Microsoft v. Motorola

Microsoft v. Motorola

C.A No. C10-18230LR

FACTS:

In October 2010, Motorola sent two letters[1] to Microsoft, offering to license its H.264 and 802.11 Standard Essential Patents (SEPs) on terms that, Microsoft calculated, would result in a royalty of $4 billion. These two SEPs related to certain Wi-Fi and video compression SEPs. Microsoft responded by filing a breach of contract action, claiming that Motorola’s excessive royalty offer constituted repudiation and breach of Motorola’s obligation to license it’s SEPs on Reasonable and Non-Discriminatory Terms (RAND). By previous orders in this proceeding, the District Court had concluded that Motorola’s RAND commitments created binding contractual obligations.

CAUSE OF ACTION: Breach of Contract

ISSUE: Whether Motorola’s RAND commitments created a binding contractual obligations for Motorola to license SEPs on FRAND terms.

HELD:

The Court relied primarily on the following policy considerations to reach its valuation of the licensing terms:

a)      the risk of patent hold-ups;

b)     accounting for royalty stacking; and

c)      Valuing the patent on its own merits, and not in the context of the standard.

In addition to identifying these key considerations, the Court also adopted the Georgia-Pacific case[2] as the analytical framework for performing RAND analyses.

The Court’s findings on the relevant aspects of the subject have been summarized below-

Standard Setting Organization (SSOs) –

The Court defined SSOs in this case as- “voluntary membership organisations whose participants engage in the development of industry standards including telecommunication and information technology standards.” (Order 10)

It further noted that SSOs play a significant role in the technology market by allowing companies to agree on common technological standards so that all compliant products work together (Order 10, Para 11). This promotes wide spread adoption of their standards because the interoperability benefits of standards depend on broad implementation (Order 11, Para 13).

Standard Essential Patent (SEPs) –

As observed in this case, “a patent is “essential” if it is necessary to implement either an optional or mandatory provision of a standard” (Order 13, Para 24). At para 53 (Order 21) the definition is further elaborated in the following words-

“A given patent is “essential” to a standard if use of the standard requires infringement of the patent, even if acceptable alternatives of that patent could have been written into the standard.”

IEEE-SA Standards Board Bylaws provide that IEEE (Institute of Electrical and Electronics Engineers) standards may include “Essential Patent Claims” which it defines as-

“any Patent Claim the use of which was necessary to create a compliant implementation of either mandatory or optional portions of the normative clauses of the [Proposed] IEEE Standard when, at the time of the [Proposed] IEEE Standard’s approval, there was no commercially and technically feasible non-infringing alternative.”

Royalty Stacking[3] –

“Royalty stacking” refers to the payment of excessive royalties to many different holders of SEPs for a standard.[5] It was observed that-

“[J]udges . . . can and should look at the overall cumulative royalty costs for a given standard and not just assess whether the terms being offered by one particular licensor are fair and reasonable in vacuo.”[6]

The Court pointed out that Motorola’s royalty request “raises significant stacking concerns.” Consequently, the “anti-stacking principle constrains RAND because parties in a RAND negotiation would determine a reasonable royalty by considering how much in total license fees the implementer can pay [for all essential patents] before implementation of the standard becomes cost-prohibitive.”[7]

Appropriate Perspective for Valuing the Invention –

Any RAND analysis must also consider the value of the patented technology itself, separate and apart from the value of the standard.[8]  If the RAND valuation considers the value of the standard itself, then the participant is improperly rewarded for the value of the standard, which would be contrary to the purpose behind the RAND commitment.[9]

The Court noted that Motorola was not involved in the formative stages of the H.264 Standard.  Instead, Motorola became involved after the draft H.264 Standard had been prepared, and Motorola’s contributions were limited to the sub-category of interlaced video.[10]

Motorola’s 802.11 SEPs –

The Court observed that Motorola could not produce sufficient evidence that its patents were essential to the 802.11 Standard.[11] The Court’s Order also carefully reviewed each of Motorola’s SEPs, its importance to the relevant standard, and its use in Microsoft’s products.[12] The Court also observed that although certain Motorola patents “provide technical value” to the standard, “alternatives were available that may have provided similar technical value,”[13] which must be considered so as to avoid any attempt to capture the value of the standard itself as opposed to the actual economic value of the subject patents.[14]

At the end, both the sheer number of SEPs, and the relatively humble contribution made by Motorola’s patents, were significant factors in the Court’s royalty determination.

Georgia Pacific Factors –

The court’s analysis in Microsoft v. Motorola employed a modified version of the Georgia-Pacific factors which courts use to calculate “reasonable royalty” damages in patent infringement actions because FRAND royalties for SEPs differ from typical “reasonable royalty” damages. The Court’s analysis in Microsoft v. Motorola reviewed the 15 elements/factors laid down in Georgia-Pacific Corp. v. United States Plywood Corp., 318 F. Supp. 1116 (S.D.N.Y. 1970) in turn, emphasizing certain factors, deemphasizing others, and adding additional guidance regarding RAND application of the Georgia-Pacific factors.

Determination of Royalty Rate –

The court based its FRAND royalty on the rates that members of existing video compression and WiFi patent pools would have charged in a hypothetical world where all owners of standard patents had joined the pools. It found that companies get two kinds of value from being pool members:

1. the value of a license to use pooled patents and
2. the value of royalty revenue from the patents they contribute to the pool.

The court pegged the license value at twice the royalty value.[15] Reasoning that a FRAND royalty should capture both kinds of value, the court calculated Motorola’s FRAND royalty as three times the hypothetical pool royalty value. The court thus concluded that the royalty rates sought by Motorola “did not fall within the range of FRAND royalties.”[16]

In this case, although the Court focused upon the policy interests underlying both Standard Setting Organisations (SSOs) and the RAND commitment, The Court also acknowledged and emphasized that-

“a RAND royalty should be set with the understanding that SSOs include technology intended to create valuable standards[,] . . . [and to] induce the creation of valuable standards, the RAND commitment must guarantee that holders of intellectual property will receive reasonable royalties on that property.”

The Court also acknowledged that a “patent that is extremely important and central to the standard would reasonably command a higher royalty rate than a less important patent.”[17]

Injunctive Relief –

The Court granted Microsoft’s motion to dismiss Motorola’s request for injunctive relief as no irreparable harm was caused to Motorola due to presence of FRAND license commitment. The Court concluded that Microsoft having the third party beneficiary status, FRAND license agreement was a remedy adequate to compensate Motorola.[18]

Was Motorola bound to license SEPs on FRAND terms?

Statements made by Motorola to ITU/IEEE re SEPs constituted binding agreements to license SEPs on FRAND terms. Microsoft being the third party and beneficiary to those agreements, had right to FRAND license on SEPs. Applying for a patent license and negotiating towards a patent license were not conditions precedent to Motorola’s obligations to grant licenses on FRAND terms.