Tuesday, February 7, 2012

Motorola likens its enforcement of FRAND patents to bank robbery: 'it only takes one bullet to kill'

[Update] I have been told by a person knowledgeable about the process that the related passage from an expert report submitted by Motorola could, or perhaps should, be understood to relate to the use of a gun by a guard. However, my primary concern here related to the analogy between patents and bullets in a gun, and to the concept of one person killing another (as opposed to the abstract notion of military strategy). That's why all subsequent links back to this article emphasize, or exclusively relate, to the (accurate) one-bullet-to-kill quote. [/Update]

Patent litigation is full of surprises, but what I learned this afternoon is beyond belief. Based on what was said in open court today in Mannheim, Germany, a wholly-owned subsidiary of Motorola Mobility submitted an expert report on patent royalties according to which a single patent that is essential to an industry standard is pretty much as valuable as a large number of patents on the same standard because, in the context of a bank robbery, "it only takes one bullet to kill", reducing the importance of any additional bullets in the same gun.

Apple knows better than anyone else what MMI means by that: on Friday, it had to remove various products from its German online store due to an injunction based on a standard-essential wireless patent Motorola is enforcing. An appeals court granted Apple some temporary reprieve, but enforcement could resume within a matter of weeks.

War analogies aren't unheard of in connection with patent litigation. I, too, have used such analogies as "mutually assured destruction" many times before. The willingness "to go thermonuclear war" on Android is perhaps the most-quoted statement from the official Steve Jobs biography. This is the first time that a company asserting patents in a lawsuit makes some kind of connection with a bank robbery, but it's debatable whether that's worse than those war analogies. But what is clearly outrageous here is that a holder of standard-essential patents presents an argument according to which the value of a FRAND-pledged patent is mostly based on one's ability to "kill" others with it.

That is the very opposite of what FRAND-pledged standards-essential patents should be used for.

The context: a Motorola v. Microsoft trial in Germany

This afternoon I attended a trial in Mannheim at which General Instrument Corporation, a wholly-owned subsidiary of Motorola Mobility, asserted two FRAND-pledged patents that it declared (and still considers) essential to the H.264 video codec standard against three different Microsoft companies (the U.S. parent company, an Ireland-based entity, and the German subsidiary).

I found out in a U.S. court filing about the two patents asserted by General Instrument Corp. back in November. A short summary of today's trial (technically four trials, but organized as one because of overlapping issues) is that the court is inclined to rule, with a decision scheduled for April 17, 2012, that Microsoft Windows 7, Internet Explorer 9, the Windows Media Player and the Xbox 360 infringe on those two patents. The focus at today's trial was on Motorola's FRAND licensing obligations. As I explained in this recent post, German courts don't deny an injunction because of a patent holder's failure to honor the related obligations unless a defendant has taken certain steps to procure a license. Therefore, today's discussion was, for the most part, about whether Motorola's refusal of an offer that Microsoft made to Motorola -- and a bond over 1.46 million euros -- constitutes abusive conduct based on which an injunction must be denied.

Motorola has consistently demanded a royalty to the tune of 2.25% of Microsoft's sales of the aforementioned and other products implementing the H.264 codec. The 2.25% rate was mentioned multiple times at today's public court session by the presiding judge, Dr. Holger Kircher, as well as counsel for both parties. If that percentage sounds familiar, that's the rate MMI is also demanding from Apple for all products implementing the 3G/UMTS wireless telecommunications standard. I have furthermore heard from an executive of a large company in this industry (who is not affiliated in any way with Apple or Microsoft) that Motorola also declared years ago that it deemed a 2.25% royalty appropriate for its patents related to 4G/LTE. Someone there appears to think that 2.25 is a lucky number.

It was furthermore mentioned that MMI owns 17 patent families that it deems essential to H.264, but in the Mannheim actions, it is asserting only 2 patents. This obviously raises the question of how much Motorola can demand for the two patents over which it is actually suing, given that 2.25% was what it offered for a portfolio license.

Microsoft's latest offer is to pay 0.02 euro (two eurocents) for the first 10 million units, and 0.01 euro for everything on top. On that basis, Microsoft calculated the 1.46 million euro bond that it posted (covering royalties for the German market until September 2011). Optionally, Microsoft would be open to license its own H.264-related patents to Motorola on the same terms. Motorola's counsel said that he would discuss the appropriate royalty rate again with his client, but in his opinion, the value of one patent out of a portfolio of patents on the same standard must be higher than the value of the portfolio divided by the number of patents in it. He didn't personally use the one-bullet-to-kill analogy. Still, he argued that one would have to talk about a "percentage" for the value of a single standard-essential patent as opposed to a fraction of a percent. In this context, Microsoft's counsel quoted the related sentence from Motorola's expert report and vehemently opposed that line of thought.

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