District Court Judge Enjoins Standards-Essential Patent Owner From Enforcing ITC Exclusion Order

by Orrick, Herrington & Sutcliffe LLP
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In a growing body of legal authority regarding standards-essential patents (SEPs), Northern District of California Judge Ronald Whyte ruled Monday that an owner of SEPs violated its licensing commitments by initiating a U.S. International Trade Commission (ITC) Section 337 action without first offering a reasonable and non-discriminatory (RAND) license. Judge Whyte further granted a preliminary injunction preventing the SEP owner from enforcing any relief it may obtain in the pending ITC investigation.

This is the latest in a series of rulings from courts and government agencies that limit or preclude SEP holders from pursuing injunctive and exclusionary relief, and the first ruling by a federal court enjoining a party from enforcing an ITC order. Judge Whyte’s ruling may be particularly influential in pending and future disputes as to whether owners of SEPs can avail themselves of ITC Section 337 actions.

Case Background

LSI Corporation and Agere Systems LLC (collectively, “LSI”) own two patents that they declared essential to practicing the IEEE standard for wireless Internet connectivity known as “WLAN,” “Wi-Fi” or “802.11” (the “802.11 standard”). LSI committed to license the patents on RAND terms to any interested licensees pursuant to the IEEE patent policy, which imposes certain obligations on standard-setting participants and patent holders in order to ensure that SEPs are disclosed in a timely fashion and licensed on RAND terms.

In 2002, Agere contacted RealTek Semiconductor Corporation (“RealTek”) to suggest that RealTek license certain Agere patents allegedly essential to the 802.11b standard (an earlier amendment to the 802.11 standard). The parties engaged in some discussions over the next few months but licensing discussions ceased shortly thereafter. LSI did not contact RealTek again until 2012, when it sent a letter that did not offer a license but instead demanded that RealTek cease and desist its allegedly infringing activities.

Shortly after sending the cease-and-desist letter, LSI filed a complaint with the ITC alleging that RealTek infringed two of LSI’s SEPs by importing products that practice the 802.11 standard. LSI sought orders to exclude RealTek’s allegedly infringing products from entry into the United States and direct RealTek to cease importation.

RealTek then sent LSI a letter requesting a license to the two SEPs on RAND terms. When LSI responded with a license proposal that RealTek believed was unreasonable, RealTek filed suit in the Northern District of California for breach of contract, promissory estoppel, and a declaratory judgment that LSI must offer RealTek a RAND license or else the SEPs were unenforceable. RealTek then moved for summary judgment, arguing that LSI breached its contractual commitment to the IEEE, to which RealTek was a third-party beneficiary, by initiating the ITC investigation before offering RealTek a RAND license. RealTek further sought an order enjoining LSI from enforcing any exclusion order or injunctive relief that the ITC might issue until after the district court had determined RealTek’s RAND licensing obligations.

Summary of Decision

Judge Whyte began by analyzing RealTek’s breach of contract claim, noting that LSI undisputedly entered into a contract with IEEE to license its SEPs on RAND terms and that RealTek undisputedly was a third-party beneficiary to that contract. Judge Whyte then concluded that LSI breached that contract by naming RealTek as a respondent in the ITC investigation without first offering RealTek a RAND license.

In reaching his decision, Judge Whyte relied on recent decisions in Microsoft Corp. v. Motorola, Inc., No. 10-cv-1823 (W.D. Wash). In that case, the trial court (W.D. Wash.) enjoined Motorola from enforcing injunctive relief against Microsoft for its alleged infringement of Motorola’s SEPs, and that ruling was upheld on appeal to the Ninth U.S. Circuit Court of Appeals. Judge Whyte reasoned that LSI’s filing of an ITC complaint before offering a license to RealTek was “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.” Judge Whyte concluded that LSI’s breach of contract harmed RealTek because the threat of an ITC exclusion order gave LSI improper leverage in licensing negotiations. Further, while Judge Whyte noted that an injunction “may” be appropriate if a party outright refuses to accept a license on court-determined RAND terms, he refused to accept the argument that RealTek was an unwilling licensee to LSI’s patents simply because RealTek wished to preserve its rights to contest infringement and validity through appeal before entering into a RAND license.

Having ruled that LSI breached its contract, Judge Whyte then enjoined LSI from enforcing any exclusion or cease and desist order it might obtain from the ITC against RealTek until after Judge Whyte determined LSI’s RAND obligations and LSI complied with those obligations. Judge Whyte reasoned that RealTek had established a likelihood of success on the merits, that RealTek would be irreparably harmed absent an injunction (because customers had expressed concern about the possible injunction, which could lead to loss of business), and that the balance of equities and public interest favored an injunction.

Possible Implications

Judge Whyte’s decision could have wide-reaching consequences and diminish the ITC’s attractiveness as a forum for enforcing SEPs. Following the Supreme Court’s decision in eBay Inc. v. MercExchange, LLC, 547 U.S. 388 (2006), it has become more difficult to obtain injunctions against alleged patent infringers in district court, particularly if the patent owner is a non-practicing entity or if the patents are SEPs. The ITC currently may grant exclusion orders without applying the four-factor injunction test affirmed in eBay, and so parties seeking to block U.S. sales of infringing products increasingly have turned to the ITC. But if patent owners are prevented from enforcing an ITC exclusion order until after the adjudication of a RAND royalty dispute in parallel district court proceedings, then much of the attractiveness of the ITC relative to district court goes away.

For more information about the RealTek decision or its implications, please contact the authors or your Orrick relationship partner.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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