A. Microsoft v. Motorola (W.D. Wash, No. C10-1823)
This is an important case because it is the first decision that sets a framework for determining "fair, reasonable, and non-discriminatory" (FRAND) royalty; and provides guidance for calculating the value of a Standards Essential Patent (SEP), affecting (1) SEP holders and potential licensees negotiating FRAND licenses; and (2) patent holders deciding whether to declare a patent essential to a standard.
The case involved Motorola's patents covering IEEE's 802.11 (WiFi) standards and ISO/IEC's and ITU's H.264 video codec standards. Motorola offered to license patents to Microsoft at a proposed royalty of 2.25 percent of the end product (i.e., each Xbox 360, PC/laptop or smartphone implementing the standard). Microsoft did not take a license, sought declaratory relief that Motorola breached its FRAND obligations to the Standards Development Organizations (SDOs), and Motorola sued Microsoft for patent infringement. On April 25, 2013, Judge James L. Robart issued a 207 page opinion. The Judge stated that to decide whether Motorola's opening offers were in good faith, a fact-finder must be able to compare them with a reasonable RAND royalty rate and because more than one rate could conceivably be RAND, a reasonable royalty range (Order p. 5). A bench trial was held from November 13, 2012-November 20, 2012 to determine (1) a RAND royalty range for Motorola's Standards Essential Patents (SEPs) and (2) a specific RAND royalty rate for Motorola's SEPs. Testimony from 18 witnesses was taken.
The Court's analysis is separated into six parts:
- First, the court introduces the parties and their relation to one another;
- Second, the court provides background on standards, SSOs and the RAND commitment;
- Third, the court develops a framework for assessing RAND terms;
- Fourth, the court analyzes the H.264 Standard and Motorola's H.264 SEPs and their importance to Microsoft's standard-using products;
- Fifth, the court analyzes the 802.11 Standard and Motorola's 802.11 SEPs and their importance to Microsoft's standard-using products; and
- Sixth, determines the appropriate RAND royalty rate for Motorola's SEPs.
The Court applied a modified Georgia–Pacific analysis to account for the purpose of the RAND commitment. The court stated that the owner of an SEP is under the obligation to license its patents on RAND terms, whereas the owner of a patent uncommitted to RAND has monopoly power over its patent and may choose to withhold licensing. The court stated further that the hypothetical negotiation almost certainly will not take place in a vacuum: the implementer of a standard will understand that it must take a license from many SEP owners, not just one, before it will be in compliance with its licensing obligations and able to fully implement the standard. This methodology is based on a conventional Georgia-Pacific patent royalty analysis, as modified to give substantial weight to royalty stacking, relative value and public interest considerations.
"Economic Guideposts" for assessing RANDÂ terms: Beyond the actual RAND royalty rate determinations, this order is also important for the precedent it sets in how to determine RAND terms for a patent portfolio. Judge Robart lays out what he terms several "economic guideposts":
- A RAND royalty should be set at a level consistent with the SSOs' goal of promoting widespread adoption of their standards.
- In the context of a dispute concerning whether or not a given royalty is RAND, a proper methodology used to determine a RAND royalty should therefore recognize and seek to mitigate the risk of patent holdup that RAND commitments are intended to avoid.
- Likewise, a proper methodology for determining a RAND royalty should address the risk of royalty stacking by considering the aggregate royalties that would apply if other SEP holders made royalty demands of the implementer.
- At the same time, a RAND royalty should be set with the understanding that SSOs include technology intended to create valuable standards... . To induce the creation of valuable standards, the RAND commitment must guarantee that holders of valuable intellectual property will receive reasonable royalties on that property.
- From an economic perspective, a RAND commitment should be interpreted to limit a patent holder to a reasonable royalty on the economic value of its patented technology itself, apart from the value associated with incorporation of the patented technology into the standard.
The court examined the importance of Motorola's H264 SEPs to the H.264 Standard and to Microsoft's products. Court concluded that 14 of the 16 Motorola H.264 SEPs are directed only to interlaced video. The court concluded that (1) interlaced video is becoming less prevalent in the marketplace; (2) little evidence suggests that Microsoft products often encounter interlaced video; (3) and Motorola demonstrated that support for interlaced video in coding tools is important to Microsoft so that its products will seamlessly play any video encountered by users. The court determined that Motorola's H264 SEPs provide only minor importance to the overall functionality of Microsoft's Windows product. The court determined that Motorola's H264 SEPs provide only minor importance to the overall functionality of Microsoft's Xbox product. The court examined the importance of Motorola's 802.11 SEPs to the 802.11 Standard and to Microsoft's products.
Calculating the RAND royalties, the Court held:
- The RAND royalty rate for Motorola's H.264 SEP portfolio is 0.555 cents per unit; the upper bound of a RAND royalty range for Motorola's H.264 SEP portfolio is 16.389 cents per unit; and the lower bound is 0.555 cents per unit. This rate and this range are applicable to both Microsoft Windows and Xbox products. For all other Microsoft products using the H.264 Standard, the royalty rate will be the lower bound of 0.555 cents.
- The RAND royalty rate for Motorola's 802.11 SEP portfolio is 3.471 cents per unit; the upper bound of a RAND royalty range for Motorola's 802.11 SEP portfolio is 19.5 cents per unit; and the lower bound is 0.8 cents per unit. This rate and this range are applicable to Microsoft Xbox products. For all other Microsoft products using the 802.11 Standard, the royalty rate will be the low bound of 0.8 cents.
