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Microsoft and Motorola File Trial Briefs As Seattle Trial Draws Near~pj Updated: Text
Thursday, November 08 2012 @ 02:31 PM EST

The parties in Microsoft v. Motorola have filed their trial briefs, albeit in redacted form. Keep in mind that a trial brief means what the party thinks is at issue and what its position is going into trial. Neither side has proven anything yet. That's what the trial if for. But it does give us a clear picture of where each side sees its position at this point. Microsoft's main argument is that FRAND licenses should be priced similarly to patent pool licenses, like MPEG LA's. A novel idea. But this is their position, maybe because it's how it would like it to be, even though it has never been so before. It shows that Apple and Microsoft are a bit newer to FRAND than Samsung and Motorola, and they don't like how it's always been, because it will cost them, and they want Android to lie down and die.

Motorola argues that reality is the proper ruler - what would the negotiation have arrived at if the parties had sat down and discussed it a couple of years ago instead of Microsoft cunningly suing for the court to set a price instead?

The Court has recognized that it faces difficult issues of first impression: considering what methodology should be used to determine a RAND royalty rate range, and then using that methodology to determine a range of RAND rates applicable to Motorola’s standard essential patents (“SEPs”). (See, e.g., Dkt. No. 490 at 22.) In doing so, to be as true as possible to what actually happens in the real world, the Court should recreate the licensing negotiation that would have taken place had Microsoft negotiated with Motorola in October 2010.

And MPEG LA shows up, deeply disturbed that its licenses and negotiations are going to be shown to a jury and hence to the world, so does Kyocera, and so does Koninklijke Philips, and pretty much everyone is pleading with the court to exclude the public and seal their trade secrets. Kyocera proposes a change to the Protective Order, but it's sealed so we can't read it. Microsoft has responded to RIM's request that Microsoft be excluded from RIM's trade secrets, and it opposes the moves to close the courtroom, which in my experience is certainly a first. It's usually Microsoft asking for privacy. Instead, Microsoft argues, quite sensibly, that "while the financial terms of a license agreement often qualify as protectable trade secrets, the remaining terms generally do not."

The appeals court isn't going to do a thing for Motorola on its appeal for a rehearing. And so onward the parties go, with the trial set for the 13th.

We have one volunteer to attend at least one day, but if you can make it to Seattle for another day of this trial, we'd be relieved.

Jump To Comments

[Filings
Motorola Trial Brief as Text
Microsoft Trial Brief as Text]

The filings:

518 - Filed & Entered: 11/05/2012
NOTICE of Joinder JOINING [495] MOTION to Seal Documents and Trial Testimony and Exclude Unauthorized Persons From the Courtroom During Testimony Regarding Trade Secrets, by Interested Party LG Electronics, Inc.. (Attachments: # (1) Exhibit Declaration of Jungsheek Juhn, # (2) Certificate of Service Certificate of Service)(Rylander, Kurt)

519 - Filed & Entered: 11/05/2012
MOTION to Seal by Interested Party MPEG LA, LLC. Noting Date 11/9/2012, (Bigby, Aaron)

520 - Filed & Entered: 11/05/2012
DECLARATION of Tony Piotrowski filed by Interested Party MPEG LA, LLC re [519] MOTION to Seal (Bigby, Aaron)

521 - Filed & Entered: 11/05/2012
PROPOSED ORDER (Unsigned) re [519] MOTION to Seal , [520] Declaration (Bigby, Aaron)

522 - Filed & Entered: 11/06/2012
NOTICE of Joinder JOINING (495 in 2:10-cv-01823-JLR) MOTION to Seal Documents and Trial Testimony and Exclude Unauthorized Persons From the Courtroom During Testimony Regarding Trade Secrets, by Plaintiffs Kyocera Communications, Inc., Kyocera Communications, Inc., Kyocera Corporation, Kyocera Corporation. (Tondini, John)

523 - Filed & Entered: 11/06/2012
DECLARATION of Eric Klein filed by Plaintiffs Kyocera Communications, Inc., Kyocera Corporation re (495 in 2:10-cv-01823-JLR) MOTION to Seal Documents and Trial Testimony and Exclude Unauthorized Persons From the Courtroom During Testimony Regarding Trade Secrets (Tondini, John)

529 - Filed: 11/06/2012 Entered: 11/07/2012
ORDER of USCA (12-35352) as to [303] Notice of Appeal, filed by Motorola, Inc., Motorola Mobility LLC, General Instrument Corporation; The panel has unanimously voted to deny appellants petition for rehearing. Judge Thomas and Judge Berzon have voted to deny the petition for rehearing en banc, and Judge Wallace so recommends. The full court has been advised of the petition for rehearing en banc, and no judge has requested a vote on whether to rehear the matter en banc. Fed. R. App. P. 35. The petition for rehearing is denied and the petition for rehearing en banc is rejected (LMK)

524 - Filed & Entered: 11/07/2012
MOTION to Seal by Interested Parties Kyocera Communications, Inc., Kyocera Corporation. (Attachments: # (1) Proposed Order) Noting Date 11/16/2012, (Tondini, John)

525 - Filed & Entered: 11/07/2012
SEALED MOTION to Amend the Protective Order; re [447] Order on Motion to Amend ; by Interested Parties Kyocera Communications, Inc., Kyocera Corporation. (Attachments: # (1) Proposed Order) Noting Date 11/23/2012, (Tondini, John)

526 - Filed & Entered: 11/07/2012
SEALED DOCUMENT Declaration of Eric Klein In Support of Motion to Amend Protective Order by Interested Parties Kyocera Communications, Inc., Kyocera Corporation re [447] Order on Motion to Amend (Tondini, John)

527 - Filed & Entered: 11/07/2012
MOTION to Amend Protective Order [Redacted] by Interested Parties Kyocera Communications, Inc., Kyocera Corporation. (Attachments: # (1) Proposed Order) Noting Date 11/23/2012, (Tondini, John)

528 - Filed & Entered: 11/07/2012
DECLARATION of Eric Klein filed by Interested Parties Kyocera Communications, Inc., Kyocera Corporation re (527 in 2:10-cv-01823-JLR, 111 in 2:11-cv-00343-JLR) MOTION to Amend Protective Order [Redacted] (Tondini, John)

530 - Filed & Entered: 11/07/2012
Terminated: 11/08/2012
APPLICATION OF ATTORNEY Matthew R. Clements FOR LEAVE TO APPEAR PRO HAC VICE for Defendants General Instrument Corporation, Motorola Mobility LLC, Motorola, Inc. (Fee Paid) Receipt No. 0981-3008299. (McCune, Philip)

531 - Filed & Entered: 11/07/2012
NOTICE of Joinder JOINING [495] MOTION to Seal Documents and Trial Testimony and Exclude Unauthorized Persons From the Courtroom During Testimony Regarding Trade Secrets, by Interested Party Koninklijke Philips Electronics N.V.. (Stewart, Douglas)

532 Filed & Entered: 11/07/2012
DECLARATION of Michael Marion in support of re [531] Notice of Joinder, by Interested Party Koninklijke Philips Electronics N.V.. (Stewart, Douglas)

533 - Filed & Entered: 11/07/2012
RESPONSE, by Plaintiff Microsoft Corporation, Defendant Microsoft Corporation, to [495] MOTION to Seal Documents and Trial Testimony and Exclude Unauthorized Persons From the Courtroom During Testimony Regarding Trade Secrets, [498] MOTION to Seal . (Harrigan, Arthur)

534 - Filed & Entered: 11/07/2012
TRIAL BRIEF REDACTED by Plaintiff Microsoft Corporation, Defendant Microsoft Corporation. (Harrigan, Arthur)

535 - Filed & Entered: 11/07/2012
SEALED DOCUMENT Microsoft Corporation's Trial Brief by Plaintiff Microsoft Corporation, Defendant Microsoft Corporation re [495] MOTION to Seal Documents and Trial Testimony and Exclude Unauthorized Persons From the Courtroom During Testimony Regarding Trade Secrets (Harrigan, Arthur)

536 - Filed & Entered: 11/07/2012
RESPONSE, by Plaintiff Microsoft Corporation, Defendant Microsoft Corporation, to [502] SEALED MOTION to Seal Terms of Patent License Agreements and to Deny Microsoft In-House Counsel Access to the Agreements; re [501] MOTION to Seal Nonparties Research in Motion Limited and Research in Motion Corpora. (Attachments: # (1) Proposed Order)(Harrigan, Arthur)

537 - Filed & Entered: 11/07/2012
DECLARATION of T. Andrew Culbert in Support of Microsoft's Response to RIM's Motion to Seal filed by Plaintiff Microsoft Corporation, Defendant Microsoft Corporation re [502] SEALED MOTION to Seal Terms of Patent License Agreements and to Deny Microsoft In-House Counsel Access to the Agreements; re [501] MOTION to Seal Nonparties Research in Motion Limited and Research in Motion Corpora (Harrigan, Arthur)

538 - Filed & Entered: 11/07/2012
RESPONSE, by Defendants General Instrument Corporation, Motorola Mobility LLC, Motorola, Inc., to [510] MOTION to Seal Trial Exhibits That Disclose Microsoft's Trade Secrets, [498] MOTION to Seal , [502] SEALED MOTION to Seal Terms of Patent License Agreements and to Deny Microsoft In-House Counsel Access to the Agreements; re [501] MOTION to Seal Nonparties Research in Motion Limited and Research in Motion Corpora, [519] MOTION to Seal . (Palumbo, Ralph)

539 - Filed & Entered: 11/07/2012
TRIAL BRIEF REDACTED by Defendants General Instrument Corporation, Motorola Mobility LLC, Motorola, Inc.. (Palumbo, Ralph)

540 - Filed & Entered: 11/07/2012
MOTION to Seal Trial Brief by Defendants General Instrument Corporation, Motorola Mobility LLC, Motorola, Inc.. (Attachments: # (1) Proposed Order) Noting Date 11/16/2012, (Palumbo, Ralph)

541 - Filed & Entered: 11/07/2012
SEALED DOCUMENT Motorola's Trial Brief by Defendants General Instrument Corporation, Motorola Mobility LLC, Motorola, Inc. re [540] MOTION to Seal Trial Brief (Palumbo, Ralph)

542 - Filed & Entered: 11/08/2012
ORDER re (530 in 2:10-cv-01823-JLR) Application for Leave to Appear Pro Hac Vice. The Court ADMITS Attorney Matthew R Clements for Kyocera Corporation, and for General Instrument Corporation,Matthew R Clements for Motorola Mobility LLC, by William M. McCool. (No document associated with this docket entry, text only.)(DS)

I didn't get all the documents. Some are sealed, so I can't, and some don't matter from our perspective. I haven't read them all yet myself, so we can do that together.

Microsoft's argument is a bit more complex than my short description, so to be fair, here's the argument in a bit more detail, from the introduction to the trial brief. We'll work on text versions, but Microsoft's is a TIFF, and that's a headache.

Here's the introduction:

The purpose of this phase of the breach of contract trial is to determine a RAND royalty, both a range and specific royalty, for the Motorola Defendants' patents that they have declared essential to the 802.11 and H.264 standards.1 RAND royalties rest on two key principles that derive from the fundamental requirement of apportionment that holds a patent owner is not entitled to a royalty for the value contributed to a product by the patented and unpatented contributions of others. Velo-Bind, Inc. v. Minnesota Min. & Mfg. Co., 647 F.2d 965, 973 (9th Cir. 1981) ("where the patent creates only part of the profits, damages are limited to that part of the profits, which must be apportioned as between those created by the patent and those not so created."); see also, Dowagiac Mfg. Company v. Minnesota Moline Plow Company, 235 U.S. 641, 646 (1915).

First, the main purpose of the RAND requirement "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." Apple, Inc. v. Motorola, Inc., No. 1:11-cv-08540, 2012 WL 2376664, at *11 (N.D. Ill. June 22, 2012). See Broadcom Corp. v. Qualcomm Inc., 501 F.3d 297, 313-14 (3d Cir. 2007); Bohannan and Hovenkamp, Creation without Restraint (2011) at 358-62; Federal Trade Commission, The Evolving IP Marketplace: Aligning Patent Notice and Remedies With Competition (March 2011) at 192 (Ex. 1034); Farrel et al., "Standard setting, patents, and hold-up", 74 Antitrust L. J. 603, 608 (Ex. 1014); Swanson & Baumol, "Reasonable and Non-Discriminatory (RAND) Royalties, Standard Selection, and Control of Market Power," 73 Antitrust L. J. 1, 7-11 (2005) (Ex. 1013). The prohibition on recovering hold-up value from standard implementers arises from a party's willing participation in the standard-setting process (which subjects the patent owner to the patent disclosure and commitment policies of the standard organization) and is an integral part of the RAND commitment.

Second, in the context of complex standards involving contributions from many parties and the existence of many standard essential patents, principles of apportionment mean that an individual patent holder is not entitled to more than its legitimate share and that the aggregate royalty for all patents essential to practice the standard must be reasonable. The determination of a RAND royalty therefore must also assure that the standard will still be economically viable if the other holders of standard-essential patents receive similar amounts. Put another way, a cumulative royalty for all patents essential to a standard that is so high that the standard cannot succeed in the market would fail the "R" in the RAND test, as it would not be a "reasonable" royalty. This latter aspect is the so-called "stacking" problem. See, e.g. Lemley & Shapiro, "Patent Hold-up and Royalty Stacking," 85 Texax L. Rev. 1991, 2015-16, 2026-28 (2007) (Ex. 1030); Swanson & Baumol, 73 Antitrust L. J. at 57; Shapiro, "Navigating the Patent Thicket: Cross Licenses, Patent Pools, and Standard-Setting," in Jaffe et al., Innovation Policy and the Economy (2001) at 6-8 (Ex. 1012). See also Hovenkamp, "Competition in Information Technologies: Standards-Essential Patents, Non-Practicing Entities and FRAND Bidding," U. of Iowa Legal Studies Research Paper No. 12-32 (Oct. 2012) at 9-10 (Ex. 1647).

