So now we know.

The royalty Microsoft offered to pay is so low, you'd think Microsoft would be thrilled Motorola said yes -- 2 pennies per unit up to 10 million units, and 1 penny afterward, figures that Motorola accepts while stating clearly that it's not a FRAND rate in Motorola's eyes. Motorola earlier refused the offer. Why the change? And why is Microsoft going ballistic and whining to the judge [PDF] and to the FTC [PDF], telling the FTC that Motorola is violating the FTC's January order? Here's the part in Motorola's letter to the judge that seems to be causing Microsoft so much anxiety, and where you see GI, it means General Instrument Corporation, of which Motorola is a subsidiary the parent and GI the subsidiary [PJ: Sorry for the confusion.]:

Pursuant to German law, Microsoft owes GI the royalties specified in the license agreement as well as past damages to compensate GI for Microsoft's prior infringing use of GI's patents. See Exhibit B.

Past damages will be calculated in further proceedings in the German courts pursuant to German damages law.

Motorola recognizes that Microsoft appears to dispute that the Orange Book license is executed and enforceable in Germany. That issue—as well as past damages—will be decided by the German courts in due course.

Jump To Comments

[Update 1, Update 2]

When Microsoft got wind of this "acceptance" of its offer, it went absolutely nuts, as you can see in its letter to the FTC, Microsoft's Exhibit B. Motorola is trying to "unlawfully leverage its FRAND-encumbered SEPs to extract payments from Microsoft in excess of FRAND and in violation of the Commission's Order," Microsoft writes. To which Motorola would likely say, We are just accepting the figures you yourself proposed.

Here's why Microsoft is so upset:

Microsoft's Orange Book offer, as amended over time, proposed FRAND royalties for the period after Google's acquisition of Motorola (at which time Motorola became bound by the royalty terms of Google's license agreement with the MPEG-LA AVC/H.264 patent pool), but proposed a payment for the prior period of at least ten times FRAND rates and included a royalty-free grant back to Microsoft H.264 German SEPs. In its January 15 letter, Motorola purports to accept Microsoft's Orange Book offer to lock in this excess-of-FRAND compensation. In addition, Motorola seeks in its letter to condition its acceptance of the Orange Book offer on the outcome of further German proceedings in which it expressly reserves the option of seeking "damages" in excess of FRAND (i.e., non-FRAND royalties, Motorola's lost profits and/or Microsoft's profits as if this were an ordinary patent infringement case under German law not involving FRAND-encumbered SEPs.

The filings, first, so we don't get lost:

655 - Filed & Entered: 02/22/2013
Letter from Motorola re [653] Minute Order re Submission of Additional Evidence. (Attachments: # (1) Exhibit A, # (2) Exhibit B)(Palumbo, Ralph)

656 - Filed & Entered: 02/22/2013 Letter Docket Text: Letter from Microsoft re Submission of Additional Evidence re [653] Minute Order . (Attachments: # (1) Exhibit A, # (2) Exhibit B)(Harrigan, Arthur)

Motorola seems to have given Judge Robart pause, at least for a bit. But apparently that all happened *before* he saw all these documents. He heard about them, issued his orders, and presumably is reading them after the orders issued. The letter from Motorola is dated yesterday, after all. So perhaps he won't accept any of this. Motorola didn't get much from him so far, so maybe this will change absolutely nothing. But when he heard about these developments, he at least wanted to see the evidence.

I've never understood how Judge Robart could set a worldwide royalty for Motorola's FRAND patents. It strikes me as American hubris, to assume to set a price for a royalty for all situations in all the countries in the world, particularly for a judge who has never done it before. Has any judge? Situations vary, after all, and laws in various countries do too, and that's exactly why normally you have negotiations between the parties. The agreement that Motorola just accepted from Microsoft, however, may clue him in that setting just one rate worldwide isn't really possible or equitable, in that Microsoft offered payments for previous infringement at a higher than FRAND rate, or it's higher than Microsoft now claims in Seattle is FRAND. It surely has to have him thinking about why Microsoft would have made such an offer in Germany, given all it has asserted in Seattle. It doesn't match. Maybe, if he thinks he has the right to decide all this for the world, he should at least set a range instead. And of course Motorola's position has been from day one that he lacks the authority to do what he's doing, so all this will eventually have to be sorted out on appeal.

