Defenses based upon a patentee’s failure to provide reasonable and non-discriminatory (RAND) license terms are becoming a bigger issue and more common as more patentees sue companies on patents they claim are essential to standards. Reed Smith, led by Silicon Valley partner Steven S. Baik, recently secured a groundbreaking summary judgment for plaintiff Realtek in a cutting-edge patent matter. Further restraining companies that assert “standards-essential patents” against rivals, U.S. District Judge Ronald Whyte in San Francisco prevented LSI Corp. from enforcing any exclusion order (an injunction against importation) obtained in the International Trade Commission against Realtek Semiconductor Corp. Judge Whyte ruled that there was a breach of contract by LSI in suing Realtek for an injunction before providing RAND license terms.

This seminal decision makes clearer that once a company commits to RAND obligations as part of the standards-setting process, it cannot seek injunctive relief before seeking to negotiate, thereby removing the “hold up” effect of a threatened injunction during any potential negotiations for a license. These issues have far-reaching, significant implications to patents in general, and to the large, high-tech companies that typically have large patent portfolios and are often involved in the standards-setting process. This is the first instance in which a U.S. District Court has enjoined the enforcement of an ITC exclusion order based upon a breach of RAND obligations by the patentee, and one of the few cases dealing with the extent and effect of RAND obligations.

Realtek sued LSI for breach of contract with regard to the commitments it undertook with the IEEE (the 802.11 standards body) and to Realtek, a third-party beneficiary of the contract. In our motion, we sought summary judgment that LSI sued Realtek in the ITC (where the only relief is an injunction—an exclusion order from importation into the United States) before providing a RAND license offer on two patents LSI claims are essential to the 802.11 standards.

The court heard argument primarily on the propriety of the relief sought—an injunction against LSI from seeking and/or enforcing any injunction against Realtek, including before the current ITC investigation. Judge Whyte affirmed his tentative ruling that LSI did breach its contractual obligations by pursuing a “sue first for injunction and negotiate later” strategy, and enjoined LSI from enforcing against Realtek any exclusion order that may issue from the ITC action.

This seminal case may have broader implications involving other cases related to standards-essential patents pending before the International Trade Commission, including cases between Apple, Microsoft and Motorola Mobility. Shortly after Judge Whyte’s decision, several U.S. Senators urged the ITC to carefully consider the appropriateness of granting exclusion orders based upon standards-essential patents encumbered with RAND obligations, echoing the rationale set forth in the district court’s order.

Client Alert 2013-144