Saturday, February 4, 2012

Motorola wants 2.25% of Apple's sales in return for license to standard-essential wireless patents

In my previous post (on Motorola's lawsuits against the German Apple Stores), I said that a statement by Apple's counsel at yesterday's Mannheim trial made me aware of a discovery request that Apple filed in the United States in order to strenghten its defenses against Motorola in Germany. Just like Apple's lawyers previously obtained the patent cross-license agreement between Qualcomm and Samsung, which helped (among other things) avoid preliminary injunctions against the iPhone 4S in France and Italy, Apple also wanted to be able to show Motorola's patent cross-license agreement with Qualcomm to German courts, given that Apple may be licensed by extension, based on the concept of patent exhaustion.

Apple brought the related motion on January 18, 2012, in the Southern District of California, where Qualcomm is headquartered. The court granted Apple's motion on January 25, but MMI brought a motion to quash two days later. Apple opposed that one on January 30; MMI defended it on February 1; and on February 2, the court denied MMI's motion. That denial of MMI's motion to quash was referenced by Apple's lead counsel in that particular litigation, Johannes Heselberger of the renowned Bardehle Pagenberg firm.

The Qualcomm-Motorola agreement was discussed at the hearing, but only behind closed doors. Even an Apple inhouse lawyer had to leave the room. That agreement may very well help Apple keep its more recent products, the iPhone 4S and iPad 2, on sale in Germany despite Motorola's legal attacks in Mannheim and Düsseldorf.

Apple's January 30, 2012 brief opposing MMI's motion to quash contains some information that a lot of people are wondering about these days when they see what's going on between Apple and Motorola over FRAND patents: the royalty rate that Motorola demanded when Apple asked for a FRAND offer.

The answer is: 2.25%. I assume this relates to Apple's sales and to all of MMI's standard-essential patents, though the context is only one patent (the one over which Motorola has already forced Apple, temporarily, to remove certain products from its German online store. Assuming in Motorola's favor that this was a license to all standard-essential wireless patents, the amount still appears excessive to me given how many companies hold patents on such standards and what royalty rate this would lead to in the aggregate.

Let me show you the relevant excerpt of the document that revealed it. The document is a letter that was sent by the Bardehle Pagenberg firm (on Mr. Heselberger's stationery and bearing his colleague Dr. Christof Karl's signature), to Dr. Marcus Grosch of Quinn Emanuel, Motorola's remarkably-successful German lead counsel, on October 17, 2011, ahead of a trial that took place four days later. Here's the part that discloses Motorola's royalty demand (click on the image to enlarge):

Such numbers rarely show up in the public record. In this case, the related document was not sealed, and it appears that Motorola's counsel did not allege a violation of a protective order.

Apple apparently wants to use the Qualcomm-MMI patent license agreement in two ways. On the one hand, it claims that MMI's standards-essential patents implemented by Qualcomm's baseband chip are exhausted, meaning Apple can't be sued because its supplier, Qualcomm, has a license. On the other hand, Apple apparently wants to use the commercial terms of that agreement as one of various indications for the unFRANDness of MMI's 2.25% royalty demand.

With a view to the latter, I found out (by performing some additional searches on electronic court records in the U.S.) that Apple has recently brought a variety of discovery motions in order to obtain information from third parties -- other wireless device makers -- that could help to convince different German courts that Motorola is asking for too high a royalty rate:

  • Nokia: Apple filed a motion in the Northern District of California on January 23, 2012. It was granted four days later.

  • HTC: Apple filed a motion in the Western District of Washington on January 24, 2012.

  • LG Electronics: Apple filed a motion in the Southern District of California on January 20, 2012. On February 1, the court order Apple to serve this on MMI, which will then get to respond.

  • Ericsson: Apple filed a motion in the Eastern District of Texas on January 20, 2012. Six days later, it dismissed it voluntarily, without citing a reason.

The scope of the proposed subpoenas is a request for all "documents that grant or granted, or purport or purported to grant, to [other handset maker] any rights, protections, or licenses in or to any Motorola IPR [Intellectual Property Rights]--including without limitation Motorola Wireless IPR, regardless of whether it is Essential Wireless IPR--that provide or provided a covenant not to sue relating to any Motorola IPR, or that otherwise authorize or authorized [other handset maker] to practice any Motorola IPR, including but not limited to all agreements, amendments, appendices, attachments, schedules, and addendums".

Apple's lawyers can try to use such information to allege discriminatory pricing on MMI's part. If MMI asked Apple for a royalty rate way in excess of what it asked others in the industry, the question would be why that is so. MMI would likely argue that others also licensed standard-essential wireless patents to them. Apple, however, will presumably claim that MMI made Apple a prohibitive license offer that Apple couldn't possibly accept without messing up its cost structure (since other holders of standard-essential patents could then ask for similar rates in the future), with MMI's alleged objective being to seek injunctive relief against Apple in order to have leverage against Apple's non-standards-related innovations. That's also what Apple is saying about Samsung.

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