Wednesday, October 31, 2012

Apple: Motorola's essential wireless patents are at best worth $1 per iPhone

Five days ahead of a FRAND contract trial in the Western District of Wisconsin, Apple has formally declared to the court its willingness to pay Motorola Mobility for a license to its standard-essential wireless patents ("wireless" meaning cellular and WiFi standards in this context), but it will only write an immediate check to the wholly-owned Google subsidiary if the per-unit royalty does not exceed $1. If the court sets a FRAND rate at or below $1, Apple will take a license and start to pay right away. Otherwise Apple will appeal the decision and exhaust all of its legal options before Google gets anything.

Apple's lawyers made this declaration, which may be the biggest smartphone patent news on Halloween 2012, on their client's behalf in a response to a Motorola motion for clarification. That motion was filed yesterday and pointed out that Microsoft, whose FRAND contract case against Motorola will go to trial on November 13, had explicitly committed to the conclusion of a license agreement on court-ordered terms. Apple's position in the somewhat similar case in Wisconsin is basically that Microsoft's actions don't create legal obligations for others. But Apple seeks to demonstrate to the court that it is serious about resolving the wireless SEP dispute with Motorola Mobility through a license agreement on FRAND terms. Here's the passage from Apple's filing that contains the commitment to take a license at a court-determined rate of up to $1 per unit:

"Apple has however been an outspoken leader in the industry on FRAND and has repeatedly urged that a rational and consistent framework for determining FRAND rates for wireless standards-essential portfolios must be set. Apple's actions in both licensing and litigation have matched its words in public. Because of that, Apple is willing to pay the FRAND rate this Court sets going forward if that rate is less than or equal to $1 per unit for its worldwide sales of covered products, as further discussed below in Section II.D. This is the rate that Apple believes is appropriate in these circumstances, a rate that flows from Apple's articulated FRAND framework, and the only rate that can be supported by experts at this trial. To the extent the Court sets the rate higher than $1 per unit, Apple reserves the right to exhaust all appeals and also reserves the right available to any party offered a license: the right to refuse and proceed to further infringement litigation. The Court has stated that it intends to set the “current fair license rate for purposes of specific performance.” Dkt. No. 424 at 18. With regard to Motorola’s request for an order requiring Apple to pay Motorola for the past (which is also beyond the scope of the specific performance remedy requested), Apple is confident that parties can negotiate a resolution once the Court sets a FRAND rate going forward."

Apple made this conditional commitment from a position of strength. Its filing notes that Judge Barbara Crabb has laid out her plan, which may very well culminate in a court order requiring Google's Motorola to make Apple a licensing proposal on court-determined FRAND terms. Apple also recalls that Motorola is going to face a major problem at the upcoming trial because its only expert, Dr. Leonard, "cannot testify about a particular rate at trial" because the court held that he "did not offer any opinion about what particular rate or range or rates would constitute a FRAND royalty". Indeed, the court's pretrial decisions largely favor Apple, as I said yesterday.

At next week's trial, Apple intends to support its no-more-than-$1 position not only with expert testimony but also with "copious real-world evidence--including Motorola's contemporaneous licenses--that establishes a ceiling for the FRAND rate Motorola could charge Apple for Motorola's worldwide portfolio".

Apple's position is that it wants a solution but the price must be fair. Otherwise, litigation over Motorola's SEPs will continue, which Apple would much prefer to avoid. Given that Motorola has not been able to enforce any SEP against Apple in the United States, Apple is prepared to take its chances if necessary:

"Motorola cannot offer evidence at this trial that the rate should be higher than $1 per phone, but to the extent the Court sets the rate higher than $1 per unit, Apple reserves the right to exhaust all appeals and needs also to reserve the right available to any party offered a license: the right to refuse and proceed to further infringement litigation. Make no mistake, that is not an outcome Apple desires. The parties have spent an exhausting two years litigating against each other around the world. But if the Court were to set, for example, the rate Motorola is seeking (2.25% of Apple’s covered product revenue), that would amount to billions of dollars per year. That is orders of magnitude more than Apple is paying for even substantially larger standards-essential patent portfolios. Indeed, over several years such a figure would eclipse the recent entire cost of acquisition of Motorola. In such circumstances, Apple may need Motorola to demonstrate that its declared essential patents are in fact essential patents and worth that amount of money, a hurdle Motorola has thus far been unable to clear with what are presumably its best patents."

Motorola's motion for clarification also asked the Wisconsin court to let a German court (presumably the Mannheim Regional Court, which I regard extremely highly for its technical expertise and case management but with which I have previously disagreed on FRAND issues) set a FRAND rate for Germany. Apple argues that the U.S. litigation that gave rise to next week's FRAND trial predates Motorola's German lawsuits, and if the Wisconsin-based court sets a rate, it should apply on a worldwide basis and "moot the later-filed German rate-setting action".

I will report on this again (or update this post) once Judge Crabb enters her decision on Motorola's motion for clarification. Whatever the decision will be, I'm convinced that Motorola is never ever going to get anything close to 2.25% of Apple's revenues. Apple's "$1 maximum" position may be justified from a FRAND point of view (I guess it is) but such a deal wouldn't give Google the strategic leverage over Apple that it hoped to get when it paid $12.5 billion for Motorola Mobility.

A few months ago, Apple valued Samsung's wireless SEPs at a rate of about half a cent per patent and unit.

Motions in limine adjudged in Microsoft v. Motorola FRAND case

I also have an update on the Microsoft-Motorola FRAND case in Seattle. A week after ruling on the parties' Daubert motions, Judge James Robart adjudged the other motions in limine (motions to exclude testimony or argument). He didn't issue a written order but instead made the decisions at a pretrial conference on Monday. The bottom line is that he largely denied both parties' motions in limine, and on some of the issues (for example, the question of whether Motorola's royalty demand would have to be consistent with the Entire Market Value Rule) he just pointed to the reasons underlying his Daubert decisions. A denial of a motion in limine doesn't mean that a party has lost on the issue it tried to resolve: it merely means that it will have to object to specific arguments or representations as opposed to the court imposing broader restrictions on the other party. And even spurious arguments and evidence of questionable probative value can survive a motion in limine but still won't have much weight. In this case, since there's no jury that can be confused, the judge is going to be aware of all arguments anyway when setting FRAND terms.

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Tuesday, October 30, 2012

Android ecosystem is rightly concerned about breadth and depth of Nokia's patent portfolio

Today's big patent story is a TechCrunch article speculating about the possibility of a Nokia patent application discouraging Google from implementing multi-user accounts on smartphones (while providing that functionality on tablet computers). I don't have an opinion on that particular hypothesis, but I am convinced that Nokia's patent portfolio is just too strong to be ignored by Google and its hardware partners. The most efficient solution would probably be for Android companies to take a license to Nokia's patents. My interpretation of Nokia's public statements is that it seeks to monetize its patents, and not to exclude.

There are several reasons for which I consider Nokia's portfolio to be fairly strong and reasonably valuable.

In June 2011 Nokia and Apple announced a settlement of a multijurisdictional patent spat that latest almost two years, and Apple conceded publicly that it came out on the paying end. This was a significant victory for Nokia.

The strength of a patent portfolio is largely a function of how innovative a company was (and how well it managed the patenting process) between five years back and 15 years back. That's because patent applications usually take several years to be processed. It doesn't always take five years, but sometimes it takes even longer than that. With a maximum term of validity of 20 years, it doesn't matter whether a company was in great shape in the 1970s or 1980s (example: Motorola). Even a patent that is 19 years old (counting from the filing date, not the date of grant) will expire in a year -- even in Germany, where you can get an infringement ruling in less than a year, you might not get to enforce it before it expires. So as a rule of thumb I would focus today on a company's innovative and patenting activity from 1997 to 2007. Nokia was very much at the forefront of wireless innovation, including pre-iPhone smartphones, during that relevant period.

In May, Nokia brought infringement actions in the United States and Germany against HTC, Viewsonic and RIM. The patents it selected for those lawsuits cover a broad range of technologies, reflective of Nokia's engineering tradition.

At this early stage one has to be careful about assessing the prospects of a patent enforcement campaign, but it's fair to say that Nokia is off to a good start. First hearings on three of its lawsuits against RIM have already been held in Munich. Dozens of other hearings (and some trials) will take place over the next six months.

