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Microsoft v. Motorola Trial in Seattle, Days 5 and 6 - Phase I of Trial Ends ~pj
Tuesday, November 20 2012 @ 11:29 PM EST

We had a reporter in the courtroom Monday and today at the Microsoft v. Motorola trial in Seattle. This phase of the dispute ended today, the bench trial, but with the judge, the Hon. James Robart, asking for more briefing at the end of the day on the matter of sealing. And the parties will file their closing statements as briefs next month. Then the judge will rule.

But then you know already, if you read Groklaw, that trials never really end, or so it seems sometimes.

Remember when we all laughed at Microsoft's expert, Leo Del Castillo, testifying that the Xbox's version of IE didn't support interlaced H.264? Well, Microsoft just sent a letter [PDF] to the judge, acknowledging that in fact it does. So much for that expert.

The most interesting bit, to me, from yesterday is the news that the judge said two significant things. One was that courts generally follow a modified Georgia-Pacific procedure, which is what Motorola wanted, in figuring a RAND price or range. He didn't commit to doing so himself, but he seems to be leaning in that direction. If you recall, in its trial brief, Motorola wrote:

As Motorola’s expert economist, Professor Richard Schmalensee, will explain, the most appropriate way to reconstruct that negotiation is to employ a modified form of the well-known Georgia-Pacific hypothetical negotiation, used in patent damages analysis.

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

Dr. Schmalensee testified Monday, and the judge asked him more questions than any other witness, our reporter says.

And the judge also criticized a ruling of the 9th Circuit Court of Appeals regarding sealing documents, but in the end he followed it, as he must, and the result of that was that despite his strong personal belief that the public has a right to know what is going on, because there is case law that says otherwise, and he is "constrained" by it, today most of the evidence was presented with our reporter (and all the others) put outside of the room.

The most interesting thing the judge said today, from the notes, was that he hadn't been given much in the way of specifics that would help him reach a figure for Microsoft to pay Motorola. Um. That's why standards bodies leave it up to the parties to work out in bilateral negotiations.

Here's how Microsoft's letter [PDF] to the court about interlaced H.264 reads in full:

Dear Judge Robart:

On November 15, 2012, Mr. Del Castillo testified (22:23-23:4) that Xbox's recently launched version of Internet Explorer did not support interlaced H.264. After Dr. Drabik's testimony to the contrary, we went back to Mr. Del Castillo, and he checked with internal Microsoft resources and tried the search Dr. Drabik identified. Mr. Del Castillo determined that he had been misinformed. Xbox's Internet Explorer browser will play interlaced-coded H.264 video from the Internet if it encounters such content. Microsoft wanted to inform the Court and correct the record.

Because otherwise, it might strike someone's mind that the expert had fibbed to make Motorola's patents seem unnecessary. It's better to look unexpert than untruthful.

Here are the court clerk's notes from the docket on PACER on the two days of the bench trial:

596 - Filed & Entered: 11/19/2012
Bench Trial - Held
Docket Text: MINUTE ENTRY for proceedings held before Judge James L. Robart- Dep Clerk: Casey Condon; Pla Counsel: Jesse Jenner, Ralph Palumbo, Steve Pepe, Mark Rowland, Thomas Miller; Def Counsel: Arthur Harrigan, David Pritikin, Richard Cederoth, Andrew Culbert, Ellen Robbins, Christopher Wion; CR: Debbie Zurn, Barry Fanning; DAY 5 - Bench Trial held on 11/19/2012. 8:45 a.m. - The court discusses the licensing agreements with counsel. The licensing agreements shall be sealed, redacted and placed in the public record. Exhibit 54 admitted Nov. 16. Exhibit 59 was admitted in the minutes Nov. 16, however, the exhibit is not admitted. Ajay Luthra resumes the stand. Witnesses admitted: Timothy Drabik. Dr. Orchard resumes the stand. Tim Williams, Richard Schmalensee, Ramamirthan Sukumar, Michael Dansky. Exhibits admitted: 1, 2, 5, 12, 13, 14, 43, 44, 45, 47, 49, 50, 51, 64, 73, 104, 107, 123, 140, 141, 185, 193, 293, 294, 420, 561, 640, 641, 936, 1489, 1585, 1675, 1676, 1677, 2041, 2174, 2176, 2183 (601469-601477), 2202, 2230, 2329, 2366, 2367, 2368, 2369, 2370, 2371, 2372, 2373, 2377, 2393, 2399, 2451, 2684, 2688(sealed), 2753, 2840, 2922, 2945, 2961, 2968, 2982, 3034(a), 3034(b), 3035, 3036, 3081, 3145, 3293-3316 (demonstrative), 3423 (demonstrative), 3424 (demonstrative). Court in recess at 4:00 p.m. Court to resume Tues., Nov. 20 at 9:00 a.m. (CC) ...

