Thursday, September 5, 2013

Motorola wanted a free license -- now Microsoft basically gets one and Google will have to pay

A federal jury yesterday rendered a verdict that makes Google (Motorola) a convicted patent troll. It has been found to have breached the duty of good faith and fair dealing flowing from Motorola's FRAND licensing pledges to standard-setting organizations. None of the companies typically described as trolls have actually been convicted of similarly unlawful conduct.

The reputational cost of this finding far exceeds the $14.5 million damages verdict. And it's also a clear signal to other standard-essential patent (SEP) holders: there's a potential liability if you renege on your promises, and damages could be much greater in cases in which someone actually does obtain and enforce injunctive relief, or in which an implementer, at point blank, bows to threats. Before the Seattle trial, AllThingsD's John Paczkowski raised the good question of whether other victims of Motorola's conduct, such as BlackBerry, might now also seek damages and adjustments of extortionate royalties. And let's not forget that Apple has also brought breach-of-FRAND-pledge claims against Google's Motorola, a matter that is currently on appeal.

There's another front on which Google has to be worried about yesterday's verdict: antitrust. The FTC let Google off the hook without major consequences other than imposing restrictions with potential loopholes, dropping from its final consent order its holding that Google's Motorola breached antitrust rules. Now there's a jury verdict that serves as more than a replacement for the related sentence in the FTC's draft order. And Google is not off the hook in Brussels: the European Commission is investigating both Apple and Microsoft's complaints over Motorola's SEP abuse. In May it issued a Statement of Objections (SO), a preliminary antitrust ruling with respect to Motorola's behavior vis-à-vis Apple, with a hearing to be held in a matter of weeks based on what I hear, and yesterday's verdict does nothing to dissuade the Commission from also handing down an SO with respect to Motorola's SEP abuse against Microsoft. This could get more costly than yesterday's verdict: the EU can impose fines of up to 10% of annual revenues.

I'll talk about one of my antitrust concerns -- tying -- now. I had been saying for some time that the plan that Motorola and Samsung pursue in their disputes with Apple and (only Motorola) with Microsoft is to create a situation in which they will get away with infringement of non-SEPs without paying an appropriate royalty and accepting the usual restrictions, such as the anti-cloning provision HTC acceded to in its settlement with Apple. Their cash-only offers were totally prohibitive. As an ITC judge found last year in a preliminary ruling on Motorola's complaint against Microsoft, "Motorola was not interested in good faith negotiations and in extending a [F]RAND license" to Microsoft. The real objective was a royalty-free and restriction-free license to Microsoft's non-SEPs. Motorola admitted this much in yesterday's closing argument, as GeekWire's Todd Bishop, who did some excellent coverage (as did a couple of other reporters) of the FRAND breach trial, reported on Twitter:

Motorola wanted "zero-zero" agreement with Microsoft where both companies could freely use each other's patented technologies. #motosoft

Now, I wouldn't have a problem with someone merely proposing a "zero-zero" agreement involving SEPs and non-SEPs. If two companies negotiate and, without undue pressure, both arrive at the conclusion that the IP they bring to the table is equally valuable, and if they find it more efficient (which it undoubtedly is) to have a comprehensive license agreement involving SEPs and non-SEPs alike, that's fine. But just like in the Samsung-Apple dispute (especially, but not only, the part of it that was put before the ITC), there's one thing that a SEP holder absolutely must do if the other party is not interested in a comprehensive deal involving both categories of patents or doesn't accept a related proposal: it must make a SEP-specific cash-only offer on FRAND terms.

The correct approach to the analysis of someone's compliance with a FRAND pledge and the SEP-related obligations under competition law is to determine whether a SEP holder has made at least one offer that, all by itself, is FRAND. If someone offers a reasonable royalty only if that one is tied to non-SEPs, which are FRAND-unencumbered, and makes an out-of-this-world cash-only "offer" that is the equivalent of demanding $54 million for a standard Ford Taurus, then neither offer is FRAND-compliant, and consequently, either one is part of a behavior that comes down to a breach.

If Motorola had offered Microsoft a cash-only deal on terms within the FRAND range established by Judge Robart, it could have made any number of other proposals without a problem. For example, an alternative proposal involving Microsoft's non-SEPs would have been fine and would not have constituted tying, since there was a tying-free FRAND offer on the table. Even if Motorola had proposed in the alternative that the parties sign a license agreement for a fee that would be determined by rolling the dice (which is what baseball arbitration of the kind Google proposes is basically about, unlike actual baseball arbitration, which prevents unreasonable outcomes beforehand), it wouldn't matter.

I recently explained the concept of tying (a topic on which I also did some work outside of the IT industry, consistently fighting against abuse) in a post on the Samsung-Apple situation, using the example of a water monopoly that would force everyone to buy smartphones from it.

Because of the Western District of Washington litigation (which Motorola can and will take to an appeals court, but I don't expect a fundamentally different result when all is said and done), Motorola's tying strategy against Microsoft has failed. There won't be a "zero-zero" license. Actually, instead of Motorola getting a freebie, yesterday's damages award alone amounts to eight years' worth of court-determined FRAND royalties for Motorola's SEPs. Also, Microsoft will benefit from Nokia's license agreement with Motorola as far as the wireless devices business it is acquiring from Nokia is concerned, a deal that will provide Microsoft with "the most cost-effective patent arrangements for smart devices" of any industry player.

Google's (Motorola's) chutzpah is astonishing. At least 20 Android device makers are known to pay Microsoft royalties; it's actually more than that because the 20 licensees include major Original Device Manufacturers (ODMs) like Foxconn parent Hon Hai, who then pass on their licenses to the companies for which they manufacture phones and tablets. These companies include major patent holders and a number of companies that are known as rather aggressive litigants -- the likes of Samsung, LG and HTC are quite the opposite of low-hanging fruit and soft targets. Even Motorola, before Google took control of it, was basically prepared to pay up. But then Google took charge, and Google is adamant about its claim that Android device makers don't need third-party patent licenses, despite the fact that Microsoft has won (with most of its infringement claims against Motorola not even having been adjudged yet) a U.S. import ban and three German injunctions against Motorola Mobility. Realistically, this dispute can have only one outcome: Google will end up the net payer. The licensing fees from Google/Motorola to Microsoft will be substantial, while the fees for Motorola's SEPs will be modest, and breach damages and antitrust fines may add to Google's overall Motorola acquisition costs.

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