In mid-August, the Munich I Regional Court appeared inclined to agree that a Nokia antenna patent is indeed quite broad.On Thursday (October 25) I attended hearings on a couple of other patents: EP1148681 on a "method for transferring resource information" and EP1474750 on a "method and system for storing and transferring multimedia tags". The '681 patent may be infringed when two BlackBerry devices establish a direct connection via NFC. I don't know whether there are any Android devices out there that infringe this patent. For the '750 patent on multimedia tags there definitely is an Android issue: Nokia is also asserting this patent against HTC in Mannheim.

Tagging multimedia data is a typical social networking function, and Judge Dr. Matthias Zigann, the judge presiding over several Nokia v. RIM lawsuits in Munich, realized that an overbroad interpretation of this patent would affect virtually every smartphone or tablet computer out there that provides access to social networks via WiFi networks. Nokia clarified that its infringement theory primarily relates to devices that come with preinstalled Twitter and Facebook apps. The court appeared reasonably receptive to that theory, and RIM was struggling to deny responsibility for the operations performed by such apps.

There was laughter in the courtroom when Judge Dr. Zigann said that the graffiti community also uses the word "tag" for a name left on an object and explained that he acquired his awareness of graffiti terminology when he was prosecuting graffiti artists as a district attorney in one or more cases earlier in his career.

But apart from that anecdote, the hearing wasn't fun for RIM. Its counsel outlined several non-infringement arguments but RIM's defense may ultimately depend on its ability to convince the court that this patent is very likely to be invalidated in a parallel nullity action.

Next month the Munich-based court will discuss three more Nokia patents, one of which it's asserting against HTC, Viewsonic and RIM in parallel. I will follow these litigations as they unfold. At this stage I believe Nokia is likely to win a significant number of infringement rulings against these defendants in 2013.

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Pretrial decisions favor Apple against Google's Motorola in Wisconsin FRAND case

Motorola Mobility is in for two rough rides next month at the upcoming FRAND contract trials in Seattle, Washington (Microsoft) and Madison, Wisconsin (Apple). Two days ago I reported on Judge Barbara Crabb's note to the wholly-owned Google subsidiary that it may have to cope with overlaps between the two trials. In mid-August, Apple had scored a partial victory at the summary judgment stage. And late on Monday, Judge Crabb ruled on the parties' motions in limine (motions to exclude testimony or argument). On balance, those decisions favor Apple, but the judge sided with Motorola on a few questions, including a legal issue relating to the history of negotiations between the parties that Apple will have to overcome in order to receive a court-ordered FRAND license to Motorola's standard-essential patents (SEPs). Apple is on the winning track but it still has some work to do.

In the Washington/Microsoft case, Judge James Robart has also adjudged the motions in limine, but at this stage all that is known is that he granted some and denied some at the pretrial conference held yesterday. I will report on that case again as soon as further information becomes available.

Motorola fiercely opposed in both cases -- the Microsoft case and the Apple case -- the idea that the courts might set the terms of a FRAND license and take whatever measures necessary to ensure that such a license be put in place. Judge Robart in Seattle clarified on October 10 that his intent is to bring about a definitive solution, i.e., a license deal rather than additional SEP litigation. And Judge Crabb in Wisconsin reserves the same right. She denied Motorola's motion to preclude Apple from "seeking specific performance". In my comments on the headlines of the parties' sealed motions in limine I had already said that the most likely explanation was that Motorola wanted to prevent Apple from gettin a court-ordered license deal. Based on Judge Crabb's order, it turns out that this is indeed what "specific performance" meant here.

Not only does Judge Crabb say that if Apple proves breach of contract it may be entitled to a court-determined license agreement but she even thinks that this "may be the only appropriate remedy" in order to prevent further SEP assertions by Google's Motorola Mobility. Here's a complete paragraph from the order (click on the image to enlarge or read the text below the image) -- a paragraph that I believe will be cited in many FRAND disputes in the future:

I conclude that specific performance may be an appropriate remedy under the circumstances of this case. In fact, it may be the only appropriate remedy. As I held previously, Motorola's declarations to ETSI and IEEE constitute binding agreements to license its essential patents on fair, reasonable and nondiscriminatory terms, and Apple is a third party beneficiary to those agreements. Dkt. #194 at 42. As a third party beneficiary, Apple is entitled to a license of Motorola's patents on fair, reasonable and nondiscriminatory terms. Unless and until Motorola gives Apple a fair license to its declared-essential patents, Apple will continue to face the threat of patent infringement litigation from Motorola. It would be highly inefficient to require Apple to bring a new lawsuit for monetary damages or declaratory relief each time Motorola sues it for patent infringement. Additionally, it makes little sense to order the parties to continue negotiating a license when they have been unable to reach an agreement through five years of negotiations.

The degree of clarity that this paragraph provides and the focus on solutions that it reflects are representative of the entire 57-page order. Other federal judges handling smartphone-related cases have received much more attention so far because there's more public excitement about infringement cases than FRAND contract cases and because there's simply more press in California or Chicago than in Wisconsin, but I'm extremely impressed with Judge Crabb's no-nonsense style. The way she decides and writes is unfussy and to the point. And very importantly, she doesn't try to navigate around thorny issues: she deals with them.

In its Wisconsin FRAND case Apple benefits greatly from Microsoft's pioneering efforts to enforce a FRAND promise and from the FRAND part of Judge Posner's ruling, which addressed some of the issues that Motorola was trying to relitigate in Wisconsin. But Judge Crabb told Motorola that its ongoing appeal of Judge Posner's ruling does not change the fact that certain issues have been adjudicated by a district court. For example, Judge Posner threw out some Motorola SEPs because they were not valid or not infringed, and while this won't be taken into consideration with a view to the reasonableness of Motorola's original 2.25% royalty demand, it will be a relevant factor when determining the appropriate FRAND royalty rate based on what's known today. Also, Judge Crabb has concluded that Judge Posner has already adjudicated the question of whether Apple needed to make a counterproposal to Motorola before suing for breach of a FRAND pledge: it didn't have any such obligation.

But there's one issue in this context that Apple needs to take seriously (though it need not panic). The ETSI (3G, GPRS) FRAND rules say that licenses "may be made subject to the condition that those who seek licenses agree to reciprocate". Judge Crabb notes that neither party has previously given much attention to this clause. While Judge Posner's finding that Apple didn't have to make counteroffers and negotiate with respect to Motorola's 2.25% demand still stands, Motorola may get some mileage out of that reciprocity clause. It certainly won't be held in breach of its FRAND pledge only because it wanted a back-license to Apple's SEPs. And here's a more important ramification:

"Additionally, this provision suggests that Apple may have been required to engage in licensing negotiations related to its own patents. In other words, evidence that Apple refused to provide a license to its own patents or refused to engage in negotiations related to its own patents would be relevant to whether Motorola breached its contract with ETSI. Neither party has provided evidence or argument on this issue, so I cannot determine the significance of this provision at this stage. The parties should be prepared to address this issue at trial."

I don't think this is a loophole that will ultimately enable Motorola to bring and pursue abusive SEP assertions. And since I wasn't present at any Apple-Motorola meetings, I have no idea what Apple said about the grant-back option. Even if Apple can't prove that it addressed the grant-back issue satisfactorily, the court may nevertheless find that, on the bottom line, Motorola breached its contract through an unreasonable demand. Also, it's well-documented (and restated in yesterday's order) that the parties started talking in 2007, at a time when Apple may not have owned even one patent essential to an ETSI standard. It does own a number of them by now as it stated in a letter to Samsung in April 2012, but back in 2007 its ETSI SEP holdings may have amounted to zero, in which case the whole grant-back question is a non-issue.

Apple has some homework to do. Otherwise there's a risk of further delay before it finally obtains a FRAND license to Motorola's SEPs, despite the judge's belief that such a license "may be the only appropriate remedy". But if Apple comes up with some good points in this regard, it may soon be licensed on a worldwide basis to Motorola's SEPs (except that Google will presumably appeal such a decision).

