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Microsoft and Motorola File Letter Briefs on Terms of Google's MPEG LA License ~pj
Monday, March 04 2013 @ 03:31 PM EST

In the Seattle litigation between Microsoft and Motorola over how much Microsoft should pay for Motorola's FRAND patents, the presiding judge, Hon. James L. Robart, asked the parties to file short letter briefs by March 1st on how to interpret one section of the Google-MPEG LA license agreement, and they have now done so. As you will see, things have changed since Motorola revealed the terms of the Google-MPEG LA license. The judge now has questions about the language, after the January 28th hearing.

Does it cover Motorola as an affiliate of Google? Are all affiliates covered? Or only those specified by a licensee? And is the royalty cap provision in one section a stand-alone provision? Is there, in other words, a cap on how much Microsoft has to pay?

His request is related to his decision to reopen the trial that ended in November, now that Motorola has presented new evidence that didn't present at that trial. It didn't have to, by the way. The trial was to be held in parts, and November was part one. Now that the new arguments are on the table in connection with the next phase about exactly what the rate should be, however, the judge sees a need to go back and take another look, and I think you'll agree with him that what Motorola has presented changes the picture, and not in a way that favors Microsoft as much as before, which was trying for a low-ball figure. And that is now in question.

Jump To Comments

The parties' letter briefs, first:
657 - Filed & Entered: 03/01/2013
Letter from Arthur W. Harrigan, Jr. re [654] Minute Order letter re issues related to Google-MPEG LA License Agreement. (Harrigan, Arthur)

658 - Filed & Entered: 03/01/2013
Letter from Ralph H. Palumbo re [654] Minute Order re Google-MPEG LA License Agreement. (Palumbo, Ralph)

You can see what the trial was about by reading the trial briefs. As you will see, Microsoft's arguments back at the trial were essentially that while Motorola never joined MPEG LA, its standard-essential patents should be valued according to the pool's rates for other standard essential patents. Its other argument was that Google did join, and so when it brought Motorola under its wing, Motorola became an affiliate, and hence Motorola's patents were swept into the pool whether Motorola likes it or not. The judge seemed to be leaning in Microsoft's diretion, but once the Google-MPEG LA license agreement showed up, he's having to take another look. Motorola's evidence seems to have caught Microsoft by surprise, not just the judge, and its former position makes it look like it didn't present the full picture or didn't know it.

The actual questions the judge asked them to address in his order are:

The court directs the parties to Section 3.1.7 of the Google-MPEG LA license which states in relevant part:
Enterprise Licensees. Pursuant to Article 2.7 and notwithstanding anything to the contrary in Article 2.9 hereof, and in lieu of the royalties specified in Articles 3.1.2, 3.1.3, 3.1.4 and 3.1.5, a Licensee and its Affiliates which are licensees under the AVC Patent Portfolio License and are identified in writing to the Licensing Administrator by Licensee shall pay no more than the following total amounts in each Calendar Year for all such licenses for the combined Sales of Licensee and its Affiliates during such year:

[Prescribing royalty amounts and caps.]

(Google-MPEG LA License § 3.1.7 (emphases added).) From the italicized language of Section 3.1.7, it appears to the court that Licensee and its Affiliates fall under the royalty cap prescribed therein only if the Affiliates are themselves licensee under the AVC Patent Portfolio and are identified by the Licensee in writing to the Licensing Administrator.

No later than March 1, 2013, the parties may submit letter briefs of no more than 6 single-spaced pages in length addressing:

(1) whether the court’s understanding of the italicized language is correct; and

(2) whether Section 3.1.7 of the Google-MPEG LA License Agreement is a stand-alone royalty cap provision or whether the section affects other provisions of the license agreement, and in particular whether Section 3.1.7 has an affect Motorola’s obligation to license its standard essential patents as an Affiliate of Google.

As Matthew Rizzolo at The Essential Patent Blog pointed out earlier, this is a crucial issue because if the judge finds that the language of Section 3.1.7 means that royalty caps do *not* apply to Motorola’s patents, "that could dramatically increase the amount of RAND royalties owed by Microsoft to Motorola for H.264-essential patents."

Clearly, the judge may be shifting somewhat away from Microsoft's theory, and indeed by my reading, so is Microsoft, which now agrees with Motorola, and the judge's proposed interpretation, about the wording regarding the Enterprise License and when affiliates are covered. Microsoft now agrees that the agreement's language about affiliates means that "Affiliate (i) must itself be a Licensee under the AVC Patent Portfolio License, and (ii) must be identified by the Licensee in writing." But then Microsoft begins a tricky dance to try to get past what appears to have turned into a sinkhole position.

It all turns on the phrase "commensurate to the scope of the licenses which Licensee has selected hereunder” in section § 8.3 of the agreement. What does "scope" actually mean in the grant back context? Microsoft now claims it isn't seeking any grant-back rights associated with Google’s Enterprise License, and "so none of the provisions relating to Enterprise Licensees are relevant to the issues before the Court." Hmm. Now they tell us.

