Judge Whyte recently issued his final ruling on Daubert and other evidence regarding RAND issues for the upcoming Realtek v. LSI jury trial based on his tentative ruling discussed in our Nov. 14 post. Judge Whyte basically kept his tentative rulings and bases thereof, as discussed in our prior post.  He did provide additional insight into his statement about Realtek not negotiating for a RAND license from LSI during the time that LSI was seeking an exclusion order from the ITC.

Recall that the particular evidentiary ruling here concerns excluding evidence of whether LSI’s June 20, 2012 license offer– made after LSI filed suit in the ITC seeking an exclusion order–was RAND in order to show that Realtek failed to mitigate damages by not negotiating with LSI for a license — i.e., argument that had Realtek negotiated it could have accepted a RAND offer and avoided litigation or other costs.  The specific state law on duty to mitigate focuses not on what options were available to Realtek, but only the reasonableness of the action Realtek took — i.e., the reasonableness of Realtek not negotiating with LSI while the ITC action was pending:

“[I]t is appropriate for courts to focus ‘not on the failure of the plaintiff to pursue the … alternative courses of action suggested by [the] defendant but upon the reasonableness of the action which [the] plaintiff did in fact take.  The fact that in retrospect a reasonable alternative course of action is shown to have been feasible is not proof of the fact that the course actually pursued by the plaintiff was unreasonable.”

Judge Whyte’s tentative ruling excluded that mitigation evidence, stating that “Realtek’s refusal to negotiate under the threat of an ITC exclusion order was a reasonable course of action” and “Realtek would not be unreasonable in declining to negotiate with LSI under the circumstances.”

In now finalizing his ruling, Judge Whyte provides some additional insight into his ruling based on the distinction between the threat of an injunction that underlies all licensing negotiations (RAND-based or otherwise) and the fact that the patent owner here filed an action actively seeking an injunction:

"At the outset, it is worth noting that LSI was correct when it contended at the December 20, 2013 hearing on this court’s tentative order that the threat of an injunction is always present in license negotiations.  The patent holder’s best alternative to a negotiated agreement in patent license negotiations is typically to file suit, which necessarily involves the threat of an injunction.  However, as others have discussed, negotiated patent royalties may often be higher than the true value of the technology because an injunction would impose serious hold-up and switching costs on the accused infringer.  Therefore, a negotiation arriving at a reasonable royalty rate is unlikely to occur when one party is under the threat of an exclusion order.

     Returning to LSI’s best argument, the court recognizes that the threat of an injunction forms the backdrop to many license negotiations.  Still, one fact peculiar to this case distinguishes LSI’s June 20, 2012 proposal from the typical license negotiation:  LSI had already filed an ITC action against Realtek to enforce the patent at the time it offered Realtek a license to the patent.  In a typical license negotiation, the threat of an injunction is not always credible.  The threat’s credibility depends on the litigation, reputational, and other costs faced by the patent holder.  It is still uncertain at what point the patent holder will invoke its best alternative to a negotiated agreement of filing suit.  Here, however, LSI has already filed an ITC action against Realtek, so LSI’s threat of an exclusion order is thus entirely credible.  At this point, LSI possessed especially strong leverage over Realtek, and thus the court cannot call unreasonable Realtek’s refusal to negotiate a supposedly “fair, reasonable, and nondiscriminatory” royalty rate with LSI in this weakened position.

As stated in our prior post on the tentative ruling, it is import to avoid over-reading its import under the circumstances – e.g., not misread this as encouraging parties not to negotiate.  This is an evidentiary ruling on state law duty to mitigate based on whether the decision not to negotiate under these particular circumstances was “reasonable” or at least not “unreasonable” without deciding whether other options — e.g., negotiating — also would be more or less reasonable.