Microsoft, Google's Motorola complete briefing on implications of MPEG LA H.264 license agreement

More than three months after a FRAND trial was held in a Microsoft-Google contract case in the Western District of Washington, the rate-setting decision has not been made yet, due to the court's diligence on the one hand and Google's persistent efforts to evade its grant-back obligations under a license agreement with MPEG LA on the other hand. But it appears that briefing is complete now and Judge James Robart, the federal judge presiding over this litigation, now has all the facts in the file to determine a FRAND rate (a range and a specific number) for Motorola's standard-essential patents (SEPs). The rate-setting decision will pave the way for another trial: a breach-of-contract jury trial, at which the question is going to be whether Motorola's initial 2.25% royalty demand was blatantly unreasonable.

In order to discuss in greater detail the implications of a grant-back clause in the MPEG LA license Microsoft says entitles it to a reciprocal license from Google and its subsidiaries at the pool rate, which is a tiny fraction of the original royalty demand that corresponded to $4 billion in a conservative estimate, the court held a post-trial hearing on January 28 and requested three rounds of additional briefing:

• In time for the January 28 hearing the parties were requested to present "extrinsic evidence" relevant to the interpretation of the MPEG LA-Google license agreement (which has to be construed under New York law). Microsoft submitted a declaration by MPEG LA chief executive Larry Horn in support of its position on grant-back. Google's Motorola, which only had a declaration by its own lawyers on its side, could have figured that MPEG LA was going to be key here but didn't request the right to depose an MPEG LA official until a point at which this would have delayed the whole process. Therefore, the court denied a related motion.

  Microsoft additionally submitted a declaration that shows the addition of the word "Affiliates" to the grant-back clause.

• On February 14 the court requested further briefing on what Google's Motorola describes as an executed and enforceable H.264 license agreement in Germany while Microsoft argues that Google actually made a counteroffer which Microsoft rejects.

• On February 21 the court gave the parties until yesterday (Friday, March 1) to submit briefing on the implications of the mentioning of "Affiliates" in Section 3.1.7 on the royalty obligations of "Enterprise Licensees" in connection with a royalty cap for "Motorola's obligation to license its [SEPs] as an Affiliate of Google". The court asked the parties to comment, in particular, on its interpretation "that Licensee [i.e., Google] and its Affiliates [i.e., Motorola and its former subsidiary General Instrument] fall under the royalty cap prescribed therein only if the Affiliates are themselves licensee[s] under the AVC Patent Portfolio and are identified by the Licensee in writing to [MPEG LA]".

Now that the parties have briefed the court I'm going to explain their positions. Google has been arguing for some time that it doesn't have to honor the grant-back obligation (or at least not to the extent that the MPEG LA royalty caps would proportionately apply to the license fees Microsoft is going to pay) because it selected in 2012 (unlike in the past) an "Enterprise License", which (as I'll explain further below) is an option relating to some AVC/H.264 license offerings and potentially saving a group of affiliated companies money. This isn't Google's only argument against reciprocity, but it might be the last one the court needs resolved before the rate-setting decision comes down.

Google is trying to benefit from the fact that MPEG LA decided to write up a license agreement covering multiple fields of use for H.264 in one document. The confusion that Google is trying to create here could have been avoided in the first place if there had been separate (even if largely overlapping) license agreements for different types of use, but I can understand that MPEG LA, which has well over a thousand licensees for the AVC/H.264 pool alone (which isn't its only patent pool), preferred an all-in-one contract over two or more largely-duplicative separate agreements -- also because this was a way to ensure that a company wouldn't take a license covering one field of use but elect to infringe in other fields of use.

I'll show you the documents and then discuss the parts I consider relevant. You can click here to skip the documents and proceed to the discussion.

Documents

It was previously known that Google signed the same license agreement with MPEG LA as more than 1,100 other licensees. The actual document bearing a Google executive's signature -- signed in 2005 and renewed for another five-year term in 2011 -- was attached to MPEG LA chief executive Larry Horn's declaration:

Google's MPEG LA License of 2005 by

This is Google's (Motorola's) March 1, 2013 brief:

13-03-01 Motorola Letter Re. MPEG LA-Google License by

And here's Microsoft's March 1, 2013 brief:

13-03-01 Microsoft Letter Re. MPEG LA-Google License by

Discussion of relevant parts

There are two basic categories of MPEG LA H.264 licenses:

1. licenses that you need if you make technology products capable of encoding (for a consumer's own use or for transmission to a consumer) or decoding (by any consumer) video files in the H.264 format, and

2. licenses covering the distribution (especially, but not only, Internet broadcasting) of video files encoded in the H.264 format.

Either category has subcategories:

1. For the technology product licenses a distinction is made between the sale of such products ("AVC Products") to consumers and OEM distribution (for example, PCs running Windows, which comes with H.264 functionality). There's no difference here in terms of what the end user gets. It's just a commercial thing. As a result, Microsoft needs two licenses because it sells Windows directly as well as through OEM channels.

2. The distribution/broadcasting licenses include Title-by-Title AVC Video (note that AVC and H.264 are synonyms for purposes of this license agreement), Subscription AVC Video, Free Television AVC Video, and Internet Broadcast AVC Video Use. The names already indicate the scope of those licenses, but in connection with the grant-back obligation we can just lump all distribution/broadcasting licenses together.

The license agreement defines these fields of use, as well as numerous other terms, in Section 1, "Definitions" (pages 3-8 based on the page numbering of the agreement; pages 4-9 of the PDF document). The license grant clauses incorporate those definitions by reference. Those clauses are sections 2.1-2.7 (pages 8-9 based on the page numbering of the agreement; pages 9-10 of the PDF document). The order of those license grants does not reflect the two categories I discussed above. The tech product licenses are granted in sections 2.1 ("AVC Products") and 2.6 ("OEM Licensee"); the distribution/broadcasting licenses are granted in sections 2.2-2.5; and section 2.7 then offers licensees the option to choose for each calendar year a bundle called "Enterprise License", which represents the combination of any or all distribution/broadcasting licenses chosen (but, to be perfectly clear, does not involve any tech product licenses) and comes with the option to apply the annual royalty cap to a group of affiliated companies.

The royalties sections (3.1.1-3.1.7; pages 10-14 based on the page numbering of the agreement; pages 11-15 of the PDF document) have the same order as the license grant sections (2.1-2.7).

The Enterprise License clauses are 2.7 for the license grant and 3.1.7 for the royalties. This is how the Enterprise License royalties clause begins:

"Enterprise Licensees. Pursuant to Article 2.7 and notwithstanding anything to the contrary in Article 2.9 hereof, and in lieu of the royalties specified in Articles 3.1.2, 3.1.3, 3.1.4 and 3.1.5, a Licensee and its Affiliates which are licensees under the AVC Patent Portfolio License and are identified in writing to the Licensing Administrator by Licensee shall pay no more than the following total amounts in each Calendar Year for all such licenses for the combined Sales of Licensee and its Affiliates during such year:"

I'll now make it easier to understand by substituting section numbers with descriptions and defined terms with actual party names:

"Enterprise Licensees. Pursuant to [the Enterprise License grant section] and notwithstanding anything to the contrary in [a section related to the Enterprise License that disallows Google to sublicense its affiliates, but entitles its affiliates to licenses from MPEG LA if they request them], and in lieu of the royalties specified in [the distribution/broadcasting royalties sections], [Google] and its Affiliates which are licensees under the AVC Patent Portfolio License and are identified in writing to [MPEG LA] by [Google] shall pay no more than the following total amounts in each Calendar Year for all such licenses for the combined Sales of [Google] and its Affiliates during such year:"

The respect in which the Enterprise License terms are different from the tech product and individual distribution/broadcasting licenses is that the royalties section requires that a licensee identify in writing its affiliates which are also licensees, so as to ensure that the royalty cap is applied to the collective license fees paid by the whole group, as opposed to applying the cap to each company from the group.

Google says it exercised this potentially money-saving option in 2012 but didn't identify Motorola Mobility as an affiliate to benefit from the group-wide Enterprise License royalty cap, and on this basis argues that Motorola Mobility consequently doesn't have to grant Microsoft a license to its own H.264 SEPs, or at least doesn't have to do so on terms that include the royalty cap it doesn't benefit from.