I have a couple of immediate responses. One, when I see a case from 1915 plus a long string of law papers, I think, "Oh, they are trying to change the law."

Second, despite Microsoft's executive in a recent interview saying that the patent system works well for the US, clearly it isn't any more to Microsoft's lawyers. That's why they want a change. Why? Because you can't develop a smartphone any more withou stepping on hundreds of thousands of patents that you don't personally own. Google has pointed that out. Here Microsoft concurs.

The obvious solution is that standards bodies should require that anything contributed to a standard must be royalty-free. The UK just decided that was the way to go, and they are right. But neither party in this litigation will say that at the moment. Instead, Motorola argues it's not fair to change the rules *after* it donated its technology to the standards under a different process and understanding. And Microsoft says, Let's do it anyway, because otherwise we can't afford to sell a phone.

Unspoken is this: what Microsoft says is too much money is less than Microsoft asks for its utility patents. So it's a kind of Moneyball analysis, where Microsoft thinks if it can devalue the standards-essential patents that Motorola has in spades, it can crush it with royalties for Microsoft's utility patents, which Microsoft has in spades. Hence Android lies down and dies, because it can no longer compete. That is, in my opinion, the real game.

Motorola's Trial Brief as text: Here's Motorola's equivalent trial brief:

MOTOROLA'S TRIAL BRIEF
[REDACTED]

TABLE OF CONTENTS

Page

I. INTRODUCTION ........................................................ 1

II. How to Determine Rates Commensurate With RAND ...................................................... 2

A. Reconstructing Hypothetically the Microsoft and Motorola Negotiation .............. 2

B. The Via Licensing Pool and MPEG LA Pool Are Not “Comparables” and
Reliance on Them Is Not Justified by a Multilateral Ex Ante Methodology .......... 5

C. Hold Up and Stacking Are Not Proven Problems Here.......................................... 9

D. Microsoft’s New SEP Licensing Paradigm Has Drastic Policy Implications ...... 10

III. Motorola’s Patents Make Valuable Contributions to the Standards and to
Microsoft’s Products ........................... 11
A. The Parties’ 802.11 Portfolios .......................... 12
1. Motorola’s 802.11 Patents are Directed to Core Features ........................ 12

2. Microsoft’s Products Use Motorola’s Patents to Satisfy Consumer
Demand .................................................. 15

3. Microsoft’s 802.11 Patents ............................ 16

B. The Parties’ H.264 Portfolios ................................................ 16
1. Motorola’s H.264 Essential Patents are Directed to Core Features.......... 16

2. Microsoft’s Products Use Motorola’s Patents to Satisfy Consumer
Demand .......................................... 19

3. There Were No Comparable Alternatives to Motorola’s Patents at
the Time the H.264 Standard Was Adopted ................................ 21

4. Microsoft’s H.264 Patents .................................... 21

IV. Determining a Range of RAND Rates In This Case Based On a Hypothetical
Bilateral Negotiation .................................. 22
A. Motorola’s Licenses and Licensing Practices................... 22

B. 2.25% Is the Only Logical Starting Point ....................... 23

C. The RAND Rates for the Parties’ Portfolios......................... 24
V. CONCLUSION....................................... 24

[Cases - see PDFs]

INTRODUCTION

The Court has recognized that it faces difficult issues of first impression: considering what methodology should be used to determine a RAND royalty rate range, and then using that methodology to determine a range of RAND rates applicable to Motorola’s standard essential patents (“SEPs”). (See, e.g., Dkt. No. 490 at 22.) In doing so, to be as true as possible to what actually happens in the real world, the Court should recreate the licensing negotiation that would have taken place had Microsoft negotiated with Motorola in October 2010.

In reconstructing that bilateral negotiation, the Court should focus on the importance of Motorola’s patented technology to Microsoft’s products, recognizing that the products broadly implement both the 802.11 and H.264 standards. In addition to this technical assessment of the patents, the Court should also consider the value and importance of Motorola patents as demonstrated by Motorola’s past SEP licenses. These licenses are negotiated market transactions that reflect how Motorola and a variety of third parties have actually valued Motorola’s portfolios when negotiating at arm’s length under a RAND commitment. This is the best measure of value of Motorola’s patents. Indeed, these negotiated rates reflect the balance, which Microsoft itself has recognized, between (1) the right of SEP holders not just to recoup their substantial investment in R&D, but to receive fair value for their patents; and (2) the right of implementers to obtain reasonable (but not de minimis) rates because they are locked into complying with the standard.

In contrast, Microsoft’s “patent pool” approach disrupts this delicate balance by mandating depressed royalty rates that heavily favor implementers. If a SEP holder is forced to license patents only at “pool rates” it does not believe will provide fair value, it will be unlikely to contribute its valuable patents to the standard. Companies such as Motorola invest billions of dollars in R&D to develop the best technology. It makes little business sense to contribute such valuable technology to a standard if the only return will be pennies on a dollar. The result of Microsoft’s approach, apart from imposing a penalty on Motorola that was never envisioned by either Motorola or the standard setting organizations (“SSOs”) with which Motorola actually

1

contracted, is weaker standards that will ultimately have a deleterious impact on consumers.

II. HOW TO DETERMINE RATES COMMENSURATE WITH RAND

A. Reconstructing Hypothetically the Microsoft and Motorola Negotiation

In its Daubert Order, the Court observed that it “must employ a methodology which in some way reconstructs the negotiation that would have taken place between Microsoft and Motorola.” (Dkt. No. 490 at 22.) Motorola agrees that the Court must try to reconstruct what would have actually happened in the real world had Microsoft negotiated with Motorola. As Motorola’s expert economist, Professor Richard Schmalensee, will explain, the most appropriate way to reconstruct that negotiation is to employ a modified form of the well-known Georgia-Pacific hypothetical negotiation, used in patent damages analysis.

This is a rational approach. Georgia-Pacific is an established, reliable framework for creating a hypothetical negotiation between two parties in damages cases, and provides a helpful analog for RAND licensing. As the Court observed, the Federal Circuit “has consistently sanctioned the use of the Georgia-Pacific factors ‘to frame the reasonable royalty inquiry.’” (Id. at 13.) Similarly, the Court also noted that “other courts have spoken to the applicability of the Georgia-Pacific factors in determining a reasonable royalty in the RAND context.” (Id.) Moreover, as Dr. Schmalensee will explain, there is significant support in the literature for employing a methodology like Georgia-Pacific to determine RAND terms.

In emulating this real-world negotiation, the Court should start with how companies – including both Motorola and Microsoft – actually have negotiated patent licenses in the past. Motorola’s experts, Dr. Schmalensee and Mr. Donohoe, and Kirk Dailey, formerly the Corporate Vice President of Intellectual Property at Motorola, will explain that, in the real world, RAND licenses are complex agreements that require the exchange of sensitive business information and extensive negotiation to account for unique circumstances of each licensing situation. Given that it is industry practice to cross-license SEPs on a portfolio basis, taking into account respective market positions, industry conditions and other commercial considerations, the parties typically discuss and

2

evaluate the scope, use, and importance of patents in each party’s portfolios, to arrive at a final RAND rate for that license. Mr. Dailey will testify that the foregoing is what Motorola has done – and continues to do – in patent license negotiations. Indeed, as Judge Crabb recently observed:
[T]here are all these things that enter into [a SEP license] such as the value of each parties’ portfolio and cross-licensing. I mean those are just the major questions. Then you get into anybody that’s negotiating a license has a multitude of things to consider: How often the payments are made; what currency the payments are made in; what’s the geographical scope; what things are excluded. . . . All of those things are just – if you thought about it, they would take weeks and weeks and weeks to think about. . . . I mean this is what people – these are the kinds of contracts that people negotiate who are experienced, who spent years in the business, who have backgrounds in finance and economics.
(Nov. 1, 2012 Hr’g Tr., Case No. 11-CV-178-BBC (W.D. Wis.), at 8-9.)1fn

Motorola has identified 58 licenses that include at least one of the SEPs at issue. All of these licenses “provide at least some indicia of the appropriate initial royalty rate” in this case. (Dkt. No. 490 at 14.) More than that, these licenses provide evidence regarding Motorola’s licensing practices. [redacted] These real-world licenses are arms’-length market transactions that reflect the value of Motorola’s patents and are the best evidence for modeling the hypothetical negotiation here.

Motorola appreciates the Court’s concern regarding whether it should apply the Entire Market Value Rule (“EMVR”), which is used in a “reasonable royalty” damages analysis under 35 U.S.C. § 284, to the hypothetical RAND licensing negotiation context. But if the Court wishes to recreate the actual real-world negotiation between the parties, the EMVR should not be a constraint in that analysis.2fn [redacted]

3

[redacted] Indeed, Mr. Donohoe will testify that royalty rates in real-world SEP patent licenses are commonly stated as a percentage of sales or final product price. See, e.g., Ex. 2863 at § 20.05.3fn He will explain that there are several reasons for this, including ease of accounting and efficiency, and because the royalty will adjust automatically as the price adjusts. Even the current IEEE LOA form expressly permits royalties to be based on a final product price. See, e.g., Ex. 214.

Both Motorola’s and Microsoft’s own licenses confirm this real-world licensing practice. [redacted] And several of Microsoft’s interoperability protocol patent licenses, which purport to license on “reasonable and non-discriminatory terms,” include a royalty based on the product sold by the licensee. See, e.g., Exs. 3043-3046.

There are additional reasons the EMVR is an inappropriate constraint in a private licensing context. Because parties to SEP licenses typically seek broad coverage and protection, SEP licenses almost always cover future unknown products that cannot be accounted for in an EMVR analysis. This case is a real-world example demonstrating why this is the case. For example, in October 2010, Microsoft’s Xbox was the only Microsoft Wi-Fi product with significant sales. But on October 26 of this year, Microsoft introduced its Surface Tablet – a product that Microsoft has been heavily advertising4fn – that relies entirely on Wi-Fi to connect to the internet. And Microsoft apparently is working on its own smartphone, which undoubtedly will have Wi-Fi capabilities.5fn

The EMVR is a damages analysis applied to specific products after infringement has been found. It is inappropriate to apply this damages constraint in a licensing context that deals with future, unknown products, which may use the standardized technology in new and unanticipated ways. That is why the EMVR is not applied in real-world bilateral licensing. Similarly, SEP

4

licenses are almost always worldwide in scope; applying the EMVR in this context would have the effect of imposing a U.S. litigation constraint to arms’-length licensing around the world.

Even if the Court believes the EMVR might have some applicability to licensing, whether the EMVR applies here should be informed by Motorola’s past licensing practices. See, e.g., Riles v. Shell Exploration & Prod. Co., 298 F.3d 1302, 1313 (Fed. Cir. 2002) (finding expert’s damages models improperly “ignored [patent holder’s] established licensing practice” when considering appropriate royalty rate); Unisplay, S.A. v. Am. Elec. Sign Co., Inc., 69 F.3d 512, 519 (Fed. Cir. 1995); Studiengesellschaft Kohle, m.b.H. v. Dart Indus., Inc., 862 F.2d 1564, 1568 (Fed. Cir. 1988) (“[T]he patentee’s usual licensing approach should be considered in assessing a reasonable royalty.”).

The industry practice – endorsed by SSOs – of using net selling price of the end product, along with Motorola’s history of doing so, necessarily informs what the royalty base would be in this negotiation, because that base is predicated on the royalty base in prior real-world negotiation involving the parties. See, e.g., The Boeing Co. v. United States, 86 Fed. Cl. 303, 319-20 (2009); Mondis Tech., Ltd. v. LG Elecs., Inc., Nos. 2:07–CV–565–TJW–CE and 2:08–CV–478–TJW, 2011 WL 2417367, at *3 (E.D. Tex. June 14, 2011).

B. The Via Licensing Pool and MPEG LA Pool Are Not “Comparables” and
Reliance on Them Is Not Justified by a Multilateral Ex Ante Methodology

The nub of Microsoft’s case is that the Court should adopt the rates of the Via Licensing pool for 802.11 and the MPEG LA pool for H.264. But patent pools are voluntary organizations and, unlike with the IEEE and ITU, Motorola has no contractual obligation to these pools. Motorola has not joined these pools. As Mr. Dailey will explain, Motorola invests nearly $1.5 billion annually in R&D. Motorola – like other high-technology companies – is entitled to recover a fair return on this investment through patent licensing, if it chooses. Certain companies will not join pools as licensors because low pool royalty rates do not permit a fair return on R&D investment. [redacted]

5

[redacted] As a plaintiff relying on these pools, Microsoft necessarily bears the burden of showing that they are “comparable” to the real-world negotiation between Microsoft and Motorola.6fn See, e.g., Lucent Techs., Inc. v. Gateway, Inc., 580 F.3d 1301, 1329 (Fed. Cir. 2009). Microsoft, however, cannot meet this burden. As the Court recognized during the Daubert hearing (Oct. 18, 2012 Hr’g Tr. at 39) and as Mr. Roger Smith, Motorola’s patent pool expert, will explain, patent pools are fundamentally different from, and typically have much lower rates than, private arms’-length negotiated licenses. There are many reasons for this, including: (1) the principal objective of these pools is to minimize royalty exposure and maximize freedom of operation for licensees; (2) pools that allocate revenue based on patent-counting ignore the value of the patents, which deters holders of high-value SEPs from joining as licensors; (3) due to the non-negotiable nature of pool patent licenses, royalty rates must be low to entice licensees to join; (4) pools have low licensing transaction costs that allow for lower rates; and (5) concerns over antitrust scrutiny deter higher rates. Generally, as recognized by Microsoft’s expert, Dr. Lynde, the higher the value of an owner’s SEPs and the stronger its licensing program, the lower the incentive to join a pool. Lynde Depo. Tr. at 182:20-183:3. Indeed, such an owner will see a greater return on its investment by negotiating licenses with potential licensees. For example, of the top eight firms holding SEPs for H.264, three (Nokia, Motorola, and IBM) declined to join MPEG LA’s H.264 pool.

