Friday, July 13, 2012

Microsoft says Google 'committed to license' Motorola's H.264 patents to it under the MPEG LA agreement

Four weeks after I reported on a Microsoft court filing that appeared to relate to a grant-back provision in Google's license agreement concerning the MPEG LA AVC/H.264 patent pool, I saw a Microsoft filing with the ITC (which remanded the investigation of Motorola's complaint against the Xbox to a judge) that confirms what I thought. Here's the key passage:

"Motorola has similarly failed to establish any need to take discovery in connection with Microsoft's Motion for Partial Termination on the grounds that Motorola's new parent, Google, committed to license two of the patents at issue to Microsoft as a result of its participation in the MPEG-LA AVC [H.264] patent pool. {...] And given Google's acquisition of Motorola, any factual information regarding Google's participation in MPEG-LA is readily accessible to Motorola."

With respect to Google, "participation" means that it's a licensee (see this list; by the time of publication, Google was #376), not a contributor of patents to the pool (here's the list of licensors, which includes Apple and Microsoft). But the MPEG LA license agreement ensures that companies can't have it both ways and benefit from the attractive pool rates as a licensee while making extortionate demands for their own H.264 patents when dealing with the actual owners of the patents in the pool.

I received a copy of MPEG LA's license agreement more than two years ago and blogged about it, with a focus on financial terms, at that time. Meanwhile I've also obtained the latest version, and the parts of it that are relevant to the grant-back issue are still the same.

I haven't seen the agreement that Google signed with MPEG LA, but knowing how pools operate (there are dozens of companies, including a number of very large ones, involved in this one), I can hardly imagine that Google could have negotiated a special have-your-cake-and-eat-it deal. Yesterday, Google subsidiary Motorola Mobility filed a brief opposing Microsoft's motion for partial termination of the ITC investigation with respect to the H.264 patents-in-suit, but that pleading is sealed, so I don't know what Google's arguments are. Anyway, let's have a look at what the MPEG LA AVC/H.264 license agreement (named "AVC Patent Portfolio License", abbreviated as "AVC PPL") says. I think it's very clear, and if Google indeed made the grant-back promise, it's going to lose the H.264-related parts of its various lawsuits against Microsoft (ITC, district court, Germany) big-time and going to get only a tiny fraction of the royalty rate it demands.

In the following quotes, I will replace, to make things easier to understand, "the Licensing Administrator" with "[MPEG LA]", "Licensee" with "[Google]" and "Licensor" with "[Microsoft]". When reading this, please keep in mind that AVC means H.264.

We'll start with the grant-back clause:

"8.3 [Google] Grant. Upon full execution of this Agreement, [Google] agrees to grant a worldwide, nonexclusive license and/or sublicense (commensurate to the scope of the licenses which Licensee has selected hereunder) under any and all AVC Essential Patent(s) that [Google] and its Affiliates, if any, have the right to license and/or sublicense, to [Microsoft] or any sublicensee of [MPEG LA] desiring such a license and/or sublicense on fair and reasonable terms and conditions. For purposes of this Section 8.3 only, [Microsoft's]' per patent share of royalties which are payable pursuant to Article 3 of this Agreement shall be presumed to be a fair and reasonable royalty rate for the aforementioned license and/or sublicense to be granted by [Google]."

As you can see, the per-patent royalty rate is reciprocal. The FRAND rate that Google can get for its H.264-essential patents is simply the same per-patent rate that Google also pays for Microsoft's H.264-essential patents under the MPEG LA deal. As I explained in my recent analysis of a German court ruling, Microsoft previously argued in court that the MPEG LA pool rate should apply, but Motorola denied it and wanted far more. When the Mannheim decision came down in early May, Google's acquisition of Motorola Mobility had not yet been formally closed, and Motorola Mobility wasn't bound to MPEG LA's grant-back terms as long as it was independent (since it was neither a licensee nor a licensor).

The worldwide scope of this grant-back provision means that the injunction ordered by the Mannheim Regional Court is unenforceable not only because of a U.S. court ruling that bars Motorola from seeking enforcement but also because there's a clear contractual obligation to grant a license on certain terms.

In the passage I just quoted, you can see the term "Affiliates". Motorola Mobility is a wholly-owned Google subsidiary and, therefore, an affiliate. The fact that Google entered into its license agreement with MPEG LA before it acquired Motorola Mobility doesn't matter at all. Here's the definition of "Affiliate":

"1.1 Affiliate - shall mean a Legal Entity which now or hereinafter, directly or indirectly, controls, is controlled by or is under common control with [Google]. The term 'control' as used in this Section 1.1 shall mean (a) ownership of more than 50% of the outstanding shares representing the right to vote for directors or other managing officers of [Google] or such Legal Entity; or for [Google] or a Legal Entity which does not have outstanding shares, of more than 50% of the ownership interest representing the right to make decisions for [Google] or such Legal Entity; or (b) a relationship similar to that described in Subsection 1.1(a) deemed by [MPEG LA] in its sole discretion to represent 'control.' An entity shall be deemed an Affiliate only so long as such 'control' exists."

If there was ever any doubt, the words "now or hereinafter" make clear that Motorola Mobility is a Google affiliate under the standard terms of the MPEG LA AVC pool license agreement.

Three patent lawsuits between Microsoft and Motorola Mobility pending in the Western District of Washington are going to be on hold until the issues concerning Motorola's FRAND licensing obligations have been resolved. Motorola Mobility is suing Microsoft patents that are essential to two industry standards: AVC/H.264 and IEEE 802.11 (WiFi, or WLAN). The MPEG LA agreement may take care of the H.264 part (the more important part of this particular dispute).

If Motorola Mobility loses its H.264-related claims against Microsoft (and any such claims against Apple, which is, as I mentioned above, also an MPEG LA contributor) because of Google's contractual grant-back obligations, the question is going to come up internally at Google as well as among investors how this could possibly happen. Obviously, Google didn't pay $12.5 billion only for 17 H.264-related patent families, but Google's stated primary goal was to get leverage over Apple and Microsoft, whose patents Android has already been proven to infringe in a number of cases. It's a well-documented fact that Google looked at the state of Motorola's pending lawsuits when it performed its hasty due diligence in the summer of 2011. I'm sure Google looked closely at Motorola's patent license agreements -- but did it remember its own H.264-related obligations? Did its due diligence include an analysis of existing Google agreements with a view to how those might affect the post-acquisition value of Motorola's high-priced patents?

Someone who spends $12.5 billion to buy himself into pending litigation should have thought this through. That's called fiduciary duty.

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