Saturday, May 4, 2013

Documents expose Google's (Motorola's) persistent efforts to stall Microsoft's FRAND contract case

Google and, before Google acquired it, Motorola never really liked the Microsoft v. Motorola FRAND contract case in the Western District of Washington (for my reporting and commentary on the recent FRAND rate-setting determination see initial reaction, follow-up including media round-up, closer look). They wanted to "negotiate" with Microsoft under the threat of injunctive relief. As injunctions make a standard-essential patent (SEP) holder the dictator of the royalties, I put "negotiation" in quotes.

Google's (Motorola's) troubled relationship with the FRAND contract case has resulted in various efforts to stall the process. The latest one started on Wednesday with a letter from Google's Motorola to the court, seeking to (preferably) preclude Microsoft from presenting certain damages theories at the breach-of-contract trial in the summer or (alternatively) allow more time for discovery, potentially requiring a postponement of that second trial. Some of the documents Google attached to its motion letter revealed that Microsoft had already raised those damages theories last year. Microsoft responded on Friday. The documents it attached to its reply expose Google's stalling and show that Judge Robart criticized Motorola's dilatory tactics at a hearing about a year ago, at which he even mentioned the possibility of sanctions for misconduct.

In the current context, the documents both parties filed prove that

  • Microsoft's counsel already mentioned in a May 7, 2012 hearing, in the context of irreparable harm from Motorola's envisioned (but thwarted) enforcement of a German SEP-based injunction, that Microsoft "had to move its [Germany-based] distribution center [for the EMEA -- Europe, Middle East, Africa -- region] to the Netherlands because it wouldn't have time to make the change after an injunction was entered",

  • Judge Robart clarified at a July 2012 hearing (at which Microsoft again raised the distribution center-related damages theory) that "expert reports on both breach and damages [were] not called for at this time and they may be filed in accordance with the schedule that the court puts out in regards to the subsequent trial",

  • Motorola's counsel acknowledged in a summary he wrote on March 29 that "[t]he first element of Microsoft's damages [attorneys' fees being the second one] will be the costs incurred by Microsoft to move its operations in Germany to the Netherlands in preparation for a potential injunction in Germany", and

  • thanked Microsoft's counsel in a brief reply to a March 30 summary regarding supplemental responses (again mentioning distribution center relocation costs).

In light of these facts it's hard to attribute to anything other than stalling the timing of Google's May 1 motion, more than a month after its counsel was undoubtedly aware of Microsoft's plans for producing documents and making witnesses available in connection with the distribution center relocation costs -- and about a year after this damages theory came up for the first time.

I have uploaded both parties' letters and the attached documents to Scribd. I'm now going to list them and highlight certain key passages:

  1. Google's (Motorola's) May 1, 2013 letter

    The first paragraph says Microsoft disclosed "brand new damages theories" on April 3, 2013. But they were first mentioned at a hearing almost a year, and even if one had forgotten about that in the meantime, a few days before April 3 Motorola's counsel had just mentioned the distribution center relocation issue (and acknowledged receipt of an email from Microsoft's counsel mentioning it as well).

    Toward the bottom of page 7, Google (Motorola) mentions as one of its defenses in this context "Microsoft's decision to not use Germany's Orange Book procedure to avoid an injunction". Microsoft disputes this in the letter it filed yesterday, and the German ruling (granting Motorola the requested injunction) makes clear that Microsoft did make an offer in accordance with the Orange-Book-Standard framework: it offered ten times the MPEG LA pool rate, and the court didn't rule out that this might have been a sufficient royalty, but decided to grant an injunction as it didn't want to rule out either that Motorola could ask for more money without acting abusively under antitrust law. What Motorola blames Microsoft for is a decision not to commit to take a license on FRAND terms to be determined by a German court. But the German Orange-Book-Standard decision mentions as the first option for a defendant to offer a rate above the upper end of a FRAND range, and Microsoft had already brought the Seattle contract action to determine rates on a worldwide basis.

    Footnote 3 (bottom of last page) says:

    "Such modifications to the schedule may require moving the August 26, 2013 trial date. Precluding Microsoft from relying on its new damages theories will preserve the trial date."

    So Google either wants to get rid of these damages theories or otherwise at least hopes to delay the damages trial.

  2. Declaration attached to Google's (Motorola's) letter

    Google's (Motorola's) summary of discussions and correspondence with Microsoft regarding damages-related discovery.

  3. Exhibits A-I to Google's (Motorola's) letter

    Exhibit A contains Microsoft's February 2011 initial disclosures. Obviously there was nothing in them concerning the distribution center move, which happened more than a year later (even the German Motorola lawsuit that gave rise to it wasn't filed until several months after these disclosures). The question is when Microsoft had to supplement these initial disclosures. In Microsoft's understanding, supported by a transcript, the court actually put all discovery unrelated to FRAND rate-setting on hold last spring.

    Exhibit B and C contain disclosures of witnesses by Microsoft.

    Exhibit D is an excerpt from a transcript of a March 14 conference call.

    Exhibits E-H are documents from the parties' correspondence regarding discovery requests and depositions. The most interesting passage is near the top of page 76 of the PDF document (second page of April 9 letter from Microsoft's counsel to a Quinn Emanuel lawyer representing Google's Motorola). I had quoted that paragraph in my report on Motorola's letter and will quote it again for your convenience:

    "The relocation of Micosoft's EMEA distribution center from Germany to the Netherlands was completed in June 2012. Motorola was aware of Microsoft's efforts to mitigate the potential harm resulting from the German injunction by relocating its EMEA operations to the Netherlands long before Quinn Emanuel became involved in this litigation. For example, at the summary judgment hearing that took place on May 7, 2012, Art Harrigan [counsel for Microsoft] explained that Microsoft had to move its German distribution center to the Netherlands as a result of the injunctive relief Motorola was seeking, since the relocation would take time to accomplish and could not be achieved effectively after the injunction became effective. Then, during a telephonic status call with the Court on July 9, 2012, Mr. Harrigan stated Microsoft's position that expert damages reports -- which would involve 'figuring out what it costs to dismantle Microsoft facilities in Germany in anticipation of an injunction' -- should be postponed until after the November 2012 [F]RAND [rate-setting] trial."

  4. Exhibits J and K to Google's (Motorola's) letter

    Discovery-related correspondence, nothing special there.

  5. Microsoft's response to Google's (Motorola's) letter

    In the first paragraph of Section I (Introduction), Microsoft points to its aforementioned disclosures of the EMEA distribution center-related damages theory during the May 7, 2012 hearing and July 9, 2012 conference call and cites Rule 26(e)(1), which says that supplementation of disclosures is necessary "if the additional or corrective information has not otherwise been made known to the other parties during the discovery process or in writing". Microsoft then recalls Motorola's specific agreement that "damages discovery will proceed on a separate schedule", which Microsoft says the court set on March 14, 2013.

    Near the top of page 2 of the letter, Microsoft describes Motorola's request for additional discovery as "both unjustified and untimely", the latter referring to the fact that this request could and should have been made weeks earlier rather than "wait[ing] to seek relief until the requested discovery expansion will inevitably impact the entire case schedule".

    Microsoft says that in any event, Motorola has "access to the discovery it needs" and Microsoft is flexible with respect to the number of depositions in terms of not insisting that depositions in the breach-of-contract context and those related to damages be counted separately.

    In the subsequent section Microsoft provides detail on the factual background, starting with Motorola's pursuit of a SEP-based injunction in Germany. Footnote 2 (on pages 2 and 3) explains that even after Judge Robart barred Motorola from enforcing the then-upcoming German injunction by means of a temporry restraining order (TRO), "there was no assurance that the Court would enter a preliminary injunction, or that the Ninth Circuit would affirm the Court’s ruling", creating legal uncertainty that "justified Microsoft's responsible efforts to ensure continuity of Xbox and Windows sales in EMEA by relocating its German distribution facilities beyond the reach of any German injunction". Even though the current dispute between the parties over these damages theories is a procedural dispute (timeliness, discovery), both parties have already discussed some of the key aspects of the merits.

  6. Exhibit 1 to Microsoft's response

    On July 10, 2012, one of Microsoft's outside attorneys on this case, Shane Cramer, wrote an email to Motorola counsel Phil McCune, asking his counterpart to inform Microsoft if there's any disagreement about Microsoft's understanding of the court's statements at a hearing the previous day "that damages discovery will proceed on a separate schedule, in conjunction with expert reports on damages and breach". Mr. McCune replied the next day: "We agree."

  7. Exhibit 2 to Microsoft's response

    This is an excerpt from a transcript of a May 7, 2012 hearing. Microsoft's counsel lays out a distribution center-related damages theory starting on page 3 of the document:

    "Microsoft's irreparable harm actually began before we even came into the court. And that is that it had to move its distribution center to the Netherlands because it wouldn't have time to make the change after an injunction was entered. There were hundreds of people dismantling its German operations. There was concern about all kinds of partner relationships being dismembered, because the German operation is huge and complicated, and there was no way to comply with an injunction without making the preparations."

    Judge Robart's initial reaction was that Microsoft simply shouldn't have chosen Germany as a location for its distribution center:

    "That just seems to me that Microsoft made a bad legal decision. German law was the same when it set this up as it is now. And they chose to go into a large and very lucrative market in the face of law which was known to them. So, that argument doesn't have much traction with me."

    The fact that the argument didn't have much traction in connection with irreparable harm (at the time the issue was whether to enjoin Motorola from enforcement of the German injunction) doesn't mean that the damages theory will be dismissed now, where it's about damages, not irreparable harm as a requirement for an injunction.