Here's part of how Rizzolo sums up Microsoft's position:

Microsoft argues in its latest letter brief that the grantback provision binds not just Google, but also all of its affiliates — and that this means that Motorola owes Microsoft a license to its H.264-essential patents at a capped, per patent rate prescribed by the agreement (which works approximately $2700 per patent per year).

Microsoft claims that the Enterprise License provision and its royalty terms are “irrelevant to the issues before the Court,” because it — unlike Google — is not a video content provider and does not need to invoke this license. According to Microsoft, the Enterprise License provision also does not affect the grantback provision, characterizing it simply as a standalone royalty cap provision that is designed for the convenience of any particular MPEG LA patent pool licensee.

And here's his take on Motorola's argument:
In its letter brief, Motorola argues that the Enterprise License provision is not a standalone royalty cap. Motorola asserts that this provision (and the particular licenses selected by Google) “directly affect[] not only the scope of the grant back obligation under Section 8.3, but also affects the scope of any grant back license required under the grant back obligation because the grant back obligation must be commensurate in scope with the selected license.” The “commensurate to the scope” language is key here — essentially, Motorola argues that because the Google-MPEG LA agreement extends no rights to Motorola or Motorola’s products (because it was never identified by Google as a licensed affiliate under Section 3.1.7), the grantback provision does not confer any obligations on Motorola. Motorola asserts that its interpretation is further bolstered because such limited reciprocal cross-licensing is a common industry practice.

Motorola also acknowledges Microsoft’s arguments about the purported purpose of the grantback provision, but dismisses this view as contrary to the “plain meaning” of the words of the agreement. Motorola argues that in any event, Motorola is not a holding company or non-practicing entity, but is in fact an operating company — and that the court should not decide issues based on hypothetical concerns.

The issues arose during that January hearing, during the second half of the day's argument, over the terms of the Google-MPEG LA license agreement, which you can find here as PDF (and text, if you scroll down). I also did my best to explain it in that article. And here are the earlier briefs the parties filed on how they each viewed the agreement.

Notice that before the hearing, Microsoft's position was this:

The Google License is a separate contract that ultimately derails Motorola’s excessive H.264 demands. It includes a “grant-back” provision that entitles Microsoft to a worldwide, nonexclusive license to all H.264 essential patents owned by Google and its “Affiliates.” Defendants Motorola Mobility LLC and General Instrument Corp. (“Defendants”) are Google’s Affiliates because they are wholly-owned subsidiaries. The “grant-back” provision in the Google License includes a specified per-patent royalty rate that is, by its terms, “presumed” to be fair and reasonable. Google agreed to these terms on behalf of itself and its Affiliates. Microsoft is therefore entitled to a license of Defendants’ H.264 essential patents at the royalty rate specified in the Google License.
I notice that there was no distinction made, and Microsoft didn't say it wasn't seeking a grant back from the patents covered by the Enterprise License. Now, after acknowledging the the judge has question one interpreted correctly, it says it isn't after that grant back.

Motorola's position before the hearing was that "there is no automatic inclusion of Affiliates, under the Enterprise License Google chose." They had to be identified in writing and it was a matter for Google to decide. Further, it pointed out that at the time the agreement was signed, Motorola wasn't an affiliate anyhow:

As an initial matter, under the language of this provision, the grant back requirement only extends to those entities that were Affiliates at the time of "full execution" of the Agreement. At the time of the execution of the AVC Agreement in 2005, Motorola had not yet been acquired by Google and was not subject to its control. Thus, it was not an "Affiliate" at the time of "full execution" of the agreement and Section 8.3, therefore, has no applicability to Motorola and its patents.
That was, I assume, a panic flag for Microsoft, and it brought the caps to the fore, as well as what a royalty rate should be for past infringement, prior to Motorola being acquired by Google, and we see them shifting. In my experience, parties in litigation make changes in strategy only when they worry they are losing with the old one. When Microsoft agreed with the judge's question number one, it concedes that Motorola has won this point.

If you recall, Microsoft had introduced extrinsic evidence, at the judge's request, in the form of a Declaration of Lawrence A. Horn [PDF], MPEG LA’s President and CEO, and the judge accepted his declaration without allowing Motorola the chance to depose Mr. Horn. Motorola's position was that it is hearsay, but it rolled forward after the judge denied them the deposition.

As far as answering the judge's second question, Microsoft's position is that Google took more than one license, not just the Enterprise License, and that the grant back it seeks is for the AVC/OEM type of license, not the types of functions covered by the Enterprise License. It sees the Enterprise License as only covering things like YouTube. Where it gets these definitions is a mystery. I think it's playing on scraps from emails and positing that the choices Google made for various products were because of some such division, but that is, from what I see, just a handy assertion, Microsoft's attempt to interpret favorably to its interests, and its interest would be that 3.1.7 is viewed as a stand-alone provision. Here's its reasoning:

The term “Enterprise Licensee” is defined in § 1.25 as “a Licensee which elects an Enterprise License under Sections 2.7 and 3.1.7 hereof.”

