I've finally got Microsoft's trial brief [PDF] in Microsoft v. Motorola, the Seattle litigation, done as text for you. Originally, I was going to put it with Motorola's but it took me so long, I was afraid you'd never even notice it was there. What an awful job it was, because Microsoft opted to file the document as a tiff, so it ended up requiring a lot of hand typing. I suppose they did it because there are redactions. But since the brief includes the references to the trial testimony of the various witnesses, when the transripts are made public, we'll get to patch in the blanks. So it makes a lot of work for absolutely nothing.
Before we take a look at the brief, I thought I'd like to explain a little background for you on FRAND issues, as best I understand it. Because what we are watching is nothing less than an upending of the law regarding FRAND patents. Of course, US law is a system whereby the courts interpret the statutes that the legislative branch passes, and those decisions collectively over time establish what the law is at any given time. So it's not a bad thing that the law does this. It's normal for law to grow and change as facts in various cases present new fact patterns. But the changes we are watching aren't coming primarily from the courts but from regulators like the FTC. And considering how Microsoft whines nonstop to regulators about Google, perhaps it might explain a result that is so far leaving the playing field tilting Microsoft's way.
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Here's a Law 360 article [PDF, automatically downloads), FRAND And A Patent Owner's Right To Injunctive Relief, which explains how it traditionally has been until recently, and indeed even this article is from 2012. Note on page 3 of the slides how it describes what it means to commit to donating your patents as FRAND:FRAND commitment does NOT:
Constitute a license, only obligation to undertake
bilateral negotiations in good faith
Impose specific license terms
Preclude injunctive relief for patentee
Mean "ART/Numerical Proportionality" (because -not all essential patents are created equal) Does what's been going on in Seattle match that slide? Obviously not. The judge there has already ruled to the contrary, that Motorola's RAND commitment is a license, whether or not Microsoft was willing to negotiate a price. So that's one change. And then, on page 5, the author addresses injunctions:
FRAND does not exclude injunctive relief
Three-tier test
The owner of
1. a valid essential patent;
2. that is found to be infringed; and
3. who made a licensing offer that is found to be FRAND
complied with his obligations and
can still obtain an injunction against the standard adopter
who rejected the FRAND offer.
So that's how it always was. FRAND patent owners could seek injunctive relief. Now it's viewed as a sin against the holy spirit, to hear Microsoft tell it. It was around 2007 when the first court (see page 4) wouldn't order an injunction. I mention this history because when you read about Motorola being "guilty" of seeking injunctions for FRAND patents, you'll understand that when Motorola donated to the standard, it did so under that understanding that owners of FRAND patents had the full right to do so. That was then. This is now. Compare that with what Microsoft tells the Seattle court:
When the patent holder makes the RAND commitment, it
gives up the right to employ the conventional process of negotiation
to extract all that the traffic will bear from individual
implementers. Because the non-discriminatory royalty has to be
equally available to all, the demand cannot be justified by the
posture or needs of any individual implementer. It
is
not a rug bazaar. A multiple of a RAND royalty would be very difficult
to justify under any circumstances because that would skew the
ensuing discussions away from, not toward RAND.
Obviously that represents a huge shift. In fact, if you recall, Motorola quoted Microsoft's lawyer, when he was asked if he'd valued the Motorola patents, as saying he had not, because “the process by which a reasonable royalty can be calculated is incredibly complex and context specific”. Yet now, Microsoft tells the court: While
purely bilateral license agreements for SEPs may provide information
relevant to a RAND valuation, such agreements pose significant
problems. RAND licenses must be provided at reasonable,
non-discriminatory
royalties
to any and all comers, regardless of their identity. While royalty
structures might broadly vary by categories of products, RAND
royalties should be essentially the same for each and every
licensee -- as the IEEE requires, RAND royalties must be "demonstrably
free of unfair discrimination." (11/16/12 Tr. 175 (Lynde); Ex.
3394.) Those royalties should reflect the absolute value of the
patents, not their relative value based on what the patent holder can
extract from a particular licensee. A patent holder that wishes to
pursue hold-up in violation ofits RAND commitment would do so through
a bilateral agreement. (11/19/12 Tr. 158 (Scbmalensee).)
Now, Microsoft estimates that the patents are worth essentially nothing, or next to nothing. It actually values them, at one point, as being worth zero. Is this a game? One so intricate and boring that the public isn't seeing the pea moved from one hand to the other?
Here's
InsideCounsel explaining how important the changes we are watching are, in the context of Judge Richard Posner tossing out both parties' patent claims in Apple v. Motorola: Many experts thus expect Posner’s ruling in Apple, Inc. v. Motorola, Inc. will strongly influence other courts and administrative agencies. If that happens, damage assessments will become far more important in patent infringement cases. Parties will need to adopt new, more rigorous methods for determining patent damages. And patentees will be unable to obtain injunctions for infringements of their FRAND patents. All this “will fundamentally alter the nature of patent litigation,” says J. Gregory Sidak, chairman of Criterion Economics, which supplies economic analyses for use in legal disputes.
What's interesting to watch is the role regulators are playing.
I'll let
Professor Jorge L. Contreras explain it, as he does
on Patently O:
Against this backdrop, regulators in the U.S. and Europe have actively pursued a FRAND clarification program of their own. As I noted in February, the U.S. Department of Justice (DOJ) appears to have persuaded Microsoft, Apple and Google to release a trio of "voluntary" statements describing their interpretations of FRAND. This public display occurred in connection with DOJ's review (and approval) of major patent acquisition transactions by each of these parties. The European Commission, which approved Google's acquisition of Motorola Mobility shortly thereafter, also exhibited a keen interest in Google's view of FRAND commitments.
Six months later, there has been another flurry of FRAND clarifications. This time, however, guidance is being offered not by companies, but by the regulators themselves (or, rather, by senior agency officials speaking "on the record" at public events). These include the following speeches by officials of the DOJ, FTC and EC: -
Jon Leibowitz, Chairman of the FTC, at the Georgetown Global Antitrust Enforcement Symposium (September 19 [PDF]),
-
Joseph Wayland, Acting Asst. Attorney General in the Antitrust Division of DOJ, at the Fordham Competition Law Institute (September 21),
-
Joaquin Almunia, Vice President of the European Commission responsible for Competition Policy, also at Fordham (September 20),
-
Fiona Scott-Morton, DOJ Deputy Asst. Attorney General for Economic Analysis, at the National Academies of Science (NAS) Symposium on Management of Intellectual Property in Standard Setting Processes (October 3 [PDF]),
-
Howard Shelanski, Director of FTC Bureau of Economics, also at NAS (October 4), and
-
Renata Hesse, Deputy Attorney General in the Antitrust Division of DOJ at the International Telecommunications Union (ITU) Patent Roundtable (October 10 [PDF])
It is no coincidence that these officials each came forward with comments regarding FRAND within a few weeks of each other. As suggested by Dr. Scott-Morton, this effort was at least loosely coordinated within the three agencies, each of which is actively involved in matters involving the licensing of patents essential to industry standards.
FRAND "clarification" is maybe too small a word.
And the big changes began coming from coordinating agencies, not from the courts.
That's what regulators do, one supposes. Although I'm thinking there has to be some review of regulators' decisions at some point, unless everyone agrees to voluntarily change the landscape. But if only one side is regulated, who is looking at the impact on the patent smartphone wars? I mean by that that Apple's Steve Jobs, just before the smartphone wars opened, declared he intended to destroy Android. And the patent claims have been serious and extreme. Is anyone going to regulate that? What about Microsoft? It's been trying to kill Linux as long as Groklaw's been writing, and long before that. And here they are, with Apple, following the same patent M.O., and both bleating about how awful FRAND patents are.
I have a suggestion.
If regulators want to fix something, how about fixing this? -- that FRAND is incompatible with the GPL license and hence most FOSS software. Here's Simon Phipps explaining the incompatibility for anyone new: The strawman is that, if any open source project can be found that's successfully implementing a technical standard that requires use of patented techniques and has those patents licensed under "Fair, Reasonable And Non-Discriminatory" (FRAND) terms, then it must be OK for all open source projects and all variants of FRAND.
But that's wrong. Open source is not a set of rules waiting to be gamed by corporate lawyers and lobbyists. It's the pragmatic embodiment of an ideal called software freedom, based on the understanding that the flexibility to use, study, improve and share software is the essential dynamic of the new meshed society. When there's a difference between the pragmatic embodiment and the ideal, it's the ideal that wins every time.
Of course FRAND terms are incompatible with software freedom, even if you can find a project that has devised a construct to allow it to attempt to accommodate that incompatibility. When a standard includes patents that are not automatically licensed to all implementers -- on "Restriction Free" (RF) terms -- that means a standard may require permission to be implemented. Requiring explicit permission to act is anathema to software freedom.
The whole point of open source is that the software involved can be freely used and developed independently. If any implementer is required to have a relationship with anyone at all -- including an intermediary benefactor or non-profit -- that's automatically incompatible with the ideal of software freedom. The only "FRAND" compatible with software freedom is the "RF" - restriction-free - variant.
So any procurement policy that's intended to be compatible with open source must specify that any required standards are only open if all knowingly-incorporated standards are available restriction free to all. If it permits standards with restrictions on implementation -- no matter how much the name for the restrictions is tuned to sound OK -- then it discriminates against open source.
Of course Microsoft and Apple love the new rules regarding FRAND. But there is something bigger happening, as you might have noticed when Judge Richard Posner tossed out both Apple and Motorola's claims and especially when Judge Lucy Koh refused to order an injunction against Samsung as Apple asked her to. Here's the change I see. When you and I watch the patent smartphone wars, we feel disgusted. We see that phones we want to have are in danger, on all sides, no matter what phone you like. And it's for alleged violation of patents that, when we read them, we consider inconsequential, even preposterous. Rounded corners and all that. And we ask ourselves, how could anyone grant a patent for *that*? You want to shut down the competition for *that*? That can't be the law, can it? That's awful.
Judges are people, you know, and many of them see all the gaming going on and the misuse of courts for what parties could just figure out on their own in negotiations. And some of them, like Judge Posner, don't like it either. So there is a sea change in the courts that has begun.
