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Funai Electric Co., Ltd. v. LSI Corp.

United States District Court, N.D. California, San Jose Division

March 27, 2017

FUNAI ELECTRIC CO., LTD., ET AL., Plaintiffs,
v.
LSI CORPORATION, et al., Defendants.

          ORDER GRANTING IN PART AND DENYING IN PART MOTION TO DISMISS FIRST AMENDED COMPLAINT [RE: ECF 48]

          BETH LAB SON FREEMAN United States District Judge.

         Plaintiffs Funai Electric Company Ltd., Funai Corporation, Inc., Funai Service Corporation, and P&F USA, Inc. (collectively, “Funai”) claim that Defendants LSI Corporation (“LSI”), Agere Systems LLC (“Agere”), and Avago Technologies General IP (Singapore) Pte. Ltd. (“Avago”) lied to two different standard setting organizations (“SSOs”) as part of a scheme to monopolize the markets for certain technologies. Defendants represented that if their technologies were incorporated into standards for wireless Internet connectivity and video compression, they would license any standard essential patents on fair, reasonable, and non-discriminatory (“FRAND”) terms. Funai contends that Defendants had no intention of honoring that commitment and, in fact, not only refused to offer Funai FRAND licenses to three patents Defendants have asserted are standard essential, but also sued Funai for infringement of those patents. Funai has responded by suing Defendants under the Sherman Act and state law.

         Defendants move to dismiss a number of claims asserted in Funai's operative first amended complaint (“FAC”) under Federal Rule of Civil Procedure 12(b)(6). For the reasons discussed below, the motion is GRANTED IN PART AND DENIED IN PART.

         I. BACKGROUND[1]

         According to Funai, Defendants' scheme to monopolize began with their misrepresentations to two SSOs: the Institute of Electrical Electronics Engineers (“IEEE”), which developed what is now a widely practiced standard for wireless Internet connectivity known as “WLAN, ” “Wi-Fi, ” or “802.11”; and the International Telecommunications Union (“ITU”), which worked with the International Organization for Standardization and the International Electrotechnical Commission (“ISO/IEC”) Moving Picture Experts Group (“MPEG”) to develop what is now a widely practiced standard for video compression known as “H.264, ” “MPEG-4 Part 10, ” or “AVC.” FAC ¶¶ 26, 30-32, 126, ECF 40.

         Defendants' Misrepresentations to the IEEE (802.11 Standard)

         The IEEE released the initial 802.11 protocol for wireless Internet connectivity, “legacy 802.11, ” in 1997. FAC ¶ 29. A number of amendments were released over the next fifteen years, culminating in the release of the “802.11” standard in 2012. Id. During this period, the IEEE had a policy governing intellectual property rights (“IPR policy”) which might affect a standard under consideration. Id. ¶¶ 33-36, 44-46. That policy required those involved in a standard's development to disclose ownership of any patent or patent application that might be essential to the standard. Id. ¶ 33. Upon such disclosure, the IEEE requested Letters of Assurance stating either that the patentee would not enforce such patents against those implementing the standard or that the patentee would license such patents without compensation or on FRAND terms. Id. ¶ 34. If Letters of Assurance were not provided, the IEEE would revise the standard to incorporate alternative technologies or would discontinue work on the standard altogether. Id. ¶ 36.

         In 2003, Defendant Agere and its predecessor in interest, Lucent Technologies, Inc., submitted Letters of Assurance to the IEEE, specifically identifying U.S. Patent Nos. 6, 452, 958 ('958 patent) and 6, 707, 867 ('867 patent) as containing one or more claims that may be required to practice the 802.11e and 802.11g standards. FAC ¶ 38 and Exh. 1. The Letters of Assurance stated that Agere was “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.” Id. (alteration in original). Based on those Letters of Assurance, the IEEE released the 802.11 standard and amendments to that standard which Defendants assert incorporated their patented technology. Id. ¶ 39. Absent Defendants' Letters of Assurance, the IEEE either would have revised the standard to employ alternative technologies instead of Defendants' technologies or would have stopped working on the standard. Id. In reliance on the IEEE's standard setting process and Defendants' Letters of Assurance promising to license any standard essential patents on FRAND terms, Funai incorporated aspects of the 802.11 family of standards into its products. Id. ¶¶ 42, 61-63.

