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In a First, Seattle Judge Sets RAND Rate in MS v. Motorola ~pj Updated 2Xs
Friday, April 26 2013 @ 09:11 AM EDT

I did tell you not to be surprised if the judge in Microsoft's home court in Seattle favored Microsoft in setting a RAND rate for a couple of Motorola standard essential patents in Microsoft v. Motorola. And in fact, he more or less did, in a Findings of Fact and Conclusions of Law [PDF, 207 pages], although he ordered more than Microsoft offered or thought fair. But interestingly, as Matt Rizzolo points out on The Essential Patent Blog, he used Motorola's methodology to come up with a figure, not Microsoft's:
One interesting thing about the findings is that while the ultimate RAND royalty appears to favor Microsoft, Judge Robart seems to have sided with Motorola as to the right approach to determine RAND royalties — simulating a hypothetical, bilateral negotiation between the parties (whereas Microsoft had suggested determining RAND on the basis of an ex ante, multilateral negotiation at the time of the standard’s adoption).
I feel confident that this will be appealed by Motorola, because the judge in effect sets the "rule" that you can be ordered to accept pool rates in pools you haven't joined instead of following the normal negotiation structure of the standard body you did agree to put your standard essential patents in. And that just can't be right. Who'd donate patents to standards bodies if they know it has no bearing on the royalties they can expect in return?

While we read the judge's magnum opus together, I'll just say one quick word about Florian Mueller's strange article today that gloats that it will take 7,000 years at this RAND rate for Google to recoup its price paid for the Motorola patents. []

First, if you noticed, in the most recent round of quarterlies, Google isn't in the "let's sue and get a lot of money from royalties on patents" business. That's more a Microsoft strategy. Probably because no one wants Microsoft's products. Google does make money, though, buckets of it, because people like Google's products. I believe that would indicate that Google knows how to make money. Nor did they, or anyone but Florian, ever imagine that they'd get repaid the purchase price by royalties on only two of the many patents that came with the Motorola purchase. That wasn't the plan. It was, from what I read, defensive in nature. Where does he come up with this kind of stuff? In his dreams, I guess. I believe Freud called those kinds of dreams wish fulfillment dreams. Of course, Microsoft did hire him. In his universe, Google is always doomed.


In litigation, it's not over 'til it's over, and there is a long way to go with this case. Perhaps you noticed that in the Apple v. Samsung litigation, after the disastrous jury decision against Samsung, with all its conceptual and math problems, post-trial activity by Samsung has been quite successful in balancing out an unfair result, even in the same court, let alone in the appeals to come. Litigation isn't like football, where the end of the game is really the end and suddenly it's over with a clear winner and a clear loser and nothing can change it. Litigation's a process, and now the long appeal process begins. The same law firm, Quinn Emanuel, is representing Motorola here, and rest assured, they'll be making their moves.

Sometimes judges get things wrong. Juries do too, sometimes. And that is what the appeals are for, because humans are human, and you need a corrective safety net to make up for that. But one thing you can take to the bank: Google is not going out of business over this. I'm sure they noticed, if I did, and I'm only a paralegal, that this judge seemed to favor Microsoft whenever he could, so they've likely had some plans cooking on the back burner on what to do next. Lawyers don't just say, "Oh, that's bad, that ruling. I guess I'll give up now."

Deeper, this was a case where Motorola made an offer, and it expected a negotiation. They were not expecting Microsoft to accept the opening offer. It's not how these things work. Instead of negotiating in the normal course, Microsoft took them to court. Now the judge, instead of ordering Microsoft to negotiate, accepted Microsoft's suggestion that he set a price himself, despite the judge having no experience in standards bodies and how they work at all, and Rizzolo describes the result like this:

That’s about 4 cents/unit total — and even at the upper bounds, it’s about 36 cents/unit. From a review of the parties’ post-trial briefs (Motorola, Microsoft), these RAND royalty rates are much closer to the ones urged by Microsoft than Motorola. And obviously, they are much lower than the 2.25% rates offered by Motorola in its initial licensing letters (which work out to about $4.50 on a $199 Xbox). Judge Robart apparently did not find Motorola’s prior licenses (many of which involved Motorola’s cellular SEP portfolios) to be good comparables for a license between Motorola and Microsoft involving 802.11 and H.264 patents. Instead, he appears to have based much of his determinations on rates offered by patent pools (the MPEG LA AVC/H.264 pool and the Via Licensing 802.11 pool), as well as license rates charged by chip designer ARM Holdings.
But Motorola didn't put its patents into the MPEG LA/H.264 pool. So it's a strange way of figuring a rate, frankly. Do you seriously think companies will offer patents to standards bodies if this can happen to them? I think not.

And so, as so often has happened in the software world, Microsoft tries to ruin things for everyone else to get a benefit for itself. A leopard doesn't change its spots.

That's why there are regulatory bodies. And as you know, claims of Microsoft and friends using patents, via trolls, against Android as an anticompetitive weapon are already in the air, with Google, Red Hat, Blackberry and Mindspring joining together to ask the US Department of Justice and the FTC to investigate antitrust implications of aspects of the patent strategies afoot, and rightly so, in my view. The smartphone patent wars are not just about patents. That's just on the surface. Think SCO Group, but with patents instead of copyrights. This particular litigation is just one small corner of a much bigger picture.