I'm not sure Apple and Microsoft like it quite as much when that change in the air wafts by them. For example, here's Apple [PDF], asking the Federal Circuit to review en banc the court's panel upholding Judge Koh's decision in Apple v. Samsung II, not to order an injunction. You could sum up Apple's position like this: Apple doesn't want it to be so hard to get an injunction for its utility patents, only for Samsung's FRAND patents: The "causal nexus" requirement, as applied in
Apple II, requires the patentee to prove, as a prerequisite to securing a preliminary injunction, that the patented feature "drives consumer demand for the accused product." Slip op. 8, 10, 12. Neither the Supreme Court nor this Court has ever before imposed such a feature-specific prerequisite to injunctive relief. In this respect (and others) Apple II conflicts with Apple I and the Supreme Court's prohibition against judicially adoped principles that could preclude injunctive relief in broad swathes of cases. The "causal nexus" requirement warrants en banc review because it dramatically reduces the availability of preliminary injunctions, particularly in cases involving multi-featured smartphones, tablets, computers, and other electronic devices. Um. Yes. Yes it does. That's a feature, not a bug, of the nexus requirement. See that sentence about the Supreme Court prohibiting "judicially adopted principles" that could preclude injunctive relief? And yet, both Apple and Microsoft are cheering when courts and the FTC come up with "judicially adopted principles" that are banning injunctions for FRAND patents, except after a newly created FTC process unfolds for six months first. That kind of "judicially adopted principles" (and its from a regulator, not a court at that) doesn't bother Apple, or Microsoft.
As a matter of fact, Microsoft felt that FRAND patent owners *should* be allowed to seek injunctions as recently as 2011, as you can read in this article [PDF], FRAND and Injunctive Relief: Exploring a Standard-Essential Patent Owner’s Right to Injunctive Relief by McDonnell Boehnen Hulbert & Berghoff, a law firm:
In 2011, the Federal Trade Commission (FTC) initiated a policy project to discuss standard-setting issues. As part of the project, a workshop was held, and comments from consumers, academia, and industry members were solicited.10 Interestingly, one of the questions for which the FTC requested comments was whether a FRAND commitment should preclude a patent owner from seeking an injunction against practice of the standard.11 Comments both for and against an SEP owner’s entitlement to injunctive relief were received. Notably, Broadcom, Cisco Systems, Hewlett-Packard, IBM, and Research In Motion commented that SEP owners should not be entitled to injunctive relief while Microsoft, Nokia, and Qualcomm disagreed.12 However, those comments are not binding and, perhaps as an indication of the current level of uncertainty surrounding the issue, Microsoft has since published a statement suggesting that it will not seek an injunction against any firm on the basis of an SEP.13
_________
10 Patents and Standards: Tools to Prevent Patent ‘Hold-up’, http://www.ftc.gov/opp/ workshops/standards/index.shtml (last visited July 31, 2012).
11 Request for Comments and Announcement of Workshop on Standard-Setting Issues, 76 Fed. Reg. 28036, 28037-38 (May 13, 2011).
12 FTC Issues Agenda for Workshop to Explore the Role of Patented Technology in Collaborative Industry Standards, http://www.ftc.gov/os/comments/ patentstandardsworkshop/ (last visited July 31, 2012).
13 Microsoft’s Support for Industry Standards, http://www.microsoft.com/about/legal/ en/us/IntellectualProperty/iplicensing/ip2. aspx (last visited July 31, 2012).
So as you can see, at the moment, there is a real danger of the playing field being unequal, with it tilting all Apple and Microsoft's way, with FRAND patent owners like Motorola unable to ask for injunctions until after they've slogged through multiple steps and can prove in writing that the prospective licensee is willfully avoiding payment, while Apple and Microsoft are free to swashbuckle around the courts with their nonFRAND patents. Don't get me wrong. I don't think software is patentable subject matter anyway, and as far as I'm concerned, standards should be available to everyone without paying a cent to anyone. But my bigger point is, when is someone going to notice that there's some Machiavellian bullying going on with patents, with Android and Linux the intended victim? Methinks, if regulators look into it, they'll find something worth regulating. Can it be a coincidence that both Apple and Microsoft are following the identical M.O. at exactly the same time?
[ Update: The DOJ and the USPTO have just issued a
policy statement [PDF] suggesting that the ITC should not order injunctions in cases involving standards essential patents. That is the only remedy the ITC has, so you can do the math. Joe Mullin at ars technica reports that "There are some pretty big exceptions, such as situations where a potential licensee refuses to take a license on a 'fair, reasonable and non-discriminatory' or FRAND basis. Today, Microsoft praised the DOJ/PTO statement as a tougher rule than the one that the FTC endorsed, and suggested that the FTC should re-think its position on patents, which (at least according to Microsoft's reading) would allow for more exceptions." Microsoft again.]
Here's Microsoft's trial brief regarding what price it thinks it should pay to Motorola for its patents, somewhere between nothing and almost nothing:
*****************
HONORABLE JAMES L. ROBART
IN
THE UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF
WASHINGTON
AT SEATTLE
MICROSOFT
CORPORATION, Plaintiff,
v.
MOTOROLA INC., et al.,
Defendants.
______________
MOTOROLA MOBILITY, LLC., et al.,
Plaintiffs,
v.
MICROSOFT
CORPORATION, Defendant.
______________
No.
C 10-1823-JLR
REDACTED
PLAINTIFF
MICROSOFT CORPORATION'S POST-TRIAL BRIEF
TABLE
OF CONTENTS
INTRODUCTION..................................1
ARGUMENT...................................2
I.
RAND
VALUATION MUST REFLECT CORE RAND PRINCIPLES
............................ 2
A.
RAND Principles Include Prevention of Hold-Up and Stacking Problems,
and
Recognize the Non-Royalty Benefits of Standardization to Patent
Owners .................. 2
1.
RAND Valuation Must Address Hold-Up
................................. 3
2.
RAND Valuation Must Track Basic Principles of Patent Valuation
..................... 3
3.
RAND Valuation Should Consider Other Economic Benefits Of
Standardization to Patentees
...........................................5
B.
These Core RAND Principles, Considered On This Record, Translate to
a
Comparable-Based Valuation Methodology
.............................. 7
1.
RAND
Valuation Requires Consideration of Alternatives
........................ 7
2.
Patent Pools Provide Real-World Comparables for RAND Valuation
.................. 8
3.
Bilateral Agreements Are Unlikely To Provide RAND Comparables
................. 13
II.
A RAND ROYALTY FOR MOTOROLA'S H.264 STANDARD-ESSENTIAL PATENTS IS A
CAPPED AMOUNT IN THE RANGE OF 0.065 TO JUST OVER 0.2
CENTS PER UNIT
............................................15
A.
The
Value ofthe Complex H.264 Standard Bears No Relationship To
Motorola's Technology
.......................................15
B.
The MPEG LA H.264 Patent Pool Royalties Establish a RAND Royalty for
Motorola's H.264 Standard-Essential Patents
............................... 17
C.
Motorola's H.264 Standard-Essential Patents Are Worth No More Than
the Average MPEG LA Pool Patent.
....................................
18
D.
Google Has Agreed That the MPEG LA Pool Rates Are Presumptively RAND
Royalties for Motorola's H.264 Standard-Essential Patents
.......................... 19
E.
A RAND Royalty For Motorola's H.264 Standard-Essential Patents Is a
Capped Amount In the Range of$167,000 (0.065 Cents Per Unit) to
$521,000 (Just Over 0.2 Cents Per Unit) With the Best RAND Royalty
Estimate Being $502,000 (Just Under
0.2
Cents Per Unit)
.............................................
20
III. A
RAND ROYALTY FOR MOTOROLA'S 802.11 STANDARD-ESSENTIAL
PATENTS IS AN
AMOUNT IN THE RANGE OF 3 TO 6 CENTS PER UNIT............. 21
A.
The
Broad 802.11 Standard is Dominated By Unpatented Technology and
Motorola's Patents Reflect At Most Marginal Contributions
............................ 21
B.
Relevant Benchmarks Establish an Appropriate Royalty for Motorola's
802.11
Patents.........................................
23
C.
A RAND Royalty for Motorola's 802.11 Standard-Essential Patents Is
in the Range of
$428,000 (3 Cents per Unit) to $920,000 (6.5 Cents
per Unit), with the Best RAND Royalty Estimate Being $736,000 (5
Cents per Unit) .............................. 25
IV.
CHARLES
DONOHOE'S RAND ROYALTY ESTIMATES ARE UNSUPPORTED BY EVIDENCE AND
DEEPLY
FLAWED...................................
26
V.
DETERMINING
A GOOD FAITH RANGE
.......................................
33
CONCLUSION....................................
34
TABLE
OF AUTHORITIES
Page(s)
CASES
Apple,
Inc. v.
Motorola,
Inc.,
869 F.Supp. 2d 901 (N.D. Ill. 2012) .....................8
Edmonson v.
Popchoi,
172 Wn.2d 272, 256 P.3d 1223 (2011) ....................34
Frank
Coluccio Const. Co., Inc. v. King
Cty.,
136 Wn. App. 751, 150 P.3d 1147 (2007)..................34
Fujitsu
Ltd. v. Belkin
Int'l, Inc.,
No. 10-CV-03972-LHK, 2012 WL 5835741 (N.D. Cal. Nov. 16, 2012)........23
Garretson v.
Clark,
111 U.S. 120 (1884)................4
General
Elec. Co. v. Joiner,
522 U.S. 136 (1997)....................32
Hathaway v.
Bazany,
507 F.3d 312 (5th Cir. 2007).................33
LaserDynamics,
Inc. v. Quanta
Computer. Inc.,
694 F.3d 51 (Fed. Cir. 2012).................4, 13, 24, 30
Quanta
Computer, Inc. v. LG
Elecs., Inc.,
553 U.S. 617 (2008).................12, 13
ResQNet.com,
Inc. v. Lansa, Inc.,
594 F. 3d 860 (Fed. Cir. 2010)...............28, 30
Rogerson Hiller Corp. v. Port of Port Angeles,
96 Wn. App. 918, 982 P.2d 131 (1999)............34
Sheldon v.
Metro-Goldwyn
Pictures Corp.,
309 U.S. 390 (1940)...................4
Uniloc
USA, Inc. v. Microsoft
Corp.,
632 F.3d 1292 (Fed. Cir. 2011)
Vel0-Bind,
Inc. v. Minnesota
Min. & Mfg.
Co.,
647 F.2d 965 (9th Cir. 1981)..................4
Wendler
Ezra,
P.C. v. Am.
Intern. Group, Inc.,
521 F.3d 790 (7th Cir. 2008)(per curiam)..............32
OTHER
AUTHORITIES
Farrell
et al.,
"Standard
setting, patents, and hold-up," 74 Antitrust
L.J 603 (2007)...............10
Hovenkamp,
"Competition in Information Technologies," U. of Iowa Legal
Studies
Research Paper No. 12-32 (Oct. 2012)
........................
10
Layne-Farrar,
Padilla, and Schmalensee, "Pricing Patents For Licensing in
Standard- Setting Organizations: Making Sense of FRAND
Commitments," 74 Antitrust
L.J.