What about the fact that the agreement sets a higher rate Microsoft has to pay for before the Google acquisition than for afterward? What if Judge Robart was thinking about deciding that the Google MPEG license doesn't apply to Motorola, something both Google and Motorola claim it does not. Should the higher rate in the agreement for prior to the acquisition apply in Seattle for everything, if that were his decision? No wonder he'd like further briefs, which have to be filed by March 1st. And no wonder Microsoft is turning purple.

It's a complex turn of events, but if you stick with it and read through all the details, I think you'll enjoy it. At least, I do.

Let's start with Motorola's letter to Judge Robart yesterday:

February 22, 2013

The Honorable James L. Robart
United States District Court
Western District of Washington
[address]

Re: Microsoft Corporation v. Motorola Mobility, Inc.
Case No. C10-1823-JLR
Motorola's Submission of Additional Evidence

Dear Judge Robart:

Pursuant to the Court's order of February 14, 2013 (Dkt. 653), General Instrument Corporation ("GI"), Motorola. Inc. and Motorola Mobility LLC (collectively including GI, "Motorola") hereby submit GIs January 11, 2013 acceptance of Microsoft's tendered offer for a"H.264/AVC Patent Cross-License For Germany** together with GI's German counsel's cover letter of January 15, 2013 to provide a status update to the Court. These are the documents discussed at the telephonic conference with the Court on February 12, 2013.

Motorola and GI wish to bring these documents to the Court's attention to keep the Court fully apprised of ongoing proceedings in other jurisdictions concerning H.264 patents.

Ongoing German Proceedings

As this Court is aware, in litigation in Mannheim, Germany, GI accused Microsoft of infringing two European patents relating to video encoding/decoding technology.

In these litigations, Microsoft asserted an "Orange Book" defense—an antitrust defense that derives its name from the Orange-Book-Standard decision of May 6, 2009 from the German Supreme Court (docket no. KZR 39/06). On December 23, 2011, to support its Orange Book defense under German law, Microsoft made a license offer for the two asserted patents. An amended offer was made on August 31, 2012. This license offer constituted a signed license for current and future sales. See Ex. A at 7 (Microsoft date of execution). Under German law, such an offer is called an "Orange Book offer." This offer, which was drafted solely by Microsoft, was still open when GI accepted that offer by executing the license tendered by Microsoft. See id. (GI date of execution).

Exhibit A thus reflects in Motorola's view an enforceable license agreement.

Pursuant to German law, Microsoft owes GI the royalties specified in the license agreement as well as past damages to compensate GI for Microsoft's prior infringing use of GI'spatents. See Exhibit B.

Past damages will be calculated in further proceedings in the German courts pursuant to German damages law.

Motorola recognizes that Microsoft appears to dispute that the Orange Book license is executed and enforceable in Germany. That issue—as well as past damages—will be decided by the German courts in due course.

Impact on Issues Before This Court

The intent of Motorola's submission is to provide a status update to the Court as to ongoing proceedings—not to advocate that the German proceedings affect this Court's pending decision.

Respectfully,

SUMMIT LAW GROUP PLLC

/s/ Ralph H. Palumbo

Ralph H. Palumbo

To which Motorola would likely respond, we're not doing that. We are merely accepting your money, and as the agreement states, it's up to the Mannheim court to figure out disputes about the agreement. And Motorola didn't write that agreement. Microsoft did.

Motorola's Exhibit A is the H.264/AVC Patent Cross-License for Germany, the agreement Microsoft now wishes not to have to abide by. Microsoft signed it when it sent its offer back on August 31, 2012. It had to make a specific offer, it says itself in the opening paragraphs, because "the District Court of Mannheim has indicated the Orange Book Standard requires Microsoft, when proposing specific license fees in this Agreement, to set the license fees such that refusal by GI would be a blatant violation of antitrust law."

