Google acquired Motorola Mobility for $12.5 billion in hopes of being able to leverage its patents against Apple, Microsoft and others on whose intellectual property Android demonstrably infringes to a massive degree. But when Google bought Motorola, it also assumed obligations, one of which is to honor the FRAND licensing pledges it made to standard-setting organizations and, by extension, third parties relying on them. Motorola's FRAND promises are going to be at issue in two contract law trials next month. On November 5 (in a week from tomorrow), Apple's contract claims will go to trial in the Western District of Wisconsin, and eight days later, a Microsoft FRAND enforcement lawsuit from November 2010 will get its day in court in the Western District of Washington.
The wholly-owned Google subsidiary is struggling with this situation in two different ways, a logistical and a substantive one. The logistical one is that the two trials may very well overlap, but some witnesses are needed in both federal districts. The substantive part is certainly the more pressing problem: apart from appeals, Motorola's assertions of standard-essential patents (SEPs) against Apple and Microsoft could come to an end in a matter of weeks. Theoretically, Google's Motorola could still try different procedural maneuvers, but its chances of actually achieving something -- and of avoiding backlash from the courts adjudging the FRAND cases -- could be very, very slim, depending on the clarity provided by the courts in Seattle, WA and Madison, WI. Motorola particularly doesn't want the courts to take measures that would result in SEP license agreements.
On Tuesday (October 23, 2012), Motorola made an attempt to conflate procedural and substantive issues. It filed a "motion for guidance on trial schedule" in Wisconsin that was formally limited to the question of whether the Apple trial would be concluded before the Microsoft trial begins. Most of the text of the motion, however, addressed the scope of the trial, which is Motorola's primary concern. In the Microsoft case, Motorola brought an entire motion only to narrow the scope of the trial, and didn't gain any ground because Judge James Robart, while formally agreeing with Motorola that a breach-of-contract issue would be the subject of a subsequent jury trial, reaffirmed his game plan. He wants a true solution while Google's Motorola would rather keep the door open to even more problems. Further below I'll talk about how Microsoft and Motorola summarized their positions ahead of their trial. But let's stay in Wisconsin for a couple more paragraphs.
Motorola's motion for guidance on the trial schedule was, for the most part, a disguised summary judgment motion seeking to avoid in Wisconsin what Motorola couldn't avoid in Washington State: a FRAND rate-setting decision by a court of law. Motorola would be fine with this in Germany, where it recently felt forced to accept a licensing proposal from Apple and where the parties will meet in court, presumably next year, over the determination of a FRAND rate. But Motorola doesn't want this to happen in the United States, and especially not in a way that takes care of the FRAND licensing question on a worldwide basis.
Motorola's Wisconsin motion wasn't sealed, but Apple's response, filed on Friday at Judge Crabb's request, is inaccessible to the public. Anyway, a few hours after Apple filed its opposition, Judge Crabb entered a terse "text-only" order that didn't address Motorola's substantive concerns in the slightest and just told the Google subsidiary that the court doesn't plan to spend more time on this trial than necessary, but if things take longer, it's Motorola's (and not the court's) problem:
"Motorola has filed a request for guidance, directed to the scheduling of the trial set to begin on November 5, 2012 (dkt. .) At present, the trial is expected to run for two weeks. The court will make every effort to keep the trial to one week but can make no promises that it will not last longer. Motorola will have to work within this schedule and plan its witnesses' testimony accordingly. Signed by District Judge Barbara B. Crabb on 10/26/12."
This doesn't mean that the court will necessarily grant Apple's wish and engage in FRAND rate-setting. But it appears that the judge doesn't want to rule this possibility out, or commit to anything, at this stage. Motorola had argued in its motion that the trial could be concluded within one week unless it becomes a rate-setting trial and expressed concern about the fact that "[i]n its recent motion in limine oppositions, Apple intimated that it will request the Court to impose a royalty rate for the entire ETSI and IEEE global portfolios owned by Motorola". Yes, "global portfolios". If this worked out, the German FRAND rate-setting exercise might just be rendered unnecessary.
Motorola's lopsided version of reciprocity
In both cases (Wisconsin and Washington State) Motorola has already lost on some key contract law issues at the summary judgment stage, but it's still defending its position that its initial royalty demand of 2.25% (of the price of the relevant end product) did not constitute a breach of contract. And it disputes the courts' jurisdiction to determine FRAND rates. But it's limited in its ability to make its case, particularly in the dispute with Microsoft because of its October 2010 demand letters. Motorola is now trying to thread the needle and identify licensing terms that its demand letters did not specify (at least not in detail). This way, Motorola hopes to kill two birds with one stone, seeking to complicate things for the courts that are trying to bring about a solution (by telling the judges that setting a FRAND royalty rate is insufficient) and additionally trying to read some more reasonableness into its original demands than the October 2010 letters to Microsoft reflected.
Those original demand letters did make reference to a "grant back license" to Microsoft's patents essential to the same standards. And in the motion for guidance in the Apple case in Wisconsin, Motorola also argues that "the contracts at issue require reciprocal cross-licensing of essential patents".
I don't agree with Motorola that the courts need to set the terms for an SEP cross-license. As long as Apple or Microsoft don't seek injunctive relief based on their SEPs (which I'm sure they won't because they've made unequivocal statements in litigation and in public), there's no reason why the grant-back licensing terms couldn't be set later. Also, as far as Microsoft's H.264-essential patents are concerned, Motorola could easily license them under the terms of the MPEG LA AVC/H.264 pool, anytime -- as its corporate parent, Google, already has.
