Yesterday the United States District Court for the Western District of Washington ruled on a Microsoft motion for partial summary judgment in a litigation involving FRAND-pledged, standard-essential Motorola Mobility patents allegedly covering mandatory parts of the H.264 video codec standard and the IEEE 802.11 WLAN (WiFi) standard, and Microsoft's related defenses and counterclaims. I think there's some interesting stuff in the court order that's also reasonably relevant to FRAND issues in other jurisdictions.
The order adjudicates a couple of the issues Microsoft's motion raised, and a footnote suggests that Motorola didn't oppose those parts of the motion (apparently because it realized it couldn't succeed). With respect to a couple of other questions, the court did not find that Microsoft met the threshold for summary judgment (i.e., the combination of a winning legal argument and the absence of a relevant, genuine factual dispute) at this stage, but its reasoning nevertheless makes several points that clearly show that FRAND is not an empty word.
The court now plans to reach conclusions on the remaining FRAND-related questions ahead of a patent infringement liability trial. For that purpose, the court declares its intent to schedule a "mini-trial" on FRAND and allows both Microsoft and Motorola to bring additional summary judgment motions on limited issues. The scope of those motions would actually enable Microsoft to win the most important part of this case even ahead of the mini-trial.
This course of action demonstrates that FRAND-related considerations are absolutely key to that litigation. It reminds me of the way a Dutch court handled a Samsung v. Apple case last year (putting FRAND first).
The court order stops short of setting a date for the FRAND mini-trial. For the next round of FRAND summary judgment motions, the briefing schedule has a deadline for final reply briefs on April 20, 2012, and after the court decides on those motions (no particular target date given for that), it will set a schedule for the mini-trial. My guess is that the mini-trial will take place in the summer.
In the following, I'll highlight the court's decisions and some of Judge James Robart's remarks that appear particularly interesting to me.
FRAND licensing obligations as a means of preventing extortionate or exclusionary conduct
Quite at the beginning, the court order summarizes, at a high level, what FRAND licensing commitments in connection with standards are all about. The court order uses the term RAND, which is synonymous with FRAND (the absence of the "F" doesn't suggest unfairness) and still very common in the United States.
Here's the court's summary of the concept of FRAND-based standards:
"Standards setting organizations ('SSOs') play a significant role in the technology market by allowing companies to agree on common technological standards so that all compliant products will work together. Standards lower costs by increasing product manufacturing volume, and they increase price competition by eliminating 'switching costs' for consumers who desire to switch from products manufactured by one firm to those manufactured by another.
One complication with standards is that it may be necessary to use patented technology in order to practice them. If a patent claims technology selected by a SSO, the patent is called an 'essential patent.' Here, Motorola is the owner of several declared-essential patents to certain standards established by the IEEE and the ITU. [...] In order to reduce the likelihood that owners of essential patents will abuse their market power, many SSOs, including the IEEE and the ITU, have adopted rules related to the disclosure and licensing of essential patents. The policies often require or encourage members of the SSO to identify patents that are essential to a proposed standard and to agree to license their essential patents on reasonable and non-discriminatory ('RAND') terms to anyone who requests a license. Such rules help to insure that standards do not allow essential patent owners to extort their competitors or prevent them from entering the marketplace."
The royalty base issue
The court document also quotes from two offer letters (one related to 802.11, the other to H.264) that Motorola sent Microsoft and which resulted in Microsoft instigating this lawsuit. Motorola's 2.25% demand is publicly-known by now. What increasingly gets attention is the fact that Motorola wants to apply that percentage to the price of end products even if a patent covers only a subset of the functionality of a single component. Here's what Motorola wrote to Microsoft:
"As per Motorola’s standard terms, the royalty is calculated based on the price of the end product (e.g., each Xbox 360 product, each PC/laptop, each smartphone, etc.) and not on component software (e.g., Xbox 360 system software, Windows 7 software, Windows Phone 7 software, etc.)."
In the "Common Royalty Base" part of this recent blog post, I gave examples that this could also mean the price of an entire car that comes with built-in functionality of certain kinds. Or how about airplanes that offer WLAN/WiFi services? While computers are the most expensive one of Motorola's own examples, Motorola's offer just says "end product", and the list of examples is open-ended (it ends with "etc."), so any concern about how they would handle cars and airplanes with such functionality is reasonable, and well-founded. It's bad enough if they want a $45 royalty on a $2,000 computer, but where does it stop? Apple's proposal of a Common Royalty Base would be the solution -- but Motorola doesn't appear to like that.
Even if someone was convinced that Motorola could not extend its royalty base to an entire car or airplane, those examples nevertheless serve to show that there must be some reasonable apportionment of the value of patents to the subset of a larger product that their claimed inventions actually form part of.
I saw in a recent filing with the ITC that Motorola says it might have been willing to negotiate with Microsoft and that Microsoft could, in the course of such negotiations, have explained its business model to Motorola. In my opinion, Microsoft's business model of selling operating system software for PCs and smartphones (and complete devices only in the case of the Xbox 360) is well-known and didn't have to be explained to Motorola.
I'll leave the royalty base discussion at that for the time being, though I guess I'll address it again in the not too distant future because it is a major problem.
Court agrees that Motorola has contractual commitments
Especially in Europe, courts don't always hold that commitments to make licenses available on FRAND terms are binding contracts. Quite often, FRAND licensing obligations are viewed as a matter of antitrust law rather than contract law. The Dutch case I mentioned before would be an example of a court disagreeing that a FRAND pledge has the status of a contract.
But Microsoft has convinced the Seattle-based district court that "through Motorola's letters to both the IEEE and ITU, Motorola has entered into binding contractual commitments to license its essential patents on RAND terms."
