What is it really all about? In my view, it's about disadvantaging Android, by devaluing patents that Android vendors own while keeping utility patents that Microsoft (and Apple) have at full price.
This is a bench trial, meaning the judge, the Hon. James L. Robart, decides the issues without a jury, which the parties agreed to. So that is why you will see him asking witnesses questions directly. Then, after this part of the dispute is settled, establishing a royalty or a royalty range, then the rest of the dispute will go to a jury. This is all happening in the United States District Court for the Western District of Washington in Seattle, a picture of which you can find here on Instagram. Also, there's live tweeting, hashtag #motosoft.
Here's Phil Dawson's report:
Judge James Robart - Room 14106 - Tuesday, 11/13/12
Arrived just after 8:30, courtroom already nearly packed. Lucky to get a seat and at least a dozen people were standing in the back. I would guess I was one of maybe 3 or 4 other non-lawyers in the bunch.
Judge opened with a remark about this courtroom has not been so crowded since the hearings regarding Seattle's strip club licensing changes. And said he would see if something could be done to get more seating.
Pre-trial Issues Discussed:
Microsoft introductions—lots of lawyers' names that I did not catch. Ditto for Motorola. [PJ: You can find the names of the lawyers in the beginning and end of the trial briefs, linked above.]
Judge mentioned that he has at least 10 hours of deposition-reading in front of him.
Brief discussion regarding motions to seal—which were granted in part and denied in part.
Has about 50 exhibits – trying to determine which have trade secrets – 5 to be sealed – 2 just need redactions, namely exhibits 1141 & 1636 which have patent pool agreements with royalty details. MPEG LA wanted redactions also. Exhibits 288, 2353, and 272 are sealed.
Judge said he does not want to have to keep clearing the courtroom when trade secrets are discussed, so would have to complete discussion on any given document to avoid constantly clearing and reseating the courtroom.
Said they will use 2 sealed docs today, namely Exhibits #? and 1173. Some exhibits need additional redactions. Asked the judge about his ruling on showing details [when showing to the judge].
Judge said that if the matter was used by the judge for his decision, then it will not be redacted.
Question asked: If docs not submitted get used—then redactions can be proposed after the fact? Did the judge have further guidance? Concern expressed about royalty rates; mentioned that third parties expressed grave concern—adamantly opposed to having that info revealed in the record. Proposed a middle ground to use a “code sheet” so that companies are not named. So they would refer to “company A, company B, etc.”
Judge responded that he held an expansive view of the public's right to know what he based his decisions on.
Motorola said they would still like to use the code sheet idea.
Judge mentioned that one lawyer from each side has been enjoined to not use any confidential info learned here in connection with any other matters. [I presumed this refers to the trade secrets and royalty deals.]
Microsoft's Opening Statement
Royalty should be proportionate to use of the patent in the relevant standards, resulting in reasonable RAND rates. Motorola is asking for unjustifiable amounts, via patent stacking. This may affect future RAND settlements. Discussed how patent pools are formed, specifics on the MPEG LA group. Purpose is to protect patents while making payments low enough to attract licensees. Motorola abruptly left the MPEG LA discussions. During those discussions, Motorola never said their patents deserved higher royalties. Professor Murphy will testify to the impact of the patent pools, supporting RAND. Matt Lind to provide data details indicating that Motorola's royalty should be pennies, not dollars. Gary Sullivan will testify that Motorola's contribution was only interlaced video, which was added later (and is old, unimportant technology); alternate technical solutions were available. Motorola patents are tangential to XBox, and are rarely called on in real-world use. Interlaced video support is contained in $3 to $4 chips from another company.
