Sunday, November 4, 2012

Apple wants Wisconsin FRAND trial to set terms for standards-related cross-license with Motorola

On the eve of the FRAND trial scheduled to start in Wisconsin tomorrow, Monday (November 5), there's no shortage of uncertainty about whether this trial will indeed happen, and if so, when and with which scope.

After Motorola brought a motion for guidance on Tuesday, Apple stated that it would enter into a standard-essential patents (SEP) license agreement on court-determined terms only if the royalty rate does not exceed $1 per iPhone. Judge Barbara Crabb, whose orders reflect a genuine desire to resolve this SEP dispute, did not like that answer and was having second thoughts, wondering whether there is any point in a FRAND rate-setting trial under the circumstances. In a motion filed on Saturday, Apple recognized that the trial is no longer certain to go forward.

Both parties had until noon Central Time today to respond to Judge Crabb's Friday order (the one in which she expressed her concerns about whether Apple is entitled to any remedies that justify having a trial). I just read those filings.

Motorola's lawyers, who made a very smart move with a motion on Tuesday that raised the issue of Apple's potential unwillingness to take a license, unsurprisingly try to reinforce Judge Crabb's doubts. They use a very good metaphor to describe the position Apple took earlier in the week with its no-more-than-$1 position, saying that "Apple wants to have its cake served by the Court, then decide whether it wants to eat it". They also have a point where they say that Apple "wants to enforce a contract, yet not be bound by its terms".

But Motorola's filing addresses an obsolete position. Apple has already moved past the $1 maximum position that didn't sit well with the judge. Apple's latest position, expressed in today's filing, is that it only "placed conditions on the commitment the Court asked for is that it would have been one-sided, because Motorola would have no similar obligation to pay a FRAND rate for Apple's standards-essential patents (because Motorola had not brought a similar action seeking to establish a FRAND rate for Apple's patents)". Yes, Apple now wants clarification of the terms -- or at least of the principles underlying the determination of the terms -- of an SEP cross-license. Just an SEP cross-license -- this has nothing to do with Apple's non-standard-essential patents on multitouch gestures and other iOS features.

Earlier this year, Apple already said in a letter to Samsung that it has a "strong and growing" portfolio of cellular SEPs, including but not limited to patents it acquired out of Nortel's bankruptcy estate. Apple now wants to leverage those patents in order to reduce the net cost of licensing Motorola's SEPs.

Interestingly, Apple now makes a reciprocity argument that is quite similar to one that Motorola made in a tentative (and subsequently approved) pretrial order in the Microsoft FRAND case in Seattle. The wholly-owned Google subsidiary submitted that "the [F]RAND royalty rates determined by the Court should reflect the grant back license" that it believes it's entitled to based on the terms of the FRAND licensing promises it made to the relevant standard-setting organizations. It will be difficult for Motorola to argue in Wisconsin in a way that would contradict its position in Washington State.

In order to ensure that the terms Apple will have to accept will also apply to Motorola's license to Apple's SEPs, Apple proposes two alternative ways forward:

"(1) the trial proceed as planned starting tomorrow with the understanding that the Court will set a FRAND rate according to a methodology that both Apple and Motorola will agree to be bound by, thus effectively eliminating the disputes between the parties as to their standard essential patents; or

(2) if Motorola is unwilling to agree to be bound by the methodology adopted by the Court in option one, the Court defer the trial for a limited period (e.g., 6-9 months) to allow the development of a record as to both parties' standard essential patents such that the Court could determine in one proceeding what the FRAND payment of each party should be, and both parties would agree to be bound by that determination."

This proposal of two alternatives is constructive, and Apple's brief as a whole is anything but arrogant. I also think it's reasonable for Apple to attach the following three conditions to its commitment:

"(1) that the license in both directions be worldwide; (2) that both parties preserve their rights to appeal the Court's ruling, such that both parties' payment obligations would begin after such appeals are concluded; and (3) that the FRAND royalty obligation apply to both parties only to otherwise unlicensed products (in other words that neither party should have to pay twice for the same product)."

There's no indication that Judge Crabb has a problem with a ruling of worldwide scope; there's nothing wrong with reserving the right to appeal (if I were Apple, I would offer to pay immediately based on the district court's decision and, if the appeals court sets a lower rate, seek a refund later, but the right to appeal is certainly key); and Apple is right that there should be no double dipping. The problem is just that Apple says all of this only now. Everyone has made preparations for the trial, and now Apple suggests two alternatives, the second one of which would result in considerable delay. Judge Crabb may consider Apple's modified/clarified position untimely. I don't think Motorola can reasonably refuse to be bound by the methodology that Judge Crabb would determine, but even if it unreasonably refused, the judge might cancel the trial.

The court will hold a hearing tomorrow at 9 AM Central Time to discuss the scope (if any) of the trial.

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