Tuesday, February 28, 2012

Apple's proposal for licensing Motorola's standard-essential patents does NOT specify a royalty rate

In the aftermath of yesterday's key decision by a German appeals court on a Motorola v. Apple injunction, I did a follow-up post today proposing that Google and Motorola should now pursue licensing, not litigation. I have seen the debate continue in many other places, of which I'd like to highlight two:

  • I agree with AllThingsD's John Paczkowski that Motorola is engaging in reality distortion by claiming victory based on yesterday's decision. I'd like to add a couple of "local" observations:

    1. One, the final paragraph of the court's press release makes clear that the current opinion of the court is that Motorola is committing an ongoing violation of antitrust law. That's nothing to be proud of or happy about, especially not in light of the fact that the European Commission will soon decide on whether to launch formal investigations further to Apple's and Microsoft's complaints over Motorola's alleged FRAND abuse. Many other companies in MMI's place would now read the writing on the wall and accept Apple's licensing proposal in order to defuse the antitrust situation.

    2. Two, if the appeals court recognized that Apple made a binding offer to take a license and pay FRAND royalties (of an unspecified amount, as I'll explain in this post), that's nothing new. When the same appeals court denied Apple's previous motion for a suspension of the injunction on January 23 (a fact that shows that winning such a stay is not a routine thing in Germany at all), it already recognized the same fact. At the time, the outcome-determinative objection to Apple's motion was a lack of clarity concerning the exact implications of a future challenge to the validity of MMI's relevant patents -- not a lack of an offer to pay royalties.

  • The Korea Times reports today that Samsung CEO Choi Gee-sung (a courageous and ambitious business leader) appears less confident about further developments in Samsung's litigation with Apple, and quotes an unnamed senior Samsung executive saying that the company's "legal experts are closely studying the possible effect of Apple's recent legal victory against Motorola". Indeed, the defense that worked for Apple against Motorola could also be invoked against Samsung if necessary. So far, however, Samsung hasn't proven Apple's infringement of any valid Samsung patent in Germany. Whenever it achieves this in connection with a standard-essential patent, Apple can use the same strategy as in the Motorola case to avoid an injunction.

Also, while this speech was almost certainly written before yesterday's Karlsruhe decision, European Commission Vice President Almunia told members of the European Parliament today that "hold-up" based on essential patents is not acceptable. The related article doesn't specifically mention the word "standard-essential", but the context is clear, especially in light of how the Vice President's recent statement on Google-Motorola highlighted the issue that standard-essential patents can no longer be worked around once they become a mandatory part of a standard (prior to that elevation, they can still be worked around like any other patent, such as slide-to-unlock).

Three examples of how the FRAND subject continues to make headlines. And it probably will for some more time.

In follow-up discussions today (with different, independent people whom I hold in the highest regard) I realized that something I previously said about Apple's proposal to take a license to Motorola's standard-essential wireless patents has largely gone unnoticed, simply because there's so much going on and the information was conveyed in the middle of a very long blog post on Apple's iterative approach (of repeatedly amending its licensing proposal). Some people were wondering how much less than Motorola's well-documented 2.25% royalty demand on the selling price of entire devices (see the "Common Royalty Base" part of this recent blog post) Apple may have offered to win yesterday's suspension of the enforcement of Motorola's injunction. The answer is that Apple has not offered any particular percentage. It has just committed to pay whatever a court would consider to be a FRAND royalty.

I've been watching (by reading court documents and attending different trials) the evolution of Apple's proposal to MMI for some time. I can rule out that Apple has offered a specific percentage. Under German law, it doesn't have to. In order to satisfy the German Orange-Book-Standard criteria, it's sufficient to commit to paying a FRAND royalty. I did report on this in the aforementioned long blog post on Apple's iterative approach, but I should have reiterated this in the meantime. This link leads to the relevant section of that post:

The issue in this iterative process is not that they have to agree on a particular percentage for future royalties. Under Orange-Book-Standard, a would-be licensee can either offer a particular royalty rate or can leave this determination to the courts (technically, the patent holder is then free to determine the amount in his reasonable discretion, but subject to judicial review and, if necessary, adjustment). Leaving the exact royalty amount open is the path Apple has, not surprisingly, chosen.

There wasn't any indication at any of the trials I watched or documents I read that indicated that Apple changed its approach and offered a specific percentage or amount. Otherwise the appeals court would have had to comment, in its ruling, on the appropriateness of whatever Apple would have proposed. But it didn't.

Under German law (not just patent law but also in other fields), it's fairly common to agree on an obligation to pay something without specifying the amount beforehand. I've signed such agreements myself. The legal basis for this is Article 315 of the German Civil Code, which basically says that if an agreement lets the beneficiary of a payment or other consideration unilaterally determine what he is owed, then this discretion must be exercised in a fair and reasonable manner, and any such demand can be adjusted by a court of competent jurisdiction if need be. This enables parties to conclude an agreement and recognize, in principle, certain obligations even before they are able to agree on, for example, the amounts of future payments. They can enter into a binding agreement and sort out such questions later.

In a case like Motorola v. Apple, this is helpful because it enables Apple to create a situation in which Motorola is barred from pursuing injunctive relief (otherwise Apple and Motorola would never agree, or Apple would have to pay far more than it believes a court would consider appropriate). In other cases, the Art. 315 approach comes in handy because the parties may not be able to foresee the future circumstances under which an amount has to be determined. For example, if parties agree on a contractual penalty and the range of how severe a formal breach of contract may be is very wide, there's no single amount that they can agree upon ex ante, but they can agree that certain misconduct must have consequences and rely on the ability of a court of law to determine an appropriate amount ex post if they fail to agree on it without judicial help.

There's no doubt that Motorola will try to get as much out of Apple's unspecified FRAND commitment as possible. But at this stage, it appears that Motorola has not yet accepted Apple's proposal anyway, so it can't trigger the process that would result in a court's determination of the royalty rate. If Motorola at some point does accept Apple's proposal (it might come under pressure from antitrust regulators who probably won't tolerate the current situation forever), it can then certainly try to convince German judges that the royalty should be significant. I explained that in a section on the German situation in my post earlier today on Google's and Motorola's worldwide tactical options. This is unlikely to be so much of a threat to Apple that it can tip the scales in the wider dispute. If necessary, Apple will pay what it has to pay, but it won't have an obligation to grant Motorola a license to any of its own non-essential patents.

So far, Microsoft's German proposal to Motorola (concerning MMI's patents on the H.264 video codec standard) is different from Apple's in the sense that it does specify a particular per-unit royalty amount. At the trial I had the impression that Motorola's 2.25%-of-price-of-device demand was not really viewed by the court as a realistic position. We will see how that case evolves. Differences like this aside, yesterday's ruling is also very helpful to Microsoft because it shows that the Orange-Book-Standard bar isn't infinitely high once these issues are put before senior German judges.

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