Tuesday, September 11, 2012

Microsoft-Motorola dispute over proper way to determine FRAND royalty rates continues

Late on Monday, Microsoft and Google-controlled Motorola Mobility filed their replies in support of their Daubert motions (motions seeking to exclude each other's FRAND testimony). I reported on the original motions and opposition filings on Saturday.

Both reply briefs provided quite some additional information on the parties' positions and theories and clearly exceeded my expectations. In the following I'll share some observations:

  • Three months ago, European Commission Vice President JoaquĆ­n Almunia stressed the shared responsibility of regulators, courts and industry (i.e., standard-setting consortia) for the FRAND framework. Motorola's reply brief makes some points from which one could derive suggestions for meaningful improvement. For example, Motorola acknowledges that "avoiding hold up and [royalty] stacking is desirable", but it keeps coming back to what its IEEE and ITU FRAND commitments do not require contracting parties to do in order to address these issues. To the extent that FRAND commitments can be interpreted accordingly, the courts as well as antitrust regulators can hold Motorola to its promise, and to the extent that standard-setting organizations failed to impose useful requirements, they could at least clarify where they stand now and ensure greater clarity when drafting future FRAND commitments.

  • Motorola quotes authors who describe as "scant" any "evidence that royalty stacking and other complementary issues are widespread and recurring problems". Whether this helps Motorola in this litigation is doubtful since its very own conduct is at issue in this litigation, not that of others. And any objective industry observer can only come to the conclusion that FRAND abuse is rampant, or at least there's widespread concern. Antitrust regulators have undoubtedly received more high-profile FRAND abuse complaints over the last twelve months than ever, and I keep hearing from participants in SSO meetings (such as ETSI members) that FRAND issues are a hot topic of discussion among members of such organizations. That fact is also confirmed by the flood of public interest statements filed with the ITC in the investigations of Motorola's complaints against Apple and Microsoft. Still, Motorola's denial of sufficient evidence should be food for thought for those advocating improvement. What could and should be done to make it harder for SEP holders in future disputes to deny the existence of the problem? For example, surveys among implementers of standards might help.

  • For the most part, I thought Motorola's brief did a great job arguing for an unFRANDly position I may not agree with, but the final statement of its introductory part contains the demonstrably false claim that "Microsoft's attempt to declare that patent pool rates, and nothing else [this emphasis mine], are [F]RAND by analogizing them to its multilateral, ex ante negotiation should be rejected and expert testimony on this unreliable, unexplained and unimplemented “methodology” should be excluded." The fact of the matter is that Microsoft's responsive brief said that "a multilateral ex ante framework [...] is part of a reasonable route to a FRAND royalty" and stresses that "[its] experts use other inputs to inform the appropriate [F]RAND valuation, including the entire market value rule and smallest saleable unit analysis (principles of Federal Circuit reasonable royalty law)".

    This is all about the legal standard for whether or not Microsoft's expert testimony is admissible, and Microsoft's opposition brief says that "[a]ll that the Court needs to decide is whether the methodology proposed by Microsoft is one way [emphasis mine] of legitimately addressing the economic and valuation issues underlying the [F]RAND requirement." It just has to be one way, not the only one, or the best one, or unique in any other respect. The court can only grant Motorola's Daubert motion against Microsoft's FRAND royalty testimony if its underlying methodology is absolutely no way to develop a FRAND rate.

    Simply put, no matter how much Motorola complains that Microsoft favors "the artificially low pool rates of MPEG LA [for H.264] and Via Licensing [for IEEE 802.11]" and that these pool rates are "depressed", Microsoft has the right to pick a fairly favorable or even the most implementer-friendly methodology as long as it's within the FRAND ballpark. Motorola is free to argue at trial that those are lowball numbers, sandbagged or whatever it may wish to call them in addition to the characterizations I just quoted, and that may affect the weight given to Microsoft's FRAND position, but that's different from declaring it an entirely inadmissible position.

  • Microsoft's reply brief reinforces an issue with Motorola's expert testimony that I didn't mention in my previous post on this Daubert dispute (because I focused on other issues) but would like to address now. According to Microsoft's pleadings, Motorola's experts used license agreements that primarily, exclusively or additionally involve cellular standards (2G, 3G) as indications of reasonable royalty rates. As Judge Posner noted in his Apple-Motorola decision, a phone that can't implement a cellular standard is not a phone. That's fundamentally different from the relevance of WiFi and video codecs to Windows and the Xbox. But at any rate, since Motorola chose the Georgia-Pacific approach, it can only rely on royalties that it received from other parties for the particular patents at issue in this dispute. In this context Microsoft quotes Federal Circuit case law that is less than two weeks old: an opinion in LaserDynamics v. Quanta, and it says that "[w]hen relying on licenses to prove a reasonable royalty, alleging a loose or vague comparability between different technologies or licenses does not suffice". That decision also reminds everyone that the Federal Circuit has previously thrown out reasonable royalty theories for a lack of comparability.

  • With respect to Georgia-Pacific, which I already discussed in my previous post on this Daubert dispute, Microsoft rejects Motorola's representation that it considers a modified Georgia-Pacific analysis "an inherently unreliable methodology for determining a [F]RAND royalty". Microsoft just blames Motorola for failuing "to apply the Georgia-Pacific factors and related reasonable royalty law [particularly the Entire Market Value Rule] in any recognized, principled, or sound way". Therefore, Microsoft reiterates its assertion that Motorola's expert testimony seeks to capture hold-up value.

    I have no idea how strict Judge Robart will be in his Daubert ruling. Some judges, like Judge Posner in Apple v. Motorola and Judge Alsup in Oracle v. Google, seize the Daubert opportunity to throw out various theories early on. Others have a more permissive line and think that unreasonable and unreliable theories can still be countered at trial. But even a somewhat permissive stance would make it very hard for Motorola to get away with theories based on very different industry standards, or with a refusal to apply the Entire Market Value Rule. Motorola is trying to sell to Judge Robart what it couldn't sell to Judge Posner, or at least something of very similar "quality". It will be interesting to see what happens.

On a related note, the two parties will meet in a few hours in San Francisco at the United States Court of Appeals for the Ninth Circuit for a hearing on Motorola's preliminary injunction appeal.

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