IP Law Daily, PATENT—NDCal: Semiconductor Company Plausibly Alleged Wi-Fi Patent Owners Breached Obligations to License Patents on RAND Terms, (Oct 12, 2012)

By Peter Reap, J.D., LLM

Realtek Semiconductor Corporation plausibly alleged a breach of contract claim against LSI Corporation and Agere Systems, LLC (the defendants) based on their alleged “inherently unreasonable” offer to license two essential Wi-Fi patents on reasonable and non-discriminatory (RAND) terms, the federal district court in San Jose has decided (Realtek Semiconductor Corporation v. LSI Corporation, October 10, 2012, Whyte, R.). The defendants’ motion to dismiss Realtek’s breach of contract, promissory estoppel, and declaratory judgment claims was denied, but was granted as to Realtek’s California Unfair Competition Law claim.

Background

This case arose out of the defendants’ alleged breach of an obligation to license certain patents on reasonable and non-discriminatory (“RAND”) terms to companies (namely, Realtek) practicing technical standards promulgated by the Institute of Electrical and Electronics Engineers (“IEEE”).

Standards facilitate the adoption and advancement of new technologies, enable development of products that interoperate with one another, and reduce costs for both suppliers and purchasers. At the same time, technical standardization creates a “lock-in” effect and the risk of “patent hold-up.” To combat those risks, standard development organizations, like the IEEE, adopted rules, policies, and procedures requiring participants to disclose relevant intellectual property rights and commit to offering licenses to so-called “essential” patents to any implementer of the standard on RAND terms.

At issue here was the standard for wireless internet connectivity known as “WLAN,” “Wi-Fi,” or “802.11.” Defendant Agere owned rights in a number of patents and pending applications, including U.S. Patent Nos. 6,452,958 (“the '958 patent”) and 6,707,867 (“the '867 patent”), that defendants asserted was or may become “essential” to comply with one or more amendments to the 802.11 standard. Agere is a wholly-owned subsidiary of defendant LSI.

Prior to the releases of the 802.11 protocols, Agere submitted Letters of Assurance pursuant to IEEE bylaws stating it “is prepared to grant a license to an unrestricted number of applicants on a worldwide, non-discriminatory basis and on reasonable terms and conditions to comply with the [Proposed] IEEE Standard.” These letters identified the '958 and '867 patents as including “one or more claims that may be required to practice” the 802.11e and 802.11g

standards.

In March 2012, a representative of LSI contacted Realtek and asserted that Realtek products, as incorporated into certain third-party devices, infringed the '958 and '867 patents. Less than a week later, defendants filed a complaint with the U.S. International Trade Commission (“ITC”) against Realtek and other respondents alleging, inter alia, that Realtek infringed the '958 and '867 patents.

On May 24, 2012, Realtek responded and requested that LSI and/or Agere disclose the RAND license terms consistent with Agere’s contractual obligations. On June 20, 2012, LSI provided license terms to Realtek for the identified “essential” patents.

Realtek alleged that the effect of the proposal, if accepted, was that Realtek would have to pay a royalty exceeding the selling price of Realtek’s products, which Realtek contended was “inherently unreasonable.” Thus, Realtek alleged, defendants breached their RAND obligations.

Realtek further alleged that the defendants made licensing proposals to other component manufacturers that included a different royalty structure that did not have the effect of requiring a royalty that exceeded the selling price of the component. Thus, Realtek alleged, defendants also breached their RAND obligations by failing to license their patents on non-discriminatory terms.

Realtek filed suit alleging four claims—breach of contract, promissory estoppel, declaratory judgment that defendants must offer Realtek a RAND license or that the alleged “essential” patents are unenforceable as to Realtek, and unfair competition.

Breach of Contract

Alleged breach. The defendants argued that Realtek failed to allege a breach of contract because there was no requirement that defendants’ opening proposal be a complete offer of RAND terms. The defendants further argued that the parties were required to negotiate in good faith prior to filing suit on RAND commitments, and that the court should not step in until negotiations reached an impasse.

The recent opinion in Microsoft Corp. v. Motorola, Inc., —- F. Supp. 2d ——, 2012 WL 2030098 (W.D. Wash. 2012) was particularly instructive here, the court determined. That case, like this one, involved Letters of Assurance sent to the IEEE in connection with the 802.11 standard.