Royalty rate estimated:Â Initially, Motorola had sought from Microsoft as much as $4 billion a year for use of its standard, essential wireless and video patents, while Microsoft argued its rival deserved about $1 million a year. Judge Robart decided that appropriate payment was about $1.8 million.19
B. Apple v. Motorola (N.D. Illinois, Eastern Division, No. 1:11-cv-08540)
The parties filed patent infringement lawsuits in October 2010 after prior licensing negotiations failed. Some of these infringement actions were consolidated in a case before Judge Posner. Apple asserted Motorola infringed claims of four nonstandard- essential patents, while Motorola asserted Apple infringed claims of one patent that was essential to the Universal Mobile Telecommunications Standard (UMTS, a 3G cellular standard). As the trial date approached, Judge Posner excluded all of the parties' respective expert testimony on damages. Since neither party could prove an entitlement to damages, Judge Posner tentatively canceled the jury trial, finding that it would make little sense to hold a jury trial on infringement liability if a party could not receive relief. However, he allowed the parties to submit further briefing, including relating to the potential for equitable remedies such as injunctive relief. Because Motorola asserted an SEP that was encumbered by a FRAND licensing commitment, Judge Posner specifically requested that Motorola address the bearing of FRAND on the injunction analysis.20
In his opinion, Judge Posner found that neither Motorola nor Apple was entitled to damages or an injunction, and dismissed the case with prejudice. In addressing Motorola's damages claims, he set forth a clear opinion of what he considers to be the proper way to determine a reasonable royalty for SEPs:
"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 ruled that Motorola could not obtain damages for any infringement of its asserted standardessential patent because Motorola did not provide evidence for calculating a royalty consistent with the above framework.
Additionally, with regard to injunctive relief, Judge Posner similarly found that Motorola's FRAND commitment precluded such relief:
"I don't see how, given FRAND, I would be justified in enjoining Apple from infringing the '898 unless Apple refuses to pay a royalty that meets the FRAND requirement. By committing to license its patents on FRAND terms, Motorola committed to license the '898 to anyone willing to pay a FRAND royalty and thus implicitly acknowledged that a royalty is adequate compensation for a license to use that patent. How could it do otherwise? How could it be permitted to enjoin Apple from using an invention that it contends Apple must use if it wants to make a cell phone with UMTS telecommunications capability— without which it would not be a cell phone?"
Apple and Motorola have appealed Judge Posner's dismissal of their respective cases to the Federal Circuit (Docket Nos. 2012-1548, -1549). As this case and similar cases go through the appeals process, more to using SEPS to obtain an injunctive relief, as well as finding a methodology for calculation of a reasonable royalty.
In re Innovatio IP Ventures, LLC21
Plaintiff and patent-owner Innovatio IP Ventures, LLC ("Innovatio") had sued a number of entities including coffee shops, restaurants, hotels, supermarkets, large retailers, transportation companies, and other commercial users of wireless internet technology located throughout the United States. Innovatio alleged that the users provide wireless internet access to their customers or use it to manage internal processes, and by doing so infringe various claims of twenty-three patents owned by Innovatio. Judge James F. Holderman in Chicago (Northern District of Illinois) largely adopted Judge Robart's approach, and in at least one respect—the royalty base—he actually took a licensee-friendlier approach, focusing completely on the price of WiFi chipsets because the patent holder failed to convince him of a royalty based on the price of an entire end product.22
Numerically, Innovatio IP Ventures, LLC, a patent assertion entity that has sued numerous defendants throughout the United States, is deemed entitled to a per-unit royalty of "9.56 cents for each Wi-Fi chip used or sold by the Manufacturers in the United States, subject to the terms of the patents, the applicable statute of limitations, and a finding of infringement for a license to its portfolio of 19 patents essential to the IEEE 802.11 (WiFi) standard. This is a victory for the manufacturers whose products are actually at issue in this case, such as, Cisco Systems, Motorola Solutions, SonicWALL, Netgear, and Hewlett-Packard. According to the order, "Innovatio's proposed method, for example, would have resulted in royalties on average of approximately $3.39 per access point, $4.72 per laptop, up to $16.17 per tablet, and up to $36.90 per inventory tracking device (such as a bar code scanners)." Based on the non-weighted average of those four examples of $15.30, this means Innovatio got 1 percent less of what it wanted.
Toward the end, Judge Holderman's ruling explains why the 9.56 cents per unit Innovatio is (subject to the conditions quoted further above) entitled to "is approximately three times Judge Robart's [F]RAND rate of 3.471 cents per unit." There's a reason for this difference. Judge Robart concluded that Motorola's patents were only of minimal value to the standard, [...] whereas the court here has found that Innovatio's patents are of moderate to moderate-high importance to the standard. A multiplier of about three is a reasonable difference between the two royalties to account for the greater importance of lnnovatio's patents to the 802.11 standard."
There's a clear and strong trend in U.S. courts toward rationality in connection with SEP royalty rates. Conversely, irrational demands fail consistently these days.
Impact of these decisions—With standardization of increasingly complex technology becoming more widespread in mobile and consumer electronics, decisions regarding current and potential standardessential patents will be increasingly important to a company's intellectual property strategy. Judge Robart's decision sets forth the first ever framework to setting a FRAND royalty. Only time will tell if other courts approve of and adopt Judge Robart's framework. For patents already declared standard essential, the patent holder and potential licensees can refer to Judge Robart's analysis when making initial license offers and negotiating FRAND licenses. Finally, companies holding patents that could potentially be declared standard essential can look to the court's decision to guide their decision-making process when determining whether to declare them essential and subjecting them to a FRAND obligation.