The grant-back obligation in Section 8.3 clearly includes Affiliates (whether notified or not) and is meant to be "commensurate to the scope of the licenses which Licensee has selected [under the agreement]". Google now contends that the "scope" includes whether it includes a particular subsidiary (Motorola Mobility in this case) in its notifications relating to the Enterprise License ("selects to have its Affiliates licensed"). But Microsoft says that "the Agreement provides no ability for Google to make any such selection. It has some choice: it can use any or all of the different types of licenses the agreement covers (for example, it can elect to implement H.264 in products sold to consumers and/or OEMs). But it can't perform an end run around the grant-back obligation because the optional identification (with a view to the Enterprise License royalty cap) only relates to "its Affiliates which are licensees under the AVC Patent Portfolio License". Motorola doesn't have a license, so it wasn't and isn't eligible for notification. If it had taken or now took a license, then it would have its own grant-back obligation under an MPEG LA-Motorola agreement.

In light of that, Microsoft points out that it wouldn't make sense for the grant-back clause to include a licensee's "Affiliates" if this related to companies that have a grant-back obligation under their own agreements with MPEG LA.

Microsoft also points out that "Google has taken three separate and distinct types of license offered by MPEG LA": the AVC Products license, the OEM Licensee license, and the Enterprise License (a bundle of all distribution/broadcasting licenses). YouTube needs a broadcasting license, while Google's distribution of the Android and Chrome operating systems (directly and, especially, through OEM partners) falls under the AVC Products and OEM Licensee terms. Microsoft argues that "the Enterprise License and its royalty terms are irrelevant to the issues [in this FRAND rate-setting case]" because "Microsoft is not a video content provider and therefore does not need, and has not taken, an Enterprise License from MPEG LA". Therefore, "Microsoft is not seeking any grant-back rights for such a license in this litigation". It just wants a grant-back with respect to the tech product licenses. Simply put, what Google pays for the distribution of Android and Chrome OS (Google in this context including its subsidiaries such as Motorola Mobility without any need for notification) is what Microsoft is willing to pay, proportionally based on the number of H.264 SEPs, for Google's (Motorola's) H.264 SEPs in connection with Windows and the XBox. This is unrelated to video streaming.

While the H.264 FRAND ball is now in the court's court, Microsoft and Google (the parent company as well as its Motorola Mobility subsidiary) are going to meet at the Munich I Regional Court on Thursday for a (non-standard-essential) patent trial relating to Google Maps.

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Google's attempts to circumvent grant-back clauses are evil, hurt its reputation as a licensing partner

Yesterday I reported on a Motorola Mobility v. Microsoft trial in Mannheim, Germany, where the wholly-owned Google subsidiary desperately tried to argue that a grant-back clause in an Exchange ActiveSync (EAS) license agreement between Microsoft and Google wouldn't apply to Microsoft's implementation of the DirectPush part of EAS. And I mentioned that Google is also disputing that the grant-back clause of MPEG LA's AVC/H.264 license agreement covers Motorola's H.264 video codec patents, even though MPEG LA CEO Larry Horn explained in a declaration that this kind of situation was always meant to fall, and actually does fall, under the agreement.

I don't see Google's litigation strategy working out. From a procedural point of view it undoubtedly has the right to defend its peculiar positions, but the question I want to raise here is whether it's a good business decision to do so. My answer would be no.

Google can try all it wants to soften intellectual property rights through lobbying and litigation, but it will never be able to do away with them altogether. Policy makers may make adjustments in areas where they are really needed. Nevertheless, the technology industry (and the content industry, which is also key to Google's business) will continue to have intellectual property rights, and licensing will continue to be the way tech companies deal with each other (or tech companies deal with content producers). Without licensing, technology and content would never be shared, which is not an option.

In light of the importance of licensing it would be in Google's best interest to prove to the business world that it's a reliable partner who honors license agreements in good faith. This industry is watching closely the current wave of smartphone patent disputes, including the related countersuits. There are companies whose positions on how to comply with FRAND licensing pledges are questionable. Google (as Motorola's owner for the last eight months) is one of them, but far from the only one. Google is, however, the black sheep of the family in the sense of being the only litigant in all these disputes to refuse to honor its grant-back licensing obligations. No one is accusing companies like Apple, Microsoft or Samsung of anything comparable. And Google is behaving like this in connection with not only one technology, but two: the H.264 video codec and the EAS synchronization protocol. It's doing this in two jurisdictions: in the federal Western District of Washington and in Germany. (Even three if we include a declaratory judgment proceeding in the UK.)

The business world has a broader and more general perspective than the legal universe on the question of what conduct constitutes good faith or bad faith:

From a legal point of view, the positions Google takes in its futile efforts to extricate from crystal clear back-licensing obligations border on the frivolous, but I don't mean to say that they necessarily meet the standard of bad-faith litigation. Not everything that fails is an act of bad faith the way the courts define the term. Google has extremely sophisticated lawyers working on these cases, in-house and externally, and the theories they develop sound amazingly good if one considers that there's no real substance behind them. The courts can't dismiss them without adjudging them on substance (or the lack thereof). Google will even have the right to appeal the upcoming rulings, so the United States Court of Appeals for the Ninth Circuit and the Karlsruhe Higher Regional Court may also have the pleasure to deal with them.

The problem I see here -- and which I believe Google's decision-makers should also recognize -- is that a lot of businesspeople involved with licensing (I've done a variety of license deals over the years) may view Google's related conduct as bad-faith behavior. Pacta sunt servanda is not just a legal principle. Let's look at it this way: if you own intellectual property and grant someone a license, and you comply with your part of the deal and make everything available that you've promised to make available, and you don't look for ridiculous ways to accuse the other party of infringement when it's actually relying quite reasonably on the deal it has in place with you -- if all of this is the case, wouldn't you also want your partner to honor his part of the deal? Isn't that what business -- not only but also the licensing business -- is all about?

Grant-back promises are an essential and often indispensable part of license deals. No one wants to extend a license to patents on a given standard without having at least access (even if not an immediate license) to the other party's related patents on fair terms. Someone who refuses to honor his grant-back obligations does something much worse than stopping to pay the agreed-upon royalties. If you stop paying royalties, you'll have to be sued and you'll ultimately have to pay. Make no mistake: it's also pretty bad, but there will be only a few cases in which the licensor will go out of business as a result of a delayed payment. However, a refusal to comply with a grant-back obligation as part of a broader strategy to pursue injunctive relief at all costs means that one party tries to have a destructive impact on the business of the other party, even though the latter always honored its part of the deal. That's terribly unfair.

All sorts of companies may be concerned about Google's conduct and think that if Google does this to Microsoft, it may one day also do it to them. In other words, what Google is doing here comes with a reputational cost. The effect of appearing to be untrustworthy in such deals is going to be that other parties will think twice before they do any deal with Google, and if they do one, they will look at the envisioned terms very skeptically and will in some cases insist on deal structures that provide them with greater upfront assurances that Google is later going to comply.

It doesn't really matter that Microsoft is enforcing certain intellectual property rights against Android, and that it proactively sued Motorola (the year before Google signed an agreement to acquire it). Granted, the lawsuit that went to trial in Germany on Friday or the FRAND determination action in Seattle might not be occurring at this stage (though we'll never know) if Microsoft had not sued Motorola after negotiations following the expiration of a license agreement didn't bear fruit over an extended period of time. But contracts are made to have a reliable basis for dealing with each other even in bad times. No, not just "even in bad times": especially in bad times. Friends who are forever friends will never need a contract: they can resolve everything amicably. But business partners need to be able to count on each other regardless of whether they are friends. No other company who already has some kind of license agreement in place with Google or is contemplating entering into one can be sure that it will always be on friendly terms with Google. Regardless of who sues first and for what reason, someone who grants Google a license today will want Google to honor its part of the deal tomorrow, no matter whatever else may happen between today and tomorrow.

