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Apple and Google Discuss Possible Binding Arbitration of All, or Most, FRAND Claims ~pj
Saturday, November 17 2012 @ 01:59 AM EST

When the Hon. Barbara Crabb issued her order explaining why she was dismissing Apple v. Motorola in Wisconsin, she wrote that arbitration was the logical solution instead of her courtroom:
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.
Apple has taken the hint. That's been known to happen after a judge issues an order tossing out your claims. Apple and Google are now talking things over as to how to proceed with arbitration.

Here is Apple's letter [PDF] to Google, dated November 8, 2012:
November 8, 2012

BY OVERNIGHT & EMAIL

Kent Walker
Senior Vice President and General Counsel
Google Inc.
[address]

Dear Kent:

I wanted to follow up on your recent public offer to submit our dispute over the licensing of standards essential patents ("SEPs") to binding arbitration. Apple's goal has always been to find a mutual and transparent process to resolve this dispute on terms that are fair, reasonable and non-discriminatory ("FRAND") without the threat or taint of exclusionary remedies. Your offer to arbitrate made before Judge Crabb on November 5, 2012 was therefore welcome news. We agree to arbitrate the value of mutual licenses to our respective SEP portfolios. To ensure this process is effective, efficient and consistent with our FRAND obligations, we propose the following guidelines:

1) Litigation Stand Down. Neither party should seek to obtain or enforce injunctions, exclusion orders or court-ordered royalty rate setting (including the ongoing Orange Book process in Germany) based on patents held by either party that have been declared essential to an industry standard and that are subject to a FRAND licensing obligation.

2)Worldwide Scope. The arbitration should cover all FRAND-encumbered SEPs in our mutual portfolios. This would ensure an efficient process that avoids piecemeal resolution. The ultimate outcome of the arbitration should be a worldwide standard essential patent cross-license.

3. Common Base. The royalty base between the parties should be common and bear the closest possible relationship to the actual functionality covered by the standard in question.

4) Timely Resolution. It is in both parties' interest to resolve these issues quickly as our licensing dispute has lingered for several years. An ample record has been developed in our various litigations that could be used to streamline this process. We should commit to a hearing in four months which would then allow the arbitrator to reach a decision in six months time.

Binding arbitration on these terms will give us the best opportunity to reach a worldwide standard essential patent cross-license that comports with our FRAND obligations. We look forward to your response.

[signature]

Bruce Sewell
Senior Vice President and General Counsel

CC: David Drummond, Google Inc.

Hmm. So Motorola is disarmed for six months, while Apple is free to do whatever it wants with its stupid design patents and utility patents and its non-royalty claims and defenses? And Apple reduces the price it owes by offering to cross license with its SEPs? Does it have any comparable to Motorola's that would justify valuing them equally? How unlikely is that, considering Apple is Johnnie Come Lately to cell phones?

Its offer is like you and I meet at dawn with pistols. I have a pistol. You show up with a pistol plus a machine gun. And you say, "Hey, let's not shoot each other with pistols. Let's agree that neither of us can shoot the other with a pistol, and we agree to figure out a talk solution. We agree nobody can pick up a pistol while we are talking." How stupid would I be to say, "Sure" while you still have a machine gun that you are free to use while I now have nothing?

That's exactly what this whole FRAND battle has been about. Apple and Microsoft want to disarm FRAND patent owners, set a low price and take away injunctive relief, so they can mow them down with design and utility patents. Why? Because they don't have a lot of FRAND patents while Android vendors like Motorola and Samsung do. And both Microsoft and Apple are infringing them and have been for years.

So here Apple suggests that Motorola lay down its standard essential patents and the injunctive relief they offer, worldwide, while Apple still gets to use its weapons and shoot at will? And notice that while Motorola's suggestion was to use arbitration to decide the price Apple should pay, Apple now wants to throw in its standard-essential patents and cross license, with the obvious effect of reducing its obligation to pay. That's not what Motorola suggested, but it doesn't dismiss the thought altogether. Rather Google sets some terms. But I hope Google noticed this bit of news, that Apple is acquiring 1,024 patents and patent applications from the Rockstar Consortium.

