A Reed Smith trial team led by Silicon Valley partner Steven S. Baik has scored a significant victory for Realtek Semiconductor Corp. in a jury trial before U.S. District Judge Ronald M. Whyte.

In Realtek Semiconductor Corp. v. LSI Corp. et al., CV12-3451 (N.D. Cal., filed June 29, 2012), Taiwan-based computer chip manufacturer Realtek sued LSI for failure to provide reasonable and non-discriminatory license terms related to two LSI wireless networking patents. LSI had previously committed to license these two Wi-Fi Internet patents under reasonable and nondiscriminatory, or “RAND,” terms, which allow other companies to fairly integrate standardized technologies into their products.

However, in a May 20, 2013, order granting Reed Smith’s motion for summary judgment, Judge Whyte ruled that LSI had breached its RAND licensing obligations in March 2012, when it sued Realtek in the International Trade Commission for patent infringement—and only days after it had sent a cease-and-desist demand letter to Realtek alleging infringement.

In a precedent-setting ruling, Judge Whyte enjoined LSI from enforcing any exclusion order that the ITC might issue, reasoning that the court must first determine a patent-holder’s obligation to negotiate a license for standard-essential patents before any injunctive relief from the ITC can be enforced.

This trial is also the first in California in which jurors were asked to decide the licensing terms for declared Standard Essential Patents, or “SEPs,” which cover such popular technologies as wireless Internet networking.

After LSI sued Realtek in the ITC, LSI initially asked for royalties that would have far exceeded the sales price of Realtek’s chips. At trial, LSI dramatically reduced the royalties it sought and had asked jurors to set a royalty of .185 percent for each patent, or 0.37 percent for both patents. However, Realtek asserted that the two Wi-Fi patents at issue were not nearly that valuable, because they have added little, if any, innovation to the Wi-Fi standards. Realtek’s attorneys further argued that the decision to include the two Wi-Fi patents was a result of a political compromise at the Institute of Electrical and Electronics Engineers (IEEE), the group that established the Wi-Fi standard.

The jury agreed with Realtek and determined a 0.12 percent royalty for the ‘958 patent, and a 0.07 percent royalty for the ‘867 patent—a combined 0.19 percent, which is nearly half the total royalty rate sought by LSI.

“Not only is this the first trial in which District Court jurors have determined the RAND rate for a patent, but we believe these royalties are also the lowest ever to be set for comparable technologies related to declared standard essential patents,” Mr. Baik said.

The case has been closely watched by industry leaders, especially the manufacturers of end products that incorporate Wi-Fi technology, such as TVs, smart-phones and wireless LAN. Initially, LSI sought to obtain royalties based upon the sales prices of these end products, rather than provide rational terms based on the cost of the chips.

However, Reed Smith successfully argued that royalty rates based on declared standards-essential patents should be even lower in order to avoid the prospect of "royalty stacking" or "patent hold-up," where holders of declared SEPs seek royalties that are disproportionate to any actual contribution to the standard.

“True RAND rates should be even lower; and, as a whole, the industry must continue to hold standards-essential patent holders accountable to their RAND commitment,” Mr. Baik said.

The jury also awarded Realtek $3.825 million in attorneys’ fees, based on the breach of contract found earlier by the court. Realtek had requested damages to cover legal fees incurred defending itself against LSI’s patent infringement claims at the ITC.

“This is a significant victory for the entire technology sector,” Mr. Baik said. “Now patent litigants know there can be repercussions in U.S. courts for pursuing sue-first-for-injunction-and-negotiate-later strategies at the ITC.”

At Reed Smith, Mr. Baik was assisted in this matter by San Francisco-based Intellectual Property partners James Daire and William R. Overend, counsel Christine M. Morgan, and associates Kirin K. Gill and John W. McCauley.

About Reed Smith

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