Sunday, May 26, 2013

Google tells Federal Circuit what it actually likes about Judge Robart's FRAND rate ruling

A couple of weeks ago Apple filed a copy of Judge Robart's FRAND rate ruling with the Federal Circuit and explained why it believes this supplemental authority supports its case in the "Posner appeal". On Friday Google's Motorola replied to Apple's notice.

Google's primary position is that the Microsoft v. Motorola FRAND rate ruling in the Western District of Washington is "inapposite to [the Posner appeal] because it purports to set a FRAND rate to license a different class of products involving different patent portfolios and different standards and arises in a purported contract case that does not involve infringement damages". The differences in products, patent portfolios and standards are, of course, unrelated to overlaps of the issues. Apple didn't claim that Judge Robart has determined the proper license fee Apple would have to pay for Motorola's cellular standard-essential patents (SEPs). And while it's true that the Seattle case is a contract case, the rate-setting decision applied a methodology from the realm of patent damages -- the Georgia-Pacific factors. Toward the end of the filing, Google notes that "the patent pools analysis [Judge Robart] used [...] is not at issue [in the Posner appeal]."

Wholly apart from disputing relevance, Google explains in which ways Judge Robart's FRAND rate ruling, should it be deemed relevant, supports its case. These are the points from Judge Robart's ruling that Google likes (quoting from Google's representation of Judge Robart's ruling in its latest filing with the appeals court, not from the original decision):

  1. "ex ante incremental value at the time of standardization may be helpful in determining a FRAND rate but is only one factor in the analysis"

  2. "Georgia-Pacific requires a hypothetical negotiation at the time of first infringement"

  3. "only certain Georgia-Pacific factors may be relevant to a given case [...]--especially 'customary practices of businesses licensing [F]RAND-encumbered patents'"

  4. "comparable 'real-world' licenses are relevant to hypothetical negotiation analysis"

  5. "The Decision acknowledges that Motorola's wireless cell phone portfolio is 'extremely strong.'"

  6. "acknowledges that FRAND rates can be higher than pool rates"

It's an additional validation of Judge Robart's comprehensive and balanced approach that Google isn't fundamentally opposed to all key aspects of his methodology, though I'm sure it's unhappy about the result in that particular case.

In my detailed commentary on Judge Robart's ruling I had also noted that he agreed with Google's Motorola on a lot of items, including the selection of the governing framework (Georgia-Pacific), and I discussed the differences between his approach and that of Judge Posner (which is not to say that one is superior over the other, but Judge Robart's reasoning will be more difficult to attack in its entirety on appeal).

Let's just have a quick look at what the six "likes" (or, more appropriately here, "Google +1's") mean for the Posner appeal:

  • They don't explain away the most important aspect of Judge Robart's FRAND rate ruling, which is that it's a proof of concept for the notion that FRAND disputes should be resolved through court determination of license fees rather than injunctive relief or any other form of extortion. The specifics of each case are different, and I, too, acknowledged that Judge Robart's case-specific decision can't serve as a blueprint for every FRAND rate dispute out there. But the fact of the matter is that the first FRAND rate determination made by a federal court has worked out very well, and there's no indication that other cases can't be resolved the same way.

  • Items 1 and 2 (the numbering is mine) relate to Google's primary criticism of Judge Posner's approach to license fees: timing. But I wouldn't overstate the difference between Judge Robart and Judge Posner's approaches, and I'm not sure it makes a different of even one cent of royalties in the Apple-Motorola case. Judge Posner basically says: "Your SEPs are worth what they were before they became SEPs (value of 'patent qua patent'), but anything above and beyond that is hold-up value which I won't give you". Judge Robart effectively says: "I'll assume that you negotiated when the alleged infringement began, but I'll also assume that you both negotiated in full awareness of the fact that hold-up value in terms of value the patent didn't have prior to standard-setting must be excluded."

  • As for items 3 and 4, I don't think Apple would even disagree that if a FRAND rate is set according to Georgia-Pacific (which is not its preference), some factors don't apply. With or without FRAND it's probably hard to find a case in which all 15 factors apply. But it's definitely good for Google that customary licensing practices and comparable "real-world licenses" are among the ones Judge Robart considered relevant. However, in the Microsoft v. Motorola case those customary practices also included patent pools, which Google didn't like. Also, if a rate isn't FRAND, it isn't FRAND regardless of whether it can perhaps somehow be reconciled with customary practices.

    The customary licensing practice Google likes best is the one of many deals involving royalties relative to an entire product as opposed to, for example, a component like a baseband chip. In the past all phones were just phones, apart from minor differences in terms of address books etc., while nowadays there's a distinction between feature phones and portable computers, i.e., smartphones/tablets. Apple changed this, and Apple reasonably argued in a different but related context that a jalopy and a new sports car pay the same highway toll. Furthermore, there's a difference between what results from free-form negotiation vs. a simulated negotiation in a restricted scenario. Most license deals involve SEPs and non-SEPs at the same time, and there's nothing wrong with this if it's what the parties agree on, without one party coercing the other into a deal. But in a FRAND dispute it's necessary to set a separate royalty only for SEPs because SEPs, unlike non-SEPs, must be licensed. If parties can't agree on a FRAND rate and a court must set it, then I think the only practicable approach is to focus on the smallest salable unit.

    One more thing about item 4: one of Google's problems in the Microsoft case was that the license deals it presented weren't deemed comparable. Some involved completely different patents (which Google now also claims with respect to Apple's citation to Judge Robart in the Posner appeal), and others did involve some or all of the relevant ones, but also related to many others. Part of the reason is what I just explained: there's a structural difference between the results of most voluntary negotiations and those of simulated negotiations for the purpose of setting infringement damages or FRAND rates. I've criticized certain "baseball arbitration" proposals in the FRAND context (which don't even correspond to what is actually done in baseball when a non-free agent is involved), and those who argue that there would be enough real-world license deals in place to indicate a FRAND range don't consider that decisions in FRAND disputes will result in FRAND-only rates while real-world settlements will most of the time also involve non-SEPs, which in turn makes them much less useful, or in many cases entirely useless, as comparables in subsequent FRAND disputes. A single non-SEP can be more valuable than a large number of SEPs because it owner usually doesn't have an obligation to license it. Besides usually involving non-SEPs, deals between major players are typically cross-licenses and then it's hard to figure out how valuable a particular party's portfolio was in the eye of the parties. By contrast, decisions like the one Judge Robart made contribute to the development of relevant case law and deliver "clean" results ("clean" in terms of not involving non-SEPs, cross-licensing etc.).

  • Item 5 -- Judge Robart's extremely favorable comment on the strength of Motorola's cellular SEP portfolio -- is the only thing in Judge Robart's decision that I disagreed with. But Google has every right to get mileage out of it.

  • Regarding item 6, it's true that Judge Robart agreed with Google that FRAND rates can be higher than pool rates, but under the specific circumstances of that Microsoft v. Motorola case, the difference wasn't much. It amounted to a few hundred thousand dollars per year, which is negligible in the context of a license deal with the world's largest software company and a leader in the gaming console business.

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