I'm now going to quote the summary at the end of the order. Among the items I did not discuss above, one that's particularly worth paying attention to is the first one: while Judge Posner held that Motorola was not entitled to injunctive relief over FRAND-pledged SEPs, Judge Crabb found that this is not, all by itself, tantamount to a finding of a breach of contract. And with respect to item 18 I'd like to mention that Judge Crabb doesn't believe Apple can raise a patent exhaustion-related argument at this stage, and she says that "Apple's breach of contract theories premised on the Chi Mei and Qualcomm licenses [which Motorola terminated with respect to Apple as a third-party beneficiary] may be flawed". So I would count item 18 in Motorola's column even though Apple will be allowed to use Motorola's license agreements with those third parties as evidence for the unreasonableness of the 2.25% royalty demand.

1. Plaintiff Apple Inc.'s motion to preclude Defendant Motorola Mobility, Inc. from offering evidence or argument that it was entitled to seek injunctive relief or that it did not breach its contracts with ETSI and IEEE by doing so, dkt. #310, is DENIED.

2. Apple's motion to exclude evidence and argument that Motorola's patents ruled invalid or not infringed have value, dkt. #311, is GRANTED IN PART and DENIED IN PART. Prior decisions regarding validity and infringement of Motorola's declared-essential patents are relevant to the current fair, reasonable and nondiscriminatory rate for Motorola's standards-essential patent portfolio, but are not relevant to Motorol’s license offers made before the decisions were issued, as explained in this opinion.

3. Apple's motion to exclude evidence and argument that Apple must satisfy a condition precedent to trigger Motorola's licensing obligation, dkt. #312, is GRANTED.

4. Apple's motion to preclude Motorola from offering evidence or argument that it had a 'process' for complying with standards-setting organizations' disclosure policies, dkt. #313, is GRANTED IN PART and DENIED IN PART. Motorola cannot introduce any evidence at trial regarding its process for disclosing intellectual property rights unless it made that information available to Apple during discovery.

5. Apple's motion to preclude Motorola from offering evidence about why it purported to suspend its license with Chi Mei, dkt. #314, is GRANTED IN PART and DENIED IN PART. Motorola may present any evidence on this issue at trial that it provided to Apple during discovery.

6. Apple's motion to preclude Motorola from arguing that its cellular standards-essential patent rights were not exhausted as to the first iPhone, dkt. #315, is DENIED.

7. Apple's motion to preclude evidence and argument regarding opinions on alternatives from Motorola's technical experts, dkt. #316, is DENIED.

8. Apple's motion to exclude certain Motorola expert testimony, dkt. #317, is DENIED.

9. Apple's motion to exclude Dr. Leonard from opining on the correct royalty rate for Motorola's declared standards-essential patents, dkt. #318, is GRANTED IN PART and DENIED IN PART. Dr. Leonard may not testify about a particular rate or range that qualifies as a fair, reasonable and nondiscriminatory rate for Motorola’s standards-essential patents, but may offer opinions about whether Motorola's 2.25% offer was a breach of Motorola's contracts with ETSI and IEEE. Additionally, Dr. Leonard may offer criticisms of the methods used by Apple’s experts to calculate a particular rate.

10. Apple's motion to exclude testimony of Dr. Leonard relating to synergies, dkt. #319, is DENIED.

11. Apple’s motion to take judicial notice of Exhibits 1-45, dkt. ##322, 323, to the Sept. 28, 2012 Declaration of Richard Anthony Lopez, dkt. #321, is GRANTED.

12. Apple's motion for leave to rely on supplemental expert reports, dkt. #226, is DENIED.

13. Motorola's motion to preclude Apple from seeking specific performance, dkt. #280, is DENIED.

14. Motorola's motion to preclude evidence and argument relating to timeliness of patent disclosures to ETSI, dkt. #283, is DENIED.

15. Motorola's motion to determine the terms of ETSI and IEEE policies, dkt. #286, is DENIED.

16. Motorola's motion to preclude evidence and argument arising after January 4, 2011, dkt. #289, is GRANTED IN PART and DENIED IN PART. Both parties are constrained by the explicit prohibitions of their non-disclosure agreements, but may introduce evidence arising after January 4, 2011 that is not expressly prohibited by those agreements.

17. Motorola's motion to exclude evidence and argument concerning prior litigation judicial decisions regarding the patents-in-suit, dkt. #292, is DENIED.

18. Motorola's motion to exclude evidence and argument relating to non-parties Chi Mei Communications Systems and Qualcomm, dkt. #295, is DENIED.

19. Motorola's motion to exclude evidence and references to irrelevant standards and standards-setting bodies, dkt. #298, is GRANTED IN PART AND DENIED IN PART. Apple is precluded from introducing testimony and evidence regarding standards that are not at issue in this case and standards-setting bodies other than ETSI and IEEE, and ETSI and IEEE standards that are not at issue in this case, unless Motorola opens the door to such evidence and argument.

20. Motorola's motion to preclude the testimony and opinions of Dr. Louis Berneman, dkt. #301, is DENIED.

21. Motorola's motion to preclude the testimony and opinions of Dr. Dennis Carlton, dkt. #304, is DENIED.

p>22. Motorola's motion to exclude evidence or argument related to allegedly 'noninfringing alternatives' to Motorola patents, dkt. #307, is DENIED.

23. Motorola's motion to strike the supplemental expert report of Dr. Cimini, dkt. #218, is GRANTED.

24. Motorola's motion to strike the supplemental expert report of Dr. Brian Napper, dkt. #229, is GRANTED.

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Sunday, October 28, 2012

Judge to Google's Motorola: you may have to cope with two overlapping FRAND trials next month

Google acquired Motorola Mobility for $12.5 billion in hopes of being able to leverage its patents against Apple, Microsoft and others on whose intellectual property Android demonstrably infringes to a massive degree. But when Google bought Motorola, it also assumed obligations, one of which is to honor the FRAND licensing pledges it made to standard-setting organizations and, by extension, third parties relying on them. Motorola's FRAND promises are going to be at issue in two contract law trials next month. On November 5 (in a week from tomorrow), Apple's contract claims will go to trial in the Western District of Wisconsin, and eight days later, a Microsoft FRAND enforcement lawsuit from November 2010 will get its day in court in the Western District of Washington.

The wholly-owned Google subsidiary is struggling with this situation in two different ways, a logistical and a substantive one. The logistical one is that the two trials may very well overlap, but some witnesses are needed in both federal districts. The substantive part is certainly the more pressing problem: apart from appeals, Motorola's assertions of standard-essential patents (SEPs) against Apple and Microsoft could come to an end in a matter of weeks. Theoretically, Google's Motorola could still try different procedural maneuvers, but its chances of actually achieving something -- and of avoiding backlash from the courts adjudging the FRAND cases -- could be very, very slim, depending on the clarity provided by the courts in Seattle, WA and Madison, WI. Motorola particularly doesn't want the courts to take measures that would result in SEP license agreements.

On Tuesday (October 23, 2012), Motorola made an attempt to conflate procedural and substantive issues. It filed a "motion for guidance on trial schedule" in Wisconsin that was formally limited to the question of whether the Apple trial would be concluded before the Microsoft trial begins. Most of the text of the motion, however, addressed the scope of the trial, which is Motorola's primary concern. In the Microsoft case, Motorola brought an entire motion only to narrow the scope of the trial, and didn't gain any ground because Judge James Robart, while formally agreeing with Motorola that a breach-of-contract issue would be the subject of a subsequent jury trial, reaffirmed his game plan. He wants a true solution while Google's Motorola would rather keep the door open to even more problems. Further below I'll talk about how Microsoft and Motorola summarized their positions ahead of their trial. But let's stay in Wisconsin for a couple more paragraphs.

Motorola's motion for guidance on the trial schedule was, for the most part, a disguised summary judgment motion seeking to avoid in Wisconsin what Motorola couldn't avoid in Washington State: a FRAND rate-setting decision by a court of law. Motorola would be fine with this in Germany, where it recently felt forced to accept a licensing proposal from Apple and where the parties will meet in court, presumably next year, over the determination of a FRAND rate. But Motorola doesn't want this to happen in the United States, and especially not in a way that takes care of the FRAND licensing question on a worldwide basis.