Taking this concept even further, the court furthermore "finds that Microsoft, as a member of both the IEEE and the ITU, is a third-party beneficiary of Motorola's commitments to the IEEE and ITU."
The judge explains in a footnote that "[o]n February 13, 2012, the court held a status conference in which Motorola stated on the record that it did not dispute that it entered into the aforementioned binding contractual commitments with the IEEE and the ITU and that Microsoft is a third-party beneficiary of these commitments." In other words, Motorola only recently realized that these two items were slam dunks for Microsoft, making further opposition appear futile.
Does each offer have to be in line with FRAND?
The court notes that "Microsoft argues that because Motorola committed to make its essential patents relating to the 802.11 and H.264 Standards available to an unrestricted number of applicants on RAND terms, any offer by Motorola must likewise be on RAND terms." Let me compare this once again to the Dutch Samsung v. Apple case. In that one, the judge looked at Samsung's 2.4% royalty demand (also on the full market value of the end product) as being "out of step with Samsung's FRAND licensing obligation", and therefore denied Samsung injunctive relief.
Motorola told the Seattle-based court that only the completed licenses need to be on FRAND terms, not each and every offer on the way to a final agreement.
This district court tried to resolve the question through contract interpretation (not through the application of antitrust law) and wasn't satisfied with Microsoft's related arguments. But the court notes that "Microsoft may ultimately prevail on this point" (the position that Motorola's "exorbitant" royalty demands are the opposite of its obligation to make its relevant patents available on FRAND terms).
The court didn't find Motorola's counterargument compelling either, but since Microsoft wanted summary judgment, it had the burden of proof and didn't prevail at this stage. Rather than merely denying this part of Microsoft's motion, the court elected to provide "guidance for the path forward". In this context, the judge says that he's presently unconvinced by Motorola's claim that a give-and-take negotiation process would ultimately lead to FRAND terms. At least in the ITU policy (which governs H.264), the court sees a potential indication that the negotations themselves (and, therefore, any offers that form part of them) must meet FRAND criteria. Furthermore, "[i]t seems unlikely to the court that either the IEEE or the ITU would deem a patent essential for a certain standard only to permit that patent holder to turn around and abuse that power by seeking outrageously high royalty rates. To wit, during the February 13, 2012 status conference, counsel for Motorola agreed that blatantly unreasonable offers would violate its RAND obligations under the policies."
I think it's a major deficiency of the German Orange-Book-Standard approach that it doesn't deny patent holders injunctive relief based on abusive demands -- only on abusive refusals to accept offers from implementers of the standard. In that regard, the guidance provided in this ruling from Seattle is clearly more holistic, and in my view, pro-competitive.
It appears that Microsoft still has every opportunity to prevail on this count. It just didn't address the contract interpretation issues that the court would have liked to see discussed in greater depth at this stage.
Taking disputes over FRAND royalty rates to court is perfectly acceptable and doesn't change anything about a patent holder's FRAND licensing obligations
Motorola argued (in that district court as well as in other venues) that Microsoft basically lost its entitlement to a FRAND license because it went to court right after Motorola's first set of licensing offers. On this one, the Seattle court sets the record straight in no uncertain terms:
"Indeed, it would appear that at any point in the negotiation process, the parties may have a genuine disagreement as to what terms and conditions of a license constitute RAND under the parties' unique circumstances. Because the policies leave it to the parties to determine what constitutes a RAND license, when such a genuine disagreement arises, it appears to the court that the only recourse for the parties is to file a lawsuit in the appropriate court of law."
That is a clear pro-rule-of-law stance. With respect to Motorola's "repudiation" (loss of entitlement) argument, the judge even says that "[t]he court is perplexed by Motorola's argument". This looks to me like a diplomatic way of saying that the argument is nonsensical, and possibly also disingenuous.
Even though Microsoft formally didn't prevail on the third count of its motion, the passages I just quoted from the court order show that Microsoft's argument was persuasive from a policy point of view.
Breach of obligations through unFRANDly offers: depends on facts, therefore not suitable for summary judgment
Microsoft's fourth request was for the court to determine that Motorola's offers to Microsoft breached Motorola's FRAND licensing obligations. This presupposes a ruling in Microsoft's favor on the previously-discussed third count, on which the court appears to be quite sympathetic to Microsoft's views but, for the time being, unconvinced at the legal level. Furthermore, the judge wouldn't be comfortable deciding summarily that "it is always facially unreasonable for a proposed royalty rate to result in a larger royalty payment for products that have higher end prices". He denied this part of the motion, not because Microsoft was necessarily wrong but because this depends on the specific facts, and the envisioned mini-trial will be an opportunity to reach conclusions on any such factual issues.
But Microsoft has the chance to make a lot of headway even before that mini-trial. The order allows Microsoft to "file another summary judgment motion on its breach of contract and promissory estoppel claims specifically addressing whether the IEEE Policy and ITU Policy require offers to be on RAND terms". Promissory estoppel would mean that Microsoft has a defense that serves all (or at least the most important ones) of its purposes, and it now has the chance to get to that point even before the mini-trial.
The court formally also allows Motorola to "file a summary judgment motion with respect to its claim that Microsoft repudiated its right to a license for Motorola's declared-essential patents on RAND terms", but based on what I quoted above from yesterday's order, Motorola would need to come up with entirely new and surprisingly strong arguments to succeed on this count.
So the really interesting question at the summary judgment stage is going to be whether Microsoft wins on the promissory estoppel count, or alternatively makes progress toward that goal. Otherwise, it gets another bite at the apple at the mini-trial. The coming months should be very interesting for this litigation and the wider Microsoft-Motorola dispute (though it would be even more interesting if it also touched directly on the antitrust issues that standard-essential patents raise).
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