Who Should Read this Advisory:
- Entities that own or control patents essential to industry standards (commonly referred to as standardsessential patents or “SEPs”) if those patents are subject to licensing commitments made to standards-setting organizations.
- Entities that currently or plan to manufacture or sell products that comply with industry standards.
- Entities currently engaged in or contemplating proceedings before the International Trade Commission (ITC) concerning SEPs.
Why You Need to Know About this Case:
- This is the first significant case in which a federal court has enjoined a party from enforcing exclusionary relief afforded by the ITC due to a party’s commitments to license its SEPs on reasonable and nondiscriminatory (RAND) terms.
- The court determined that a patent holder’s decision to commence an ITC investigation prior to making a RAND license offer was a per se violation of the patent holder’s contractual commitment to grant a license to its SEPs on RAND terms, and, as a result, the court granted a preliminary injunction preventing the patent holder from enforcing any relief obtained from the ITC until the court has a chance to determine the patent holder’s compliance with its RAND obligations.
- Though the court’s holding is relatively narrow—the defendant was enjoined from enforcing exclusionary relief because it did not offer a RAND rate until after it filed its ITC complaint—its logic is broader in scope. The court indicates that seeking injunctive relief based on the use of SEPs can violate a party’s RAND commitment in other circumstances, and that a RAND commitment is an admission that monetary damages are adequate compensation for the use of such patents. The court also finds that breaching a RAND commitment by seeking injunctive relief causes harm, because it enables patent holders to exercise unfair bargaining power in negotiations taking place in the shadow of such relief. These findings will likely be cited in cases where SEP owners seek exclusionary remedies in district court or at the ITC.
Background on SEPs and RAND Licensing Commitments.
Over the last several years, the licensing and enforcement of standards-essential patents has become an important issue in patent infringement litigation and among antitrust enforcers. Because SEPs can, in some circumstances, give the patent owner the potential power to block or “hold-up” implementation and adoption of important industry standards, SEPs implicate legal and public policy issues in the overlapping spheres of antitrust and intellectual property law.
Recognizing the potential blocking power of essential patents, many standards-setting organizations (SSOs) have put in place intellectual property rights policies that encourage patent owners to identify any SEPs that they hold and to agree that they will license their SEPs on RAND terms. RAND terms, as envisioned by SSOs, are intended to reward the patent owner for its investment in research and development, but also permit the standard to be widely and successfully implemented. These RAND licensing commitments have added a contract law overlay to the existing antitrust and intellectual property issues surrounding SEPs.
In the technology marketplace, there has been significant litigation between major manufacturers and patent owners over the contours of RAND licensing commitments and what they permit or prohibit the owner of an SEP to do in licensing negotiations or patent infringement litigation. These battles have included household names like Apple, Samsung, Google/Motorola, Nokia and Ericsson. The Federal Trade Commission, the Justice Department’s Antitrust Division and the United States Patent and Trademark Office have all weighed in on the issues related to SEPs and RAND licensing commitments, and the FTC has even recently entered into consent orders with Bosch and Google/ Motorola restricting their ability to enforce SEPs in a manner that the FTC views as contrary to their RAND licensing commitments. In the Google/Motorola consent order, the FTC indicated that disputes between patent owners and potential licensees over RAND license terms can and in many cases should be resolved by a court or arbitrator, with the court or arbitrator establishing the RAND licensing terms.
One common issue in these FRAND licensing dispute cases is whether injunctive relief is available based on the use of SEPs, and if so, under what circumstances. In recent litigation between Realtek Semiconductor and LSI Corp. in the United States District Court for the Northern District of California, Realtek argued that LSI and co-defendant Agere Systems had breached their RAND commitments by seeking injunctive relief before the ITC prior to making a RAND licensing offer, and that this breach barred the defendants from seeking such injunctive relief until the federal court could consider the boundaries of the parties’ RAND obligations. In a recent order, United States District Court Judge Ronald Whyte granted summary judgment on Realtek’s favor on the breach claim and issued an injunction “barring defendants from enforcing any exclusion order or injunctive relief by the ITC, which shall remain in effect until this court has determined defendants’ RAND obligations and defendants have complied therewith.”
The case is Realtek Semiconductor Corp. v. LSI Corp., No. C-12-03451-RMW, Order Granting Plaintiff Realtek Semiconductor Corporation’s Motion for Partial Summary Judgment and Denying Defendants LSI Corporation and Agere Systems LLC’s Motion to Stay (N.D. Cal. May 20, 2013).