There is no overlap between the Enterprise License and the license grants for AVC Products or OEM Licensees -- these licenses cover different types of products and have different terms. The Enterprise License, which Google elected to take, includes rights to stream H.264-encoded video over the Internet, relevant to a service like Google’s YouTube. In contrast, the grants for AVC Products and OEM Licensees (which Google also elected to take) concern software containing H.264-compliant video codecs, relevant to products like Google’s Android and Chrome operating systems. (See ECF No. 643 Ex. C (Feb. 28, 2011 email from Google to MPEG LA); Lo Dep. 40:21-41:16.) The AVC Products and OEM Licensee grants -- not the Enterprise License -- are the types of licenses pertinent to the Microsoft products for which it seeks a grant-back license.

Motorola on the other hand says it is not stand-alone and it reveals that for 2012, Google did not elect to continue taking an Enterprise License:
In response to Question 1, Motorola submits that the Court's interpretation of Section 3.1.7 is correct. In response to Question 2, Section 3.1.7 is not a stand-alone royalty cap, and is relevant to the grant back obligations set forth in Section 8.3 of the agreement. Motorola notes, however, that nonparty Google Inc. is the "Licensee" under the Google-MPEG LA License; Motorola Mobility LLC is not a party to that agreement. As explained at the hearing, it is undisputed that although Google has in the past selected an Enterprise License under Section 3.1.7, Google did not take an Enterprise License in 2012. As explained below, the particular license selected by Google directly affects not only the scope of the grant back obligation under Section 8.3, but also affects the scope of any grant back license required under the grant back obligation because the grant back licenses must be commensurate in scope with the selected license.
In other words, whatever the grant back could be must be defined by what was originally licensed, the scope of the license. And to Motorola, the royalty caps only apply to Licensees' affiliates under the stated conditions:
Here the term, "its Affiliates which are licensees under the AVC Patent Portfolio License and are identified in writing to the Licensing Administrator by Licensee," is grammatically straighforward. The payment caps (i. e. , "shall pay") apply to the Licensee and Affiliates but only when those entities "are licensees" and "are identified in writing." In other words the royalty caps do not apply if the purported affiliate is neither a licensee nor identified to the Licensing Administrator. This definitial prerequisite to the applicability of the licensing caps is in accord with the remainder of the contract. The language in question is capable of no other meaning; indeed, Microsoft's MPEG LA witness, Mr. Horn, did not suggest in his declaration that MPEG LA or any MPEG LA licesee has ever suggested that Section 3.1.7 is ambiguous or capable of more than one meaning. Accordingly, the plain meaning applies and the Court's construction is correct.
Presumably, if Motorola were to prevail, that would affect future royalties as well. And further, Motorola argues, the grant back applies only to licensees, and it's an agreement between Google and MPEG LA, not Motorola and MPEG LA, so if there is a grant back obligation, it's Google's alone:
The facts support the conclusion that a grant back "commensurate to the scope" of the license selected by Google cannot include a cross-license to unlicensed Google affiliates' patents. The clear intent of Section 8.3 is that the license grants for the MPEG LA Licensors and any pool Licensee should be reciprocal. But Motorola has obtained no license rights from MPEG LA under the Google-MPEG LA License, and thus has no duty of reciprocity to Microsoft or any other MPEG LA Licensor.
To me, the most significant argument is this last. I mean, standards bodies are voluntary. You are not required to join a pool like MPEG LA either. It's voluntary. It's optional. And here Microsoft is trying to force Motorola into the pool even though it wasn't in it and wasn't reaping any benefits from the pool. The judge may go for it, and it seems fair to Microsoft, but it feels wrong to me. But you can make up your own mind. Here are both letter briefs, as text:

Here's what Motorola's letter brief says:

[Summit Law Group letterhead]

March 1, 2013

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

Re: Microsoft Corp. v. Motorola Mobility, Inc.
Case No. C10-1823-JLR

Dear Judge Robart:

Motorola respectfully submits this response to the Court's February 21, 2013 order (Dkt. #654) regarding the construction of the Google-MPEG La License agreement.

The Court has posed two questions:

(1) Is the court's understanding of the language of Section 3.1.7 of the Google-MPEG LA License correct?

(2) Is Section 3.1.7 of the Google-MPEG LA License Agreement a stand-alone royalty cap provision, or does the section affect other provisions of the license agreement, and in particular does Section 3.1.7 affect Motorola's obligation to license its standard essential patents as an Affiliate of Google?

See Dkt. 654 at 3.

In response to Question 1, Motorola submits that the Court's interpretation of Section 3.1.7 is correct. In response to Question 2, Section 3.1.7 is not a stand-alone royalty cap, and is relevant to the grant back obligations set forth in Section 8.3 of the agreement. Motorola notes, however, that nonparty Google Inc. is the "Licensee" under the Google-MPEG LA License; Motorola Mobility LLC is not a party to that agreement. As explained at the hearing, it is undisputed that although Google has in the past selected an Enterprise License under Section 3.1.7, Google did not take an Enterprise License in

The Honorable James L. Robart
March 1, 2013
Page 2

2012. As explained below, the particular license selected by Google directly affects not only the scope of the grant back obligation under Section 8.3, but also affects the scope of any grant back license required under the grant back obligation because the grant back licenses must be commensurate in scope with the selected license.1

(1) The Court's understanding of Section 3.1.7 of the Google-MPEG LA
License is correct.

Section 3.1.7 of the Google-MPEG LA license states in relevant part:
3.1.7 Enterprise Licenses. Pursuant to Article 2.7 and notwithstanding anything to the contrary in Article 2.9 hereof, and in lieu of the royalties specified in Articles 3.1.2, 3.1.3, 3.1.4 and 3.1.5, a Licensee and its Affiliates which are licensees under the AVC Patent Portfolio License and are identified in writing to the Licensing Administrator by Licensee shall pay no more than the following total amounts in each Calendar Year for all such licenses for the combined Sales of Licensee and its Affiliates during such year:

[Prescribing royalty amounts and caps.]

(Emphases added.)

The Court in its February 21, 2013 order correctly determined the plain meaning of this section is that a "Licensee and its Affiliates fall under the royalty cap presecribed therein only if the Affiliates are themselves licensee[s] under the AVC Patent Portfolio and are identified by the Licensee in writing to the Licensing Administrator." Dkt. 654 at 2. Motorola submits that the Court's interpretation is correct and consistent with the plain meaning of Section 3.1.7.

Under New York law, "[i]f the court finds that the contract is not ambiguous it should assign the plain and ordinary meaning to each term and interpret the contract without the aid of extrinsic evidence." Alexander & Alexander Serv. v. These Certain Underwriters at Lloyd's, London, England, 136 F.3d 82, 86 (2d Cir. 1998). Contract language is ambiguous when it is "capable of more than one meaning when viewed objectively by a reasonably intelligent person who has examined the context of the entire integrated agreement and who is cognizant of the customs, practices, usages and terminology as generally understood in the particular trade or business." Albany Savings Bank, FSB v. Halpin, 117 F.3d 669, 673-74 (2d Cir. 1997). Whether the terms of a

The Honorable James L. Robart
March 1, 2013
Page 3

contract are ambiguous is a matter of law for the court to decide. Alexander & Alexander , 136 F.3d at 86.

Here the term, "its Affiliates which are licensees under the AVC Patent Portfolio License and are identified in writing to the Licensing Administrator by Licensee," is grammatically straighforward. The payment caps ( i. e. , "shall pay") apply to the Licensee and Affiliates but only when those entities " are licensees" and " are identified in writing." In other words the royalty caps do not apply if the purported affiliate is neither a licensee nor identified to the Licensing Administrator. This definitial prerequisite to the applicability of the licensing caps is in accord with the remainder of the contract. The language in question is capable of no other meaning; indeed, Microsoft's MPEG LA witness, Mr. Horn, did not suggest in his declaration that MPEG LA or any MPEG LA licesee has ever suggested that Section 3.1.7 is ambiguous or capable of more than one meaning. Accordingly, the plain meaning applies and the Court's construction is correct.

(2) Section 3.1.7 of the Google-MPEG LA License is not a standalone
royalty cap provision.

Though Microsoft will likely argue that Section 3.1.7 is a standalone royalty cap provision and has no relationship to the "scope" of the license granted to Google, its position is contrary to the plain meaning of the Google-MPEG LA License and contradicted by its own counsel's statements at oral argument.

Section 3.1.7 permits a Licensee to elect an "Enterprise License" for itself and its identified Affiliates, and sets out royalties to be paid under that Enterprise License. The identities of licensed Affiliates are plainly relevant to both the scope of the license granted to Google, and to any cross-license Google may be obligated to provide under Section 8.3. Accordingly, whether Google has elected an Enterprise License and identified Motorola as an Affiliate to be licensed under that Enterprise License is relevant to determining whether a grant back "commensurate to the scope" of the license selected by Google includes rights to Motorola's patents, and whether any required grant back license must also be an Enterprise License.

Section 3.1.7 is not a standalone section. Under Section 3.1.7, each year Google has the alternative to choose an Enterprise License for itself and any Google Affiliates who are themselves Licensees under the AVC Patent Portfolio and are identified by Google in writing to the Licensing Administrator, and pay capped royalties in lieu of paying the royalties due from Google individually under Articles 3.1.2, 3.1.3, 3.1.4 and 3.1.5 (and any individual Affiliate-Licensee). Thus, in years when Google selects an Enterprise License for itself and its identified Licensee-Affiliates, the scope of the license grant extends to both Google and its identified Affiliates.