Here is Google's reply:

November 13, 2012

Bruce Sewell
Senior Vice President and General Counsel
Apple Inc.
[address]

Dear Bruce:

We appreciate your November 8th letter responding to our offer for arbitration. As you know, we have long sought a path to resolving patent issues, and we welcome the chance to build on the constructive dialogue between our companies. While we prefer to seek a framework for a global (rather than a piecemeal) resolution that addresses all of our patent disputes, we are committed to reaching agreement on a license for our respective standard-essential patents ("SEPs").

To help us make progress, here are some further thoughts on your proposed conditions for arbitration:

1. Standstill: We agree with the idea of a standstill (and "stand-down"), and would extend it so that each of us dismissed any claims, defenses, or requests for relief alleging breach of FRAND obligations or seeking to enforce FRAND obligations, any allegation in any forum alleging that any party has failed to honor its FRAND obligations, and Apple's claims regarding Motorola's contract with Qualcomm (as discussed below). However, the standstill/stand-down should not extend to the pending Orange Book court process in Germany, where the record is well developed and the process is scheduled to resolve before an arbitration decision would be reached. Our companies have already submitted their dispute to the court overseeing the Orange Book process, and we should not delay it.

2. Worldwide Scope: We are open to extending the arbitration decision beyond the U.S. (other than Germany where the Orange Book process is already underway). Perhaps the fastest and most efficient way to do this would be to extend the Orange Book process to apply worldwide, as we have suggested previously, but we remain open to other alternatives.

3. Timeline and Additional Discovery: Like you, we want to get these matters resolved quickly. To do that, assuming that arbitration would cover licenses for both Motorola's and Apple's SEPs, we would need to set an expedited schedule for discovery on Apple's SEPs (where no discover has yet occurred). Based on that schedule, we could set reasonable time periods for a hearing and decision.

4. Arbitration Panel: The arbitration should be decided by a majority of a panel of three arbitrators with knowledge of the industry. This would permit a greater breadth of expertise to consider the issues under consideration, allowing each company to select one arbitrator with the third arbitrator to be mutually agreed upon. We would be happy to discuss potential alternative arbitration services or formats.

5. Subject Matter of Arbitration: In setting the royalty base and rate, the arbitration panel should be empowered to decide the appropriate methodology for base and rate setting, with pre-conditions. As Apple has raised the related question of whether it should pay royalties on sales of Apple devices with Qualcomm chips, the arbitration panel should also decide this question (including the issues of whether exhaustion applies and defensive termination was proper). In short, this proceeding would be the forum for all issues between us relating to use of and payment for either party's SEPs.

6. Covered Patents: The patents covered by the arbitration should be patents owned or controlled by each company and their affiliates essential to cellular standards (e.g., 2G, 3G, LTE), WiFi, and other royalty-bearing standards, regardless of whether they were declared essential. The arbitration should also cover any other patents subject to a RAND or FRAND commitment.

7. Non-Royalty FRAND Terms: In parallel with setting up the arbitration process and conducting any remaining discovery, the companies should agree to negotiate, in good faith, the non-royalty FRAND terms. If the companies can agree on these terms (or even narrow the scope of any disagreements), we can reduce the number of issues that the arbitration panel needs to decide. We suggest the panel employ a "baseball arbitration" procedure to resolve any areas in which the parties are unable to reach agreement.

8. Past Infringement: Besides establishing royalties on a go-forward basis, the arbitration decision should apply to past sales to address royalties owed.

We believe that these terms will allow us to efficiently and effectively reach a license on our SEP portfolios in a manner consistent with our FRAND obligations. I would be happy to discuss these matters live or to connect our teams to discuss ironing out the details. We look forward to hearing back from you.

Sincerely,

[signature]

Kent Walker
SVP & General Counsel

cc: David Drummond, Chief Legal Officer & SVP, Corporate Development

In short, Google says, "We remember you. This will only work out if we keep an eye on you."

Here is Google's letter with my comments in colored text, translating what I read between the lines:

Dear Bruce:

We appreciate your November 8th letter responding to our offer for arbitration. As you know, we have long sought a path to resolving patent issues, and we welcome the chance to build on the constructive dialogue between our companies. While we prefer to seek a framework for a global (rather than a piecemeal) resolution that addresses all of our patent disputes, we are committed to reaching agreement on a license for our respective standard-essential patents ("SEPs").