As the Court recognized, “[t]he motivation of someone joining the pool and setting a pool rate is not the same as Motorola’s motivation, which is to maximize its return.” (Oct. 18, 2012 Hr’g Tr. at 40.) Indeed, Microsoft did not join the MPEG LA pool to generate a licensing revenue stream from its H.264 SEPs. Dean Hachamovitch, Microsoft’s Vice President in Charge of Internet Explorer, explained in a blog that “revenue plays no part in our decision” to join the MPEG LA pool. Ex. 2840. Rather, Microsoft sought to maximize its return by selling as many

6

H.264 products as possible that were clear of infringement claims. [redacted]

Compelling evidence of the inappropriateness of using patent pools as comparables comes from an email sent by Gary Sullivan, the Microsoft employee who served as chairman of the committee that developed the H.264/AVC standard. Ex. 2345. [redacted]

Ignoring the general differences between pools and bilateral licenses and the fact that Motorola has not joined these pools, Microsoft’s experts have concocted a “multilateral ex ante” approach to justify reliance on pool rates. But neither the Via Licensing nor MPEG LA pool is “multilateral” or “ex ante” – and indeed Microsoft has not pointed to any real-world negotiation that was both “multilateral” and “ex ante” within its own definitions. Dr. Lynde defines a “multilateral” negotiation as requiring “full participation” of all patent holders and prospective licensees. Neither Via Licensing nor MPEG LA was negotiated with “full participation.” While the 802.11 standard has (in Dr. Lynde’s words) “in the hundreds or thousands” of SEPs and SEP

7

holders, the pool itself has only five licensors. As for MPEG LA, it appears that fewer than two dozen7fn companies (out of over 1,100 licensees and licensors) were involved in establishing the terms of the agreement. In recognition of this, during the October 18 oral argument, Microsoft’s counsel conceded that MPEG LA is “not fully multilateral,” and that the Via Licensing pool “is not as strong a comparable as the MPEG LA pool.” (Oct. 18, 2012 Hr’g Tr. at 44.)

Microsoft would also require that RAND terms be set ex antei.e., before the 802.11 and H.264 standards were adopted or widely implemented. But Microsoft has not demonstrated that either of these pools is the result of an ex ante process. In the case of Via Licensing, that pool agreement was established in 2005, nearly seven years after the original 802.11 standard was adopted in 1997. And in the case of MPEG LA, the H.264 standard was adopted in May 2003 and the terms for the MPEG LA H.264 pool were agreed upon six months later in November 2003.

Microsoft’s reliance on pools also contradicts the economic theory it has advanced throughout this litigation – that the value of a SEP should be the incremental value of that SEP over available alternatives. Patent pools do not value patents in this way. Indeed, the two pools Microsoft proposes as “comparables” do the opposite – these pools treat all patents (both weak and strong) as if they are equally valuable (or equally unimportant) and distribute royalties on an equal, per-patent basis. This “patent counting” approach ignores the technology of the patent, its importance, its contribution to the standard, and its use. This not only deters high-value SEP holders from joining these pools, but also means that the pool rates reveal nothing about the incremental value of any particular patent or portfolio in the pool. And such patent counting directly contradicts what Microsoft’s own Gary Sullivan said [redacted] Ex. 2345. Indeed, Judge Crabb expressed

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skepticism that this was “an appropriate way” to proceed when Apple suggested that she adopt a similar patent-counting method. (Nov. 5, 2012 Tr., Case No. 11-CV-178-BBC (W.D. Wis.), at 28.)

C. Hold Up and Stacking Are Not Proven Problems Here

Critically, Microsoft’s theoretical “multilateral ex ante” approach is not necessary to address hold up and stacking. For example, as Microsoft conceded in its proposed findings of fact, “[a]dopting a multilateral perspective means considering the aggregate royalty burden potentially imposed by all SEP holders; it does not require or imply that the actual negotiation of RAND license agreements should necessarily be conducted multilaterally. Rather, it provides a larger contextual framework for private parties to use in evaluating proposed RAND terms in bilateral negotiations or for a court to consider in evaluating proposed RAND terms in the event of a dispute.” (Dkt. No. 454 ¶ 89.) As the Court observed, “[e]very possibility exists that Microsoft’s stacking concern could be addressed through a bilateral negotiation.” (Dkt. No. 490 at 26.)

Microsoft’s experts admit they have no specific evidence that any of Motorola’s successfully-negotiated SEP licenses has led to a stacking problem. Indeed, given that Microsoft has taken just one 802.11 license and one H.264 license, it demonstrably does not have a stacking problem. And Microsoft ignores that while stacking is a theoretical risk, Microsoft has not presented any credible evidence that it is a real-world problem for 802.11 or H.264. This is because (1) many SEP holders do not license their patents, electing instead to save their patents for defensive purposes and (2) most SEP licenses are cross-licenses that yield lower “net” rates.

Regarding hold up, Microsoft’s experts again admit that they have no specific evidence that Motorola has held up licensees. Microsoft also ignores that nearly all of Motorola’s licenses are cross-licenses. In a cross licensing situation, there is minimal risk of hold up because both parties have portfolios to be licensed, subject to their RAND commitments. If Motorola sought hold up, its licensee would most certainly either complain or seek hold up as well. And given Microsoft’s failure to identify any evidence of hold up, it is not surprising that, as the Court will hear, Microsoft’s experts admit RAND terms can be reached through private bilateral negotiation.

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D. Microsoft’s New SEP Licensing Paradigm Has Drastic Policy Implications

Microsoft’s “multilateral ex ante” “lens” or “perspective” flies in the face of industry and SSO practice and is inconsistent with Microsoft’s own public statements to the government even after this case was filed. On June 14, 2011, David Heiner, Microsoft’s Vice President and Deputy General Counsel, and Amy Marasco, Microsoft’s General Manager, Standards Strategy and Policy, sent a joint letter on behalf of Microsoft to the Federal Trade Commission, in which they laid out a very different understanding of RAND than Microsoft now propounds to this Court. See Ex. 2970. The reasonable positions in that letter highlight the policy implications of the Court adopting or endorsing Microsoft’s academic and unrealistic litigation paradigm.

As Microsoft stated in its FTC letter, the RAND commitment balances rights:

Through balanced IPR policies that help make innovative technology available to implementers on reasonable terms, and that do not undercut the value of patented technology or overly burden patent holders, standards can help to catalyze innovation by encouraging companies to contribute their innovative technology to collaborative standards-setting activities and to share their intellectual property with others via the standardization process. Standards will not fulfill their salutary purposes if standards policies deter innovators from contributing patented technologies or investing in further innovation related to standardized technology.
Id. By advocating a depressed patent pool rate in the guise of a “multilateral ex ante” “perspective,” Microsoft disrupts this balance by substantially favoring licensees at the expense of patent holders. As Microsoft itself recognized, this reduces the chance that SEP holders will contribute to a new standard in the future. Ironically, while Microsoft maintains that its paradigm enables the ready adoption of strong standards, this paradigm would actually result in weaker standards, because patent holders who invest billions of dollars in R&D will withhold their “crown jewel” patents if they believe they will be forced to license their patents for pennies.

Microsoft’s paradigm also would lead to unsettling results. If Microsoft were correct that RAND rates should be assessed through a multilateral ex ante “lens” and should approximate pool rates, nearly all existing SEP licenses would potentially be viewed as non-compliant with RAND.

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This would open the floodgates of litigation, and courts would be inundated with lawsuits by licensees trying to use the judicial system to re-negotiate their licenses. Such a result in no way comports with Microsoft’s acknowledgement that RAND licenses are typically negotiated bilaterally after the standard is adopted or with Microsoft’s FTC statement that “[p]roposals to somehow reduce ‘RAND’ to some uniform formula could undermine the value of current practices and restrict some of the flexibility that helps to enable current licensing practices and protect the defensive value of contributed patent technology.” Id.

III. MOTOROLA’S PATENTS MAKE VALUABLE CONTRIBUTIONS
TO THE STANDARDS AND TO MICROSOFT’S PRODUCTS

At trial, Motorola will offer evidence regarding (1) the nature, strength and importance of Motorola’s essential patents to the 802.11 and H.264 Standards and Microsoft’s products and (2)the rates of Motorola’s previous SEP licenses, negotiated successfully under RAND commitments. See, e.g., Unisplay, 69 F.3d at 519 (The patentee’s prior license agreements “should carry considerable weight in calculating a reasonable royalty rate.”); Chisum on Patents, Vol. VII, § 20.07[2][a], p. 20-1243 (“The theory underlying giving weight to [actual prior and existing] licenses is that the actual results reached by persons with conflicting economic interests constitute direct and reliable evidence of the fair market value of a license under the patent (i.e., the sum that a willing buyer and willing seller would have agreed to in hypothetical negotiations prior to commencement of infringement by the defendant).”).

In particular, Mr. Donohoe will testify that in arriving at final royalty numbers he employed the kind of modified Georgia-Pacific approach recommended by Professor Schmalensee to emulate a hypothetical bilateral negotiation between the parties. He will testify that, in conducting his analysis, he considered information regarding Motorola’s extensive licensing history for SEPs and numerous SEP licenses, information about the strength and scope of the parties’ 802.11 and H.264 portfolios as provided by Motorola technical experts Dr. Timothy

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Williams and Dr. Timothy Drabik respectively, as well as information provided by Motorola expert Michael Dansky regarding the value of the parties’ 802.11 and H.264 portfolios and the importance of the standards and the parties’ patents to the parties’ respective product lines.

A. The Parties’ 802.11 Portfolios

The 802.11 Standard is a wireless communications standard colloquially known as “Wi-Fi,” and is the most widely used and universally accepted wireless communications standard for ordinary consumer and business use. In recent years, there has been a steadily predominant trend to provide 802.11-compatible Wi-Fi in personal computers, laptops, video game consoles, cellular telephones, smartphones, and many other consumer and business products.

The IEEE 802.11 working group issued its first Standard in 1997. Subsequently, the 802.11 working group issued various amendments to the original Standard including amendments for different communications protocols (802.11a, (b) (g)), improved security (802.11i), quality of service (QoS) (802.11e), and higher throughput (802.11n). Periodically, the various 802.11 amendments were consolidated into a single document – of particular relevance here is IEEE 802.11-2007 (in 2007) (Ex. 427), and IEEE 802.11-2012 (in 2012) (Ex. 386A).

Each communication protocol is capable of certain data rates. In 1999, the “802.11a” and “802.11b” protocols were approved. 802.11a devices can communicate at data rates up to 54 megabits/sec. 802.11b is slower (11 megabits/sec), but has a greater range than 802.11a. In 2003, the “802.11g” protocol was approved, which had the range of 802.11b and the data rate of 802.11a. In 2009, the “802.11n” protocol was approved. It specifies new technology including the use of multiple antennas and data streams, to increase the data rate to 600 megabits/sec.

1. Motorola’s 802.11 Patents are Directed to Core Features

As of October 2010, when Motorola’s offer was made and the negotiation would have taken place, there were at least 23 patent families in Motorola’s 802.11 portfolio. Those patent families include at least 48 Motorola U.S. patents, and in addition many foreign counterparts to those patents. A summary list of Motorola’s 802.11 SEPs is marked as Exhibit 3320. As

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Motorola’s expert Dr. Tim Williams will testify, Motorola’s essential patents8fn are predominantly directed to important core aspects of the Standard that are necessarily and widely used by devices that are compliant with the 802.11 Standard. The 23 Motorola 802.11 patent families can be grouped into 9 general categories: (A) network setup; (B) channel access management; (C) data modulation techniques; (D) security and encryption; (E) power management; (F) low density parity check codes; (G) data fragmentation; (H) fast transitions; and (I) mesh networking. Some of these groups are discussed in more detail below.

Of the 23 Motorola families of 802.11 essential patents, at least 11 families claim subject matter that is used in Microsoft’s Xbox products, based on the fact that Microsoft states that its Xbox products are certified by the Wi-Fi Alliance to comply with the 802.11 Standard. In addition, a hypothetical negotiation would need to account for the likely use of Motorola 802.11 SEPs in future products (e.g., Microsoft’s recently released Surface tablet product). Exs. 3379-80.

Significantly, there are no acceptable alternative approaches to the 802.11 technologies covered by the Motorola essential patents that have been shown to have been actually considered for implementation by the 802.11 IEEE Standards Organization. Nor has it been shown how any purported alternative would or could have been implemented in the Standard and, if implemented, how the Standard would have been amended or rewritten, and what technological or commercial advantages or disadvantages would have resulted. Inadequacies of the approaches that Microsoft argues as alternatives to Motorola’s 802.11 patents are summarized in Ex. 3317.

