Monday, March 12, 2012

European Commission document confirms Apple refused to grant Motorola a portfolio cross-license

Through a Bloomberg article I became aware of the fact that the European Commission's clearance decision on Google's proposed acquisition of Motorola Mobility (MMI) has just been published and that it makes reference to patent cross-licensing negotiations between Apple and MMI. Last week I commented on a Dow Jones Newswires story according to which Apple recently made patent licensing proposals to Samsung and Motorola.

I'll quote and discuss the two passages from the EU document that relate to cross-licensing. One of them mentions negotiations that took place "in late 2011":

"156. [In the context of Motorola Mobility's negotiations with Apple in late 2011 concerning a potential cross-licensing settlement, the parties discussed the scope of any potential settlement in the event that the Google/Motorola Mobility transaction is closed.] From the information available to the Commission, this option envisaged a cross-licence possibly to the benefit of all Android OEMs but also with mutual carve-outs. [...]"

The reason for which those settlement talks took place isn't clear. From time to time, courts simply require parties to hold such talks even if they don't really want to. A famous recent example involves Oracle and Google.

On December 22, 2011 (a date so close to Christmas that I'm sure it was after the "late 2011" settlement talks the EU document refers to), I attended an Apple v. Motorola trial in Munich. The court had asked the parties to dispatch representatives who could negotiate a settlement. But Apple didn't even send any corporate officer. Motorola sent Neill Taylor, its Vice President of Law and Chief Intellectual Property Counsel. No Apple official sat besides its outside counsel. The judge was a bit disappointed but had made it clear at a previous hearing that the parties' willingness to settle, and reasons for failure to settle, wouldn't affect the outcome of a patent infringement case. Still, a junior Apple lawyer in the audience realized that the absence of an Apple official was noted and then said that she would take the court's message (encouraging the parties to settle) home. That was it from Apple's side.

Neill Taylor summed up the status of any settlement efforts (in English, but an interpreter helped out). He said that the parties held talks on various occasions, including a two-day meeting in November 2011, and continue to talk. He confirmed that "payments and licenses have been discussed". But he also stressed that the parties "have many disputes in many jurisdictions", which was presumably a message to the Munich court that a settlement would require a worldwide solution and couldn't necessarily be brokered in Germany. He also pointed to a confidentiality agreement that prevented him from being more specific. (I just looked up my notes from December 22; I didn't report on this part of the trial at the time.)

What I consider interesting is that Apple and MMI talked about a deal that might benefit all Android device makers. This means they realized that the deal would have to be palatable to Google, which didn't (and still doesn't) own MMI in formal terms but is likely to own it soon and has to consent to any settlement before MMI can enter into it.

But the most important word in the passage quoted above is "carve-outs". I have said on a number of occasions that settlements between Apple and Android device makers would be more sophisticated than straightforward one-royalty-for-all-patents portfolio cross-licenses. The greatest strategic benefit to Apple is not in the royalty rate. It's in those carve-outs, which would likely exclude some patents from a deal and impose field-of-use restrictions on the implementation of others.

Nothing serves better to illustrate the importance of those carve-outs than this second quote from the European Commission document -- its footnote 89:

"For instance, according to Apple, Motorola Mobility has insisted that Apple cross-licenses its full non-SEP portfolio in exchange for Motorola Mobility's SEPs. Apple also argues that its refusal to accede to this demand led Motorola Mobility to sue Apple in an attempt to exclude Apple's products from the market. On the terms of Apple's own argument, Motorola Mobility's allegedly anti-competitive behaviour in this regard well precedes the merger at issue in the present decision. See, for instance, the e-mail of 2 February 2012 from Apple to the Commission."

The sentence that ends with "precedes the merger at issue" says that this footnote relates to an argument that is unrelated to the relevant merger review regardless of whether Apple's antitrust allegations are true (the Commission doesn't take a position on that in the merger clearance decision).

The acronym SEP refers to "standard-essential patents". Here we can see clearly that, if Apple's representation to the Commission was accurate and not misleading, MMI tried to leverage its SEPs in order to force Apple to provide a license to its non-standard-essential patents, and we can see that Apple clearly refuses to do that. Apple wants those carve-outs.

The last sentence of the second quote refers to an email Apple sent the European Commission on February 2, 2012. Just one day later, Apple was forced to temporarily remove certain products from its German online store because of MMI's enforcement of an injunction based on a standard-essential patent. Presumably, Apple filed its formal EU antitrust complaint against MMI not much later.

There's nothing in the EU document that suggests Apple and MMI weren't able to agree on a royalty rate. The deal breaker was Apple's insistence on restrictions and exclusions from a cross-license agreement. As we know now, Apple would be willing to enter into an agreement that benefits all Android device makers (though I'm sure this would require those other Android device makers to accept certain terms and conditions, as opposed to them just getting a free ride on a deal MMI strikes with Apple). But a total portfolio cross-license, which would deprive Apple of the protection of its exclusive intellectual property, is where Cupertino draws the line.

If an agreement between "Googlorola" and Apple was only a matter of a few dollars more or less per device, I guess Apple might even have sent a corporate officer to the Munich trial on December 22. But under the circumstance of MMI demanding the relinquishment of Apple's crown jewels, Apple closed the door.

Going forward, I am sure that carve-outs -- not royalty rates -- will continue to be the key issue. Either Google and MMI reach a point at which they have so much legal leverage that Apple gives in (I don't see that happen too soon), or otherwise Google and MMI will have to go back to Apple at some point and accept those undisclosed but hugely important carve-outs. The more leverage Apple builds through its continued enforcement of patents, the more likely it is that Google and MMI will drop their demand for unrestricted access to Apple's entire patent portfolio.

This is a tug-of-war. In my opinion, Apple has excellent chances of being able to command those carve-outs when all is said and done. It may take time. It will cost money. But that is the most likely end game, even if it's not what Google and MMI apparently hope for.

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