[PJ: We notice you are not yet paying us for the patents in this litigation, and while your goal is to make us give up injunctive relief, ours is for you to pay us what you owe. If we can also settle everything, great, but not if this primary issue is not resolved. We noticed that you would like to reduce what you owe us by setting terms whereby the price for your SEP patents are equal to ours. Um. No.]
To help us make progress, here are some further thoughts on your proposed conditions for arbitration:
[PJ: The terms you offer are not acceptable. Here's what would be.]
1. Standstill: We agree with the idea of a standstill (and "stand-down"), and would extend it so that each of us dismissed any claims, defenses, or requests for relief alleging breach of FRAND obligations or seeking to enforce FRAND obligations, any allegation in any forum alleging that any party has failed to honor its FRAND obligations, and Apple's claims regarding Motorola's contract with Qualcomm (as discussed below). However, the standstill/stand-down should not extend to the pending Orange Book court process in Germany, where the record is well developed and the process is scheduled to resolve before an arbitration decision would be reached. Our companies have already submitted their dispute to the court overseeing the Orange Book process, and we should not delay it.
[ PJ: No way we are agreeing to giving up injunctions unless you quit suing us about our so-called "violations" of our FRAND obligations. Oh, and just because you are afraid to lose in Germany is no reason for us to stop that process now.]
2. Worldwide Scope: We are open to extending the arbitration decision beyond the U.S. (other than Germany where the Orange Book process is already underway). Perhaps the fastest and most efficient way to do this would be to extend the Orange Book process to apply worldwide, as we have suggested previously, but we remain open to other alternatives.
[PJ: We are not interested in any lop-sided, unfair terms. We *like* the Orange Book process, so either let's use that or you suggest something we can actually agree to. And we're not stopping the German matter. We suggested arbitration of your claims in Apple v. Motorola in Wisconsin, not Germany.]
3. Timeline and Additional Discovery: Like you, we want to get these matters resolved quickly. To do that, assuming that arbitration would cover licenses for both Motorola's and Apple's SEPs, we would need to set an expedited schedule for discovery on Apple's SEPs (where no discover has yet occurred). Based on that schedule, we could set reasonable time periods for a hearing and decision.
[PJ: Do you *have* any valuable SEPs? *We* do. So before we agree to cross-license, we'd need to be able to put a realistic value on what you have, because otherwise we might get stiffed on royalties. So there won't be any pre-set value on yours when you've done discovery on ours and we haven't done any on yours. We recall you were not around when we were helping to create standards. So a straight equivalency might not be fair, nor is it reassuring that you suggest it without letting us know what cards you hold.]
4. Arbitration Panel: The arbitration should be decided by a majority of a panel of three arbitrators with knowledge of the industry. This would permit a greater breadth of expertise to consider the issues under consideration, allowing each company to select one arbitrator with the third arbitrator to be mutually agreed upon. We would be happy to discuss potential alternative arbitration services or formats.
[PJ: Let's get some arbitrators who actually understand FRAND patents and the marketplace we are in, so it's not a waste of time and so we don't end up with wild and ridiculous decisions.]
5. Subject Matter of Arbitration: In setting the royalty base and rate, the arbitration panel should be empowered to decide the appropriate methodology for base and rate setting, with pre-conditions. As Apple has raised the related question of whether it should pay royalties on sales of Apple devices with Qualcomm chips, the arbitration panel should also decide this question (including the issues of whether exhaustion apples and defensive termination was proper). In short, this proceeding would be the forum for all issues between us relating to use of and payment for either party's SEPs.
[PJ: We're not laying down our guns unless you lay yours down too. You've pretended in courtrooms that you don't owe a thing because Qualcomm paid us already. So if we are going to work for a solution, that has to be part of the deal. And we should set some pre-conditions on how goofy the arbitrators can get. The idea is to settle all claims in this litigation, not just settle our claims and leave yours standing and hanging over us.]
6. Covered Patents: The patents covered by the arbitration should be patents owned or controlled by each company and their affiliates essential to cellular standards (e.g., 2G, 3G, LTE), WiFi, and other royalty-bearing standards, regardless of whether they were declared essential. The arbitration should also cover any other patents subject to a RAND or FRAND commitment.
