Intel, R2 Semiconductor Each Take on Risk in German Patent Fight

Patent owner R2 Semiconductor LLC touted its win over Intel Corp. in February after a German court issued an injunction that could block the technology giant from selling several generations of chip processors. But months later, the company hasn’t actually pulled the trigger.

An R2 news release said the hedge-fund backed company was “fully prepared to enforce” the injunction against Intel the week after the Düsselfdorf Regional Court found Intel’s products infringing. Intel told investors it would “vigorously” defend the suit, though it warned them of potential risk from the lawsuit in US government filings.

An injunction could trigger product recalls or jeopardize Intel’s 17 billion-euro investment in a new chip plant and disrupt the company’s overall operations in Europe’s largest economy.

Intel appealed the court’s ruling, and R2 isn’t obligated to act onits order ahead of an appellate decision both companies say is months down the road. The delay could be explained by the complicated process of negotiating a royalty rate or by hesitation on the part of R2, as it could be liable for Intel’s potentially massive injunction-related damages if its lower-court win were later reversed, according to attorneys and analysts interviewed by Bloomberg Law.

“Ultimately it’s going to come down to whether R2 has the confidence to go ahead and try to enforce that knowing there could be very painful consequence in the event it’s overturned,” said Tamlin Bason, an analyst at Bloomberg Intelligence based in the United Kingdom, where R2 and Intel are also litigating the same patent.

“I’ve seen enforcement in such situations where it happens much quicker,” said Wolrad Prinz zu Waldeck und Pyrmont, a veteran German patent lawyer and a partner at Freshfields who’s familiar with but not involved in the case.

Amid the injunction stalemate, R2 and Intel also continued to spar over whether Intel infringes R2’s European patent and whether the patent describes an obvious technological advancement, which would render it invalid. R2, meanwhile, has pressed other forms of leverage against Intel, pushing ahead with suits against its corporate customers, including Dell Technologies Inc., Amazon Web Services, and Fujitsu Technology Solutions GmbH, over the same patent and an additional suit over Intel’s alleged infringment in France.

“It’s all trying to build pressure points to get that royalty agreement,” Bason said. The Bloomberg analyst also stressed the pressure for Intel to settle to avoid the injunction, which he said would inflict not just easily quantifiable business costs, but also reputational ones.

“If Germany is just 1% of the global PC market, that’s still billions of dollars if R2 puts that injunction into place,” he said of the impact on Intel and its clients. “But if you’re Dell, and you can’t sell laptops in Germany, so you miss your earnings estimates—I’d be very surprised if Intel wouldn’t settle prior to an injunction taking effect.”

Risk on Appeal

A possible explanation for the delay, Prinz zu Waldeck und Pyrmont said, is that R2 would take on a significant risk by pressing its injunction before resolution of Intel’s appeal.

That’s due to a section of the German Code of Civil Procedure that requires a company enforcing an injunction to pay for the damages resulting from enforcement when a lower court judgment is reversed on appeal. The plaintiff “shall be obligated to compensate the defendant for the damages he has suffered by the judgment being enforced, or by the payments he had to make, or any other actions he had to take in order to avert enforcement,” the civil code section says.

German patent litigator Bolko Ehlgen confirmed the code section creates liability for a party that enforces an injunction prior to ensuring legal victory through the appellate stage, though he said he wasn’t familiar with the R2-Intel dispute.

Intel has said in US Securities and Exchange Commission public filings it can’t estimate the potential damages R2’s injunction would cause when enforced.

The US-based chipmaker told investors “uncertainty exists” as to when the injunction would take effect. Intel also said it was unclear “at what point we may be successful in appealing the decisions in Germany as to infringement and validity,” as well as “the extent to which we and our customers are able to mitigate the impact of the injunction” and “the costs of recalling products,” among other factors.

Appellate Debate

The appeal hinges on a disagreement between Intel and R2 over whether the regional court in Düsseldorf and the specialized Federal Patent Court of Germany interpreted a key term in R2’s patent in a consistent way, according to Prinz zu Waldeck und Pyrmont.

R2’s European Patent 3,376,653 describes a technology to prevent voltage spikes from frying integrated circuits that the company alleges is used in several generations of Intel chip products.

The patent also contains the phrase “interleaved between” to describe the positioning of charge-storage circuit segments and switching block segments located on a chip. Intel has argued that the two courts read the term in conflicting ways.

The German appellate court must pick one or the other reading, and when it does, Intel has contended, the patent’s scope will either be so broad that it’ll be found obvious and canceled or so narrow Intel’s chips won’t be found to infringe, according to Prinz zu Waldeck und Pyrmont.

“If you’re in a situation when you’ve gotten a ruling on infringement but the invalidity court takes a different interpretation” of the patent, “then there’s a risk there that the judgment would be reversed and there’ll be this liability attached,” he said.

R2, meanwhile, has countered that the lower courts deciding patent validity and infringement have been consistent in their findings.

The regional court, which issued the injunction, interpreted the disputed claim construction term “in line with the understanding of the patent court” after that court had already issued a preliminary opinion stating the R2 patent was valid, said R2’s German lawyer, Volkmar Henke of Bardehle Pagenberg, in a statement.

“Intel’s hope that they’re going to get some kind of reversal of those opinions down the road is wishful thinking,” Henke added.

Intel declined to comment on the European litigation.

Going on Offense

Intel has tried to go on offense against R2 in Germany and elsewhere in Europe, including filing a preemptive suit seeking a declaration that its products don’t infringe the R2 patent in Milan, Italy.

The company has continued to press the point that there’s a patent interpretation discrepancy that needs to be addressed by the German courts and has so far unsuccessfully sought to block enforcement of the injunction in several different courts in the country.

In a May 15 filing, Intel asked Germany’s Federal Patent Court to clarify its interpretation of the “interleaved between” term. In the German-language filing, which was reviewed by Bloomberg Law with the assistance of a German lawyer, Intel’s lawyers contended that the regional court issued its ruling granting R2 an injunction without the benefit of the patent court’s interpretation of the term. The patent court’s ruling was issued just a few days before a Dec. 7 oral argument in the regional court, the company said.

R2’s founder and CEO David Fisher said in a statement to Bloomberg Law that R2 is not content to wait for action from an appeals court in Germany, and is prepared to enforce the injunction if Intel doesn’t negotiate a settlement.

“It is now up to Intel to choose a path that avoids the extreme business disruption it would suffer under the injunction,” Fisher said. “Otherwise, R2’s only path forward is enforcement.”