They set it at a couple of pennies per unit, and I doubt they expected Motorola to ever sign it. And at first, it in fact refused to do so. But that was before Judge Robart started ruling for Microsoft over and over and over -- and before the FTC got into this dispute -- and the judge seemed willing to decide for the world what Motorola should receive, if anything. I've never understood how a Seattle judge could make such a determination for Germany, frankly. Germany has its own laws that control German patents and Germany knows how its own laws work better than a US judge. They don't need, it logically follows, a US judge to tell it what to do about its own patent law, which the judge stated he isn't an expert in.

The FTC issued its order on January 3rd. So Motorola/General Instrument signed the Microsoft agreement shortly thereafter, on January 11th. Done. We'll see.

Three things about the agreement stand out to me:

• The opening section at 0.1 says: "This Agreement shall be effective as of its signing by GI." That would mean to me that it is effective as of January of 2013, when it was signed by Motorola/GI.

• 3.10 reads: "Freedom to negotiate a new royalty rate. The parties are free at any time to negotiate a new royalty rate, or have a new royalty rate determined by a Court of Law, arbitral tribunal, an antitrust authority or independent third-party charged with giving a binding opinion." It surely couldn't go much lower, I wouldn't think.

• Section 8.1 and 8.2 say German law governs the agreement and the Mannheim District Court has exclusive jurisdiction over any disputes about the agreement.

What's Motorola's Exhibit B? It's Quinn Emanuel's letter to Microsoft's German lawyer, referencing Microsoft's offer and saying in effect, Thanks and surprise -- we accept your offer. Here's the text:

Dear Colleague,

In the above matter we refer to the offer of your clients to conclude a license agreements (the cross-license agreement attached to your letter of 31 August 2012 and your letter dated 23 December 2011).

We note that your clients, in the context of the aforementioned offer, acknowledged and accepted their obligation to pay damages on the merits ("Schadenersatz dem Grunde nach anerkannt"). This follows inter alia from your letter of 23 December 2011, where the following is stated:

"As required by the recent case law of the District Court in Mannheim (esp. decision of 9 December 2011, docket no. 70122/11) Microsoft Corp. expressly acknowledges ("erkennt dem Grunde nach an") the duty to cover past damages for any past use of the Licensed Patents. The damages are to be determined in accordance with the respective principles set forth under German law."

For the sole purpose of partially resolving the pending disputes our client has decided — without prejudice and without acknowledging any legal obligation to do so — to accept your clients' offer.

For the avoidance of doubt, the acceptance of the offer does particularly not represent any acknowledgement or acceptance whatsoever as to

(1) the compliance of your clients' offer with FRAND terms and/or any applicable legal requirement such as the requirement laid down in the Orange Book decision of the German Federal Supreme Court; our client particularly denies that the rate set in the license is a FRAND rate.

(2) an obligation of our client or Google Inc. to grant licenses under the patents in suit with regard to any MPEG LA pool license agreement; or

(3) the standard essentiality of the Licensed Microsoft Patents as defined in the agreement or any past, present and/or future use of the Licensed Microsoft Patents by our client and/or any of its affiliates.

Even though our client accepts the license agreement to resolve the dispute going forward, the agreed license rate is without prejudice to calculating past damages prior to the date of the conclusion of this agreement (in whatever form our client might choose to calculate such damages under German law). Our client will specify the amount of past damages after having received the proper accounting under German law. With regard to your understanding as to the release regarding any further claims for past use of the H.264 technology (your letter of 23.12.2011), we remark that a "release" only occurs as far as German law provides for that in connection with accepting the offer regarding the two patents in suit. Particularly, our client retains all rights under the Mannheim court's judgments specifying your clients' duty to render account which your clients owe both under their statutory obligations and the corresponding acknowledgement to pay past damages (rendering account is the indispensable prerequisite for this under German law). This is in line with case law of the Karlsruhe appellate court (appeal process to the 9 December 2011 decision cited by you in your statement quoted above, decision of the Karlsruhe appellate court 13 June 2012, case number 6 U 136/12). We also remark that the

2

acknowledgement of the duty to pay damages has been made unconditionally, i.e. not conditioned upon the conclusion of the license agreement.

Our client retains the right to exercise the option for a cross license at a later point in time. Based, on the conclusion of the license agreement due course, our client will declare the pending disputes moot with regard to our client's request for injunctive relief and recall. We expect that your client will submit a corresponding declaration immediately thereafter.

The attached counter-signed version has been signed by Ms. Catherine Lacavera, patent litigation director of Google Inc., who is authorized so sign for GI.

Yours sincerely,

[signature]

Dr. M. Grosch
Attorney at Law

3

But this is the part that has Microsoft's panties in a bunch:

Even though our client accepts the license agreement to resolve the dispute going forward, the agreed license rate is without prejudice to calculating past damages prior to the date of the conclusion of this agreement (in whatever form our client might choose to calculate such damages under German law). Our client will specify the amount of past damages after having received the proper accounting under German law.

Microsoft's letter to Judge Robart, which it failed to make available in a copy and paste version, strikes a "between us buddies" tone in the opening paragraph:

Dear Judge Robart:

Motorola apparently intends to submit as new "evidence" a January 15, 2013 letter from Motorola's German counsel regarding Orange Book issues in the German action. Microsoft submits that any ongoing issue related to the Orange Book process have no bearing on the matters currently pending before the Court, as the Court has recognized previously. Moreover, Motorola had ample opportunity to address any potentially relevant aspect of the Orange Book process previously. Its belated efforts to massage the record should be disregarded.

Microsoft tries to persuade that judge that if he reviews the Motorola letter, Microsoft would like to state that it's not an acceptance of Microsoft's offer but rather a counteroffer, with Motorola imposing conditions "contrary to Microsoft's prior Orange Book submissions." They attach the letter, Exhibit A, Microsoft sent to Motorola on receiving the news that Motorola was accepting their offer after all. And for good measure they attach also their letter to the FTC, Exhibit B, accusing Motorola of a flagrant breach of the FTC's January 2013 settlement with Motorola and Google "which prohibits Motorola from pursuing injunctions based on RAND-encumbered patents world-wide, including injunctive relief of the kind it still seeks in Germany".

Well, not precisely. They are saying they'll drop the injunction and accept money, some of which is still to be determined as to an amount for past infringement. But the royalty rate Microsoft proposed was accepted, despite it not being a FRAND rate, as Motorola sees it. And, as Microsoft itself states, the offer from Microsoft was made prior to the FTC settlement. Finally, and this may be the paragraph that especially caused Judge Robart to reopen the trial, Microsoft ends like this:

Motorola had ample opportunity at the November trial to explain any possible bearing that Microsoft's Orange Book offer could possibly have on the Court's determination of a RAND royalty. Its current belated effort should be disregarded.

The letter to Dr. Grosch from Microsoft's German lawyer is a sketch. The first paragraph states that his letter of acceptance is "not an acceptance of Microsoft's offer, but rather a counteroffer." The FTC Order from January, the letter goes on, "bans Motorola from obtaining or enforcing any injunction based on any pending claim or any new claim." Microsoft only made the August offer "as part of its defense to the injunction proceeding that Motorola can no longer pursue," Microsoft whines. "Yet Motorola maintains its actions and demands for injunction before the Appellate Court Karlsruhe, and seeks via its purported 'acceptance' of the Orange Book offer (which is limited to only two Motorola German H.264 SEPs) to circumvent the worldwide determination of royalties in the proceedings in the Western District of Washington". ...

So that's Microsoft's panic. And that's not all. It also sees the Motorola move as a way to circumvent the right the FTC Order gives any potential licensee, like Microsoft, "to challenge in court Motorola's allegations that its SEPS are valid and infringed." And it closes:

Motorola attempts to circumvent this requirement of the FTC Order by enforcing as the apparent requirement of the Mannheim Regional Court that Microsoft abandon its nullity action as a condition of the Orange Book process. Motorola's decision to enforce this legal rule imposed by the Mannheim Regional Court violates the FTC Order every bit as much as Motorola's decision to improperly enforce an injunction on a Standard Essential Patent.