         Defendants' Misrepresentations to the ITU (H.264 Standard)

         The ITU and ISO/IEC began developing the current video compression standard's precursor, H.26X, in the 1990s. FAC ¶ 32. Several amendments were released over the years, culminating in the release of the H.264 standard. Id. At the time the H.264 standard was under consideration, the ITU's IPR policy requested disclosure of any patent or patent application that might cover elements of the proposed standard and the licensing of such patents royalty-free or on FRAND terms. Id. ¶ 45. If a patentee indicated unwillingness to commit to a royalty-free or FRAND license, the ITU could take a number of actions, including revising the standard to remove the potential conflict. Id. ¶ 46.

         In 2002, prior to release of the H.264 standard, Defendant Avago's predecessor in interest, VideoLocus, submitted a proposal to the ITU recommending that its technology - which later was disclosed in U.S. Patent No. 6, 982, 663 ('663 patent)[2] - be incorporated into the standard. FAC ¶ 48. Along with the proposal, VideoLocus submitted licensing declarations promising to license its granted, pending, or planned standard essential patents on FRAND terms. Id. ¶¶ 49-50 and Exhs. 2-3. Based on those licensing declarations, the ITU released the H.264 standard. Id. 51. Absent the licensing declarations, the ITU either would have revised the standard to employ alternative technologies instead of Defendants' technology or would have stopped working on the standard. Id. In reliance on the ITU's standard setting process and Defendants' licensing declarations, Funai incorporated aspects of the H.264 standard into its products. Id. ¶ 54.

         Defendants' Commitments to MPEG LA (H.264 Standard)

         Non-party MPEG LA administers license agreements for pools of patents that are asserted to be essential to certain standards and technologies. FAC ¶ 55. An entity that takes a license for a particular patent pool can manufacture and sell products using any or all of the pooled patents in exchange for the payment of royalties. Id. ¶ 56. MPEG LA collects the royalties for the benefit of the various patent holders who contribute to the patent pool as licensors. Id.

         When an entity takes a license to a patent pool, such entity is contractually obligated to grant reciprocal licenses to its own asserted standard essential patents by either (1) directly granting such licenses to other licensees to the patent pool or (2) joining the patent pool as a licensor. Id. ¶ 57. A licensee who grants such a reciprocal license either directly or by joining the patent pool receives the same per-patent rate that other licensors receive. Id.

         Among the patent pools administered by MPEG LA is the AVC Patent Portfolio License, relating to the H.264 standard. FAC ¶ 55. Defendant LSI was a licensee to the AVC Patent Portfolio License as early as October 2009 and as recently as December 2015. Id. ¶ 58. LSI thus was contractually obligated to grant reciprocal licenses to its asserted standard essential patents to other licensees to the patent pool. Id. Funai alleges that LSI has asserted in legal proceedings that the claims of its '663 patent are necessarily infringed by use or implementation of the H.264 standard. Id. ¶ 59. Because LSI has asserted that the '663 patent is standard essential, LSI had a contractual obligation to grant a reciprocal license to the '663 patent to other licensees to the AVC Patent Portfolio License. Id.

         Defendants' Refusal to Offer FRAND Licenses and Commencement of Litigation

         Defendants refused to grant Funai a reciprocal license to the '663 patent as required under the terms of the MPEG LA license. FAC ¶¶ 93-94. Defendants likewise refused to grant Funai licenses to the '958, '867, and '663 patents on FRAND terms as required under their commitments to the IEEE and ITU. FAC ¶¶ 64-71, 85-89. Defendants have offered to license the '958, '867, and '663 patents to Funai only upon the conditions that Funai pay exorbitant royalties and take licenses to many of Defendants' other patents that are irrelevant to Funai's products or are invalid. Id. ¶¶ 66-68, 86-88.

