Wednesday, December 19, 2012

Microsoft to Google: standard-essential patent licensing 'is not a rug bazaar'

Late on Monday, at around the same time that Judge Koh denied Apple an injunction against Samsung, Microsoft and wholly-owned Google subsidiary Motorola Mobility filed their post-trial briefs in the FRAND contract action in the Western District of Washington. They also submitted their proposed findings of fact and conclusions of law. I wanted to take the time (despite all the Apple-Samsung action yesterday) to identify the most interesting parts of those filings. There was some media coverage of Motorola's proposal of a $100-125 million annual royalty cap for its H.264 (video codec) patents, but the fact that Motorola, roughly two years after some aggressive demand letters that gave rise to this litigation, concedes that there could be a cap is something I already wrote about in October. The amount of such a cap wasn't known at the time. Also, I covered Microsoft's consistent position on the proper royalty rate last month.

When I first blogged about Motorola's new-found acceptance of the notion of an annual royalty cap, I presented my theory as to the underlying strategy. I believe Google (Motorola Mobility) was just looking for a way to distance itself from the original demand, which actually amounted to $4 billion a year (or more), arguing that the original letter was just an initial offer and the amount, at the end of a negotiation, would have been much lower. I don't think that would be a credible story, especially since the initial demand letters came with a clear ultimatum, but Google knows that the next stage after the FRAND rate-setting phase will be a breach-of-contract trial and it's desperately looking for ways to defend Motorola's October 2010 letters. If it dropped its 2.25% position and said, for example, that 1% is the proper rate, then it would be a straightforward thing for a jury to determine that someone who asks for 2.25 times of what he himself believes he's entitled to (let alone what the court thinks he should really get) took a blatantly unreasonable position and breached a FRAND contract. So the name of the game is for Motorola to somehow make up a story of its position today being consistent with the demands it communicated two years ago, even though today's demands are but a very small fraction of the original one. I don't think this will work, but Google is trying because in the alternative it would concede a breach, with all that it entails.

Toward the end, Microsoft's post-trial brief starts to look past the current stage and on to the breach-of-contract issue:

"Microsoft submits that a demand exceeding the upper bound of what is actually [F]RAND would presumptively violate the duty of good faith and fair dealing, as the very purpose of the [F]RAND commitment is to make non-discriminatory offers that anyone can accept, especially where, as here, the patent holder is concurrently seeking injunctive relief and has an incentive to forestall the consummation of a license. Any offer above the high end of [F]RAND would require proof of extenuating circumstances to establish that the offer was legitimately made in good faith."

This is a proposed course of action for determing breach, and since the current stage is still about determing a range (and a point), it's already relevant to the impending decision. The above paragraph basically says: there's a FRAND range from $x (low end) to $y (high end), and for every dollar and cent in excess of $y, you had better come up with a really good excuse that you demanded this differential of $z without knowing that you were outside the permissible range -- and absent a sufficient excuse, you've committed a breach.

Further below, that paragraph clarifies that FRAND royalties "must be equally available to all" regardless of "posture or needs", and then says this, which made me smile:

"It is not a rug bazaar."

To me this analogy looks very much like an allusion to Google's (Motorola's) position that the proper way to determine a FRAND royalty is to attempt to assess, based on the Georgia-Pacific factors, what the outcome of a negotiation between the parties would have been. Google (Motorola) wants that approach because it apparently believes that this is its best chance to somehow capture hold-up value of standard-essential patents (compensation in excess of a FRAND rate).

Microsoft's counterproposal has consistently been to look at what the outcome of multilateral ex-ante pool rate negotiations would have been. (Even if one looks at post-standardization pool rates, they're tiny compared to Motorola's demands, so the ex-ante perspective, even though it's the most accurate point of comparison, isn't even necessary to conclude that Motorola asked for a huge multiple of a FRAND rate.)

Google (Motorola) has consistently rejected pool rates and argues that the MPEG LA AVC/H.264 pool was basically just formed to bring (or keep) royalties down, for the benefit of large H.264 implementers like Microsoft. Microsoft's post-trial brief highlights a major plausibility problem that Motorola's claim has:

"No fewer than four of the licensor participants in that pool (Dolby Laboratories, Electronics and Telecommunications Institute (ETRI), Fraunhofer-Gesellschaft, and Columbia University) derive 'most or all of their relevant revenue from licensing, as opposed to making and selling products' -- meaning that they have no 'royalty exposure' [to minimize] or need to 'maximize freedom of operation.' [...] While some pools may aim to minimize royalty payments, the MPEG LA H.264 pool is different. It could not have attracted ETRI and the other similarly-situated licensors unless its royalty rates generated respectable returns."

The list of MPEG LA H.264 patent licensors is available on the Internet. All four of the entities mentioned by Microsoft as examples of revenue-oriented, non-implementing patent holders appear on that list.

Dolby Laboratories is well-known for its ubiquitous noise-reduction system. Dolby is never shy to collect money. For example, when BlackBerry maker Research In Motion refused to pay what Dolby wanted to receive, it sued in the United States and in Germany (and then RIM backed down and paid up).

ETRI (of South Korea), Fraunhofer-Gesellschaft (of Germany) and Columbia University (of New York City) have other sources of funding (from governments and donators), but when they license their patents, they simply want to get paid at market rates (or above, but not below). They don't have or share the interests of companies building products implementing a given standard.

What I also considered noteworthy in Microsoft's brief is a statement that (I'm paraphrasing this now) the value of a standard is not just the value of the totality of all patents that read on it. There's more to it. Standards frequently include technology that was never patented, or that is no longer covered by patents because the relevant ones expired. Standard-setting involves contributions and efforts that aren't even patentable in the first place. In a world in which some patent holders make excessive royalty demands especially in connection with industry standards, it's important to remind patent holders of the limits of their intellectual property rights.

I wish I could also quote something really convincing from Google's (Motorola's) filings in this case. But for the reasons I explained above, Google (Motorola) is going in circles because it is forced to defend, at all costs, its original demand letters, and that tactical requirement unfortunately precludes it from making constructive and enlightening contributions to the FRAND discussion. It's really time for this FRAND dispute to come to an end. The rate-setting decision, which could come down anytime (though observers believe it's more likely in January than in Dcember), is going to be a key milestone.

If you'd like to be updated on the smartphone patent disputes and other intellectual property matters I cover, please subscribe to my RSS feed (in the right-hand column) and/or follow me on Twitter @FOSSpatents and Google+.

Share with other professionals via LinkedIn: