Saturday, March 2, 2013

Microsoft, Google's Motorola complete briefing on implications of MPEG LA H.264 license agreement

More than three months after a FRAND trial was held in a Microsoft-Google contract case in the Western District of Washington, the rate-setting decision has not been made yet, due to the court's diligence on the one hand and Google's persistent efforts to evade its grant-back obligations under a license agreement with MPEG LA on the other hand. But it appears that briefing is complete now and Judge James Robart, the federal judge presiding over this litigation, now has all the facts in the file to determine a FRAND rate (a range and a specific number) for Motorola's standard-essential patents (SEPs). The rate-setting decision will pave the way for another trial: a breach-of-contract jury trial, at which the question is going to be whether Motorola's initial 2.25% royalty demand was blatantly unreasonable.

In order to discuss in greater detail the implications of a grant-back clause in the MPEG LA license Microsoft says entitles it to a reciprocal license from Google and its subsidiaries at the pool rate, which is a tiny fraction of the original royalty demand that corresponded to $4 billion in a conservative estimate, the court held a post-trial hearing on January 28 and requested three rounds of additional briefing:

  • In time for the January 28 hearing the parties were requested to present "extrinsic evidence" relevant to the interpretation of the MPEG LA-Google license agreement (which has to be construed under New York law). Microsoft submitted a declaration by MPEG LA chief executive Larry Horn in support of its position on grant-back. Google's Motorola, which only had a declaration by its own lawyers on its side, could have figured that MPEG LA was going to be key here but didn't request the right to depose an MPEG LA official until a point at which this would have delayed the whole process. Therefore, the court denied a related motion.

    Microsoft additionally submitted a declaration that shows the addition of the word "Affiliates" to the grant-back clause.

  • On February 14 the court requested further briefing on what Google's Motorola describes as an executed and enforceable H.264 license agreement in Germany while Microsoft argues that Google actually made a counteroffer which Microsoft rejects.

  • On February 21 the court gave the parties until yesterday (Friday, March 1) to submit briefing on the implications of the mentioning of "Affiliates" in Section 3.1.7 on the royalty obligations of "Enterprise Licensees" in connection with a royalty cap for "Motorola's obligation to license its [SEPs] as an Affiliate of Google". The court asked the parties to comment, in particular, on its interpretation "that Licensee [i.e., Google] and its Affiliates [i.e., Motorola and its former subsidiary General Instrument] fall under the royalty cap prescribed therein only if the Affiliates are themselves licensee[s] under the AVC Patent Portfolio and are identified by the Licensee in writing to [MPEG LA]".

Now that the parties have briefed the court I'm going to explain their positions. Google has been arguing for some time that it doesn't have to honor the grant-back obligation (or at least not to the extent that the MPEG LA royalty caps would proportionately apply to the license fees Microsoft is going to pay) because it selected in 2012 (unlike in the past) an "Enterprise License", which (as I'll explain further below) is an option relating to some AVC/H.264 license offerings and potentially saving a group of affiliated companies money. This isn't Google's only argument against reciprocity, but it might be the last one the court needs resolved before the rate-setting decision comes down.

Google is trying to benefit from the fact that MPEG LA decided to write up a license agreement covering multiple fields of use for H.264 in one document. The confusion that Google is trying to create here could have been avoided in the first place if there had been separate (even if largely overlapping) license agreements for different types of use, but I can understand that MPEG LA, which has well over a thousand licensees for the AVC/H.264 pool alone (which isn't its only patent pool), preferred an all-in-one contract over two or more largely-duplicative separate agreements -- also because this was a way to ensure that a company wouldn't take a license covering one field of use but elect to infringe in other fields of use.

I'll show you the documents and then discuss the parts I consider relevant. You can click here to skip the documents and proceed to the discussion.


It was previously known that Google signed the same license agreement with MPEG LA as more than 1,100 other licensees. The actual document bearing a Google executive's signature -- signed in 2005 and renewed for another five-year term in 2011 -- was attached to MPEG LA chief executive Larry Horn's declaration:

Google's MPEG LA License of 2005 by

This is Google's (Motorola's) March 1, 2013 brief:

13-03-01 Motorola Letter Re. MPEG LA-Google License by

And here's Microsoft's March 1, 2013 brief:

13-03-01 Microsoft Letter Re. MPEG LA-Google License by

Discussion of relevant parts

There are two basic categories of MPEG LA H.264 licenses:

  1. licenses that you need if you make technology products capable of encoding (for a consumer's own use or for transmission to a consumer) or decoding (by any consumer) video files in the H.264 format, and

  2. licenses covering the distribution (especially, but not only, Internet broadcasting) of video files encoded in the H.264 format.

Either category has subcategories:

  1. For the technology product licenses a distinction is made between the sale of such products ("AVC Products") to consumers and OEM distribution (for example, PCs running Windows, which comes with H.264 functionality). There's no difference here in terms of what the end user gets. It's just a commercial thing. As a result, Microsoft needs two licenses because it sells Windows directly as well as through OEM channels.

  2. The distribution/broadcasting licenses include Title-by-Title AVC Video (note that AVC and H.264 are synonyms for purposes of this license agreement), Subscription AVC Video, Free Television AVC Video, and Internet Broadcast AVC Video Use. The names already indicate the scope of those licenses, but in connection with the grant-back obligation we can just lump all distribution/broadcasting licenses together.