Motorola apparently seeks damages that are not limited to FRAND royalties, but rather may include royalties in excess of FRAND, Motorola's "lost profits" and/or Microsoft's profits.

Ah, now that is interesting. Microsoft offered in the German situation more than what it now claims in Seattle is a proper FRAND rate? Intriguing.

Quinn Emanuel is, I conclude, the most swashbuckling firm I have ever watched at work. They simply never give up, they fight hard for their clients, and they are deep. They probably all play chess like a master and can solve Rubik's cubes. And they may have concluded, as I had too, that getting fairness for Motorola in Seattle was not to be expected. So they are trying something else to do the best they can for their client. Microsoft would prefer to be privileged in a court in its own backyard, I guess. Who wouldn't?

Whatever happens, there will be an appeal. And that is where I can see this move helping Motorola's claim that the judge in Seattle overreached, both in deciding he had jurisdiction to set just one royalty for the entire world and in ignoring a valid German decision that doesn't match his royalty rate, if it doesn't after he reaches his decision, and, if it happens, ignoring what Motorola views as a fully executed and valid license agreement.

In short, things just got more complicated, and we have miles and miles to go. And while Microsoft is expressing indignation, let's think about something. When Motorola donated its patents under FRAND terms originally, it wasn't expecting anything like the new way folks want its rights altered mid-stream. Not only does Microsoft want it to be unable to seek injunctions as relief, but now Microsoft wants the worldwide rate it is allowed to seek to be set by a single judge, without regard to the various circumstances in the world that normally Motorola could have negotiated personally. Does that feel fair to you?

Before you answer, I'll mention that a judge in Illinois just ruled [PDF] the opposite to Judge Robart on the subject of whether FRAND terms represent a contract. Judge Robart claims the right to settle all this because he viewed Motorola's FRAND submission to be a contract. In Illinois, Motorola, NetGear and Cisco have been trying to push back against a nonpracticing entity called Innovatio IP Ventures, who has been suing restaurants and supermarkets and coffee shops all over the place for using wireless in their businesses or letting customers go on the Internet on their wireless, claiming they are infringing Innovatio's 17 patents when they do that. The three companies brought a declaratory action against Innovatio, and one thing they tried was to argue that Innovatio's RAND patents required them to license on reasonable terms, and they were not doing so. On the RAND issues, the Illinois judge said a RAND agreement is not a contract. It's an agreement to negotiate with a willing potential licensee. That's the very argument that the judge in Seattle shot down when Motorola raised it.

And the Illinois judge wrote that this area of law, RAND obligations, is "muddled", and in footnote 10 he lists some of the conflicting views on injunctions, damages, and contract:

¹⁰ At least one academic commentator agrees that RAND obligations may bar injunctive relief, but do not prevent a patent holder from suing for damages. Doug Lichtman, Understanding the Rand Commitment, 47 Hous. L. Rev. 1023, 1043 (2010) (“Courts could interpret RAND as a public commitment that creates a defense of equitable estoppel. Under that estoppel, the patent holder would be deemed to have permanently waived his right to seek triple damages or to ask for injunctive relief, but would otherwise be allowed to invoke patent law’s damages regime.”). Other commentators contend that both an injunction and damages are available. Suzanne Michel, Bargaining for RAND Royalties in the Shadow of Patent Remedies Law, 77 Antitrust L.J. 889, 893 (2011) (“If negotiations break down, the implementer can bring a contract claim asking the court to enforce the patentee’s promise to license at RAND rates. The patentee can claim patent infringement, seeking remedies, including compensatory damages and a permanent injunction prohibiting future infringement.” (footnote omitted)); see also J. Gregory Sidak, Holdup, Royalty Stacking, and the Presumption of Injunctive Relief for Patent Infringement: A Reply to Lemley and Shapiro, 92 Minn. L. Rev. 714, 747-48 (2008) (arguing that “removing the presumption of injunctive relief would decrease dynamic efficiency”). The court also notes that Professor Mark Lemley, another highly respected patent law scholar, contends that a RAND obligation should bar an infringement action, but would allow the patent holder to recover a RAND royalty through a contract claim. See Mark A. Lemley, Intellectual Property Rights and Standard-Setting Organizations, 90 Cal. L. Rev. 1889, 1925 (2002) (“[I]f a court determines that an IP owner granted a license by virtue of agreeing to be bound by an SSO IP rule, the only remaining questions concern the scope of the license and the royalty rate. The IP owner in that case has only a contractual claim for a royalty, not a cause of action for patent infringement that might result in an injunction, treble damages, and attorneys’ fees.”).

