Saturday, February 2, 2013

Google's attempts to circumvent grant-back clauses are evil, hurt its reputation as a licensing partner

Yesterday I reported on a Motorola Mobility v. Microsoft trial in Mannheim, Germany, where the wholly-owned Google subsidiary desperately tried to argue that a grant-back clause in an Exchange ActiveSync (EAS) license agreement between Microsoft and Google wouldn't apply to Microsoft's implementation of the DirectPush part of EAS. And I mentioned that Google is also disputing that the grant-back clause of MPEG LA's AVC/H.264 license agreement covers Motorola's H.264 video codec patents, even though MPEG LA CEO Larry Horn explained in a declaration that this kind of situation was always meant to fall, and actually does fall, under the agreement.

I don't see Google's litigation strategy working out. From a procedural point of view it undoubtedly has the right to defend its peculiar positions, but the question I want to raise here is whether it's a good business decision to do so. My answer would be no.

Google can try all it wants to soften intellectual property rights through lobbying and litigation, but it will never be able to do away with them altogether. Policy makers may make adjustments in areas where they are really needed. Nevertheless, the technology industry (and the content industry, which is also key to Google's business) will continue to have intellectual property rights, and licensing will continue to be the way tech companies deal with each other (or tech companies deal with content producers). Without licensing, technology and content would never be shared, which is not an option.

In light of the importance of licensing it would be in Google's best interest to prove to the business world that it's a reliable partner who honors license agreements in good faith. This industry is watching closely the current wave of smartphone patent disputes, including the related countersuits. There are companies whose positions on how to comply with FRAND licensing pledges are questionable. Google (as Motorola's owner for the last eight months) is one of them, but far from the only one. Google is, however, the black sheep of the family in the sense of being the only litigant in all these disputes to refuse to honor its grant-back licensing obligations. No one is accusing companies like Apple, Microsoft or Samsung of anything comparable. And Google is behaving like this in connection with not only one technology, but two: the H.264 video codec and the EAS synchronization protocol. It's doing this in two jurisdictions: in the federal Western District of Washington and in Germany. (Even three if we include a declaratory judgment proceeding in the UK.)

The business world has a broader and more general perspective than the legal universe on the question of what conduct constitutes good faith or bad faith:

From a legal point of view, the positions Google takes in its futile efforts to extricate from crystal clear back-licensing obligations border on the frivolous, but I don't mean to say that they necessarily meet the standard of bad-faith litigation. Not everything that fails is an act of bad faith the way the courts define the term. Google has extremely sophisticated lawyers working on these cases, in-house and externally, and the theories they develop sound amazingly good if one considers that there's no real substance behind them. The courts can't dismiss them without adjudging them on substance (or the lack thereof). Google will even have the right to appeal the upcoming rulings, so the United States Court of Appeals for the Ninth Circuit and the Karlsruhe Higher Regional Court may also have the pleasure to deal with them.

The problem I see here -- and which I believe Google's decision-makers should also recognize -- is that a lot of businesspeople involved with licensing (I've done a variety of license deals over the years) may view Google's related conduct as bad-faith behavior. Pacta sunt servanda is not just a legal principle. Let's look at it this way: if you own intellectual property and grant someone a license, and you comply with your part of the deal and make everything available that you've promised to make available, and you don't look for ridiculous ways to accuse the other party of infringement when it's actually relying quite reasonably on the deal it has in place with you -- if all of this is the case, wouldn't you also want your partner to honor his part of the deal? Isn't that what business -- not only but also the licensing business -- is all about?

Grant-back promises are an essential and often indispensable part of license deals. No one wants to extend a license to patents on a given standard without having at least access (even if not an immediate license) to the other party's related patents on fair terms. Someone who refuses to honor his grant-back obligations does something much worse than stopping to pay the agreed-upon royalties. If you stop paying royalties, you'll have to be sued and you'll ultimately have to pay. Make no mistake: it's also pretty bad, but there will be only a few cases in which the licensor will go out of business as a result of a delayed payment. However, a refusal to comply with a grant-back obligation as part of a broader strategy to pursue injunctive relief at all costs means that one party tries to have a destructive impact on the business of the other party, even though the latter always honored its part of the deal. That's terribly unfair.

All sorts of companies may be concerned about Google's conduct and think that if Google does this to Microsoft, it may one day also do it to them. In other words, what Google is doing here comes with a reputational cost. The effect of appearing to be untrustworthy in such deals is going to be that other parties will think twice before they do any deal with Google, and if they do one, they will look at the envisioned terms very skeptically and will in some cases insist on deal structures that provide them with greater upfront assurances that Google is later going to comply.

It doesn't really matter that Microsoft is enforcing certain intellectual property rights against Android, and that it proactively sued Motorola (the year before Google signed an agreement to acquire it). Granted, the lawsuit that went to trial in Germany on Friday or the FRAND determination action in Seattle might not be occurring at this stage (though we'll never know) if Microsoft had not sued Motorola after negotiations following the expiration of a license agreement didn't bear fruit over an extended period of time. But contracts are made to have a reliable basis for dealing with each other even in bad times. No, not just "even in bad times": especially in bad times. Friends who are forever friends will never need a contract: they can resolve everything amicably. But business partners need to be able to count on each other regardless of whether they are friends. No other company who already has some kind of license agreement in place with Google or is contemplating entering into one can be sure that it will always be on friendly terms with Google. Regardless of who sues first and for what reason, someone who grants Google a license today will want Google to honor its part of the deal tomorrow, no matter whatever else may happen between today and tomorrow.

The smartest thing Google could do now is to declare to the court in Seattle that it recognizes the applicability of the MPEG LA grant-back clause, and to withdraw its push notification patent claims in Mannheim well ahead of the April 19 ruling. It would not be the smartest thing in the narrow context of the Microsoft-Motorola dispute: with Microsoft already having won injunctions over four different patents in three different fora in two different countries, there's no question that Motorola badly needs leverage, and even a long-shot attempt to gain leverage may be necessary if seen in that light (and only that light). There are no budget constraints, obviously. But from a more strategic perspective a retreat on this problematic front would be conducive to Google's reputation as a licensing business partner. Google's world-class litigators just want to try anything to win, and that's their job. But this is no different from a general who wants Congress to send ever more troops and money to win a war that may already have been lost: it's obvious that (and why) the general wants this, but political leaders can't always justify giving military leaders what they ask for. I think Google should take a business perspective on this, especially since there's no indication whatsoever that Motorola will gain any advantage in litigation, while the costs to Google's trustworthiness in licensing are not that hard to see.

Just Don't Be Evil.

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