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Microsoft v. Motorola Trial in Seattle, Day 4 - Motorola's Opening Statement ~pj Updated
Saturday, November 17 2012 @ 02:47 AM EST

Our reporters were in the courtroom again Friday at the Microsoft v. Motorola trial in US District Court in Seattle, trying to figure out what Microsoft should pay Motorola for its FRAND patents.

Today was the day Motorola presented its opening statement. It had asked to do it as it began its side's presentation. Microsoft has presented, including today, 10 witnesses. Today, Motorola began its side of the story. Phil Dawson summarizes Motorola's opening statement like this:

Microsoft wants low pool rates based on multilateral ex ante negotiations. This does not reflect real-world negotiations. This model does not consider the strength of Motorola's contributions. Other important patent holders rejected the MPEG LA pool. Motorola seeks to simulate a real-world negotiation that would have happened. Motorola will compare the strength of their patents vs. Microsoft patents. Multiple witnesses from multiple companies will attest to how bilateral negotiations would work.


Here is Phil Dawson's report:

Judge James Robart - Room 14106 - Friday, 11/16/12 - Day 4

Issue of Sealing Documents:

Discussion of letter from Motorola. Judge uses “3 blind men and an elephant” metaphor about how they are feeling their way around the problem of what to do with sealed evidence and each is feeling a different thing. Judge sees it as Motorola's problem. It is some of the most important evidence though. Judge accepts new and improved redacted materials. Court will continue to not display confidential docs on the large courtroom screen, and companies can remain unnamed, but judge says that company names matter as to context. Deals with smaller companies do not fairly compare to deals with companies like IBM, Google, Apple, etc. Judge will consider an appeal advisory before he publishes.

Motorola replies to judge's comments. Counsel makes a remark about how he feels like he is "in the lions' den." Judge says he's glad he did not call it a zoo. (Chuckles in court.) No witnesses today that will discuss sealed matters. Judge says he will allow avoiding naming company names--using "numbered exhibits".

Counsels can still appeal to Federal Circuit about matters the judge intends to publish in his ruling.

Motorola counsel said they would expedite that request to speed things up for the judge.

Judge said that expediting may not matter because it will take him until at least springtime before his decision is published.

Prospect of separately sealed portion on Tuesday is discussed. Judge says this is not needed.

Microsoft says issue is comparability--will need to discuss specific products to determine that.

Motorola asks if materials can be kept out of the record. Short answer is once submitted, it's in the record. Don't submit it if you don't want it in the record.

Microsoft's 9th Witness, Prof. Timothy Simcoe:

C.V. submitted. Asst. Prof at Boston University. His focus is on standards-setting organizations (SSOs). Published many articles. SSOs have an interest in wide implementations and would like to avoid hold-ups and stacking.

Refers to Gibson testimony from yesterday. Companies have people work on committees to determine how to get standards to work. Those people may not know (usually do not know) what patents are involved. Patents are considered essential even if they only cover a small portion of the standard. Patents cannot be considered essential prior to the standard being published. There is no mandatory search process to find patents that may relate to the standard.

LOAs are requested as much in advance as possible to assure patents used in standards will be available under RAND terms. Pools require at least one essential patent for patent owner to join the pool. Pools usually hire independent experts to determine if given patents are essential.

Discussed difference between the MPEG engineering group and the MPEG LA pool group. Exhibit on eligibility for joining the pool. Patents must be available "without undue constraints."

FTC notice on SSOs discussed; it mentions RAND commitment. Motorola interjects that the phrase quoted said "will attempt..." to get to RAND terms, not a hard requirement.

Exhibit showing earlier statement made by Motorola about stacking, saying it can make pricing prohibitive. That doc proposes "aggregated reasonable terms" and proportionality. These are not new principles—they were clarifications of existing RAND rules.

IEEE operations manual discussed, which says patents should be made available at "nominal competitive cost."