603 - Filed & Entered: 11/20/2012
Bench Trial - Completed
Docket Text: MINUTE ENTRY for proceedings held before Judge James L. Robart- Dep Clerk: Casey Condon; Pla Counsel: Arthur Harrigan, David Pritikin, Richard Cederoth, Christopher Wion, Andrew Culbert; Def Counsel: Jesse Jenner, Ralph Palumbo, Steven Pepe, Kevin Post, James Batchelder; CR: Debbie Zurn, Barry Fanning; DAY 6 - Bench Trial completed on 11/20/2012. Exhibit 502 admitted Nov. 19, 2012. Redacted exhibits admitted: 69, 70, 334, 413, 1660, 1680, 1681, 2366, 2370, 2371, 2372, 2377, 2773, 2782, 2789, 3253, 3335, 3373, 3390. The court strikes as moot Dkt. ##581, 585. Michael Dansky resumes the stand. Witnesses sworn: Kirk Dailey, Charles Donohoe. 1:50 p.m. - Defense rests. Matthew Lynde recalled. 2:20 p.m. - Plaintiff rests. Exhibits admitted: 13 (sealed), 36, 37, 38, 62, 69, 413, 1162, 1660, 1672, 1680, 1681, 2115, 2249, 2466, 2467, 2468, 2477, 2483, 2515, 2572, 2692, 2718, 2724, 2747, 2768, 2800, 2829, 2832, 2833, 2838, 2839, 3162, 3163, 3164, 3200, 3373, 3396, 3448. The court takes the matter under submission. Post trial briefs (up to 24 pages) and revised findings of fact due Friday, Dec. 14, 2012 by noon. The court will accept a 10 page brief regarding the Google license. Counsel to advise the court why exhibit 16 should remain sealed. (CC)

So that last entry gives you at least of hint of what was going on when our reporter wasn't allowed in the room today.

Here is his summary of the day yesterday, and his PDF with more details:

Right. So attended today, Monday, Day 5.

Key Points:

All the interesting numbers are going to be sealed as is the courtroom during those bits. However, apart from the numbers the redacted documents are to be the full docs. The judge wasn't happy about this.

Get a copy of the Subpoena and Motion to Quash for Mr. Caruana. [PJ: Here it is (PDF)].

From my notes with partial/almost accurate quotes:

"Widespread belief that the District Court Judges are all-powerful. I do feel constrained by 9th Circuit."

"9th Circuit decision in Electronic Arts is simply wrong as I have explained previously. The philosophy in this district will no longer enter protective orders enabling private agreements."

[PJ: He is referring to In re Elec. Arts, Inc., 298 F. Appx. 568, 569 (9th Cir. 2008), which we've seen used before in the Apple v. Samsung case and in other cases. The odd thing is, as Samsung points out in its request [PDF] for sealing of licensing terms involving Samsung, that Microsoft in this litigation is asking for things to be made public, but in Apple v. Samsung, it took exactly the opposite position when it was its license threatened with being made public:

Counsel for Samsung conferred with counsel for the parties. While Motorola does not oppose, Microsoft has stated that it will potentially oppose Samsung’s requests.1....

