Despite an agreement with the United States Federal Trade Commission and ongoing investigations by the European Commission's Directorate-General for Competition, Google continues to play standard-essential patents (SEP) hardball with antitrust regulators and Microsoft. Documents filed by Microsoft and wholly-owned Google subsidiary Motorola Mobility with the United States District Court for the Western District of Washington late on Friday reveal that Google is still not prepared to content itself with FRAND royalties in exchange for a license to its patents declared essential to the H.264 video codec standard.
While Google recently withdrew a couple of H.264 declared-essential patents from an ITC investigation after Microsoft informed the U.S. trade agency of FTC Chairman Jon Leibowitz' understanding that Google would withdraw its SEP-based requests for U.S. import bans, Google's latest SEP-related shenanigans are designed to take advantage of the complexities of multijurisdictional litigation. Google continues to threaten Microsoft with the enforcement of an injunction ordered by a German court in May 2012 unless Microsoft, to put it simply, agrees to a disgorgement of profits made in Germany with the past sale of H.264-compatible products such as Windows and the Xbox, which could result in a payment exceeding a FRAND royalty rate by a huge factor. It's like saying: "OK, we'll stop trying to get your products banned in the future, but for past implementation of the standard in question you have to let us sue you for many billions of dollars. We say the opposite but actually know you're not going to accept this, so then there's no deal and we'll keep pushing for a ban. And U.S. courts and regulators are not going to help you because this is strictly a German issue."
By virtue of having followed the Microsoft v. Motorola FRAND contract action in Seattle since it started in November 2010 as well as the German Motorola Mobility v. Microsoft H.264 litigation, and having analyzed the proposed FTC-Google agreement and knowing the German Orange-Book-Standard framework, I don't find it hard to see what's going on. But Google is probably hoping that its tactics won't be easily understood by others. With this blog post I hope to contribute to transparency. I'll show you the documents both parties filed yesterday and I'll put them into context.
Let's start with what Microsoft wants and Google doesn't because that's far more straightforward than what Google wants and Microsoft opposes. Microsoft's position is that the FRAND litigation in Seattle is going to result in a worldwide license deal. A rate-setting trial was held in November. The court allowed some further briefing, including the filings the parties made yesterday (some additional briefing will be due on March 1). Under its tentative agreement with the FTC, Google promised not to seek injunctions against willing licensees who have initiated a FRAND determination action. In light of what I just explained, Microsoft believes Google should do in Germany what it did at the ITC and withdraw its prayers for SEP-based injunctive relief. Currently the German case is on appeal, pending before the Karlsruhe Higher Regional Court. Google's Motorola has thus far been unable to enforce the existing injunction due to a series of U.S. rulings (a temporary restraining order was converted into a preliminary injunction, upheld by the United States Court of Appeals for the Ninth Circuit and later replaced by a summary judgment order). But apart from refraining from enforcement (in order to avoid contempt sanctions in the U.S.), Google has not done anything in the German proceedings to remove the threat of a sales ban. Its prayers for injunctive relief are still being litigated at the Karlsruhe-based appeals court, and Google could seek enforcement the moment it believes that it won't be sanctioned by a U.S. court for doing so (or elects to take the risk of sanctions).
Google appears to recognize -- especially in the wake of its tentative agreement with the FTC (which it honored at the ITC) -- that it can no longer unconditionally pursue a German sales ban. But it hoped and still hopes to get more leverage out of the $12.5 billion deal with respect to Microsoft than merely a FRAND royalty rate, determined by a U.S. court (where patent damages law, including reasonable-royalties law, is fairly well developed). So in mid-January, roughly a week after the announcement of the FTC consent decree, Google essentially told Microsoft that the only basis on which it would agree to withdraw its prayers for SEP-based injunctive relief in Germany is an agreement under which Microsoft allows Google to seek damages for past SEP infringement in Germany under any of the three damages theories German patent law provides. With highly successful products like Windows and the Xbox at stake, it's a given that the damages theory Google will focus on is a disgorgement of profits. The other two damages theories -- reasonable royalty and actual damages incurred -- are unlikely to result in any substantial amount of money for just a couple of FRAND-pledged SEPs.
Now let's talk about the specifics of what "Google essentially told Microsoft" meant in the previous paragraph. Google's German counsel, Quinn Emanuel's Dr. Marcus Grosch, wrote a letter to Microsoft's German counsel, Freshfields Bruckhaus Deringer's Professor Peter Chrocziel, sending him a countersigned license agreement Microsoft had proposed to Google's Motorola in the German proceedings but reserving the right to seek damages for past infringement under any available theory, including disgorgement, which would be completely detached from FRAND.
