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Microsoft v. Motorola Trial in Seattle, Day 3 and Judge Crabb Explains Dismissal of Apple v. Motorola~pj
Thursday, November 15 2012 @ 11:02 PM EST

We had two reporters in the courtroom today once again at the Microsoft v. Motorola FRAND trial in Seattle. Their coverage is demonstrating, to me anyway, that the last place in the world you can determine a proper royalty for a standard-essential patent is in a courtroom. I don't know which is worse, whoever came up with this bizarre FRAND legal strategy for Microsoft and Apple or the companies for following it. And I do see the wisdom of the two judges who threw out Apple's FRAND claims, Judge Richard Posner in Illinois and Judge Barbara Crabb in Wisconsin. Judge Crabb has just filed an order explaining the dismissal, so after I show you our reports from the trial in Seattle, I'll show it to you as text. Maybe this Seattle judge, Hon. James Robart, should read it, because Microsoft's claims are very similar to Apple's.

It is looking like this trial will be still going on next week, probably until Tuesday. So we need someone to step forward and volunteer to cover for us Monday and Tuesday, if possible, as neither of our reporters will be able to attend. One of them took vacation days to cover this week. Please email me if you can go as Groklaw's eyes and ears. And I know you join me is thanking our volunteers for helping us to know for sure what was really going on in that courtroom this week.

Jump To Comments

Here's Phil Dawson's report:

Judge James Robart - Room 14106 - Thursday, 11/15/12

Some details I didn't mention before:
Tons of paper in the courtroom. Microsoft has racks of binders--5 racks with 3 shelves each, more racks in front of the bench, and so many boxes of papers, such that boxes are under the pews in the general seating area as well as stacks of them near their table. Motorola seems to have fewer materials, but still many boxes.

Issues today with redacted docs? Motorola has a redacted doc to present. Microsoft objects to the redactions as they were discussed during testimony. Will consider redactions if Microsoft counsel is authorized to speak for Marvell. Verbal agreement from Ms. Ochs is okay. Sealed docs with Microsoft future product plans may be discussed.

Judge commends counsel on their professionalism.

Microsoft's 7th Witness, Leonardo DelCastillo:

Xbox to be used as demonstrative. Judge Robart jokes that demonstratives become possessions of the court. (Laughter.)

General Manager of Xbox development team. 200 people report to him. Main contact for hardware issues.

Demonstrative on game play. Video shorts. Competitors are Sony and Nintendo. Online stores allows one to purchase extras for games, connect to other players online. Discussion of connection to Netflix to access streaming content.

Video games are what drive customers to Xbox vs. competitors. Shows game library--over 1000 games available.

Exhibit of Xbox development time-line--models and pricing. Differences in models discussed. Over time, same model will cost less.

Console packages demonstrative--four offerings available today. Consoles are the same except for amount of storage. Discusses introduction of Kinect. Exhibit of Xbox bundles, including special editions for Halo, Star Wars. 802.11 does not differ between models. Controller does not use 802.11. Xbox can decode H.264 content.

Discussion of progressive vs. interlaced. Apps only support progressive. Netflix uses progressive. Average person could not tell the difference between progressive and interlaced content. Why does Xbox bother to support interlaced? Because it's part of the standard. Supports DVD playing, but that uses MPEG2. Can download IE onto Xbox, but IE does not support interlaced. Xbox can be used as set-top box for Uverse. Requires app download and set-up by Uverse. This is not that popular. Users might use 802.11 to connect to home network. Wired connection is available.

Microsoft does not build the hardware that does 802.11. Background on when 802.11 adapter was available. Wired connection is interference-free, not true for 802.11. Xbox connections are encrypted, whether to Xbox live service or to another Xbox. Xbox does not rely on 802.11 security. Exhibit on 802.11 tech features that are not relevant to normal Xbox usage. 802.11 can be used to connect Xboxes for sharing the game experience but this is not considered widely used. Discusses other 802.11 features like QOS that Xbox doesn't support.

Exhibit on entertainment partners. Video would mostly be progressive, but a small number of apps use interlaced (mostly older apps that will be rewritten for progressive). Uverse service for Xbox was discontinued about a year ago.

Motorola Cross-examination of Del Castillo:

H.264 was first supported on Xbox with an HD-DVD accessory player. Exhibit on summary of product details. Supported both main and high profiles for H.264. Includes support for interlaced. Added doc as exhibit but is sealed as confidential internal product spec.

Statement read from press release about Xbox being the best HD-DVD viewing experience. Mentions 11,000 Uverse users on Xbox. Details on Microsoft web site mentions H.264 support. Confidential doc was discussed so was not shown on large courtroom monitor. Microsoft marketing group was concerned that Xbox may appear outdated because Playstation then had Wi-Fi out of the box. Exhibit submitted as sealed.

