Monday, December 30, 2013

2013: The year Google raised a FRAND defense (against Intellectual Ventures)

In what will probably be my last post for this year (though it won't be the last post here on a patent case, or one of the last ones, in general as far as my own plans are concerned), I'm going to talk about a couple of FRAND-related court filings that were made earlier this month. Both of them involve Google and its Motorola Mobility subsidiary.

The first one is Google's (Motorola Mobility's) answer to Intellectual Ventures' amended complaint in the Southern District of Florida, in which IV is asserting various wireless patents originally obtained by Nokia. Lo and behold, Google is actually resorting to a FRAND defense against some of IV's patents-in-suit:

"M. Thirteenth Defense and Affirmative Defense

Plaintiffs' claim for damages is limited by FRAND principles since Plaintiffs contend one or more of the patents are essential to the practice of and Plaintiffs or its alleged predecessors in interest to the '793 Patent, the '392 Patent, the '960 Patent, the '771 Patent, the '784 Patent, the '073 Patent, and the '353 Patent participated in the relevant standardization processes and/or submitted a declaration including a FRAND commitment covering one or more of these patents to the relevant standards body and/or otherwise committed to license one or more patents on commercially reasonable and non-discriminatory terms."

Also this month, Google decided to raise this defense against yet another patent-in-suit, and IV did not oppose the related modification, though it does, of course, disagree on substance.

Actually, this kind of FRAND defense was already in Google's answer to the original complaint, filed several months earlier. I admit that I had not paid close attention to this lawsuit. And a FRAND defense that merely relates to a limitation to a "claim for damages" is not a full-fledged, comprehensive FRAND defense of the kind that Apple and Microsoft raised against Motorola. But still it's significant enough that Google feels forced to raise a FRAND defense against IV, and as that litigation unfolds, it may have to be much more specific about how it believes a FRAND licensing pledge to a standard-setting organization benefits third parties.

In its disputes with Apple and Microsoft, Google's Motorola does not recognize third-party beneficiares. In the Microsoft FRAND case in Seattle, its then-counsel made a concession to that effect in early 2012, but on appeal Google is probably going to re-raise this issue. Google is, in fact, disputing the rights of third-party beneficiaries in its cross-appeal of the dismissal of a FRAND contract case brought by Apple in the Western District of Wisconsin.

The Federal Circuit appeal (actually, Google tries to get it transferred to the Seventh Circuit) of that Wisconsin FRAND contract case is the other FRAND case I wish to discuss in this post. On December 19, Apple filed its reply brief in support of its appeal of the dismissal, the public redacted version of which entered the public record the following week (this post continues below the document):

13-12-19 Apple Reply Brief in Appeal of Wisconsin FRAND Dismissal by Florian Mueller

Now Google will get to file a reply brief in support of its cross-appeal, and then briefing will be complete and the appellate hearing will be scheduled. You can find more details in the briefs. I'll just share my high-level observations here.

The most fundamental disagreement between Apple and Google is that Apple argues on appeal, as it did in district court, that a FRAND licensing pledge is enforceable like any options contract in the sense that a beneficiary can obligate the patentee to make an offer on FRAND terms (court-determined if necessary) without the beneficiary (here, Apple) having to make an unconditional commitment to take a license on court-determined terms. Unlike Apple, Microsoft made that commitment in its own dispute with Motorola. That's why Microsoft already has a FRAND rate determination and a jury verdict finding a breach of contract by Motorola in place, while Apple needs help from the appeals court in the form of a remand to district court in order to reach the stage of the Microsoft-Motorola proceedings further down the road (like in 2016 or so). But let's separate tactics from the legal framework. No matter what Microsoft did, Apple may actually be right that it's not necessary to make a commitment of this kind, or to write a blank check, which is how Apple portrays it.

Apple wants to retain its choice to either accept an offer on court-determined FRAND terms or to "continue to fend off Motorola's infringement allegations (which thus far have failed dismally)". As to the dismal failure of Motorola's infringement claims, Apple notes that "[i]n fact, in the course of years of litigation asserting eight declared-essential patents in multiple U.S. jurisdictions, Motorola has never--not once--succeeded in proving that Apple has infringed a valid patent." (That, of course, is yet another data point that calls into question the "wisdom" behind Google's $12.5 billion Motorola deal.)

Whether this appeal will ultimately be adjudicated by the Federal Circuit or by the appeals court Google prefers in this particular case (the Seventh Circuit), Wisconsin state contract law will be the governing law. Of course, a ruling will bear considerable weight in all states that have a similar contract law framework in place as Wisconsin.

I'm not an expert in Wisconsin contract law. I did, however, notice that Apple places more emphasis on Wisconsin law while Google's Motorola makes a whole lot of policy arguments that, according to Apple's reply brief, "amount to arguments to change Wisconsin law". Generally, lawyers emphasize applicable law if they believe it's on their side, or they focus on facts if that seems opportune, but the more they talk about policy, the less confident they are of their positions in those other areas.

