Friday, November 16, 2012

Apple and Google disagree on key parameters of potential FRAND arbitration, including scope

Yesterday I reported on Google's (Motorola's) proposal to have an arbitration panel set the terms for a standard-essential patent (SEP) license agreement with Apple. Meanwhile, Apple has filed with the court an exchange of letters between the companies concerning this subject. I have uploaded to Scribd a declaration to which Apple's November 8, 2012 letter to Google and Google's November 13 reply to Apple are attached as exhibits.

Let me clarify that most if not all of Google's standard-essential patents are held by its wholly-owned Motorola Mobility subsidiary. But Google micromanages Motorola's litigation and already made clear in August 2011, when the acquisition was announced, that any settlements relating to Motorola Mobility's patents would have to be settlements with Google as a whole. At a recent German court hearing, the corporate representative of Motorola Mobility was a Google in-house lawyer. And the exchange of letters this post discusses consist of a letter from Apple's Senior VP and General Counsel, Bruce Sewell, to his counterpart at Google, Kent Walker, with a copy to David Drummond, Google's Chief Legal Officer. Mr. Walker replied to Mr. Sewell and also copied Mr. Drummond. If Motorola Mobility itself controlled the process, Google would simply have referred Apple's letter to Motorola, which would in turn have responded.

The fact that Google is Motorola and that Motorola is Google in this context should have been obvious to everyone, especially (but not only) in light of what Mr. Drummond's comments on the August 2011 conference call following the Google-Motorola announcement. I have used Google and Motorola interchangeably in many of my recent posts covering lawsuits originally brought by Motorola before the acquisition. This was not understood by a very few people who failed to see the strategic forest because of all sorts of formalistic, legalistic trees. Apple and Google should have provided clarity to everyone now about who's in the driver's seat.

An arbitration proceeding between Apple and Google (including Motorola) would have some important implications if it happened. I don't mean to rule out that it will happen but I doubt it at this juncture. Should it happen at some point, a number of pending litigations, including Motorola's appeal of the FRAND part of Judge Posner's ruling, would be withdrawn. There wouldn't be any risk of SEP-based sales bans between these two companies. It would all just come down to the determination of a royalty rate and possibly other business terms.

Ongoing antitrust investigations of Google's (Motorola's) use of SEPs in the European Union and the United States would also be narrowed in the event of arbitration, though Google could still be fined for misconduct -- and Google's SEP assertions against Microsoft would also have to be addressed one way or another.

The Apple-Google correspondence I published shows that the parties still disagree on several key parameters of an arbitration proceeding. The list may not appear to be long, but some of the issues are so fundamental that I doubt they're going to agree in the very near term unless there's a change of circumstances that affects either party's stance.

Two particularly important kinds of disagreement relate to scope: the subject matter of the arbitration and the scope of a standstill and "stand-down". Apple proposed to stay all SEP-related litigation, including a FRAND rate-setting process underway in Germany following Google's less than voluntary acceptance of Apple's offer to take a license on FRAND terms to be determined by a German court in accordance with the Orange-Book-Standard procedure. Google demonstrates its belief that German courts will be more sympathetic to its business interests than U.S. courts: while Google didn't want U.S. district courts in Washington State (where a Microsoft FRAND contract case is currently being tried) and Wisconsin to set FRAND terms, it would want to explicitly exclude the German Orange-Book-Standard rate-setting case from the scope of a stand-down. Google's argument that the record in the German litigation is well-developed is specious. There would be no problem with providing the same record to an arbitrator, or arbitration panel, setting worldwide rates. And the record was even more developed in the Wisconsin case (and also in Judge Posner's court) than it will ever be in Germany, a jurisdiction that doesn't have a discovery process.

Google's response to Apple stresses that the Qualcomm-related patent exhaustion case in the Southern District of California should be consolidated into a FRAND arbitration proceeding. I don't think this is unreasonable to propose. But there is a contradiction between Google's approach to all issues pending in the United States and its attitude toward the German rate-setting litigation.

The parties do, however, appear to agree on the idea of an SEP cross-license (just to be clear, there is no reference to non-SEPs in those letters). However, while Apple believes an arbitration hearing could take place in four months and that a decision could be made in six months' time, Google says that the parties would firstly have to conduct discovery of Apple's SEPs (since there hasn't been any Apple v. Google SEP litigation so far) and should then set a "reasonable" schedule. Google doesn't propose any specific timelines at this stage. I don't want to read too much into it, but at first sight it looks like Apple truly wants this to be resolved in the very near term while Google keeps its options open to stall.

Another key substantive issue on which the parties disagree at this point is the royalty base. Apple proposed that "[t]he royalty base between the parties should be common and bear the closest possible relationship to the actual functionality covered by the standard in question". Google opposes any such precondition, saying that the arbitration panel should be free to determine the royalty base.

A smaller issue is whether there would be only one arbitrator (Apple's proposal) or a three-person panel, with each party appointing one arbitrator and agreeing on a third, independent one (Google's counterproposal). In my business experience, a panel of three is pretty common in commercial arbitration. Google also says it's willing to discuss other formats.

Google wants to negotiate non-royalty licensing terms, leaving to the arbitrators only those issues on which the parties can't agree. While it does make sense to narrow the scope of the arbitration, the need to negotiate could also result in further delay unless the parties set a clear deadline by which an item has to be agreed upon or will be put before the arbitrators.

The final item of Google's response relates to past infringement and proposes that "{b]esides establishing royalties on a go-forward basis, the arbitration decisioin should apply to past sales to address royalties owed". I interpret this as saying that there would be one royalty rate -- as opposed to a surcharge for past infringement -- but this would have to be stated even more clearly in a formal agreement. If Google really does accept the notion of one royalty rate for past and future use, it's a radical departure from the position Motorola Mobility took in a German infringement litigation with Apple, where it obtained an injunction because Apple wanted to be free to continue to challenge the validity of Motorola's patent-in-suit in the event that Motorola should seek more than the equivalent of a FRAND royalty as damages for past infringement.

The further negotiation of the parameters of an arbitration proceeding between Apple and Google could be influenced by developments in the Microsoft-Google FRAND case in Seattle.

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