The smartest thing Google could do now is to declare to the court in Seattle that it recognizes the applicability of the MPEG LA grant-back clause, and to withdraw its push notification patent claims in Mannheim well ahead of the April 19 ruling. It would not be the smartest thing in the narrow context of the Microsoft-Motorola dispute: with Microsoft already having won injunctions over four different patents in three different fora in two different countries, there's no question that Motorola badly needs leverage, and even a long-shot attempt to gain leverage may be necessary if seen in that light (and only that light). There are no budget constraints, obviously. But from a more strategic perspective a retreat on this problematic front would be conducive to Google's reputation as a licensing business partner. Google's world-class litigators just want to try anything to win, and that's their job. But this is no different from a general who wants Congress to send ever more troops and money to win a war that may already have been lost: it's obvious that (and why) the general wants this, but political leaders can't always justify giving military leaders what they ask for. I think Google should take a business perspective on this, especially since there's no indication whatsoever that Motorola will gain any advantage in litigation, while the costs to Google's trustworthiness in licensing are not that hard to see.

Just Don't Be Evil.

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Microsoft filing shows addition of 'Affiliates' to grant-back clause of MPEG LA AVC/H.264 license

On Monday Judge James L. Robart will hold a Microsoft v. Motorola hearing to discuss with parties' counsel the bearing of a grant-back clause in Google's (i.e., Motorola's parent company's) patent license agreement with pool firm MPEG LA. If the entire Google group is found to have a grant-back obligation at the equivalent of the pool rate, a royalty demand that originally amounted to billions of dollars per year would be contracted to a few hundred thousand dollars. On Wednesday Microsoft submitted a declaration of MPEG LA chief executive Larry Horn that supports its related theory; Google submitted a declaration by one of its lawyers but apparently couldn't find anyone involved with MPEG LA and the contributors to its AVC/H.264 pool to support the claim that the grant-back clause is meaningless.

On Friday Microsoft submitted an additional declaration that shows how the grant-back clause in the MPEG LA AVC/H.264 license agreement evolved during the first quarter of 2004. The related emails already formed part of the evidentiary record but Microsoft's declaration now draws the court's attention to those documents and, as a side effect, enables the rest of us to see how the key passage "and its Affiliates, if any," was added -- and such additions always have a purpose. The license agreement explicitly defines "Affiliates" as including companies acquired after the date of the agreement.

What lends even more significance to the evolution of the clause is the fact that the recipients of those draft contracts included an executive of General Instrument Corporation, then a wholly-owned Motorola subsidiary and now a wholly-owned Google subsidiary. Motorola/GI walked out on the deal, but at any rate, today's Google-Motorola group as a whole knew exactly what reciprocal-licensing obligations it entered into because of Google's conclusion of a license agreement with MPEG LA and its subsequent acquisition of General Instrument as part of Motorola. If Google doesn't like the effects of the grant-back clause now, it should probably blame those who conducted due diligence on the Motorola acquisition: they should have checked on whether any of Google's existing agreements were going to be affected by the merger.

Knowing that the upcoming FRAND rate-setting decision in Seattle is going to be one of the key events in this year's patent-related disputes (this will be the first time, at least in a high-profile case, for a federal court to set a FRAND rate), I try to ensure that those researching the matter have access to the most important facts, including the key parts of what Microsoft filed yesterday.

Here's the header of a January 22, 2004 email by MPEG LA's Larry Horn to the AVCGroup mailing list (click on the image to enlarge):

And here's the grant-back clause in the draft license that was attached to that email (click on the image to enlarge or read the text below the image):

8.3 Licensee Grant. Upon full execution of this Agreement, Licensee agrees to grant a worldwide, nonexclusive license and/or sublicense (commensurate to the scope of the licenses which Licensee has selected hereunder) under any and all AVC Essential Patent(s) that Licensee has the right to license and/or sublicense, to any Licensor or any sublicensee of the Licensing Administrator desiring such a license and/or sublicense on fair and reasonable terms and conditions. For purposes of this Section 8.3 only, the Licensors' per patent share of royalties which are payable pursuant to Article 3 of this Agreement shall be presumed to be a fair and reasonable royalty rate for the aforementioned license and/or sublicense to be granted by the Licensee.

At that stage, there was no reference to Affiliates, as you can see above. But this changed over the next couple of months. Here's the header of an email from MPEG LA's Larry Horn to the AVCGroup mailing list, dated March 26, 2004 (click on the image to enlarge):

The purpose of that email was to send out a redlined (i.e., edits were marked up) version the "final draft" he sent out to the prospective contributors. And this is where, finally, "and its Affiliates, if any," was added to the grant-back clause (there had been a version in between the January 22 and March 26 drafts that said "or" instead of "and"). Here's the grant-back clause (click on the image to enlarge or read the text below the image):

8.3 Licensee Grant. Upon full execution of this Agreement, Licensee agrees to grant a worldwide, nonexclusive license and/or sublicense (commensurate to the scope of the licenses which Licensee has selected hereunder) under any and all AVC Essential Patent(s) that Licensee <or>and its Affiliates, if any, ha<s>ve the right to license and/or sublicense, to any Licensor or any sublicensee of the Licensing Administrator desiring such a license and/or sublicense on fair and reasonable terms and conditions. For purposes of this Section 8.3 only, the Licensor's per patent share of royalties which are payable pursuant to Article 3 of this Agreement shall be presumed to be a fair and [...]

I hope some Seattle-based reporters will find the time to attend the Monday hearing and report.

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Affidavit by MPEG LA chief supports Microsoft's interpretation of Google patent license agreement

On Monday (January 28, 2013), Microsoft and wholly-owned Google subsidiary Motorola Mobility will square off in federal court in Seattle to discuss the implications of a grant-back clause in a license agreement Google signed with patent pool firm MPEG LA for the rate-setting part of the FRAND contract case in the Western District of Washington. Yesterday (Wednesday, January 23, 2013) was the deadline for the parties' briefing and submissions of extrinsic evidence that might assist the court in the interpretation of the relevant contract.

Microsoft argues that, as a contributor to the MPEG LA pool, it is entitled to a reciprocal license to Google's H.264 declared-essential patents at the equivalent of the pool rate, and that the MPEG LA-Google contract (which is the same contract numerous other licensees signed with MPEG LA) also relates to patents held by companies acquired by Google subsequently to the conclusion of that agreement, such as Motorola Mobility in this particular case. Microsoft also took this position in the ITC investigation of Motorola's Xbox complaint, but its related motion has meanwhile been denied as moot (i.e., a non-issue) because the Google subsidiary withdrew its H.264-related claims earlier this month. Unlike a federal court, the ITC can't determine royalties or award damages; it can only ban the importation of infringing products into the U.S. market.

Originally Motorola demanded an annual royalty amounting to $4 billion in a conservative estimate. Very recently it was talking about a possible annual cap in the $100-125 million range (Microsoft accused Google/Motorola of "rug bazaar" negotiation tactics). If Microsoft's legal theory relating to the MPEG LA agreement succeeds, we're ultimately going to be looking at hundreds of thousands of dollars.

Google (Motorola) tries to prevent this by taking the position that Google's H.264 license has a different "scope" than the grant-back license demanded by Microsoft, and that, in any case, the license agreement "extends only to Affiliates identified to MPEG LA by Google in writing".

In my opinion, the language of any license agreement always has room for improvement, but I think this one is clear enough that someone who signed it knew he was going to have a grant-back obligation even with respect to companies that become subsidiaries after the conclusion of the agreement, which the contract in fact states expressis verbis. But Judge Robart wanted to look at this from all angles and asked the parties for briefing on extrinsic evidence. Google argues that this is unnecessary and that the agreement must be interpreted in the light most favorable to the party that didn't draft it, arguing that this is a non-negotiable "take it or leave it" agreement. I don't know about MPEG LA's flexibility in negotiations, but even if MPEG LA itself never negotiated the terms, there still wouldn't be a Hobson's Choice situation: MPEG LA does not have exclusive rights to the patents in the pool, and Google could always have chosen to freely negotiate direct license agreements with any of the contributors rather than go through MPEG LA as an optional one-stop shop.

Last week it became clear what kind of extrinsic evidence Google was particularly concerned about: an affidavit by an MPEG LA official. Judge Robart denied Google's belated request to take a deposition, given that MPEG LA was the most obvious organization to testify in this context.

While the declaration attached to Google's brief was signed by one of its outside counsel, Microsoft provided a declaration of Lawrence (Larry) Horn, the president and CEO of MPEG LA. I'm sure that if Google had been able to find support for its theory from anyone in the industry, it would also have relied on a declaration by an external witness, but the theory flies in the face of everything professionals in this industry know about standard-essential patent licensing.

Larry Horn's declaration strongly supports Microsoft. I have uploaded it to Docstock. Here's the PDF version, and below that one you can find the full text of the declaration because I thought this would be useful reference material for anyone researching this matter (and I think that affidavit speaks for itself):

01/23/2013 declaration of Lawrence A. Horn, President & CEO of MPEG LA

DECLARATION OF LAWRENCE A. HORN

I, Lawrence A. Horn, declare as follows:

1. I am the President and CEO of MPEG LA, LLC. Before assuming my current role, I was in charge of Licensing and Business Development from approximately July 1997 to March 2006. MPEG LA is a world-leading packager of patent pools for standards and other technology platforms used in the consumer electronics industry.

2. Among other technologies, MPEG LA administers patent pools associated with certain video compression standards, including the MPEG-2, MPEG-4 Visual, AVC/H.264, and VC-1 standards.

3. I understand that the above-captioned matter [Case No. C10-1823-JLR, W.D. of Wash.] involves a dispute regarding various patents claimed by Motorola Mobility LLC and/or [Google/Motorola subsidiary] General Instrument Corporation to be essential to the AVC/H.264 video compression standard. The term "AVC" (or "Advanced Video Coding") and "H.264," being materially synonymous, are used interchangeably here.

4. From approximately Fall 2002 to Summer 2004, I was actively involved in the formation of MPEG LA's AVC/H.264 patent pool. On behalf of MPEG LA, I facilitated a series of meetings among potential licensors that led to the formation of the AVC/H.264 patent pool, including development of standard terms on which licensors joining the pool agreed to license their standard essential patents (SEPs) (following a determination that such patents are in fact essential). Since formation of the pool in 2004, MPEG LA has administered it.

There are currently 30 Licensors in the MPEG LA AVC/H.264 pool, who collectively have contributed hundreds of SEPs. Microsoft is one. There are currently more than 1,500 Licensees to the pool, including Microsoft and Google, Inc.

6. I understand that a true and correct copy of the January 24, 2005 AVC Patent Portfolio License Agreement between MPEG LA and Google, attached hereto as Exhibit 1 (the "Google License"), has previously been filed as part of the public record in the above-captioned matter. The Google License is a representative example of MPEG LA's standard AVC Patent Portfolio License Agreement (the "AVC/H.264 License"), which has been available to interested licensees since approximately July 2004, subject to updates, expansions and renewals.

7. MPEG LA's standard AVC/H.264 License includes the following "grant-back" provision:

8.3 Licensee Grant. Upon full execution of this Agreement, Licensee agrees to grant a worldwide, nonexclusive license and/or sublicense (commensurate to the scope of the licenses which Licensee has selected hereunder) under any and all AVC Essential Patent(s) that Licensee and its Affiliates, if any, have the right to licensor and/or sublicense, to any Licensor or any sublicensee of the Licensing Administrator desiring such a license and/or sublicense on fair and reasonable terms and conditions. For purposes of this Section 8.3 only, the Licensors' per patent share of royalties which are payable pursuant to Article 3 of this Agreement shall be presumed to be a fair and reasonable royalty rate for the aforementioned license and/or sublicense to be granted by the Licensee.

Exhibit 1 (underlining and italics added).

8. Section 8.3 of the AVC/H.264 License is identical to Section 8.3 of a prior license agreement for an earlier video compression standard -- MPEG LA's original MPEG-4 Visual Patent Portfolio License (the "MPEG-4 License") -- except that the phrase "and its Affiliates, if any" (underlined and italicized above) was added for the AVC/H.264 License. I understand that a true and correct copy of the original MPEG-4 License (without attachments) executed by General Instrument in September 2002 (attached hereto as Exhibit 2), was produced by Defendants in the above-captioned matter.

9. "Affiliate" is defined in the AVC/H.264 License to include any Legal Entity controlled by the Licensee, including those entities owned "more than 50%" by the Licensee:

1.1 Affiliate - Shall mean a Legal Entity which now or hereinafter, directly or indirectly, controls, is controlled by or is under common control with Licensee. The term "control" as used in this Section 1.1 shall mean (a) ownership of more than 50% of the outstanding shares representing the right to vote for directors or other managing officers of Licensee or such Legal Entity; or (b) a relationship similar to that described in Subsection 1.1(a) deemed by the Licensing Administrator in its sole discretion to represent "control." An entity shall be deemed an Affiliate only so long as such "control" exists.

Exhibit 1.

10. The words "now or hereinafter" in Section 1.1 of the AVC/H.264 License ensure that entities over which the Licensee acquires control after execution of the license agreement are also treated as Affiliates.

11. The final terms of the AVC/H.264 License were developed through a process of negotiation among the initial group of H.264 essential patent holders responsible for forming the H.264 patent pool, many of whom are now also Licensees.

12. The phrase "and its Affiliates, if any" was added to Section 8.3 as a result of discussions that I initiated. These discussions consisted primarily of emails among me and the participants in the pool formation discussions (members of the "AVCGroup" identified in the emails). Attached as Exhibits 3 and 4 are true and correct copies of email exchanges from March and April 2004, concerning the proposed addition of the "and its Affiliates, if any" language to the grant-back provision that I understand were produced by Microsoft in the above-captioned matter. Paul Bawel represented General Instrument/Motorola at the MPEG LA AVC/H.264 pool formation meetings and was among those who received emails sent to the AVCGroup at the time these emails were exchanged. Garrett Glanz was Microsoft's representatives, and also received emails sent to the AVCGroup.

13. The email string from March 2004 (Ex. 3) includes my response to comments by Sony's representative, in which I described the purpose of the proposed addition to Section 8.3:

We will address your other comments in due course, but I want to comment here on Section 8.3. The proposed change makes this like the grantback in other licenses. It is in the interest of fairness both to other Licensees as well as Licensors because it assures that an affiliate of a Licensee that owns an essential patent cannot decline to license the essential patent on fair and reasonable terms.

14. As reflected in the emails, although Sony expressed concern that the proposed change might dissuade some potential licensees from taking a license, Sony indicated that it was "fine with the revised language of 8.3" if others found it acceptable. Ex. 3.

15. In April 2004, Sony again expressed its concerns, preferring to kep the language in the original MPEG-4 License or, at a minimum, to re-define "Affiliates":

Our preference would be to drop Affiliates completely from the AVC license, in accordance with the scope of the MPEG4 Video license. If there is consensus against this, however, we must change the definition of Affiliates to be "more than 50%." (Ex. 4)

16. In response, I recommended that the term "Affiliates" should be defined to apply only where a Licensee's control was "more than 50%" (rather than "50% or more"). I also stated that the grant-back provision would apply to those Affiliates meeting the "more than 50%" ownership requirement:

[T]he grant back obligations of a Licensee would apply in the normal course only to a "more than 50%" Affiliate (not a "50% or more" Affiliate and not to a less than 50% Affiliate). (Ex. 4)

17. As reflected in the final version of the standard AVC/H.264 License adopted in approximately July 2004, the AVCGroup ultimately reached consensus and approved inclusion of the phrase "and its Affiliates, if any," in Section 8.3. As with all other AVC/H.264 Licenses, this language is included in Section 8.3 of the Google License. Ex. 1. The Google License also includes, in Section 1.1, the standard "more than 50%" language that had been under discussion. Ex. 1.

18. In the course of discussions regarding the purpose of Section 8.3 and related definitions, it was agreed that all Affiliates of a Licensee (rather than, for example, only the Affiliates of an Enterprise Licensee that are expressly identified by the Enterprise Licensee) needed to be included in the grant back obligation under Section 8.3. Based on my involvement in developing the terms of the standard AVC/H.264 License, the purpose of including the phrase "and its Affiliates, if any" in Section 8.3 was to eliminate any distinction between the H.264 standard essential patents of a Licensee and those of its Affiliates -- both are subject to the same grant-back terms. This prevents a Licensee from avoiding its grant-back obligations by holding patents indirectly, for example, via a subsidiary that it controls. Where a Licensee owns only 50% of a related company (but not more), the requisite control may be lacking. My understanding from various exchanges regarding the "more than 50%" language was that some companies were concerned that they would be unable to comply with the grant-back provision if they owned only 50% of the related company -- for example, where a licensee was engaged in a 50/50 joint venture. This is one reason why "more than 50%" ownership is required in the definition of Affiliate.