         On March 12, 2012, Defendants LSI and Agere filed a complaint before the United States International Trade Commission (“ITC Action”) against a number of respondents, including Funai, asserting infringement of the '958, '867, and '663 patents and one other patent, the '087 patent. FAC ¶ 99 and Exh. 5. Defendants sought to exclude the respondents' allegedly infringing products from entry into the United States. Id. On the same date that they filed the ITC action, Defendants filed suit against Funai in the United States District Court for the Central District of California (“District Court Action”), asserting infringement of the same four patents at issue in the ITC action. Id. ¶ 98 and Exh. 4. The parties stipulated to stay the District Court Action pending resolution of the ITC Action. Id. ¶ 100.

         In July 2013, the Administrative Law Judge (“ALJ”) presiding over the ITC Action determined that Funai did not infringe any asserted claims of the '958, '867, or '663 patents. FAC ¶ 101. In January 2014, while the ALJ's determination was on appeal, Funai and LSI entered into a license and settlement agreement under which they released each other from claims of liability relating to the '087 and '663 patents as of the execution date of the license and settlement agreement. Id. ¶ 102. LSI also granted Funai a license to the '087 and '663 patents through September 30, 2015. Id. Based on the license and settlement agreement, the district court dismissed with prejudice all claims relating to the '087 and '663 patents. Id. In March 2014, the full ITC affirmed the ALJ's findings of non-infringement regarding the '958 and '867 patents and also found the claims of the '958 patent to be invalid. Id. ¶ 103. In March 2015, the Federal Circuit upheld the ITC's finding of no violation based on lack of domestic industry and declined to reach other liability issues. Id. ¶ 104.

         In June 2015, Defendants filed a first amended complaint in the District Court Action to (1) add Avago as a plaintiff, (2) add infringement allegations regarding another patent, and (3) add counts for “Declaratory Judgment for Future Infringement” regarding the '087 and '663 patents that previously had been dismissed from the case. FAC ¶ 105. Later the same month, Defendants filed a second amended complaint in the District Court Action. Id. ¶ 106. In September 2015, the District Court Action was transferred to the Northern District of California, and in October 2015 Defendants filed a third amended complaint alleging actual infringement of the '663 patent. Id. ¶ 108. In December 2015, Defendants filed a fourth amended complaint again alleging infringement of the '663 patent. Id. ¶ 109. In February 2016, Defendants voluntarily dismissed the District Court Action without explanation. Id. ¶ 110. Defendants still refuse to offer Funai licenses to the '958, '867, and '663 patents on FRAND terms.[3]

         Funai filed this action on March 11, 2016, and it filed the FAC as of right on August 29, 2016. The FAC asserts claims for: (1) violation of Section 2 of the Sherman Act; (2) violation of California's Unfair Competition Law (“UCL”); (3) breach of contract based on IEEE FRAND obligations; (4) breach of contract based on ITU FRAND obligations; (5) breach of contract based on licensing agreement with MPEG LA; (6) promissory estoppel; (7) declaratory judgment for determination of FRAND rate and order requiring Defendants to offer FRAND license or declaring Defendants' patents to be unenforceable against Funai; (8) declaratory judgment of non-infringement of the '148 patent; and (9) declaratory judgment of non-infringment of the '087 patent.

         Defendants move to dismiss Claims 1, 2, 4, 5, 6, and 7 in whole or in part.

         II.LEGAL STANDARD

         “A motion to dismiss under Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim upon which relief can be granted ‘tests the legal sufficiency of a claim.'” Conservation Force v. Salazar, 646 F.3d 1240, 1241-42 (9th Cir. 2011) (quoting Navarro v. Block, 250 F.3d 729, 732 (9th Cir. 2001)). When determining whether a claim has been stated, the Court accepts as true all well-pled factual allegations and construes them in the light most favorable to the plaintiff. Reese v. BP Exploration (Alaska) Inc., 643 F.3d 681, 690 (9th Cir. 2011). However, the Court need not “accept as true allegations that contradict matters properly subject to judicial notice” or “allegations that are merely conclusory, unwarranted deductions of fact, or unreasonable inferences.” In re Gilead Scis. Sec. Litig., 536 F.3d 1049, 1055 (9th Cir. 2008) (internal quotation marks and citations omitted). While a complaint need not contain detailed factual allegations, it “must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.'” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). A claim is facially plausible when it “allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Id.

         III. DISCUSSION

         A. Claim 1 for Violation of Section 2 of ...


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