Motorola's Wisconsin motion wasn't sealed, but Apple's response, filed on Friday at Judge Crabb's request, is inaccessible to the public. Anyway, a few hours after Apple filed its opposition, Judge Crabb entered a terse "text-only" order that didn't address Motorola's substantive concerns in the slightest and just told the Google subsidiary that the court doesn't plan to spend more time on this trial than necessary, but if things take longer, it's Motorola's (and not the court's) problem:

"Motorola has filed a request for guidance, directed to the scheduling of the trial set to begin on November 5, 2012 (dkt. [386].) At present, the trial is expected to run for two weeks. The court will make every effort to keep the trial to one week but can make no promises that it will not last longer. Motorola will have to work within this schedule and plan its witnesses' testimony accordingly. Signed by District Judge Barbara B. Crabb on 10/26/12."

This doesn't mean that the court will necessarily grant Apple's wish and engage in FRAND rate-setting. But it appears that the judge doesn't want to rule this possibility out, or commit to anything, at this stage. Motorola had argued in its motion that the trial could be concluded within one week unless it becomes a rate-setting trial and expressed concern about the fact that "[i]n its recent motion in limine oppositions, Apple intimated that it will request the Court to impose a royalty rate for the entire ETSI and IEEE global portfolios owned by Motorola". Yes, "global portfolios". If this worked out, the German FRAND rate-setting exercise might just be rendered unnecessary.

Motorola's lopsided version of reciprocity

In both cases (Wisconsin and Washington State) Motorola has already lost on some key contract law issues at the summary judgment stage, but it's still defending its position that its initial royalty demand of 2.25% (of the price of the relevant end product) did not constitute a breach of contract. And it disputes the courts' jurisdiction to determine FRAND rates. But it's limited in its ability to make its case, particularly in the dispute with Microsoft because of its October 2010 demand letters. Motorola is now trying to thread the needle and identify licensing terms that its demand letters did not specify (at least not in detail). This way, Motorola hopes to kill two birds with one stone, seeking to complicate things for the courts that are trying to bring about a solution (by telling the judges that setting a FRAND royalty rate is insufficient) and additionally trying to read some more reasonableness into its original demands than the October 2010 letters to Microsoft reflected.

Those original demand letters did make reference to a "grant back license" to Microsoft's patents essential to the same standards. And in the motion for guidance in the Apple case in Wisconsin, Motorola also argues that "the contracts at issue require reciprocal cross-licensing of essential patents".

I don't agree with Motorola that the courts need to set the terms for an SEP cross-license. As long as Apple or Microsoft don't seek injunctive relief based on their SEPs (which I'm sure they won't because they've made unequivocal statements in litigation and in public), there's no reason why the grant-back licensing terms couldn't be set later. Also, as far as Microsoft's H.264-essential patents are concerned, Motorola could easily license them under the terms of the MPEG LA AVC/H.264 pool, anytime -- as its corporate parent, Google, already has.

At any rate, Motorola uses the terms of a grant-back license as an argument in the Microsoft case for the claim that its original royalty demand (which corresponded to a $4 billion annual royalty figure) was FRAND (fair, reasonable and non-discriminatory). I'll now quote three paragraphs from Motorola's position stated in the proposed pretrial order for the Microsoft case and will comment below each quoted paragraph. Motorola references some of its Proposed Findings of Fact -- the relevant passages were redacted in that document, but the tentative pretrial order sheds light on what they say (even though it doesn't state all the numbers).

"1. The [F]RAND royalty for a license to Motorola's H.264 SEPs is 2.25% of the net selling price ('NSP') of licensed products (e.g., Microsoft's Xbox 360 or Windows OS software), based on a hypothetical negotiation between the parties considering the relevant evidence (e.g., Motorola's past licenses, the strength and value of Motorola's patents, and the use of Motorola's patents by Microsoft). Based on that same evidence, an appropriate cap should apply to any net royalties payable to Motorola. The royalty due to Motorola would be offset by a [F]RAND royalty for a license to Microsoft's H.264 SEPs which also is 2.25% of the NSP of licensed products (e.g., Motorola's smartphones and set-top boxes), based on a hypothetical negotiation between the parties considering the relevant evidence (e.g., the relative strength and value of Microsoft's patents and the use of Microsoft's patents by Microsoft)."

The royalty base stated above is grossly inconsistent with Motorola's October 2010 demand letters, which explicitly ruled out that the royalty would be a percentage of Windows revenues, stressing that the total price of the relevant end product, such as a laptop computer running Windows, would be the royalty base. Motorola has backtracked in this regard -- and we're not talking about a subtlety but about billions of dollars per year. After the November 13 FRAND rate-setting trial, the breach of contract issue will be decided based on whether Motorola's initial royalty demand was "blatantly unreasonable". If Motorola now argues that Windows sales -- not PC sales -- are the appropriate royalty base, the difference between what it wanted then and what it claims now is probably more than what's needed to conclude that the original demand was blatantly unreasonable and, as a result, constituted a breach of a FRAND contract.

"2. The [F]RAND royalty for a license to Motorola's 802.11 SEPs is 2.25% of the NSP of licensed products (e.g., Microsoft's Xbox 360) based on a hypothetical negotiation between the parties considering the relevant evidence (e.g., Motorola's past licenses, the strength and value of Motorola’s patents, and the use of Motorola’s patents by Microsoft). The royalty due to Motorola would be offset by a [F]RAND royalty for a license to Microsoft's 802.11 SEPs which is 0.25% to 0.5% of the NSP of licensed products (e.g., Motorola smartphones and tablets), based on a hypothetical negotiation between the parties considering the relevant evidence (e.g., the relative strength and value of Microsoft's patents and the use of Microsoft's patents by Microsoft)."

Motorola hopes that its 2.25% royalty demand appears more reasonable in the H.264 context by suggesting that Microsoft's H.264 patents have the same value. For IEEE 802.11 (WiFi, or WLAN), Motorola suggests that Microsoft is entitled to a fraction of that percentage.

What appears to be a quid pro quo with respect to H.264 is, at a closer look, as nonsensical as it is asymmetrical. It makes no sense because Microsoft's position -- and not only Microsoft's but also that of many other major industry players -- on the appropriate H.264 royalty rate is already expressed by its participation in the MPEG LA AVC/H.264 pool. A license to the entire pool would cost a small fraction of what Motorola now sort of "offers" to pay for Microsoft's share of the pool. But even if we forget about that context for a moment, it's an asymmetrical proposal since Microsoft's revenues with H.264-compatible products dwarf Motorola Mobility's related sales. Also, the question of apportionment (under the Entire Market Value Rule) is not resolved by simply saying that Microsoft can also collect a percentage of the end product price.

"4. Based on the royalty rates discussed above for the parties' H.264 portfolios and each party's relative exposure, Microsoft would owe royalties as set forth in Motorola Proposed Finding of Fact 472(h). However, the parties would have agreed to a reasonable cap as set forth in Motorola Proposed Finding of Fact 472(i). Depending on the structure for payment, a running royalty for Windows would be as set forth in Motorola Proposed Finding of Fact 472(j)."

Motorola's suggestion that "a reasonable cap" would have been part of a negotiated license deal does not have any support in Motorola's October 2010 demand letters -- but Motorola will presumably argue that its original letters were more reasonable than they appear at first sight if one considers that negotiation might have changed something. However, two years ago Motorola gave a pretty clear ultimatum to Microsoft, and it asked for a percentage without any indication of the possibility of a royalty cap.

Having followed this dispute for a couple of years, I must say that I was very surprised to find a reference to a "royalty cap". Not only is it new but it also seemed counterintuitive to me. I'm not aware of any case law that requires a royalty cap. If someone wants to maximize his FRAND royalty income, he would usually just argue that if a percentage is FRAND, it should be applied to all product sales. But as I said before, Motorola is seeking to justify its 2010 demand letters. If it weren't for that reason, I doubt very much that it would ever have argued that its royalties should be capped.

The proposed royalty cap for Windows is stated in one of the redacted passages of the joint proposed pretrial order. It won't be a small amount, I'm sure. And even with the royalty cap, Motorola would still try to inflate H.264 (and IEEE 802.11) royalties in order to leverage the asymmetry between the two companies' revenues.