19. The first AVC/H.264 Licensees were issued in July 2004. At approximately the same time, I initiated separate negotiations among the group of MPEG-4 Licensors (many of whom were also Licensees) that led to inclusion of similar "Affiliates" language in an updated version of the MPEG-4 license. Attached as Exhibit 5 is a true and correct copy of an email string from July 2004 reflecting these discussions that I understand was produced by Microsoft in the above-captioned matter.

20. As referenced in emails included in Exhibit 5, at least two MPEG-4 Licensors, Toshiba and Fujitsu (both also Licensees), expressed concerns about the proposed change to the grant-back provision in the original MPEG-4 License. I explained the purpose of adding the proposed "Affiliates" clause as follows:

"Licensee or its Affiliates" is standard in the grant-back clauses of MPEG LA's MPEG-2, 1394, DVB-T and AVC Patent Portfolio Licenses (in the AVC License, Licensees also do not have the right to extend sublicenses to Affiliates). The purpose of this language is to prevent a Licensee from avoiding its grant back obligations through its affiliates (who then have the opportunity to hold licenses and licensors hostage to their essential patent claims for failure of the grant-back clause to apply to them) while the Licensee takes advantage of a license under all of the Licensors' essential patents. We believe this is a matter of fairness, and it has caused no problem in other licenses. Therefore, the suggestion was made to revisit this issue here, and we recommend including this language because it is in the interest of all Licensors and Licensees to do so.

Ex. 5. This explanation accurately describes the purpose of the similar "and its Affiliates, if any" clause in Section 8.3 of the AVC/H.264 License.

21. In further response to an email from Fujitsu, I proposed that the definition of "Affiliates" in Section 1.1 of the original MPEG-4 License be revised to clarify that it would apply only where a Licensee owns "more than 50%" of another entity. Ex. 5.

22. The proposed changes to Section 8.3 and Section 1.1 were adopted by the MPEG-4 Licensors, resulting in provisions that are virtually identical to their counterparts in the AVC/H.264 License. Attached hereto as Exhibit 6 is a true and correct copy of the updated version of the MPEG-4 License (without attachments) with these changes executed by General Instrument in August 2005, which I understand was produced by Defendants in the above-captioned matter. It replaces the original version of the MPEG-4 License that General Instrument executed in September 2002 (see Ex. 2), whose grant-back provision did not cover "Affiliates," as explained above.

23. From the beginning of my tenure at MPEG LA, I have been involved in marketing the patent pools that MPEG LA administers and have periodically engaged in discussions with potential licensees regarding the scope and meaning of various standard license terms. Whenever a potential licensee has asked about operation of the "Affiliates" clause in the grant-back provisions discussed above, I have explained that the grant-back obligation applies to the SEPs of both the Licensee and all of its Affiliates, without exception. As a matter of policy, and to ensure delivery of consistent information on this topic, other MPEG LA personnel also provide the same response when fielding similar inquiries.

24. I understand that Motorola Mobility LLC and General Instrument Corporation are wholly-owned subsidiaries of Google. As wholly-owned subsidiaries, both companies would be treated as Google's Affiliates under the terms of the Google License. I am also aware that Microsoft is a Licensor and a Licensee to MPEG LA's AVC/H.264 patent pool. Accordingly, I understand that the grant-back provision of the Google License provides Microsoft with the right to license any AVC/H.264 SEPs held by Google, Motorola Mobility LLC, or General Instrument Corporation, all as provided in Section 8.3. This application of Section 8.3 is consistent with the purpose of the "and its Affiliates" language, as reflected in the discussions among the Licensor participants during the formation of the AVC/H.264 pool, described above.

I declare under penalty of perjury under the laws of the United States of America, that the foregoing was true and correct.

DATED this 21st day of January, 2013, in Chevy Chase, Maryland

LAWRENCE A. HORN

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Google not allowed to take belated deposition of MPEG LA official in Microsoft FRAND case

The grant-back provision in a license agreement between Google and patent pool administrator MPEG LA could effectively determine the license fees Microsoft will have to pay for certain Motorola patent families that have been declared essential to the H.264 video codec standard. On New Year's Eve, Judge James L. Robart, the federal judge presiding over a Microsoft v. Motorola FRAND contract lawsuit in the Western District of Washington, scheduled a hearing on this question for January 28 and ordered the parties to submit briefing on January 23. Besides the MPEG LA license agreement the hearing will also address a summary judgment motion that could result in the invalidation of three H.264-related Google patents (which are being asserted through offensive counterclaims).

An administrative hearing related to this matter took place yesterday (Friday, January 18, 2013) after Microsoft and Google disagreed on an evidentiary issue. Microsoft told the court that it (in the court's words) "intends to submit a declaration from an individual at MPEG LA regarding MPEG LA's understanding of the MPEG LA-Google license agreement". Google then wanted to take a deposition of the MPEG LA official, but for practical reasons such deposition wouldn't take place before the briefing deadline on Wednesday.

After the Friday hearing Judge Robart told Google in an order that its request to take a deposition of an MPEG LA official is too late. The United States District Court for the Western District of Washington will neither postpone its FRAND rate-setting decision (following a first trial held in November 2012 and paving the way for a second one on a breach-of-contract question) nor deprive Microsoft of the opportunity to address statements made at any relevant depositions in its January 23 briefing (and, as a result, deprive itself of the benefit of reading both sides' related briefing). Judge Robart notes that "the MPEG LA declarant is in no way a surprise witness" (Google could have figured that "MPEG LA would have an opinion as to the interpretation of its own agreement with Google"), and Motorola already contacted MPEG LA after the December 31 order that scheduled the January 28 hearing: "Motorola thus could have noticed and taken the deposition of MPEG LA regarding MPEG LA's understanding of the Goo[gl]e-MPEG LA license agreement at any time since the court's minute order, but chose not to do so".

Given that Google's litigation department is extraordinarily sophisticated and that Google contacted MPEG LA shortly after the New Year's Eve order, I can't help but suspect that the belated request for a deposition is an act of gamesmanship rather than a result of an oversight. Google was probably hoping that it could either delay the resolution of this case or impair Microsoft's ability to brief the court before the January 28 hearing.

The implications of the Google-MPEG LA license agreement are still very relevant, but at this stage this is only about rate-setting and no longer about sales or import bans. In late November Judge Robart granted a Microsoft motion for summary judgment against Google's prayers for injunctive relief over standard-essential patents. And in early January Google withdrew two H.264 declared-essential patents from its ITC complaint over the Xbox gaming console in the aftermath of reaching an agreement with the antitrust enforcers at the FTC. But there is still a huge discrepancy between the parties' positions on royalties, with Google more recently taking the position that the annual royalty cap should be in the range between $100 million and $125 million, while the royalties it can demand under the MPEG LA reciprocity clause would amount to no more than a six-digit figure per year.

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Microsoft, Motorola to debate implications of Google-MPEG LA agreement at Jan. 28 hearing

On New Year's Eve, Judge James L. Robart, the federal judge presiding over the Microsoft v. Motorola Mobility FRAND contract litigation in the Western District of Washington, scheduled an oral argument for January 28, 2013 to "address both the Google-MPEG LA license agreement and Microsoft's motion for summary judgment of invalidity". These two items were not discussed at the FRAND rate-setting bench trial that took place in mid-November.

I have reported on the Google-MPEG LA matter before. Two weeks ago it became known that Google signed the same standard license agreement with MPEG LA as more than 1,000 other companies, and I interpret the agreement as containing a definitive grant-back obligation covering, in conjunction with the agreement's definition of affiliate companies (which includes companies acquired after the conclusion of the license agreement), Motorola's allegedly H.264-essential patents. The Seattle FRAND case involves H.264 and IEEE 802.11 (WiFi, or WLAN) patents; the Google-MPEG LA agreement relates to the H.264 video codec standard.