Some examples of Motorola's essential patent coverage of core 802.11 technologies:

(A) and (B) Network Setup and Channel Access Management: For the wireless 802.11 Standard, communication connections must be established over the airwaves before any further communication can occur. This is done by a predetermined exchange of control information

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between a wireless “station” (e.g., a computer, smartphone or an Xbox console) and an “access point” (e.g., a Wi-Fi router connected to Comcast cable or a Verizon phone line). If this exchange proceeds correctly, a wireless connection is established between the wireless station and access point. Because the access point is connected to the Internet, the wireless stations can communicate, via the router, over the Internet. If more than one station has established a connection to an access point, the nature of Wi-Fi communication is such that only one station can communicate at any one point in time. The 802.11 Standard provides for various “channel access management” techniques to enable multiple devices to efficiently share the channel.

Motorola’s essential patent portfolio includes four families that cover key aspects of network setup and channel access management: U.S. Patent Nos. 6,069,896 (Borgstahl); 6,331,972 (Harris); 5,142,533 (Crisler); and 6,404,772 (Beach).

(C) Data Modulation Techniques: Once a communication connection between a station and an access point is established, data can be communicated back and forth between the devices. In the 802.11 Standard, depending on whether the devices are using the 802.11a, 802.11b, 802.11g or 802.11n versions, various modulation techniques are specified by the Standard. Generally, “modulation” refers to the manner in which the basic “carrier wave” of the wireless transmission is varied over time in order to encode the data that is being transmitted. For example, AM radio uses amplitude modulation, where the amplitude of the carrier wave is varied to transmit voice, music and other information. The modulation techniques specified by the 802.11 standard are considerably more sophisticated. Motorola’s six standards-essential data modulation patent families are directed to important aspects of these modulation techniques. Those families are: U.S. Patent Nos. 6,473,449 (Cafarella); 5,329,547 (Ling); 5,822,359 (Bruckert); 5,519,730 (Jasper); 5,272,724 (Solomon); and 6,038,263 (Kotzin).

(D) Security and Encryption: Any commercially practical implementation of the 802.11

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Standard must provide security for the communication in order to prevent eavesdropping and ensure authentic communication. Motorola has four patent families that are essential to the security provisions of the 802.11 Standard: U.S. Patent Nos. 5,357,571 (Banwart); 5,467,398 (Pierce); 5,689,563 (Brown); and 5,412,722 (Sherly).

(E) Power Management: Power management is important when wireless capability is provided in portable, battery-powered devices. Motorola patents that are essential to this key aspect of the Standard are U.S. Patent Nos. 5,029,183 (Tymes) and 5,479,441 (Kramer) (members of the same family); 5,560,021 (Vook); and 6,236,674 (Morelli).

(F) Low Density Parity Check Codes (“LDPC”): Motorola has three families relating to LDPC – U.S. Patent Nos. 7,143,333 (Blankenship); 7,165,205 (Blankenship); and 7,493,548 (Nimbalker). These patents are effective for correcting communication errors caused by noise or poor transmission conditions, and are expected to be important for future Wi-Fi applications.

(G), (H), and (I): The remaining Motorola patent families – U.S. Patent Nos. 5,311,516 (Kuznicki) (Data Fragmentation); 7,236,477 (Emeott) (Fast Transitions); and 7,197,016 (Belcea) (Mesh Networking) – are more peripheral to the 802.11 Standard, and would have less significance in a hypothetical negotiation, but nonetheless should be accorded reasonable value.

2. Microsoft’s Products Use Motorola’s Patents to Satisfy Consumer
Demand

Based on the fact that Microsoft states that its Xbox products comply with the 802.11 Standard and bear the Wi-Fi logo (e.g., Exs. 562, 2040, 2236, 2329), those products use at least the following 11 Motorola 802.11 essential U.S. patents: 6,069,896 (Borgstahl); 6,331,972 (Harris);6,473,449 (Cafarella); 5,329,547 (Ling); 5,822,359 (Bruckert); 5,519,730 (Jasper); 5,272,724 (Solomon); 5,142,533 (Crisler); 5,357,571 (Banwart); 5,467,398 (Pierce); and 5,689,563 (Brown). Consumer demand for the Xbox is in part driven by the portions of the 802.11 Standard (e.g., network setup and channel access) on which Motorola’s patents read.9fn

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The Xbox is the smallest saleable unit sold by Microsoft that provides complete 802.11 functionality. The Xbox uses an integrated circuit chip that provides some, but not all, of the Wi-Fi capabilities of the Xbox. According to internal Microsoft documents, the Xbox itself, not the Wi-Fi chip, is used to perform at least some 802.11 functionality. Exs. 2029-2030. Moreover, without other circuitry and software provided by Xbox, the Wi-Fi chip, by itself, cannot communicate or otherwise function with even those aspects of the 802.11 Standard that are implemented in circuitry within the chip. For example, the Xbox implements the 802.11 Standard’s highest level of security in order to be certified compliant by the Wi-Fi Alliance, and Motorola’s Banwart patent includes claim limitations that read on security functions carried out in the processor and memory of the Xbox, not in the Wi-Fi chip.

Microsoft’s new Surface tablet will use only 802.11, instead of cellular or wired connections, to connect to the internet. Exs. 3379-3380. Without 802.11 capability, the Surface tablet would be unable to compete in the market, because consumers can readily select tablet devices other than the Surface that have 802.11 capability.

3. Microsoft’s 802.11 Patents

Microsoft owns 6 families of patents that it has claimed are essential to the 802.11 Standard. At least four of the Microsoft patent families, however, are in fact not essential. Moreover, the two remaining patent families that arguably are essential relate to aspects of the Standard that are peripheral to the normal use of the Standard, and relate to 802.11 technology that has not been widely adopted in actual commercial use. Neither of these two arguably essential Microsoft patents is used in any Motorola 802.11-compliant product.

B. The Parties’ H.264 Portfolios

1. Motorola’s H.264 Essential Patents are Directed to Core Features

Motorola has 16 U.S. patents, and many foreign counterparts, that are essential – as

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defined by ITU/ISO/IEC – to the practice of the H.264 Standard.10fn These 16 essential patents fall within 6 families, all directed to core aspects of the H.264 Standard.

U.S. Patent No. 5,235,419 (“The Krause Family”). The Krause Family is directed to compressing effectively certain types of video data. The data is first compressed using different block sizes. The encoder then transmits the compressed block data and a code word for the block size that results in the most compression. The Krause Family also describes a decoder that receives the compressed block data and the code word, and uses the code word to recover a motion vector. Having the motion vector, the block data can then be decompressed. The adaptive compression technology claimed in the Krause Family is important to the H.264 Standard because it is directed to a fundamental prediction technique that improves coding efficiency. The Krause Family is essential to the H.264 Standard at every Level of the Baseline, Main, and High Profiles.

U.S. Patent No. 5,376,968 (“The Wu Family”). The Wu Family is also directed to compressing video data effectively. Here, blocks of a “superblock” (i.e. macroblock) are compressed using different compression modes. An encoder selects the most efficient mode for compressing the blocks, and then transmits the compressed macroblock and data indicating which compression mode was used. The Wu Family further describes a decoder that performs the reverse process. Like the Krause Family, the technology claimed in the Wu Family is important to the H.264 Standard because it is fundamental to prediction, the core feature of H.264 that is responsible for much of H.264’s coding gain. The Wu Family is essential to the H.264 Standard at every Level of the Baseline, Main, and High Profiles.

U.S. Patent No. 6,005,980 (“The Eifrig Family”). The Eifrig Family is directed to compressing efficiently video data that includes a field coded block. A prediction motion vector (“PMV”) is derived for a block based on the motion vectors of a particular set of three neighboring blocks. The technology claimed in the Eifrig Family is important to the H.264 Standard because it

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provides a more efficient motion compensation technique. Specifically, it provides greater coding gain by using the three neighboring blocks – left, top, and top-right – to calculate the PMV. The Eifrig Family is essential to the H.264 Standard at the Main and High Profiles, Levels 2.1 to 4.1.

U.S. Patent Nos. 6,980,596, 7,310,374, 7,310,375, 7,310,376, 7,310,377, 7,421,025, 7,477,690, 7,817,718 (collectively, “The MBAFF Family”). The MBAFF Family is directed to adaptive frame/field (“AFF”) coding on a group of neighboring macroblocks, e.g., a pair of macroblocks. Coding macroblocks in pairs is referred to as macroblock adaptive frame/field (“MBAFF”) coding in the H.264 Standard. As disclosed in the ‘596 patent, it is preferable in some applications to be able to divide macroblocks coded in field mode into the same 7 block sizes as macroblocks coded in frame mode (16×16 pixels, 16×8 pixels, 8×16 pixels, 8×8 pixels, 8×4 pixels, 4×8 pixels, and 4×4 pixels). This can be achieved by performing AFF coding on macroblock pairs instead of on single macroblocks.

MBAFF is an innovative feature of H.264, which greatly enhanced coding efficiency. Motorola’s MBAFF invention was adopted after experts from Sony and VideoTele confirmed Motorola’s findings that MBAFF outperformed available alternatives by up to 18%. Sony stated that: “We regard this feature [MBAFF] important for developing SDTV/HDTV applications with JVT [Joint Video Team] coding technology.” Ex. 2274 at 1. Similarly VideoTele reported that: “Our simulation results support that macroblock-level frame/field adaptive coding is a useful technique . . . giving a bit rate savings of 11% to 18% on the two sequences tested.” Ex. 2227 at 4. The MBAFF Family is essential to the H.264 Standard at the Main and High Profiles, Levels 2.1 to 4.1.

U.S. Patent Nos. 7,769,087, 7,660,353, and 7,839,931 (collectively, “The PAFF Family”). The PAFF Family is directed to improving a coding technique called “PAFF,” which involves deciding, on a picture-by-picture basis, whether to code a picture in a frame mode or in a field mode (as opposed to making such decisions separately for each pair of macroblocks in a picture (MBAFF)). The PAFF Family improved the efficiency of applying PAFF to “bi-predicted” pictures, which are pictures having two motion vectors, and provide for greater reduction in bit

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rates through flexibility not found in prior PAFF methods. The PAFF Family is essential to the H.264 Standard at the Main and High Profiles, Levels 2.1 to 4.1.

U.S. Patent Nos. 7,162,094 and 6,987,888 (collectively, “The Scan Family”). The ‘094 and ‘888 patents are directed to scan paths optimized for interlaced video. The ‘094 patent discloses a scanning pattern for a 4×4 pixel block’s frequency coefficient array. The ‘888 patent discloses a scanning pattern for an 8×8 pixel block’s frequency coefficient array. The inventions disclosed in the Scan Family are important because they improve coding efficiency. Specifically, the 4×4 and 8×8 scan patterns result in significantly more compression than the traditional zigzag pattern in many applications, including interlaced video coding.

The inventions of Motorola’s Scan Family were adopted into the standard after experts from Samsung and Sony confirmed Motorola’s findings that the inventions outperformed available alternatives. Samsung stated that: “The computer simulation carried out using the current JM2.1 codec with CVLC demonstrated that additional bit rate reduction (BDBR) of up to 8.64% and 6.15% on average is possible.” Ex. 2281 at 5. Sony stated that: “The simulation results show that by employing the proposed method coding efficiency gain by up to 3% will be obtained.” Ex. 710 at 2. The ‘094 patent is essential to the standard at the Main and High Profiles, Levels 2.1 to 4.1, and the ‘888 patent is essential at the High Profile, Levels 2.1 to 4.1.11fn

2. Microsoft’s Products Use Motorola’s Patents to Satisfy Consumer
Demand

Microsoft sells and has sold numerous products that are compliant with the H.264 Standard, including the Xbox, Windows 7, Window 8, Windows Vista, Windows Embedded, Zune for Windows Expression, Windows Phone 7, and now the new Surface tablet. Each of these products supports Profiles and Levels covered by Motorola’s H.264 patents. As explained above,

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Motorola’s patents span the Baseline, Main and High Profiles, and in particular Profiles and Levels used for High Definition (“HD”) video. Because a compliant decoder operating at these Profiles/Levels must implement all tools for that Profile and Level, Microsoft’s products use the technologies claimed in Motorola’s H.264 patents. Dr. Drabik confirmed, for example, that the Xbox, and Windows 7 running on a laptop computer, both play H.264 progressive and interlaced video, including MBAFF-encoded video. Additionally, Dr. Sukumar confirmed that Xbox users use their consoles to watch video, including interlaced video and MBAFF-encoded video.12fn

Microsoft’s products use Motorola’s patented H.264 technologies to satisfy consumer demand for devices that play a wide range of digital video content. For example, during development of Windows 7, Microsoft’s consumer research found that consumers highly valued HD video playback. Ex. 2377 at 30; DeVaan Depo. Tr. 80:12-25, 82:8-19. [redacted] DeVaan Depo. Tr. at 84:10-11. [redacted] Id. at 42:19-22. [redacted] Id. at 42:12-14. [redacted] Ex. 2373 [redacted] Id. at 58:17-19.

Because consumers were installing H.264 codecs, Microsoft decided to support H.264. [redacted] Id. at 49:16-23. [redacted]

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[redacted] Ex. 2373; DeVaan Depo. Tr. 59:7-16.

Similarly, Microsoft recognized consumer demand to play video using the Xbox. In 2006, Microsoft sold an HD DVD accessory to allow customers to play HD video, including H.264 video. Then, in 2007, Microsoft put native H.264 support in the Xbox. Now, Microsoft touts the Xbox as the “all-in-one entertainment center” and reports that users are watching 30 hours of video per month on the Xbox. Ex. 3375.

Without H.264 capability, Microsoft would have difficulty selling its products, because its products would be unable to play a significant and growing proportion of H.264 video content.