The license agreement defines these fields of use, as well as numerous other terms, in Section 1, "Definitions" (pages 3-8 based on the page numbering of the agreement; pages 4-9 of the PDF document). The license grant clauses incorporate those definitions by reference. Those clauses are sections 2.1-2.7 (pages 8-9 based on the page numbering of the agreement; pages 9-10 of the PDF document). The order of those license grants does not reflect the two categories I discussed above. The tech product licenses are granted in sections 2.1 ("AVC Products") and 2.6 ("OEM Licensee"); the distribution/broadcasting licenses are granted in sections 2.2-2.5; and section 2.7 then offers licensees the option to choose for each calendar year a bundle called "Enterprise License", which represents the combination of any or all distribution/broadcasting licenses chosen (but, to be perfectly clear, does not involve any tech product licenses) and comes with the option to apply the annual royalty cap to a group of affiliated companies.

The royalties sections (3.1.1-3.1.7; pages 10-14 based on the page numbering of the agreement; pages 11-15 of the PDF document) have the same order as the license grant sections (2.1-2.7).

The Enterprise License clauses are 2.7 for the license grant and 3.1.7 for the royalties. This is how the Enterprise License royalties clause begins:

"Enterprise Licensees. Pursuant to Article 2.7 and notwithstanding anything to the contrary in Article 2.9 hereof, and in lieu of the royalties specified in Articles 3.1.2, 3.1.3, 3.1.4 and 3.1.5, a Licensee and its Affiliates which are licensees under the AVC Patent Portfolio License and are identified in writing to the Licensing Administrator by Licensee shall pay no more than the following total amounts in each Calendar Year for all such licenses for the combined Sales of Licensee and its Affiliates during such year:"

I'll now make it easier to understand by substituting section numbers with descriptions and defined terms with actual party names:

"Enterprise Licensees. Pursuant to [the Enterprise License grant section] and notwithstanding anything to the contrary in [a section related to the Enterprise License that disallows Google to sublicense its affiliates, but entitles its affiliates to licenses from MPEG LA if they request them], and in lieu of the royalties specified in [the distribution/broadcasting royalties sections], [Google] and its Affiliates which are licensees under the AVC Patent Portfolio License and are identified in writing to [MPEG LA] by [Google] shall pay no more than the following total amounts in each Calendar Year for all such licenses for the combined Sales of [Google] and its Affiliates during such year:"

The respect in which the Enterprise License terms are different from the tech product and individual distribution/broadcasting licenses is that the royalties section requires that a licensee identify in writing its affiliates which are also licensees, so as to ensure that the royalty cap is applied to the collective license fees paid by the whole group, as opposed to applying the cap to each company from the group.

Google says it exercised this potentially money-saving option in 2012 but didn't identify Motorola Mobility as an affiliate to benefit from the group-wide Enterprise License royalty cap, and on this basis argues that Motorola Mobility consequently doesn't have to grant Microsoft a license to its own H.264 SEPs, or at least doesn't have to do so on terms that include the royalty cap it doesn't benefit from.

The grant-back obligation in Section 8.3 clearly includes Affiliates (whether notified or not) and is meant to be "commensurate to the scope of the licenses which Licensee has selected [under the agreement]". Google now contends that the "scope" includes whether it includes a particular subsidiary (Motorola Mobility in this case) in its notifications relating to the Enterprise License ("selects to have its Affiliates licensed"). But Microsoft says that "the Agreement provides no ability for Google to make any such selection. It has some choice: it can use any or all of the different types of licenses the agreement covers (for example, it can elect to implement H.264 in products sold to consumers and/or OEMs). But it can't perform an end run around the grant-back obligation because the optional identification (with a view to the Enterprise License royalty cap) only relates to "its Affiliates which are licensees under the AVC Patent Portfolio License". Motorola doesn't have a license, so it wasn't and isn't eligible for notification. If it had taken or now took a license, then it would have its own grant-back obligation under an MPEG LA-Motorola agreement.

In light of that, Microsoft points out that it wouldn't make sense for the grant-back clause to include a licensee's "Affiliates" if this related to companies that have a grant-back obligation under their own agreements with MPEG LA.

Microsoft also points out that "Google has taken three separate and distinct types of license offered by MPEG LA": the AVC Products license, the OEM Licensee license, and the Enterprise License (a bundle of all distribution/broadcasting licenses). YouTube needs a broadcasting license, while Google's distribution of the Android and Chrome operating systems (directly and, especially, through OEM partners) falls under the AVC Products and OEM Licensee terms. Microsoft argues that "the Enterprise License and its royalty terms are irrelevant to the issues [in this FRAND rate-setting case]" because "Microsoft is not a video content provider and therefore does not need, and has not taken, an Enterprise License from MPEG LA". Therefore, "Microsoft is not seeking any grant-back rights for such a license in this litigation". It just wants a grant-back with respect to the tech product licenses. Simply put, what Google pays for the distribution of Android and Chrome OS (Google in this context including its subsidiaries such as Motorola Mobility without any need for notification) is what Microsoft is willing to pay, proportionally based on the number of H.264 SEPs, for Google's (Motorola's) H.264 SEPs in connection with Windows and the XBox. This is unrelated to video streaming.

While the H.264 FRAND ball is now in the court's court, Microsoft and Google (the parent company as well as its Motorola Mobility subsidiary) are going to meet at the Munich I Regional Court on Thursday for a (non-standard-essential) patent trial relating to Google Maps.

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