates a give-and-take negotiation between the patent holder and potential licensee.”  This comports with LSI’s experience in licensing the SEPs at issue to other entities: 

 “The terms of [the] initial offer consider the broadest possible needs of a potential licensee in that technology area, with the intention of providing appropriate rights for a licensee to operate over a potentially long period of time.  From that common, reasonable, and non-discriminatory starting point, the path to the execution of a license has diverged in many directions due to the unique circumstances surrounding the licensee and its business.”

 According to LSI, the second principle that has emerged is that “[t]ypically, a licensor prefers to execute a single license covering the patent holder’s portfolio in the subject technology as opposed to a series of single patent licenses; the larger the patent portfolio involved, the more the simple efficiencies around expenses and time drive this preference.” 

 The third principle that has emerged is that licensors typically prefer to license at the system level rather than the level of individual components. 

 Another issue that emerges in license negotiations is the duration of the grant.  According to LSI, “[m]ore commonly, both parties prefer the flexibility of a term license, for example, of only a five year duration.”  This is because “[a] limited term license potentially costs the licensee less than a lifetime license, and a limited term license allows the parties to adjust to future licensing terms to account for changes in the business climate for the particular licensed technology.” 

 An additional issue that parties negotiate in a license to an SEP is the form of payment.  LSI asserts that “[t]here is no RAND standard or established practice for a particular method or form of payment in a RAND license context.”  Nonetheless, most negotiated payments are either a running royalty, a fixed amount, or a mixture of both.  In LSI’s experience, certain “licensees prefer negotiating a fixed amount, which could be a lump sum payment or a series of predetermined payments made over time.” 

 LSI asserts that “[a] final area of interest in the context of RAND licensing is the method by which the parties determine the amount of royalties to be paid to use the patented technology.”  According to LSI, “[o]ne common method to determine an appropriate royalty rate is to base payment on assessment of the value of the technology in a component relative to the overall cost of the product in which the component is used.”  This is known as the “entire market value rule.”  “A corollary of the entire market value rule is that where the component using the technology is not the driver of sales for the product, it is neither fair nor appropriate to base a royalty payment on the full value of the product.” 

    LSI Comments on Determination of RAND Rate and Licensing Terms

 LSI has “never sought or obtained in any forum a determination of a RAND rate for any of” its alleged SEPs at issue.  LSI comments that, in Realtek’s breach of contract action against it in the Northern District of California (referenced above), Realtek “seeks determination of a RAND rate for” two of the three alleged SEPs at issue – the ‘958 and ‘867 patents.  That “case is presently scheduled for trial on February 14, 2014” and, “[t]o date, a RAND rate for the ‘958 and the ‘867 patent[s] has not been determined.”

Respondents’ Alleged Constructive Refusal to Negotiate a License

 LSI relies upon its history of unsuccessful negotiations with the Funai respondents and Realtek (summarized above) to argue that “Funai’s continued delay was plainly an attempt to evade its obligation to fairly compensate LSI for use of its patent rights and constitutes a constructive refusal to negotiate” and, with respect to Realtek, to argue that “it is clear that the problem is not LSI’s proposal; the problem is Realtek and its refusal to engage in good faith negotiations, as found by the ALJ based on all the evidence.” 

 LSI then argues that the Funai’s and Realtek’s purported refusal to negotiate a license to LSI’s alleged SEPs justifies the remedy of an exclusion order in this investigation.   Relying again on Judge Robart’s decision in Microsoft v. Motorola and Judge Holdermann’s decision in Innovatio, LSI argues that “[a]t a minimum, injunctive relief must be available for SEPs where an infringer refuses to take a license.”  “The Commission is authorized to enforce the patent rights of all patent holders, and holders of SEPs are no exception.” 

LSI’s Statement Regarding Public Interest

 According to LSI, “[t]he Commission has found public interest considerations to outweigh the statutorily mandated exclusion order only three times before, and all in cases prior to the 1988 legislative amendment removing the requirement that a patentee show irreparable harm.”  LSI argues that “an exclusion order is the usual remedy upon a finding of violation of Section 337.”

 LSI contends that “[t]here are no public interest considerations that would exclude entry of remedial orders” given that “[n]o party has argued that there will be an impact on public health, safety, and welfare.”  Further, the availability of the accused products to the public is not a concern with respect to an exclusion order because LSI’s “many licensees could easily meet U.S. consumer demand.” 

 LSI also argues that Funai’s reliance on the United States Trade Representative’s disapproval (USTR) of the Commission’s exclusion order in Certain Electronic Devices, Including Wireless Communication Devices, Portable Music and Data Processing Devices, and Table Computers (Samsung v. Apple) in support of its argument that an exclusion order is improper in cases involving alleged SEPs is misplaced.  “As an initial matter, this was the first executive disapproval of a Commission exclusion order on policy grounds since 1987, and thus the disapproval was a rare occurrence that should not affect Commission practice.”  Further, “[t]here is nothing in the U.S. Trade Representative’s letter indicating that every exclusion order in an Investigation involving SEPs will be vetoed.”  According to LSI, “the USTR letter makes clear that the Commission retains the authority to issue exclusion orders concerning SEPs, provided that the public interest is protected. 

 Regarding Funai’s reliance on the Policy statement from the U.S. Department of Justice cited in the USTR disapproval, LSI asserts that the Policy Statement does not “support a blanket prohibition on exclusion orders for SEPs.”  According to LSI, “[t]he Policy Statement’s concern that a patent holder may pressure a licensee to accept unreasonable licensing terms does not indicate that LSI will do so here.”  “As the ALJ recognized in the Initial Determination, Complainants have abided by their RAND obligations and will continue to do so” while all of Respondents’ RAND-related defenses were rejected by the ALJ. 

 LSI also argues that Realtek is incorrect in arguing that an initial offer must satisfy RAND obligations.  Specifically, LSI quotes the ALJ’s determination that “[t]here is no authority for the argument that a patent holder must make an initial offer for a specific fair and reasonable royalty rate. …Indeed, the limited precedent on the issue appears to indicate that an initial offer need not be the terms of a final FRAND license because SSOs intend the final license to be accomplished through negotiation.”

LSI’s Comments on Bond

 LSI contends that “[t]he Commission should adopt the ALJ’s recommendation that the bond … should be [redacted] of the entered value of the article.”  LSI argues that respondents’ position that bond should be set at zero because a standard reasonable rate is known by virtue of LSI’s license agreements with other entities “lacks merit.”  According to LSI, “[e]ach executed license…is different and, accordingly, a bond based on a standard royalty rate is not possible.” 

 What’s Next?  On November 14, 2013, the parties filed reply comments with the ITC, but those comments were filed under seal.  We await posting of the public version of the parties’ reply comments.  As noted above, we will also be providing a summary of the respondents’ publicly available comments.