The proposed agreement that Google countersigned almost four months after the offer was made (and, according to a Microsoft filing, after originally rejecting it in the proceedings before the German appeals court) is not a licensing offer made in regular FRAND negotiations. It must be viewed against the background of the German Orange-Book-Standard framework and how it is applied by certain courts, particularly the courts that have dealt with the German Motorola v. Microsoft SEP dispute so far (Mannheim Regional Court and Karlsruhe Higher Regional Court). The way Orange Book is applied there is that the only obligation an owner of SEPs has is not to refuse an offer by an implementer to take a license on terms to be determined subsequently by a court of law or terms so exceedingly generous that such refusal would constitute a blatant antitrust violation (identifiable as a violation without any in-depth analysis). Only if such a proposal is rejected, injunctive relief is considered abusive and, consequently, denied.
Simply put, Microsoft was forced to make that licensing offer in order to defend itself against Google's push for injunctive relief. It presumably knew that Google was not going to accept it as long as it could still defend its refusal before the appeals court. Only if the appeals court had determined (or at least given a strong indication) that such refusal was considered abusive conduct, Google would have considered a deal on such terms. Here's the proposed agreement, now bearing signatures on behalf of both parties:
General Instrument Corporation was a Motorola subsidiary and is now, by extension, a Google subsidiary. It holds the H.264 SEPs at issue.
The proposed agreement provides Motorola with an optional grant-back of a license to seven Microsoft H.264 SEPs. Google did not want to exercise this option for the time being but reserved the right to do so at a later time.
It makes a distinction between the period "before the Google Acquisition Date" and the one "after the Google Acquisition Date", referring to Google's acquisition of Motorola Mobility, which is relevant because of a grant-back obligation Google and its subsidiaries have under Google's license agreement with patent pool firm MPEG LA, whose contributors include Microsoft. On May 22, 2012 Google formally closed the acquisition. For the period prior to closing (and, therefore, prior to any grant-back obligation), Microsoft offered to pay royalties of 2 eurocents ($0.026) per unit for the first 10 million licensed units, and 1 eurocents ($0.013) per unit for all units above 10 million units (clause 3.1.1). This is a small fraction of the 2.25% of sales demanded by Motorola, but for the period after the grant-back obligation kicked in, Microsoft only offers (in clause 3.1.2) a flat fee of €2,100 ($2,770) per year per licensed patent (one of the two patents expired last fall). This number apparently corresponds to what Google would have received as a contributor to the MPEG LA pool on a per-patent basis, with respect to Microsoft's use of a given patent in the German market.
Considering that €2,100 ($2,770) per year is not even chump change relative to the $12.5 billion price Google paid for Motorola Mobility, it would certainly come as a huge surprise if Google suddenly accepted this number instead of trying to argue in court, until all appeals are exhausted, that it's entitled to more (I don't think it is entitled to more, but it would be out of character for Google to content itself with a payment that doesn't even offset a tiny fraction of its litigation expenses and is next to nothing compared to the 2.25% royalty demand it has defended for such a long time). And the fact of the matter is that Google doesn't really want to strike a deal on such terms. It didn't countersign Microsoft's offer almost four months later because it suddenly arrived at a more realistic assessment of the market value of the patents in question. The real reason is gamesmanship. Its signature doesn't mean much because there are strings attached. Here's the accompanying letter:
The letter refers not only to the proposed agreement of August 15, 2012 but also to a letter (not filed with the U.S. court) dated December 23, 2011. This is what Motorola's January 2013 letter says about the relevance of Microsoft's December 2011 letter to the August 2012 licensing proposal:
"We note that your clients, in the context of the aforementioned offer, acknowledged and accepted their obligation to pay damages on the merits ('Schadenersatz dem Grunde nach anerkannt'). This follows inter alia from your letter of 23 December 2011, where the following is stated:
'As required by the recent case law of the District Court in Mannheim (esp. decision of 9 December 2011, docket no. 70122/11) Microsoft Corp. expressly acknowledges ('erkennt dem Grunde nach an') the duty to cover past damages for any past use of the Licensed Patents. The damages are to be determined in accordance with the respective principles set forth under German law.'"
German district court rulings are usually not published. The decision referenced above was made in a Motorola Mobility v. Apple case, and I published that one.
