IP Law Daily, PATENT—N.D. Cal.: Jury’s award of $3.82 million in damages to Realtek for LSI’s breach of contract upheld, (Jun 18, 2014)

By Peter Reap, J.D., LL.M.

In a case brought by Realtek Semiconductor Corporation against LSI Corporation and Agere Systems LLC (collectively, “LSI” or “defendants”) for breaching their reasonable and non-discriminatory (“RAND”) licensing obligations by initiating an ITC Section 337 action naming Realtek as a respondent before approaching Realtek with a RAND licensing offer, a jury’s award of $3.825 million in damages to Realtek for LSI’s breach of contract was upheld because it was supported by sufficient evidence, the federal district court in San Jose, California, has determined (Realtek Semiconductor Corporation v. LSI Corporation, June 16, 2014, Whyte, R.). Thus, motions for judgment as a matter of law brought by each of the parties were denied.

Background. Agere owns two patents, U.S. Patents Nos. 6,452,958 (“’958 Patent”) and 6,707,867 (“’867 Patent”), that it had designated as essential to the Institute of Electronic Engineers’ (“IEEE”) standard for wireless internet connectivity known as “WLAN,” “Wi-Fi” or “802.11 standard.” In 2001, Agere became a wholly owned subsidiary of LSI. Realtek is a Taiwanese company which designs and supplies integrated circuits, including integrated circuits for WLAN technology. Prior to the release of the 802.11 protocols at issue, in 2003 and 2004, Agere submitted Letters of Assurance, as required by the IEEE Standards Board Bylaws, stating with respect to the ’958 Patent and the pending application which led to the ’867 Patent that it “is prepared to grant a license to an unrestricted number of applicants on a worldwide, nondiscriminatory basis and on reasonable terms and conditions to comply with the [Proposed] IEEE Standard.”

On March 7, 2012, several years after the release of the 802.11 protocols, a representative of LSI contacted Realtek and asserted that Realtek products, as incorporated into certain third-party devices, infringed the ’958 and ’867 Patents. On March 12, 2012, LSI filed a complaint with the International Trade Commission (“ITC”) naming Realtek and others as respondents and alleging, that Realtek infringed the ’958 and ’867 Patents. On May 24, 2012, Realtek requested that LSI make the ’958 and ’867 Patents available for a reasonable and non-discriminatory (“RAND”) license pursuant to defendant’s designation of these patents as essential to the IEEE 802.11 standard and their promise in the Letters of Assurance.

On June 29, 2012, Realtek filed the instant action asserting that the defendants breached their RAND licensing obligations by initiating an ITC Section 337 action naming Realtek as a respondent before approaching Realtek with a RAND licensing offer. In its complaint, Realtek requested an injunction preventing LSI from enforcing its standard essential patents against Realtek without offering a RAND license, a declaration of RAND rates for the ’958 and ’867 Patents, and a declaration that the ’958 and ’867 Patents were unenforceable as to Realtek if LSI failed to offer Realtek a RAND-complaint license.

On May 20, 2013, the court granted partial summary judgment in favor of Realtek on its breach of contract claim and granted a conditional preliminary injunction preventing LSI from enforcing any exclusion order or injunctive relief with respect to the IEEE 802.11 standard-essential patents should the ITC grant said relief in the action before it. In its order granting partial summary judgment, the court held that LSI breached its RAND licensing obligations to Realtek by failing to offer a license to the standard essential ’958 and ’867 Patents before filing a Section 337 action at the ITC.

Beginning February 10, 2014, the court held an eleven day jury trial to determine the amount of Realtek’s breach of contract damages and RAND rates for the ’958 and ’867 Patents. The jury awarded $3,825,000 in damages to Realtek for LSI’s breach of contract and found RAND royalty rates of 0.12% for the ’958 Patent and 0.07% for the ’867 Patent.

On March 4, 2014, The ITC dismissed the ’867 Patent because it had expired on February 23, 2014. As to the ’958 Patent, the ITC determined that the ’958 Patent was invalid, not infringed by Realtek, and that no domestic industry existed as to the ’958 Patent. Further, on March 20, 2014, the Ninth Circuit dismissed LSI’s appeal of this court’s grant of the preliminary injunction, finding the appeal mooted by the ITC’s refusal to issue an exclusion order, as the preliminary injunction was only operative if the ITC were to issue an exclusion order.

Realtek and LSI now each moved for judgment as a matter of law.

Breach of contract damages. Realtek bore the initial burden of proving the extent of its injury. The burden then shifted to LSI to prove that Realtek failed to act reasonably in limiting its damages, the court observed. The law was clear that although Realtek is only entitled to the reasonable expenses it incurred as a result of LSI’s breach, the initial burden of proving the extent of the injury was on Realtek, and the burden of proving that Realtek failed to reasonably limit its damages was on LSI. To be entitled to recovery, Realtek did not need to offer any affirmative evidence that its damages were reasonable—it needed only to offer evidence showing the amount of consequential damages it sustained according to the court

LSI did not cite a single case in support of its proposition that Realtek must prove that it actually paid its invoices. As such, consistent with the verdict form language proposed by LSI, Realtek only need to prove the amount of damages it incurred as a result of LSI’s breach.