Discussion from Motorola that this doc was from 2005, and they thought that older strategy docs would not be sealed. Microsoft would like redactions then; to be discussed further later on.

Agreed that consumers may consider Wi-Fi to be a must-have feature. Cites internal Microsoft docs showing that addition of Wi-Fi is considered an improvement.

Doc needing redactions submitted. Judge notes that redactions need to be submitted within 36 hours.

Omni is the Xbox wireless adapter, uses the Marvell chip referred to yesterday for Wi-Fi. COGS--"cost of goods sold" estimates discussed. Microsoft interjects that if actual costs are discussed, they would like the court cleared.

Feature comparison on 802.11 options. Newer Omni had twice the speed (MBPS) than the older version (newer version supporting 802.11n). Microsoft efforts to "take over the living room". Forbes article titled "Xbox is winning the living room war." This strategy was considered very important to Steve Ballmer, per that article. Tries to get witness to agree with Ballmer's comment. Hesitates as he is not in a position to gauge importance. Questioner asks if he has a basis for disagreeing with Ballmer. (Laughter.)

Exhibit on how Microsoft is expanding use of Xbox beyond gaming. Confidential matter to be discussed later.

Microsoft Redirect of DelCastillo:

Says that HD-DVD player was not a successful product.

Judge comments on his attempt to keep the public included as much as possible, but the courtroom is cleared for discussion of sealed document. It is close to break time anyhow.

“Civilians” leave the courtroom.

Break after closed discussion.

Microsoft's 8th Witness, Jerry Gibson:

EE Prof. at UCSD. Has taught elsewhere. Teaches on digital communications. Educational background details.

Exhibit 367 - curriculum vitae

Research on video and voice over wireless networks. Has written 300 papers and an undergraduate textbook. Active in IEEE. Received awards. IEEE Fellow.

Was asked to analyze patents in this case for 802.11, for workarounds for Motorola patents, and to assess importance. Demonstrative shown for his conclusions. Motorola patents cover a small portion of a limited set of functions in the standard. Workarounds were available to Motorola's patents. Concludes Motorola patents are of little or no value to the Xbox.

Discusses types of wireless communications, including AM/FM radio. Shows a wireless network graphic, from wired connection to wireless access point and devices that connect using Wi-Fi. Two huge binders contain a copy of the 802.11 standard. Big demonstrative on an easel showing elements of the standard, but does not contain all elements. Is the de facto standard for home use and use in businesses that offer Wi-Fi to customers. Standard is introduced as evidence, but counsel "will not burden the court with the large diagram."

Background on wireless proprietary products that led to the development of the 802.11 standard. Time-line on the versions of the standard. 1997 is when the standard was first published. Doc from IEEE Working Group web site on meetings. Over 130 meetings, over 30 task groups formed. Over 1,000 companies participated. Membership list reviewed -- people and companies. List of companies who participated in working groups. Discussion on what prior tech was incorporated into the standard.

There are some features that are optional in the standard. Says there is no way to objectively determine if a patent is essential, but he would estimate that 1000 patents are essential.

Discussion of Letters of Assurance. [About LOA's: I was not sure about these so did some research. LOA's can be either assurances that patent holders will not enforce patents for use within a specific standard, or it could assure RAND terms. Details are here.]

Over 100 companies submitted LOAs. Stated that Motorola patents reflect a small portion of the overall standard's function. Doc showing all Motorola patents he thinks are essential. Uses exhibits to avoid reading tons of patent numbers to be entered as evidence. [Yay!]

List of Motorola's patents he thinks are not used by Xbox. List of Motorola patents with expiration dates. Demonstrative on which Motorola patents are used in Xbox; analysis is very technical talk. Way too many acronyms. Motorola did not invent these technologies. Blow-by-blow detail on each patent [Zzzz...]. Most are not relevant to today's use in Xbox.

On to security patents. Motorola did not invent this technology. Little or no benefits to Xbox for these patents. There were acceptable alternatives to Motorola patents and those alternatives would not have resulted in lower functionality or performance.

Judge asked one of Motorola counsel to identify himself. Judge said he would be an asterisk otherwise. (I presume that means in the transcripts.)

Lunch

Microsoft Continues with Prof. Gibson:

Judge asks about what determines what patents apply to what tech within the standard. Counsel gives background that initial info on these patents came from Motorola (i.e., that Motorola provided documentation on which of their patents applied to what functions in the standard), and that Prof. Gibson is giving his analysis based on Motorola's documents.