Even if (just assuming this now for the sake of the argument) Wisconsin state contract law is indeed on Apple's side, the Federal Circuit will probably still be fairly sympathetic to Google's approach, for policy reasons. Apple's lead counsel in this appeal, Orrick Herrington Sutcliffe's E. Joshua Rosenkranz, has already won one Federal Circuit appeal for Apple against Motorola, recently appeared on the winning track at the hearing in the "Posner appeal", and is virtually certain to revive Oracle's copyright case against Google. But in those other cases, the positions he took were clearly compatible with the Federal Circuit's intellectual property-friendly philosophy, and Google's (Motorola's) position on FRAND royalties was so out of line that Chief Judge Rader of the Federal Circuit repeatedly labeled it as "crazy". In the Wisconsin appeal, Google's position is (apart from certain elements such as its denial of third-party beneficiary rights) nowhere as strikingly unreasonable as in the "Posner case", and Apple's position is nowhere as right holder-friendly as in Mr. Rosenkranz's other smartphone-related Federal Circuit appeals.

It could be that the Federal Circuit concludes that Wisconsin contract law entitles Apple to a FRAND offer from Motorola regardless of whether it pre-commits to its acceptance, with no wiggle room to decide in Motorola's favor based on such notions as Apple being an allegedly "unwilling licensee". But if the Federal Circuit feels that Google's (and Qualcomm's) warnings against a devaluation of FRAND-pledged SEPs can be outcome-determinative, then Apple is in for a really rough ride at the appellate hearing.

It has been pointed out by others, of which I'd like to particularly mention Professor Thomas Cotter, that FRAND determinations factoring in the inevitable uncertainty surrounding the validity and essentiality of declared-essential patents could result in what I would describe as a downward spiral. If there's a probabilistic discount once in the process, that's fine and fair. But if there's a further discount, and if this affects future determinations in which earlier decisions and settlements are used as comparables, then, theoretically speaking, royalty rates could converge with zero.

Motorola argues that Apple would simply use a FRAND determination by a court as a bargaining chip. If, for example, the court says that Motorola is entitled to $1 per device, Apple will then tell Motorola that it can, for instance, get 70 cents now or Apple will continue to litigate, since the $1 offer would be a get-out-of-jail card at any stage of the dispute. And it's true that if Apple could always change mind and accept a $1 offer that a court orders Motorola to make, then it would only be rational for Motorola to do a deal slightly below $1 now. 70 cents would probably be too low, unless Motorola fears that it's unlikely to gain serious leverage through SEP assertions. But 90 cents would probably be just a rational decision. Now, if the court determination of $1 was right, but if Motorola accepted 90 cents for the reason I just outlined, then this would affect future FRAND rate-setting decisions. Future rate-setters (courts or arbitrators) would see that a court thought $1 was fair, but they would also see that Motorola settled for 90 cents. And if you have a sequence of rate-setting decisions influenced by this, then it becomes increasingly unlikely that a future court or arbitrator would, all other things being equal, attach a $1-per-unit valuation to Motorola's portfolio.

All I'm saying here is that the policy concerns expressed by Google in this context aren't all unreasonable. I've criticized a number of Google positions, mostly on FRAND. In this particular case here, while I see potential merit in Apple's theory of an enforceable options contract, I can't say that Motorola and Qualcomm (and others) don't raise a legitimate policy concern.

From the Federal Circuit's vantage point, looking at the record of this case and of related cases, neither of the parties nor the district judge make a perfect impression. Judge Barbara Crabb in Wisconsin was pretty much on Apple's side and then became a bit emotional about Apple's "no more than $1" position. She initially wanted to dismiss Apple's case even without prejudice, only to realize after further thought that this was too extreme. That doesn't look great. But Apple's behavior before the district court can be perceived (rightly or wrongly) as somewhat arrogant, also in light of the fact that other litigants, such as Microsoft, did commit beforehand to take a license on court-determined terms, which is also what the Federal Trade Commission deemed reasonable in the Google-Motorola FRAND antitrust case. But Google's Motorola also has its credibility problems. It has notoriously taken "crazy" positions on FRAND, it's known to have drawn antitrust scrutiny in the U.S. and Europe, and it's presumably not lost on the Federal Circuit that Google is the driving force behind a massive anti-patent (and generally IP-eviscerating) push in Washington DC and elsewhere.

All in all, this looks like the most difficult one of Mr. Rosenkranz's smartphone-related appeals to win, unless Wisconsin law is as firmly on Apple's side as he argues. Should it come down to policy considerations, I would bet on Google this time around.

If you'd like to be updated on the smartphone patent disputes and other intellectual property matters I cover, please subscribe to my RSS feed (in the right-hand column) and/or follow me on Twitter @FOSSpatents and Google+.

Share with other professionals via LinkedIn: