Netgear 2013 Annual Report Download - page 93

Table of Contents NETGEAR, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Innovatio's various counterclaims, cross claims, and affirmative defenses on August 3, 2012. In addition, on October 1, 2012, Cisco, Motorola and the
Company filed an amended complaint alleging racketeering, fraud, interference with contract, unfair business practices, and conspiracy, among other
things, against Innovatio. On February 4, 2013, the Court dismissed the offensive claims of Cisco, Motorola, and the Company that alleged Innovatio
was engaging in racketeering, fraud, and unfair business practices by demanding licensing fees from hotels, cafes and other businesses but left intact
claims against Innovatio that allege breach of contract with respect to Innovatio's fair, reasonable, and nondiscriminatory (FRAND) royalty obligations.
The parties have already exchanged their Final Infringement, Unenforceability and Invalidity Contentions and Damages contentions.
The Court has implemented special damages-
focused proceedings prior to proceeding to the liability or infringement phase of the case.
Accordingly, the parties on July 18 and July 19, 2013 participated in a bench trial on essentiality. Because the plaintiff and defendants disagree as to
whether approximately 230 patent claims asserted by Innovatio are essential to practicing the 802.11 standard, this bench trial was held to determine
whether those claims are essential. Essential claims are subject to FRAND royalty obligations, and such royalty obligations are generally subject to
lower rates than Innovatio is currently demanding from the parties it is accusing of infringing its patents. On July 26, 2013, the Court issued an order
deeming all claim essential. The Court reviewed various arguments on the IEEE's definition of “Essential Patent Claims”
and found that essential patent
claims are those which are necessary to implement mandatory or optional features but also can cover items not explicitly required by the standard --
either “enabling”
technologies or items that are technically and commercially necessary to implement the standard. The Court confirmed its previous
holding that the prospective licensee has the burden of proving essentiality, and that the analysis should be performed on a claim by claim basis, as
opposed to a patent by patent basis. The Court then held a bench trial, which began on September 9, 2013, and ended on September 19, 2013, to
determine what the FRAND royalty rate would be on the patents and claims earlier found to be essential by the Court. The Court ruled on September 25,
2013 that the FRAND royalty for Innovatio's standard-essential Wi-
Fi patents would be 9.56 cents per unit, far lower than the several dollars per unit
that Innovatio had sought. Innovatio’s method would have valued the patents at rates ranging from $3.39 per unit for a wireless router to $16.17
per unit
for a tablet. The Court also determined that the correct royalty base for making a FRAND determination is the price of the Wi-
Fi chip embedded in each
product, finding the patents made up a small part of the value of the chip. Innovatio had said the rate should be based on the selling price for accused
products, which could run to hundreds of dollars and lead to royalties of many dollars per unit. The Court concluded that Innovatio's expert witnesses
presented "no legally sound and factually credible method" for calculating the FRAND rate based on the price of the whole product, leaving it no choice
but to base its analysis on the price of the chip.
On November 22, 2013, during a court-
ordered mediation, Innovatio and the Company agreed to settle the case for a payment from the Company
to Innovatio in return for a fully-paid-
up license to the patents in suit, their foreign counterparts, and any other patents that Innovatio currently holds.
The settlement did not have a material financial impact to the Company.
U.S. Ethernet Innovation, LLC v. NETGEAR, Inc.
On June 22, 2012, U.S. Ethernet Innovations, LLC (“USEI”)
sued the Company in the District Court for the Eastern District of Texas, alleging
infringement of certain of its Ethernet-related patents: U.S. Patent Numbers 5,732,094 (“Method for automatic initiation of data transmission”
);
5,434,872 (“Apparatus for automatic initiation of data transmission”); 5,299,313 (“Network interface with host independent buffer management”)
and
5,530,874 (“Network adapter with an indication signal mask and an interrupt signal mask”).
USEI is a patent holding entity with a nominal office in the
Eastern District of Texas. The accused products include products such as the “Netgear RT311 Internet Gateway Router.”
The Company received an
extension until August 17, 2012 to answer the complaint. USEI has sued, in addition to the Company, the following companies on the same and other of
its Ethernet-
related patents: Ricoh Americas Corporation, TRENDnet, Inc., Xerox Corporation, Konica Minolta Business Solutions U.S.A., Inc.,
Freescale Semiconductor, Inc., Sharp Electronics Corporation, Digi International Inc., NetSilicon, Inc., Epson America, Inc., Cirrus Logic, Inc., Yamaha
Corporation of America, Control4 Corporation, Samsung Electronics Co., Ltd., Samsung
Electronics America, Inc., Samsung Telecommunications
America, LLC, Samsung Austin Semiconductor, LLC, Oki Data Americas, Inc., STMicroelectronics N.V., and STMicroelectronics, Inc. (collectively,
“Defendants”).
The Company received a further extension to answer the complaint and answered on September 4, 2012 via a 12(b)(6) motion to dismiss the
complaint for various reasons, including a lack of pleading specificity. USEI responded to the Company's motion to dismiss under Rule 12(b)(6) on
September 21, 2012. The Company submitted its Reply in Support of its Motion to Dismiss on October 1, 2012.
USEI served its infringement contentions on the Company on October 10, 2012. The Company filed its transfer motion for a transfer to the
Northern District of California and supporting declarations on November 16, 2012. On December 3, 2012, Defendants filed their joint invalidity
contentions.
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