The United States District Court for the Western District of Washington has now, after the court and the parties reached an agreement on redactions of confidential business information, published the FRAND rate determination made last Friday, setting the royalties Google's Motorola Mobility can reasonably charge Microsoft for the use of Google's standard-essential patents (SEPs) in Microsoft's implementations of certain standards (the H.264 video codec standard and the IEEE 802.11 WiFi standard). This is a historic decision by Judge James L. Robart, the federal judge presiding over this contract litigation. No U.S. court has previously made a FRAND royalty determination at the request of an implementer of a standard (as opposed to a run-of-the-mill damages award for past infringement). We will now see many more FRAND determinations in the years ahead, also due to the proposed FTC-Google antitrust settlement.
The bottom line is that Motorola will get a few cents per unit of Microsoft products implementing the standards in question, resulting in a total annual amount of maybe a couple million dollars as opposed to the $4 billion annual payment Motorola originally demanded and defended last year as being "in fact reasonable [F]RAND]". The court set a range and a point. The range is needed to determine whether Motorola's initial royalty demand was reasonable and non-discriminatory. The point is what Microsoft will pay under the license Google's Motorola now has to extend. These are the per-unit amounts the court arrived at:
H.264 patents: The range is 0.555 cents ($.00555) per unit to 16.389 cents ($.16389) per unit. The lower bound (half a cent per unit) is what Microsoft will have to pay, as the court found that "Motorola did not demosntrate that its H.264 SEP portfolio provided significant technological value to Microsoft's products". Dozens of major H.264 patent holders make their patents available through the MPEG LA AVC/H.264 pool at similar rates, which the court considered, besides the fact that Google as an MPEG LA licensee agreed to reciprocity, "an indicator of a [F]RAND royalty rate". The court also found that Microsoft is an intended third-party beneficiary of a grant-back obligation in Google's license agreement with MPEG LA.
IEEE 802.1 patents: The per-Xbox royalty will be 3.471 cents ($.03471) per unit for the Xbox and 0.8 cents ($.008) per unit for all other Microsoft products using the standard; the range is 0.8 cents ($.008) to 19.5 cents ($.195) per unit. A Via Licensing pool of IEEE 802.11 SEPs was considered less successful than MPEG LA's AVC/H.264 pool but its rates were still found to be reasonably indicative of a FRAND rate for patents reading on this standard.
In terms of what Google can expect to get per year, it appears that these per-unit rates correspond to an annual payment of less than $1.8 million -- again, Motorola originally wanted $4 billion. Microsoft's position at the trial was that Motorola can ask for approximately $1.2 million a year. The court's determination is 50% higher than that one, but less than a 20th of a percent of Motorola's initial demand.
Even if "only" compared to Motorola's reduced demands, which were made at the FRAND rate-setting trial in November 2012 and included the suggestion that royalties relating to the H.264 video codec could be capped at $100 million to $125 million per year (which Motorola didn't say initially) and Xbox-related royalties for IEEE 802.11 would be in the "1.15 percent to 1.73 percent" range, the wholly-owned Google subsidiary will now have to content itself with very, very little.
This FRAND rate determination is a strategic win for Microsoft in its wider patent dispute and a strong indication that Google way overpaid for Motorola. I'll just reiterate what I wrote on Wednesday:
$12,500,000,000 certainly has a lot of zeroes, but $12,500,000,000 is a high price for a lot of zeroes. Zero enforceable injunctions against Microsoft in Germany. Zero enforceable injunctions against Apple in Germany if, as I predict, the push injunction against Apple is now lifted. Zero U.S. import bans (on Monday the ITC just tossed the sole remaining patent-in-suit in Motorola's case against Apple, and Google faces a high hurdle in its attempt to salvage its case against Microsoft after an Administrative Law Judge recommended its dismissal a month ago). Zero offensive wins in U.S. federal court.
The FRAND rate Judge Robart has set is not zero, technically speaking. But it's a whole lot closer to zero than to what Google's Motorola demanded (and to what Google paid for this patent portfolio).
Google may not have thought the deal through because it just wanted patents, desperately, after its losing bid for Nortel's far more valuable portfolio. Google was probably misguided by the number of patents the acquisition target held instead of understanding their very limited value. Last year an ITC judge already found that "Motorola was not interested in good faith negotiations and in extending a [F]RAND license" to Microsoft, but didn't say what Motorola is actually entitled to in light of its FRAND licensing obligation (the ITC doesn't make FRAND determinations and resolve contract disputes). Judge Robart has performed this complicated task. His findings of fact and conclusions of law are 207 pages long and contain some very sophisticated calculations. All the facts were on the table, and the result is that SEPs are not the answer to Android's patent infringement issues. Nor are Motorola's non-SEPs, which haven't given Google any serious leverage either.
The next step in the Seattle FRAND action, which Microsoft brought in November 2010 to enforce Motorola's FRAND licensing commitment, is a decision on Microsoft's claim that Google's Motorola breached its FRAND contract by making a blatantly unreasonable initial royalty demand. The court has already set a schedule for that process, envisioning a trial (which may or may not involve a jury) to begin on August 26, 2013. Motorola's counsel conceded last year that if the court found the initial royalty demand "blatantly unreasonable", this would constitute a breach of contract, entitling Microsoft to even further remedies (though Microsoft has already achieved its most important objective: it has enforced its entitlement to a license on FRAND terms, while Google is not entitled to injunctive relief against Microsoft over these patents). The breach-of-contract decision should be a fairly easy one -- frankly, it's hard to see why there's even a need for a trial to determine that the original $4 billion demand was far, far outside the FRAND range determined by the court, but it's too early to tell how this question may be resolved in the alternative to a trial. The outcome, however, is easy to predict, and will add to Google's SEP-related worries.
Finally, here's the document (there may be one or more follow-up posts on this decision, but for an initial reaction I'll leave it at this):
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