Tuesday, January 1, 2013

Microsoft, Motorola to debate implications of Google-MPEG LA agreement at Jan. 28 hearing

On New Year's Eve, Judge James L. Robart, the federal judge presiding over the Microsoft v. Motorola Mobility FRAND contract litigation in the Western District of Washington, scheduled an oral argument for January 28, 2013 to "address both the Google-MPEG LA license agreement and Microsoft's motion for summary judgment of invalidity". These two items were not discussed at the FRAND rate-setting bench trial that took place in mid-November.

I have reported on the Google-MPEG LA matter before. Two weeks ago it became known that Google signed the same standard license agreement with MPEG LA as more than 1,000 other companies, and I interpret the agreement as containing a definitive grant-back obligation covering, in conjunction with the agreement's definition of affiliate companies (which includes companies acquired after the conclusion of the license agreement), Motorola's allegedly H.264-essential patents. The Seattle FRAND case involves H.264 and IEEE 802.11 (WiFi, or WLAN) patents; the Google-MPEG LA agreement relates to the H.264 video codec standard.

Originally, Microsoft raised this contractual issue with a focus on injunctive relief. Even before the court took a closer look at the Google-MPEG LA deal, Judge Robart made a summary judgment decision barring Motorola Mobility from the pursuit and enforcement of injunctive relief against Microsoft over any H.264 or IEEE 802.11 SEPs anywhere in the world. The agreement still has a bearing on the rate-setting decision Judge Robart is preparing: if the court agrees with Microsoft, Google's Motorola Mobility will be entitled to a royalty rate corresponding to the MPEG LA AVC/H.264 pool rate, relative to the number of patents contributed. On that basis, the annual cap would be a six-digit figure, a far cry from the $100 million cap Google (Motorola) more recently proposed.

Here's what Judge Robart is now particularly interested in with respect to the Google-MPEG LA deal:

"At argument, with respect to the Google-MPEG LA license agreement, the parties shall address (1) the proper interpretation of the Google-MPEG LA license agreement under the law of the State of New York; and (2) the import of the Google-MPEG LA license agreement as it relates to H.264 standard essential patents held by Motorola Mobility LLC and General Instrument Corporation, as wholly-owned subsidiaries of Google. The parties may submit, no later than January 23, 2013, (1) relevant extrinsic evidence to the Google-MPEG LA license agreement, such as affidavits from MPEG LA regarding the purpose and intent of the grant-back provision (Section 8.3) of the Google-MPEG LA agreement; and (2) additional briefing, limited to 12 pages, addressing any proffered extrinsic evidence."

The fact that the judge wishes to take a closer look at certain subissues doesn't indicate in any way how he would rule based on the information that has been provided thus far. The only thing that can be concluded on a reliable basis is that this agreement, which Google (Motorola) claimed has no bearing on the case, is important enough to warrant an extra hearing and additional briefing.

I also venture to guess that any "affidavits from MPEG LA regarding the purpose and intent of the grant-back provision" are likely to support Microsoft's theory. The licensors contributing patents to the pool, who must have been comfortable with the terms because otherwise they wouldn't have joined (and no one could have forced anyone to join), certainly wanted to ensure that third parties, such as Google in this case, wouldn't be able to take advantage of the reasonable pool rates while demanding excessive royalties for their own patents allegedly reading on the very same standard. Just look at the collective sophistication of this group of licensors, most of whom are also implementers of the standard. Companies like Apple, Cisco, HP, Microsoft, Philips, Sharp and Sony are nobody's fools, especially when it comes to standard-essential patent licensing. Google (Motorola) now asserts that the license agreement has loopholes that allow Google to do what it's doing, but the "purpose and intent" was undoubtedly a reciprocal arrangement and I would be surprised if the extrinsic evidence supported Google.

Even if the Google-MPEG LA agreement was ultimately held not to apply to the Microsoft-Motorola contract issues, I believe Google would still be unlikely to persuade the court of a royalty rate anywhere near its most recent demand. The rate might be a bit higher if there's no contractual requirement for a grant-back on equivalent terms, but in any event the fact that dozens of major players, even including some high-profile licensing businesses such as Dolby, ETRI and Fraunhofer-Gesellschaft, made their patents available on those terms is a strong indication of a FRAND market rate. Maybe the court would consider the upper end of the FRAND range to be higher than the pool rate, but there can be no doubt that the pool rate falls within the range. In light of this, the whole discussion of the Google-MPEG LA agreement is an opportunity for Microsoft to prevail with respect to H.264, but even if Google (Motorola) could fend off this challenge, it would still have to deal with the relevance of the MPEG LA pool rate as hard evidence for what the market largely believes to be an appropriate royalty rate.

Judge Robart's order doesn't indicate how the need for another hearing affects the schedule for the rate-setting decision. The most efficient course of action for the court would certainly be to issue just one order, and in that case, the hearing needs to be held before a decision can be made. Theoretically, the court could also set a rate for IEEE 802.11 patents separately, or it could set rates for both categories of patents but reserve the right to modify the H.264 rate if the Google-MPEG LA agreement is interpreted according to Microsoft's position, but this court is so busy that in the summer it stayed the parties' mutual infringement claims pending resolution of the FRAND contract issues, so it's most likely that only one rate-setting order will come down, either at the end of this month or, more likely, in February.

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