The Honorable James L. Robart
March 1, 2013
Page 4

In years such as 2012 when Google does not select an Enterprise License, and instead chooses to pay individual royalties under Articles 3.1.2, 3.1.3, 3.1.4 and 3.1.5, the scope of the license selected by Google does not extend to its Affiliates. Section 2.9 of the Google-MPEG LA License makes clear that Affiliates are only licensed under the Agreement if Google, as Licensee, selects an Enterprise License under Section 3.1.7:

2.9 No Sublicenses. Subject to Article 3.1.7, the sublicenses granted in Sections 2.1 and 2.7 of this Agreement do not include the right of the Licensee to grant any further sublicenses. The Licensing Administrator is willing to offer an AVC Patent Portfolio License to any Affiliate of Licensee.
(Emphasis added.) Thus, in years when Google does not select an Enterprise License under Section 3.1.7, the scope of the license grant extends only to Google, and not to any Affiliates.

This interpretation is consistent with the plain meaning of the agreement, and with the extrinsic evidence. In particular, as described in Motorola's Brief Regarding Extrinsic Evidence Relevant to the Google-MPEG LA License (Dkt. #642 at 4-5), correspondence between Google and MPEG-LA shows that in order to obtain a license for its affiliates, Google must elect an Enterprise License and must provide the Licensing Administrator a list of Google Affiliates to be covered under the Enterprise License. For example, in March, 2010, Google wrote to MPEG LA that "Google has elected the AVC Enterprise License for both 2009 and 2010. We are still in negotiations with Mr. Harkness concerning a side letter explicitly listing the Google affiliates covered under our 2009 and 2010 EVC Enterprise Licenses." Post Decl., Ex. A (Dkt. #616-1) at GGMM-00032972. The side letter further stated that Google may select Affiliates to be included in the scope of its Enterprise License:

While the AVC License does not contain a term under which all Affiliates of Google may receive coverage under Google's AVC License, and each Affiliate may take its own AVC License in its own name, Google desires to include its Affiliates in its license grant pursuant to the AVC License...

... Google will submit to MPEG LA a list of Affiliate(s), each a Legal Entity that it wishes to include in its license grant under the AVC License....

Id. at GGMM-00032974.

In particular, the language of Section 3.1.7 is relevant to determining the scope of the grant back under Section 8.3. Section 8.3 states:

The Honorable James L. Robart
March 1, 2013
Page 5

8.3 Licensee Grant. Upon full execution of this Agreement, Licensee agrees to grant a worldwide, nonexclusive license and/or sublicense (commensurate to the scope of the licenses which Licensee has selected hereunder) under any and all AVC Essential Patent(s) that Licensee and its Affiliates, if any, have the right to license and/or sublicense, to any Licensor or any sublicensee of the Licensing Administrator desiring such a license and/or sublicense on fair and reasonable terms and conditions. For purposes of this Section 8.3 only, the Licensors' per patent share of royalties which are payable pursuant to Article 3 of this Agreement shall be presumed to be a fair and reasonable royalty rate for the aforementioned license and/or sublicense to be granted by the Licensee.
As noted above, nonparty Google is the "Licensee" under the Google-MPEG LA agreement. Thus, to the extent Section 8.3 imposes any obligation to offer cross-licenses, that obligation applies to Google, not Motorola.

Microsoft's counsel recognized at argument that the parenthetical "commensurate to the scope of the licenses which Licensee has selected hereunder" refers to whether Google as Licensee has selected the AVC patent portfolio license, the OEM AVC product license, or the Enterprise license. See 28 Jan. 2013 Hearing Tr. at 51:7-17. Microsoft's counsel further acknowledged that "[t]he licenses, "selected hereunder" that matter in this case are the AVC product license and the OEM license" -- Google has not selected an Enterprise License for this year. See id. at 53:18-21.

Because Google has not selected an Enterprise License under Section 3.1.7 and identified Motorola in writing as an Affiliate to be licensed under the Enterprise License, under the plain meaning of Sections 2.9, 3.1.7, and 8.3, the "scope of the licenses which Licensee has selected hereunder" does not include a license for Motorola and its products. Accordingly, under the plain meaning of the agreement, a grant back license commensurate to the scope of the license selected by Google cannot include a grant back for rights to Motorola's patents.