3. There Were No Comparable Alternatives to Motorola’s Patents at the
Time the H.264 Standard Was Adopted

Motorola’s inventions were adopted into the H.264 Standard because they achieved better coding efficiency than other technologies proposed at the time by experts involved in the JVT, which included Microsoft. The technologies to which Microsoft now points as allegedly comparable to Motorola’s inventions are, in most cases, technologies that were not recognized as viable alternatives during development of the H.264 Standard. In the cases in which Microsoft points to alternative technologies that were considered in connection with H.264, the allegedly comparable alternative was not shown to provide the efficiency the JVT experts sought to achieve. For example, Microsoft points to scans submitted by Sony as alleged alternatives to Motorola’s Scan Family. The JVT determined that Sony “[n]eed[ed] to demonstrate larger gain for acceptance.” Ex. 2216 at 28. Ultimately, Sony itself and others recommended the adoption of Motorola’s submission. Similarly, the technology alleged by Microsoft as an alternative to Motorola’s MBAFF and PAFF Families – applying AFF to single macroblocks – was characterized as “need[ing] more work” and abandoned. Ex. 3382 at 7.

4. Microsoft’s H.264 Patents

Microsoft’s claim of 40 essential patents is exaggerated because at least 17 are not essential: 15 are directed to optional features in Annexes B.3, C, D and E of the H.264 Standard

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and at least 2 have narrow claim limitations that do not read on the H.264 Standard. For the remaining 23 Microsoft patents, there were alternatives available at the time of the adoption of the H.264 Standard that offered comparable performance. Some of these alternatives were presented to the JVT and demonstrated to meet or exceed Microsoft’s patents. For example, alternatives to Microsoft’s transform patents were proposed by others and found by the JVT to perform equally well or better than Microsoft’s patents. Ex. 2217 at 1; Ex. 2216 at 18.

IV. DETERMINING A RANGE OF RAND RATES IN THIS CASE BASED ON A
HYPOTHETICAL BILATERAL NEGOTIATION

Mr. Donohoe will testify, based on his long experience in licensing negotiations, that, in recreating the hypothetical negotiation between Microsoft and Motorola, he relied on the technical assessment of Drs. Williams and Drabik described above, as well as on 58 Motorola licenses that include patents in the H.264 and 802.11 portfolios. Of these 58 licenses, he principally relied upon seven (notably including running royalty licenses to Option NV in 2004, RIM in 2010, and VTech in 2011) in determining a range of RAND royalty rates. See, e.g., Exs. 13, 2805, 2833.

A. Motorola’s Licenses and Licensing Practices

Motorola’s Mr. Dailey will testify regarding Motorola’s long and successful history of engaging in bilateral negotiations that have led to RAND licenses. He will explain that many of these agreements are for Motorola’s cellular portfolios, which include certain patents that are also found in Motorola’s 802.11 portfolio. He will also explain that in recent negotiations, 802.11 and H.264 technology has become increasingly important to Motorola’s competitors.

Mr. Donohoe will testify regarding his view of these agreements, including his reliance on seven specific licenses that include Motorola’s 802.11 and H.264 portfolios in their entireties. He will testify that several of these licenses, [redacted] lead directly to some of his conclusions in this case.

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He will describe licenses entered into by Motorola’s subsidiary, Symbol Technologies, which [redacted] Exs. 36-39; see also Ex. 2944. Finally, he will explain that products covered by Motorola’s licenses, including VTech’s InnoTab 2 and RIM’s PlayBook tablets, utilize Motorola’s portfolios in the same way that Microsoft would. See, e.g., Ex. 2801.

Microsoft criticizes Motorola for failing to apportion the royalty between the cellular and non-cellular portfolios in certain licenses, but this ignores that conducting such an apportionment would necessarily be arbitrary and contrary to how parties conduct real-world negotiations. Indeed, the license parties themselves have not apportioned the value of these portfolios in the agreements. [redacted]

B. 2.25% Is the Only Logical Starting Point

As Mr. Donohoe will explain, these licenses demonstrate that there was no more logical starting point for Motorola’s opening offer, or for recreating the negotiation between the parties, than 2.25% of net selling price.13fn [redacted]

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[redacted]

In this case, the 2.25% starting point was based on Motorola’s standard offer for core SEP portfolios, the actual opening offers to Microsoft for licenses to the 802.11 and H.264 portfolios, [redacted]

C. The RAND Rates for the Parties’ Portfolios

Mr. Donohoe will testify that, using the Georgia-Pacific factors as a framework in emulating a hypothetical bilateral negotiation, and relying on the technical opinions of Dr. Williams and Dr. Drabik regarding the importance of the parties’ patents to the respective standards, and the financial opinions of Mr. Dansky regarding the importance of the standard (and thus these patents) to the parties’ products, he determined the following RAND rates:

Portfolio [redacted]

Net Payment to Motorola [redacted]

Per Unit Range (Low/High) [redacted]

Running Royalty Range (Low/High) [Redacted]

V. CONCLUSION

In determining a RAND range, the Court should construct the hypothetical negotiation that would have taken place between the parties in October of 2010 had Microsoft engaged in negotiations at that time. In simulating this negotiation, the Court should disregard Microsoft’s attempt to force Motorola into accepting low pool rates from two pools that Motorola has declined to join and that are neither “multilateral” nor “ex ante” by Microsoft’s own definitions. Instead, the Court should use the best evidence of what this licensing negotiation would have looked like: the licenses that Motorola has successfully negotiated for these SEPs.

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DATED this 7th day of November, 2012.

Respectfully submitted,

SUMMIT LAW GROUP PLLC

[list of lawyers - see PDF]

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[list of lawyers cont. - see PDF]

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_______________
1fn The transcript of this hearing in Apple, Inc. v. Motorola Mobility, Inc., was provided to the Court by separate letter. All emphasis is added unless otherwise indicated.

2fn This “Rule” springs from the Federal Circuit’s 35 U.S.C. § 284 damages jurisprudence, and there is no reason why it should be applied in the RAND licensing context, which takes place between private parties on a bilateral contract basis.

3fn “Ex. __” refers to the identified proposed trial exhibit number. A courtesy copy of each cited exhibit will be provided to the Court in electronic and paper form by the parties on Thursday, November 8, 2012.

4fn As just one example, the home page at www.microsoft.com now features the Surface tablet.

5fn See http://blogs.wsj.com/digits/2012/11/02/why-microsoft-might-want-to-build-its-own-smartphone/.

6fn Microsoft’s reliance on patent pools also belies its assertions about the EMVR. The two pools relied on by Microsoft as “comparables” include a fixed per unit rate, regardless of the product’s price or whether the 802.11 or H.264 functionality is the basis for customer demand.

7fn See http://www.mpegla.com/Lists/MPEG%20LA%20News%20List/Attachments/138/n_03-09-11_avc.html.

8fn A patent claim is essential to the 802.11 Standard if it is “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.” Ex. 5 at 14. Motorola expert Dr. Williams compared a representative claim from the “parent” patent of each of the 23 Motorola 802.11 essential patent families to the 802.11 Standard to verify essentiality under the IEEE’s definition. The claim charts reflecting this analysis are marked as Exs. 3293-3316.

9fn For example, until the Xbox included 802.11 capability, Xbox 360 sales were generally stagnant from 2007-2009. Microsoft’s witness Albert Penello confirmed that it would be “difficult to sell an Xbox console if it did not have the ability to connect wirelessly to the internet.” Ex. 2817. With embedded 802.11 capability, such sales are now projected to reach nearly $30 billion by 2017. Ex. 2467.

10fn Motorola has one additional U.S. Patent 6,836,514 directed to error correction, an optional feature provided in Annex B3 of the H.264 Standard.

11fn Microsoft’s assertions that Motorola’s patents are invalid over prior art is flawed, because the alleged prior art identified by Microsoft’s expert lacks elements disclosed in the claims of Motorola’s patents. Microsoft’s assertion that the Krause and Wu patents do not cover software decoders is equally flawed, because one of ordinary skill reading the specifications (including the references to algorithms) would understand that the “decoder apparatus” could be implemented in hardware or software. In any event, this is a hypothetical license negotiation, not a patent trial. The parties will not have resolved individual patent disputes in such a negotiation.

12fn To the extent it matters, Microsoft’s Xbox product has been found by an ITC judge to infringe the ‘596 MBAFF and ‘094 scan patents (Ex. 428); the Xbox and Windows 7 products have been found to infringe the German counterparts to the ‘419 Krause and Wu ‘968 patents (Exs. 2206, 2239).

13fnIn the interest of recreating as closely as possible the actual negotiation that would have taken place between Microsoft and Motorola, it is at least relevant that, in actuality, Motorola’s opening offer was 2.25%. Motorola’s numerous other licenses merely confirm that this is Motorola’s standard, well-understood negotiating practice.

27

Microsoft's Trial Brief, as text: And here's Microsoft's trial brief as text, minus header, footer, and the cases list, which you can read in the PDF:

REDACTED
PLAINTIFF MICROSOFT
CORPORATION'S TRIAL BRIEF

TABLE OF CONTENTS

Page

INTRODUCTION ......................................... 1

ARGUMENT .............................................. 2

I. THE PROPER FRAMEWORK FOR DETERMINING RAND
ROYALTIES REQUIRES AVOIDING HOLD UP AND STACKING
ERRORS .............................................. 2

II. THE MPEG LA POOL PROVIDES THE MOST RELIABLE BENCHMARK
FOR A RAND ROYALTY FOR MOTOROLA'S H.264 STANDARD-
ESSENTIAL PATENTS AND A VOIDS HOLD UP AND STACKING
ERRORS ........................................... 3

A. The MPEG LA Pool Established Royalties For 2,450 Standard-
Essential Patents Owned by 26 Different Patent Owners, and the
Pool Patents Have Now Been Licensed By More Than 1,100
Licensees .............................................. 4

B. Motorola's H.264 Standard-Essential Patents Are Not Entitled to
Anything More Than a Pro Rata Share .................................. 5

C. Motorola's Parent Company's MPEG LA H.264 Pool License
Provides a Comparable Measure ofRAND......................... 7

D. The RAND Royalty That Microsoft Should Pay in 2012 for
Motorola's H.264 Standard-Essential Patents is $474,000 .......................... 8

III. SEVERAL RELEVANT BENCHMARKS EXIST FOR DETERMINING
A RAND ROYALTY FOR MOTOROLA'S 802.11 ESSENTIAL PATENTS
THAT AVOID HOLD UP AND STACKING CONCERNS ................................. 8
A. The Via Pool Provides a Benchmark .................................................. 8

B. The Market Price for 802.11 Chips, Such as the Marvel Chipset,
Provides a Benchmark ................................. 10

C. Motorola's Prior Valuations Provide a Benchmark for 802.11
Valuation ................................. 11

D. The RAND Royalty That Microsoft Should Pay in 2012 for Motorola's
802.11 Standard-Essential Patents is $736,231 ............................ 12

IV. THE 2.25% OF WINDOWS SALES AND XBOX SALES THAT
MOTOROLA NOW DEMANDS IS NOT A RAND ROYALTY ....................... 13
A. Apart From Facilitating Compliance With the Standards (Which
Is Not Compensable in a RAND Royalty), Motorola's Standard-
Essential Patents Have Little, If Any, Value in Microsoft's Products ...... 13
1. Motorola's H.264 Patents .................................. 13

2. Motorola's 802.11 Patents ............................... 16

B. By Using Windows Sales and Xbox Sales As the Royalty Base
For Their 2.25% Royalty, Motorola Violates Principles of
Apportionment and the Entire Market Value Rule .................................... 18

C. Motorola's Demand Fails to Account for its Rapidly Expiring
Patents ........................................... 21

D. Licenses to Motorola's Cellular Telephone Network Standard-
Essential Patents May Well Reflect Hold-Up and Are Wholly
Irrelevant, Given That No Apportionment Has Been Performed .............. 21

E. Motorola's Dismissal of Pool Royalties Has No Basis in Fact ................. 23

CONCLUSION ................................................. 24

[Table of Contents, Cases - see PDF]

[Cases cont. and Authorities - see PDFs]

INTRODUCTION

The purpose of this phase of the breach of contract trial is to determine a RAND royalty, both a range and specific royalty, for the Motorola Defendants' patents that they have declared essential to the 802.11 and H.264 standards.1 RAND royalties rest on two key principles that derive from the fundamental requirement of apportionment that holds a patent owner is not entitled to a royalty for the value contributed to a product by the patented and unpatented contributions of others. Velo-Bind, Inc. v. Minnesota Min. & Mfg. Co., 647 F.2d 965, 973 (9th Cir. 1981) ("where the patent creates only part of the profits, damages are limited to that part of the profits, which must be apportioned as between those created by the patent and those not so created."); see also, Dowagiac Mfg. Company v. Minnesota Moline Plow Company, 235 U.S. 641, 646 (1915).

First, the main purpose of the RAND requirement "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." Apple, Inc. v. Motorola, Inc., No. 1:11-cv-08540, 2012 WL 2376664, at *11 (N.D. Ill. June 22, 2012). See Broadcom Corp. v. Qualcomm Inc., 501 F.3d 297, 313-14 (3d Cir. 2007); Bohannan and Hovenkamp, Creation without Restraint (2011) at 358-62; Federal Trade Commission, The Evolving IP Marketplace: Aligning Patent Notice and Remedies With Competition (March 2011) at 192 (Ex. 1034); Farrel et al., "Standard setting, patents, and hold-up", 74 Antitrust L. J. 603, 608 (Ex. 1014); Swanson & Baumol, "Reasonable and Non-Discriminatory (RAND) Royalties, Standard Selection, and Control of Market Power," 73 Antitrust L. J. 1, 7-11 (2005) (Ex. 1013). The prohibition on recovering hold-up value from standard implementers arises from a party's willing participation in the standard-setting process (which subjects the patent owner to the patent disclosure and commitment policies of the standard organization) and is an integral part of the RAND commitment.