Originally, Microsoft raised this contractual issue with a focus on injunctive relief. Even before the court took a closer look at the Google-MPEG LA deal, Judge Robart made a summary judgment decision barring Motorola Mobility from the pursuit and enforcement of injunctive relief against Microsoft over any H.264 or IEEE 802.11 SEPs anywhere in the world. The agreement still has a bearing on the rate-setting decision Judge Robart is preparing: if the court agrees with Microsoft, Google's Motorola Mobility will be entitled to a royalty rate corresponding to the MPEG LA AVC/H.264 pool rate, relative to the number of patents contributed. On that basis, the annual cap would be a six-digit figure, a far cry from the $100 million cap Google (Motorola) more recently proposed.

Here's what Judge Robart is now particularly interested in with respect to the Google-MPEG LA deal:

"At argument, with respect to the Google-MPEG LA license agreement, the parties shall address (1) the proper interpretation of the Google-MPEG LA license agreement under the law of the State of New York; and (2) the import of the Google-MPEG LA license agreement as it relates to H.264 standard essential patents held by Motorola Mobility LLC and General Instrument Corporation, as wholly-owned subsidiaries of Google. The parties may submit, no later than January 23, 2013, (1) relevant extrinsic evidence to the Google-MPEG LA license agreement, such as affidavits from MPEG LA regarding the purpose and intent of the grant-back provision (Section 8.3) of the Google-MPEG LA agreement; and (2) additional briefing, limited to 12 pages, addressing any proffered extrinsic evidence."

The fact that the judge wishes to take a closer look at certain subissues doesn't indicate in any way how he would rule based on the information that has been provided thus far. The only thing that can be concluded on a reliable basis is that this agreement, which Google (Motorola) claimed has no bearing on the case, is important enough to warrant an extra hearing and additional briefing.

I also venture to guess that any "affidavits from MPEG LA regarding the purpose and intent of the grant-back provision" are likely to support Microsoft's theory. The licensors contributing patents to the pool, who must have been comfortable with the terms because otherwise they wouldn't have joined (and no one could have forced anyone to join), certainly wanted to ensure that third parties, such as Google in this case, wouldn't be able to take advantage of the reasonable pool rates while demanding excessive royalties for their own patents allegedly reading on the very same standard. Just look at the collective sophistication of this group of licensors, most of whom are also implementers of the standard. Companies like Apple, Cisco, HP, Microsoft, Philips, Sharp and Sony are nobody's fools, especially when it comes to standard-essential patent licensing. Google (Motorola) now asserts that the license agreement has loopholes that allow Google to do what it's doing, but the "purpose and intent" was undoubtedly a reciprocal arrangement and I would be surprised if the extrinsic evidence supported Google.

Even if the Google-MPEG LA agreement was ultimately held not to apply to the Microsoft-Motorola contract issues, I believe Google would still be unlikely to persuade the court of a royalty rate anywhere near its most recent demand. The rate might be a bit higher if there's no contractual requirement for a grant-back on equivalent terms, but in any event the fact that dozens of major players, even including some high-profile licensing businesses such as Dolby, ETRI and Fraunhofer-Gesellschaft, made their patents available on those terms is a strong indication of a FRAND market rate. Maybe the court would consider the upper end of the FRAND range to be higher than the pool rate, but there can be no doubt that the pool rate falls within the range. In light of this, the whole discussion of the Google-MPEG LA agreement is an opportunity for Microsoft to prevail with respect to H.264, but even if Google (Motorola) could fend off this challenge, it would still have to deal with the relevance of the MPEG LA pool rate as hard evidence for what the market largely believes to be an appropriate royalty rate.

Judge Robart's order doesn't indicate how the need for another hearing affects the schedule for the rate-setting decision. The most efficient course of action for the court would certainly be to issue just one order, and in that case, the hearing needs to be held before a decision can be made. Theoretically, the court could also set a rate for IEEE 802.11 patents separately, or it could set rates for both categories of patents but reserve the right to modify the H.264 rate if the Google-MPEG LA agreement is interpreted according to Microsoft's position, but this court is so busy that in the summer it stayed the parties' mutual infringement claims pending resolution of the FRAND contract issues, so it's most likely that only one rate-setting order will come down, either at the end of this month or, more likely, in February.

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Google signed same standard license agreement with MPEG LA as 1,100 other AVC/H.264 licensees

On Friday (December 14, 2012), Microsoft and wholly-owned Google subsidiary Motorola Mobility had a filing deadline for post-trial briefs relating to the implications of Google's grant-back obligation under a license agreement with MPEG LA. The filings were made in the FRAND contract lawsuit pending in the Western District of Washington, but the issue could also be dispositive of the last two patents left over from Motorola's ITC complaint against Microsoft after the withdrawal of Motorola's IEEE 802.11 (WiFi, or WLAN) patent.

Also on Friday, Reuters reported on a motion the parties brought to protect the confidentiality of certain documents, particularly settlement proposals. Nevertheless, Microsoft's post-trial brief on Google/MPEG LA was filed publicly. It contains useful information, some of which validates assumptions I made when I previously reported on this issue in June and July.

In particular, I assumed that Google had signed either the standard MPEG LA license agreement (a copy of which I already received in 2010) or a materially consistent one. Microsoft's brief states the following about what Google signed:

"A company seeking a license to the patents in the H.264 Patent Pool must execute MPEG LA's standard 'AVC Patent Portfolio License' agreement (of which the Google License is a representative example) to become a 'Licensee.' [...] Google is among more than 1100 such Licensees."

A footnote additionally clarifies:

"The agreement in the same format is executed by each of the licensees of the MPEG AVC Patent Pool."

AVC and H.264 are synonyms for the purposes of that patent pool.

I previously stated my interpretation of the grant-back clause of the MPEG LA AVC/H.264 license agreement and concluded that Microsoft was very clearly entitled to a reciprocal license at a royalty rate consistent with the MPEG LA H.264 pool rate. It was pretty clear to me from the agreement that licensees make a firm grant-back commitment without any loopholes, and that it includes subsidiaries, not only those companies that are subsidiaries at the time of signing the agreement but also entites that subsequently become subsidiaries (the contract refers to "Affiliates", and wholly-owned subsidiaries are the clearest case of an affiliate).

Microsoft's brief states that a Google licensing executive expressed, at the recent FRAND rate-setting trial in Seattle, his "understanding that [the Google License] does not apply to the Motorola patents" but "was unable to provide any explanation" for this. However, Microsoft then dismantles the arguments Motorola Mobility made in the ITC investigation. None of Motorola's interpretations of the agreement, as summarized in Microsoft's brief, appear even remotely convincing to me, but I would have preferred to also read Google's (Motorola's) own argument in the Seattle case. I would encourage Google (Motorola) to make its brief, or at least a public redacted version available to the general public. Since I have a copy of the MPEG LA standard AVC/H.264 license agreement, I doubt that anyone can come up with a convincing interpretation of the agreement to the effect that Google could shirk its grant-back obligation, but again, I'd like to read Google's arguments.

Toward the end, Microsoft's brief explains inhowfar the existence of that agreement is relevant to the FRAND rate-setting issues in the Seattle case:

"For procedural reasons and in light of the importance of a timely resolution of the issues pending in this case, Microsoft has not yet sought to take the steps necessary to enforce against Google its rights to a grant-back license, which would at a minimum have created a distraction from the key issue for trial in November and could potentially have delayed that trial. But, wholly apart from Microsoft's contract right to license [Motorola's] H.264 Essential Patents under the Google License, that license is compelling, if not conclusive, evidence of the appropriate RAND royalty to be applied to Defendants' H.264 essential patents."

At an earlier stage of this litigation, Microsoft had stressed the relevance of that agreement to the question of injunctive relief, but that is no longer an issue after Judge James L. Robart entered summary judgment (after the rate-setting trial) in favor of Microsoft, determining that Google's Motorola Mobility would not be allowed to seek (or enforce) sales bans against Microsoft's products anywhere in the world over its H.264 and IEEE 802.11 (WiFi, or WLAN) declared-essential patents.