Microsoft's First Witness, John Devaan:
John Devaan – Microsoft employee. Corporate VP for Windows Development. 1,200 people work for him. Explains Windows' overall function. Thousands of features added for each release. Mentions a book: “Windows 7 Inside Out” to which he was a contributor. Focus of that book is on what is new and different. Windows Internals – another book. John said he knows the author, who used to work for him. This book is used more for tech support and development people vs. casual Windows users. This book's emphasis is also on what is new and different. Both entered as exhibits. Covered the process of how a new version of Windows is developed. Four phases: 1) Design — creates vision and specs; 2) development phase; 3) public testing w/ beta; 4) RTM (Release To Manufacturing) phase. Discussed how features are included/excluded; Microsoft uses a top down/bottom up process. People involved includes 5,000 engineers, plus others. Cost of this effort? “A lot,” he said, but agreed with the lawyer that it would be “North of $1B”, given that most of those 5,000 engineers earn 6-figure salaries.
H.264 support in Win/7 was discussed. It uses a chip on the computer or software to play a video coded in that standard. Microsoft used the H.264 standard, then modified it. In 2006 or so, HD TV and streaming video was beginning to be more prevalent. Discussed hardware decoders, which are sometimes a separate chip, and is often is a feature of the computer's installed GPU. Microsoft does not provide hardware decoders. VLC Media Player and Flash are examples of software options for playing H.264-encoded content. Microsoft does not provide those apps.
Interlaced video was described. Laptops in general do not use interlaced display; today's newer tech uses progressive display. There is not a lot of content that uses interlaced today. But it's included because it is part of the H.264 standard.
Mentioned that 802.11 is supported by Windows/7. Mentioned that, for example, 802.11 has little value for desktop PCs. [I personally would differ. My old Sony Vaio “all-in-one” PC that died a few months ago used WiFi.] Win RT tablets – unique in that they are using touch and keyboard. Microsoft Surface also supports H.264 and 802.11.
Media Foundation is used in Win/7 & 8, and that product has an H.264 encoder and decoder, up to levels 5.1. IE9 uses Media Foundation API for H.264. And Microsoft's Media Player uses Media Foundation. Refers to the Windows/7 Inside Outside book: Part III – digital media, pg. 408, says which file formats/codecs are supported. AVCHD, MPEG4 video, uses H.264 compression codec. Book discourages users from downloading other codecs—doing so can cause problems, per Microsoft. Win/7 was the first version to use H.264 directly. Eliminates risk of using 3-party codecs.
Discussed a “Pillar/Vision” document for Windows/7. That document said that Microsoft wanted to include support for broadcast video, as well as live video. In terms of how Windows functions, if a hardware decoder cannot be found, Windows software will decode the codec. There is no ethernet port on Surface tablet. [Presume that comment was made to lay the foundation for their needing 802.11 for WiFi.]
Microsoft Redirect of Devaan:
How is H.264 typically accessed? Most users would use Flash (v. Win/7 software). Used YouTube as an example.
Hardware, e.g., Blu-ray player, will use 3rd-party software vs. Win/7?
Microsoft made the distinction from the earlier comment about 3rd-party codecs. Microsoft agreed that “reputable 3rd party software” is okay; they were trying to discourage users from “just searching the internet for codecs.” Discussed the difference between interlaced and progressive video.
Microsoft 2nd Witness, Garrett Glanz
General manager of Licensing in Microsoft IP group—for all patents. Has been there 12 years, 2 years in this position. Manages inbound and outbound licensing Was Microsoft's rep to the MPEG LA pool. Discusses timeline of pool development, including Motorola's decision to not join the pool.
May 2003 H.264 adopted. Starts with call for patents. Initial meeting, and MPEG LA coordinates the meeting. MPEG LA collects/distributes royalties. At this time, H.264 was not used much. Competing technology then included Real Video, MPEG4, Windows Media Video. MPEG LA issued press release saying licensing terms were reached. 20 cents/unit after 100,000 units, lower afterwards. Free if under 100,000 units. There is a royalty grace period. Companies involved were listed in the press release, and included Motorola. VIA licensing was also doing a patent pool for a video standard. Microsoft and Motorola participated in that one too. Paul Bawell was the Motorola rep.
