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Software Standards and Patent Licensing
Tuesday, February 14 2012 @ 02:30 PM EST

With Google's acquisition of Motorola Mobility there have been a number of competitors claiming Google (Motorola) is acting unfairly in its licensing of patents related to the H.264 and 3G/UMTS standards.

Among the complaining parties are Microsoft and Apple, both of which claim that the Motorola Mobility approach to FRAND (fair reasonable and non-discriminatory) licensing under the respective standards is anything but fair and reasonable. The fight is over the fact that Motorola Mobility (and now Google) is asking a 2.25% royalty for a single patent in each of these instances.

While it is the epitome of chutzpah for Apple and Microsoft to complain about the patent licensing behavior of any other company, that does little to clarify the issues involved in patent licensing related to standards. This article will walk through those issues so we can all have a better understanding of such licensing and why different companies perceive the terms "fair and reasonable" from very different perspectives, depending on whose ox is being gored.

Who Develops and Sets The Standards

There are standards organizations all over the place (see, Standards Organizations). Some, such as the International Organization for Standardization (ISO) operate at a high level providing a mechanism for standards adoption at an international level. There are similar organizations at the regional and national level. The work of these organizations is oftentimes political in nature, and the process can truly be ugly in practice. Just ask the folks who fought the Open Document Format / Office Open XML wars.

What we are more interested in here are the standards developing organizations, particularly those focused on information technology. Among the primary organizations in this arena are IEEE (Institute of Electrical and Electronics Engineers), OASIS (Organization for the Advancement of Structured Information Standards), and W3C (World Wide Web Consortium), although there are numerous others.

How Do Standards-Developing Bodies Work

Each of these standards-developing bodies establishes its own operating practices (bylaws) and intellectual property policies, and these practices and policies can have a profound impact on the standards setting process. Just as an example, some of the issues that may be confronted in the process include:

  • Who can participate in the standards-developing process?

  • Are participants required to disclose their patents during the standards-developing process (so others can decide whether the patented technology should be included in the standard, with full knowledge of the potential financial/technical impact)?

  • At what stage does the standards development group establish its IP licensing policy -- before starting work or at the end of the work?

  • Are all licensing approaches royalty-bearing or may they be royalty-free (thus having a bearing on whether the standard may be implemented in free and open source software)?
Those are just a few of the questions. It is worth taking a quick peek at just one such body, OASIS. OASIS membership is generally open to anyone (see, OASIS Bylaws) who is willing to pay the applicable membership fee (see, OASIS membership application [PDF]). The organization operates on democratic principles of governance.

The actual standards-developing work is undertaken in technical committees, and each technical committee is obligated to establish the intellectual property rules that will govern its work at the outset pursuant to the OASIS intellectual property rights policy. Among the more important aspects of the IPR policy are:

  • Its definitions of key terms, such as Contribution, Covered Product, Essential Claims, IPR Mode, and Licensed Product, to name a few;

  • The establishment of the IPR Mode that will govern the technical committee's work as established at the outset. The IPR Mode options are: reasonable and non-discriminatory (RAND), royalty-free on RAND terms (RF-RAND or FRAND), Royalty-Free on Limited Terms (RF-LT), and Non-Assertion (NA);

  • licensing obligations for copyrights, trademarks and patents; and

  • an IPR disclosure obligation, which includes the nature and timing of the disclosure (OASIS follows the ex ante model, i.e., requiring disclosure at the time of contribution, not later at the time of adoption).

Not requiring ex ante disclosure in the standards-developing process can lead to unhappy surprises when the IPR disclosure is made after the work is done and the standard is moving to adoption, and this has clearly resulted in some unfortunate and heavily litigated standards/patent cases (see, Rambus and Qualcomm). Interestingly, the Qualcomm case involved the same H.264 standard at issue in the present argument with Google/Motorola Mobility.

Also, each standards-developing organization adopts its own licensing definitions, i.e., there is no one, established definition of what constitutes RAND, FRAND, or any other form of licensing. Here are the definitions used by OASIS:

RAND - [An Obligated Party] will grant to any OASIS Party or third party: a nonexclusive, worldwide, non-sublicensable, perpetual patent license (or an equivalent non-assertion covenant) under its Essential Claims covered by its Contribution Obligations or Participation Obligations on fair, reasonable, and non-discriminatory terms to make, have made, use, market, import, offer to sell, and sell, and to otherwise directly or indirectly distribute (a) Licensed Products that implement such OASIS Standards Final Deliverable, and (b) Licensed Products that implement any Final Maintenance Deliverable with respect to that OASIS Standards Final Deliverable.

RF-RAND or FRAND - [An Obligated Party] will grant to any OASIS Party or third party: a nonexclusive, worldwide, non-sublicensable, perpetual patent license (or an equivalent non-assertion covenant) under its Essential Claims covered by its Contribution Obligations or Participation Obligations without payment of royalties or fees, and subject to the applicable Section 10.2.2 or 10.2.3, to make, have made, use, market, import, offer to sell, and sell, and to otherwise directly or indirectly distribute (a) Licensed Products that implement such OASIS Standards Final Deliverable, and (b) Licensed Products that implement any Final Maintenance Deliverable with respect to that OASIS Standards Final Deliverable. .... [and with] license terms that are fair, reasonable, and non-discriminatory ...