671 (2007) (Ex. 1674)...............8
Restatement
(Second) of Contracts §
205
(1981)
.............................
34
INTRODUCTION
According
to Motorola's expert Richard Schmalensee, in the event of a
disagreement about whether particular royalties are RAND royalties,
the "Court needs to step in and say what is good faith, what is
RAND." (11/19/12 Tr. 170.) That is now the task before the
Court.
Microsoft,
through its economic and technical experts, has provided a
comparables-based methodology for determining RAND royalties,
anchored in the economic principles underlying the RAND commitment,
which prevents patent owners from abusing the power conveyed by
standardization. Microsoft's proposed valuation methodology using
real-world comparables (a common approach in real estate and many
other markets) assures that the RAND royalty for Motorola's patents
tracks what the market evidence shows are truly reasonable and
non-discriminatory royalties for the use of a few patents from the
broad, complex technical standards at issue.
Motorola,
by contrast, has offered nothing of value to the Court in setting a
RAND royalty. It
repeatedly
promised, but failed to provide, a "modified"
Georgia-Pacific analysis. Its economist, Schmalensee, largely agreed with Microsoft. Its technical experts failed to establish in any rigorous way that the Motorola patents represent anything more than isolated and dated aspects of the standards, or are better than available alternatives. Motorola's valuation expert Dansky confirmed the obvious -- that the standards themselves are often important to Microsoft's products -- but offered no testimony on the importance of Motorola's patents to the standard or to Microsoft. And while Motorola's license expert Donohoe briefly testified about a few Motorola license agreements, they are demonstrably noncomparable and provide no meaningful guidance. In the end, Motorola provided neither useful real-world evidence nor a coherent methodology for determining a RAND royalty.
1
ARGUMENT
I.
RAND
VALUATION MUST REFLECT CORE RAND PRINCIPLES.
A.
RAND Principles Include Prevention of Hold-Up and Stacking Problems,
and Recognize the Non-Royalty Benefits of Standardization to Patent
Owners.
Standard
setting organizations ("SSOs") develop standards to
facilitate interoperability and widespread adoption of particular
technologies. Economists recognize that significant efficiencies and
other benefits may be achieved merely from the adoption of a uniform
standard, regardless of whether the standard reflects any
technological advances. (E.g.,
11/13/12 Tr. 140 (Murphy).)
A patent may be considered "essential" to a standard if the patent is necessary to implement either a mandatory or optional section of a standard. (11/16/12
Tr. at 17 (Simcoe); 11/19/12 Tr. 71-72 (Williams); Ex. 1568 at MS-MOTO_1823_00004073096 (IEEE-SA Standards Board Bylaws).) Although the trial testimony focused on certain patented aspects of
the
two standards at issue, this patent-based perspective distorts in
important ways the actual standards development process. Most of the
technology reflected in popular standards like
H.264
and 802.11 is unpatented-built on technologies known to the engineers
collaborating to write the standard, or on unpatented contributions
from those engineers or from prior technology. (11/14/12 Tr. 114-15 (Orchard);
11/13112 Tr. 215 (Sullivan);
11/14/12 Tr. 43 (Sullivan);
11/15/12 Tr. 96 (Gibson).) Moreover, most of what is included in the standards does not involve a conscious choice by the collaborating engineers between alternatives or between patented technologies -- and the inclusion of a given technology in a standard does not mean that it was superior to alternatives. There is no evidence that these engineers commonly consider specific patents or that they are even conscious of what might be patented when framing the standards. Typically, patents are just not considered. (11/15/12 Tr. 199 (Gibson); 11/15/12 Tr. 43-44 (Sullivan); 11/19/12 Tr. 22 (Luthra).) In the end, however, a successful and widely adopted standard may well implicated thousands of patents worldwide.
2
1.
RAND Valuation Must Address Hold-Up.
SSOs
and regulators recognize that standard-essential patents ("SEPs")
may be used to block firms from implementing a standard and could
impede its adoption. Without meaningful checks, SSO participants
could use patents to unfairly exploit the standardization process.
For example, they could submit their own patented technology to the
SSO for consideration, in the guise of providing broader
interoperability. If the
suggested technologies are incorporated in the standard, and the
standard is broadly adopted, the patent holder's patents provide it
leverage to pounce on implementers, including its competitors. Even
in the absence of such intent, every patented technology incorporated
into a broadly-adopted standard endows the patent holder with the
ability to hold up implementers, independent of any technical or
commercial merit in the patent. As one of Motorola's economic experts
in other litigation pointed out, "it only takes one bullet to
kill"-and any SEP is a bullet.
The
peer-reviewed literature universally recognizes this danger of
hold-up. The solution imposed by virtually all SSOs is to require
that SEPs be licensed on RAND terms, and as Schmalensee put it, "the
RAND commitment and the whole apparatus exists to deal with hold-up."
(11/19/12 Tr. 142.) This follows from the straightforward economic
principle that firms with sunk costs in implementing a technology
cannot readily switch to different technical solutions. These
switching costs and inefficiencies make implementers vulnerable to
patent holders exploiting the power of their SEPs. But the SEP holder
that has made a RAND commitment is not entitled to exploit this
hold-up leverage. (11/19/12 Tr. 169 (Schmalensee).) Restraining this
hold-up power is the first and most important of the core economic
principles underlying the RAND commitment.
2.
RAND Valuation Must Track Basic Principles of Patent Valuation.
A
broadly-accepted economic and legal principle is that a patent owner
is entitled to the value of the use of its patent, and not to the
value of the benefits of others' SEPs or of the
3
standard
as a whole. This principle comports with patent valuation in general,
and is especially acute in the RAND context. Complex standards arise
from the contributions of dozens, if not hundreds, of companies,
research institutes, and universities. And with complex
interoperability standards, the relative overall contribution of any
specific piece of technology tends to be small, reflecting incremental
changes. Apportionment is critical in a RAND valuation because no
party is entitled to compensation for unpatented aspects of the
technology or for improvements provided by other companies, much less
for the value of the standard as a whole. The principle of
apportionment to limit damages compensation for patent infringement
to the patent owner's contribution has long been recognized by the
Supreme Court, the Ninth Circuit (in the pre-Federal Circuit era),
and the Federal Circuit. See
Sheldon v. Metro-Goldwyn
Pictures Corp., 309 U.S. 390, 402 (1940); Garretson v.
Clark, 111 U.S. 120, 121 (1884);
VeloBind,
Inc. v. Minnesota Min. Mfg.
Co., 647 F.2d 965, 973 (9th Cir. 1981); LaserDynamics.
Inc. v. Quanta
Computer. Inc., 694 F.3d 51, 69-70 (Fed. Cir. 2012); Uniloc
USA, Inc. v. Microsoft
Corp., 632 F.3d 1292, 1318 (Fed. Cir. 2011). Schmalensee endorsed the need for an apportionment analysis, stating that if "you wanted to determine whether a royalty for Motorola's 802.11 standard-essential patents was consistent with its RAND obligation, you would want to look at the value of the overall standard and Motorola's contribution to that value." (11/19/12 Tr. 166.) No witness disputed this point; rather, as Simcoe testified, this perspectiv on the RAND commitment "reflected commonly held views." (11/16/12 Tr. 75.)
When
many patents are implicated in a given standard, the payment of even a
seemingly modest amount to each patent holder can, in the aggregate,
erect an economic barrier to using the standard-the "stacking"
problem. To avoid this problem, the magnitude of any individual
royalty claim also has to be assessed in light of the potential
claims of all other patent holders. The stacking problem becomes even
more severe when all patents essential to the multiple
standards
that apply to complex technological products are considered
4
together.
Motorola conceded that stacking is a real risk in its pretrial
proposed findings offact.
(Dkt.
No. 462 at ¶
13.)
Likewise, in a submission to the European Telecommunications
Standards Institute ("ETSI"), Motorola (together with two
other companies) observed that the increase in "multi-function,
multi-technology products" covered by "ever more patents"
has given rise to "the phenomenon of ... 'royalty-stacking."
(Ex. 1031 at 2.) It
then
described a proposed "clarification of existing [RAND] rules"
to make clear that SEP holders must
grant
licenses on terms that are objectively commercially reasonable,
taking into account the overall licensing situation, including the
cost of obtaining all necessary licenses from other relevant patent
holders for all relevant technologies in the end product.
(Ex.
1031 at 3.) It
was
necessary, according to Motorola, to send a "signal to judges in
patent litigation that they can and should look at the overall
cumulative royalty costs for a given standard, and not just assess
whether the terms being offered by one particular licensor are fair
and reasonable in
vacuo." (Id.)
3.
RAND Valuation Should Consider Other Economic Benefits Of
Standardization to Patentees.
A third economic principle underlying
RAND is that firms can derive substantial benefit from having their
technology incorporated into standards, irrespective of whether they
ever seek or are paid royalties on their patents. As Professor Simcoe
explained, these benefits include diffusion of their technology, lower
costs in implementing the chosen technology, and faster time to
market. (11/16/12
Tr. 40.) Motorola's Ajay Luthra explained that getting Motorola's technology into the H.264 standard also provided opportunities for royalty-free cross-licensing with other companies holding H.264 SEPs. (Ex. 420 at 1.) For many owners of SEPs, those noncash benefits are more than a sufficient return on their investments in research and development, and obviously sufficient to induce participation in the SSO process. It is not unusual for companies to participate in SSOs and contribute their technology, but never try to license their patents for cash. ( E.g., 11/19/12 Tr. 174 (Schmalensee) ("[P]atent
5
rights
are often not asserted in this part of the world."); 11/13/12
Tr. 160 (Murphy) ("[T]here's very
little licensing of 802.11 patents, generally. . .. [T]he most common
rate is actually zero, that most people are actually collecting.").)
Even foundational contributors, such as Telenor in
H.264
development, forego patents and potential royalties entirely.
(11/14/12
Tr. 115 (Orchard); 11/13/12
Tr. 215 (Sullivan).) These SSO participants are not walking away empty-handed because they reap substantial benefits in ongoing and future sales of their products.
As
the Institute of Electrical and Electronic Engineers (the "IEEE"),
publisher of the
802.11
standard, recognized in its Operations Manual (part of the
participants' undertaking when Motorola submitted its blanket letters
of assurance), licensing SEPs on RAND terms means (at least with
respect to Motorola's 802.11 patents) licensing at "nominal
competitive cost." (11/16112
Tr. 27-30 (Simcoe); Ex 1130 at 19.) Motorola's doomsday arguments about the collapse of the standards system if companies cannot extract high royalties (e.g., Dkt. No. 541 (Motorola Trial Br.) at 1, 10) are fallacious, because they overlook the myriad motivations that companies have to contribute their technology to standards, the fact that an unchecked effort to extract high royalties would itself doom standardization
(11/13/12 Tr. 144-45 (Murphy)), and the fact that some SSOs actually require royalty-free licensing.
