We previously discussed the comments filed by complainant LSI in the International Trade Commission (ITC) investigation of whether Realtek and Funai infringe 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.
A summary of the comments filed by respondent Realtek is provided below.
Realtek’s Comments on the Merits
In its merits comments, Realtek addresses LSI’s contention that its ‘958 patent, an alleged SEP, is entitled to an earlier priority date of a parent patent based on the technology disclosed in the parent being incorporated into one portion of the 802.11 standard. Realtek argues that “[a]fter [LSI’s predecessor-in-interest] filed the ‘958 patent application, the [IEEE] adopted the 802.11b standard, which refers to a formula in the ‘182 patent,” the parent patent. “In 2002, Complainants amended the ‘958 patent application to incorporate the [‘182 patent application] and claim priority to the 1996 date … to try to make the ‘958 patent relevant to the new standard.” According to Realtek, “[t]hat desire is not enough to justify a new filing date.”
Realtek’s Comments on the Public Interest and Remedy
Alleged RAND-Encumbered Nature of LSI’s Alleged SEPs
Realtek contends that, as a result of LSI’s declarations to the IEEE, LSI is obligated “to offer Realtek licenses to both the ‘867 and ‘ patents on reasonable, and non-discriminatory (RAND) terms and conditions” and also “have a duty to negotiate in good faith with Realtek.”
Citing to the USTR’s recent disapproval of the exclusion order in Samsung v. Apple, Realtek argues that “the use of patents in standards may allow patent holders to gain undue leverage and engage in patent hold-up to extract excessive royalties from implementers of standards or exclude them altogether.” “Such conduct harms competition and consumers by ultimately raising prices for products.” Thus “standards organizations such as the IEEE…require that patent holders commit to license patents essential to a standard on RAND terms” in order “[t]o address the concerns over patent hold-ups.”
Contrary to LSI’s contentions, Realtek argues that the first license offer made by a holder of alleged SEPs must be on RAND terms. “[A] patent holder cannot satisfy its RAND obligation simply by making any offer. It must be a good faith offer that is not unreasonable, because an unreasonable offer violates a patent holder’s RAND obligations.” (citing Microsoft v. Motorola ).
History of the License Negotiations Between LSI and Realtek
As with LSI’s comments, most of the license negotiations comments are redacted. An initial negotiation apparently occurred in 2002-2003 (nine (9) years before LSI filed its complaint with the ITC that initiated the investigation) and a second negotiation beginning in 2012. Early on, Realtek apparently requested a “detailed claim analysis” showing LSI’s infringement contentions. In response, LSI “suddenly terminate[d] discussions with Realtek,” which Realtek interpreted to mean that LSI was “abandon[ing] its assertions against Realtek.” “After the 2002-2003 discussions, there was no further contact between [LSI] and Realtek until March 12, 2012, the day [LSI] filed [its] Complaint in this Investigation, when Realtek received a [redacted] letter from [LSI].” The parties further exchanged correspondence, but could not reach a deal. Realtek asserts that LSI “remain[s] indifferent to [its] RAND obligations to Realtek up to and including their most recent licensing demand.”
LSI Licensing of Its Alleged SEPs
Nearly all of Realtek’s summary of LSI’s SEP licenses to other entities is redacted. Realtek provided a comparison of LSI’s offers to Realtek and to other licensees, also redacted. Realtek contends that this comparison shows that LSI’s offer to Realtek violate LSI’s RAND obligations: “[W]hen [LSI’s] offer to Realtek is compared to the licenses . . . that [LSI] ha[s] successfully negotiated, the unreasonableness of [LSI’s] offer becomes even more apparent.”
Licenses to Patents Involving Similar Technologies
Realtek argues that “[t]he record does not include sufficient information to establish whether there is an ‘industry practice’ for licensing patents ‘involving technologies similar to the technologies in the ‘958 and ‘867 patents.”
Realtek asserts that the recent opinion in Innovatio sets “a royalty rate of less than a dime for each Wi-Fi chip sold for the patentee’s entire Wi-Fi portfolio for patents that were of moderate to moderate-high importance to the standard.” Realtek argues further that the court in Microsoft “set a royalty of 3.471 cents per unit on Motorola’s entire 802.11 standard essential portfolio of patents that were of very minimal value to the standard.” Relying on these two decisions, Realtek argues that “[a]ny royalty rate on an individual patent within [LSI’s] portfolio would presumably be far less and would need to factor in, among other things, the value of the patent to the standard.”
Forums in Which a RAND rate Has Been Established
No RAND rate has been adjudicated for these patents, though Realtek is seeking “a determination of a RAND rate for the ‘958 and ‘867 patents . . . in [its] Northern District of California” case against LSI. The trial to determine the RAND rate is set for February 14, 2014.
Realtek argues that “[t]he overall value of the 802.11 standard must be divided among all standard essential patent holders resulting in a necessarily low value of the average standard essential patent.” Citing the Microsoft and Innovatio decisions, Realtek argues that “[u]nless it is shown that a patented technology made significant technical contribution that had no reasonable or viable alternatives, the presumption should be that the value of that patent is low.”
