Earlier this month it became known that in fiscal year 2012 (mid-2012 to mid-2013) alone, Samsung paid Microsoft more than $1 billion in Android patent royalties. Samsung is only one, but presumably by far the largest, of Microsoft's 27 Android patent licensees. While Microsoft's patent licensing effort has been tremendously succesful, litigation results (after more than four years of suing Motorola) suggest that Samsung could get a deal on far better terms, or opt to defend itself in court for years (the Motorola way), if the royalty rate had to be negotiated again. A zero-zero cross-license would be a real possibility considering that Microsoft is now a device maker and Samsung holds many patents essential to cellular telecommunications standards.
I've said it before on Twitter: Android isn't free in light of substantial royalties changing hands, but Motorola has so far proven that Android could have been free if every Android device maker had decide to take their chances in court and modify products as needed.
For Microsoft's Android patent licensing business it's now key to hold Samsung for as long as possible (2018) Samsung to the terms of the existing license agreement. Presumably Samsung would be prepared to settle the case if Microsoft substantially lowered the royalty rate. But for now, it's an all-or-nothing proposition: either Samsung still has to comply with the 2011 contract or it doesn't have to.
Samsung has initiated an arbitration proceeding under ICC (International Chamber of Commerce) rules, and a week ago it brought a motion to compel arbitration and to stay the case in the Southern District of New York (this post continues below the document):
Without access to all the terms of the agreements in question, it's impossible to form an opinion as to which party's contract interpretation is more convincing. The above memorandum of law at least sheds some light on Samsung's argument.
There are two contracts (which was known before, but in less detail): a patent licensing agreement and a business collaboration agreement. The latter related to Samsung's role as a Windows device maker. The patent license agreement requires disputes to be resolved in the Southern District of New York, where Microsoft brought its suit. The business collaboration agreement, however, appears to be even more confidential and, according to Samsung's filing, "specified that [the parties] would arbitrate certain disputes in Japan under the Rules of Arbitration of the International Chamber of Commerce ('ICC Rules')." Under ICC Rules, even the question of arbitrability (i.e., whether a dispute falls under an arbitration clause) must be arbitrated.
Samsung's filing shows that Microsoft's objective was not merely to collect patent royalties on Android devices but also to provide an additional incentive for Samsung by promising Success Credits and Collaboration Credits in connection with Windows phones and tablets as well as Microsoft search services. At the end of the year, Samsung pays the balance between the royalties due under the patent license agreement and the credits under the business collaboration agreement. At least based on Samsung's lawyers' representation of the contractual situation, the business collaboration agreement enjoys priority over the patent license agreement with respect to royalty reports:
"Under the [business collaboration agreement], the 'Royalty and Credit Calculation Report . . . will be deemed to constitute, include, supersede and be in lieu of any 'Royalty Report' otherwise due under Section 4.2.3 of the [patent license agreement].'"
This already lends quite some credibility to Samsung's claim that the two agreements (and a third one, which is just a non-disclosure agremeent) are "interconnected." According to Samsung, the business collaboration agreement allows it to terminate the patent license agreement "in the event that Microsoft breaches Section 9.7 of the BCA." And that section allegedly "prohibits either party from assigning "any rights or obligations hereunder, whether by operation of law, contract or otherwise, including by way of a change of Control." An acquisition wouldn't necessarily be an assignment and Microsoft pointed to a clause in the license agremeent that makes it apply to whatever business may be acquired later. But Samsung now says the following about the business collaboration agreement:
"As relevant here, where the 'assignment is to a competitor of the other party,' the 'assignment' is defined to include any 'merger of a party with a third party.' Part of the parties' dispute about the Annual Invoice concerns whether Microsoft's acquisition of Nokia's Devices and Services business and subsequent integration of that business into its existing operations constitutes a 'merger' with a Samsung competitor within the meaning of Section 9.7."
Nokia's handset division undeniably was and continues (under the Microsoft umbrella) to be a Samsung competitor.
With the greatest caution due to the fact that the agreements themselves are sealed, my impression at this stage is that Microsoft has strong arguments under the patent license agreement per se, but Samsung has a strong point under the business collaboration agreement, and it appears that the business collaboration agreement has more weight in the overall (and rather complex) contractual relationship between these parties. My guess is that the matter will have to be referred to arbitration at least for the purpose of establishing arbitrability. But let's await Microsoft's response to Samsung's motion.
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