The Ninth Circuit has stated that courts must ensure that the public’s right of access does not allow court records to be used “as sources of business information that might harm a litigant’s competitive standing.” In re Elec. Arts, Inc., 298 F. Appx. 568, 569 (9th Cir. 2008) (sealing licensing agreement) (internal quotations and citation omitted). The Ninth Circuit emphasized in In re Electronic Arts that compelling reasons to seal documents exist where public court records might become a “vehicle for improper purposes” such as the release of trade secrets.

_______
1 In recent litigation in the Northern District of California, Microsoft, as a non-party, intervened to prevent disclosure of the terms of its licensing agreements with Samsung and requested that the courtroom be sealed when Microsoft’s licenses were discussed. Apple Inc. v. Samsung Electronics Co., Ltd., Case No. 11-cv-01846-LHK (N.D. Cal.), Dkt. Nos. 1390, 1391. As in this case, the licensing agreements in Apple were relevant in determining a RAND rate for Samsung’s patent portfolio.

End PJ note.]

"Public has a right to know basis for" decision. "Nothing in record to justify sealing records other than Motorola's agreement with 3rd parties."

"Treat license agreements as sealed. Expect redacted to be the entire other than pricing, royalty, guaranteed minimum payments. Remainder in public record."

"Reluctantly compelled to seal courtroom whenever discussed."

"Persuaded that party seeking to use should not be encumbered."

"Will add note" (I think this was for the next time 9th Circuit considers this sort of thing).

"Contrary to position taken by at least one party... set royalty rate uses Georgia Pacific factors." Says look at other patent agreements as primary.

"EA shelters very terms [that are] the heart and soul of license terms."

"Each party set forth their pet theory."

"Jenner [MS attorney Jesse Jenner] acknowledged in opening Georgia-Pacific has a role."

(I wish I'd been typing as I might have gotten down the entire thing.) The documents are sealed but part of the record for appeals court. MT seemed to be unclear on this point, about in record meant for the court, not public record). [PJ: That is the opposite of what "in the record" normally means to me.]

Then the judge asked for 3rd parties to speak on the sealing issues. RIM (in notes elsewhere as Asian suit guy) Mr. Tounderi (apparently not his name as judge apologized and corrected himself afterwards, but I really don't have his name down]). Said the other license terms are competitively sensitive to RIM and apparently wanted the entire thing sealed. Judge asked him to cite authority. The standard is apparently competitively harmful. Won't seal entire document "blanket rejection of idea" these are so secret.

Then R. Paul Zeineddin of Samsung spoke, saying their position is like RIM's and they want they entire thing sealed, including what is licensed, other non-monetary terms, what licenses it may/may not cover. Harmful etc.

Judge: "Let me stress again, the fact that it is sensitive is not 9th Circuit. 9th Circuit is competitively harmful, not competitively sensitive." Will be on tomorrow so they have until then to somehow convince him otherwise (there might have been an actual deadline).

Then they moved onto the motion to quash the subpoena for Jonathan Caruana, a Microsoft employee. Motorola said agreed to withdraw the subpoena. Judge - "Very wise." Otherwise "someone's going to be spending Thanksgiving in jail". I got an answer out of one Motorola attorney (the one that did cross on Dr. Orchard) and one MS (the main guy I think, short, looks like the MT guy I asked) about who they thought the comment was directed at. MT didn't know but said something about "I think everyone's hearts beat faster there". Microsoft guy said he thought the judge didn't like the motion to quash (which I think he wrote or signed etc). The motion should be in the public record. So I'm really curious what it said. [PJ: Here it is (pdf). They served him on the 16th. He's apparently an expert on the Xbox. Maybe Motorola withdrew the subpoena because Microsoft's letter acknowledged that IE on the Xbox does play interlaced. Just guessing. Or they did it because the judge was so worked up. I'm guessing the former, actually.]

"With some amazement, Motorola [still] says 12 witnesses" -- withdrew Mr. Heiner told MS yesterday. Mr. Taylor and Kowalski won't be appearing either. Judge was unhappy. He thinks he set a deadline on Saturday for that and that MT should have told him. Telling MS isn't informing court. Court does work for witnesses as well, wasted time, etc. "Pretty astounded that counsel of this caliber" can't get their act together [those words not exact]. In fairness I don't think the judge told MT what he thinks he did -- he said he expected professional conduct, not playing games, and when they knew someone wasn't going to be appearing tell MS; don't think he actually told them to tell him (obviously no one called him on it, since presumably they should know to tell the court as well).

Then a brief summary of the less interesting stuff.

Today's witnesses were Dr. Luthra, MS cross continued, basically on when MT started with H.264. Did they discuss license pricing (of course not).

Then Dr. Drabik (sp?) pronounced Draebik aka Fujitsu Laptop guy (the one who didn't know about the bottled water). Apparently did prototype fiber to the home in the 80s at Bell labs. He was on H.264 things. He seems to have been one of the only people who tested an Xbox. He had tried out IE on Xbox with www.findthatfile.com and searched for H.264 MBAFF, H.264 PAFF and got a video to play, observed interlacing artifacts (this got in over MS objections as rebuttal vs revised expert report). Said Orchard was wrong about stuff like never using interlaced tools on progressive content, many products do it. Cross - stuff about claim charts. There's apparently something called progressive field encoding (or something PSF) that uses MT's field encoding related things for progressive and the difference between interlaced and progressive has grown sharper for him over the course of the case.

MT finishes cross of Orchard mostly about MS's contribs to early/predecessor versions of H.264. (He's 2 inches in my notes in the PDF).

The MS redirect -- all they asked him about was can Windows decode encrypted satellite/ cable transmissions? "Not so far as I am aware," I believe was the answer. No Recross. Apparently they haven't heard of this thing http://cetoncorp.com/products/ infinitv-4-pcie/. (I did ask the MT attorney if he'd heard of it in a recess; I think I got smiley-version that I think meant no comment, or perhaps he was smiling for a different reason. I asked the MS attorney and got a no comment if he knew it existed when he was asked the question.

Then Tim Arthur Williams testified about 802.11. There were objections to things about RTS/CTS not being in the expert report, that didn't make it past as rebuttal testimony. He had modified Gibson's giant chart with notations about which patents apply to which sections with lots and lots of arrows.

MS had objections about this chart (possibly 12 pages of them, or maybe it was for a slightly different thing) as they say they only got it at 12:30 am today and objection document was written while he was asleep. MT says we gave it to them earlier. MS: sure but it wasn't legible since it's a print out of a giant chart (you could just have attached the blasted pdf in the first place). Judge thinks MT was playing games I think. So they got to use the chart with the witness but maybe not for other things.

Dr. Richard Schmalensee was I think one of the most important witnesses. (He's made $1M/year on being an expert witness). He's an econ guy and was talking about pricing patents and some of the academic studies of things. Basically it's that the ex ante license model doesn't work in the real world, and RAND seems to be working so bilateral negotiations work, judge should do Georgia Pacific modified to take RAND into account (how up to the judge).

The judge asked him more questions than any other witness. Royalty stacking, and hold-up show up in the academic models but don't seem to in the real world. Hold-up shows up with nonRAND patents held secret by people who then emerge from under the bridge like trolls (his words).

Discussion of patent pools being joined by vertically integrated companies who make money from selling things as opposed to licensing and as such have an incentive to keep license fees as low as possible. Discussion of the effects of limiting rates to pool rates. Innovation goes down ... bad things happen.