Discussion on alternatives available to Motorola patents. Says that Motorola solution does not provide any benefit over the alternatives. Repeated this litany for 11 patents. Other 13 Motorola patents discussed. Rinse & repeat (i.e. continues to use the same litany that there are alternatives available, Motorola patents do not provide any benefit (sometimes he said “little or no benefit”) over alternatives). Says he only used materials that predate Motorola's patents in assessing alternatives.

Witness moves to large board showing elements of 802.11 standard. Physical layer specs, security sections, etc. States that Motorola has not patented any one entire area listed on that board. Demonstrative on his analysis on examples of third party LOA patents for security/encryption. Same for power management. Same for channel access/QOS. Patents read into evidence. Same discussion for data modulation. More patents into evidence. Same for LDPC and error control. Same for mesh networking and ad hoc networking. Same for fragmentation and aggregation. Did not do analysis on all LOA patents. Motorola patents cover less than one percent of the standard. 802.11 patent was about implementation not innovation. Motorola patents have little or no value to the Xbox and to Microsoft in general.

Motorola Cross-examination of Prof. Gibson:

Refers to deposition, saying he had not formed an opinion on Motorola patents being essential. He said he assumed going into his analysis that they were essential. Doesn't understand the question about having an opinion on third party standards been essential or not--responds that he was told to assume they are essential going in.

Asks about LOAs determining essential to standard or not. Wording in one specific Microsoft LOA says "might be or might become essential." There are 7 Microsoft patents that they assert are essential. The example Microsoft LOA contains a patent that ended up being not asserted as essential.

Break.

Motorola Cross Continues

Alternatives mentioned in testimony. Asked if he determined if his proposed alternatives would indeed work in the standard. Responded that that is not how alternatives work--that the committees would have had to work that out.

Asked if he showed that any alternatives presented were considered by the committee. Responded “no.”

Asked if he showed if any alternatives would have made the standards better or worse. Responded “no.”

Alternatives were not tested or simulated by the witness. Is there any evidence that Motorola patents were just chosen coincidentally? No.

His analysis did not determine if alternatives would cost more.

Active scanning vs. beacon concept. Waveband uses the beacon concept. Active scanning is a feature of the 802.11 standard. If one assumes that Motorola patent covers active scanning, then witness was incorrect that the patent provides no benefit. Witness agreed.

If router uses WPA2 security, then would Xbox need to use WPA2 security also? Witness agreed. Makes the point that without Xbox having security support, Xbox has less technical value in real-life situations. Uses personal example—asked witness about his home network. Witness uses CCMP security at home. Two benefits: prevents eavesdropping and stops others from accessing his network. [Motorola is obviously trying to make the point that most people would not consider using unsecured Wi-Fi at home, so most Xbox users would actually use 802.11 security, but this is never stated directly.]

Wi-Fi Alliance requires certification to have "Wi-Fi" shown on products. Microsoft puts that logo on the Xbox package consumers see. Xbox end-to-end security if used without Wi-Fi security would result in some Xbox data being sent in the clear. Discusses addition of IE to Xbox. Same issue that IE data can be sent in the clear if Wi-Fi security is not enabled. Asks if 802.11 security adds value to Xbox in this context? Witness agrees.

Motorola tries to enter a doc into evidence--is denied due to no foundation with witness. Judge gets a tad grumpy, but still tries to help counsel.

Discussion of Wi-Fi pass-phrase storage in flash memory. Witness does not know where it is stored in Xbox. Makes the connection that Wi-Fi is not just on the 802.11 chip--that storing the pass-phrase in flash memory means that Xbox itself is involved in making 802.11 work. 802.11n requires 802.11b and 802.11g to be compliant. Technical benefit for Xbox that if 802.11n speeds cannot be supported, device will drop to lower 802.11g or 802.11b speed. Peer-to-peer-- chart used earlier shows that peer-to-peer is not a value add for Xbox, but Xboxes can connect that way. Surface tablet does not have cable connection--must use 802.11 to connect. Witness said he cannot speak to that product.

No redirect.

Judge: How do you determine what is essential?

A: IEEE has a definition, but witness cannot quote it. Basis of most of the 802.11 standard is tech that is old and not patented.

Question on how alternatives are chosen.

A: Not a good vetting process for determining how essential. [New word “essentiality” used in court several times.]

Discussion of QOS for voice.

Microsoft Redirect of Prof. Gibson:

Xbox does not prioritize voice.

Motorola Recross of Prof. Gibson:

Xbox uses “best effort” for all packets.

Witness dismissed.

Judge:

Hours left: 6 for Microsoft 9 for Motorola.

Wants a chart for use of sealed exhibits.

