Monday, August 19, 2013

Google makes 'defensive suspension' argument in FRAND contract dispute with Microsoft

In one week from today, the Microsoft v. Motorola breach-of-FRAND-contract trial in the Western District of Washington will start. And one week ago, Judge James Robart, the federal judge presiding over this case, handed down a summary judgment ruling that slightly narrowed the issues to be put before the jury. In that order he requested further briefing on one subissue: the bearing of Motorola's refusal to conclude a FRAND license agreement with Marvell, the maker of the chipset used in Microsoft's Xbox that implements the IEEE 802.11 (WiFi, or WLAN) standard. Microsoft argues that Motorola had an obligation to extend such a standard-essential patent (SEP) license to Marvell. Had it complied with it, Microsoft says it would have been licensed by extension, under the theory of patent exhaustion, an affirmative defense to infringement. Google's Motorola would like this theory thrown out before trial.

The parties filed their responses to the request for further briefing late on Friday. For most of us it will be totally sufficient to know (when the trial starts) what Judge Robart decides. I don't want to go into too much detail on a subitem. There is, however, an issue of transcendental importance that Motorola raises in its Marvell-related brief: defensive suspension. This one may very well come up repeatedly; in fact, it has already come up before, as I'll discuss in a moment. Besides arguing that patent exhaustion would not apply due to the territoriality principle (which is also a frequently-reoccurring issue, also in connection with Samsung's SEP assertions against Apple) and saying that only Marvell, not Microsoft, has standing in this context, Google also says that it would depend on the "specific terms" of a Motorola-Marvell agreement whether such a license would bar Motorola from bringing IEEE 802.11 SEP infringement claims against Microsoft's Xbox. In this context, Motorola places particular emphasis on the notion of a defensive-suspension clause (click on the image to enlarge or read the text below the image):

"Defensive suspension provisions are common in patent license agreements, including [F]RAND agreements. Indeed, Microsoft itself has acknowledged that '[w]hile there is no exhaustive lift of traditional [F]RAND licensing terms, in addition to a possible compensation element, such terms may include a field-of-use restrictions, reciprocity, non-sublicensability, defensive suspension and other common patent licensing considerations.' [...] Under Microsoft's own logic, Motorola and Marvell could have agreed to a defensive suspension clause under which Marvell may have been barred from selling licensed chipsets to Microsoft after Microsoft initiated litigation against Motorola. [...] Likewise, Motorola and Marvell could have agreed to other provisions allowing for termination of Microsoft's pass-through rights under certain circumstances. Thus, the scope of Microsoft's pass-through rights under a Motorola-Marvell license agreement depends on what terms Motorola and Marvell would have agreed to."

Apple has experienced this with Motorola and Samsung. Both sent termination notices to chipset makers at some point, saying that Apple is no longer a third-party beneficiary and, thus, no longer licensed by extension. In December 2011, a French court rejected Samsung's argument based on termination with respect to Apple as a third-party beneficiary, noting among other things that the ETSI FRAND licensing commitment, which was the relevant one in that case, requires SEP holders to extend irrevocable licenses. About a month later an Italian court adopted the French reasoning. As a result, Samsung failed to win French and Italian preliminary injunctions against the iPhone 4S.

In the paragraph I quoted further above, Motorola is effectively saying that it could have played the same game with Microsoft even if it had extended a license to Marvell.

Irrespectively of whether a FRAND licensing pledge contains the word "irrevocable", Motorola's argument that assertions of non-SEPs (in this case, Microsoft's October 1, 2010 complaints) entitle a SEP holder to defensive suspension must be rejected because, in conjunction with Motorola's stance on SEP-based injunctions, the net effect would be that anyone holding SEPs could get away with any infringement of non-SEPs simply by shutting down the non-SEP holder's products.

Defensive suspension may be fair, reasonable and non-discriminatory under narrow circumstances involving mutual SEP assertions. The only such circumstance that I can think of right now is a scenario in which SEP holder A licenses chipset maker C, but C has a customer B, who also holds patents essential to the same standard, and sues A. In that case, defensive suspension is the only way that enables A to bring about a FRAND license agreement with a reciprocity clause. Even in that scenario, I don't think injunctive relief should be available to either party over its SEPs (one of the reasons being that consumers would be harmed even if two companies agreed that they wanted to duke it out this way). But if A and B ask a court to determine a FRAND rate, then it would be fair to perform a valuation of both parties' portfolios and identify the net payer (and the amount of a net payment). This would greatly reduce (or almost eliminate) the risk of A ending up paying a much higher royalty, relative to objective patent value, than B, only because B benefits from A's agreement with C while B may be awarded a higher royalty in court. If both portfolios are evaluated by the same court, then that court will (at least it should, and normally it would) apply consistent standards to the valuation of both portfolios.

Motorola has recently made a spurious argument in this contract dispute about Microsoft allegedly having sought and enforced injunctive relief over FRAND-pledged SEPs, but it's only a distraction. Motorola didn't even raise FRAND defenses. If a given patent is subject to some FRAND licensing promise in a certain context, it still isn't necessarily available to all comers on FRAND terms for all kinds of use. Motorola wasn't entitled to FRAND licenses to any of Microsoft's SEPs-in-suit, which is why it didn't raise a FRAND/licensing defense in the related infringement proceedings (before the ITC and the Mannheim Regional Court, where Motorola's counsel did not even contradict when the judge said that a particular file system patent didn't have the exclusionary effect of a standard-essential patent). All that Google (Motorola) wants to achieve here is to muddy the water to the extent that a jury could get confused.

At any rate, even Motorola never argued that Microsoft asserted any WiFi-essential patents against it. Defensive suspension is only acceptable in order to bring about reciprocity, and reciprocity should be limited to the same standard. That's not just my opinion but also the way the FTC defined reciprocity in its proposed Google-Motorola consent order ("relevant standards", not just any standards).

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