Second, in the context of complex standards involving contributions from many parties and the existence of many standard essential patents, principles of apportionment mean that an individual patent holder is not entitled to more than its legitimate share and that the aggregate royalty for all patents essential to practice the standard must be reasonable. The determination of a RAND royalty therefore must also assure that the standard will still be economically viable if the other holders of standard-essential patents receive similar amounts. Put another way, a cumulative royalty for all patents essential to a standard that is so high that the standard cannot succeed in the market would fail the "R" in the RAND test, as it would not be a "reasonable" royalty. This latter aspect is the so-called "stacking" problem. See, e.g. Lemley & Shapiro, "Patent Hold-up and Royalty Stacking," 85 Texax L. Rev. 1991, 2015-16, 2026-28 (2007) (Ex. 1030); Swanson & Baumol, 73 Antitrust L. J. at 57; Shapiro, "Navigating the Patent Thicket: Cross Licenses, Patent Pools, and Standard-Setting," in Jaffe et al., Innovation Policy and the Economy (2001) at 6-8 (Ex. 1012). See also Hovenkamp, "Competition in Information Technologies: Standards-Essential Patents, Non-Practicing Entities and FRAND Bidding," U. of Iowa Legal Studies Research Paper No. 12-32 (Oct. 2012) at 9-10 (Ex. 1647).

ARGUMENT

I. THE PROPER FRAMEWORK FOR DETERMINING RAND ROYALTIES
REQUIRES AVOIDING HOLD UP AND STACKING ERRORS

Microsoft urges the Court to adhere closely to a RAND valuation framework that avoids hold up and applies proper principles of apportionment to prevent the risk of undue royalty

2

stacking. An ex ante multilateral framework addresses both concerns. An ex ante perspective addresses hold up because it values standard essential patents in light of the a1ternatives that existed before the standard was finalized and, more critically, before the industry had made irreversible investments in implementation and became locked into the standard. A "multilateral" perspective ensures that apportionment principles are properly applied by considering the contributions and claims of all potentially interested parties and the aggregate royalty burden that would potentially result in stacking multiples ofthe RAND royalty sought by any given patent holder. As set forth below, evidence concerning pools and other objective benchmarks establish reliable data for detennining the relevant RAND values in keeping with these principles here.

II. THE MPEG LA POOL PROVIDES THE MOST RELIABLE BENCHMARK FOR
A RAND ROYALTY FOR MOTOROLA'S H.264 STANDARD-ESSENTIAL
PATENTS AND AVOIDS HOLD UP AND STACKING ERRORS.

For the H.264 standard, a large number (26) of patent owners (other than the Motorola Defendants) have formed a patent pool to license their respective standard-essential patents. A large number (over 1,100) of licensees-including Defendant Motorola Mobility, Inc.'s own parent company, Google, Inc. ("Google"}-have licensed the pool patents. The pool royalties are RAND royalties for at least two key reasons: First, the pool royalties were set before the standard in question was widely adopted, mitigating the danger of "patent hold-up" because prospective licensees had lower sunk costs in standard-compliant products. In at least this way, the pool provides a real world approximation of the "ex ante" economic framework, effectively separating the value of the patents from the value created by their inclusion in the standard. The pool rate is set on the assumption that substantially all holders of standard essential patents will join and, thus, represents the estimated value of all patents on the standard. As such, the pool royalty represents the aggregation of the incremental value of each essential patent as an approximation of the process of individually analyzing each patent against available alternatives. This excludes hold up, because if the licensors had attempted to set their royalties at the "patent

3

hold-up" level (capturing the value of standard compliance), prospective licensees could have chosen a competing standard or other alternative technology instead, or pushed the SSO to modify the standard. Second, because pool set the total royalties that would be charged for the patents in the pool as a group, each pool patent owner had to consider the royalties it would charge and receive in the broader context of the royalties that others would charge and receive, in a multi-lateral context.

The pool royalties therefore address both the "patent hold-up" and the royalty stacking issues. They provide a baseline, market-based measure of what standard-essential patents are actually worth in the RAND context. Further, the licensors identified where products potentially differ in terms of their benefit from the standard, and provided product categories to accommodate different royalty pricing as necessary. The pool royalties define specific per unit royalties with volume discounts for each product category, with annual caps that are adjusted upward over time in a rational, market based compromise between the licensors and would-be standard implementers that effectively encourages both to participate. The royalties also take into account the expiration of patents and utilize a formula calibrated annually based on current patent holdings ofeach licensor. The pool royalties therefore provide the best available measure for the RAND royalty to which Motorola is entitled. There is no evidence that the patents in Motorola's H.264 portfolio are worth more than the average pool patent.

A. The MPEG LA Pool Established Royalties For 2,450 Standard-Essential Patents
Owned By 26 Different Patent Owners, and the Pool Patents Have Now Been
Licensed By More Than 1,100 Licensees.

The MPEG LA pool was set up between 2003 and 2004, shortly after the initial adoption of the H.264 standard, but prior to its widespread implementation. A patent owner that wishes to participate in the pool as a licensor must first submit its patents to an independent evaluator who assesses whether the patents are genuinely essential. A total of2,450 patents have been found by the evaluator to be essential to the H.264 standard and included in the pool. These patents are

4

owned by 26 different patent owners, including Microsoft. The H.264 pool patents have now been licensed by over 1,100 licensees.

Pool royalty rates were established at the outset with the hope that substantially all H.264 standard-essential patents would eventually be included in the pool, thereby establishing a market-based price for all of the patented intellectual property included in the standard. Motorola, Inc. participated in the pool royalty-setting process. As a pre-requisite to participation, Motorola submitted one of its H.264 patents for a determination of essentiality by MPEG LA's independent expert, an evaluation intended to ensure that only essential patents would be included in the pool. Motorola, Inc. actively engaged in the royalty-setting negotiations and approved the H.264 pool royalty rates, but withdrew from the process at the eleventh hour, after many other participants, including Microsoft, had executed the pool agreements. Ultimately, Motorola neither contributed patents to the pool nor licensed the pool patents of the remaining participants. During discovery, Microsoft tried to probe whether Motorola rejected the MPEG LA pool to preserve its ability to use its standard-essential patents to "hold up" implementers of the H.264 standard. Motorola claimed privilege as to its aims. The Court has ruled that Motorola may not offer evidence at trial concerning its reasons for not joining the MPEG LA pool.

The pool royalties collected are divided among the licensors based upon a formula that considers, by country, the royalties received on sales in that country, and the number and type of unexpired pool patents in that country that a particular licensor has contributed.

B. Motorola's H.264 Standard-Essential Patents Are Not Entitled to Anything
More Than a Pro Rata Share.

The H.264 standard relates to techniques for compressing a video signal so that it can be efficiently transmitted or stored using a minimum of bandwidth. Dozens of companies were involved in the creation ofthe standard, and by any objective measure over 2,500 patents worldwide have been identified as essential to the standard. There is ample economic support for the default rule in contexts such as this that a holder of RAND-committed standard-essential

5

patents should receive no more than its pro rata share based on the number ofpatents essential to the standard absent some demonstration that it is entitled to greater compensation. See, e.g., Hovenkamp, "Competition in Information Technologies" at 8-9 ("FRAND obligations tend to 'level' the value ofpatents in the sense that they apply a uniform royalty measure to patent that are declared essential ... [F]irms know all this in advance, so if they wish to assert later that a particular patent within their standards-adaptable portfolio is unusually valuable, they can always say so and leave the SSO to decide whether or not to adopt it. Absent that, there does not seem to be any good reason for not treating all patents alike, and the cost of determining individual value would very likely swamp the system."); Farrell et al., 74 Antitrust L. 1. at 643 ("Without reliable information about the relative importance of various patents, a natural if imperfect default for a SSO to adopt for standards covered by large number of patents is to divide up the aggregate royalty by the number of essential patents. While this proportionaJity rule could in theory be highly imperfect, it is voluntarily used by a number of patent pools.")2

In valuing Motorola's H.264 standard-essential patents, the broader context is important. Much of H.264 was built on video coding technology that is now in the public domain. For the still-patented aspects of H.264, Motorola's patents are but a sliver (and as explained in detail below, even that sliver is of little relevance to modern video). Over 50 companies have declared to the ITU that they have patents potentially essential to the H.264 standard, and the MPEG LA pool alone contains 2,450 patents that have been determined to be essential. Whatever the value of the H.264 standard, the patented technology used in that standard comes from many, many sources, and Motorola is entitled to no more than its pro rata contribution ofpatented technology after having taken account ofthe contributions of others.

There is no contrary evidence. Motorola's expert never even attempts to show that Motorola's H.264 patents are even of average value in relation to other's H.264 patents. Simply declaring that some patent relates to core technology in a standard cannot be enough to justify an

6

outsized royalty, as the standard in the end comprises the sum ofall its many pieces--especially in the case ofa complex standard like H.264. Therefore, the question here is not just whether a given royalty is reasonable for Motorola to receive, but also whether some considerable multiple of that royalty would be reasonable for all of the H.264 standard-essential patents. RAND must be assessed in that light.

C. Motorola's Parent Company's MPEG LA 0.264 Pool License Provides a
Comparable Measure of RAND.

Google, the parent company of Motorola, has licensed the patents in the MPEG LA H.264 patent pool. The license agreement Google signed obliges it to license to the pool licensors (including Microsoft), as well as to other pool licensees, any H.264 standard-essential patents owned by Google or Google affiliates, including Motorola. The operative language in the license agreement reads:
[reads]
[redacted] In fact, the royalty that Microsoft has urged represents an overestimate of that royalty for the Motorola patents.

Microsoft does not here seek enforcement of its contractual right to Motorola's H.264 standard-essential patents at the MPEG LA pool royalty. Rather, this shows that a sophisticated company like Google agreed that [redacted], and the

7

rights to be licensed for those royalties include the very patents at issue here. This makes the Google MPEG LA license a powerful comparable.

D. The RAND Royalty That Microsoft Should Pay in 2012 for Motorola's H.264 Standard-Essential Patents Is $474,000.

Around the world, Motorola has a total of 63 patents that it claims are essential to the H.264 standard. For 2012, Microsoft has paid $13 million in royalties to the MPEG LA H.264 pool. If Motorola were a licensor in the MPEG LA H.264 pool, Motorola's share ofthe 2012 pool royalties paid by Microsoft would have been $474,000.3 This is the RAND royalty that Microsoft should pay for Motorola's H.264 standard-essential patents in 2012. The royalty for other years can readily be calculated based on the number of unexpired Motorola patents remaining in those years.

III. SEVERAL RELEVANT BENCHMARKS EXIST FOR DETERMINING A RAND
ROYALTY FOR MOTOROLA'S 802.11 ESSENTIAL PATENTS THAT AVOID
HOLD UP AND STACKING CONCERNS

As with H.264, 802.11 results from the contributions ofdozens of parties and involves hundreds and hundreds ofessential patents. Again, the default rule in contexts such as this is that a holder of RAND-committed standard-essential patents should receive no more than its pro rata share based on the number of patents essential to the standard absent some demonstration that it is entitled to greater compensation. See supra. Consistent with this principle and the framework set forth above, several objective benchmarks point to a RAND royalty for Motorola's declared-essential 802.11 patents at around five cents per unit.

A. The Via Pool Provides a Benchmark.

A patent pool organized by Via Licensing Corporation ("Via") was formed between 2003 and 2005, several years after the first version of the 802.11 standard was adopted, but contemporaneous with widespread implementation of the standard. As such, its pricing model is

8

unlikely to include substantial hold-up value. As it did when the MPEG LA H.264 pool was formed, Motorola tried to participate in the Via pool. However, the supposedly essential patent that Motorola submitted to Via was rejected by the independent evaluator, who concluded that the Motorola patent was not, in fact, essential to the 802.11 standard.

The Via pool eventually came to include 38 standard-essential patents worldwide from five different patent owners: Electronics and Telecommunications Research Institute, Japan Radio Co., Ltd., Koninklijke Philips Electronics N.V., LG Electronics, Inc., and Nippon Telegraph and Telephone Corporation. There are six additional licensees. The royalties that are collected by the Via 802.11 pool are divided among the licensors based upon a formula that considers, by country, the royalties received on sales in that country and the number of unexpired pool patents for the relevant period in that country that a particular licensor has contributed. And, as with the MPEG LA pool, the pricing contemplated that eventually all standard-essential patents for 802.11 would be included. 4

As in the case of H.264, Motorola's 802.11 standard-essential patents represent a sliver of the technology encompassed in the 802.11 standard. The original standard issued in 1997, prepared by a group within the Institute of Electrical and Electronics Engineers ("IEEE") called the 802.11 Working Group. Beginning in 2002, 802.11 expanded more broadly into mainstream consumer applications. Amendments to the standard (containing enhanced features) have been issued since then, and are assigned letters of the alphabet (802.11b, 802.11c, 802.11d, etc.). Much of the 802.11 technology was based on earlier wireless and networking technology not subject to any patent rights. To the extent the technology is covered by patents, there are dozens of companies that made significant contributions to 802.11 and that hold patents that are essential to the standard. U.S. patents identified in letters of assurance to the IEEE total 150, but the actual number is almost certainly several multiples of that because most companies do not specifically identify their patents when they submit letters of assurance to the IEEE, including

9

pioneers in WiFi, such as Qualcomm, Broadcom, Atheros, Lucent, Intel, IBM, Novell, NEC, Marvell, and Ericsson. No basis exists for concluding that Motorola had any outsized contribution to 802.11 or holds more valuable patents than these other companies. Rather, although Motorola participated in the 802.11 Working Group at various times, its participation was limited, and the contributions ofits patents are nominal and are not linked to any proposals adopted by the group. Moreover, many other companies contributed to these same areas ofthe standard as Motorola. Motorola's experts' mere incantation that Motorola's patents touch on fundamental technology for 802.1 1 (such as network setup} is simply beside the point. Once enacted, all of the patented technology incorporated into the standard is by definition fundamental to the standard (that is why the patents are called "standard-essential"). See Hovenkamp, "Competition in Information Technologies," at 8-9. There simply is no evidence to support Motorola's claims that its patents are worth more than the average 802.11 standard-essential patent.