Discussion of next witnesses.

Adjourn.

And here's our second reporter's report, with more details to follow over the weekend, so stop back by:
Brief impressions from today: Two witnesses Delcosteo GM of Xbox HW Team and Dr. Gibson Chair of EECS UC Santa Barbara.

Delcosteo's examination was on the value proposition of features that used either H264 or WiFi. On H.264, Xbox doesn't really use interlaced video; but on cross examination well, yeah it does in those places and yeah those places are valuable. There was an XBox used as a demonstrative which the judge reminded MS that the court gets to keep (not very useful given the lack of a power cord) but the lawyer "didn't bring extras for everyone."

As expected HD DVD was initially ignored as a thing, apparently the accessory was $199 -- "Not a successful product by any stretch" (presumably of the imagination). Interestingly in his testimony was the estimated cost of goods for the WiFi dongles, $14.97 was the projected cost of the 802.11n dongle that would cost the consumer $99. We didn't get the actual numbers as the courtroom was sealed for about 10 minutes to go over real COGs and future product plans (somehow I envision next xbox having 802.11 and bluray/H.264 support at a wild guess). For some reason he didn't want to contradict things Ballmer had said during a Forbes interview; can't imagine why not.

Professor Gibson's testimony was somewhat dreadfully boring as it involved building a wall of binders around him and showing slides of 802.11 related patents and yes there are alternatives and Motorola's patents have little or no value for each and every patent (I don't think I completely marked down which were little or no and which were just no value). Motorola's cross examination was mostly going through how some alternatives weren't equivalent and that Motorola's patents had technical value. Non broadcast SSIDs were a big thing regarding Active Scanning and as such AT&T Wavelan wasn't as good.

Xbox's vaunted end to end encryption shown not to encrypt everything (such as IE on Xbox's traffic) and as such 802.11 security had technical value.

In what seemed to be aimed at linking the non Wifi chipset parts of the Xbox to 802.11 where the passphrase was stored was an issue. Professor Gibson wasn't willing to commit to either the existence of flash memory in the xbox nor that the passphrase would be stored in it assuming the xbox had any.

The Motorola lawyer (Laurence Rogers is what I wrote down) tried to introduce some sealed testimony from the ITC as evidence, exhibit 502 by somebody named Coruma. This got shot down on the grounds that it needed to be introduced with a witness and Professor Gibson wasn't going to recognize it, so not questioning counsel's veracity but can't be brought in to evidence using Gibson. After maybe 30 seconds the judge suggested, "You can ask the witness to assume it" (namely that the passphrase is stored in flash storage on the Xbox) and if so then there would be 802.11 functionality on the Xbox outside of the Marvell chipset (Gibson didn't necessarily think storing a passphrase was really deserving of the name).

There were also some issues involving the use of two different uses of the word 'essential' as the Letters of Acceptance say something like 'these patents might be essential or might become essential' and there was an example of an MS xbox patent they weren't claiming to be essential currently. Motorola's attorney wasn't being very nice on the whole, but I wasn't sure if Gibson was being intentionally obtuse and not understanding questions, but it seemed like reasonably expected professor behavior not wanting to be misunderstood.

The judge asked some questions about differences between standards essential patents and patents that were fundamental to standards. Why weren't the alternatives to Motorola's patents adopted (because you choose something that works and move on).

Much more detail is in my semi-legible handwriting which I will try and decode into text over the weekend.

MS has about 6:40 left and Motorola 9:05 at this point according to Judge Robart's current estimate.

Judge Crabb Explains Dismissal of Apple v. Motorola

The Hon. Barbara Crabb, presiding over the now dismissed Apple v. Motorola litigation in Wisconsin has now issued her order explaining the dismissal. At the last minute, Apple filed a motion asking for several forms of relief, trying to avoid the dismissal, and all of them are denied. One issue remains however from Apple's 11th-hour motion: should the dismissal be with or without prejudice? Apple wants without prejudice, of course, because it still hasn't accepted what the rest of us can see and this judge references -- that Apple's legal attack on Motorola regarding FRAND and the relief it was asking for was too extreme. As Judge Crabb writes:

Moreover, Apple has not identified any case that would support an order of exclusion if Motorola were found to have breached its obligation to disclose patents to ETSI when it failed to disclose the ‘898 patent. In any event, the remedy that Apple is seeking (an order of unenforceability) is so far out of proportion to any harm that Apple has suffered or is likely to suffer in the future that it is unlikely that any court would impose such an order. This is an example of what Judge Posner noted in the Illinois case: the requested injunctive relief “would impose costs disproportionate to the harm to the patentee” Apple Inc. v. Motorola Mobility, 2012 WL 2362630, *1 (June 7, 2012).
The parties are briefing the matter, and Motorola's brief is available. If I were Apple, I wouldn't set my heart on this. This judge has figured out the game here, and the FRAND theories and demands from Apple have fallen to the ground pretty decisively. This is now at least the third courtroom that has told Apple that it's gone overboard. When will the executives rein in the legal team?

