In a recent blog post outlining "A Solid Foundation for Patent Peace", Microsoft stressed its readiness to engage in good-faith discussions with Google but also noted that "[t]his particular litigation now stands at a crossroads". There are indeed some unmistakable signs of a crossroads. Apart from Microsoft winning a second German injunction against Motorola's Android-based devices, there were three interesting case management motions last month:
As a follow-up to a court hearing, the two companies agreed to stay all of their patent infringement actions pending in the Western District of Washington until their dispute over Motorola's FRAND licensing obligations is resolved. Judge Robart granted this stipulation but kept all options open by ordering a stay "until further order of [his] court".
Motorola brought a motion to limit the scope of the FRAND trial scheduled to take place in November. In the blog post I just linked to, I focused on what that motion revealed about Google's (Motorola's) tactical plans. Now that Microsoft has responded to the motion, I'm going to talk about the issues it raises (further below).
Motorola furthermore asked the United States Court of Appeals for the Ninth Circuit for "further expedition of [Motorola's] appeal" (of a preliminary injunction barring the Google subsidiary from enforcing a German patent injunction) through an immediate decision, without oral argument. Contrary to skipping oral argument, the appeals court scheduled a hearing for September 11, 2012. While the appeals court's order said that Motorola's motion was "granted", it was actually only the request for an expedited appeal -- but not the one for a decision without oral argument -- that was granted.
Items 2 and 3 above reflect Motorola's burning desire to obtain and enforce injunctions over standard-essential patents against Microsoft. While it's common and perfectly appropriate that a party appealing a preliminary injunction wants the appeal to be adjudicated swiftly, asking for a decision without a hearing is an extreme proposal, and telling a judge that there's no legal basis for the trial he has already scheduled is even more unusual.
Those motions are part of an attempt to salvage Motorola's litigation campaign, which faces two major problems:
On the one hand, time is not on Motorola's side if it hopes to gain leverage against Microsoft through enforcement of injunctive relief. The November FRAND trial will most probably result in a determination of a reasonable royalty rate far below Motorola's 2.25% demand. That determination would pave the way for a finding that Motorola breached its FRAND pledge by making a "blatantly unreasonable" demand, and, even more importantly, for a finding that Motorola has to accept a certain court-determined royalty rate. Also, the ITC as well as the Seattle-based district court (Western District of Washington) will at some point determine whether a grant-back clause in Google's H.264 license agreement with MPEG LA simply gives Microsoft access to Google's (including Motorola's) H.264-essential patents at the MPEG LA AVC/H.264 per-patent pool rate.
On the other hand, Microsoft is making steady progress with its own enforcement of non-standard-essential patents against Motorola. It has won a U.S. import ban and two German injunctions. Another German Microsoft v. Motorola trial will take place in Mannheim this Friday.
None of the above would be a big deal if Google (Motorola) wanted to honor its FRAND licensing promise (rather than use standard-essential patents as a strategic weapon) and agreed to take a royalty-bearing Android patent license from Microsoft. The latter is what most of the market has already done. Most recently, Microsoft signed up Honeywell and Sharp. But when Google announced its merger agreement with Motorola Mobility less than a year ago, it suggested that the threat of mutually assured destruction would deter patent assertions against Android by Apple, Microsoft and other major players -- a plan that certainly hasn't worked out so far. The day that Google realizes that it can't bring about peace on its preferred terms through engaging in an arms race, it may be willing to negotiate a license agreement on market terms.
Microsoft's response to Google's (Motorola's) motion to redefine the scope of the upcoming FRAND trial describes the situation as follows:
"Motorola's efforts to evade its [F]RAND commitments are collapsing. Motorola is obligated to grant a [F]RAND license to any implementer, and Motorola now recognizes that once this Court establishes [F]RAND terms for its standard essential patents, Motorola's enforcement campaign--a campaign based on making exorbitant demands while seeking injunctions that would have crippling and devastating effects--is doomed. And Motorola seeks to forestall its day of reckoning by continually arguing that 'negotiating' is a substitute for actually granting a [F]RAND license."
The filing contains various quotes from Motorola's statements (in earlier pleadings as well as at different hearings) that show one thing: Motorola originally wanted a FRAND trial to happen, but it has (as it admitted in its motion) changed mind. For example, in opposing Microsoft's motion for a preliminary injunction against Motorola's enforcement of its German H.264 patent injunction, Motorola argued that an injunction was unnecessary to prevent Microsoft from paying more than a FRAND royalty rate in Germany: the U.S. district court could always determine a FRAND rate and any amount paid by Microsoft above that rate could be reimbursed. At the same hearing in mid-April, Motorola's counsel even told Judge James L. Robart: "I'm saying Your Honor does have jurisdiction to deal with that." In this context, "jurisdiction" means "jurisdiction to adjudicate the terms of the ITU [H.264] agreement on a worldwide basis".
One of Motorola's legal theories at this stage is that the district court doesn't have the right to create a standard-essential patent license agreement between Microsoft and Motorola "ab initio" (from scratch), but Microsoft argues that the FRAND royalty rate is the only important term that's missing. Under the FRAND licensing promises Motorola made (and now refuses to honor), it committed to grant worldwide, perpetual SEP licenses. One can certainly think of a number of other terms that parties to a license agreement must define, but those are not the reason why these two companies are embroiled in litigation against each other.
Over the years I negotiated many license agreements in the software industry. Speaking from that experience, most of the text of license agreements involving non-FRAND-pledged, non-standard-essential intellectual property relates to limitations and restrictions of all sorts, such as a license covering only one country or expiring after a couple of years without renewal. If there are no such restrictions, there really isn't anything important to define other than a license fee. There are all sorts of little things one can talk about, such as payment terms (net 30 days? 45? 60? with or without early payment discount?), but those are minor details. Companies like Google and Microsoft could sign an agreement that doesn't even say a word about all of that, and they'd be highly unlikely to ever go to court over them. The only important thing they can't agree upon is the royalty rate.
The underlying fundamental issue is far more important than this particular dispute between two large companies. If courts couldn't determine a FRAND royalty rate and ensure that someone who made a FRAND licensing promise has to accept such a rate, those FRAND pledges would be pretty much unenforceable. Companies could make any demand (such as 2.25% of the price of the end product) and seek and enforce injunctions unless the demand is met. They would just have to create the appearance of being willing to "negotiate".
All recent decisions by U.S. judges that addressed the parameters of FRAND licensing negotiations reflected a complete understanding of the problem that negotiations under the threat of an injunction are unlikely to yield a FRAND result. Therefore, the case management proposals that are most likely to be adopted by U.S. judges are presumably the ones that outline an efficient and reliable roadmap to an agreement on fair, reasonable and non-discriminatory terms.
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