Realtek contends that the record evidence demonstrates that “the ‘958 and ‘867 patents necessarily comprise, at best, a small fraction of the overall value of the 802.11 standard.” This is because “there are estimated to be over 3,000 patents related to the 802.11 standard” and “the IEEE 802.11-2012 specification . . . includes very little discussion of either of those technologies.” Realtek also argues that “based on the number of letters of assurance (LOAs) submitted to the IEEE for the 802.11 standard, a conservative estimate is that there are at least 203 declared essential patents and 46 then pending patent applications for the 802.11.” Therefore, “at best, [LSI’s] patents represent only a tiny fraction of the 802.11 standard essential patents and do not represent a significant portion of the overall value of the 802.11 standard.”
Realtek argues that the ex-ante value of the ‘958 patent to the 802.11 standard is low because several alternatives, including at least one with better performance, were available at the time the relevant 802.11b standard was being developed. Realtek contends that the ex-ante value of the ‘867 patent is low because alternatives existed at the time the 802.11b standard was being developed and the portion of the standard to which the ‘867 patent is relevant only applies to an optional feature on a small subset of products.
Realtek then cites to expert testimony in its Northern District of California case against LSI on the appropriate RAND rate to argue that “[c]onsideration of the Georgia-Pacific factors indicates that the outcome of the hypothetical negotiation would have been pushed toward the lower end of the bargaining range” because of the availability of alternative technologies.
Relyin upon Judge Robart’s opinion in Microsoft, Realtek argues that LSI’s expert’s reliance upon the Via Patent pool as a comparable is misplaced given Judge Robart’s conclusion that there are “numerous flaws inherent in the Via Pool,” including the fact that it has “not been very successful in attracting licensors or licensees.” “Given the poor participation in the pool, it has not achieved a primary purpose of RAND commitments – to encourage widespread adoption of the 802.11 standard – and thus has lower relevance as an indicator of a RAND rate.”
Undue Leverage or Constructive Refusal to Negotiate a License
Realtek argues that LSI’s “conduct is the very definition of seeking undue leverage and reveals that they constructively refused to negotiate with Realtek.” Specifically, Realtek contends that LSI “attempted to gain undue leverage and engaged in patent hold up against Realtek by failing to offer Realtek licenses to [the] ‘958 and ‘867 patents on RAND terms before initiating this investigation and negotiate a license in good faith with Realtek even after this investigation began.”
Realtek argues that, if an exclusion order is issued in this case, “then RAND obligations would be rendered meaningless.” Failing to require SEP owners to make a RAND offer before initiating litigation or to negotiate in good faith afterwards would leave SEP owners “free to extract higher royalty rates with the threat of an exclusion order or discriminate against certain licensees by never granting a license before their products are excluded from the United States.” Realtek asserts that this result “would harm the public by suppressing competition and ultimately rais[ing] prices for consumer products.”
Realtek also argues that the LSI license negotiations were not really negotiations at all. Realtek cites to Judge Whyte’s summary judgment ruling in the N.D. Cal. action that held that LSI’s initial correspondence to Realtek in 2002-2003 did not even contain an offer. “By initiating this investigation and seeking injunctive relief before even making a license offer to Realtek, [LSI] imposed undue pressure on Realtek before the parties even started license negotiations.” This is the type of undue leverage “that RAND terms were created to prevent and that the USTR, DOJ, USPTO, and district courts” have warned against. Thus, quoting Judge Whyte, “‘[LSI’s] conduct [against Realtek] is a clear attempt to gain leverage in future licensing negotiations and is improper.’”
Realtek also asserts that LSI constructively refused to negotiate with Realtek because it “never intended to give Realtek any legitimate offer to license the ‘958 and ‘867 patents, let alone an offer that reflects a true RAND royalty rate for” those patents. The rates proposed by LSI “would far exceed the revenues Realtek receives from the sale of its products” and “would end Realtek’s business altogether.”
Realtek Proposed Bond
Realtek asserts that any bond should be set at zero since LSI does not make any competing products nor does its licensees. Realtek also argues that LSI’s bond request must be rejected because LSI has “only asserted against Realtek patents that they declared standard essential and committed to licensing on RAND terms” and LSI’s “failure to enter any evidence of a reasonable royalty or to claim they are unable to determine a reasonable royalty is disingenuous, at best.” “I[t] further undercuts any arguments they may make that they have negotiated with Realtek on a good faith basis or that they have offered Realtek RAND terms.”
Realtek also argues that any bond should not exceed a RAND rate, because any more would give LSI amounts in excess of what they agreed to take under their RAND obligations.
What’s Next? Respondent Funai’s comments will be the subject of a separate post. Also, on November 14, 2013, the parties filed reply comments with the ITC, but those comments were filed under seal. The public versions of the reply comments were just made available and will be the subject of a separate post.