Finally,
a RAND valuation must recognize that a license for only a
standard-compliant implementation has less value than an unrestricted
license. RAND commitments do not
entitle
implementers to use the patents for anything other than an
implementation of the standard. (E.g.,
Ex.
2839). Because a RAND value can never exceed the value of an
unrestricted license, traditional patent damages law principles, such
as the "entire market value rule," that apply a check on
patent damages likewise serve as a further check on RAND valuation.
Motorola
suggested that the Court should ignore hold-up and stacking because
(according to Motorola) they have not been problems in the past.
(E.g.,
11/13/12
Tr. 177-78
6
(Murphy).)1
There
are two fallacies in this argument. First, the evidence shows that
there has
been
hold-up by Motorola, including in the very licenses it urges the
Court to consider as "comparables." (11/20/12
Tr. 101-03 (Dailey).) Second, even if other companies have complied with their obligations (so hold-up and stacking have not been problems), that proves nothing: the issue here is the royalty Motorola demands, which, if duplicated by others, would render implementation of the standards impossible. (11/16/12 Tr. 179 (Lynde); 11/13/12 Tr. 145-46, 150-51, 201-02 (Murphy).) That is the true measure of "hold up" and stacking.
B.
These Core RAND Principles, Considered On This Record, Translate to a
Comparable-Based Valuation Methodology.
1.
RAND Valuation Requires Consideration of Alternatives.
The
Court must here translate the core economic principles underlying
RAND into a workable methodology. Many commentators have proposed
that one way of assessing a RAND royalty is to determine the value
of the patent, before adoption or implementation of the standard, in
comparison to available alternatives that could have been adopted
instead. The primary consideration is the added benefit, if any, that
stems from using the patented technology, separate and apart from its
incorporation in the standard. E.g., Swanson & Baumol, "Reasonable and Nondiscriminatory (RAND) Royalties, Standard Selection, and Control of Market Power," 73
Antitrust
L.J. 7-11 (2005) (Ex.1013). As Schmalensee explained, "[i]f a technology is easy to invent around or has a ready supply of close substitutes, it is likely to receive a relatively lower compensation than others." (11/19/12 Tr. 165.) Even where a patented technology conferred substantial benefit, if there were "multiple alternatives before the standard was settled, its incremental contribution, properly measured, may be close
7
to
or equal to zero." (11/19/12
Tr.
165-66 (Schmalensee).) Judge Posner agreed that a RAND
royalty
should reflect only "the value conferred by the patent itself as
distinct from the additional value-the hold-up value-conferred by the
patent's being designated as standard essential." Apple,
Inc. v. Motorola, Inc., 869
F. Supp. 2d 901, 2012 WL 2376664, at *11 (N.D. Ill. 2012). See
also Layne-Farrar,
Padilla, and Schmalensee, "Pricing Patents For Licensing in
Standard-Setting Organizations: Making Sense of FRAND Commitments,"
74 Antitrust
L.J. 671,672
(2007) (Ex. 1674).
Moreover,
given the breadth of standards like H.264 and 802.11, a compliant
product must support many features, including those rarely used, so a
patent that confers little benefit may still have substantial hold-up
value. This is especially true in situations where the standard
includes technology primarily to enable backward compatibility, such
as support for interlaced video in the H.264 standard or support for
older "b" and "g" modulations in the
802.11
standard. (11/14/12
Tr.
52 (Sullivan); 11/15/12
Tr.
189-191 (Gibson).)
2.
Patent Pools Provide Real-World Comparables for RAND Valuation.
Microsoft
demonstrated that there were numerous, viable alternatives to the
patents Motorola has claimed are essential and that the value of
Motorola's contributions are therefore slight. (E.g.,
11/15/12 Tr.
Pool
rates must be reasonable, or the pool is unlikely to succeed.
(11/13/12
Tr. 75
(Glanz);
(11/13/12
Tr. 147 (Murphy) ("I have to have rates that are high enough to get
8
participation
by the sellers, the patent holders, the holders of the intellectual
property rights; and I have to have rates low enough to get the end
customers on board.").) Where a patent pool has licensed SEPs
before widespread adoption ofa standard, the risk ofa "hold-up"
royalty is mitigated by market forces: prospective licensees could
reject hold-up royalties, and simply use a different standard.
(11/13/12
Tr. 204 (Murphy).) In any event, because pools often share the SSO's goal to promote widespread adoption of standards, they have the right incentive to avoid hold-up. (Id. at 147, 155.)
If
a patent pool contains large numbers of patents from multiple patent
owners, the pool rates must be set with an eye to the overall
licensing situation, including the cost of obtaining all necessary
licenses from other relevant patent holders. If one pool participant
insists on a disproportionate royalty for its patents, the other
licensors are unlikely to agree. For this reason, as Professor Murphy
explained, pool rates provide a benchmark that serves the "goal
of preventing royalty stacking." (11/13/12
Tr. 153.) The per-patent amount received by pool licensors also varies from year to year, due to the expiration of pool patents. Therefore, using pool rates as a benchmark provides a mechanism for adjusting royalties over time as licensed patents expire. (11/16/12 Tr. 104-05 (Lynde).)
Patent
pools normally divide the collected royalties among the participating
patent owners based upon the number of patents contributed to the
pools, providing a real world illustration of how proportionality can
be achieved when licensing SEPs. (11/13/12
Tr. 157-58 (Murphy).) Where royalties are paid in a lump sum for multiple
patents, simply allocating the royalties among the different patents on a pro
rata basis is a reasonable starting point, as both Motorola's former Vice President of Intellectual Property, Kirk Dailey, and Motorola's expert Charles Donohoe admitted. According to Dailey, where a license agreement involves a lump sum royalty payment for three patents, [redacted] (11/20/12
9
Tr. 83-84.) [Redacted.] (11/20/12
Tr. 143.) Where, as here, Motorola never showed its patents were
worth more than the average pool patent, the pro
rata valuation
approach is entirely appropriate. See
Hovenkamp,
"Competition in Information Technologies" U. of Iowa Legal
Studies Research Paper No. 12-32 at 8-9 (Oct. 2012); Farrell et al.,
"Standard setting, patents, and hold-up," 74 Antitrust L. J.
603,
643 (2008).
The
reliability of pools as a relevant comparable is supported by
Motorola's own actions. In its ETSI submission, Motorola endorsed the
use of pools as a benchmark and observed that pool rates can be
expected to be "reasonable due to the dual role of most of the
members (IPR owners, and future licensees)." (Ex. 1033 at 2;
11/16112
Tr. 34-35 (Simcoe).) Motorola also participated in the formation of the MPEG LA H.264 pool, actively urged rates on the scale ultimately adopted, and approved the press release that announced the agreed-upon royalty rates. (11/13/12 Tr. 68-96 (Glanz).) Motorola's parent company Google is a licensee of the MPEG LA H.264 pool, and has agreed to license its patents and those of its affiliates at the pool rates. (Ex. 103, § 8.3.)
In
its trial brief, Motorola argued that pool rates were not a reliable
comparable because the "principal objective" of patent pools
"is to minimize royalty exposure and maximize freedom
of operation for licensees" (Dkt. No. 541 (Motorola Trial Brief)
6). But the evidence at trial showed the opposite, at least as to the
MPEG LA H.264 pool. No fewer than four of the licensor participants
in that pool (Dolby Laboratories, Electronics and Telecommunications
Institute (ETRI), Fraunhofer-Gesellschaft, and Columbia University)
derive "most or all of their relevant revenue from licensing, as
opposed to making and selling products"-meaning that they have
no "royalty exposure" or need to "maximize freedom
of operation." (11/16/12
Tr. 87-89 (Lynde).) While some pools may aim to minimize royalty payments, the MPEG LA
H.264
pool is different. It
could
not have attracted ETRI and the other similarly-situated
10
licensors
unless its royalty rates generated respectable returns. And
Motorola's own conduct belies its arguments: in its ETSI submission,
Motorola observed that pool rates can be expected to be "reasonable
due to the dual role of most ofthe members, IPR owners, and future
licensees." (Ex. 1033, p. 2; 11/16/12 Trial Tr. 34-35
(Simcoe).)2
Moreover,
other participants have already reaped -- as Motorola has -- the benefits
of participating in setting the standard, including advance
knowledge, faster product development at reduced costs, and increased
market size, so royalties flowing from broad licensing under a pool
rubric provide a potential bonus. (11/16/12 Tr. 39-41 (Simcoe).) Even
if it truly were the objective of the pools to set "low"
rates, in testimony Motorola itself elicited, Schmalensee confirmed
that even such "low" rates could still be RAND (11/19/12
Tr. 180), and offered no specific testimony as to whether he believed
the MPEG LA H.264 Pool or Via Pool rates were "low" or not
RAND. Motorola's expert in patent pools, Roger Smith, did not testify
at all.
Motorola
advanced a straw man argument that Microsoft's valuation approach
somehow forces Motorola to join pools against its will. (Dkt. No. 541
(Motorola Trial Br.) at 1, 5-9.) But Microsoft is not asking the
Court to order Motorola to join the MPEG LA H.264 pool or any other
pool. Nor is Microsoft asking the Court to compel Motorola to
participate in any particular standard-setting process. Microsoft
merely showed that pool rates provide "the best available
comparables" for determining the RAND royalty that Motorola is
contractually obliged to charge. (11/16/12 Tr. 31 (Simcoe).)
Pools
are not the only real-world comparable that may be considered in
determining a RAND royalty. For example, sometimes the standard is
substantially embodied in a
11
component
sold as a separate unit -- for example, in a Marvell or Atheros 802.11
chipset. (11/14112
Tr. 62-63 (Ochs); 11/15/12 Tr. 24, 48-49 (Del Castillo); 11/19/12
Tr. 113-15 (Williams).) Where such a component substantially embodies the standard's functionality, as
802.11
chipsets do (11/14/12
Tr. 62 (Ochs)), the market value of the component reflects all of the costs associated with manufacture and distribution, other IP and the value of compliance with the overall standard.
802.11 chipsets are commodity items with cents per-unit profit margins, demonstrating that the value of a single company's portfolio of 802.11 SEPs is likely to be very low -- consistent with the IEEE requirement that the RAND royalty be "nominal" for 802.11
RAND licenses. (Ex. 1130 at §
6.3.2.)
At
trial, Motorola advanced the unsupported assertion that the 802.11
chip is not the smallest saleable unit with respect to its SEPs
because the chips need support from other components of a computer,
such as computer memory to store an 802.11 network password.