Realtek met its initial burden of proving its breach of contract damages by offering invoices showing the legal fees Realtek incurred in defending itself in the ITC action, the court noted. However, numerous entries in Realtek’s invoices were redacted. Realtek had several ways in which it could satisfy its initial burden of proving that the redacted entries were reasonable fees related to the ITC action. Instead, Realtek proffered invoices that redacted the subject matter of many entries, without providing any evidence demonstrating that the fees shown on the redacted entries were incurred as a result of LSI’s breach of contract. Consequently, the jury could have relied on Ms. Sundeen’s testimony that Realtek was not entitled to breach of contract damages with respect to the $853,582 Realtek claimed based on redacted invoice entries, the court held.

Realtek argued that it was entitled to all of its breach of contract damages as a matter of law because LSI did not offer sufficient evidence to prove that Realtek failed to mitigate its damages. LSI, in turn, contended that it was entitled to judgment as a matter of law that Realtek failed to mitigate its damages. The jury’s verdict was supported by sufficient evidence, and therefore both parties’ motions for judgment as a matter of law were denied, the court held.

LSI conceded that Realtek received a discount of at least five percent on its attorneys’ fees from the law firm of Finnegan, Henderson, Farabow, Garrett & Dunner (“Finnegan”). However, LSI argued at trial that Realtek still failed to mitigate its damages for five main reasons: (1) Realtek did not secure a larger rate discount, (2) Realtek did not secure a rate freeze, (3) Realtek did not prevent Finnegan from billing for clerical work, (4) Realtek did not save enough in fees from the joint defense group, and (5) Realtek’s total fees are unreasonable based on a survey by the American Intellectual Property Law Association (“AIPLA”).

The jury was entitled to rely on Ms. Sundeen’s testimony concerning joint defense group savings and the AIPLA survey in finding that Realtek failed to mitigate its damages, the court reasoned. In concluding that Realtek acted unreasonably, the jury could have credited Ms. Sundeen’s extensive experience with ITC litigation and the use of joint defense groups.

The jury could have relied on Ms. Sundeen’s use of Realtek’s direct sales to determine its amount at risk in the ITC litigation. Moreover, even if the jury found that Realtek’s potential exposure was greater than the $30,000 used by Ms. Sundeen, the jury could have arrived at the conclusion that Realtek failed to mitigate its damages based on the AIPLA survey in any number of other ways. For example, the jury could have used the median litigation costs reported in the AIPLA survey instead of Ms. Sundeen’s more conservative use of the 75th percentile. Therefore, the jury’s conclusion that Realtek failed to mitigate its damages was supported by sufficient evidence, the court explained.

Nor was LSI entitled to judgment as a matter of law that Realtek’s breach of contract damages were $2.5 million. The jury could have reasonably found that several factors supported a damages verdict of more than the $2.5 million for which LSI advocated.

RAND royalty rates. Realtek advanced two arguments that it was entitled to judgment as a matter of law on the RAND royalty rates. First, Realtek asserted that the court should enter judgment as a matter of law that the ’867 Patent has a royalty rate of zero. However, this issue related to the scope of the court’s declaratory judgment jurisdiction, which was addressed in the court’s Order Denying Permanent Injunction and Granting Declaratory Relief. Judgment as a matter of law on the ’867 Patent was improper because the jury’s verdict determining a royalty rate for the ’867 Patent was supported by substantial expert testimony and other evidence.

Second, Realtek contended that Dr. Layne-Farrar’s estimation of the number of Agere standard essential patents was not supported by substantial evidence, and thus that LSI did not support its proffered royalty rates with sufficient evidence.

LSI presented sufficient evidence to support the jury’s verdict finding RAND royalty rates for the ’867 and ’958 Patents, the court held. Even had the jury credited every argument Realtek made that caused Dr. Layne-Farrar to adjust her royalty rate, the jury still could have returned a verdict with royalty rates higher than the rates the jury actually found. Based on that alone, the jury’s verdict was supported by substantial evidence, the court ruled.

To the extent Realtek’s argument was construed as a Daubert challenge that Dr. Layne-Farrar’s testimony was so unreliable as to not be admissible under the Federal Rules of Evidence, Realtek’s motion was also denied. Dr. Layne-Farrar’s calculations were based on a reliable, testable, quantitative methodology, and were thus not subject to exclusion under Daubert.

The case is No. C-12-3451-RMW.

Attorneys: Scott D. Baker (Reed Smith LLP) for Realtek Semiconductor Corp. Charles Adam Pannell, III (Kilpatrick Townsend & Stockton LLP) for LSI Corp. and Agere Systems, LLC.

Companies: Realtek Semiconductor Corp.; LSI Corp.; Agere Systems, LLC

Cases: Patent CaliforniaNews