Late on Monday, Administrative Law Judge David Shaw issued a notice of his initial determination on the ITC investigation of Motorola's November 2010 complaint against Microsoft's Xbox. He deems the Xbox to infringe four Motorola patents, three of which are FRAND-pledged standard-essential patents. In total, there are four standard-essential patents at issue, but one of them was not deemed infringed. Only one of the asserted patent claims was proven invalid in the ALJ's opinion, but another claim from the same patent survived.
The final point of the notice is that "Respondent [Microsoft] has not prevailed on any equitable or [F]RAND defense". Holders of standard-essential patents have previously brought ITC complaints, and the ITC limits the ability of defendants to raise FRAND issues. For example, if defendants bring counterclaims against FRAND-pledged patents, they have to immediately sever them from the ITC investigation and assert them in a federal lawsuit. The ITC itself is more focused on other aspects of these cases, based on which it can and sometimes (but not necessarily) does order import bans. The opinion of one ITC judge on a FRAND defense is, in my opinion, far less meaningful than what federal courts and antitrust regulators say. Motorola is being formally investigated by the European Commission for suspected abuse of patents essential to particular standards that are also at issue in its ITC and other cases. Even though the start of formal investigations doesn't constitute a final decision, it's based on reasonably strong suspicions of abuse - a fact that says more than an initial determination by the ITC, which is a trade body, not an antitrust enforcer.
I saw media reports quoting Microsoft that this is just the beginning (given that the initial determinations can be reviewed by the Commission, the six-member decision-making body at the top of the ITC) and it says it will ultimately prevail, while Motorola stressed that Microsoft started the dispute. Neither company's statement contained anything unusual for companies in the respective roles and situations.
Two of the allegedly standard-essential patents relate to the H.264 video codec standard, while the other two relate to the IEEE 802.11 (WLAN, or WiFi) standard. The non-standard-essential patent, U.S. Patent No. 6,069,896, covers wireless networking functionality, but since it apparently isn't standard-essential, products could provide wireless networking capability by other means.
The next step will certainly be for Microsoft to request a thorough Commission review of these initial findings. Also, the Commission routinely asks the parties to an investigation as well as third-party stakeholders for public interest statements with a view to possible remedies. Even if an infringement of a patent presumed valid is deemed to have occurred, the ITC does not necessarily order an import ban or other measures, such as a cease-and-desist order. In this case, the public interest in preventing abuse of standard-essential patents will probably be a major issue. I predict that a number of companies and organizations that have no reason to support Microsoft or make Motorola's life difficult are going to be profoundly concerned about the fact that FRAND defenses appear to bear little or no weight with at least certain ITC judges. This is an industry issue that is far bigger than the question of which smartphones, tablet computers or, in this particular case, gaming consoles may infringe some patents.
On the subject of abuse, let me remind you that Motorola demands, for a limited number of patents essential to the H.264 and IEEE 802.11 standards, annual royalty payments to the tune of $4 billion (in a conservative estimate) from Microsoft and considers these demands to be "reasonale [F]RAND".
After Microsoft received Motorola's demand letters in 2010, it filed a lawsuit in the Western District of Washington to enforce Motorola's FRAND licensing obligations. That case has recently drawn a lot of attention because of a temporary restraining order that bars Motorola from the near-term enforcement of a patent injunction it might win in Germany next week. Motorola's ITC complaint against Microsoft was filed a couple of weeks after that Seattle lawsuit over FRAND issues.
An important hearing has been scheduled in the FRAND enforcement case for May 7, and a decision on a partial summary judgment motion will be made on or not long after that hearing. Any additional findings and decisions in the Seattle case can still be considered by the ITC during the Commission review and even afterwards (for example, an exclusion order could be lifted, stayed or modified). That's what Motorola itself said in its April 18 brief opposing a Microsoft motion to delay resolution of the ITC Xbox investigation in light of the Seattle proceedings. In the following, I'll just quote from that Motorola pleading because I think it really helps to put yesterday's ITC decision into perspective (emphasis is Motorola's, not mine):
"The Initial Determination due on April 23 is an initial ruling that undoubtedly will be the subject of petitions and contingent petitions for review. The ID will not, itself, put in place any exclusion order. Such remedial action will not go into effect, if at all, at least until the target date of August 23, and possibly later if a remand is ordered. Thus, this Investigation as presently scheduled already ensures that no exclusion order can go into effect until well after the May 7 hearing date Microsoft repeatedly notes is critical to its Motion.
Furthermore, even if Judge Robart ultimately makes a decision on RAND issues that disposes of any of the 5 patent infringement claims at issue in this Investigation (and Motorola believes that will not occur), ample procedures exist to assure that any remedy ordered by the ITC is not inconsistent with such a decision, assuming that becomes an issue. Just as licenses, consent orders and other settlements routinely reduce or eliminate remedial orders in other ITC cases, the remedy recommended and/or ordered by the ITC in this Investigation could similarly be trimmed back consistent with a ruling from the Seattle court. And even if a broad remedy were issued in this Investigation, well-used procedures already exist to modify or rescind any such order, e.g., Commission Rule 210.76. [...]
The ITC already has rules and procedures that allow for modification of any remedy -- whether prior to or after its issuance -- so as to conform appropriately to rulings from federal courts, should that become necessary. Accordingly, there is no need to delay further the Initial Determination and/or target date in this Investigation in order to provide Judge Robart with the clear path he desires in connection with deciding RAND issues. The Commission can consider imposition of an appropriate remedy in or after August, if necessary, and can take into account at that time any ruling by Judge Robart."
In light of what Motorola wrote less than a week ago, it will be important to watch both the next phase of the ITC investigation as well as the proceedings in Seattle. If Motorola wins in both venues, U.S. consumers may not be able to buy the Xbox gaming console during the Christmas Selling Season (unless the parties settle, of course). If Motorola wins at the ITC but loses in Seattle, it will, at best, achieve an import ban against the Xbox with respect to a non-standard-essential patent that can be worked around. If Microsoft defeats the non-essential patents in the further ITC process and wins on the FRAND issues, the Xbox will continue to be sold without a need for even the slightest modification, and Motorola still won't get its annual $4 billion royalty payment. Those are the possible outcomes. It's too early to offer a prediction, but in my opinion, Microsoft has made very significant headway in the FRAND enforcement case and has a strong breach-of-contract claim, which may be adjudicated pretty soon.
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