Though Microsoft has argued that Affiliates' patents must be included in Section 8.3's grant back even when those Affiliates are not themselves licensed, to prevent Licensees from using unlicensed holding companies to shield those patents from MPEG LA, that argument does not comport with the language of the contract. The plain meaning of the "commensurate to the scope of the licenses which Licensee has selected hereunder" parenthetical belies Microsoft's argument. And neither Microsoft nor its MPEG LA witness Mr. Horn identified any situation when an MPEG LA licensee has ever actually engaged in shielding patents through unlicensed holding entities. ANd it cannot be disputed that Motorola is not a shell holding company -- Motorola is an operating, separate business affiliate of Google with its own products. The Court should interpret

The Honorable James L. Robart
March 1, 2013
Page 6

the Google-MPEG LA License in light of the facts of the case, and not any hypothetical or imagined harm.

The facts support the conclusion that a grant back "commensurate to the scope" of the license selected by Google cannot include a cross-license to unlicensed Google affiliates' patents. The clear intent of Section 8.3 is that the license grants for the MPEG LA Licensors and any pool Licensee should be reciprocal. But Motorola has obtained no license rights from MPEG LA under the Google-MPEG LA License, and thus has no duty of reciprocity to Microsoft or any other MPEG LA Licensor.

This interpretation is also consistent with industry practice, and produces an equitable result. Cross-licensing is common among standards-essential patent owners, and permits both parties involved to obtain freedom of action for their products. But an unlicensed business should have no obligation to give up their patent rights to the MPEG LA Licensors unless and until it seeks to obtain protection for its own products under an MPEG LA license. Accordingly, whether Google, as an MPEG LA Licensee, has selected an Enterprise License under Section 3.1.7, and the identify of any Affiliates to be covered under that Enterprise License, is directly relevant to the Court's determination of the scope of the license selected by Google and any cross-license owed to MPEG LA's Licensors.

Section 3.1.7 is also relevant to determining to whom Google is obligated to license under Section 8.3 and what terms Google is obligated to offer. As an example, if Google has not selected an Enterprise License, Google is not obligated to grant an Enterprise License to Microsoft or any other MPEG LA Licensor. Thus, because Google did not select an Enterprise License, Microsoft is not entitled to a grant back license for its affiliates, nor may Microsoft enjoy the benefit of Section 3.1.7's enterprise royalty cap. Microsoft can only obtain a grant back license "commensurate to the scope" of the license chosen by Google -- which in this case, as Microsoft's counsel has acknowledged, does not include an Enterprise License covering Microsoft subsidiaries. See 28 Jan. 2013 Hearing Tr. 53:18-21.

Respectfully,

SUMMIT LAW GROUP PLLC

/s/ Ralph H. Palumbo
Ralph H. Palumbo

cc: All Counsel of Record

_____________
1 Motorola further understands that the Court wants to understand the relevance of the Google-MPEG LA License to its determination of the RAND rate and range for Motorola's H.264-essential patents. Motorola respectfully submits that the Google-MPEG LA License itself is no more relevant than any other MPEG LA H.264/AVC License Agreement currently in the record.

As you can see, it makes perfect sense, and that leaves Microsoft in a pickle. What to say now? Microsoft's theories depended on facts that turned out not to be correct.

Here's Microsoft's letter brief:

[CALFO HARRIGAN LEYH & EAKES LLP Letterhead]

March 1, 2013

Honorable James L. Robart
United States District Judge
USDC Courthouse
[address]

RE: Microsoft Corp. v. Motorola, Inc., et al., Case No. C10-1823-JLR

Dear Judge Robart:

Microsoft respectfully submits this letter in response to the Court’s February 21, 2013 Minute Order (ECF No. 654), which requested letter briefs from the parties addressing two issues related to § 3.1.7 of the Google-MPEG LA License Agreement (“the Agreement”), concerning the royalties owed by Enterprise Licensees. Microsoft is not seeking any grant-back rights associated with Google’s Enterprise License and, as explained below, none of the provisions relating to Enterprise Licensees are relevant to the issues before the Court.

Google has taken three separate and distinct types of license offered by MPEG LA and described in Section 2 of the Agreement (titled “Licensing Administrator Grant”): (1) the “AVC Products” license (defined in § 2.1); (2) the “OEM Licensee” license (defined in § 2.6); and (3) the “Enterprise License” (defined in § 2.7). The Enterprise License consists of a combination of lesser-included license types relevant to video content providers (the Title-by-Title, Subscription, Free Television, and Internet Broadcast AVC Video licenses) defined in §§ 2.2-2.5.

The “Royalties and Payments” due for each type of license are set forth in Section 3 of the Agreement: (1) § 3.1.1 sets forth the per-unit rates and annual caps applicable for the AVC Products license; (2) § 3.1.6 sets forth the per-unit rates and annual caps for OEM Licensees; and (3) § 3.1.7 sets forth the annual caps1 applicable for Enterprise Licensees. The term “Enterprise Licensee” is defined in § 1.25 as “a Licensee which elects an Enterprise License under Sections 2.7 and 3.1.7 hereof.”