Update: Matt Rizzolo at The Patent Essential Blog adds some additional details:

Microsoft’s letters also bring up a couple of interesting questions, which unfortunately have not yet been answered:

First — is a FRAND patent owner ever entitled to more than a FRAND royalty for infringement, such as in cases of willful infringement? The implication from Microsoft’s letter appears to be that at least Microsoft thinks the answer is no, but it’s not explicitly addressed. Microsoft just says that here, Motorola is not entitled to damages “in excess of FRAND” — but there’s certainly a case to be made for allowing increased damages in cases of willful infringement to deter gamesmanship by potential licensees....

Second — in this particular case, would an additional damages award by the German court matter at all? For instance, if Judge Robart sides with Microsoft and agrees that he alone has jurisdiction to determine the amount of past damages and future royalties payable to Motorola for its SEPs, he could simply order Motorola to return to Microsoft any amount of German damages that exceed his to-be-determined RAND rate. (He clearly has no qualms about his rulings affecting the actions in Germany, having previously enjoined Motorola from enforcing its injunction over there.) In fact, as pointed out by Microsoft’s German counsel in his letter to Motorola’s counsel disputing the purported acceptance of the Orange Book offer, this course of action was actually proposed to Judge Robart by Motorola back in April 2012. Intuitively, this makes sense, because if it’s determined that Motorola did not breach its RAND obligations to Microsoft, Motorola may actually be entitled to these damages in Germany. That being said, the FTC could still consider it a breach of the consent decree — I guess we’ll have to wait to find out.

In terms of what this all means for Judge Robart’s upcoming decision on the RAND rates for Motorola’s patents, it’s hard to say. Both Motorola and Microsoft discount the relevance of the Orange Book offer/agreement as to the actual RAND terms for Motorola’s patents — with Motorola claiming that the rate is too low while Microsoft claims that the rate is far too high. Of course, Judge Robart could still use this as persuasive evidence — either of the proper RAND rate or of the structure of the agreement (i.e., cents per patent per unit, or no royalty caps for units made prior to the Google-Motorola acquisition). Given the particularly large volume of Microsoft H.264-compliant products, it’s a good bet that the royalty cap issue could have a huge effect on the final RAND royalty amount (and as we noted last week, it’s something Judge Robart might be paying attention to as well).

Update 2: Take a look at the FTC-Google/Motorola Agreement [PDF], specifically Section IV.E.4, and I'll highlight with color the part that I think you will find the most relevant:

E. Notwithstanding any other provision of this Order, nothing herein shall 1. prevent or restrict the Potential Licensee and Respondents from negotiating, arbitrating or entering into any License Agreement involving FRAND Patents on any terms or in any manner that is mutually agreed to by the Potential Licensee and Respondents;

2. prevent or restrict Respondents from enforcing any License Agreement entered into prior to the effective date of this Order;

3. as to a Potential Licensee, apply to Respondents’ FRAND Patents to the extent already licensed to such Potential Licensee;

4. prevent or restrict Respondents from pursuing relief, claims or defenses other than Covered Injunctive Relief, including damages for infringement and potential enhancements for willful infringement;

5. restrict any party from arguing in any Request for a FRAND Determination that the District Court cannot or should not hear this action on jurisdictional or justiciability grounds or that an alternative forum would be more appropriate; or

6. restrict any party from making arguments in any Request for a FRAND Determination or in Binding Arbitration regarding the validity, Essentiality, Infringement or value of the patents at issue in such proceeding.