To the general public, the upcoming November FRAND trials in Wisconsin and Washington State will be much less exciting than infringement trials such as Apple v. Samsung. But they will raise some interesting questions such as that of a FRAND royalty cap and will likely result in landmark decisions, unless Google (Motorola) elects to solve the scheduling conflict between the two trials by settling the FRAND parts of these disputes next week. There's no particular reason to assume that it will happen. But it's always a possibility, in any dispute, that the parties' lawyers show up on the first trial day and announce a settlement.

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Friday, October 26, 2012

Oracle enlists additional high-profile copyright lawyers for Google Java appeal

Three weeks ago I reported on Oracle's notice of appeal of the final ruling of the United States District Court for the Northern District of California in the Java-Android intellectual property dispute. As I explained then, it would take Oracle two steps (prevailing on copyrightability and defeating the "fair use" defense) to win the copyright part of the case. Unlike Samsung in the Apple case from the same district, Oracle does not need to have a jury verdict reversed on the copyright side. Copyrightability was decided by the judge, and "fair use" was not decided by anyone (as opposed to Google having prevailed on it, as it did only in the world of spin).

Simply put, the hurdle that Oracle's appeal faces is not a function of the amount of damages Oracle was awarded and the ones it was once seeking (with any six-billion figure having been due to Google's misleading representation of Oracle's position in a filing). This case is pretty much an all-or-nothing case, not a million-dollar or billion-dollar bargaining exercise where you may meet in the middle. It's about injunctive relief more than anything else, a fact that has not changed on appeal. In the end, Oracle itself waived its damages claims for the purpose of the initial district court proceedings). The chances of Oracle's appeal hinge on the logic of the case and the decisions that have worked out in its favor, such as an API copyright infringement finding by the jury that the appeals court, or the district court on remand, could easily supplement with a judgment as a matter of law on the "fair use" issue. If Oracle had been awarded, say, 500 million dollars, its case would obviously appear stronger to the outside, but if it had to overcome, in its pursuit of injunctive relief, more hurdles (and/or higher ones) than the two I just mentioned (neither of which his high as far as the standard of review is concerned), its appeal would actually face a steeper challenge, as counterintuitive as it may seem.

The Federal Circuit case number is 13-1021. Google also appealed, and there's a second case number (13-1022), but both appeals are proceeding now as a unified cross-appeal.

Not much has happened so far, but over the last couple of days, several interesting appearances of lawyers on Oracle's behalf were entered. I rarely report on lawyer appointments (I would usually refer people to American Lawyer Media, which operates, but if such appointments provide indications as to the importance of a matter or the likely strategy, then I occasionally comment on them as well. I reported on David Boies' short-lived representation of Barnes & Noble against Microsoft and John Quinn's appearance on Samsung's behalf (almost four months before the California trial at which he had a key role). In the Oracle v. Google case, the appointments that were made these days confirm that the focus will be on copyright, even though Oracle's team also has a fair amount of patent expertise. And it's absolutely clear that Oracle is as determined as ever to prevent Google from further implementing its "embrace, extend, extinguish" strategy for Java.

Michael Jacobs (who defended Linux against SCO and was one of the leaders of Apple's winning team in the Samsung trial) and his Morrison & Foerster team are now going to work together with colleagues from Kirkland & Ellis and Orrick Herrington & Sutcliffe, two firms that, like MoFo, do a lot of work for Apple, these days especially in connection with Android (such as certain disputes with HTC).

The leader of Kirkland's Copyright, Trademark and Internet Practice Group, Dale Cendali, is an adjunct professor at Harvard Law School, teaching copyright and trademark litigation and has argued copyright matters all the way up to the Supreme Court. Diana Torres from Kirkland's L.A. office has also handled various high-stakes copyright cases, some but not all of them involving the entertainment industry, a sector in which copyright issues are litigated more frequently than in any other. Among other clients, Mrs. Torres represented the Motion Picture Association of America as an amicus curiae in an appeal relating to Napster.

Four lawyers from Orrick also bring a combination of appellate and IP expertise to the table. Let me quote just one sentence about Joshua Rosenkranz from his web profile:

The American Lawyer named Mr. Rosenkranz "Litigator of the Year" in its January 2012 edition, dubbing him "the Defibrillator" based on his streak of appellate wins for companies that "appeared to be at death's door."

Just to be clear, Oracle's case is not "at death's door" for the reasons I explained further above. But there are a few commentators out there who suggested so, including Linus Torvalds, who (as usual) did not really explain his reasoning. And this "Debrillator" is now going to work hard to prove them wrong. He is, by the way, also trying to salvage an Apple touchscreen patent.

Orrick's Mark Davies co-leads the team appealing the ITC's decision against Apple's complaint against Motorola. His appellate cases also include some copyright matters. Interestingly, one of them involved copyright of short phrases, which is related to one of many aspects of the API copyrightability issue, and copyright registration (on which Google based some of its arguments).

Two other Orrick lawyers, Gabriel Ramsey and Annette Hurst, are IP generalists with a lot of copyright expertise. Mrs. Hurst previously dealt with "fair use" issues in an appellate proceeding.

The issues of API copyrightability and "fair use" are important ones not only to Oracle and Google but to the industry at large. This case still has the potential to make history, and the Federal Circuit will without a doubt be fully aware of the importance of this matter from an intellectual property point of view. This will be one of the most interesting Federal Circuit proceedings in 2013.

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Thursday, October 25, 2012

Google's Motorola Mobility withdraws WiFi patents from Microsoft Xbox ITC case

Wholly-owned Google subsidiary Motorola Mobility has narrowed the remanded ITC investigation of its complaint against Microsoft's Xbox gaming console by 50%. Motoorla dropped two WiFi-related patents from the case, leaving only two H.264 (video codec) patents. Motorola's motion for partial termination, which is not based on any kind of settlement but which Microsoft obviously doesn't oppose, was filed yesterday and just entered the public record. Here's the header section of the motion (click on the image to enlarge or read the text below the image):


Investigation No. 337-TA-752 (Remand Proceeding)


Pursuant to Commission Rule 210.21(a)(1), Complainants Motorola Mobility LLC and General Instrument Corporation (collectively "Motorola") respectfully request termination of the subject Investigation in part with respect to U.S. Patents No. 5,319,712 and No. 5,357,571 (collectively "the 802.11 Patents"). This termination is sought on the basis of Motorola's withdrawal of its allegations against Respondent Microsoft Corporation ("Microsoft") pertaining to the 802.11 Patents in this Investigation.

In late June, the ITC's top-level decision-makers remanded this investigation, which was instituted based on a complaint Motorola brought in November 2010, to an Administrative Law Judge. The remand notice provided certain instructions that suggested that Google was rather unlikely to get leverage out of this investigation. One of the issues relates to method claims -- I just mentioned that topic yesterday in connection with Microsoft's appeal of its own ITC case against Motorola. The asserted claims from the two IEEE 802.11 (WiFi, or WLAN) patents that Motorola has just withdrawn were method claims. One of the H.264 patents remaining in the investigation faces the same issue.

Microsoft says it's entitled to a reciprocal H.264 patent license from Motorola Mobility's parent company due to an MPEG LA-Google license agreement. That contract issue could, all by itself, take care of the remaining two patents in the investigation.

The target date for the remanded investigation is July 23, 2012. A hearing will take place on December 5 and 6, and a remand initial determination (a preliminary ruling by a judge) is scheduled for March 22, 2013. Motorola's partial withdrawal reduces the risk of further delay. In fact, if a Microsoft motion for summary judgment concerning Google's grant-back obligation vis-à-vis all MPEG LA AVC/H.264 patent pool contributors succeeds, the case will just go away, possibly even prior to the upcoming evidentiary hearing.

Earlier this month, Google's Motorola Mobility withdrew its entire second ITC complaint against Apple. Just like in the Microsoft case, the motion clarified that no agreement existed between the parties. That particular termination has meanwhile been approved by an Administrative Law Judge and the Commission, the six-member decision-making body at the top of the ITC. This week's motion in the Xbox case will likely also be approved in the short term.

Next month, a Microsoft contract lawsuit to hold Motorola Mobility to its FRAND licensing promise will take place in Seattle. The parties filed a joint proposal for a pretrial order, in which they laid out their positions on that case (they unsurprisingly disagree on key issues).