Background on some patents Motorola acquired. Motorola LOAs and blanket LOA from Motorola on 802.11 patents discussed. More Motorola LOAs admitted into evidence. Collective License Agreements (CLAs) are synonymous with patent pools. Docs on other CLA proposals in which Motorola participated. Motorola said pool terms are comparable with their earlier proposal. Reviewed Motorola statement of terms about the need to strike a balance, reflecting that licensors can also be licensees. But Motorola has also criticized pools as keeping rates too low so as to avoid antitrust issues. Antitrust agencies have reviewed modern patent pools—mentions a review by DOJ. Witness says that patents considered essential are "complementary inputs." Antitrust rules do not require pools to charge low rates. Discussion of pricing structure of pools--caps, volume discounts, etc., and different prices for "field of use." Firms benefit even if no royalties are collected when standards allow wider product adoption and increased sales. Allows other products to inter-operate. A company's decision to not join a pool does not necessarily imply that their patents are more valuable.

Motorola Cross-examination of Simcoe:

Witness is here as an expert on economics and SSOs. He has never negotiated a RAND license or a patent license. He has never testified in a patent case. No opinion on Georgia-Pacific case. Asks if witness's views are not the views of IEEE or ITU. Witness says his opinions are based on his experience which includes discussions with members of those SSOs. Counsel refers to deposition to reinforce the answer that his opinions are not based on any SSO member's writings. Refers to deposition, which states it is his interpretation, not knowledge of how SSOs interpret RAND.

Does not have an opinion on whether or not the VIA pool is an appropriate benchmark of good RAND terms. Does not have an opinion on whether or not Motorola licenses constitute hold-up, but responds that licenses made after the standard is set have a potential to cause hold-up.

FRAND and RAND are interchangeable terms. Tries to get witness to admit he cannot define what RAND means. Refers to a blog entry from witness that states no one knows what the FR in FRAND means. Witness explains his comments were made to provoke a discussion. Further blog statement that the FR part of FRAND is mainly there to absolve SSOs from antitrust concerns. Counsel refers to published paper, with witness' statement that RAND and FRAND are unclear--that all it means is a commitment to negotiate, and this will not prevent hold-up and stacking.

Counsel refers to a peer-reviewed paper witness authored stating RAND is not a solution to assuring reasonable prices. Witness says that he speaks to a consensus of opinion of what RAND is. Counsel refers to witness' comments made to FTC saying it is not clear that a RAND promise makes any commitment to licensees. Refers to another witness comment that SSOs fear antitrust concerns. RAND terms leave licensors with considerable leeway to pursue aggressive pricing strategies. IEEE and ITU do not specify how to set RAND--and do not use an incremental value approach. Pools do not use incremental value approach.

Microsoft interjects to introduce other lawyers not named earlier.

Break.

Motorola continues:

RAND can be negotiated in many ways. Counsel asks if it is true that witness has no examples of royalty stacking or hold-up in any industries. Witness states that is true, but it is hard to know as these agreements are secret. SSOs are worried about antitrust concerns if all negotiations are ex ante. Refers to earlier exhibit with Motorola statements regarding RAND.

Clarifications were requested of ITSE, but those suggestions were rejected. Counsel suggests that witness cannot assess the quality of VIA or MPEG LA pools as a benchmark. Witness agrees that a price higher than the pool rate can still be RAND.

Witness has not done any work to count patents in this case. Witness believes that pools use patent counting as a pragmatic solution. Asks about SSOs determining reasonableness of licenses. Witness says they do not. Refers to paper authored by witness that became a book chapter. Backs up earlier statements that SSOs assume FRAND if agreements are reached.

Microsoft Redirect of Simcoe:

Refers back to Motorola doc to ITSE. Says they are signaling to judges that FRAND terms must be reasonable.

Motorola recross:

To that same doc, mentions again that those proposals to ITSE were not adopted.

Microsoft's 10th Witness, Dr. Matthew Lynde (pronounced "lined"):

CV submitted. Educational background. Works for Cornerstone Research. Specializes in IP disputes. Has testified in court and is an expert in IP valuation. Demonstrative on value of Motorola patents, showing 0.2 cents per unit for H.264, and 5 to 6 cents per unit for 802.11. Was done in cents per unit form because that is what pools use. Percentage basis does not work as well due to multiple-component nature of some products.

Exhibit on Motorola patents; 63 world-wide patents, 16 in U.S. Microsoft has 3 times as many world-wide and 64 in the U.S. Used MPEG LA as best benchmark. Was ex ante, multilateral negotiation. Says this is the best available objective evidence.