    Page 5 of the document contains Judge Robart's harsh criticism of both parties' tactics that was widely reported in the media at the time.

  8. Exhibit 3 to Microsoft's response

    This is an excerpt from a July 9, 2012 conference call transcript. Microsoft's lead counsel in this action said (starting toward the bottom of page 3 of the document):

    "Your Honor, with respect to the expert issue, my primary concern is the damages aspect of it, which involves, among other things, figuring out what it costs to dismantle Microsoft facilities in Germany in anticipation of an injunction. It's a lot of work. There are going to be depositions about it. There are probably going to be motions about it, and there is no reason -- we suggest that there is no reason for anybody to be working on that within the current compressed schedule for getting the RAND case ready."

    Right after that statement Judge Robart ruled on the further course of action, including the following on breach-of-contract and damages issues:

    "In terms of expert reports on both breach and damages, they are not called for at this time and they may be filed in accordance with the schedule that the court puts out in regards to the subsequent trial that we will be conducting."

    That also supports Microsoft's position that it didn't have to make additional disclosures until the court told the parties to prepare the second trial.

    What's really interesting is what Judge Robart said (on page 5 of the document) about a Motorola motion (unrelated to the distribution center-related damages) being consistent with Motorola's overall efforts to stall:

    "Well, frankly it is consistent with Motorola's approach to this litigation, which is to delay at all possible costs and to back-track if they can get away with it, so -- but I await your motion. Both sides have been warned that heavy monetary sanctions may be imposed on the law firms and the parties bad faith or abusive conduct in the litigation will be punished by equitable remedies going to the industry standard patents. That is why I am requiring the parties, in addition to the lawyers, to sign the pleadings."

    I remember that a Motorola filing with the Ninth Circuit mentioned a threat of sanctions that could be imposed on Motorola's lawyers, but no details were given and at the time I didn't have access to the hearing transcript. It's now clear that Judge Robart had warned "[b]oth sides" (same rules for everyone), but that Motorola's obstructive conduct had particularly annoyed the court.

  9. Exhibit 4 to Microsoft's response

    This is a March 29 email by Motorola's counsel to Microsoft's lawyer summarizing his "understanding of the information [Microsoft's counsel] provided on [their] telephone call [earlier that day]", including the following two aragraphs (first and second bullet point in the email):

    • "The first element of Microsoft’s damages will be the costs incurred by Microsoft to move its operations in Germany to the Netherlands in preparation for a potential injunction in Germany. The damages amount includes the actual costs of moving from the German facility to the facility in the Netherlands. Microsoft will provide actual invoices as backup for this portion of the claim. The damages amount will also include the differential in costs between operating in Germany and the higher operation costs in the Netherlands. Microsoft will provide the damages amount for this portion of the claim and an explanation of the differential costs incurred. This portion of the damages claim is not identified by actual invoices.

    • If Motorola notes a 30(b)(6) deposition on this portion of the damages claim, Microsoft may have to identify more than one person to respond – one for the moving costs and one for the differential operating costs. It is possible, perhaps likely, that one or both of these persons will reside in Europe."

  10. Exhibit 5 to Microsoft's response

    On March 30, Microsoft's counsel replied to his counterpart's summary of the conversation on the previous day (Exhibit 4), saying that in order to avoid a "semantics exercise" about the words used by him, he preferred to just provide "a general description" in his words, which Motorola's counsel subsequently called "helpful". Two paragraphs address distribution center-related damages:

    "We will provide supplemental responses to Motorola's interrogatories on breach and damages by the middle of next week. Microsoft's claim for money damages will include costs arising from preparing for a possible German injunction including costs incurred in connection with relocating a distribution facility from Germany to the Netherlands and increased operating costs that have been and will continue to be incurred as a result of the relocation. We will provide backup materials for these costs. The backup materials will include invoices, and we believe most of the costs of the move will be reflected in invoices. With respect to the operating cost differential we will include an explanation of the reasons for the differential.

    If Motorola notes a 30(b)(6) deposition on the above topics, it is likely that two, or possibly more, witnesses will be required to respond and one or more of them may be located in Europe, Ireland or Great Britain."

  11. Exhibit 6 to Microsoft's response

    This one contains email correspondence on April 30 and May 1 between the lawyers regarding depositions. Subsequently, Motorola brought its motion.

All the documents attached to Microsoft's response indicate that Seattle-based Summit Law Group represented Google's Motorola in this action, but the May 1 motion letter was filed by a Quinn Emanuel lawyer. Maybe Quinn Emanuel is now going to be in the driver's seat on Google's (Motorola's) side with respect to the breach-of-contract and damages trial. It has been representing Motorola against Microsoft from the beginning, including in both ITC investigations involving these parties.

I found the documents filed by both parties in connection with this procedural dispute very informative. This is a landmark case (as more and more people recognize after the FRAND rate-setting decision), and the more transparent it is, the better in my view.

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