Here are the filings in Apple v. Motorola in Wisconsin:

502 - Filed & Entered: 11/08/2012
Order on Motion for Miscellaneous Relief
Docket Text: ** TEXT ONLY ORDER ** ORDER granting [501] Motion for Leave to Respond re [499] Memorandum regarding the court's jurisdiction and the nature of any dismissal. Signed by District Judge Barbara B. Crabb on 11/8/2012. (lak)

503 - Filed & Entered: 11/08/2012
Order on Motion for Reconsideration
Docket Text: ORDER denying as moot [488] Motion for Reconsideration; denying as moot [489] Motion to Exclude Motorola's Newly Disclosed FRAND Theories; denying as moot [491] Motion to Enforce Summary Judgment Order Determination that ETSI's IPR Policy Unambiguously Requires Pre-Adopotion Disclosure Where a Party Submits a Technical Proposal. This case is DISMISSED. The court will decide whether dismissal is with or without prejudice after the parties have completed briefing on the issue. Signed by District Judge Barbara B. Crabb on 11/8/2012. (arw)

Filed & Entered: 11/13/2012
Dummy Motion
Docket Text: Dismissal with or without Prejudice. (arw)

504 - Filed & Entered: 11/14/2012
Response to Order
Docket Text: Response re: [502] Order on Motion for Miscellaneous Relief Motorola's Response to Apple's Bench Memorandum regarding the Court's Jurisdiction and the Nature of Any Dismissal by Defendant Motorola Mobility, Inc.. (Swedlow, Stephen)

And here's Judge Crabb's order, as text -- the only change I've made is adding links to filings and orders that she references, all PDFs, except for the four that are sealed and one, dkt. #500, which is a transcript that is not yet publicly available:

IN THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF WISCONSIN

------------------------------

APPLE INC.,

Plaintiff, v.

MOTOROLA MOBILITY, INC.,

Defendant.

__________

OPINION AND ORDER

11-cv-178-bbc

--------------------

In a statement from the bench on November 5, 2012, following a hearing with the parties, I advised them in general terms why I was dismissing plaintiff Apple Inc.’s remaining claims against defendant Motorola Mobility, Inc. This order is intended to explain in more detail why I have determined that Apple’s claims for relief in the form of nominal damages, specific performance and declaratory judgment cannot succeed. Apple has not shown either that it has a right to the relief that it is seeking or because that the discretionary relief it requests would have any practical effect.

Some background may be helpful to non-parties’ understanding of the dispute and the reasons for its dismissal. Apple and Motorola are competitors in the wireless communications industry. Motorola owns a number of patents that it has declared to be patents essential to various technological standards set by international standard setting organizations relevant to wireless communication devices. The standard setting

1

organizations consist of technology representatives from companies interested in determining standards for a particular aspect of technology; their purpose is to agree on common technological standards to enable all compliant products to work together. Often the agreed upon standard will cover technology that is the subject of a patent; in that case, the patent becomes an “essential patent.” The standard setting organizations have developed policies for this situation in an effort to prevent patent holders from abusing the market power that flows from owning technology that has become a standard. They encourage members to make known to the organization patents essential to a proposed standard and to agree to license those patents on fair, reasonable and non-discriminatory terms to anyone who asks for a license. (Such terms are referred to in the industry as “FRAND” terms.) Motorola has many patents in the cellular communication industry, some of which it has disclosed to various standard setting organizations. It has assured the organizations that these patents will be made available to competitors under “reasonable terms and conditions that are demonstrably free of any unfair discrimination.”

This suit began as part of an infringement action that Motorola filed against Apple in the International Trade Commission. After the case had been pending for a few months, Apple filed counterclaims against Motorola and removed the counterclaims to this court on March 11, 2011. It sought preliminary injunctive relief against Motorola; that motion was denied. Dkt. #85 . Motorola sought dismissal of the action; that motion was denied as well, with one inconsequential exception. Dkt. #93. On September 16, 2011, Apple filed an amended complaint, alleging ten claims for relief, dkt. #110, all variants of its primary

2

claims that Motorola was bound by its contracts with these standard setting organizations. Under those contracts, it had an obligation both to disclose to the organizations any patents it owned that would be covered by standards adopted by the organizations and to offer licenses to those patents to competitors under terms that were fair, reasonable and non- discriminatory. Apple contended that it was a third party beneficiary of these contracts and thus entitled to damages for Motorola’s breach of contract and inequitable conduct; specific performance of Motorola’s contractual commitment to license its standards-essential patents on FRAND terms; and declaratory relief, specifically, judgments declaring that Motorola had breached its contracts, that the terms it had offered Apple to license patents were not FRAND terms and that Motorola was not entitled to seek injunctive relief preventing Apple from practicing certain standards. Apple alleged other claims on which it sought injunctive relief and damages but those claims were dismissed earlier and are no longer before the court.