The Microsoft court’s decision was relevant because it reflected the court’s willingness to entertain the case despite the fact that Microsoft had not engaged in much, if any, negotiation with Motorola. In addition, both Microsoft and another recent case suggested that RAND licensing obligations existed independent of whether the parties attempted to negotiate a license. It followed that, at least to some extent, a breach of contract must be ascertainable without reference to private negotiations, according to the court.

The Microsoft court found, on a motion for summary judgment, that Motorola was not contractually obligated to make an initial offer on RAND terms. Rather, the court found, Motorola’s Letters of Assurance and the IEEE’s Intellectual Property Rights Policy focused on the resulting license, not the opening offer, and “envision a negotiation between the parties towards a resulting RAND license.” At the same time, the Microsoft court found that “any offer by Motorola (be it an initial offer or an offer during a back-and-forth negotiation) must comport with the implied duty of good faith and fair dealing inherent in every contract.”

Here, although Realtek asserted the theory rejected by Microsoft—that defendants’ initial offer had to be on RAND terms—under the liberal pleading standards of a motion to dismiss, Realtek’s complaint could not be found to fail to state a claim for breach of contract, the court ruled. Although certain allegations of defendants’ obligations were probably more in the nature of legal conclusions that need not be accepted as true, there was sufficient factual matter to render Realtek’s claim plausible. At the least, the allegations plausibly supported a claim that defendants breached their duty of good faith and fair dealing.

The defendants argued that a royalty exceeding the selling price of an infringing product was not inherently unreasonable. But reasonableness turned on the entirety of the terms and circumstances, and there was no reason the royalty rate as compared to selling price could not be one relevant factor. At this stage, it was inappropriate for the court to undertake a more searching scrutiny of the proposal’s content or Realtek’s allegations of unreasonableness.

Ripeness. The defendants argued that, unless Realtek alleges it would accept a license on RAND terms, the court is simply rendering an advisory opinion on the reasonable royalty, from which Realtek could walk away if it so chose. However, it was plausible that, once the patentee interposed the threat of an injunction, the standard implementer was placed at a bargaining disadvantage in private negotiations such that the determination of a true RAND rate almost necessarily must be conducted by a court.

The court was troubled by defendants’ decision to choose, in the first instance, a forum for enforcing their patent rights in which money damages were unavailable and the only relief was injunctive in nature. Since the defendants have done so, there was even less reason for the court to wait before determining the reasonable royalty rate, which was all the defendants were initially entitled to.

Promissory Estoppel

Realtek’s promissory estoppel claim depended on the same arguments as the breach of contract claim. Thus, for the reasons discussed above, the motion to dismiss this claim was denied.

Declaratory Judgment

Although the defendants contended it was duplicative, Realtek’s declaratory judgment claim was sufficiently distinct from its breach of contract claim at this stage, the court held. The court could not know at this stage how Realtek’s claims would unfold. In addition, the determination of a reasonable royalty was part of a live controversy between the parties over the defendants’ claims of patent infringement, which was independent of whether defendants breached the alleged contract. Thus, the motion to dismiss the declaratory judgment claim was denied.

Unfair Competition

Taken as a whole, Realtek’s factual allegations did not plausibly suggest that other competitors or consumers would be adversely affected, thus it failed to allege competitive harm supportive of a § 17200 Unfair Competition Law claim. At most, Realtek’s allegations supported the suggestion that competitors were harmed in their ability to invest in and bring to market innovative products because, through the alleged conduct towards Realtek, other manufacturers lacked “confidence that holders of claimed essential patents will not seek to enjoin their products or demand exorbitant, non-RAND licensing terms.” The impact of such diminished confidence would have on competition was too speculative to meet the plausibility standard. Thus, the unfair competition claim was dismissed.

The case is No. C-12-03451 RMW.

Scott D. Baker (Reed Smith LLP) for Realtek Semiconductor Corporation. Charles A Pannell, III (Kilpatrick Townesend & Stockton LLP) for LSI Corporation.

Cases: Patent TechnologyInternet CaliforniaNews