Pool process description: MPEG LA created a “straw man,” then attendees proposed adjustments. MPEG LA had an external expert determine what patents were essential. Many patent holders were licensees as well. Motorola had mobile phones, set-top boxes for cable TV, that would use the H264 codec. Microsoft had Windows and other products that would use it. Garrett made notes at the “pool meetings” and shared with others at Microsoft, including Will Spencer. His notes were reviewed; gave background on how they were captured, etc. Slides of the pool meeting were presented, then discussed in comparison to his notes. Concern at the pool meetings was that if royalty rates were set too low, patent holders would not contribute their patents. But if rates were set too high, competing codecs might be used instead by licensees.
Motorola suggested the initial units not need to pay royalties, and this was adopted. Motorola said the proposed rates were too expensive for mobile use—would likely then use other codecs.
Recapped Larry Horn's summary (he was the MPEG LA chair), that terms should not differ between types of licensees, and there should be annual caps on royalty payments for any one company.
At the next pool meeting there were two new “straw men” proposals, #2 and #3. #2 had a pre-payment option (vs. a cap, which could lower the rate for high-volume units). #3 had annual up-front caps. Motorola preferred #1 (original straw man), but would like to see a cap of $2 million per business unit.
In a subsequent meeting, Bawell was there for Motorola. Press release was discussed; needed to be issued so companies could make decisions regarding use of H.264, so they could use proposed royalty rates in planning. Email from Bawell, saying he wanted changes made on press release. Email from Bawell saying that the press release is okay. Apple, NTT, IBM, et al. did not join the pool initially. Apple did later. A few modifications were made to the royalty structure. Email from Bawell, agreeing in principle, but saying other details needed to be worked out. Email from Horn saying Motorola has approved the press release led him to believe that Motorola is onboard. Licensing agreement discussed further.
Motorola Cross-examination of Glanz:
Agree that Microsoft wanted to get H.264 approved. Refers to his deposition. Microsoft wanting low codec fees (in comparison to MPEG2). Terms allowed Microsoft to ship Windows and not make OEMs liable for the H.264 licenses.
Asked about pool revenues; he said they were “difficult to calculate.” Asked more about pool revenues.
Discussion of why patent holders may choose to not join the pool; posited that they may be needed for legal defense from other patent holders. He heard from Horn that Motorola had sold the patent they were using to participate in the pool. Deposition says he heard that Motorola thought it was “more advantageous” for them to not participate. More docs discussed on royalties. Discussed the VIA pool, but Microsoft elected not to join. Mentioned other pools Microsoft did not join, such as MPEG LA DRM (which is not a standards-based pool).
“Code sheet” discussion again. Judge asks them to cite an authority for where this type of indirect reference to confidential info is used. Judge feels that the public is entitled to know, but he will consider using the “code sheet.” RIM and Samsung would like to talk about that. Microsoft says it's impractical because product-specific discussions would make it obvious who is who. Samsung lawyer asked about specific sensitive docs; exhibits 2769, 3163, 3191, 3238, 3264, and 3137. Judge said that others can make their case. RIM lawyer wants an additional 48 hours to review docs. Judge says they are free to submit exhibits for possible sealing, but will not give him the requested 48 hours. RIM also wants “code sheet” to be used for the patent numbers themselves because the number itself can determine the owner. Requested that exhibit 2800 be sealed; it was not included in first list.
Motorola Continues Cross-examination of Glanz:
Mentioned email to Xavier (?last name?). Discussed updates to an internal Microsoft slide show doc. Listed 18 companies in the MPEG LA pool, but only 5 companies in the VIA pool. This is out of over 100 companies that developed the H.264 tech. IBM did not like having royalty caps. Thompson agreed. They and Nokia had not joined the MPEG LA pool. Bawell (the Motorola rep) joined Microsoft in 2006 in the IP group. Left a few months ago.
Microsoft Redirect of Glanz:
Royalties were hard to determine initially because no one could be sure of adoption rates. MPEG2 was important for DVD play-back. For Windows that is just “one of many functions.” Email from 2004 was the first he knew Motorola was not joining the pool.