In deciding the parties’ cross motions for summary judgment, I found in favor of Apple on its claims that it was a third party beneficiary of the contracts between Motorola and the standards setting organizations, that the contracts bound Motorola to disclose its intellectual property rights in a timely manner and that Motorola had failed to make the disclosures before the adoption of the standards incorporating its patents. Order, dkt. #194, at 3. I found also that Motorola had failed to show that Apple’s breach of contract or estoppel claims should be dismissed for Apple’s failure to prove that it had suffered any compensable damages. Id.

On September 24, 2012, Apple dropped its claim for money damages on any

3

remaining claims, asking only for nominal damages of less than $20. With only its claims for specific performance and declaratory relief remaining, it requested a court trial. Dkt. #255. The request was granted.

In preparation for a November 5, 2012 trial, the parties filed motions in limine that revealed considerable disagreement about the scope of the trial. Apple anticipated that the trial would result in a determination of a specific rate or range that would qualify as a fair, reasonable and non-discriminatory rate for a license to Motorola’s essential patents and an order requiring Motorola to offer that license. Motorola argued for a determination limited to the question whether its initial royalty offer of 2.25% was fair, reasonable and non- discriminatory and whether it had failed to negotiate in good faith. It pointed out that a victory for Apple would mean nothing more than nominal damages and possibly an order from the court to negotiate a license. At the time, Motorola’s argument did not seem persuasive. It appeared possible that specific performance would be an appropriate remedy if Apple proved that Motorola had breached its contracts with the standard setting organizations. I anticipated that the court would decide, first, whether Motorola had breached its contractual obligation by failing to offer a fair, reasonable and non- discriminatory rate for a license, which would require determining just what such rate would be or at least what the proper range of such a rate would be, and second, whether Motorola should be required to license its patents to Apple on those terms.

An order to this effect issued on October 29, 2012. The next day, Motorola moved for clarification, arguing that if the court determined a fair, reasonable and non-

4

discriminatory rate, Apple should be required to accept a license to Motorola’s essential patents and pay the license fee for all accused devices. Dkt. #444. Apple responded on October 31, making clear its opposition to the suggestion that it agree to be bound by any rate determined by the court. Apple’s Br., dkt. #448, at 1 (“Motorola’s commitment to standard-setting organizations to offer a FRAND rate does not bind Apple to write a blank check and accept that offer.”) Although Apple wanted the court to determine a fair, reasonable and non-discriminatory rate that Motorola must offer to Apple, it maintained that Motorola had never asked the court for an order requiring Apple to accept this rate. Rather, Apple argued, the case had always focused on Motorola’s obligation to offer a fair, reasonable and non-discriminatory license to Apple. Id. at 4. It added, however, that it would be willing to pay a rate of no more than $1 for each Apple device going forward, while it retained the right to appeal any award higher than $1, as well as to refuse any such rate and proceed to further infringement litigation. Id. at 5.

Perhaps it should have been evident earlier in the case that Apple was seeking only a ceiling on the potential license rate that it could use for negotiating purposes, but it was not. This became clear only when Apple informed the court in its October 31 response that it did not intend to be bound by any rate that the court determined. This meant that the court would determine what it believed to be a fair, reasonable and non-discriminatory rate for a license with Motorola, but Apple would pay that rate only if it was the rate Apple wanted. Even then, it was only volunteering to pay the rate. If Apple succeeded in showing that a breach occurred but did not win the rate it wanted, it could walk away, leaving

5

Motorola without a mechanism for obtaining compensation from Apple for the use of its patents except by filing infringement suits. The court would be resolving all of the issues raised in this case without necessarily bringing the parties any closer to a license agreement. In effect, Apple was asking the court to assist it in negotiating, not in putting the parties’ dispute to rest.

At the final pretrial conference on November 1, 2012, I advised the parties that it was doubtful whether the case would proceed to trial on November 5, as scheduled, because of the court’s uncertainty over the propriety of engaging in the complex task of determining a FRAND rate if the end result would not resolve the parties’ disputes over licensing and infringement. In an order entered the next day, November 2, I elaborated on these questions, asking in effect whether the relief sought by Apple would actually resolve any dispute between the parties. The parties were given until Sunday to file briefs in response, with a hearing to follow on Monday morning and the trial continued until 1:00 p.m.