There is no overlap between the Enterprise License and the license grants for AVC Products or OEM Licensees -- these licenses cover different types of products and have different terms. The Enterprise License, which Google elected to take, includes rights to stream H.264-encoded video over the Internet, relevant to a service like Google’s YouTube. In contrast, the grants for AVC Products and OEM Licensees (which Google also elected to take) concern software containing H.264-compliant video codecs, relevant to products like Google’s Android

Honorable James L. Robart
March 1, 2013
Page 2

and Chrome operating systems. (See ECF No. 643 Ex. C (Feb. 28, 2011 email from Google to MPEG LA); Lo Dep. 40:21-41:16.) The AVC Products and OEM Licensee grants -- not the Enterprise License -- are the types of licenses pertinent to the Microsoft products for which it seeks a grant-back license.

With this background, we turn to the specific issues raised by the Court:

1. First, the Court set forth its understanding that, pursuant to a portion of § 3.1.7:

[a] Licensee and its Affiliates fall under the royalty cap prescribed therein only if the Affiliates are themselves licensees under the AVC Patent Portfolio and are identified by the Licensee in writing to the Licensing Administrator.
(ECF No. 654 at 2.)

The Court’s understanding is correct. The language of § 3.1.7 italicized in the Court’s Minute Order -- “Affiiliates which are licensees under the AVC Patent Portfolio License and are identified in writing to the Licensing Administrator by Licensee” -- makes clear that in order to obtain the benefit of a royalty cap that covers both a Licensee and an Affiliate under the license grants covered by the Enterprise License option, collectively, the Affiliate (i) must itself be a Licensee under the AVC Patent Portfolio License, and (ii) must be identified by the Licensee in writing. For example, suppose Company A and Company B are both Enterprise Licensees, and both pay the full capped annual royalty pursuant to § 3.1.7. If Company A then acquires a 51% controlling interest in Company B, Company A must notify the Licensing Administrator that Company B is now an Affiliate, and then the combined entity need make only a single, capped payment -- half the amount that had been paid by the two separate companies. If Company A instead acquires a 51% controlling interest in Company C, which (for purposes of illustration) is not a Licensee, but distributes Title-by-Title, Subscription, Free Television, and Internet Broadcast AVC Video, Company C must take a license itself,2 Company A must notify the Licensing Administrator, and then the combined entity need only make the same single, capped payment under § 3.1.7.

However, as set out herein and at the January 28, 2013 hearing, the Enterprise License and its royalty terms are irrelevant to the issues before the Court. Microsoft is not a video content provider and therefore does not need, and has not taken, an Enterprise License from MPEG LA. Microsoft is not seeking any grant-back rights for such a license in this litigation.

Honorable James L. Robart
March 1, 2013
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2. Second, the Court asked:

whether Section 3.1.7 of the Google-MPEG LA License Agreement is a stand-alone royalty cap provision or whether the section affects other provisions of the license agreement, and in particular whether Section 3.1.7 has an effect on Motorola’s obligation to license its standard essential patents as an Affiliate of Google.
(ECF No. 654 at 3.)

Section 3.1.7 of the Agreement is a stand-alone royalty cap provision. Rather than paying the volume-based royalties for the various licenses needed by video content providers, an Enterprise Licensee and its Affiliates can elect to pay the single capped amount specified in 3.1.7 “in lieu of the royalties specified” in §§ 3.1 .2-3.l.5. Section 3.1.7 does not affect other provisions of the Agreement. In particular, it has no effect on Motorola’s obligation under § 8.3 to license its standard-essential patents as an Affiliate of Google.

a. Section 3.1.7 is a stand-alone royalty cap provision.

As explained above, § 3.1.7 sets forth the “Royalties and Payments” owed by Enterprise Licensees, who have taken a combined license to all of the Title-by-Title, Subscription, Free Television, and Internet Broadcast AVC Video licenses (otherwise available under §§ 2.2-2.5 for the royalties and payments set forth in §§ 3.1.2-3.1.5). Section 3.1.7 provides for a royalty cap “in lieu of" the combined payment that would otherwise be due pursuant to the individual royalty requirements for each of those four licenses. Section 3.1.7 includes a limitation on the applicability of that royalty cap to Affiliates, but it imposes no other obligations and grants no other rights. While the annual royalties payable on account of the “Combined Sales of a Licensee and each of its Affiliates” under the AVC Products and OEM License grants are also capped (§§ 3.1.1, 3.1.6), there is no corresponding obligation (as there is in § 3.1.7) that the Licensee notify MPEG LA of the Affiliates covered by these royalty caps.

b. Section 3.1.7 does not affect other portions of the Agreement or
Motorola’s obligation to license its standard essential patents as an
Affiliate of Google.