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Microsoft and Google's Motorola Mobility attack each other's FRAND royalty expert reports

Two months prior to a FRAND contract trial in Seattle, Microsoft and Google subsidiary Motorola Mobility are having a Daubert fight, i.e., motions to exclude each other's expert testimony. The court's plan is to set the terms for a FRAND license that would cover Microsoft's worldwide use of Motorola Mobility's patents declared essential to the H.264 (video codec) and IEEE 802.11 (WiFi, or WLAN) standards. Microsoft's objective is to get a license without having to overpay, while Motorola Mobility primarily wants to retain the option of pursuing and enforcing injunctive relief, and at a minimum wants to receive a very high royalty for its standard-essential patents in order to offset as much as possible of the ultimately inevitable cost of licensing Microsoft's numerous non-standard-essential patents that read on Android.

This FRAND dispute in the Western District of Washington has also resulted in a preliminary injunction barring Motorola from the enforcement of a couple of German H.264 patent injunctions. Motorola Mobility appealed this order, and the United States Court of Appeals for the Ninth Circuit will hold a hearing on Tuesday, September 11.

The Daubert motions are all about what the FRAND royalty rate should be, not about injunctive relief per se. Indirectly, however, there is a connection with injunctive relief. Motorola claims that the court does not have the authority to create a contract "ab initio" (from scratch), but even Motorola has previously agreed that if it original 2.25% royalty rate demand was "blatantly unreasonable", it has breached its FRAND-related contractual obligations, which in turn would bar Motorola from seeking and enforcing injunctions against Microsoft. In other words, if the court's plan, which Microsoft supports, works out, it's going to be "game over" for Motorola's quest for injunctions against Microsoft, but even if Motorola was right and this litigation could never result in a license agreement after the November trial, it would also be "game over" for Motorola's injunctions if the court determined a FRAND royalty rate compared to which Motorola's 2.25% demand was "blatantly unreasonable".

The expert reports themselves are sealed, but the parties' filed public redacted versions of their Daubert motions on August 27 and their responses on Wednesday (September 5), and those pleadings provide useful information as to where the parties stand. Motorola still stands by its 2.25% demand, which is ambitious and aggressive but little surprise in light of the tactical needs I outlined in the previous paragraph. Microsoft consistently argues that pool rates for large numbers of patents (including those held by a variety of major companies) declared essential to the two standards in question, such as the MPEG LA AVC/H.264 and the Via Licensing IEEE 802.11 pool rates, are within the FRAND spectrum, and the outcome of this rate-setting should not be far above those pool rates.

The parties are so far apart that there can't be an outcome that both parties accept at the same time. At least one of them will appeal, and I wouldn't even be surprised if both appealed in the end, with one arguing the court-determined rate is too low and the other one saying it's too high.

But before we get to a decision, there must be a trial at which the parties present evidence (such as expert reports) that supports their positions, and prior to that, the court will have to throw out FRAND rate theories that are contrary to law, unreliable, or irrelevant. FRAND is a range, not a point, and it's obvious that Motorola will ask for more than Microsoft will offer. The court will be inclined to resolve as much as possible at trial, but theories that are fatally deficient should be thrown out now, at the Daubert stage.

I believe the Daubert process is much more of a threat to Google's (Motorola's) 2.25% demand than to Microsoft's pool rate counterproposal, and one of the reasons I think so is that the tactical necessities I outlined above leave Motorola with no real choice: no matter how much of a long shot this may be, Motorola needs to convince the court that 2.25% is the way and the light. And if it can't convince this court, it at least wants to be able to appeal without having softened that stance. Motorola is strategically stuck. It has dug itself a hole, not only because it asked for 2.25% in the beginning but especially because it kept digging and digging as the process evolved, such as by admitting that a "blatantly unreasonable" initial demand would constitute a breach of contract.

By contrast, if Microsoft had concluded that a fair rate is not just the pool rate but, say, ten times the pool rate, Microsoft could offer that rate or something close to it. For Microsoft it would be pointless to take an extreme position because even compared to 100 times the pool rate, Motorola's demand would still have to be considered "blatantly unreasonable". Microsoft wouldn't want to pay 100 times more than it considers reasonable, but since there's a whole range of outcomes that would work for its purposes, it would be foolish to overplay its hand and risk that, in a worst-case scenario, its position is thrown out ahead of trial. But Motorola may even have to risk a Daubert order against its position: in that case, it can at least appeal, but if it voluntarily lowers its demand to the point that its initial 2.25% demand is undoubtedly unreasonable, it loses without a fight. Quite a dilemma.

In the following I'll look at some of the issues here that the parties raise in their Daubert motions and responsive pleadings.

Motorola's criticism of Microsoft's FRAND rate theory based on multilateral negotiations

Motorola's Daubert motions calls Microsoft's various expert reports "wishful thinking". The largest part of Motorola's argument is that FRAND terms result from bilateral negotiations (one patent holder, one implementer), while Microsoft's experts base their theories on "multilateral" negotiations that are held when a patent pool is formed. The second part of Motorola's motion levels further criticism and claims that Microsoft's expert opinions are not based on a methodology that provides reliable results, but it's also centered around the bilateral/multilateral argument.

In its opposition brief, Microsoft says that considering the terms of ex ante, multilateral licenses (pool rates) is a way to arrive at a FRAND rate, and all that matters is whether result is FRAND. Microsoft counters Motorola's claim that its experts' consideration of bilateral license agreements (apparently 50 of them) is the only reliable approach by noting that "the MPEG-LA pool considered by Microsoft's experts reflects the agreement of 29 licensors and more than 1,100 licensees for RAND royalties for 2,339 standard-essential patents, a combination which dwarfs the 50 agreements Motorola claims to have considered". And Motorola's argument that an ex ante (before standardization) perspective on FRAND rates is not acceptable runs counter to Judge Posner's position on FRAND royalties in Apple v. Motorola. Here's a key passage from Judge Posner's decision:

"There is another decisive objection to Motorola's damages claim. The proper method of computing a FRAND royalty starts with what the cost to the licensee would have been of obtaining, just before the patented invention was declared essential to compliance with the industry standard, a license for the function performed by the patent. That cost would be a measure of the value of the patent qua patent. But once a patent becomes essential to a standard, the patentee's bargaining power surges because a prospective licensee has no alternative to licensing the patent; he is at the patentee's mercy. The purpose of the FRAND requirements, the validity of which Motorola doesn't question, is to confine the patentee's royalty demand to the value conferred by the patent itself as distinct from the additional value--the hold-up value--conferred by the patent's being designated as standard-essential."

Judge Posner said great things about injunctive relief in connection with standard-essential patents, but the above position that FRAND rates must reflect "the value of the patent qua patent", stripped of any post-standardization hold-up value, is no less important. It should be the guiding principle of all FRAND rate-setting discussions in the world.

Theoretically, Motorola could have chosen to accept the Posner FRAND rate doctrine and to try to argue that even on that basis, 2.25% is a FRAND rate. But in that case, it wouldn't be able to criticize Microsoft's expert reports for looking at the ex ante value of such patents. And it would have to support its own 2.25% rate based on the value "qua patent" of each of its patents. Motorola apparently concluded that it can't win a battle over the value "qua patent".

Motorola's Daubert motion faces a high hurdle. It will succeed only if the court concludes that Microsoft's experts came up with numbers that are clearly outside of the FRAND ballpark. If Motorola "only" convinces the court that Miorosoft's theories are lowball offers within the FRAND range, that's not enough to get them tossed ahead of trial. And in order to deem the results of ex ante negotiations to be unreliable or even contrary to law, a court would have to determine that, contrary to Posner's "value qua patent" take, SEP holders are entitled not only to compensation based on the pre-standardization value of their patents but to payments that additionally -- and unjustly -- reward them for their participation in standard-setting. I doubt very strongly that Motorola will be able to persuade any U.S. district court, nor any U.S. appeals court, that a patent should become more expensive to license once it's included in a standard.

Microsoft argues that Motorola's expert report captures hold-up value

Motorola's opposition to Microsoft's theories based on the results of ex ante negotiations is mirrored by Microsoft's criticism that Motorola's own expert, Charles R. Donohoe, captures hold-up value (in other words, the value of being able to threaten with injunctions affecting a company's ability to implement an entire standard) in his theory supporting Motorola's 2.25% demand.