Dr. Sukamar - guy who ran survey. There was stuff about the labels in columns not being good and some summary sheet not being accepted as substantive exhibit because it's a chart and columns don't reflect the survey (not clear if this was just because of the headings or because of the nested question aspect of the survey). Basically the 16% of respondents in total who claimed to use MBAFF video were probably lying (unless they really cared about their video and knew their encoder settings which I suppose they might if they got XBOX extender to work in the first place since they know more than Dr. Orchard about how to use the Xbox to play video). MS cast other aspersions on the survey with a report from pre internet survey about response rates where less than 50% was rubbish and this was 15% of the 22k emails started it.

Michael J. Dansky - stuff about 802.11 (and maybe H.264) being important to MS and also next generation console (thankfully MS agreed not to seal courtroom for the 5 minutes of slides with quotes we couldn't see because it wasn't on our screen and MT just didn't have him read them out). Basically next generation Xbox is going to have wifi and wifi is important. Also one of the quotes was about "Internet connection vital to magical connection" and it was magical. "MS wants to own the living room." "Neutralize Sony, Apple, Google" but focus is on Apple and entertainment and consumers paying for it. [PJ: Microsoft's dreams are so consistent.]

Tomorrow 9 am to noon. 1-4:30 pm (split the extra 30 minutes 50/50). MT has 2:05. MS 3:25. (The judge initially said MT used 5:00, then said that can't be right. I'll give you the numbers when I come back out). That motion to squash should be interesting to see.

And here are his notes from today, Tuesday, and the PDF of his notes from the day:
Today was sealed from 10 am to 2pm with then 30 minutes before the trial ended. The judge requested an additional 24-page briefing on several topics along with brief thing on Motorola's proposed license with Marvell remaining sealed or not.

He wants to know:

1. What effect if any does Google's MPEG-LA pool license have upon Motorola given its apparent language that was mentioned about including subsidiaries and affiliates. [Google is a MPEG-LA H.264 (aka AVC pool) licensee, and that pool license includes a grant back for H.264, which makes perfect sense and seems fair enough to me. Depending on what that license says this entire thing about H.264 is irrelevant since MS might have a license from the pool for H.264 already. This doesn't affect 802.11 obviously. I imagine if it does affect Motorola, this sort of thing will be something to look out for in acquisitions].

2. The judge doesn't feel well-advised on the legal basis for any sort of high or low range in the contract negotiations. "I've done my best to put words in the witnesses' mouths, but they've resisted."

He had originally had things written down about reasonableness of opening bids, but I think he's happy enough with Motorola's 20-odd year history of having 2.25% as the standard for 'core' patent areas and negotiating agreements. Though in a clarification following a question about two said things about is 3x a reasonable opening/good faith etc. -- what does the law require?

Of interest, despite MS filing this lawsuit, they have naturally continued negotiations up until most recently this past weekend, according to the head of Motorola's and now Google's licensing group. The Motorola letters for 2.25% were submitted in response to a MS request to get patents on the table for negotiation, at which point MS filed the complaint before responding. He was told by an MS person that it was just a litigation tactic.

MS objected to this discussion under a rule about in limine discussions rule 408 regarding settlement discussions but was overruled and sustained in part and the questioning on that front finished soon after/moved to the sealed portion. The 2.25% standard offer apparently came about when the price of cellphones decreased. Originally it had been $9/phone when phones cost about $2000, and their licensees had requested a change to % NSP due to price drops.