(11/19/12
Tr. 99-100 (Williams).) The law is otherwise. Patent exhaustion "provides that the initial sale of a patented item terminates all patent rights to that item." Quanta
Computer, Inc.
v.
LG
Elecs., Inc., even
if additional
components are necessary to practice the patent. Id.
at
631-34.
A
product substantially embodies a patent for the purposes of patent
exhaustion if it "embodie[s] essential features of [the] patented
invention" and its "only reasonable and intended use [is]
to practice the patent." Id.
at
631. The Marvell chip is compliant with the
802.11
standard, and contains substantially all of what is needed to provide
802.11 functionality to a product like the Xbox 360. (11/14/12
Tr.
62 (Ochs).). Accordingly, the
Marvell
chip embodies essential features of any inventions disclosed in
patents Motorola deems essential to 802.11. Further, the reasonable
and intended use of the Marvell chip is to
12
allow consumer devices like
the Xbox 360 to access wireless networks using 802.11. (Id.)
So
the Marvell chip substantially embodies any of Motorola's 802.11
patents -- even those that involve storing a password in Xbox or
computer memory -- and that is why [redacted]
(11/20/12
Tr. 111-12.)
3.
Bilateral Agreements Are Unlikely To Provide RAND Comparables.
While
purely bilateral license agreements for SEPs may provide information
relevant to a RAND valuation, such agreements pose significant
problems. RAND licenses must be provided at reasonable,
non-discriminatory
royalties
to any and all comers, regardless of their identity. While royalty
structures might broadly vary by categories of products, RAND
royalties should be essentially the same for each and every
licensee -- as the IEEE requires, RAND royalties must be "demonstrably
free of unfair discrimination." (11/16/12 Tr. 175 (Lynde); Ex.
3394.) Those royalties should reflect the absolute value of the
patents, not their relative value based on what the patent holder can
extract from a particular licensee. A patent holder that wishes to
pursue hold-up in violation ofits RAND commitment would do so through
a bilateral agreement. (11/19/12 Tr. 158 (Scbmalensee).)
Before
relying on a bilateral agreement as probative of a RAND royalty, the
Court would have to be satisfied that the license did not reflect
hold-up value and is free of unfair discrimination. See
LaserDynamics, 694 F.3d at 79. A bilateral negotiation inherently reflects the specific situations and bargaining power of two particular firms, one of which is a patent holder with the power of a successful standard and the other an implementer at the mercy of the patent holder. The outcome of this bilateral negotiation would tuen on how desperate the implementer is to preserve its ability to sell standard-compliant products, no on the value of the patent holder's innovation or, as Motorola euphemistically put it, the "industry
13
conditions
and other commercial considerations," or "unique licensing
circumstances of each situation." (Dkt. No. 541 (Motorola Trial
Br.) 2.) [Redacted.]
(11/20/12
Tr. 64.) This may be "bilateral negotiation," but by
definition, it is decidedly not RAND.
In
support of its attempted reliance on bilateral license agreements,
before trial Motorola urged a RAND valuation based on a "modified"
Georgia-Pacific analysis. (Dkt. No. 541 (Motorola Trial Brief) 2.) However, as Schmalensee acknowledged, in the RAND context many of the individual Georgia-Pacific factors are suspect or irrelevant.
(11/19/12 Tr. 150 (Georgia-Pacific
"does
not contemplate the RAND obligation," so "one would want to
modify it to take that into account.").) For example, considering whether the patent holder might choose to maintain exclusivity over patent rights (Factor 4), or whether the patent holder competes with the prospective licensee (Factor 5), would be directly contrary to the RAND commitment. Likewise, the Georgia-Pacific hypothetical negotiation is ordinarily set at the time of the prospective licensee's first infringement, which in this case would be long after widespread implementation of the standards, and would maximize the patent owner's ability to capture hold-up value.
Schmalensee
had no idea what modifications to Georgia-Pacific
were
needed to ensure that the outcome of its hypothetical negotiation
would be RAND: "I didn't have a proposal, other than to entrust
to an experienced and knowledgeable licensing professional the task
of modifying that analysis in light of the RAND commitment."
(11/19/12 Tr. 161-62.) Donohoe, Motorola's license expert, [redacted]
(11/20/12
Tr. 137-38.) If one were to try to
modify
the Georgia-Pacific
analysis
to fit the RAND context, that first factor -- the "royalties
received by the patentee for the licensing of the patent in suit,
proving or tending to prove an
14
established royalty" -- would have
to be modified. As Schmalensee admitted, "if the holder of
a
standard-essential patent approached a user of the standard, and
succeeded in holding the user up, the 'hold-up' royalty would be
reflected in a bilateral agreement." (11/19/12
Tr. 158.) Such royalties would obviously exceed a RAND royalty, and would either need to be excluded from the analysis altogether or adjusted downward to remove any "hold-up" portion. No Motorola witness explained how that might be done.
II.
A RAND ROYAL TV FOR MOTOROLA'S H.264 STANDARD-ESSENTIAL
PATENTS IS A
CAPPED AMOUNT IN THE RANGE OF 0.065 TO JUST OVER
0.2
CENTS PER UNIT.
A.
The Value of the Complex H.264 Standard Bears No Relationship To
Motorola's Technology.
The H.264 standard is large and technically
complex, developed with the goal of providing improved compression
capability relative to prior video standards. (Ex. 610; 11/13/2012
Tr. 211 (Sullivan).) H.264 provided a 50% improvement over existing technology, a result that was achieved by the summer of 2001, before Motorola began its participation in the H.264 standards setting process. (11/13/2012
Tr. 215-16 (Sullivan).) The H.264 standard resulted from the contributions of roughly 170 entities, who submitted over 2300 contribution documents as part of the H.264 development process. (11/14/12
Tr. 108 (Orchard).) The Telenor Group was the largest contributor of technology to the H.264 standard. It submitted the proposal that became the basis of the first draft of the design, and contributed many of the core innovations of H.264. ( at 115;
11/13/12
Tr. 215 (Sullivan).)
Telenor did not seek patents on its contributions, and thus most of the innovations reflected in the H.264 standard are not covered by patents. (11/14/12 Tr. 115 (Orchard).) In contrast to the patents in the MPEG-LA pool and the contributions of companies like Telenor,
Motorola's
patents play a minuscule role in the technologies associated with
H.264. (Id.
at
114.) Fourteen out of the sixteen patents that Motorola claims are
essential relate to interlaced
15
video, an old technology that is an
artifact of earlier analog television, which has been fading into
disuse because virtually all modern displays, such as those on
smartphones, televisions, and computer screens, are progressive. (Id.
at
104; 11/14/12
Tr. 48 (Sullivan).) Indeed, when asked why Motorola Mobility, Inc.'s parent corporation, Google, Inc., did not support interlaced content on the popular YouTube site, Motorola's technical expert testified that "it might have something to do with how they see the future." (11/19/12
Tr. 61 (Drabik); Ex. 592.)
H.264
development was originally directed solely to progressive video
coding because the video compression community recognized that modern
digital compression technologies are superior to the primitive
technique of interlaced video scanning and concluded that interlaced
video was waning in importance. (11/13/2012
Tr.
214 (Sullivan); 11/14/2012
Tr.
48 (Sullivan).) Motorola, which was a "late bird" to the
standards setting process and wanted to ensure that it had a "seat
at the table" with the companies that had actually done the
lion's share of the work in developing the standard, pushed for the
inclusion of special coding features for interlaced video contents,
especially in the areas of MBAFF and PICAFF technologies that had
been used in prior video standards and were not invented by Motorola.
(Id.
at
12-13, 15-16, 56-57; Ex. 420 at 1.)
The
record shows that the Motorola H.264 patents have little value. No
Motorola expert performed a rigorous infringement analysis to show
that the patents are actually essential to the standard, nor did any
expert consider their validity, either to assess their value or
simply to measure the significance of the patents in relation to prior
art. (11/19/12 Tr. 4950 (Drabik).) The absurd, deeply-flawed
survey evidence Motorola sought to offer through its expert R.
Sukumar
only demonstrates the lengths to which Motorola had to go to make
even a
failed
attempt to demonstrate any relevance ofits H.264 technology to
Microsoft's products. (11/19/12
Tr. 193-200.)
16
There
were suitable alternatives for all of Motorola's interlaced patents.
(11/14112
Tr. 117 (Orchard).) Single maroblock MBAFF that had been used in prior video coding standards was a suitable alternative for Motorola's three PICAFF patents ( id. at
120), and was known to provide better
compression
for interlaced video than PICAFF (id.
at
124-25). At trial Motorola could praise PICAFF only by comparing it
to what was known not
to
be the state ofthe art for compressing interlaced video. (11/16/12
Tr. 211-12 (Luthra).) Likewise, single macroblock MBAFF was a
suitable alternative to Motorola's eight patents related to paired
macroblock MBAFF (11/14/12 Tr. 120 (Orchard)), and no test results
show that the paired version performed any better. (Id.
at
121.) Similarly, alternate scans proposed by Sony were alternatives
to Motorola's two alternate scan patents (id.
at
126, 128), and test results show that for interlaced video those
scans provided better compression over the progressive-optimized
zigzag scan than did Motorola's approach. (Id.
at
127-28, 129-30.) Using three different neighboring blocks was an
alternative to Motorola's interlaced-motion-vector-prediction
patent, and could have been done without degrading performance. (Id.
at
117, 131.)
The
two Motorola H.264 patents not directed to interlaced video are
limited by their means-plus claim language to specific disclosed
hardware embodiments, which means they cannot cover Microsoft's
software implementations of the H.264 standard. (Exs. 270 ('419
patent), 283 ('968 patent).) One of these two patents expired shortly
after Microsoft incorporated support for H.264 into its products, and
the other will expire in less than four months. (Id; 11/14/12 Tr. 133, 138 (Orchard); 11/19/12 Tr. 56-57 (Drabik).)
B.
The MPEG LA H.264 Patent Pool Royalties Establish a RAND Royalty for
Motorola's H.264 Standard-Essential Patents.
The MPEO LA H.264 pool
includes over 2,400 SEPs from 26 different patent owners;
the
pool patents have now been licensed by more than 1,100 licensees.
(11/16/12 Tr. 85 (Lynde); Ex. 1544.) Licensor participants include
technology powerhouses like Apple, Sony, Ericsson, LG, Cisco, Toshiba, and Fujitsue, as well as Microsoft. (Id. at 90-91.) The MPEG
17
LA
H.264 patent pool is "broad" and "rich," covering
all fundamental aspects of the patented
portions
ofthe H.264 standard. (11/14/12 Tr. 112-14 (Orchard).) MPEG LA has
evaluated each of these patents and confirmed their essentiality to
H.264. (Id. at 111-12.) The pool rates were negotiated before widespread adoption of the H.264 standard, and H.264 faced competition at the time from other video compression standards. (11/13/12 Tr. 204 (Murphy).)