In its opposition brief, Motorola vehemently denies this. But Microsoft's Daubert motion provides some quotes from Mr. Donohoe's report that make it plausible that Motorola really wants to be compensated based on the economic value and commercial relevance of the H.264 and IEEE 802.11 standards as opposed to the pre-standardization value of its contributed patents:

"Wi-Fi functionality has become pervasive" and "devices can[]not be competitive [without it]"

"H.264 functionality is an important feature of both Windows and Xbox"

"[a] wireless connection has certain advantages over wired connections"

"H.264 [] functionality has certain advantages over other video compression formatting standards"

"[IEEE] 802.11 technology had clear advantages and utility over wired networks and cellular technology", and "this factor supports Motorola's offer of 2.25% for its [IEEE] 802.11 [patents]"

If Mr. Donohoe's report focused on why Motorola's declared-essential patents cover technological breakthroughs that justify a 2.25% rate, I doubt that passages like the ones quoted above would be found in it. Again, I haven't seen those expert reports, so I can form my opinion only on the basis of the Daubert pleadings, but I trust both parties when they provide literal quotes from thsoe reports. And the quotes listed above appear to indicate that the Donohoe report is the antithesis of Judge Posner's value-of-patent-qua-patent take.

The 15 Georgia-Pacific factors and the Entire Market Value Rule

A significant part of the parties' Daubert dispute is all about the applicability of certain patent damages theories to the FRAND rate-setting exercise. Microsoft describes the 15 Georgia-Pacific factors as "open-ended" and "unweighted", while Motorola apparently believes that a theory based on the outcome of a negotiation that takes place under this framework (and, Motorola being Motorola, after standardization) is most likely to work for its purposes. In other words, Motorola thinks that its best shot at defending its 2.25% demand is to address the Georgia-Pacific factors.

At first sight, Georgia-Pacific is a reasonable framework. If you read the 15 factors I just linked to, there's something in it for everyone. But that framework is actually quite treacherous. If a court doesn't insist that at least some weighting of the different factors occurs, it's easy to downplay some highly important factors and to overstate the relevance of less important or even inapplicable ones.

A particularly important example here is factor #13. That one is based on she same line of thought as the Entire Market Value Rule (EMVR), which Motorola says should not apply here. Even the EMVR has been criticized as making it too easy for patent holders to overstate what they're entitled to (for example, Professor Brian J. Love wrote a paper entitled "Patentee Overcompensation and the Entire Market Value Rule"). But at least the EMVR provides courts and parties with a tool for potentially separating those parts of a complex piece of technology that a particular patent has nothing to do with from the smallest saleable unit that the patent relates to. And in today's high-tech industries, patent damages (or court-determined royalties) would be unsustainably high if the EMVR was not applied properly.

Under Georgia-Pacific, apportionment is factor number 13 out of 15. That's almost an afterthought. And it's because this is a four-decades-old framework and was developed in connection with a plywood-related product that is absolutely not comparable to today's smartphones, operating systems or gaming consoles. For today's high-tech products, identifying the relevant component of a product is the very first thing to do. But Motorola doesn't want this, and it can't: if it admitted that it used the wrong royalty base initially by demanding 2.25% based on the sale of the relevant end product, it would have to admit that its original demand was "blatantly unreasonable".

Google's (Motorola's) preference for a royalty theory based on a bilateral negotiation under the Georgia-Pacific framework would be much, much less of a problem if Motorola accepted Posner's value-of-patent-qua-patent guideline and, as a result, a focus on the pre-standard-setting value of its patents, a value that can only be assessed properly after applying the Entire Market Value Rule. On that basis, the difference in methodologies between Microsoft and Google (Motorola) would come down to the difference between bilateral and multilateral negotiations, and probably some argument over how to weigh the different Georgia-Pacific factors. They would always arrive at different numbers, and there would be plenty of room for disagreement on the value of Motorola's patented inventions, but they could have a constructive process, and possibly even reach an agreement ahead of trial. But Google (Motorola) would have to give up its dream of winning and enforcing injunctions, or at least receiving gigantic amounts of royalties, based on its SEPs.

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Ninth Circuit schedules Google-Microsoft appeal hearing for September 11, 2012

In early May -- a few weeks prior to being acquired by Google -- Motorola Mobility appealed a temporary restraining order (which was subsequently converted into a preliminary injunction) barring Motorola Mobility's enforcement of a German H.264-related patent injunction against Microsoft.

The appeal was filed with the United States Court of Appeals for the Ninth Circuit. While patent infringement cases go the Federal Circuit, this is a matter of contract law because Microsoft seeks to enforce Motorola's FRAND licensing promise.

The Ninth Circuit treated this appeal from the beginning as a preliminary injunction appeal, and all such appeals are adjudicated on an expedited schedule. But Motorola Mobility wanted to further accelerate this appeal and brought a motion last week that asked for a very near-term hearing. Yesterday (Tuesday, July 31, 2012), the appeals court granted Motorola's motion and scheduled a hearing for September 11, 2012, in San Francisco.

While Google (Motorola) will be pleased with this favorable scheduling decision, its attempt to do damage to Microsoft's Germamn business faces a very significant challenge due to at least three circumstances (in addition to the fact that Ninth Circuit caselaw does allow injunctions that go further than the one Google is appealing):

1. At the time of the hearing, the FRAND trial in the Seattle action from which the appealed injunction arose will be only two months away. It is scheduled to start on November 13, 2012. From a balance-of-hardships point of view, it would be difficult to let Motorola enforce a German injunction against Microsoft two months prior to a U.S. trial that will resolve the issue (though Motorola tries to narrow the scope of that trial in order to pose the greatest possible risk to Microsoft).

2. One of Motorola's arguments is centered around the fast-approaching expiration of one of the two German patents it could enforce (if the U.S. preliminary injunction barring enforcement in Germany was lifted). But Motorola's parent company, which directs all of its litigation at this stage, argued just the other way in the Oracle v. Google case. Here's a passage from a Google filing (emphasis mine):

   "Under such a stipulation, Oracle would be assured a recovery without proving damages, but could not obtain an injunction based on these patents. Such a stipulation would significantly streamline the damages phase of the trial, if a damages phase is necessary. Notably, such a stipulation would not constitute a significant concession on Oracle's part. The '104 patent currently stands rejected by the PTO, and will expire on December 22, 2012. The '520 patent is worth very little--only $80,000 through 2011 according to Dr. Kearl before adjusting for failure to mark and nonaccused devices, and $50,000 according to Dr. Cockburn after those adjustments—and Oracle's own engineers ranked that patent in the middle of the pack of 569 Java-related patents owned by Oracle. Based on the pending expiration of the '104 and the low importance of the '520 within Oracle's patent portfolio, Oracle could not satisfy the requirements for an injunction based on these patents. See eBay Inc. v. MercExchange, LLC, 547 U.S. 388, 391 (2006)."

   The context of the quoted passage was a discussion of the scope of the spring trial and remedies that might be available to Oracle after the trial. Google argued that even if the jury had found Google (a couple of months after that filing) liable for infringement of Oracle's '104 patent (the "Gosling patent"), an injunction would not have been appropriate for a patent that expires more than six months later. In the H.264 context, Google (through its wholly-owned subsidiary Motorola Mobility) now says that a patent that will expire in September must be enforced in Germany shortly before expiration.

3. Google (Motorola) may have no legitimate basis whatsoever for pursuing or enforcing injunctions against Microsoft over H.264-essential patents due to the terms of a license agreement relating to H.264 that Google signed with MPEG LA. If Google has an obligation to license its own H.264-essential patents (including those of any affiliate, even an entity that became an affiliate only after Google signed the AVC/H.264 pool license agreement) at the per-patent MPEG LA H.264 pool rate, there's no basis for injunctive relief. While this question has not been adjudicated yet, the fact that this issue was one of two reason for which the ITC remanded the investigation of Motorola's complaint over the Xbox to a judge suggests that this is a reasonably serious issue. The implications of Google's license agreement with MPEG LA will likely bear considerable weight with the Ninth Circuit as well as a German appeals court. By the time the German injunction issued, Google had not yet consummated its acquisition of Motorola Mobility, but the situation has changed as a result of the closing of that deal.

In a corporate blog post, Microsoft yesterday outlined a roadmap to patent peace. If the parties reached an agreement in the meantime, the September 11, 2012 hearing wouldn't even have to take place, but I have no idea what Google wants to do next.

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