We previously discussed the opening 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). To recap, the ALJ’s initial determination found the SEP patents were not infringed but rejected RAND-based defenses. The Commission decided to review the ALJ’s determination in its entirety and requested comments 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.

LSI recently filed three sets of reply comments. The first and second respond to the opening merits comments of respondents Realtek and Funai, respectively. The last set responds to the comments of Realtek, Funai and third-parties on SEP and RAND-issues.

LSI’s Reply to Funai’s and Realtek’s Comments on Liability

Infringement: LSI argues that testimony from its own expert shows that the “accused Funai products necessarily infringe when playing high-definition H.264-encoded Blu-ray discs or when streaming high-definition H.264-compliant videos” and that other expert testimony found the infringing functionality to be “a critical feature of the Blu-Ray disc players and the smart TVs that constitute the Funai” accused products.

Validity:  LSI responds that Funai’s alleged prior art Harris proposal was rejected by the IEEE when developing the 802.11 standard —  “[t]he Harris proposal was riddled with the very problems the ‘958 patent solved.”

LSI argues that secondary considerations of non-obviousness support patent validity, including the fact that the ‘958 patent was adopted into the 802.11 standard. Without the contribution of the ‘958 patent, “the consumer WLAN industry would not have taken off in the way it did.”

LSI’s Reply to Funai’s, Realtek’s and Third-Party Comments on Remedy/Bond

History of Negotiations:  LSI asserts that Funai mischaracterizes the history of license negotiations between the parties. LSI provided several RAND license offers to Funai, but Funai unreasonably did not respond.  Further, LSI’s offers were not “take or leave it demands,” but were good faith “offers” to license LSI’s patents.

LSI also takes issue with Funai’s argument that LSI could have chosen to pursue licenses at the component level, rather than the end product level, which would render Funai’s end products licensed where components are licensed: “The fact that LSI could have chosen to pursue licenses at the component level rather than at the end product level has no bearing on whether the license terms offered to Funai for its infringing end products were reasonable and non-discriminatory.”

LSI also points to the ALJ’s holding that “‘the facts presented in this investigation show that the failure of the parties to agree to terms for the licensing of the asserted SEPs cannot be attributed to” LSI. “Given this negotiation history, there is no legitimate basis for Funai’s unsupported assertion that it ‘is prepared to accept a FRAND offer.’”

With respect to negotiations with Realtek, LSI asserts that the ALJ properly held that “Realtek’s refusal to negotiate with Complainants undercut its arguments that Complainants breached their RAND obligation.” Realtek’s comments do not cite to any evidence in the record contrary to the ALJ’s holding.  Instead, it seeks to improperly inject new evidence from its Northern District of California litigation against LSI which was not before the ALJ and has not been tested through cross-examination or otherwise.

Comparable Offers:  LSI asserts that Funai’s RAND arguments were premised on “a faulty comparison between LSI’s opening license proposal to Funai and the final negotiated terms of LSI’s executed license agreements with” unidentified entities. According to LSI, “[t]he ALJ correctly agreed with Complainants that such a comparison is improper.” LSI argues that Funai failed to correct this in its comments to the Commission because it contains no comparison of offers made by LSI to other entities with the offers made to Funai.

Industry Practice for Licensing/Patent Pools:  LSI notes that “Funai appears to agree with Complainants that portfolio rather than single-patent licensing is typical practice in the consumer electronics industry.” However, LSI argues that Funai is incorrect in arguing that “‘[p]articularly for standard-essential patents, industry practice is to aggregate the relevant patents from multiple licensors into a single portfolio, commonly called a patent pool.’” According to LSI, “[p]articipation in patent pools is voluntary and most patent holders choose to license SEPs outside of a pool.” “For instance, a patent holder may choose not to join a pool if its SEPs are of particularly high value, because pools typically provide equal compensation for each patent in the pool regardless of the importance of individual patents to the standard or to licensees’ products.”

RAND Rate:  LSI argues that it provided the Commission with a “high-level term sheet for Funai that would offer” certain patents on undisclosed (redacted) terms. In contrast, Funai provided only a statement as to what it contends is a RAND rate for the three SEPs at issue (the rate was redacted in LSI’s comments). Funai “cites to no evidence in support of its proposed rate, relying only on RAND royalty rates that have been determined by other courts in cases involving different patents, different products, and different parties, as well as on the pool rates for the MPEG LA and Via licensing pools.” LSI argues further that “the court-determined rates in the Microsoft and Innovatio cases are of little or no relevance” because “[t]he courts in those cases determined RAND rates specifically for licenses of Motorola and Innovatio SEPs, respectively, but did not determine rates for all patents essential to either the H.264 or 802.11 standards.”

LSI further criticizes Funai’s reliance on patent pools because “patent pools ignore the value of the individual patents being licensed” and thus “their usefulness as an indicator of a RAND rate is markedly diminished in cases such as this one where the patents at issue are of high value.”

LSI criticizes Realtek’s proposed royalty rate because it is based on Realtek’s own license with an unidentified third-party and not any of the licenses LSI has entered into with other entities for the patents at issue. The license relied upon by Realtek can only be a comparable license “if a fact finder were to determine that [LSI’s SEPs] have no value to the standard” which Realtek failed to show before the ALJ. Second, Realtek makes no effort to identify how the patents licensed under its license compare to the ‘958 and the ‘867 patents or how the patents that are the subject to its license are incorporated into the 802.11 standard.

Undue Leverage/Patent Hold-Up/Patent Hold-Out:  LSI argues that Funai, Realtek and the third-party commenters are incorrect in arguing for a per se rule that holders of SEPs cannot seek injunctive relief. None of LSI’s commitments to SSOs include a promise not to seek injunctive relief. Those commitments only include a promise to offer a license to willing licensees on fair, reasonable and non-discriminatory terms. Requesting injunctive relief at the ITC or in court cannot amount to undue leverage because, as found by the USTR, DOJ and PTO, an “exclusion order should continue to be available for Section 337 violations involving RAND-encumbered SEPs, upon consideration of relevant factors specific to the circumstances at issue in each case.”

Further, “[a] company should not be permitted to constructively refuse to negotiate regarding the terms of a RAND license, unreasonably prolong negotiations and force the prospective licensor to turn to the courts for enforcement of its SEPs, all the while evading its obligation to fairly compensate the SEP-holder for use of the patented technology.” Permitting such behavior jeopardizes the patent system and the effectiveness of SSOs “as patent holders may no longer participate in the standard-setting process or contribute their patents to a standard if they believe that they will not be able to receive full and fair value for RAND-encumbered patents.”

Ex Ante Alternatives:  LSI asserts that there were no alternatives to its patents at the time the 802.11 standard was adopted. Certain of the “alternatives” cited by Funai were “rejected in voting by the 802.11 Working Group based on technical inadequacies in” them. The other alternatives were technologically inferior.

Bond:  Contrary to Realtek and Fuani’s arguments, LSI argues that it “presented volumes of evidence showing [LSI’s] negotiations with numerous companies to reach a reasonable royalty to license the asserted patents.”  However, each executed license “is different and, accordingly, a bond based on a standard royalty rate is not possible.” Therefore, LSI argues that the bond should be set at a rate of an undisclosed percentage of the entered value of the product, or such other reasonable rate as may be established.

Exclusion Order:  LSI asserts that exclusion orders are the default remedy for a Section 337 violation and the Commission should not depart from its usual practice, particularly since both LSI and Realtek are unwilling licensees.

Realtek and Funai’s reply comments will be the subject of separate posts.