The
reasonableness of the pool rates was assured by the fact that many of
the licensors (who negotiated the rates among themselves) were also
future licensees, so there were "both sides on board" and
the rate negotiation was a "two-way street." (Id. at 156.) The licensed patents are all SEPs for the same standard at issue here -- H.264. ( Id at 157.) And, according to Garrett Glanz, who participated in the negotiations that established the pool, "the motivation for participating in the pool is to both ensure the success of the standard" and "to generate a reasonable revenue stream from your patents" that is consistent with your "RAND commitment to the standards organization." (11/13/12 Tr. 133-34.)
Net
receipts from the pool are divided among the patent owner
participants based upon the number of patents contributed to the pool.
(11/13/12
Tr. 157 (Murphy); Exs. 1160-64.) Because of the large number of licensed patents, the large number of licensees, and the fact that the pool patents are all H.264 standard-essential patents, the per-patent pool royalty for the most recent year provides a good initial estimate of the RAND royalty for an average H.264 SEP. (11/13/12 Tr. 157-58 (Murphy).)
C.
Motorola's
H.264 Standard-Essential Patents Are Worth No More Than the
Average
MPEG LA Pool Patent.
The pro
rata approach
to the allocation of royalties for a portfolio of SEPs is entirely
reasonable. First, all essential patents are equal in that they are
required to implement the
standard.
Accordingly, most, if not all, pool licensing arrangements for SEPs
adopt the pro
rata approach.
Second, Motorola's own practices demonstrate that portfolio licensing
18
arrangements also reflect a pro
rata approach, in that no individual patents are singled out for one-off valuation -- instead, the patents in the group are licensed together at a uniform rate.
While
in theory an individual patent may be of particular value, this takes
on less significance where an entire portfolio is licensed. In any
event, Motorola never proved that any of its H.264 SEPs was more
valuable than the average pool patent, and thus was somehow entitled
to a premium over the MPEG LA H.264 pool rates. Kirk Dailey, when
asked, responded: [Redacted] (11/20/12
Tr. 110. If anyone at Motorola ever did make that study, it has never seen the light of day, and no Motorola expert offered such any such opinion. Dr. Drabik also said he had not performed any comparison of the Motorola H.264 SEPs with the MPEG LA H.264 pool patents. (11/19/12
Tr. 60.) Instead, the evidence strongly suggests that the Motorola patents have far less value than the thousands of patents in the pool, including those relating to all the "core components" of the H.264 standard. (11/14/12
Tr. 112 (Orchard).)
D.
Google Has Agreed That the MPEG LA Pool Rates Are Presumptively RAND
Royalties for Motorola's H.264 Standard-Essential Patents.
Motorola's
corporate parent, Google, Inc., is a licensee of the MPEG LA H.264
pool, and its license agreement obliges it
to
license its affiliates' H.264 SEPs to other MPEG LA pool licensees
(such as Microsoft), upon request. (Ex. 103, ¶
8.3.)
While a royalty would be payable in connection with such a license,
Google's agreement with MPEG LA recites that the "Licensors' per
patent share of royalties" paid by Google to the MPEG LA pool
"shall be presumed to be a fair and reasonable royalty rate"
for any Motorola H.264 SEPs. (Id.) Motorola's parent company therefore has agreed that a RAND royalty for the specific Motorola H.264 patents at issue is presumed to be the very MPEG LA H.264 pool rates upon
which
Microsoft bases its proposed RAND royalty. This is powerful, if not
conclusive, evidence that the MPEG LA H.264 pool rates are RAND.
(11/16/12
Tr. 97 (Lynde).)
19
E.
A RAND Royalty For Motorola's H.264 Standard-Essential Patents Is a
Capped Amount In
the
Range of $167,000 (0.065 Cents Per Unit) to $521,000
(Just Over 0.2
Cents Per Unit) With the Best RAND Royalty Estimate Being
$502,000
(Just Under 0.2 Cents Per Unit).
Dr.
Matthew Lynde performed the necessary calculations and determined
what the MPEG LA H.264 pool rates work out to be when applied to
Motorola's H.264 SEPs. The best RAND royalty estimate can be obtained
with reference to the MPEG LA royalty formula, after adding the
Motorola H.264 SEPs but otherwise leaving the MPEG LA H.264 pool
unchanged. Lynde calculated what Motorola's share of the annual pool
royalties paid by Microsoft would have been in this scenario: just
under 0.2 cents per unit, or a total of $502,000 for the most recent
year. (11/16/12 Tr. 99-100 (Lynde).) Lynde used the same annual
royalty caps in the MPEG LA H.264 pool. (Id
at
99-100, 104; Ex. 1161.) Basing a RAND royalty for Motorola on the
MPEG LA H.264 pool rates is generous to Motorola because it has
already enjoyed the benefits of getting its patented technology
included in the standard: diffusion of Motorola technology, lower
cost to Motorola in implementing the H.264 standard, and faster time
to market for its own H.264-compliant products. (11/16/12 Tr. 40
(Simcoe).) The licensor-members of the MPEG LA H.264 pool that do not sell standard-compliant products receive pool royalties only and enjoy no such benefits. (11/16/12 Tr. 87-89 (Lynde).) Lynde noted that the documents governing the MPEG LA H.264 pool permit the licensors "to increase the pool rates up to a maximum of ten percent should they deem that useful and appropriate, for example, if there were more patents in the pool." (Id. at 100.) Lynde then performed an alternative calculation, assuming that the inclusion of Motorola's H.264 SEPs would have prompted the 10% rate increase. In that case, Motorola's share of the annual pool royalties paid by Microsoft would increase to 0.204 cents per unit, or $521,000 for the most recent year. ( Id. at 161.) This provides an upper bound on the RAND royalty. Finally, Lynde looked at what Motorola would receive if Google complied with its obligations under its own MPEG LA license. In that case, Motorola would be obliged to
20
accept "Licensors' per patent share of
royalties" paid by Google to the MPEG LA pool as "a fair
and reasonable royalty rate" for Motorola's H.264 SEPs. (Ex. 103,
¶
8.3.)
Royalties paid by pool licensees are subject to annual caps (Ex. 103,
¶
3.1.1),
and Google's cap reduces the effective per unit rate substantially.
On this basis, Motorola would be entitled to a royalty of
0.065
cents per unit, or $167,000 for the most recent year. (11/16/12
Tr. 102-04 (Lynde).)
As
Lynde explained, all of these calculations could easily be performed
for other years, including future years, and counterpart figures
determined for those years, taking account of patent expirations over
time. (11/16/12
Tr. 104 (Lynde).) Therefore, if the Court adopts one of these approaches as the basis for a RAND royalty for the most recent year, the parties ought to be able to agree on the annual royalty amount that is payable for other years, using the same approach. Failing agreement, the Court could resolve the issue.
III.
A
RAND ROYALTY FOR MOTOROLA'S 802.11 STANDARD-ESSENTIAL PATENTS IS AN
AMOUNT IN THE RANGE OF 3 TO 6 CENTS PER UNIT.
A. The
Broad 802.11 Standard is Dominated By Unpatented Technology and
Motorola's Patents Reflect At Most Marginal Contributions.
Motorola's 802.11 SEPs concern, at most, only a small portion of a
limited number of technology areas in the 802.11 standard and are
not central to enabling those technology areas; at best, these
patents cover less than one percent of the 802.11 standard. (11/16/12
Tr. 85, 154-55 (Gibson).) Like H.264, the 802.11 standard is immense and technically complex; the current draft of the standard is almost 2800 pages long. (11/16/12 Tr. 88-89 (Gibson); Ex. 386a.) The development of the first draft of the 802.11 standard took seven years and development of the standard continues today. (11/16/12 Tr. 92-93 (Gibson); Ex. 520.) Over
1,000 companies have participated in the 802.11 standard-setting process. (Ex. 1594; 11/16/12 Tr. 94-95 (Gibson).) Today, over 450 representatives from 150 organizations are actively working on the standard. (11/16/12 Tr. 94-95 (Gibson); Ex. 514.) Over 350 patents have been specifically identified as essential to the 802.11 standard via letters of assurance to the IEEE,
21
and
94 companies have filed "blanket" LOAs, including wireless
communication industry leaders such as Atheros, Broadcom, Qualcomm,
Research in Motion, and Intel. (11/15/12
Tr. 99-100 (Gibson); Exs. 7, 1592; 11/19/12
Tr. 118-19 (Williams).) Marvell also has a very valuable 802.11 portfolio and owns a few hundred issued patents essential to the 802.11 standard. (11/14/12
Tr. 64 (Ochs).) Even all of these patents taken together represent just a fraction of the technology in 802.11, because the majority of the technology in the 802.11 standard (such as data modulation, direct sequence spread spectrum, error control coding, orthogonal frequency division multiplexing, etc.), is not patented, predates the Motorola patents, and was based on a long history of research and development by companies, government agencies, and academic institutions. (11/16/12 Tr. 96-97, 154 (Gibson).) Only a very small number of companies holding 802.11 SEPs actively seek royalty-bearing licenses. (11/13/2012
Tr. 160 (Murphy).)
No
Motorola expert conducted a rigorous infringement analysis to
determine definitively which patents are actually essential to
802.11. (11/19/12
Tr. 67-134 (Williams).) Nor did any expert consider the validity of the patents or specifically refute testimony provided by Gibson that suitable alternatives existed for all of them. (Id.)
Moreover,
the Motorola
802.11
patents are rapidly expiring and have diminishing value.
Even
as the 802.11 standard dominates the market today for short and
mid-range wireless network devices, development continues on new
versions. Much of that development draws upon technology contributed
by companies such as Marvell, Atheros, and Intel that make the
semiconductors that substantially embody the commercial
implementation ofthe standard. These are commodity chips, used in
broad ranges of end products, but providing the same wireless
connectivity regardless of the end product involved. Market prices
rest on strong competition, and are now about $3-4 per chip. Chip
makers both rely on their own intellectual property and license-in
intellectual property to be used in developing chips.
22
License
rates for fundamental IP, including patent rights, designs, and
commercial know-how, are typically in the range of 1%
of chip
price. (11/14/12 Tr. 71-72 (Ochs).)
B.
Relevant Benchmarks Establish an Appropriate Royalty for Motorola's
802.11 Patents.
The
starting point in determining a RAND royalty for Motorola's portfolio
of 802.11 SEPs is Motorola's contract with the IEEE, the SSO that
issued the 802.11 standard. Under that contract, Motorola could
recover only "nominal" royalties from sellers of 802.11
standard-compliant products. Specifically, the 1994 operations manual
for the IEEE standards is "part of the RAND commitment"
that Motorola made, and it requires that RAND-committed SEPs be "made
available at nominal competitive costs to all who seek to use it for
compliance with an incorporated IEEE standard." (11/16/12 Tr.
28-29 (Simcoe); Ex. 1130 at §
6.3.2.)
One benchmark is the 802.11 patent pool operated by Via Licensing
Corporation. See
Fujitsu Ltd. v. Belkin Int'l, Inc., No.
10-CV-03972-LHK, 2012 WL 5835741, at *3 (N.D. Cal. Nov. 16, 2012)
(denying motion to exclude reasonable royalty testimony based on the
Via pool agreement). Taken alone, this pool is not an ideal benchmark
because it has not enjoyed widespread success: it has only five
licensors/licensees (ETRI, Japan Radio, Phillips, LG, and Nippon
Telegraph), and six additional licensees that pay royalties to the
pool but have contributed no SEPs. (11/16/12 Tr. 106-07 (Lynde).) The
pool was formed around the time that the 802.11 standard was first
being widely adopted. This timing may have allowed the pool to
capture higher royalties, "because the investments" in
making 802.11 standard-compliant products "had already been
made, and therefore licensors would have had more leverage when they
went to get licenses." (Id.
at
107-08.) The fact that the Via pool has only attracted six licensees
(compared to the more than 1,100 licensees in the MPEG LA H.264 pool)
suggests that the "rates are too high." (Id.
at
117.)
Another
way of estimating a RAND royalty for Motorola's 802.11 patents can be
derived from the testimony of Jennifer Ochs of Marvell. Marvell makes
the 802.11 chip which
23
contains "substantially all that is needed
to provide 802.11 functionality" to Microsoft's Xbox console.
(11/14/12
Tr. 62 (Ochs).) In the context of patent damages, reasonable royalties are "based not on the entire product, but instead on the 'smallest salable patent-practicing unit," unless the patent(s) in question form the basis for customer demand for the entire product. LaserDynamics, 694 F.3d at 67. The law is clear that this standard is not met merely because a functionality is important or even critical to a product.
Id. at 68. Motorola presented no evidence that its 802.11 patents form the basis for customer demand for the Xbox. The evidence shows that Xbox games drive customer demand for the console.
(11/25/12
Tr. 12 (Del Castillo).)
Accordingly,
a reasonable royalty (and certainly any RAND royalty) for Motorola's
802.11
patents must be reasonable with respect to the smallest salable
patent-practicing unit -- the Xbox's 802.11 Marvell chipset. Marvell
views its license from ARM Holdings (which provides "significant
IP that can be readily incorporated into a semiconductor chip,"
including patent licenses, design, and know-how that is "ready
to use") as setting the "high ceiling" for inbound
intellectual property licenses applied to its chips. (11/14/12
Tr. 71-72 (Ochs).) The royalty rate for the ARM license is "1% of the average selling price of a chip." ( Id.)
If
Motorola had been paid a royalty for its 802.11 patents that was
equal to 1% of the $3 selling price for Marvell's 802.11 chipset, it
would have received 3 cents per unit, or $428,000 in the most recent
year. (Ex. 1167; 11/15/12
Tr. 25 (Del Castillo).)
Motorola
also failed to prove that its 802.11 patents have any unique value.
No competent evidence was offered on a patent-by-patent basis that
Motorola's patents are, in fact, essential. While Gibson testified
about specific alternatives that could have been adopted in the
802.11 standard in lieu of the technology supposedly embodied in each
of
the Motorola patents, Motorola's expert Williams addressed only two
of those patents. (11/15/12
Tr. 114-44 (Gibson); 11/19112
Tr. 102-106
(Williams).) Williams tried to wave all of this aside by
24
insisting
that he considered something to be an alternative only if it could
have been inserted
into
the standard without requiring any other change (11/19/12 Tr.
115-16), but as Gibson explained, the engineers developing the
standard were fully capable of modifying related sections to
accommodate alternatives (11/15/12 Tr. 115-16).
Beyond
that, the evidence showed that the core Motorola patents are old,
that many are useful only for backwards compatibility with a
declining share of the total installed base, and that they are
rapidly expiring. (11/20112 Tr. 156 (Lynde).) Motorola's portfolio
has far less value than modern portfolios like those of Marvell, which
are pertinent to the newest versions of the standard. (11/14/12
Tr.
64 (Ochs).)
C.
A RAND Royalty for Motorola's 802.11 Standard-Essential Patents Is
in
the Range of $428,000 (3 Cents per Unit) to $920,000 (6.5 Cents per
Unit), with the
Best RAND Royalty Estimate Being $736,000 (5 Cents
per Unit).
As
indicated above, a RAND royalty calculated at 1 % ofthe $3 selling
price for Marvell's 802.11 chipset would work out to 3 cents per unit, or $428,000 in royalties in the most recent year. Adopting the Via pool's framework, Dr. Lynde offered calculations based on sales volumes and the Via pool's fee structure, and on the assumption that Motorola's 802.11 SEPs had been included in the pool, along with all other 802.11 patents that were specifically identified in letters of assurance provided to IEEE. (Ex. 1167.) Dr. Lynde gave Motorola every benefit of the doubt because he assumed that all the patents asserted to be essential by Motorola were actually essential, and he added to the pool only those patents that have been specifically identified by companies filing letters of assurance. On this basis, Motorola's share of Microsoft's payment in the recent year would have been 5 cents per unit or $736,000. (11/16/12 Tr. 114-15 (Lynde); Ex 1167.)
In addition, to generate an upper bound for the RAND royalty estimates, Lynde applied the optional increase of 25% that the Via pool allowed "should, for example, the participation and contribution of patents increase." (11/16/12 Tr. 115-16 (Lynde).) This produced an
25
estimated
annual Motorola royalty for the most recent year of 6.5 cents per
unit or $920,000. (Id.)
Under
the governing IEEE contract specifying "nominal"
compensation for essential patents, the RAND royalties proposed by
Microsoft's experts are assuredly above -- not below -- the nominal
compensation Motorola obligated itself to accept.
Royalty
estimates based on the Via pool rates are generous to Motorola in at
least two respects. First, given the available data, Motorola's
"share" of patents in the "reconstituted" Via
pool was grossly overstated. Lynde used the number of Motorola SEPs
identified in the original 2010 demand letter, not the much lower
number asserted at trial. And Lynde used a low number for other SEPs.
Many ofthe 802.11 letters of assurance that were provided to IEEE
were "blanket" letters of assurance that did not identify
specific RAND-committed patents. The exact number of unidentified
patents is unknown, but is ··certainly in the thousands."
(11/16/12
Tr. 114 (Lynde).) Had the large portfolios from companies such as
Marvell,
Atheros, Qualcomm, and other 802.11 pioneers been accounted for, the
estimate of Motorola's RAND royalty would have been considerably
less, because Motorola's proportional share of pool royalties would
shrink. Second, as explained above, the Via pool rate starting point
was likely "too high." (11/16/12
Tr. 117 (Lynde).)
IV.
CHARLES DONOHOE'S RAND ROYALTY ESTIMATES ARE
UNSUPPORTED BY EVIDENCE
AND DEEPLY FLAWED.
Charles
Donohoe, an attorney, provided all ofthe testimony concerning
Motorola's estimate ofa RAND royalty in this case. Donohoe based his
analysis on [redacted] (11/20/12 Tr. 137-38.) [Redacted] (Id. at 138.)
26
Donohoe
never actually provided a royalty for Motorola's H.264 or 802.11
patents.
Instead,
he purported to provide a royalty specific to Windows (for its use
of H.264 patents) and for Xbox and the wireless adapter (for their use
of 802.11 patents). Donohoe offered no testimony as to what royalties
Microsoft would pay for the Xbox's use of Motorola's H.264 patents.
In the case of Windows and H.264, Donohoe gave sparse testimony. [Redacted] (Id. at 146.) [Redacted] ( Id. at 146.) [Redacted] ( Id. at 145-46.) [Redacted] (11/20/12 Tr. 142.) [Redacted] ( Id. at 142, 148.) 3 [Redacted] (11/20/12 Tr. 138-39 (Donohoe); Ex. 13.) [Redacted] (Ex.
3373;
11/20/12 Tr. 96-100 (Dailey).) [Redacted.]
27
[Redacted]
(11/20/12
Tr.
100 (Dailey).) Under any Georgia-Pacific
analysis
(modified
or otherwise), the Vtech license is irrelevant under Factor 1, which
concerns "royalties received by the patentee" that prove or tend to prove "an
established
royalty." ResQNet.com, Inc. v. Lansa, Inc., 594 F.3d 860, 869 (Fed. Cir. 2010) (emphasis added).
Further,
the 802.11 and H.264 portfolio licenses were inextricably linked to
the settlement of Motorola's substantial infringement claims against
Vtech involving patents unrelated to the standards at issue here.
Motorola had sued Vtech in 2007 for infringing its cordless and
corded phone patents. [Redacted] (11/20/12 Tr. 87-89 (Dailey).) [Redacted] (id at 89), [redacted] ( Id., at 89-91; Ex. 1681 at MOTM_WSH1823_0392621.)
By October 2011,
Motorola's 802.11 and H.264 portfolios had been injected into the
settlement discussions. (Ex. 2832.) The Vtech agreement followed
shortly thereafter. [Redacted]
(11/20/12
Tr. 93
(Dailey);
Ex. 13 at §§ 3.1(a)-(b), 4.1), [redacted] (11/20/12 Tr. 93-94 (Dailey); Ex. 13.) Because Vtech licensed Motorola's H.264 and 802.11
portfolios as part of package deal, that license has no relevance to
the value of Motorola's H.264 and 802.11 portfolios. (11/13/12
Tr. 184-85, 192-93 (Murphy).) Vtech had every incentive to agree to an excessive royalty to Motorola's H.264 and 802.11 patents -- a rate it might never actually pay -- in order to reduce its actual exposure on Motorola's non-SEP infringement claims. And Motorola had every incentive to engage in the same trade. Within a month of signing the 2011
28
Vtech agreement, Dailey [redacted] (11/20/12 Tr. 94-95 (Dailey).) [Redacted] (11/20/12 Tr/ 139 (Donohoe).) (Ex. 2833; 11/20/12 Tr. 104-06 (Dailey).) [Redacted] (11/20/12 Tr. 106-07 (Dailey).) [Redacted] (11/20/12 Tr. 115-16 (Dailey; Ex. 2800.)
As Schmalensee testified,
if
H.264 video standard essential patents were licensed together with
patents
that
were essential for other standards, one would need to estimate the
value of
the
other patents and subtract it out.