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Wednesday, October 24, 2012

Preliminary ITC ruling finds Samsung in infringement of four Apple patents

Previous ITC decisions either cleared Android devices of violation of the asserted patents (Apple's three-patent complaint against Motorola) or identified a violation with respect to only one or two patents at a time. But on Wednesday, Administrative Law Judge Thomas B. Pender issued a preliminary ruling in Apple's favor against Samsung over four patents: one design patent, one hardware patent, and two multitouch software patents.

In its original complaint filed in July 2011, Apple had asserted five utility (technical) patents and two design patents. The case was streamlined in March through the withdrawal of one patent (and 15 claims of two other patents). Judge Pender's preliminary ruling does not find a violation with respect to two of the six remaining patents.

The total number of valid Apple and Microsoft patents that Android-based devices have been held by courts around the world and the ITC to infringe has now increased to 20. Twenty. Such findings were made with respect to 16 other patents prior to Judge Pender's initial determination, while the Android camp is much less successful with its counterclaims, especially because it's enforcing injunctive relief over only one patent (in Germany).

These are the patents Samsung infringed according to Judge Pender:

  • U.S. Design Patent D618,678 on an "ornamental design of an electronic device"

  • U.S. Patent No. 7,479,949 on a "touch screen device, method, and graphical user interface for determining commands by applying heuristics" (which Apple wanted to call "the Jobs patent" in a trial in Judge Posner's court that never took place)

  • U.S. Patent No. RE41,922 on a "method and apparatus for providing translucent images on a computer display"

  • U.S. Patent No. 7,912,501 on an "audio I/O headset plug and plug detection circuitry"

The above findings don't surprise me. Back in March I analyzed Judge Pender's claim construction decision and saw Apple basically on the winning track with respect to these patents.

The ITC has the authority to impose U.S. import bans, but the actual impact that such a ban can have on Samsung's U.S. business will depend on two key factors:

  1. Judge Pender's holdings are now subject to a Commission review, which Samsung will surely request. The Commission is the six-member decision-making body at the top of the ITC and usually hands down a final ruling four months after the initial determination. It has previously overruled its ALJs in many cases, and sometimes to a large extent. Even Apple has experienced this before: in the summer of 2011 it won a preliminary ruling (from a different ALJ) against HTC over two patents, but ultimately only the less powerful one of the two was deemed violated. The Commission has recently remanded the investigations of Motorola Mobility's complaints against Apple and Microsoft.

  2. The key issue as always are workarounds and designarounds. Import bans or injunctions don't apply to products that don't actually infringe the relevant intellectual property rights.

    According to Judge Pender's initial determination (and a headline of a request for briefing that I discovered and blogged about in early September), Samsung has presented to the ITC modified versions of its products that work around the three utility patents found infringed. Details on those workarounds are not available yet, raising the question of whether they merely steer clear of infringement through substantial degradations of the user experience (in a worst-case scenario the removal of features) or preserve most of the user benefits of the claimed inventions while being on the legally safe side. More information will be available when the public redacted version of Judge Pender's initial determination is published, which will presumably take a couple of weeks (at least).

    By presenting designaround products to the ITC during the original investigation, Samsung sought to eliminate or at least reduce the potential for enforcement disputes (such as the one in which Apple says HTC's current U.S. products still infringe on a patent in violation of an import ban ordered last December). If Samsung implements any designarounds cleared by the ITC, it's on the safe side and its products won't be seized at customs. If it ultimately implements designarounds that are not identical to the ones presented to the ITC, there can still be a dispute, but the fact that a designaround was cleared may increase the likelihood of clearance of future designarounds.

    The initial determination doesn't mention a designaround for the D'678 patent, but design patent infringement can always be avoided.

This preliminary ruling provides further validation to Apple's long-standing claims that Android-based devices infringe its intellectual property, but it's too early to tell whether the U.S. import ban that Apple may win on this basis is going to constitute a tipping point in the dispute. As soon as more details surface on Samsung's designarounds (hopefully those won't be redacted too ehavily), I'll analyze them just like I discussed the workarounds Samsung claims to have developed for the three multitouch software patents a California jury found infringed two months ago.

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Microsoft asks appeals court to ban Motorola's Android-based devices over four more patents

In May, Microsoft won a U.S. import ban against Motorola's Android-based devices over a meeting scheduler patent. In the meantime, Microsoft has won three German injunctions against Motorola over patents relating to text messaging, file systems and input methods.

In June, both Microsoft and the wholly-owned Google subsidiary appealed the ITC decision. While Motorola Mobility is attempting to get the import ban lifted (in order to be able to re-implement the feature covered by Microsoft's patent), Microsoft appealed certain parts of the ITC ruling that didn't work out in its favor and prevented it from scoring a multi-patent win in an effort to convince Motorola Mobility of the need to take an Android-related patent license from Microsoft as Samsung, HTC, LG and others have done.

Today the public redacted version of Microsoft's opening brief entered the public electronic record. Microsoft picked four patents for this appeal. It could have appealed the ITC ruling with respect to a couple more patents but decided to focus. For example, one of the patents on which it isn't trying to prevail at this stage is so close to expiration that even a successful appeal would make actual enforcement unlikely (justice delayed is justice denied). From a timing perspective, this appeal to the Federal Circuit is most likely Microsoft's nearest-term opportunity to prove Android's infringement of more of its U.S. patents and to reach a tipping point at which Google, Motorola Mobility's owner, may agree that a royalty-bearing license deal is the commercially most intelligent choice. All of Microsoft's claims against Motorola in federal court have been stayed (just like Motorola's claims against Microsoft) in order to focus on certain FRAND contract issues. It's unclear when the district court will finally adjudge those claims, but Federal Circuit appeals of ITC decisions take only about a year from docketing, making this appeal likely to be resolved before any infringement ruling by the United States District Court for the Western District of Washington.

These are the four patents at issue in this appeal (in the order in which they appear in Microsoft's brief):

For each patent, Microsoft has to overcome a finding of non-infringement. For three of the four patents, the ITC also denied the existence of a domestic industry, which is a requirement for an ITC import ban. One key issue in the domestic industry context is that Windows Mobile devices sold in the U.S. by third parties were not recognized as domestic industry products, and that Microsoft's substantial U.S. investments in exploitation of its patents weren't recognized either. Considering that the Federal Circuit clarified in a different case (in which InterDigital, a non-practicing entity, was the appellant) that the domestic industry requirement is not limited to the sale of products implementing a patent (because Congress would otherwise have said so in the statute governing the ITC), there's case law from this same appeals court that may very well help Microsoft. This is just one issue, but an important one for one of the patents, and with more favorable claim constructions, Microsoft could prove a domestic industry -- and infringement -- for all four patents. For one of the patents (the '762 patent) Microsoft disagrees with the ITC's claim construction but doesn't challenge that interpretation on appeal, focusing instead on its position that the accused products infringe the asserted claims of that patent even under the ITC's construction.

These are the issues presented by Microsoft's appeal -- as you can see, claim construction plays a key role, and it's particularly easy to reverse on appeal:

  • Technical Prong of Domestic Industry:

    1. Did the Commission err by construing section 337(a)(3)(C), contrary to its language, legislative history, and prior decisions of the Commission and this Court, to require the production and sale of domestic products that embody the patented invention?

    2. Did the Commission err in any event by finding that Microsoft had failed to establish that domestic products practice its '762, '376, and '054 patents?

  • U.S. Patent No. 6,578,054 ("the '054 patent"):

    1. Did the Commission err in construing the "resource state information" limitation of the asserted claims contrary to its ordinary meaning?

    2. Did the Commission err in finding that the Accused Products do not utilize "resource state information"?

  • U.S. Patent No. 7,644,376 ("the '376 patent"):

    1. Did the Commission err in construing the "notification broker" and "client applications" limitations of the asserted claims contrary to the intrinsic evidence?

    2. Did the Commission err in finding that the Accused Products do not infringe even under its claim construction?

  • u.s. Patent No. 6,826,762 ("the '762 patent"):

    1. Did the Commission err in finding that the Accused Products do not infringe the asserted claims as construed by the Commission?