Again, in assessing the importance of Motorola's 802.11 standard-essential patents to Microsoft, the broader context is important. At least 90 entities have submitted Letters of Assurance to the IEEE with respect to the 802.11 standard or have been found to hold essential patents in connection with their participation in the Via pool. Whatever the value of the 802.11 standard, the patented technology that is used in that standard comes from many, many sources, and Motorola is only entitled to its pro rata contribution of the patented technology after having taken account of the contribution ofothers.

B. The Market Price for 802.11 Chips, such as the Marvel Chipset, Provides a
Benchmark.

Where multi-featured end products are accused, the smallest saleable unit substantially embodying the invention typically supplies an upper bound for the royalty base. LaserDynamics, Inc. v. Quanta Computer, Inc., 694 F.3d 51,67-68 (Fed. Cir. 2012); see Cornell Univ. v. Hewlett-Packard Co., 609 F. Supp. 2d 279,283,287-88 (N.D.N.Y. 2009) ("[C]ounsel would have wisely abandoned a royalty base claim encompassing a product with significant non-

10

infringing components. The logical and readily available alternative was the smallest salable infringing unit with close relation to the claimed invention-namely the processor itself'); Hovenkamp, "Competition in Information Technologies," at II (endorsing the use ofthe smallest saleable unit in assessing RAND royalties). In the Xbox (the only Microsoft product analyzed by Motorola's experts for purposes of its 802.11 patents) the 802.11 functionality is provided by a $3-$4 chipset purchased from Marvell Technology Group Ltd. ("Marvell").s Royalties for substantial technologies incorporated in such chipsets are normally just cents per chipset.

C. Motorola's Prior Valuations Provide a Benchmark for 802.11 Valuation.

An internal valuation of the Motorola 802.11 essential patents undertaken by Motorola itself in 2003 provides another benchmark. At the time, the 802.11 standard was just starting to be implemented, so "hold-up" was far more difficult than it is today, when companies like Microsoft are selling millions of dollars of products that comply with the 802.1] standard.

Motorola was planning to initiate a licensing campaign and wanted to know how much it might be able to obtain. The valuation was performed by outside consultants, selected by Motorola, who worked at InteCap, Inc. ("InteCap"). [redacted] 6

11

The favorable assumptions which underlie the InteCap analysis suggest that its [redacted] recommendation is considerably higher than an appropriate RAND royalty. Indeed, Motorola's 30(b)(6) witness testified that [redacted]

A [redacted] royalty applied to a $200 Xbox console would yield a [redacted]. Given the assumptions favorable to Motorola, this supports a RAND royalty in the neighborhood of five cents and certainly caps a RAND royalty.

D. The RAND Royalty That Microsoft Should Pay in 2012 for Motorola's 802.11
Standard-Essential Patents Is $736,231.

A RAND royalty for Motorola's 802.11 patents can be determined by following the Via royalty calculation and distribution model, but adjusting royalties upwards to reflect the conceptional inclusion of all unexpired standard-essential patents on 802.11. This inclusive pool mitigates stacking concerns, and results in Microsoft paying a royalty for Motorola's 802.11 patents of 5 cents per unit; at current volumes, this would constitute an annual payment of $736,271. The royalty for other years can readily be calculated based on the number of unexpired Motorola patents remaining in those years. This analysis assumes that the pool royalty would stay constant upon addition of other patents to the pool, as did the Via pool's model, and accommodates royalty stacking concerns. 7

12

IV. THE 2.25% OF WINDOWS SALES AND XBOX SALES THAT MOTOROLA
NOW DEMANDS IS NOT A RAND ROYAL TV.

Motorola's position is that a RAND royalty for its H.264 and 802.11 standard-essential patents is 2.25% of Windows sales and Xbox sales. 8 But its 2.25% demand is a hold-up royalty that bears no relationship to the value of Motorola's patents to Microsoft's products, is based on incomparable licenses, and fails to apportion the value of Motorola's patents. Motorola's demand of2.25% of the price ofa $200 Xbox (or $4.50/unit) is more than 22 times the maximum per unit rate Microsoft would pay for a license to the 2,450 patents contained in the MPEG LA H.264 pool ($0.20/unit). Moreover, to decide that Motorola is entitled to a royalty of 2.25% from Microsoft for Motorola's standard-essential patents, requires the conclusion that all the other patent owners, on average, are also entitled to a minimum of 2.25%.

A. Apart From Facilitating Compliance With the Standards (Which Is Not
Compensable in a RAND Royalty), Motorola's Standard-Essential Patents Have
Little, If Any, Value in Microsoft's Products.

As noted above, the purpose ofRAND commitment "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." Apple, 2012 WL 2376664, at *11. That Motorola's 2.25% royalty demand is not RAND is demonstrated beyond doubt as it plainly seeks amounts greater than Motorola could have obtained in a traditional infringement suit on Microsoft's products, because there is no evidence that the Motorola patents drive consumer demand for the Microsoft products.

1. Motorola's H.264 Patents

Motorola claims to have 16 U.S. patents (some with foreign counterparts) that are essential to the H.264 standard. Of the 16, 14 relate to interlaced video. Computers display video in progressive format, meaning that the entire picture is created line by line. Progressive content is encoded by processing a picture's even and odd lines together ("frame coding"). An

13

alternative format is "interlaced video," which involves encoding odd and even lines separately ("field coding"). Interlaced video is a relic of analog over-the-air broadcast television, where there were advantages in capturing and displaying the even and odd lines of the picture separately. Interlaced video is rarely transmitted over the Internet, but in order to be fully compliant with certain profiles and levels of H.264, a product must support both progressive and interlaced video.

Microsoft products, such as Windows and Xbox, support interlaced video solely in order to be compliant with H.264, but rarely encounter this type of video and there was never any effort to take advantage of any specific technology covered by Motorola's patents. A RAND royalty is supposed to measure "the value of the patent qua patent," Apple, 2012 WL 2376664, at *11. Motorola's interlaced video patents had little or no value because they represent minor improvements on preexisting interlaced technology. Alternative technologies were available that could have been written into the standard instead if the SSO had known that Motorola would later attempt to hold up implementers with these patents.

Only two of Motorola's asserted H.264 patents-U.S. Patent Nos. 5,235,419 (Ex. 270) and 5,376,968 (Ex. 283)-are not limited to interlaced video, but one of them (the '419 patent) has already expired, and the other expires in four months. Like the interlaced patents, these patents simply involve choices (of encoding block sizes and compression modes) for which alternatives existed that could have been implemented in the standard instead. Further, the means-plus-function claim limit these patents to their disclosed hardware (i.e., not software). They therefore do not apply to Microsoft's Windows or Xbox products.

a) Microsoft Windows

Microsoft Windows provides underlying operating system software for PCs, laptops, and smartphones. Windows facilitates the basic operation of these computing devices, including managing software applications, mediating between hardware and software, and policing the

14

security and stability ofthe computer system. Windows also provides numerous user-facing features, including accessory applications such as control panels and basic word processors.

Windows is compliant with the H.264 standard and is therefore capable of decoding such video, but computers running Windows generally contain third-party software that can also decode H.264 video. Many software applications -- for example, Adobe Systems' Flash Player -- contain their own decoder. Where third-party software is available, Windows typically relies on the third-party product to complete any H.264 decoding. Further, as discussed above, the narrow form of H.264-encoded content which is mainly addressed by Motorola's patents -- interlaced video -- is a rarity on the Internet. Modern computer screens never display video in interlaced format; any interlaced content is converted to a different format (progressive format) for display. Windows Phone 7 does not provide any software H.264 decoders, leaving decoding on that platform entirely to third-party hardware not sold by Microsoft.

Motorola and its experts have gone to great length to try to find examples of interlaced video content, such as from pirate web sites and obscure test clips, that Windows can play. But their difficulty in finding such examples underscores how trivial the Motorola patents really are to Windows. Motorola is left to argue the importance of compliance with the overall H.264 standard, but that simply shows that Motorola seeks hold-up, not the RAND value of its patents. There will be no evidence at trial that shows or even suggests that the basis for customer demand for Windows is its use of the H.264 standard, let alone the Motorola H.264 standard-essential patents.

b) Microsoft's Xbox 360

Microsoft's Xbox 360 game console is also compliant with the H.264 standard, but the Motorola patents offer little value to that product either. The Xbox is primarily used for playing video games, and video games (whether played standalone or online) do not use H.264. Microsoft's Xbox Live, an online service for Xbox users, does not support interlaced format.

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Although the Xbox 360 can play DVDs, DVDs do not use the H.264 format. 9 As in the case of Windows, Motorola and its experts have gone to great lengths to try to find some examples of interlaced video content played on Xbox. For example, they argue that AT&T's U-verse television service was available as a software add-on to Microsoft's Xbox. But only a tiny percentage of Xbox users ever obtained the software for U-verse. Again, there will be no evidence at trial that shows or even suggests that, for any Xbox-related product, the basis for customer demand is its support for H.264 video, let alone the use of the Motorola H.264 standard-essential patents.

2. Motorola's 802.11 Patents.

Earlier in the course of this litigation, Motorola identified as many as 58 U.S. patents (many with foreign counterparts) that it claimed were essential to the 802.11 standard. However, Motorola now asserts that only 24 of those patents are actually essential and points to only 11 of the 24 that it contends are actually used in Xbox. However, even the larger group of 24 contains no patent that has much value, as there were available alternatives that the drafters of the 802.11 standard could have adopted instead of these patents. Moreover, these patents are either not used by Microsoft's Xbox or are not relevant to its normal operation.

The Xbox console is the only Microsoft 802.11 standard compliant product analyzed by Motorola's experts. Between 2001 and 2010, Microsoft's Xbox console was sold with only a wired Ethernet adapter for network connectivity. Starting in 2004, Microsoft began selling an adapter that could be attached to the Xbox console to permit wireless Internet connection through a local area network. The adapter was compliant with the 802.11 standard. In June 2010, Microsoft launched a redesigned Xbox console which included the 802.11 wireless capability via a Marvell chipset integrated into the console itself, without any price bump. Wireless connectivity, though, is certainly not the basis for customer demand for the Xbox

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product. While a wireless signal can be used to communicate between the Xbox console and a user's home wireless router, a wired connection will work as well, as with prior versions of the product. Many users continue to connect in that way.

The parties agree that thirteen of the 24 patents that Motorola claims are essential to the 802.11 standard are not used by the Xbox. Motorola's 6,404,772 patent (Ex. 381) concerns 802.11 Quality of Service capabilities that Xbox does not use. Motorola's power-saving patents, 5,560,021 (Ex. 166), 6,236,674 (Ex. 178), 5,029,183 (Ex. 147), and 5,479,441 (Ex. 162), are not used by the Xbox because it is not a battery-operated device, and does not support 802.11 power-saving functionality. Motorola's 7,197,016 (Ex. 100) patent relates to a mesh network routing protocol that the Xbox does not support (the Xbox does not support mesh networks). The Xbox does not offer support for low-density parity check (LDPC) codes (one way to reduce errors when transmitting a signal over a noisy transmission medium) and therefore does not use Motorola's LDPC code patents -- the 7,143,333 (Ex. 181), 7,165,205 (Ex. 183), or 7,493,548 (Ex. 182) patents. Motorola's 7,236,477 patent (Ex. 101) concerns fast transitions by wireless device moving between different wireless access points; that functionality is not supported by the Xbox, because it is stationary when used and must be unplugged in order to move it. Motorola's 5,412,722 patent (Ex. 160) requires steps to be performed by an access point, but the Xbox is not an access point and, thus, does not practice this patent. Motorola's 6,038,263 patent (Ex. 383) requires transmitting signals via spatially separate antennas, but the wireless adapter in the Xbox does not make such transmissions. And the default 802.11 settings on consumer devices, and the hard-coded setting on the Xbox itself, do not result in splitting up ("fragmenting") 802.11 packets, so the Xbox does not practice Motorola's 5,311,516 patent (Ex.154) (which expired in May of 2012).

The remaining 11 patents that Motorola contends are practiced by the Xbox, provide, at best, minimal value to the Xbox. Two of these patents, the 5,142,533 (Ex. 148) and 5,272,724 (Ex. 151) patents, have already expired. In any event, the '533 patent required the use of either

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RTS/CTS or QoS -- functionality that the Xbox does not support. Motorola's 6,069,896 (Ex. 171) and 6,331,972 (Ex. 177) patents relate to peer-to-peer communication in 802.11, which is not used in normal operation when an Xbox connects to a wireless access point. Motorola's 6,473,449 (Ex. 180), 5,329,547 (Ex. 156), and 5,822,359 (Ex. 170) patents relate to older amendments ofthe 802.11 standard that offer significantly slower communication speeds than the "n" amendment currently supported by the Xbox console. While legacy devices may exist that operate based on the older amendments, the current Xbox console is compliant with 802.11n, and patents related to the "b" and "g" amendments are of little value. Motorola has only a single unexpired patent allegedly covering the use of 802.11n, the 5,519,730 patent (Ex. 164), and that patent expires in May of next year.