So the judge didn't say specifically "I'm going to use Georgia Pacific." What I believe he said was that contrary to what one party (Microsoft) has said, courts figure out royalty rates frequently and the way they do this is the Georgia-Pacific thing, and the key factor in Georgia-Pacific is similar licenses that have been negotiated. (This is in my notes on Page 1 from Monday Day 5 in the bit about secrecy). My personal belief is that he is going to use Georgia-Pacific both based on the fact that he seems to think the precedent says to use it, and based on how much time he spent questioning Doctor Richard Schmalansee about this (on page 14 to page 15 of my notes, where the first mark saying MT is about halfway down p. 15). Now this could just be because there isn't that much to question with MS's econ expert types. Schmalansee at least provides an answer that no matter how flawed Georgia-Pacific is, due to it's uncertainty, it's still better than the attempts to simulate ex ante approaches that haven't been tried in the real world and can't work. The judge isn't going to have a fun time trying to handle Georgia-Pacific and whatever modifications are needed to make it compatible with RAND. Now this doesn't make Microsoft's arguments bad, I just don't think the judge is likely to go "great let's just pretend you entered into the MPEG-LA and Via patent pools and they increased their rates to the max pool rate." (though it might turn out that only 802.11 needs to be dealt with if Google/MT's lawyer's didn't consider the H.264 pool agreement). But he might use pool rates as comparables somewhere, but Schmalansee provides an explanation for why it makes sense for pool rates to be lower than whatever ceiling might be established by the "Reasonable" part of RAND.

So basically I doubt Motorola will end up with 2.25% of NSP, but I expect them to end up with more than tenths of a cent per unit (or maybe 1.2 cents for 802.11, see MS's pool based charts). Incidentally if one takes the $9/ $2000 cell phone rate they used for GSM you get 0.45%. I think Motorola trashed MS's argument about interlaced not being relevant to the Xbox just on a fact basis and with MS internal docs saying that it's needed and will continue to be needed due to the existence of content, not to mention things like the letter from MS saying we discovered DelCastillo's testimony about IE on XBox not supporting interlaced was just wrong. If the judge ends up doing patent or contribution counting on 802.11 patents, he may be able to value 802.11's contribution to the Xbox at about $60 since that's the selling price of the $100 dongle. As to MT's contribution to the standards, who knows, but 1% of that still gets 60 cents or 0.2% of NSP. (None of these numbers besides $60 and $100 for the dongle were mentioned in court, and patent counting might get you 1% ish) and incidentally 2.25% of $60 leads to 0.45% of $300 -- the same thing Motorola apparently got for GSM on cellphones.

Also, about patent pools. MPEG-LA has ones for various MPEG standards and those are widely considered successful. Via is for 802.11 with about 5 licensors in it at peak, but is pretty much a failed patent pool; if it were successful it would have more licensors not to mention licensees. All of them are standards essential patents and are separate from the standards bodies. MPEG-LA typically does pools for standards that come out of MPEG (like MPEG-2 in DVDs), but the work for the standard is done in the standards group, not the relevant pool. Motorola's arguments that pool patents are often low quality isn't really that great and their own witnesses don't really agree (well, except for all things being equal).

Also on the RAND/FRAND question somewhere in the comments, no witness considered there to be a difference. The only difference there might have been was that the Letters of Assurance for I think the ITU have a tickbox for reciprocal licenses only, but this wasn't a FRAND/RAND distinction just a ITU/IEEE distinction (like the wording RAND/FRAND).

Keep in mind that it is Motorola's position that this court does not have authority to decide this issue of a RAND rate. I mention that because an appeal is almost certain, no matter what the judge rules, which won't be until 2013 now. And then, depending on what happens, there will be phase 2, the jury trial as to whether or not Motorola breached its contractual duties. And then the German ruling that Microsoft in fact is infringing Motorola's patents, with the obvious injunction to follow, which the Seattle judge put on hold until this case could be decided, looms on the horizon.

Finally, our reporter adds a bit about the briefs due next month on the 14th:

I'm not entirely certain if that 24-page brief due next month is accurately described as closing statements, because it is supposed to address some matters that weren't covered to any great depth previously. The biggest thing being that "Are Motorola's patents already in the MPEG-LA pool as a result of Google's pool license?"

Not sure if it was mentioned elsewhere, but the judge said at some point (I think last week) that the ruling in this case should be expected Spring 2013 at the earliest. Quote was something like "Not Thanksgiving, Not Christmas, but spring."

I know you join me in thanking our reporter for such detail, and his boss for letting him take the time. Imagine if all we had was media reports. Thank you!

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