  • U.S. Patent No. 5,664,133 ("the '133 patent"):

    1. Did the Commission err in holding that limitations requiring that menu selections be "related to" or "associated with" data objects or containers require not only that the menu selections bear some relationship to the objects or containers, but also that the relationship be established or determined before the menu selections are retrieved?

    2. Did the Commission err in construing the limitation requiring that a menu be displayed "in the proximity" of a graphical representation of a data object to require that the menu be "deliberately" placed in that position?

    3. Did the Commission err in finding that the Accused Products and MMI's "Alternate Design" do not infringe the asserted claims?

As far as the standard of review is concerned, I said before that claim constructions are easily overturned. A high percentage of claim constructions in U.S. patent litigation are modified on appeal. For infringement findings (the application of a given claim construction) the hurdle is higher. But there are other factors that determine the likelihood of success of an appeal.

For the '054 patent, the ITC arrived at a narrow claim construction (requiring version information in objects that only serve to inform a software component of the fact that the state of another object has changed). Unless the ITC, with Motorola's support, can defend that peculiar construction, the finding of non-infringement may also be reversed. It appears that there isn't a genuine dispute over any of the other claim elements.

Microsoft has two ways to prevail on the '376 patent. It either needs a less narrow claim construction or a new infringement finding under the ITC's own construction.

For the '762 patent I explained above that Microsoft focuses just on the infringement finding under the ITC's claim construction. It's a given that Motorola Mobility will point the Federal Circuit to the Mannheim Regional Court's recent finding of non-infringement with respect to a European member of the same patent family. But this will have limited weight since these are different jurisdictions and the Federal Circuit would view a German appeals court as its peer. I didn't see the written Mannheim ruling (these decisions are rarely published in Germany), but I attended the trial and there's at least a possibility of differences in claim construction.

Microsoft would need two claim construction wins with respect to the '133 patent, but again, claim constructions are frequently reversed.

An observation I'd like to share in closing is that Microsoft's asserted claims (one patent can have many times and a plaintiff can assert multiple claims from the same patent) include a couple of method claims, and Microsoft's argument concerning those claims makes reference to the ITC ruling on now-HTC-subsidiary S3 Graphics' complaint against Apple, which also plays a key role in the remanded investigation of Motorola Mobility's complaint against Microsoft. In a footnote, Microsoft clarifies that it supports the ITC position that post-importation infringement of method claims, without an infringement through importation itself, can't give rise to import bans. But since the appeal of the S3 Graphics case is before the same court now and a few months ahead, the Federal Circuit will most likely rule on that one before it decides any of the Microsoft-Motorola cases. In the event that the Federal Circuit disagrees with the ITC, Microsoft just wants to ensure that the same standard also be applied to the method claims it's asserting against Motorola.

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Dutch court rules (again) that Samsung doesn't infringe Apple's touch event model patent

The Rechtbank 's-Gravenhage, a court of first instance based in The Hague, Netherlands, today handed down its decision (in Dutch) on an Apple infringement claim against Samsung based on EP2098948 on a "touch event model". The Dutch court now reaffirmed in a full-blown main proceeding the finding of non-infringement of EP'948 that it made in a fast-track proceeding in August 2011, when it granted Apple a preliminary injunction against Samsung over a photo gallery page-flipping patent but did not hold Samsung liable for infringement of EP'948 (and Apple's tablet design right).

This non-win was expected. The Dutch court was the first European court to throw out this patent (which would have quite some impact if Apple's interpretation of its scope ever was adopted), and in between the preliminary injunction denial and today's final (though appealable) ruling, Apple was unable to prevail on this patent against Samsung and Motorola in Mannheim, Germany, and against HTC (in a declaratory judgment action initiated by the Taiwanese handset maker) in London.

Today's The Hague ruling notes that the outcome in favor of defendants is consistent with the UK and German decisions. But with a view to Apple's likely appeals in one or more jurisdictions, it's worth noting that the underlying logic of the decisions differs in some ways:

  • Only the UK court declared the patent invalid. The Dutch and German rulings did not reach that question. In Germany, courts dismiss a case if they don't identify any infringement, and if they have serious doubt about the validity of an infringed patent, they merely stay a case, with (in)validity being determined in a separate nullity action. In the Dutch case, Samsung brought an invalidity counterclaim but only for the event of an infringement finding, which rendered it moot. Even though the court didn't have to adjudge Samsung's validity counterclaim, Apple has to bear the costs. The legal fees related to this proceeding that Apple owes Samsung amount to approximately $400,000.

  • In Mannheim, Samsung's first non-infringement argument (for details on Samsung's defenses see my reports on the two Mannheim trials; 1, 2) carried the day. Today's Dutch ruling is based on Samsung's second non-infringement argument, which had considerably less traction in Germany than the first one but was successful in the UK. I can't rule out that the second non-infringement argument would also have succeeded in Germany if the case had hinged on it.

The validity of this patent is under attack at the European Patent Office (EPO). Third parties can oppose the grant of an EPO patent within nine months. Thereafter, a patent can only be challenged on a country-by-country basis in national courts. This patent was granted in February 2011. Samsung filed its opposition in November 2011, just about in time to be admissible. HTC and now-Google-subsidiary Motorola Mobility joined the opposition proceeding later as intervenors. The three Android companies made their most recent filing in late June (apparently a reply brief to an Apple pleading).

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Tuesday, October 23, 2012

Judge 'skeptical' of FRAND position Google's Motorola will present at Microsoft trial

Against Microsoft's objections, wholly-owned Google subsidiary Motorola Mobility will be allowed to defend its well-known 2.25% royalty demand at a FRAND rate-setting trial in the Western District of Washington starting November 13, but the federal judge presiding over this litigation, Judge James L. Robart, has already declared himself "skeptical of Motorola's position" that it can base its royalty demand on the selling price of the relevant end products rather than the portion of this market value that is attributable to the relevant standards, IEEE 802.11 (WiFi, or WLAN) and H.264 (video codec).

The order, which denies both parties' Daubert motions seeking to exclude each other's FRAND royalty reports, was entered yesterday and entered the public electronic record today.

The expert reports themselves are sealed, and only versions of the Daubert pleadings are available. On September 8 I blogged about the Daubert motions and the responsive briefs. Three days later I commented on the parties' reply briefs. While not directly related to the Daubert motions, a Ninth Circuit ruling that came down later that month in Microsoft's favor is also worth mentioning.

Meanwhile Microsoft and Googlorola have also filed a variety of other motions to exclude evidence or argument, raising partly overlapping issues. I wrote about this a week ago and said the following at the end of that post:

I have no idea how Judge Robart is going to adjudicate the parties' Daubert motions and other motions in limine. Since the November 13 trial will be a bench trial, he doesn't have to worry about juror confusion. If there's something he doesn't buy, he can throw it out now or he can let a party present such an argument anyway even if it's unlikely to succeed. The EMVR [Entire Market Value Rule] issue is a key one that could be addressed ahead of the trial, and it appears ripe for a decision.

Judge Robart's approach to the Daubert order was clearly the permissive one: he didn't want to exclude testimony at this stage if any criticism, no matter how well-founded, goes to the weight and credibility of the testimony (which is a matter of, among other things, cross-examination at trial) as opposed to its admissibility. As a result, the bar was very high -- too high for the parties' Daubert motions.

Motorola will have to respond at trial to Microsoft's FRAND royalty theory based on the idea of multilateral ex ante (pre-standardization) negotiations. Judge Robart notes that the ex ante approach to standards patent royalty negotiations "has been endorsed by numerous publications and the Federal Trade Commission". Judge Robart does agree that hold-up and royalty-stacking are valid concerns and that "Microsoft's proposed framework reasonably relies upon and logically addresses widely acknowledged and published concerns of hold-up and stacking found in licensing standard essential patents". Also, "[t]he fact that multilateral license agreements for standard essential patents, including the H.264 patents, do indeed occur in practice adds to the reliability of Microsoft's proposed framework". Nevertheless, the order acknowledges that there may be some difference between an ex ante negotiation and "Motorola's ex post promise that it license its standard essential patents on [F]RAND terms". But there's no reason why Microsoft couldn't present its theories.