Not sure how pools work. What factors make it successful?
A: Licensees want to go to a single place to get the license. Needs a critical mass of participants for success. Pools usually appoint an outside expert to determine if patents are considered “essential” to the standard.
How is a patent's value assigned?
A: As more companies join a pool, the “per patent” value can decline. Each company may feel their patent is “the best,” but all must agree that all are essential and agree on assigned values. MPEG LA pool members decided to use one rate, and the number of patents matter, not whether one patent has more “value” than others. Same royalty rate would apply whether or not you just implement H.264 decode (vs. implementing both encode and decode).
Why join MPEG LA vs. VIA?
A: More companies were involved in MPEG LA, so better chance of working—and it was considered impractical to participate in both.
A: H.264 was considered a very strong standard, and would likely succeed in the marketplace; Microsoft person was chair of the std. Group.
Microsoft follow up:
VIA did not get more companies to join; they wound down that pool. Then some VIA companies joined MPEG LA.
Motorola follow up:
Used a simple example that if 10 companies each have one patent in a 10-patent pool, if the royalties are $10, then each gets $1. Judge joked: Good—now there's some math at my level. Do patents not in the pool have the same value? Cannot answer that.
Judge: Why would someone with a really essential patent join unless if was for cross-licensing? Agreed that's probably the reason.
Microsoft's 3rd Witness: Prof. Kevin Murphy
Background: Economist. U. of Chicago. Teaches MBA and PhD students. Won awards. McArthur grant. Managing Director at Navigan Economics. Has worked for Microsoft before, including anti-trust matters (IE issue, remedy phase). Has IP experience in determining royalties in software, medical products, ASACP, etc. And patents.
He was asked to present or analyze what factors should be considered for RAND royalties. He did research on other deals, other patents, other pools. Researched patent hold-ups and stacking.
Designated as an economics expert.
RAND commitments encourage adoption because it can prevent hold-ups. Uses wall plug as analogy in that once you decide on a standard, it can be very difficult to move to a different one. But the standards themselves enable interoperability which adds value. If each patent holder did its own RAND deal, the standard may then become too expensive for licensees.
Showed a graph that indicated that if all patent holders in the 802.11 standard wanted the same 2.25% that Motorola is asking for xBox, then the cost adds up to 207% of the product's price. Stressed that there would be public impact in that price increases will affect product adoptions.
He said that sometimes a patent may deserve more money out of a patent pool relative to more minor patents.
Discussed the “ex ante” period, when it is best to try to reach a good RAND agreement. There is a potential for “patent hold-up” to occur if a patent holder waits until after a standard is adopted to assert their IP rights.
He said that Motorola's patent experts could not say that its patents were any more valuable than others in the pool.
The RAND value must be related to the contribution of the patented technology itself, not the value of the standard. Simply requiring that RAND negotiations take place is not an answer.
RAND commitments are comparable to patent pools. But how to determine reasonableness? Best is to look at adoption rates. The approach to the 802.11 pool (VIA pool) was not as successful as the MPEG LA pool. There was very little licensing—nearly zero.
Said that you cannot compare the value of 802.11 on cell phones versus Win/7 functionality. Knowing the RAND rate for one does not determine the appropriate rate on the other.
Motorola Cross-examination of Murphy:
Said that Prof. Murphy has not negotiated RAND patent licenses. He agreed he is not an expert on that, just an economist. He has had no dealings with IEEE or ITU and is not an expert on SSOs (Standard-Setting Organizations). He has not published any articles on RAND. He has not testified on any prior RAND cases. He has testified for Microsoft about 10 times. He did not consider the evidence provided by Motorola's technical experts. Agreed that companies are not forced to join patent pools. Generally speaking, a new pool licensee cannot change the terms of the deal.
Microsoft did not join the 802.11 VIA pool as a licensor or licensee. Confidential document discussed that used an “ex ante” versus “ex post” dividing line analysis. Report from the VIA pool's web site showed that on 9/11/12 there were only 5 licensors.