Toward the end, the letter announces the withdrawal of Google's request for injunctive relief (sales ban and recall from retail) on this basis. Only three days later, Microsoft's counsel replied to Google's counsel, explaining that this is a counterproposal to Microsoft's August 2012 offer as opposed to an acceptance of a standing offer:
The letter discusses two key issues -- one under antitrust law and one under contract law:
Google's approach is, in Microsoft's opinion, a breach of its agreement with the FTC. This theory is also discussed in a letter Microsoft sent to the FTC another three days later.
Under German contract law, a contract is formed by the acceptance of an offer, but only if the offer and the acceptance match. If a party says it "accepts" an offer only in an amended form, it makes a counteroffer, which results in the conclusion of an agreement only if accepted by the party that made the original offer. (Unlike U.S. law, German contract law does not require a consideration, i.e., compensation, but that would be a non-issue in this case.)
Microsoft's August 2012 proposal envisioned a per-unit royalty for sales of H.264-implementing products prior to May 22, 2012, and a one-time payment (clause 3.3 of the proposal) for past use. By "accepting" Microsoft's offer only on the condition that damages for past infringements can be sought under other theories than that of a reasonable (and, if the agreement stood on its own, agreed-upon) royalty, Microsoft says Google's "acceptance" is actually a counteroffer. It would have to be accepted by Microsoft, and while Google denies that any acceptance is needed, it apparently wanted Microsoft to accept the deal by stipulating to a withdrawal of its prayers for injunctive relief.
There are situations in which an accompanying letter to a countersigned proposal can provide additional clarifications without constituting a modification to the agreement itself. For example, Google's letter also says that the proposal was signed "without prejudice and without acknowledging any legal obligation to do so". But by signing the agreement only with the explicit reservation that damages for past infringement could be sought based on non-FRAND theories, I believe Motorola did indeed modify the proposal. The primary reason why I think so is that the proposed agreement itself is clear: if an August 2012 proposal lays out royalties for a past period (the period until May 22, 2012) and a one-time payment for back royalties, there's no way it can be reasonably interpreted as allowing the pursuit of damages for past infringement on the basis of a theory such as disgorgement of infringer's profits. If Microsoft had accepted the countersigned proposal, Google would later have claimed that Microsoft also accepted the condition laid out in the accompanying letter, and at the very least this would have resulted in considerable legal uncertainty.
Besides the contract and antitrust issues, there's a third one, which is that Motorola actually told Judge Robart in Seattle last year that any royalty determination made in Germany could still be overruled by him when he sets a worldwide royalty. Motorola now tells Judge Robart that the purpose of filing the German correspondence "is to provide a status update to the Court as to ongoing proceedings--not to advocate that the German proceedings affect this Court's pending decision", and Microsoft also says that "any ongoing issues related to the Orange Book process have no bearing on the matters currently pending before [Judge Robart's court]". But in his letter to Google's German counsel, Microsoft's German counsel quoted in a footnote from what Motorola's U.S. counsel told Judge Robart in April 2012 (about six weeks before the closing of Motorola Mobility's acquisition by Google):
"You may agree eventually with the German court. You may not. If it isn't [F]RAND you may look at that and dismiss it and say, I don't think it's [F]RAND in Germany, I'm going to set a different rate. . . . But, whatever the German court does, if it's your decision to do so, you will have the ability to say, 'I don't agree with a piece that the German court did, here's my ruling as to Germany.' And if that means that Microsoft paid too much to get out of the way of a speeding train, then it has the claim to get the money back. And it gets the money back as an overpayment."
In light of that statement it's difficult to understand why there is still any litigation pending in Germany. But Google's strategy is clear: it still wants to pursue injunctive relief against an allegedly-unwilling licensee, or at least it wants to leverage the specter of a multi-billion-dollar disgorgement award in Germany.
Google desperately needs leverage against Microsoft, which keeps signing up Android device makers as patent licensees. Google appears to think that it can still get such leverage from Motorola's SEPs and that antitrust regulators are ultimately not going to do more than prevent the pursuit of injunctive relief in some (but not in all) situations. Not only has the proposed FTC-Google agreement so far failed to get Google to fully honor its FRAND licensing obligations but there are also other SEP holders, such as InterDigital, who believe that the activities of antitrust regulators on both sides of the Atlantic merely require them to be creative and come up with new schemes and arguments to obtain more than a FRAND royalty. Unless someone puts an end to these activities, the problem won't go away. Things will just become more complicated, and the related blog posts will grow longer. What a waste.
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