In 2002, defendant Agere contacted Realtek, requesting that Realtek take a license to certain of its patents that it claimed were essential to the Institute of Electrical and Electronics Engineers’ (IEEE) wireless local area network 802.11b standard. The parties did not come to an agreement. LSI then sent a cease-and-desist letter to Realtek concerning the same patent portfolio in 2012, and proceeded to initiate an investigation at the ITC asserting infringement of two SEPs it had declared essential to the 802.11b standard. Following the commencement of the ITC investigation, Realtek requested that LSI make a RAND licensing offer. LSI did send a confidential licensing offer, and Realtek proceeded to file suit in the Northern District of California alleging that LSI had breached its RAND commitments by initiating its ITC investigation prior to making a RAND offer. A hearing on LSI’s ITC complaint was held on April 2 – 10, 2013, but an initial determination will not be issued by the administrative law judge until July 18.1 Approximately one week before the ITC hearing was concluded, Realtek moved for summary judgment on its breach of RAND licensing contract claim and for a preliminary injunction blocking the defendants from enforcing any exclusionary or injunctive relief they might obtain from the ITC with respect to their SEPs. The defendants filed a separate motion to stay Realtek’s FRAND licensing claims pending resolution of the pending ITC case. Judge Whyte ruled on the pending motions in a 15-page order on May 20, 2013.
District Court Analysis
1. Summary Judgment that LSI Breached RAND by Initiating ITC Investigation Prior to Making RAND Offer
Judge Whyte began by granting summary judgment on Realtek’s claim that LSI’s decision to initiate an ITC investigation prior to making an offer to license its SEPs on RAND terms was a per se violation of its RAND commitments. In so doing, the court relied heavily on the Microsoft v. Motorola case, in which Microsoft alleged that Motorola had violated its RAND obligations by making a facially unreasonable licensing offer. There, the Western District of Washington issued an anti-suit injunction preventing Motorola from enforcing injunctive relief it might receive in a parallel action in Germany while the court considered whether injunctive relief was an appropriate remedy with respect to Motorola’s RAND-encumbered SEPs.2 On appeal, the Ninth Circuit upheld the anti-suit injunction, noting that “implicit in [Motorola’s RAND commitment] is, at least arguably, a guarantee that the patent-holder will not take steps to keep would be users from using the patented material, such as seeking an injunction, but will instead proffer licenses consistent with the commitment made.”3
Applying a similar analysis to LSI’s conduct, Judge Whyte found that “the act of seeking injunctive relief (here, at the ITC before proposing a RAND license to Realtek) is inherently inconsistent and a breach of defendants’ promise to license the patents on RAND terms.”4 The court found the defendants’ institution of an action seeking exclusionary relief prior to making a RAND offer “even more glaringly inconsistent with its RAND obligations than Motorola’s request for an injunction at the district court after offering a license to Microsoft.”5 Judge Whyte also concurred with the Ninth Circuit’s analysis that by making a RAND commitment, a patent holder admits that monetary damages would be adequate compensation for the use of its SEPs. The court conceded that injunctive relief based on SEPs may be appropriate where an accused infringer “outright refuses to accept a RAND license,” but where there is no indication that the accused infringer would not accept such a license, “there is no reason the RAND royalty rate cannot be determined first.”6
Judge Whyte went on to hold that Realtek had suffered injury as a result of the defendants’ breach of their RAND commitments because the threat of an ITC exclusion order gave the defendants unfair bargaining power in any subsequent patent licensing negotiations.7
2. Preliminary Injunction Preventing Defendants from Enforcing ITC Exclusion Order
Judge Whyte then considered Realtek’s request for a preliminary injunction preventing the defendants from enforcing any exclusionary relief received from the ITC. The court first found that Realtek had shown a likelihood of success on the merits because it had already shown that the defendants had breached their RAND obligations by seeking injunctive relief prior to making a RAND offer.
Judge Whyte then found that Realtek had shown a likelihood of irreparable harm, both because it showed evidence that the pending ITC action itself posed a threat of customer and revenue loss and because “Realtek would suffer irreparable harm in the event that Realtek’s products practicing the 802.11 standard were subject to an exclusion order.”8 In support of its claims of irreparable harm, Realtek submitted evidence of customer inquiries expressing concern over a potential exclusion order.