Defines ex ante and ex post at the judge's request.

Admits exhibit, list of patents in MPEG LA pool. Mentions many pool companies that obtain most or all of their revenue from IP licensing. Discussions of attraction of the pool and the need to balance revenue vs. adoption--that the standard may not be successful if it is too costly to adopt. Specific member companies mentioned, including Apple.

Comment from witness about Apple being THE technology company. Microsoft counsel suggests their client may not agree. (Laughter in court.)

Testifies about Motorola participation in pool discussions and that Motorola did not argue for higher royalties and did not argue that their patents should be valued higher. Refers to internal Motorola doc on pool participation that says rates are reasonable.

Google is licensee of H.264 pool, and adds that Google is now Motorola's parent company. Refers to Google's own license for MPEG LA pool. Presumes terms are FRAND. Corroborates that terms are reasonable.

Witness says there is no pool that contains all relevant patents for one standard. Exhibit of patents submitted in LOAs that are not in the MPEG LA pool.

Discusses blanket LOAs from major tech companies. Analyzed rates Google would pay to Motorola if MPEG LA pool rates were used--just under 0.2 cents per unit. Rate would be lower if other non-pool patents were added to the pool. Rate would be just over 0.2 cents if pool rates were raised by 10%. Says pool rates have not been raised though. Rates would be just over 0.06 cents based on Google grant-back provision. Defines grant-back provision.

Motorola objects to question about Motorola and Google on licensing agreement. Sustained.

Calculations in pool accounts for patent expirations. Exhibit of Motorola 802.11 patents they put forth as essential; 263 world-wide, 64 in U.S. Mentions VIA 802.11 pool, smaller than MPEG LA pool. This pool was created more ex post than ex ante; would tend to push the rates up. Summary of patents in 802.11 excluding VIA, Motorola, and Microsoft patents. Thousands of patents involved. 90 companies with blanket disclosures. Graph shown of declared essential patents for 802.11.

Judge asks about weighting on prior exhibit. Witness mentions that geography plays a role in that patents in the U.S. get higher weighting.

Lunch.

Microsoft resumes with Dr. Lynde:

Explains how royalties are distributed in pools. This is done by patent count but weighted by geography. I.e., U.S. patents get more weight. Explains how he modified his VIA pool analysis; it was adjusted to account for the low participation. Explains that his assumptions are favorable to Motorola. Calculations presented of Motorola RAND royalties using his assumptions. Mentions some Motorola patents will expire in 2013 & 2014. France Telecomm has dropped out of the VIA pool, but this would not affect his calculations. Further explanations of why he thinks his calculations are reasonable. Marvell charges $3-$4 for their Wi-Fi chip.

Explains difference between device-level cost vs. chip-level costs. Mentions ASIC chips. Motorola objects as no foundation laid. Microsoft adds foundation. Objection removed.

Discussion of ARM holdings. Earnings on a per unit basis is 5 to 9 cents for ARM patent licenses. Asserts that 5 to 6 cents would be an upper limit on what a Motorola RAND rate should be for 802.11.

Looked at internal Motorola assessment of licensing fees. Doc was from 2003, which was when Wi-Fi was taking off. Motorola had assumed royalty rate of 0.1% of retail sales cost. Intecap--consulting firm used to assess value of IP. Doc discusses stacking, that there were 50 companies involved (more are involved now). Motorola had used this lower rate structure in at least one negotiation with Gateway, suggesting 0.1% rate. Suggests that this rate is too high as it assumed that Motorola owned 25% of all of the IP in 802.11, which is overly generous to Motorola. Discussion of hold-up; refers to doc stating a “bullet analogy”--in that all it takes is one key patent to cause hold-up.

Motorola Cross-examination of Dr. Lynde:

Judge makes a remark about the Lorax—the Dr. Seuss character that "speaks for the trees," who would not be happy at all of the paper being used. (There are MANY binders on the witness stand.)

Says witness is not an expert in SSOs. Has testified many times, but not on SSOs. Witness has never negotiated a RAND contract or patent license. Refers to Microsoft letter to FTC. Witness did not speak to Microsoft execs who signed the letter. Letter was sent after the suit was filed. Letter states there is little evidence that patent hold-up is a problem today.

