Tuesday, August 27, 2013

Motorola's initial demand letters to Microsoft -- ultimatum or "let’s get things started"?

The Microsoft v. Motorola FRAND breach trial that started yesterday in Seattle gets considerably less media attention than certain California trials (Oracle v. Google and Apple v. Samsung) received, but I'm glad that there's some very informative reporting. On Twitter, Janet Tu (Seattle Times) and Todd Bishop (GeekWire) use the #motosoft hashtag for sharing information on what's happening in the courtroom. They've also written articles on the first day of the trial (Seattle Times, GeekWire).

This second trial is way more exciting from a legal than a commercial point of view. It's definitely interesting to have a debate over what constitutes a breach of a FRAND licensing promise and what the remedies for such a breach should be. But from what I read on Twitter, the damages claims themselves aren't huge if you compare them to the size of the companies involved: $23 million in relocation costs for Microsoft's European logistics center and $6 million in attorney's fees for defending against Motorola's SEP-based injunction requests. Even if Microsoft prevailed 100%, the amount wouldn't be a threat to cash-rich Google. Actually, Google's primary concern would be the embarrassment resulting from this (and which would even result from a $1 nominal damages award). While Google can try to tell the public that this trial was about Motorola's behavior in 2010, Google has had 15 months since taking full control over Motorola and hasn't really honored its FRAND licensing obligations.

Again, from a non-financial legal point of view, the breach question is an interesting one nonetheless, and Google takes this trial very seriously.

I understand from the media reports I linked to further above that counsel for Google's Motorola tries to portray Microsoft's October 1, 2010 Android patent infringement complaint(s) against Motorola as part of an effort to put Motorola out of business, a claim that has a major credibility problem because Microsoft has already announced Android patent license deals with 20 companies, 19 of which accepted Microsoft's terms without any litigation. Someone on a mission to kill the competition wouldn't be willing or able to strike so many deals -- and it's not just the number of those deals but let's not forget that companies who took a license without litigation include patent-savvy powerhouses like Samsung, LG, HTC, Foxconn parent Hon Hai and ZTE. Now, I'm not saying that Android patent deals don't have competitive impact. Of course, if money changes hands between companies, there's always some effect on competitiveness. One company may have to raise its prices (or reduce its margins, or a combination of both), while the other can invest its licensing income into more research and development or other business functions. But if you go for people's throats, they won't just do a deal on your terms because they'd stipulate to their own destruction.

As a matter of fact, Motorola was reasonably optimistic that it could settle with Microsoft if it wanted, but knew that its ability to settle was restricted (actually, eliminated) under the merger agreement it signed with Google in August 2011. Here's a passage I previously quoted from an official Motorola filing meant to inform actual and prospective investors of the potential downside of the Google deal:

"Motorola Mobility has certain potential near-term intellectual property ('IP') licensing opportunities and certain IP litigation risks that without the merger may have been able to be settled on favorable terms to Motorola Mobility and may be more difficult to settle on such terms after entry into the merger agreement. Further, if licenses are not entered into and litigation is not settled, Motorola Mobility's position in these matters may be prejudiced if the proposed merger does not close"

This doesn't support Motorola's allegation that Microsoft was "trying to put Motorola out of business".

And now that I've talked so much about that claim, I actually wonder whether it was worth it. I mean, it's irrelevant anyway. Microsoft asserted non-SEPs, which are unencumbered intellectual property. It never promised to extend a license to Motorola on FRAND terms for the ways in which it allegedly used and still uses those patents. We're not talking about a two-way lawsuit about allegations of broken promises. We're talking about two distinct categories of patents that come with different sets of rights and obligations, and only Motorola's SEPs-in-suit raise issues due to encumbrances and restrictions.

Unless someone just fell off the turnip truck, no one would seriously believe that in a dispute between two large corporations any one party would act like a charitable organization and never do anything that a creative legal team couldn't somehow find a way to criticize. Microsoft's patent assertion against Motorola was business as usual. Microsoft has always made it clear that it expects intellectual property rights to be respected and to be licensed, and that it's not in the business of allowing free-riding. This is just so different from Motorola's FRAND licensing promise at issue in this trial. Motorola promised to grant FRAND licenses to those SEPs to all comers, and instead sought injunctions (not only against Microsoft but it's still doing so against Apple as well, and it played this game against BlackBerry maker Research In Motion, a company that is notorious for poor judgment with respect to patent litigation tactics, backing down too easily in some cases and overplaying its hand years ago against a troll). By contrast, if Microsoft could be understood to have "promised" anything (and there never was a formal promise of the FRAND pledge kind), it "promised" to protect its IP, and has generally delivered on that one.

Obviously, Google (Motorola) also knows that it can't just turn this into a finger-pointing contest about who threw down which gauntlet or has the right to throw the first stone. Google's Motorola has to defend its own conduct because diversion is not a defense, and what I read in the trial reports mentioned further above indicates that Motorola describes its $54-million-for-a-Ford-Taurus kind of royalty demand as a "'let's get things started' figure" and says "what Motorola expected was the custom and practice in the industry — that you then talk", but Microsoft filed this FRAND contract case in response to Motorola's October 2010 letters.

Microsoft's take in this litigation has been that those demand letters came with a 20-day ultimatum, and that Motorola already breached its FRAND pledge by making a bad-faith demand.

There will be more talk about this in the days ahead. I already commented on the style, content and context of those letters more than a year ago. Rather than repeat what I said then, I'm now just going to (re-)publish both letters for everyone to see and to form an opinion as to how much of an "invitation" to talk -- as opposed to Hobson's Choice ("take it or leave it") -- they constituted, and we can then talk some more about this based on what the lawyers and the witnesses say as the trial unfolds. I think the language of those letters is clear all by itself, and even clearer in light of the context of a FRAND obligation and ongoing litigation. Also, we all know what happened: a day after Microsoft sought to enforce its entitlement to a FRAND license, Motorola started its pursuit of injunctive relief.

There were two letters, one for H.264 (video codec) and one for IEEE 802.11 (WiFi) patents, with the same basic structure. Here they are:

Motorola H.264 SEP Demand Letter to Microsoft by Florian Mueller

Motorola WiFi SEP Demand Letter to Microsoft by Florian Mueller

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