The court also held that the balancing of equities favored a preliminary injunction preventing the defendants from enforcing ITC relief, because if such ITC relief went into effect, Realtek would either lose all sales in the United States or be forced to negotiate a license to the defendants’ patents under threat of such exclusionary relief. In contrast, a preliminary injunction would only delay the defendants’ ability to pursue injunctive relief based on the use of their patents. Finally, the court held that a preliminary injunction serves the public interest because it shows that a patent holder’s RAND commitments have meaning.
Based on its analysis, the court entered the preliminary injunction and held that it remain in effect until the court has determined the boundaries of the defendants’ RAND obligations and until the defendants have complied with those obligations. The court also noted, however, that the preliminary injunction would only go into effect “in the event that the ITC grants an exclusion order or injunctive relief in favor of the defendants. The ITC may, of course, still analyze Realtek’s claims and defenses independently, and may find no Section 337 violation in any event. In that instance, this preliminary injunction will become moot.”
3. No Stay of District Court Litigation in Favor of ITC Determination on Realtek’s FRAND Defenses to Infringement
Following what has become a familiar path for SEP owners seeking ITC exclusion orders, the defendants argued that the district court should stay any resolution of RAND issues because (i) Realtek was simultaneously asserting RAND licensing defenses before the ITC, (ii) Realtek purportedly had not agreed to accept any RAND license terms set by the court until its invalidity and noninfringement arguments on the relevant SEPs were resolved at the ITC and (iii) any harm to Realtek would only occur in the future if an exclusion order was actually put in place. In the past, some district courts have deferred to a pending ITC proceeding when there are RAND issues being litigated both in the ITC and in a parallel district court action.9 Judge Whyte, however, did not view ongoing litigation of infringement, validity and RAND defenses in the ITC as a reason for the court to stay Realtek’s district court RAND claims.
In the order, the court rejected the defendants’ request for a stay, relying in part on a prior ruling in the cases that “Realtek may simultaneously pursue a determination of the RAND rate in this court while denying infringement before the ITC.” The court also “agree[d] with Realtek that its breach of contract affirmative defense before the ITC is substantially different in nature affirmative breach of contract claim before this court. While the ITC may consider defendants’ RAND obligations or violations thereof, it may do so only in the context of deciding whether Realtek violated Section 337 and whether an exclusion order is thus proper. Realtek has not asked the ITC to determine a RAND royalty rate, nor is the ITC independently compelled to do so. Unlike the ITC, this court may also order any monetary relief that may be warranted in light of its determination of the RAND issues. Defendants’ conduct in bringing the Section 337 action, which carries with it the threat of an exclusion order and thus increases defendants’ bargaining power in a licensing negotiation, necessitates a speedy resolution of the RAND issues by this court. The court finds no just reason to delay this determination and denies defendants’ motion to stay.”
Even apart from its straightforward holding that failure to make a RAND offer prior to initiating a claim for injunctive relief is a per se violation of a RAND commitment, this decision is significant in that it shows further support for the idea that injunctive relief based on the use of SEPs is inappropriate other than where the alleged infringer is an “unwilling licensee,” meaning that the alleged infringer has refused to take a license on RAND terms. The court reached two particular conclusions in granting a preliminary injunction that could be important for future cases: (i) a potential licensee does not have to give up its challenges to the infringement or validity of SEPs in order to assert RAND claims in district court; and (ii) the potential negotiating leverage from an ITC exclusion order can give rise to irreparable harm even before an adverse ITC decision has been issued, especially where customers have also expressed concern about the potential effects of an exclusion order.
The Realtek case and its companion ITC investigation warrant further monitoring because it is not clear what effect the court’s contingent preliminary injunction will have on further proceedings in the ITC. The injunction, by its own terms, only becomes operative if an exclusion order is issued by the ITC. Once such an exclusion order is issued by the ITC, however, the only remaining proceedings are a presidential review period of 60 days where the President decides whether or not to disapprove the exclusion order for policy reasons. If the President does not disapprove the exclusion order, the U.S. Customs and Border Patrol automatically begins blocking imports of infringing products without any further involvement by the patent owner. Therefore, it is not clear what affect an injunction on LSI or Agere would have after an exclusion order issues. In addition, it remains to be seen what steps the district court will undertake to set RAND license terms between the parties in the future.