Witness rebuts that many people feel there is a big potential for problems. Details about Microsoft doc about bilateral discussions for licenses. Witness analysis did not include any current Motorola actual licenses.

Discusses deposition that stated hold-up and stacking are not an issue. Exhibit of article by Damien (missed the last name) that states there can be a discount with cross-licenses. Details about patent pool analysis. Another paper exhibited, states that companies with stronger patents are less likely to join pools.

Witness asked if pools favor companies with large numbers of minor patents. Not always--there are other factors to consider.

Witness asked if RAND agreements can include negotiating cost. Yes. Counsel tries to say that his comparison to pool costs is invalid because it does not account for costs of the negotiations. Agrees that no one can or should be forced to join a pool.

Witness has not heard of complaints from IBM or Nokia about their Motorola licenses, but states he has no info on those licenses. Reads statement from deposition that witness did not ask Microsoft about why it did not join the VIA pool. Microsoft interjects that the statement from deposition is out of context -- reads following statement.

Reviews Microsoft doc saying that Microsoft prefers to enter into bilateral negotiations.

Counsel compares Microsoft not joining VIA pool to Motorola not joining MPEG LA pool.

Discussion of smallest salable unit (SSU). Too long of a discussion about whether or not the chip is the SSU. Wrestles with economic vs. tech/legal definition of SSU that practices the “full 802.11 function.” [I'm sure the point that Motorola was trying make is that the Marvell chip acting alone cannot do all of the functions of 802.11 in the Xbox—because of the earlier testimony that the Wi-Fi pass-phrase is stored in the Xbox's flash memory.]

Back to ARM reference; witness did not look at any ARM license agreement and it is not submitted in evidence. Witness did not determine restrictions in those licenses. Discussion about restrictions making it a less valuable license. Microsoft interjects that deposition quoted was out of context, and read the rest of his comment read about the ARM license. Reference to Intecap analysis, that witness did not assess strength of patents, and many patents in litigation were not included in the Intecap doc. Witness agrees that there is a range of rates that would be considered RAND.

RAND is not part of the calculation of damages considered in patent damages litigation. “Entire market value” rule is used in patent damages cases. In the real world it can be difficult to audit license compliance. Agrees that unit product cost is used often in license agreements.

Counsel ask if witness' analysis considered the extent to which Microsoft products use the function Motorola patents provide. No. Agrees it is possible to have a RAND license based on product prices. Further states that you risk having license issues if you don't use SSU. Counsel refers to IEEE doc that mentions product price as being a basis for royalties. Counsel refers to previous testimony witness gave on a separate case that said product price basis is commonly used.

[Comment: This was a very obtuse witness. Counsel asked numerous straightforward questions requiring a “yes/no” answer that witness would answer with a long exposition. When pressed by counsel for a “yes/no” answer, witness sometimes stated: “I think it was an accurate answer.”]

Break

Microsoft redirect of Dr. Lynde:

Refers to Intecap analysis and the fact that many licenses were not referenced. Mentions assumption of Motorola owning 25% of patents for 802.11. Says that inflated his compensation estimates for Motorola. Witness states that if everyone asked for the 2.25% product cost rate that Motorola asked for, he thinks that would result in hold-up.

Motorola no further questions.

Microsoft asks about number of witnesses and time left. Motorola says they will have to curtail witnesses but cannot say which ones will or will not testify. Judge suggests that Motorola tell Microsoft by 4:30 pm on Saturday. Judge says that if Motorola knows a witness is out, they will tell Microsoft ASAP.

Motorola opening statement:

Microsoft wants low pool rates based on multilateral ex ante negotiations. This does not reflect real-world negotiations. This model does not consider strength of Motorola's contributions. Other important patent holders rejected the MPEG LA pool. Motorola seeks to simulate a real-world negotiation that would have happened. Motorola will compare the strength of their patents vs. Microsoft patents. Multiple witnesses from multiple companies will attest to how bilateral negotiations would work.

Judge comments that he can't consider potential cross-licenses.

Motorola's First Witness, Ajay Luthra:

Education background. Works for Motorola. Advanced technology manager supporting digital video processing. Involved in MPEG standards setting. Was H.264 co-chair.