The H.264 Standard

The H.264 standard was developed by the video coding experts group (VCEG) of the International Telecommunication Union Telecommunication Standardization Sector (ITU-T). The ITU-T approach to IPR is far less disciplined than that used by OASIS. It is, for all intents and purposes, merely a guideline ('should' versus 'will' or 'must'). It encourages ex ante disclosure, but does not require it. Further, it leaves the matter of what constitutes appropriate RAND or FRAND licensing to the individual IPR holders. Consequently, any standard adopted using this approach will result in some disparity of thinking among the IPR holders as to what constitutes a "reasonable" royalty.

Royalties - How Are They Calculated And What Is "Reasonable" License fees and royalties come in a wide assortment of flavors, including:

  • One-time, up-front, fully-paid royalties;

  • Pre-paid royalties;

  • Minimum, guaranteed royalties; and

  • Running royalties for the term of the license, to name a few.

In whatever form, royalties are determined using two factors: a royalty base and a royalty rate. The royalty base is the measure of the "infringement," i.e., how much licensed product is being produced or what income is derived from the sale of licensed product. A royalty base is typically a unit of licensed product or net revenue from the sale of the licensed product. Consequently, inherent to the definition of the royalty base is what constitutes a licensed product. More on that in a bit.

The second factor in determining a royalty is the royalty rate. This is the value, most frequently either in a unit of currency or percentage, to be extracted from the royalty base as compensation. For example, where the number of widgets produced and sold is the royalty base, the royalty rate may be US$0.05 per widget. Or, where the royalty base is net revenue derived from the sale of widgets, the royalty rate may be 5% of such net revenue.

As you can see, then, there is flexibility in setting both the base and rate of the royalty, and what is reasonable is only determined when there is a meeting of the minds between the licensor and licensee and the license is entered. Prior to that event, what each of the parties perceives to be reasonable will likely be at odds with what the other party is offering.

Back to the issue of what constitutes a licensed product. Under U.S. case law there must be some association between the royalty base and the infringed patent. Thus, in software a royalty base may be the software component, the entire software application, or even the device on which the software operates, but it would be inappropriate (and undoubtedly unlawful) for a party to claim a royalty base of something even greater which is not dependent on the infringing software or the infringing device (running the software).

Let's put this in the context of the H.264 standard. It is a standard covering video compression (video codec). Thus, a reasonable royalty base may be: (a) the software component implementing the codec; (b) the larger software application incorporating that component, including an operating system; or (c) the device on which such software runs, such as a laptop or desktop computer, a tablet, an automobile information system, or a television set-top box. But to suggest, as at least one so-called "patent expert" has done, that Google-Motorola Mobility is attempting to claim a royalty on an entire automobile is either willful ignorance or purposely misleading.

Given that the definition of the royalty base can fluctuate within relevant bounds, it shouldn't be surprising that the royalty rate will typically fluctuate inversely. That is, the broader the relevant royalty base, the lower the royalty rate. I might want 10% of the revenues from the sale of a software component while being willing to take 4% of the revenues of the application incorporating the component or 2% of the device running the application. As stated before, in the end what is reasonable is that point of common ground where the licensor believes he/she is receiving fair value for the patented invention and the licensee believes the price paid is fair in relation to the cost structure of the licensed product.

The Instant Case

We started off talking about Google/Motorola Mobility's licensing practices related to certain patents that, apparently, are essential to implementation of the H.264 standard. Apple and Microsoft both complain that the 2.25% royalty that Motorola Mobility is seeking, in each case, for a single H.264-related patent is unreasonable, and that unhappiness has now extended to Google which is acquiring Motorola Mobility and which has stated that it will not alter said licensing practice. What is interesting is how these parties and their paid publicists have portrayed normative behavior in the context of standards setting and patent licensing. Consider:

  • The previously mentioned outlandish claim that Google is seeking a royalty on the entire value of an automobile that happens to include a video display system using H.264; or

  • The suggestion that the royalty rate Motorola Mobility is seeking in this instance is not fair and reasonable when compared to what Apple did with Firewire, but remember, others perceived Apple to be neither fair nor reasonable in that instance; or

  • That the royalty rate requested by Motorola is not fair, when the ITU-T provides no guidance on the patent licensing practices of contributors; or

  • In the vein of the pot calling the kettle black, the patent licensing practices pursued by Apple and Microsoft in other contexts, such as Microsoft's demand for royalties on Linux technology when it refuses to publicly disclose the patents that Linux allegedly infringes.

Companies have interests they wish to pursue, and they are generally willing to use whatever leverage is at their disposal to pursue those interests. Google has come to the conclusion that H.264 is a standard that is too patent-encumbered and not consistent with open core technologies. Is that an unreasonable position? It certainly isn't from the perspective of an open source advocate. Nor is it any more unreasonable for Google/Motorola Mobility to use its patent leverage to advance a position in opposition to H.264 than it is for Apple or Microsoft to try to kill Android using their respective patent portfolios.

Will this benefit Google? Unbiased observers are not certain, but they certainly don't begrudge Google its position.

In the end this may simply be one more skirmish in the mobile operating system wars, except cynical misrepresentations are always worth rebutting. It's clear Microsoft is having some success with its somewhat hypocritical position, as both the EU Commission and the DOJ singled out Google for further watching regarding this.

On the other hand, the USDOJ is also keeping an eye on the MPEG LA's licensing practices and how they impact Google. Also, keep in mind the tit-for-tat nature of the USDOJ approving the Microsoft-Apple-RIM acquisition of the Nortel patents. All of these things are connected.

Finally, keep an eye out for the hired guns holding themselves out as patent experts and talking about what is fair and reasonable when their real agenda is being set by those who pay them.

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