The dust has barely settled after Judge James L. Robart's landmark FRAND rate-setting determination in the Microsoft v. Motorola contract case (initial reaction, follow-up including media round-up, closer look), and the next significant disagreement between the parties has already come to light. On Wednesday (May 1, 2013) counsel for Google's Motorola filed a letter asking the court to preclude Microsoft from relying on certain damages theories at the upcoming breach-of-contract trial (scheduled to commence on August 26, 2013) or to extend certain deadlines, which Google recognizes "may require moving the August 26, 2013 trial date".
Given the discrepancy between the court's FRAND determination and Motorola's royalty demands as well as Motorola's concession, made at a hearing last year, that a "blatantly unreasonble" initial royalty demand does constitute a breach of a FRAND contract, I can't imagine any other finding than a breach. Frankly, I don't think it even makes sense to ask a jury whether an initial demand amounting to billions of dollars can be reconciled with a royalty determination that even at the upper end amounts only to a few million dollars per year. Of course it can't. But there's going to be a fight over the damages Google owes. While it's unlikely that such damages could have material direct impact on Google's bottom line, Google is presumably going to fight hard to limit the amount because damages awards for breach of contract are bad for a company's reputation, especially in a context that has also triggered antitrust investigations. Also, Google will look particularly bad if the damages it owes Microsoft end up matching or even exceeding the standard-essential patent (SEP) royalties it will get to collect until expiration of the patents in question.
According to its letter and the accompanying documents, Google is facing damages claims based on the following theories:
the litigation expenses Microsoft incurred in defending itself against Motorola's conduct in the United States and Germany;
the costs of relocating Microsoft's EMEA (Europe, Middle East, Africa) logistics center out of Germany in order to mitigate the impact of upcoming H.264-based injunctions (one-time costs of approximately $11.6 million and increased annual operating costs of approximately $5 million);
Motorola's refusal to grant a license to Marvell covering its IEEE 802.11 (WiFi) SEPs (Marvell, which supplies WiFi chips to Microsoft that are used in the Xbox, requested one in July 2011); and
Google's refusal to grant Microsoft a license to its H.264 patents under its agreement with patent pool firm MPEG LA after completing the acquisition of Motorola in May 2012.
Google argues that Microsoft has belatedly presented these damages theories. In one of the documents Google attached to its letter to the court, Microsoft's counsel (in a letter dated April&nbp;9, 2013) disagrees particularly with respect to the cost of relocating its European distribution facility out of Germany:
"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."
In another document attached to Google's letter Microsoft explained why it had to relocate its EMEA distribution facility:
"Microsoft's main logistics and products/software distribution center for the European, Middle Eastern and African ('EMEA') market was located in Germany. The injunction Motorola sought through its German actions would have not only removed Microsoft's products [not only the Xbox but also Windows] from Germany, but threatened Microsoft's entire EMEA distribution network for its products."
Google now argues that if Microsoft is allowed to pursue damages on these grounds, Motorola should be allowed to conduct further discovery (beyond Microsoft's ongoing production of documents) with a view to its defenses. This would take more time, and while Google would ideally like Microsoft's theories to be thrown out, it at least wants to achieve some extensions of deadlines, which in turn could require the court to postpone the damages trial.
At this stage it's a discovery dispute with potential scheduling implications. But Google's letter and the attached documents indicate some of Google's defenses. With respect to the relocation of the EMEA logistics center, Google argues that Microsoft should have made an offer under German Orange-Book-Standard rules, an argument that failed to impress the Ninth Circuit last year. It furthermore claims that Microsoft could have avoided some or all of the relocation costs because a temporary restraining order (subsequently converted into a preliminary injunction) by Judge Robart barred Motorola from enforcing its German H.264 injunctions anyway. Based on the sequence of events, it appears that Microsoft had to commit to this relocation before it won the anti-enforcement order. German news agency dpa reported on the relocation on April 2, 2012. The Mannheim Regional Court had originally scheduled its H.264-related Motorola v. Microsoft rulings for April 17, 2012. On April 12, 2012 I found out from a Bloomberg report on the temporary restraining order (and a day later obtained confirmation from the court) that the ruling had been postponed to May 2, 2012. Even if Microsoft had known much sooner that the ruling would come down on May 2 instead of April 17, 2012, it's hard to see how it could have waited until Judge Robart's April 11 decision on its request for an anti-enforcement order before committing to and starting a logistical operation of this scope. (There may also be other issues, such as whether Microsoft was able to rely on a temporary restraining order or preliminary injunction, given that Google appealed it on May 2, 2012, right after the German ruling, and that even by February 2013 Google had still not withdrawn its request for SEP-based injunctive relief in Germany).
This continues to be the most interesting FRAND case ever.
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