(11/19/12
Tr. 160.) See
LaserDynamics, 694
F.3d at 79; ResQNet.com,
594
F.3d at 869, 872.
While
Schmalensee said that the required apportionment of the value of these
different portfolios [redacted] was a "tough thing to do" (11/19/12
Tr.
160), the record
demonstrates
that the "value of the other patents" -- the cellular
patents -- represented the entire value [redacted], which means that the additional
29
value of the 802.11 and H.264 patents [redacted] is zero. [Redacted] (11/20/12
Tr.
74.)
Leaving aside the fact that [redacted] provides no evidence of the value of
Motorola's 802.11 and H.264 patents, the agreement was obviously the
product of hold-up. [Redacted] (11/20/12 Tr. 101 (Dailey).) [Redacted] (Ex. 1672; 11/20/12
Tr.
102-03 (Dailey).) Even if an agreement entered into under such
circumstances could be thought remotely comparable to a true RAND
license, the hold-up element would need to be subtracted out. [Redacted]
(11/20/12
Tr. 140 (Donohoe).) [Redacted] (11/20/12 Tr.
140, 147.) In
fact,
the stark differences confirm that these agreements are wholly
incomparable. [Redacted]
(11/20/12
Tr. 81-82 (Dailey); Ex. 1589), and would have played absolutely no role even in the hypothetical negotiation Donohoe suggested should inform a RAND royalty in this case. [Redacted] (11/20/12 Tr. 81-82.)
30
[Redacted] (Id. at 84-85.) [Redacted] (11/20/12
Tr. 140), [redacted] (11/20/12 Tr. 81 (Dailey).) [Redacted] (11/20/12 Tr.
138), [redacted] (11/20/12 Tr. 152-53.) [Redacted.]
While in the cases of both Windows and Xbox, [redacted] ( id. at 143-45), [redacted] (11/20/12 Tr. 137.) No Motorola witness presented any plausible reason why the long
established entire market value rule can be disregarded in the RAND
context.
The absurdity and bad faith inherent in Motorola's blind
application of a 2.25% rate to end products was made abundantly clear
in Motorola's dealings with chip supplier Marvell.
31
As
Marvell's Jennifer Ochs explained, when she wrote to Motorola
requesting a license to
Motorola's
802.11 portfolio that would protect Marvell's customers (including
Microsoft),
Motorola
responded with a proposed agreement that would require Marvell to pay
a 2.25%
royalty
based on the end products incorporating its 802.11 chipsets and sold
by Marvell's
customers-whether
a $400 Xbox
4 or
$100,000 automobile. (11/14/12 Tr. 63, 68-70 (Ochs);
Ex.
16.) As Ochs explained, it would be a "going-out-of-business
model to pay such rates"
because
even in the case of the Xbox the "royalty is slightly higher than
the cost of the chip itself."
(11/14/12
Tr. 70, 69.) That cannot be RAND.
Donohoe's
claim that Motorola's opening licensing demand "is RAND"
lacks any support in the record, and is a worthless ipse
dixit. See General Elec. Co. v. Joiner, 522
U.S. 136, 146 (1997); Wendler
&
Ezra.
P.C. v. Am. Intern. Group, Inc., 521
F.3d 790, 791 (7th Cir. 2008) (per curiam) ("An expert who
supplies nothing but a bottom line supplies nothing of value to the
judicial process.") (quotation marks omitted); Hathaway
v. Bazany, 507
F.3d 312, 318 (5th Cir. 2007) ("[A]n expert's testimony that 'it
is so' is not admissible.").
Even if it had any basis beyond
Donohoe's say-so, Motorola's proposal is facially not RAND. Donohoe sought to determine how much could Motorola extract from Microsoft in a bilateral negotiation. Thus, [redacted] (11/20/12 Tr. 144.) Donohoe did not explain how that position could be reconciled with Motorola's contractual obligation to grant nondiscriminatory licenses. Moreover, under Donohoe's approach, the significance of Motorola's patents to Microsoft's products would be important, but no Motorola witness testified as to what specific
32
value
its patents provided to Microsoft's products, beyond talking about
the legally-irrelevant value of standard compliance. (11/19/12
Tr.
211-13 (Dansky).) That only confirms Motorola's effort to capture the
hold-up value of standardization in violation of its RAND commitment.
(11/19/12
Tr.
169 (Schmalensee).) The hold-up effort is further confirmed by
Motorola's refusal to acknowledge the expiration of its patents:
Motorola seeks the full 2.25% royalty so long as it still has a
single unexpired SEP. That is the very definition of hold-up.
V.
DETERMINING
A GOOD FAITH RANGE
At the end of the trial, the Court asked the
parties to address the "standard of what constitutes a
good-faith range." (11/20/12
Tr.
171.) There are potentially two aspects to a "range" -- the
range of royalties that are truly RAND, or the range of royalties
demanded by the patent holder that, while not RAND, may be deemed
consistent with a contracting party's good faith obligations. As to
the former, in Microsoft's view, one applies the RAND principles as
described above and then looks for an upper bound for the RAND
royalty that is supported by the economic evidence. A RAND-committed
patent holder can always agree to a royalty-free license; the upper
bounds were provided by Dr. Lynde.
As to the latter, in Microsoft's
view, RAND (and good faith) requires that the patent holder's demands
hew closely to what is actually RAND. Whether Motorola's demands were
made in good faith will be determined during the "breach"
phase of this case, consistent with Washington law and its implied
covenant of good faith and fair dealing. Washington adopts the
definition set forth in Restatement (Second) of Contracts §
205.
Edmonson
v.
Popchoi,
172
Wn.2d 272, 280, 256 P.3d 1223 (2011); Frank
Coluccio Const. Co., Inc. v.
King
Cty., 136
Wn. App. 751, 766, 150 P.3d 1147 (2007). The Restatement provides
examples of violation of the duty of good faith in performance of
contractual obligations ("evasion ofthe spirit of the
bargain,
lack of diligence and slacking off, willful rendering of imperfect
performance, abuse of a power to specify terms, and interference with
or failure to cooperate in other party's
33
performance")
and in the "assertion, settlement and litigation of contract
claims and defenses" (such as "dishonest conduct such as
conjuring up a pretended dispute, asserting an interpretation
contrary to one's own understanding, or falsification of facts").
§
205
cmts. d, e.
Bad
faith includes "'obstinate conduct that necessitates legal
action' to enforce a clearly valid
claim
or right," "vexatious conduct during the course
of litigation," or the "intentional bringing
of a
frivolous claim [or) defense with improper motive." Rogerson
Hiller Corp. v.
Port
of Port
Angeles,
96
Wn. App. 918, 927-28, 982 P.2d 131 (1999).
Microsoft
submits that a demand exceeding the upper bound of what is actually
RAND would presumptively violate the duty of good faith and fair
dealing, as the very purpose of the RAND commitment is to make
non-discriminatory offers that anyone can accept, especially where,
as here, the patent holder is concurrently seeking injunctive relief
and has an incentive to forestall the consummation of a license. Any
offer above the high end of RAND would require proof of extenuating
circumstances to establish that the offer was legitimately made in
good faith. When the patent holder makes the RAND commitment, it
gives up the right to employ the conventional process of negotiation
to extract all that the traffic will bear from individual
implementers. Because the non-discriminatory royalty has to be
equally available to all, the demand cannot be justified by the
posture or needs of any individual implementer. It
is
not a rug bazaar. A multiple of a RAND royalty would be very difficult
to justify under any circumstances because that would skew the
ensuing discussions away from, not toward RAND.
CONCLUSION
For
Motorola's H.264 SEPs, the Court should find that a RAND royalty for
Microsoft is no more than $502,000 for the most recent year. For
Motorola's 802.11 SEPs, the Court should find that a RAND royalty is
no more than $736,000. The Court should direct the parties to try to
reach agreement on annual royalty amounts for other years, using the
same basic approach, and to report back to the Court.
34
DATED
this 14th day of December, 2012.
CALFO
HARRIGAN LEYH &
EAKES
LLP
By
s/
Arthur
W. Harrigan. Jr.
Arthur W. Harrigan, Jr., WSBA #1751
By s/ Christopher
Wion
Christopher Wion, WSBA #33207
By
s/ Shane P. Cramer
Shane P. Cramer, WSBA #35099 [address, phone, fax]
By
s/
T.
Andrew Culbert
T.
Andrew Culbert David E. Killough MICROSOFT CORPORATION
[address, phone, fax]
David
T. Pritikin Richard A.
Cederoth
Constantine L. Trela, Jr. William H. Baumgartner, Jr. Ellen S.
Robbins Douglas I.
Lewis
David C. Giardina John W. McBride
David Greenfield
Nathaniel C. Love
SIDLEY AUSTIN LLP [address, phone, fax]
35
Carter
G. Phillips Brian R.
Nester
SIDLEY AUSTIN LLP [address, phone, fax]
Counsel
for Microsoft Corporation
_____________
1
Motorola
also pointed to a letter sent by
Microsoft
to the FTC in 2011 as a supposed admission that hold-up has not been
a problem. (11/16/12 Tr. 133 (Lynde); Ex. 2970.) Motorola ignores the
context and antecedent of the statement, which clearly references a
specific situation where the patent holder conceals its standard
essential patents during development of the standard and then tries to
exploit them after adoption. (See Ex. 2970 at MOTM_WASH1923_0054676 (understanding hold-up as "intentional or deceptive conduct in connection with patents that read on standards").)
2
Motorola
tried to cite to various Microsoft documents to suggest that pools
provide low mtes, but Motorola misreads the documents. Exhibit 2345
is an email by Sullivan in which he correctly stated that SSOs and
pools are sepamte and different organizations. He recognized that
fundamentally-important IP may have greater value than the average
patent in a pool, but based on his personal knowledge ofH.264 and
Motorola's contributions, he believes that none of Motorola's patents
fall into that category. (11/14112 Tr. 57 (Sullivan).) Motorola also
points to a blog post written by Microsoft's Dean Hachamovitch
suggesting that revenue played no part in Microsoft's decision to
join the MPEG LA pool. (Hachamovitch Dep. at 227-32, 238-39; Ex.
2840. The post makes clear that he was not saying that the pool rates
were low, merely that Microsoft had other motivations for joining.
3 [Redacted] (11/20/12 Tr. 144) [Redacted.] These
royalty values are thus meaningless, and entirely dependent on the relative
units sold by Microsoft and by Motorola in any given year -- they are not freestanding RAND royalty rates.
4 Actually, Motorola's proposed license to Marvell explicitly excluded any protection for Microsoft even thought Marvell had specifically sought it. (11/14/12 Tr. 68 (Ochs).)
36
CERTIFICATE
OF SERVICE
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37, 38
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