[PJ: I don't know why Google is stressing this, although they seem to be wanting all Google's patents, not just Motorola's to be in the mix, but I think it's about valuing what Motorola owns, and obviously their lawyers have carefully looked at the portfolio and this language stems from that. Maybe the Nortel deal is casting a shadow here too. If you recall, Microsoft is claiming in parallel litigation with Motorola that Motorola's patents aren't valuable, that they are easy to work around, hence not essential, etc. And Apple, IIRC, is saying some of Motorola's patents don't count because they were not declared essential. So probably Google is saying, if we donated them to a FRAND process, that's enough. We're not interested in laying down our arms if you are going to turn around that say you don't owe us because they are not *really* essential. Also, while this litigation was about WiFi and cellular standards, Motorola has lots of other standards patents, and if the idea is a total resolution, they have to be factored in, because otherwise, Motorola might lay down all its patents, and then Apple will sue with its design and utility patents, and then what? At least Motorola wants a royalty rate that takes into consideration the value of everything Motorola will be putting on the table.]
7. Non-Royalty FRAND Terms: In parallel with setting up the arbitration process and conducting any remaining discovery, the companies should agree to negotiate, in good faith, the non-royalty FRAND terms. If the companies can agree on these terms (or even narrow the scope of any disagreements), we can reduce the number of issues that the arbitration panel needs to decide. We suggest the panel employ a "baseball arbitration" procedure to resolve any areas in which the parties are unable to reach agreement.
[PJ: You accused us of patent misuse, claiming we can't go after royalties until the "misuse" is cleared, and violating our FRAND "contract" by asking for too much and there's the Qualcomm matter and you accused us of untimely disclosure of one of our patents to ETSI, all based on your theory of FRAND obligations. We disagree on all of this, and we'd need to talk and discuss everything in this bucket, rather than letting the arbitrators do it, and settle what we can, if possible. Let them work on the math. But the panel can use the baseball arbitration procedure for whatever isn't agreed to by us. Here's what that means. The essential piece is that the two sides present their positions and then the panel picks the side it thinks is the more reasonable. It can't split the difference or come up with its own idea. It's also called pendulum arbitration. Why would Google suggest that? Maybe because Apple's position, at least so far, has been so unreasonable, it's unlikely to win without revision upward on what it's willing to pay. So Google would like Apple to be less extreme and really negotiate or if not, it wants it to be obvious that Apple's position is unreasonable so Motorola will win before the panel subject to baseball arbitration rules.]
8. Past Infringement: Besides establishing royalties on a go-forward basis, the arbitration decision should apply to past sales to address royalties owed.
[PJ: Dude, you owe us, and you've been monkeying around with litigation instead of paying us for quite a long time already. We do intend for you to pay us and not just going forward.]
We believe that these terms will allow us to efficiently and effectively reach a license on our SEP portfolios in a manner consistent with our FRAND obligations. I would be happy to discuss these matters live or to connect our teams to discuss ironing out the details. We look forward to hearing back from you.
[PJ: Consistent with our FRAND obligations means fair to us, too, not just to you. And whatever we come up with should be consistent with past practice in the standards world, not some new ideas on how you'd prefer standards to work.]
Sincerely,

No doubt a lawyer would find a lot more to say about all this and would notice things I didn't or take a different view here and there, but the point is: the parties are talking, but not as friends. They're talking like lawyers, meaning each is angling for the best possible deal for itself. That doesn't mean it isn't good news that they are at least talking. But it's far, far from a deal. It is very possible that Apple just saw it as a chance to try for a better solution in arbitration than it could get in a courtroom lately. But Google's reply makes it clear, there will be a real deal or none. Google didn't just fall off a turnip truck. Its answer to Apple's "Let's you lay down your arms and we don't" letter was to say, "How about you and I talk this over as adults, in real life terms, because your FRAND strategy is dying, and we don't have to do it all your way."

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