Apple came back with three suggestions: First, the trial could proceed as previously scheduled and on the same terms as the court had determined in the order deciding the motions in limine. Second, the trial could go forward as scheduled on the understanding that the court would determine a FRAND rate under a method the court would construct for determining patent value and both parties would agree that the method would be binding on them. In other words, Motorola would have to agree that any valuation method the court determined would apply to Motorola’s and Apple’s patents. Presumably, it would follow that Apple would be entitled to credit or compensation on the license fee for this value

6

because Motorola would be gaining a cross-license to Apple’s patents. Third, if Motorola would not agree to be bound by a valuation method adopted by the court, the trial would be continued for six to nine months to allow the development of a record as to both parties’ essential patents so that the court could determine in one proceeding what the FRAND rate would be, with both parties agreeing to be bound by the court’s determination. Apple’s Resp., dkt. #497, at 2-3. Apple told the court that if it adopted this third proposal and agreed to determine the value of Apple’s patents as well as Motorola’s, Apple would agree to be bound by the determination. Id.

The parties discussed these options at the Monday hearing. As for option one, Apple made no persuasive arguments about why the case should proceed under its original conception of the trial, with the court determining a non-binding FRAND rate for Motorola’s standard-essential patents. With respect to its breach of contract claim, the only relief to which Apple would be entitled if it prevailed would be damages, which it has foresworn, or specific performance, which it has not shown is warranted in these circumstances. As I explained in the November 2 order, not only has Apple failed to show that it can satisfy the four-factor test for equitable relief set forth in eBay Inc. v. MercExchange, L.L.C., 547 U.S. 388, 391 (2006), it makes no sense for Apple to ask for this relief when it is obvious that there can be no real performance by either side until all of the terms of the contract are negotiated.

Apple argued at the hearing that the trial could proceed under option one because it is asking the court simply to order specific performance that would “complete the circle” of

7

the contract that Motorola entered into with the standard setting organizations. However, Apple has not cited any authority for this proposition and it has never explained why an order that did no more than “complete a circle” would justify an order of specific performance.

Additionally, Apple has made the argument that the trial should proceed under option one on its breach of contract claims because it is entitled to nominal damages, but it has not cited a case in which a court allowed a party to proceed to trial on a claim for nominal damages. The cases it has cited all arose in situations in which the party seeking damages had failed to prove damages at trial or the court had concluded that the determination of damages was too difficult. Olympia Hotels Corp. v. Johnson Wax Development Corp., 908 F.2d 1363, 1372 (7th Cir. 1990); Felton v. Teel Plastics, 724 F. Supp. 2d 941, 954 (W.D. Wis. 2010). The fact is that the request for nominal damages in this case is just another way of asking for declaratory relief and, as explained in the November 1, 2012 order, dkt. #487, it is improper to order declaratory relief when it would have no practical effect.

Apple attempted to address the problems with option one through its two new proposals. Under option two, the trial would go forward as scheduled with the court determining a method for valuing each party’s standards essential patents and assessing a fair, reasonable and non-discriminatory rate for a license or an offer of one. Motorola expressed strong resistance to option two, making the obvious objection that the question of the value of Apple’s patents had never come up before because Motorola had never asserted a claim involving these patents. Therefore, Apple was asking the court to construct

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a method for determining the value of both parties’ patents to each other, except that the court would not know anything about Apple’s patents. Not only was Apple expecting the court to create an evaluation method without all of the information it needed, but it was asking the court to create a one-size-fits-all-evaluation method that might bind other patent holders who have nothing in common with either Apple or Motorola.

In response, Apple argued that a patent-by-patent analysis of all of the standard- essential patents was not necessary to because the court could rely on a “percentage of intellectual property rights” approach. Each party would identify the number of patents it has declared to be essential to the relevant standards. The court would then compute a percentage derived from the number of the party’s own patents to the number that have been declared essential and apply that percentage to the cost of the chip or to the board, depending on which part the court determined was the smallest saleable unit that used the technology providing all the cellular functionality covered by the patents.

Alternatively, Apple argued, the court could determine a FRAND rate by looking at the licensor’s own licensing history, but it acknowledged that this approach would not carry over to a determination of a FRAND rate for any other patent holder’s portfolio. As a third alternative, it suggested that the court could rely simply on Motorola’s history with a Chinese company to which it had licensed its technology in the past. Again, this alternative would not assist the court in deciding the value of Apple’s own patents. As Motorola noted, the proposals are a good illustration of the idiosyncratic variances of negotiations over patent valuation. Hrg. trans., dkt. #500, at 21-22.