Referred back to the xBox graph to point out that the patent stacking issue is not as dire as shown because there is usually cross-licensing which can reduce royalties. The graph does not show that effect.
Agreed that there is not much of a real patent stacking issue, if any.
Agreed that many standards-based patent agreements are negotiated ex-post. Ex post bilateral negotiations can lead to a RAND license.
Reviewed 60 Motorola licenses, and the majority were RAND. Asked if there has been any patent hold-ups, and he mentioned one resulted in an injunction, which could cause a hold-up. This testimony was stricken after Microsoft objected because they did not know what company was under discussion (regarding the injunction) so could not properly redirect.
Reviewed Vtech email to Motorola, asking for 802.11 and H.264 agreement. Specific product is Innotab [which the wife bought for the grandkids, btw.]. Prof. Murphy pointed out that you cannot separate the patent licensing offer from the other part of that email that included some sort of settlement of a prior patent dispute.
Motorola counsel displayed an Innotab box that had “WiFi” on it in six places. Judge admonished counsel to “not wave things in his courtroom” that had not been place in exhibit.
Tries to link the 2.25% rate Vtech pays to Motorola to Microsoft's Surface product.
Microsoft Redirect of Murphy:
Ties the Innotab product licensing to the settling of the legal issue regarding patents used in VTech's wireless telephones.
Compares the MPEG LA pool to the VIA pool, noting that success shows what works in the marketplace.
No redirect from Motorola.
About pools: Are there limits? For example, what products can incorporate the licensed technology?
A: Used a cruise ship example mentioned tangentially earlier—one would not expect to get a 2.25% royalty on the cost of a cruise ship that happened to have WiFi installed.
The per unit royalties—are they based on value of product?
Answer: Not usually—depends on the product. Mentions an example for xBox. There was a WiFi adapter available for $70 before xBox included WiFi support. The cost should be based on something like that instead of the total cost of an xBox.
Further discussion of what is a “device” for royalty purposes.
Then Prof. Murphy talked about differentiated costs for patents in standards.
Example: If Apple has a product that provides 21 cent of value, and IBM has a product that provides 20 cents of value, one could say that Apple's differentiated value to that patent is 1 cent.
Judge refers to Judge Posner's discussion regarding the ability to “design around” any given patent.
With regard to the attempts to quantify stacking and “hold-ups,” the Judge thought Prof. Murphy may be thinking of the old Judge Potter Stewart line regarding pornography: “I know it when I see it.” [Although Judge Robart actually said “recognize” instead of “know.”]
Discussion regarding how patents can be valuated ex ante versus ex post.
Regarding the timing on ex ante: Other options were still available.
No Motorola follow-up.
Microsoft's 4th Witness: Gary Sullivan
Microsoft employee: Principal Software Developer/Engineer. Job title is Video/Image Architect. Did his PhD thesis on video coding in 1991. Job background details. Started at Microsoft in 1999. Moved from video acceleration development to standards.
Background MPEG (ISO/IEC) and VCEG (ITU). JVT was a collaboration between these two groups. He was chair of both groups at various times. H.262/MPEG2 was the standard back then and is still used today in DVD and broadcast TV. Showed a graph of the H.264 development timeline. The primary goal was better compression. Initially there were 40-50 people at those meeting, and about 30-60 documents were submitted, about half of which were proposals. A “contribution document” was anything submitted—not necessarily a proposal. In 2000-2001 the number of people attending and the number of documents greatly increased as it became apparent that H.264 had good potential. It showed a 50% bit-rate savings over H.262/MPEG2. He was chair of both MPEG and VCEG groups when the VCEG design was adopted. Someone from Motorola was a vice-chairman then.
Interlaced video was not included initially. Contributors included Telinor, Nokia, etc. Motorola's first proposal was in December of 2001, well after the 50% compression rate improvements were made.
Refers to IEEE article he published in July of 2003, which is still widely cited in academia. Showed a graph of how the various standards compared with regard to PSNR (image quality) and bit-rate.