Thursday, November 8, 2012

Microsoft filing says Google's Motorola is entitled to $1.2 million in FRAND royalties for 2012

Very late on Wednesday, Microsoft and wholly-owned Google subsidiary Motorola Mobility filed their trial briefs ahead of the FRAND rate-setting trial that the United States District Court for the Western District of Washington will hold starting next Tuesday (November 13). I'm going to analyze the parties' positions in more detail and may do a follow-up post on this but wanted to immediately share the most important data point before attending a Nokia v. RIM trial at the Munich I Regional Court (which will involve a very interesting patent covering over-the-air updates of the operating software of mobile devices).

While Motorola's trial brief describes its 2.25% royalty demand as "the only logical starting point" for FRAND royalty negotiations of this kind, irrespective of the court's well-documented skepticism, Microsoft has consistently argued -- and the court has explicitly allowed Microsoft, against Motorola's objections, to argue at the upcoming trial -- that the rates set by patent pools such as MPEG LA's AVC/H.264 pool or Via Licensing's pool of IEEE 802.11-essential patents are a better indicator of what a reasonable and non-discriminatory royalty rate for Motoro'a standard-essential patents (SEPs) should amount to.

In connection with MPEG LA, this argument is particularly strong in light of a grant-back commitment Google made when it took an AVC/H.264 pool license, a commitment that also binds Google's subsidiaries, including companies it acquired after conclusion of that license agreement (such as Motorola Mobility). For IEEE 802.11 (the WiFi, or WLAN, standard), Microsoft also points to the market price of chipsets (such as the Marvel 802.11 chipset), which include intellectual property licenses.

Another problem Motorola faces on the H.264 FRAND question is that the value of what its H.264 SEPs contribute to Microsoft's products is doubtful because all or most of them cover the outdated technique of interlaced video. In a desperate attempt to show to the court that interlaced video can be popular, Motorola even presented a pirated Katy Perry video.

While the Daubert briefing process and ruling shed some light on both parties' methodologies, previous filings did not quantify the FRAND royalty position with which Microsoft is going into next week's trial. The trial brief fills this gap: Microsoft says that the proper FRAND royalty rate in 2012 for Motorola's H.264 SEPs is $474,000, which is what Microsoft says "Motorola's share of the 2012 pool royalties paid by Microsoft would have been" if it were a licensor in the MPEG LA h.264 pool. For Motorola's 802.11 SEPs the amount (again for calendar year 2012) would be $736,231 according to the royalty calculation and distribution model of the Via Licensing pool. The sum of these two numbers is $1,210,231 ($1.2 million).

A footnote in Microsoft's filing mentions that "[i]f the Via pool rates were increased by the maximum 25% permitted under the pool agreements upon the inclusion of additional patents in the pool, Microsoft would pay to Motorola $920,338 per year based on current volumes for a license to its 802.11 essential patents". In that hypothetical scenario, the total royalty rate for both standards (H.264 and IEEE 802.11) in 2012 would be $1,394,338 ($1.4 million). Either way, these numbers show that market realities are different from whatever drove Google's decision to pay $12.5 billion for Motorola Mobility.

Microsoft has repeatedly stated that it wants to take a license to Motorola's H.264 and IEEE 802.11 SEPs on court-determined FRAND terms. While Microsoft would defend itself vigorously against any infringement claims, it wants a solution (provided that the royalty rate is at a FRAND level), Apple made a similar commitment but ruled out paying anything in excess of $1 per iPhone for Motorola's wireless SEPs.

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