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From the arguments that Apple made, it is not realistic to think that a court could construct a “method” into which the parties could insert numbers to produce a fair valuation of a company’s patent portfolio in a given area of technology. It is no more realistic to think that this court could arrive at a fair valuation of the Apple patents simply by applying the percentage of intellectual property rights approach that Apple has suggested. Each proposal exposes more of the difficulties inherent in trying to pick a particular monetary rate for an agreement as complex as a licencing fee for rapidly changing technology. Apple has not explained how it is possible to determine a rate without knowing the answers to such questions as how a cross-license to the other party’s patents may affect that rate or what the scope of the license is (a worldwide license will be more valuable than a license to sell in only one country or only a few countries); what guarantees are incorporated into the agreement; the length of the agreement; or the frequency of payments. In effect, Apple is asking the court to assess one part of a complex contract that has yet to be negotiated.

This leaves option three, which was Apple’s request to continue the trial for six to nine months. Even if option three were adopted and the trial were continued to allow the parties to litigate the value of Apple’s patents, the trial would not resolve all of the matters that have to be considered before the parties can agree upon a license fee. There is no guarantee that the parties will complete the negotiation and actually enter into a licensing agreement under which Apple will pay Motorola for the use of its technology. In these circumstances, I am not persuaded that the case should proceed.

Apple asserted claims for declaratory relief for Motorola’s violation of its disclosure

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obligations to the standard setting organization ETSI and engaged in patent misuse, but it has not explained why monetary damages would be inadequate relief if Motorola were to sue it for infringement and seek an exclusionary order against it in the future. Certainly there is no need to address Apple’s claim for declaratory relief as it relates to Motorola’s ‘898 patent. There is no likelihood that Motorola will (or can) sue Apple on the ‘898 patent after Judge Posner dismissed Motorola’s claims with prejudice when Motorola was unable to prove the damages it alleged had been caused by Apple. Of course, it is possible that this ruling will be overturned on appeal, but until it is, Motorola cannot maintain a suit against Apple based on the ‘898 patent. If the ruling is overturned and the issue is remanded to the court in Illinois, Apple and Motorola can litigate the matter there.

Moreover, Apple has not identified any case that would support an order of exclusion if Motorola were found to have breached its obligation to disclose patents to ETSI when it failed to disclose the ‘898 patent. In any event, the remedy that Apple is seeking (an order of unenforceability) is so far out of proportion to any harm that Apple has suffered or is likely to suffer in the future that it is unlikely that any court would impose such an order. This is an example of what Judge Posner noted in the Illinois case: the requested injunctive relief “would impose costs disproportionate to the harm to the patentee” Apple Inc. v. Motorola Mobility, 2012 WL 2362630, *1 (June 7, 2012).

Apple has asked that if the case is dismissed it be without prejudice. A decision on that question will be made once the parties have completed the briefing.

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At the November 5 hearing, Motorola suggested that the parties engage in binding arbitration to resolve their dispute. If the parties really wish to resolve this licensing dispute, this is the obvious solution. It would have many advantages to the parties. It would be conducted in private; the parties would not be bound by their pleadings; they would be able to negotiate any and all of the many aspects of their licensing agreement on which they disagree; and they would finish the process with an agreement that would determine once and for all what amount of licensing fees Apple is required to pay Motorola. In the end, this seems to be the best way, if not the only way, for the parties to negotiate a rate that takes into account the many elements of a licensing fee that are not part of this case but are critical to the determination of a fair, reasonable and non-discriminatory rate.

ORDER

IT IS ORDERED that

1. Plaintiff Apple’s motion, dkt. #488, for reconsideration of the denial of its motion in limine to preclude defendant Motorola from introducing evidence that it was entitled to seek injunctions and exclusion orders to enforce its declared standards-essential patents and that doing so was not a violation of its obligations to the standard setting organizations and its motion to exclude Motorola’s newly disclosed FRAND theories, dkt. #489, are DENIED as moot;

2. Apple’s claim for declaratory relief is DENIED.

3. Apple’s motion to enforce the court’s determination at summary judgment that

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ETSI’s intellectual property rights policy unambiguously requires pre-adoption disclosure where a party submits a technical proposal, dkt. #491, is DENIED as moot; and

4. This case is DISMISSED.

5. The court will decide whether the dismissal is with or without prejudice after the parties have completed briefing on the issue.

Entered this 8th day of November, 2012.

BY THE COURT:

/s/
BARBARA B. CRABB
District Judge

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