Microsoft objected to Motorola's report on three grounds. It argued that Motorola's testimony is unreliable because it starts with the usual 2.25% royalty demand it previously made in connection with cellular standards, which are something else than IEEE 802.11 and H.264. Microsoft also alleges Motorola's expert's failure to properly account for he value of Motorola's patents essential to those standards. The order doesn't say that Microsoft's criticism is necessarily wrong, but Judge Robart declined to hold Motorola's testimony inadmissible.

A third Microsoft argument, however, almost succeeded. Microsoft argued that the Entire Market Value Rule (EMVR), a theory commonly used in connection with patent damages, requires the apportionment that Motorola refused to do by basing its royalty demands on the price of the relevant end product. The order recalls that "the court has already expressed skepticism that an appropriate [F]RAND royalty rate for Motorola's standard essential patents should be based on the end product price of Microsoft's products" and agrees with Microsoft that "Motorola's standard essential patents only relate to the 802.11 and H.264 capabilities, which in turn only constitute a portion of Microsoft's end products". It even goes as far as to say that "[i]t would thus seem illogical to turn around and base a [F]RAND royalty on the end product price".

But the outcome-determinative consideration in this regard was that Microsoft sought exclusion of this testimony for violation of the EMVR, and Judge Robart's understanding of the EMVR is that a royalty rate can be based on the end product even without a showing that the patented features create the basis for customer demand. Judge Robart particularly relies on the Federal Circuit's Lucent Technologies, Inc. v. Gateway, Inc. opinion, in which this appeals court found that "the base used in a running royalty calculation can always be the value of the entire commercial embodiment, as long as the magnitude of the rate is within an acceptable range (as determined by the evidence)". Since Microsoft argued that use of the wrong royalty base is, in and of itself, a violation of the EMVR, Judge Robart denied its Daubert motion despite the skepticism I mentioned before.

The EMVR has previously been criticized as not being hard and fast enough to prevent overcompensation of patent holders, and this Daubert decision suggests to me that there really is a need for stricter rules at least in connection with standard-essential patents. The idea of the royalty base and the royalty rate just being two variables and that a combination of them can be acceptable no matter what the royalty base is doesn't convince me. I think this applies only to negotiations in which parties can agree on a rate without a legal dispute. But once there's a controversy, there's a need for clear-cut rules that make the determination of an appropriate royalty rate reasonably likely. Considering royalty base and royalty rate just two variables that can be combined in all sorts of ways is a recipe for confusion.

By expressing skepticism of Motorola's position, Judge Robart has made clear that there's a problem. If I were Google (Motorola), I wouldn't be thrilled by the prospect of going into a trial with a theory that the presiding judge, who in this case will decide without a jury (it's a bench trial), views skeptically. But there will be other FRAND cases in the future, and some of them will involve juries. If companies are allowed to argue at a trial that a seemingly low percentage of a grossly-inflated royalty base is acceptable, some juries may buy it. There's actually a high risk that many juries will set excessive royalty rates on that basis.

In this Seattle action, the rate-setting exercise itself won't involve a jury. But again, the question is what framework should be applied in the future. What if someone starts suing Boeing over WiFi patents and seeks an allegedly modest percentage? Wouldn't it be preferable then to limit the royalty discussion to the WiFi component of the airplane as opposed to discussing percentages?

Judge Robart has already made very important contributions to FRAND case law. I think there's a very good chance, especially in light of the skepticism he expressed, that his FRAND rate-setting order after the bench trial is also going to help provide clarity, and if it is upheld by an appeals court just like his antisuit (or, more precisely, anti-enforcement) injunction was affirmed, then it may be much harder for future litigants to ignore the EMVR, in the FRAND rate-setting context, in the way Motorola proposes to.

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U.S. Department of Justice investigating Samsung's use of standard-essential patents against Apple

An Apple filing with the International Trade Commission, a U.S. government agency with quasi-judicial authority that can impose import bans on patent-infringing products, reveals another ongoing antitrust investigation concerning suspected abuse of FRAND-pledged standard-essential patents. Apple said this much in its statement on public interest considerations relevant to the investigation of Samsung's complaint. In that statement, which was filed with the ITC on Monday and entered the public record today, Apple avers that "the [United States] Department of Justice has opened an investigation into the manner in which Samsung has used--or misused--its declared-essential patents". Here's the relevant passage (click on the image to enlarge):

I have no doubt that Apple's representation is accurate because Apple would otherwise risk major problems with the ITC and the DoJ. Also, this is consistent with (but more definitive than) what an unidentified source told Bloomberg in June. According to that June 30 report, "U.S. antitrust regulators have agreed the FTC will focus on Motorola Mobility and the Justice Department will scrutinize Samsung Electronics Co.'s handling of industry-standard patent claims". The source couldn't tell Bloomberg if any information demands have been issued. Apple's filing with the ITC suggests that this has meanwhile occurred. Most likely, the DoJ investigation is at a preliminary stage now but could result in the launch of full-blown investigation anytime.

As Apple notes, the European Commission already started a formal investigation of Samsung's use of SEPs in late January (followed by the launch of two similar investigations of now-Google-subsidiary Motorola Mobility's conduct in April). On Friday, one of Samsung's German counsel expressed doubts in open court over the speed and resolve of the EU's top competition enforcer.

In early September it became known that South Korea's Fair Trade Commission is also investigating Samsung's use of SEPs.

On Friday (October 19), the Wall Street Journal reported, citing an unidentified source, that Google is contemplating a settlement with the U.S. Federal Trade Commission with respect to its wholly-owned subsidiary Motorola Mobility's pursuit of injunctive relief based on SEPs.

U.S. and EU antitrust authorities, Korea's Fair Trade Commission and competition regulators from other parts of the world also participated in a patent roundtable hosted two weeks ago by the International Telecommunication Union (ITU), a United Nations agency.

Regulators are rightly concerned about the aggressive use of SEPs by companies whose ultimate goal is to force others into broad cross-license agreements involving non-standard-essential product differentiation patents.

The context of the filing: public interest considerations in ITC investigation of Samsung's complaint against Apple

Apple told the ITC about the DoJ investigation as part of its defense against Samsung's request for a U.S. import ban against Apple's core products. Samsung filed the related ITC complaint in June 2011. In September 2012, an Administrative Law Judge made an initial determination clearing Apple of violation of any of Samsung's four remaining patents-in-suit. Meanwhile, Samsung and the Office of Unfair Import Investigations (OUII, frequently referred to as "the ITC staff") filed petitions for a review of this preliminary ruling by the six-member Commission, the top decision-making body at the ITC. In my analysis of the detailed version of the initial determination I concluded that an allegedly UMTS-essential patent, "U.S. Patent No. 7,706,348 on an "apparatus and method for encoding/decoding transport format combination indicator in CDMA mobile communication system", looked like "Samsung's best shot at the review stage".

Apple can't rely on the initial determination being the last word (though that may be the case). If there's a review and if Samsung prevails on one or both of its SEPs-in-suit, there's a high risk of a U.S. import ban, which is the only remedy the ITC can order. There is profound concern over the possibility of ITC import bans based on FRAND-pledged SEPs among regulators and major industry players, and even on Capitol Hill. Apple's filing also recalls two congressional hearings on this issue and public interest statements filed in the meanwhile-remanded investigations of Motorola's separate complaints against Apple and Microsoft.

Samsung also filed a public interest statement yesterday. Basically, Samsung argues that implementing a FRAND standard without a license to all patents is an infringement, and importing such products into the U.S. market constitutes an act of unfair competition that the ITC should stop. Samsung argues that it made a FRAND offer (claiming that its 2.4% royalty demand is appropriate) and that Apple's products should be banned since it doesn't pay. At first sight, 2.4% may look like a small amount, but if one extrapolates the figure based on Samsung's share of UMTS-essential patents, it becomes clear that no one could make any money selling wireless devices if every SEP holder made similar demands. Samsung's position that Apple should face an import ban unless it meets the 2.4% demand validates what University of Iowa College of Law Professor Herbert J. Hovenkamp wrote in the abstract of a paper he filed earlier this month: "Permitting the owner of a FRAND-encumbered patent to have an injunction against someone willing to pay FRAND royalties is tantamount to making the patent holder the dictator of the royalties, which once again is the same thing as no FRAND commitment at all."

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