List of H.264 Motorola patents. Is inventor of some of their patents. Paper on H.264 he authored. Refers to Microsoft testimony on early version of H.264 standard and says that interlaced coding tech is not included. Motorola was interested in interlaced because they supported satellite TV products that needed interlaced support. Presented proposals at MPEG conference. Interlaced remains ubiquitous in TV media.

Describes benefit of using interlaced, including coding efficiencies, keeping video in its native coding format. Refers to development time-line of H.264 used earlier. Agrees that some compression efficiencies were made before Motorola's involvement, but their input did create additional efficiencies.

Gave details on proving they made coding efficiencies. Reviewed paper he coauthored, showing H.264 “L” version was not better than the current standard and that further efficiencies can be made. Next paper mentions interlaced coding tools.

Tech details on vector motion prediction, which Motorola has patent on. Another patent discussed. Details on coding efficiencies. Document on testing of compression of interlaced.

Another doc he coauthored reviewed. VCEG test results says it needed more work.

Motorola worked on PICAFF and MBAFF improvements. Large board exhibit presented on macroblock adaptive coding. [Tons of acronyms!] More graphs. Another paper he coauthored. Another paper, this one submitted by Sony, recommending Motorola proposal be adopted. Showed 11-18% improvements. Motorola patented this technique.

Another JVT doc he coauthored. Tech details, including 20-30% bit rate savings. JVT adopted Motorola improvement; patent granted. Motorola scan patents. Another JVT proposal. 7% bit rate savings. Samsung doc showing higher bit rate savings and recommending adoption of Motorola proposal. Also same for Sony doc. Motorola scan proposal adopted in 2004. Two patents on this. Sony proposed alternate scan solution. JVT doc he coauthored discussed the alternative Sony option but showed that Sony's option needed larger gains in efficiency.

Witness finished.

Third parties wanted to speak. Judge demurs.

Judge on schedule. Time remaining to Microsoft 4+ hours, Motorola 5+ hours. Court would also like to know witnesses remaining when they are determined (referring to the earlier Saturday afternoon deadline he set).

Judge sets meeting at 8:45 am on Monday to cover third party issues.

Judge is asked if third parties are allowed to to make submissions. Judge says they are welcome.

Our second reporter will send notes in more detail over the weekend, but he shares some thoughts right away on the day:
MT spent a bunch of time with the econ guy about 'you said this slightly different thing during your deposition to this slightly different question' and getting 'I think I just said that' , and honestly I was bit unclear on why since I'd hope the judge would be able to read econ guy's answer as the 'no I didn't do that research' MT shaved head lawyer was trying to get. This was even for a "You didn't look at why MS didn't join these pools" "No" "Was there a reason you didn't look for a reason" "It wasn't necessary for the analysis" vs deposition "I don't know". I think it burned up a lot of MT time, I think MS 2:00 MT 3:30 (with the last witness being MT's).

[PJ: This wasn't a waste of time *legally*. And you'll see in the closing statement what it was all for. You don't always immediately see what a lawyer is reaching for, but he knows and depending on the answer he gets, which he already expects and knows what is coming, he'll use it at the end. In this case, closing arguments will be in briefs, not orally.]

The interesting numbers will come out M/T if at all. Looking for more briefings on using code names for the companies in oral argument at least, as MS is saying the names will be relevant to them. Judge thinks names are relevant to court as Mom and Pop software vs big company. But there are briefs due tomorrow I think on that issue. He's going to talk to MS, MT and third parties Monday 8:45 am, 3rd parties can file briefs.

Update: And here are our second reporter's notes, as a 22-page PDF. He's going to try to get a text version for us over the weekend. In any case, I appreciate his notes. He's the one who notices quirky geeky things, like that there were 34 people behind the gate when he arrived at the courtroom and later that the judge blew his nose right into the mic.

: D

So a big thank you to our reporters for a week that was really hard to cover, and they did a great job. I understand very well now that what Microsoft wants is to devalue Motorola's patents, by saying they should be valued kind of like patent pools, not like standard-essential patents. But people don't have to use the product of patent pools. You can avoid them by using something else. And companies don't have to join patent pools. But standard-essential means there is no workaround. So it's apples and oranges.


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