The other three patents -- U.S. Patent Nos. 5,357,571 (Ex. 157), 5,467,398 (Ex. 161), and 5,689,563 (Ex. 169) -- that Motorola claims are used by the Xbox relate to security. But, Xbox implements its own end-to-end encryption of any sensitive data, independent of any security provided by the 802.11 standard. As a result, Xbox data is always encrypted before the data are sent over a connection (whether wired or wireless) between a console and a router (or the Internet). To the extent that Motorola's patents actually cover some portion of 802.11 encryption, these patents provide redundant technology to Xbox's proprietary end-to-end encryption that is entirely unnecessary for the security of Xbox data and is of little value to Microsoft.

B. By Using Windows Sales and Xbox Sales As the Royalty Base For Their 2.25%
Royalty, Motorola Violates Principles of Apportionment and the Entire Market
Value Rule.

In the context of determining reasonable royalties, the "entire market value rule" bars the use of sales revenues of an accused product as a royalty base where a patent covers a single feature of a complicated, multi-faceted product, unless the patentee proves that the patent-related feature is the basis for customer demand. See LaserDynamics, 694 F.3d at 67. The law has long required the patentee to apportion the value ofthe patented technology in relation to other

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technologies, both patented and unpatented, that make up a product. See. e.g., Sheldon v. Metro-Goldwyn Pictures Corp., 309 U.S. 390,402 (1940); Dowagiac Mfg. Co. v. Minnesota Moline Plow Co., 235 U.S. 641, 645-51 (1915); Westinghouse Elec. & Mfg. Co. v. Wagner Elec. & Mfg. Co. , 225 U.S. 604,614-15 (1912); Garretson v. Clark, 111 U.S. 120, 121 (1884). It is irrelevant to this inquiry that certain features may be of general importance to any given product, or necessary for its commercial viability: "proof that consumers would not want a [product] without such features is not tantamount to proof that anyone of those features alone drives the market" for the product, and "[i]t is this latter and higher degree of proof that must exist to support an entire market value rule theory." LaserDynamics, 694 F.3d at 68.

In its opposition to Microsoft's Daubert motion, Motorola relied on Lucent Technologies. Inc. v. Gateway. Inc., 580 F.3d 1301, 1338-39 (Fed. Cir. 2009), for the proposition that the entire market value rule does not require a showing that the patent created the basis for the customer demand, "as long as the magnitude of the rate is within an acceptable range (as determined by the evidence)." Although that approach was followed by some district courts in the aftermath of Lucent, the Federal Circuit has clarified that the Lucent opinion in no way alters the fundamental standard requiring proper apportionment; instead, the entire market value rule acts as a per se bar to application of a royalty rate to end product price without a showing that the patent creates the basis for the customer demand, and the use of the broad royalty base is not permissible simply because the royalty rate has been made small enough. See e.g., Uniloc USA, Inc. v. Microsoft Corp., 632 F.3d 1292, 1302 (Fed. Cir. 2011) ("The Supreme Court and this court's precedents do not allow consideration of the entire market value of accused products for minor patent improvements simply by asserting a low enough royalty rate."). In the most recent ruling, LaserDynamics, the Federal Circuit emphasized that "the requirement to prove that the patented feature drives demand for the entire product may not be avoided by the use of a very small royalty rate," explaining that:

We recently rejected such a contention, raised again in this case by LaserDynamics, and clarified that "[t]he Supreme Court and this court's

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precedents do not allow consideration of the entire market value of accused products for minor patent improvements simply by asserting a low enough royalty rate." Uniloc, 632 F.3d at 1319-20 (explaining that statements in Lucent suggesting otherwise were taken out of context).
LaserDynamics, 694 F.3d at 67. While Federal Circuit law is persuasive authority in this action, Ninth Circuit law on apportionment predating the formation of the Federal Circuit is in accord. See Velo-Bind, 647 F .2d at 973 (9th Cir. 198]) ("[A ]lthough courts have applied the entire market value rule in certain limited circumstances, this rule is itself an exception to the more general rule that, where the patent creates only part of the profits, damages are limited to that part ofthe profits, which must be apportioned as between those created by the patent and those not so created.").

Even if it were permissible to use total sales as the royalty base by adjusting to a lower royalty rate, Motorola simply applies the same 2.25% to every Microsoft product regardless of overall feature sets or prices (Windows, all packages of the Xbox, the standalone Xbox wireless adapter) -- and even the disavowed passage in Lucent stated that the patentee must use a royalty rate that "accounts for the proportion of the base represented by the infringing component or feature." 580 F.3d at 1339. A percentage royalty, as urged by Motorola, cannot be ascertained without apportioning the use of the patents in particular implementations and devices. Otherwise, it inherently captures value for which Motorola is not entitled to compensation, especially in the RAND context.

Apportionment, whether enforced via the entire market value rule or otherwise, is an essential restraint in preventing overreaching and windfall recovery in every patent valuation context. No reasonable valuation, in a patent infringement action or any other context involving muiti-component, multi-featured products, can be had without proper apportionment. Yet, no Motorola expert has even asserted, much less attempted to show, that the Motorola H.264 or 802.11 essential patents form the basis for consumer demand for Microsoft's complex products. Therefore, Motorola's use of Windows and Xbox sales as a royalty base is both contrary to law and impermissible.

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C. Motorola's Demand Fails to Account for its Rapidly Expiring Patents.

A further problem with Motorola's proposed 2.25% royalty is that it fails to take into account the expiration of Motorola's patents. 10 Its 802.11 patents are rapidly expiring -- in fact, Motorola recently abandoned the portion of its ITC case against the Xbox on the only two 802.11 patents that have been litigated because the patents will soon expire. Likewise, the only H.264 patents not solely applicable to interlaced video are also about to expire. Motorola's continuing and unvarying 2.25% royalty is plainly not RAND. By contrast, the royalty proposed by Microsoft, utilizing the pool formulas, takes into account patent expirations.

D. Licenses to Motorola's Cellular Telephone Network Standard-Essential Patents
May Well Reflect Hold-Up and Are Wholly Irrelevant, Given That No
Apportionment Has Been Performed.

The evidence that Motorola offers to support its 2.25% royalty demand may well reflect hold-up. With few exceptions, these licenses to Motorola's portfolios of patents essential to various cellular telephone network standards were entered into by makers of cell phones and cellular telephone network equipment that had already made and sold standard-compliant products. If they did not pay Motorola for its cellular telephone network standard-essential patents, they risked injunctions or exclusion orders that would have removed their products from the marketplace. For example, [redacted] The U.S. antitrust authorities have recognized that "the threat of injunctions and exclusions" means that "[t]he prices achieved by negotiation between a

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buyer and an IP supplier in this environment will [ ] tend not to reflect the value of the patent before it was incorporated into the product or standard." Scott Morton, "Patent Portfolio Acquisitions: An Economic Analysis" (Sept. 21, 2012) at 2 (Ex. 1646.)

But Motorola's agreements are not appropriate comparables for even more fundamental reasons: they concern different patents, different standards, and different products. The primary purpose of a cell phone is to connect to a cellular network, but an Xbox console that cannot use a WiFi connection is still a useful product: tens ofmillions of them were sold by Microsoft. By the same token, Motorola told prospective licensees that [redacted] (Ex. 1117 at 21337; Taylor Dep. at 201-03, 208-09.) But neither Kirk Dailey, Motorola's head of licensing, nor K. McNei11 Taylor, Jr., Motorola's chief IP counsel, [redacted] (Taylor Dep. 5, 73-74, 212-13.)

The vast majority of Motorola's licenses include only its portfolio of cellular telephone network standard-essential patents. Importantly, these licenses provide rights only for building standard-compliant implementations; the licensed patents cannot be used in any other way, and no other aspect of the product is licensed. Yet, Motorola argues that they are relevant because they include so-called "overlap" patents-patents declared essential to both the cellular and 802.11 standards. There are two fallacies in this argument. First, the overlap is miniscule: there are just one or two 802.11 patents in the hundreds of patents included in the cellular licenses, and those are not even licensed for 802.11 implementations. Second, Motorola made no attempt to apportion the value of the royalties paid for these one or two patents versus the rest of the licensed patents.

Only a small number of Motorola license agreements actually include (together with other things) licenses to Motorola's portfolios of 802.11 essential patents or H.264 essential

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patents. But these, too, provide no assistance in determining a RAND royalty for the 802.11 or H.264 portfolios. All of them include patents in addition to Motorola's portfolios of 802.11 and H.264 standard-essential patents, and many involved only lump-sum payments (some of which flowed from Motorola to the counter-party) or were royalty-free cross-licenses. Neither Motorola nor its experts has made any effort to apportion the royalties in these agreements between the 802.11 and H.264 patents and the other patents included the agreements, typically those in Motorola's cellular essential portfolios. Thus, these agreements do not support Motorola's claim that there is an established royalty of 2.25% applicable to Motorola's 802.11 and H.264 portfolios. [redacted] -- and that single agreement is insufficient to provide an established royalty, especially where only de minimis royalties were paid [redacted] 11 See ResQNet.com. Inc. v. Lansa. Inc., 594 F.3d 860, 869, 872 (Fed. Cir. 2010); Hanson v. Alpine Valley Ski Area. Inc., 718 F.2d 1075, 1078 (Fed. Cir. 1983). Moreover, the agreement was conveniently negotiated by Motorola after this litigation commenced, in return for an agreement by Motorola to lower a separate arbitration demand. See Dunkley Co. v. Central California Canneries, 7 F.2d 972 (9th Cir. 1925) (rejecting later-arising license agreements as evidence of a reasonable royalty).

E. Motorola's Dismissal of Pool Royalties Has No Basis in Fact.

Motorola dismisses pool royalties as irrelevant, saying that the licensor-participants intend to profit from the sale of standard-compliant products and set the pool royalties at an unreasonably low level to lower their own costs. The evidence is to the contrary.

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First, both the MPEG LA and the Via pool contain licensors, such as Columbia University and the Electronics and Telecommunications Research Institute, that do not sell standard-compliant products. They have no incentive to low-ball the pool royalties to reduce their product costs because they have no standard-compliant products, but instead would be seek the maximum viable royalty. Pools seek to promote the success ofthe standard by balancing the need to attract a critical mass of licensors against the essential goal of the standard: widespread adoption by licensors -- a goal that can be achieved only by enforcing the RAND obligation.

Second, as noted above, Motorola's own parent company, Google, contractually agreed -- on Motorola's behalf -- that [redacted] Google evidently did not view the pool royalties as unreasonably low.

Finally, Motorola asserts that SSOs envision that RAND royalties will always be negotiated one-on-one between a single licensor and a single licensee. But even policies at the SSOs, including those that promulgated the H.264 and 802.11 standards, do not support that conclusion. To the contrary, for example, IEEE set up an "802.11 Patent Pool Exploratory Forum" to "promote the fair, reasonable and non-discriminatory availability of licenses essential to IEEE 802.11 through patent pools." (Ex. 297.) Likewise, in joint submissions to ETSI, Motorola itself [redacted] (Ex. 1033 at MOTM_WASH1823_0421107; Ex. 1606 at MOTM_WASH1823_0421101.)

CONCLUSION

Microsoft's proposed royalties are RAND and Motorola's proposed royalties are not.

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DATED this 7th day of November, 2012.

CALFO HARRIGAN LEYH & EAKES LLP

[signatures - see PDF] ________________
1 2 [redacted] Exh. 284.

3 In addition to Motorola's 63 patents, this figure is based on an analysis that assumes the addition to the pool of the 89 other patents that have been specifically declared essential to the H.264 standard but are not in the pool now. If only Motorola's patents are added, the annual royalty would be $502,000.

4 The Via pool included a provision for a modest increase in its pricing as more licensors and patents were included; Microsoft's experts applied this increased pricing in their assessment of the Via pool comparability.

5 Marvell has sought but has not received a license from Motorola for its chipset-a license that would exhaust the Motorola patent rights in connection with any end product incorporating such chipset, including Microsoft's Xbox.

6 In addition, [redacted] No licenses resulted, suggesting strongly that Motorola had over-priced its portfolio even then.

7 If the Via pool rates were increased by the maximum 25% permiued under the pool agreements upon the inclusion of additional patenlS in the pool, Microsoft would pay to Motorola $920,338 per year based on current volumes for a license to its 802.1 I essential patents.

8 Motorola's experts purport to offer per unit royalties for Windows and Xbox, but these are calculated by assuming a grant-back and valuation of Microsoft's patents and applying various caps. The underlying and fundamental basis for the Motorola proposed royalty is 2.25% applied 10 Windows software and to Xbox.

9 While Blu-ray discs do contain H.264 content, Xbox has no support for viewing Blu-ray discs. In any event, most Blue-ray video content is not in the interlaced video form that is addressed in the majority of Motorola's H.264 standard-essential patents.

10 The parties remain engaged in litigation in other fora related to certain of the patents at issue here, for example, ITC Investigation 337-TA-752 and cases in Germany. The decisions from the ITC action are not given collateral estoppel effect in the district courts. General Elec. Co. v. Wilkins, 2012 WL 3862350 at *1 n.1 (E.D. Cal, Sept. 5, 2012) ("The ITC decisions are not binding on this court"); Texas Instnlments Inc. v. Cypress Semiconductor Corp., 90 F.3d 1558, 1569 (Fed. Cir. 1996) ("ITC decisions are not binding on district courts in subsequent cases brought before them"), and in any event the ITC does not involve valuing the asserted patents. In the German action, neither the value nor the validity of the asserted patents was considered.

11 Although Motorola's [redacted] Moreover, [redacted] sales of smartphones incorporating the cellular standards would alone been sufficient to reach annual royalty caps in the agreement -- and any use of other licensed standards in those products did not create any additional royalty obligation. Given that, [redacted] would have had little interest in bargaining over the royalties nominally applicable to the 802.11 or H.264 standards.

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