At any rate, Motorola uses the terms of a grant-back license as an argument in the Microsoft case for the claim that its original royalty demand (which corresponded to a $4 billion annual royalty figure) was FRAND (fair, reasonable and non-discriminatory). I'll now quote three paragraphs from Motorola's position stated in the proposed pretrial order for the Microsoft case and will comment below each quoted paragraph. Motorola references some of its Proposed Findings of Fact -- the relevant passages were redacted in that document, but the tentative pretrial order sheds light on what they say (even though it doesn't state all the numbers).
"1. The [F]RAND royalty for a license to Motorola's H.264 SEPs is 2.25% of the net selling price ('NSP') of licensed products (e.g., Microsoft's Xbox 360 or Windows OS software), based on a hypothetical negotiation between the parties considering the relevant evidence (e.g., Motorola's past licenses, the strength and value of Motorola's patents, and the use of Motorola's patents by Microsoft). Based on that same evidence, an appropriate cap should apply to any net royalties payable to Motorola. The royalty due to Motorola would be offset by a [F]RAND royalty for a license to Microsoft's H.264 SEPs which also is 2.25% of the NSP of licensed products (e.g., Motorola's smartphones and set-top boxes), based on a hypothetical negotiation between the parties considering the relevant evidence (e.g., the relative strength and value of Microsoft's patents and the use of Microsoft's patents by Microsoft)."
The royalty base stated above is grossly inconsistent with Motorola's October 2010 demand letters, which explicitly ruled out that the royalty would be a percentage of Windows revenues, stressing that the total price of the relevant end product, such as a laptop computer running Windows, would be the royalty base. Motorola has backtracked in this regard -- and we're not talking about a subtlety but about billions of dollars per year. After the November 13 FRAND rate-setting trial, the breach of contract issue will be decided based on whether Motorola's initial royalty demand was "blatantly unreasonable". If Motorola now argues that Windows sales -- not PC sales -- are the appropriate royalty base, the difference between what it wanted then and what it claims now is probably more than what's needed to conclude that the original demand was blatantly unreasonable and, as a result, constituted a breach of a FRAND contract.
"2. The [F]RAND royalty for a license to Motorola's 802.11 SEPs is 2.25% of the NSP of licensed products (e.g., Microsoft's Xbox 360) based on a hypothetical negotiation between the parties considering the relevant evidence (e.g., Motorola's past licenses, the strength and value of Motorola’s patents, and the use of Motorola’s patents by Microsoft). The royalty due to Motorola would be offset by a [F]RAND royalty for a license to Microsoft's 802.11 SEPs which is 0.25% to 0.5% of the NSP of licensed products (e.g., Motorola smartphones and tablets), based on a hypothetical negotiation between the parties considering the relevant evidence (e.g., the relative strength and value of Microsoft's patents and the use of Microsoft's patents by Microsoft)."
Motorola hopes that its 2.25% royalty demand appears more reasonable in the H.264 context by suggesting that Microsoft's H.264 patents have the same value. For IEEE 802.11 (WiFi, or WLAN), Motorola suggests that Microsoft is entitled to a fraction of that percentage.
What appears to be a quid pro quo with respect to H.264 is, at a closer look, as nonsensical as it is asymmetrical. It makes no sense because Microsoft's position -- and not only Microsoft's but also that of many other major industry players -- on the appropriate H.264 royalty rate is already expressed by its participation in the MPEG LA AVC/H.264 pool. A license to the entire pool would cost a small fraction of what Motorola now sort of "offers" to pay for Microsoft's share of the pool. But even if we forget about that context for a moment, it's an asymmetrical proposal since Microsoft's revenues with H.264-compatible products dwarf Motorola Mobility's related sales. Also, the question of apportionment (under the Entire Market Value Rule) is not resolved by simply saying that Microsoft can also collect a percentage of the end product price.
"4. Based on the royalty rates discussed above for the parties' H.264 portfolios and each party's relative exposure, Microsoft would owe royalties as set forth in Motorola Proposed Finding of Fact 472(h). However, the parties would have agreed to a reasonable cap as set forth in Motorola Proposed Finding of Fact 472(i). Depending on the structure for payment, a running royalty for Windows would be as set forth in Motorola Proposed Finding of Fact 472(j)."
Motorola's suggestion that "a reasonable cap" would have been part of a negotiated license deal does not have any support in Motorola's October 2010 demand letters -- but Motorola will presumably argue that its original letters were more reasonable than they appear at first sight if one considers that negotiation might have changed something. However, two years ago Motorola gave a pretty clear ultimatum to Microsoft, and it asked for a percentage without any indication of the possibility of a royalty cap.
Having followed this dispute for a couple of years, I must say that I was very surprised to find a reference to a "royalty cap". Not only is it new but it also seemed counterintuitive to me. I'm not aware of any case law that requires a royalty cap. If someone wants to maximize his FRAND royalty income, he would usually just argue that if a percentage is FRAND, it should be applied to all product sales. But as I said before, Motorola is seeking to justify its 2010 demand letters. If it weren't for that reason, I doubt very much that it would ever have argued that its royalties should be capped.
The proposed royalty cap for Windows is stated in one of the redacted passages of the joint proposed pretrial order. It won't be a small amount, I'm sure. And even with the royalty cap, Motorola would still try to inflate H.264 (and IEEE 802.11) royalties in order to leverage the asymmetry between the two companies' revenues.
To the general public, the upcoming November FRAND trials in Wisconsin and Washington State will be much less exciting than infringement trials such as Apple v. Samsung. But they will raise some interesting questions such as that of a FRAND royalty cap and will likely result in landmark decisions, unless Google (Motorola) elects to solve the scheduling conflict between the two trials by settling the FRAND parts of these disputes next week. There's no particular reason to assume that it will happen. But it's always a possibility, in any dispute, that the parties' lawyers show up on the first trial day and announce a settlement.
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