As Motorola conceded at the January 28, 2013 hearing, Motorola is an Affiliate of Google as that term is used in the Agreement. (1/28/2013 Hearing Tr. 38:13-18.) The grant-back obligation of the Agreement extends to the patents of a “Licensee and its Affiliates.” Agreement § 8.3. But for its strained argument based on the parenthetical “(commensurate to the scope of the licenses which Licensee has selected hereunder)” appearing in § 8.3, Motorola also conceded that it would be obligated to license its standard-essential patents under the grant-back provision. (l/28/2013 Hearing Tr. 47:5-18.)

Honorable James L. Robart
March 1, 2013
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But § 3.1.7 has no connection whatsoever to “the scope of the licenses which Licensee has selected hereunder.” At the hearing, Motorola’s counsel repeatedly -- and erroneously -- suggested that a Licensee like Google can “select” to license its Affiliates, and urged the Court to find that “scope” in § 8.3 of the Agreement concerns what Affiliates a Licensee has “selected”:

[Scope] can cover whether the licensee, Google, selects to have its affiliates licensed, or does not select to have them licensed. And it’s important here that Google never selected to have Motorola licensed.

...

Neither the 2009/2010 Enterprise-type license, or the 2011/2012 AVC product-type license, ever resulted in the selection by Google of a license for its affiliate, Motorola.

...

[U]nder the “commensurate” parenthetical, because Google did not elect to have a license extend to Motorola, the grant-back of a license by Google commensurately does not cover any grant-back of patent rights from Motorola.

(1/28/2013 Hearing Tr. 41:24-42:2, 42:14-17, 46:10-13.)

Motorola’s suggestion that “scope” involves “selection” of Affiliates is baseless. The Agreement is explicit that Licensees have no ability to “select” a license for their Affiliates:

No Sublicenses. Subject to Article 3.1.7, the sublicenses granted in Sections 2.1 through 2.7 of this Agreement do not include the right of the Licensee to grant any further sublicenses. The Licensing Administrator is willing to offer an AVC Patent Portfolio License to any Affiliate of Licensee.
Agreement § 2.9. While this provision cross-references § 3.1.7, as discussed above that section only applies to Affiliates which are themselves Licensees. Contrary to Motorola’s suggestion, the “scope” of the license Google selected cannot concern whether Google “selects to have its Affiliates licensed,” because the Agreement provides no ability for Google to make any such selection. Google can “select” any of the different licenses described in §§ 2.1-2.7 of the Agreement, but it cannot “select” any license for Motorola, or “select” to include Motorola in Google’s license. Section 3.1.7 would allow Google and Motorola to make a single, combined, capped royalty payment for an Enterprise License, but Motorola must first take its own license -- a license independent of Google’s license, and one the Agreement specifically declares that the “Licensing Administrator is willing to offer” (§ 2.9) -- in order to obtain that benefit. If Motorola did so, it would have its own grant back obligation.

For this reason, as Microsoft explained in its Post-Trial Brief Concerning Google’s AVC Patent Portfolio License, the definition of Affiliate in the Agreement could not possibly be limited to those already-licensed Affiliates identified by an Enterprise Licensee pursuant to 3.1.7 and 3.3. (See ECF No. 614 at 6.) That interpretation has no basis in the language of the

Honorable James L. Robart
March 1, 2013
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Agreement: if “Affiliate” in the grant-back provision of § 8.3 meant “already-licensed Affiliates identified by an Enterprise Licensee,” such Affiliates would already have their own, independent grant-back obligation as Licensees, rendering the language “and its Affiliates” superfluous. And Motoro1a’s interpretation is flatly inconsistent with the purpose of the provision -- to “prevent[] a Licensee from avoiding its grant-back obligation by holding patents indirectly, for example, via a subsidiary that it controls.” (ECF No. 641 (Declaration of Lawrence Horn) ¶ 18; see also id. ¶ 13; 1/28/2013 Hearing Tr. 51:24-54:16; ECF No. 614 at 6-7.) It is precisely for that reason that the parties who negotiated the AVC Patent Portfolio license, including Motorola, agreed that “all Affiliates of a Licensee (rather than, for example, only the Affiliates of an Enterprise Licensee that are expressly identified by the Enterprise Licensee) needed to be included in the grant back obligation under Section 8.3.” (ECF No. 641 (Declaration of Lawrence Horn) ¶ 18 (emphasis added).)

Section 3.1.7 allows Google the option of bringing its licensed Affiliates under a single royalty cap for a specific subset of AVC license types. There is no basis in the language of the Agreement or its purposes to conceive of § 3.1.7 as allowing Google the option of holding AVC/H.264 standard-essential patents in a subsidiary to evade its grant-back obligations.

Very truly yours,

CALFO HARRIGAN LEYH & EAKES LLP

[signature]

Arthur W. Harrigan, Jr.

cc: ECF Notification List

_____________
1 “Per-unit” rates are not applicable for Enterprise Licensees.

2 As explained further below, § 2.9 of the Agreement makes clear that Affiliates are not automatically licensed simply by virtue of their acquisition by a Licensee -- there is no right to sublicense, and the Affiliate must obtain its own license.


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