But here's what I know: when a judge writes a 207-page explanation for what he's done, it's because he expects there will most likely be appeals. No court has ever set a RAND price like this in history, so we are in uncharted waters, and so is the judge. Motorola's position from day one, in fact, was that he lacked the authority to do what he has just done, so stay tuned.

After I have time to read the entire 207 pages carefully, I'll add anything else that strikes me, if you want to come back by later today. And if anyone would please volunteer to help me do this honking PDF as text, I'd appreciate it very much.

Update: While I'm still reading the ruling, I see Matt Rizzolo has a followup article explaining the methodology the judge followed, which he views as more important for future cases than the actual amount set in this instance:

While much of the focus in the media has been on the amount of RAND royalties determined by the court, it’s the methodology for determining these royalties has the potential to be truly important for future cases.

To determine RAND terms in this case, Judge Robart analyzed what would occur in a hypothetical negotiation between Motorola and Microsoft for the 802.11- and H.264-essential portfolios at issue. As in many patent-related cases, the court here used the factors outlined in Georgia-Pacific Corp. v. U.S. Plywood Corp., 318 F. Supp. 1116 (S.D.N.Y. 1970) formed the basis for this hypothetical negotiation. But to account for the unique considerations present in the standard-essential patent RAND licensing context, Judge Robart modified the G-P factors somewhat — noting that “the parties in a hypothetical negotiation would set RAND royalty rates by looking at the importance of the SEPs to the standard and the importance of the standard and the SEPs to the products at issue.”...

Importantly, Judge Robart found that negotiations in the RAND context should be constrained by the following “economic guideposts”:

  • The level of a RAND royalty should promote adoption of the standard;
  • The methodology for determining RAND terms should recognize and mitigate both the risk of “patent hold-up” and royalty stacking (the total royalties payable if other SEP holders made the same demands);
  • RAND royalties should guarantee the patent holder a reasonable return on its IP-related investment; and
  • RAND royalties should be interpreted to limit the patent holder to a reasonable royalty on the economic value of the patented technology itself, apart from the value associated with the patent’s incorporation into an industry standard.
He then goes into satisfying detail on exactly what the judge did, tables and everything. How helpful it is to have a lawyer who specializes in patents and standard essential patents in particular write about this litigation. I'm learning a lot. Here's what I notice in particular, and I expect this to matter in any appeal, should one happen. The judge ruled that past practice means looking at what patent pools do. Right there he's misunderstood, in my view, the difference between a patent pool and standards bodies, and he's thinking the latter must act like the former. They don't. Can they be forced to do so, midstream, when everyone donated patents not under the lower pool-payment strategies but following for decades a system using a negotiated rate, case by case? Can a judge change the rules and remove value from an owner, after the fact, when the deal was set on different terms? We'll see. Because that is what he's done.

Next, he says that the price can be reduced by alternatives that could have been written into the standard instead of the patented tech. I mean. That's another change. And he thinks you need to look at how much the patent contributed to the standard. That, by the way, is exactly what patent pools do not do, in that the whole idea of a patent pool is to not have to do that kind of math per patent, as I understand pools from this litigation. Next, instead of figuring the portion of profit or of the selling price that may be customary in the type of business, the judge says:

This factor must be viewed through the lens of business practices involving RAND commitments. In other words, licensing fees for non-RAND committed patents customary in a business industry cannot form the basis for comparison. Instead, factor 12 must look to customary practices of businesses licensing RAND-committed patents.
So what is the incentive to donate your patent to a standard? You devalue its worth the day you do it. And he says you can't judge the value of the standard in figuring out the patent's value, only how much it contributes to that value.

Here's another issue I see in the judge's reasoning: he thinks the purpose of RAND patents is to make sure there's no holdup or stacking. Standards bodies are set up to allow patent owners a reasonable return, as they see it, if they will donate to the standard. That is a goal that is ignored in this ruling. Instead, he seems to think it's a generous act on the part of patent owners to make this a better world, writing that RAND patent owners have to abide by "... the purpose of the RAND commitment of widespread adoption of the standard through avoidance of holdup and stacking." No. That sounds like the BSD license, where people care more about widespread adoption than protecting the code base from takeover, so they give it away. Patent owners who donate to standards bodies under RAND terms do not do so with such public-improvement goals. They expect to get something for their patents.

Next, he devalues the RAND patent further by saying you have to look at all the other patents that are essential to the standard, whose owners might also seek royalties from an implementer's use of the standard in its products. In other words, he doesn't want the XBox to be overwhelmed with royalty requirements from others, so Motorola has to reduce its price to leave room for others to also get paid.

Does that sound like the patent universe we've been watching? Don't get me wrong. I totally hate patents, particularly software patents, which I don't believe are patentable subject matter to begin with. And RAND patents are not a solution to my way of thinking. I think standards should be totally royalty free or they shouldn't be in a standard. But in the current world of patents, companies don't donate their patents to make the world a better place. And so the judge's solution is impractical. If widely adopted, it's the end of standards, except in the FOSS world which learned long ago the value of sharing without payment. And that is the real solution here, not reducing the RAND patents' value to almost nothing but getting rid of software patents, everybody's software patents. They are gumming up the works, and I don't mean just RAND patents. What the judge has created is a tilted playing field.

I guess this is a problem that the courts can't fully solve. It probably requires a change in the law. You can see courts trying to figure out what to do with the rat's nest that software patents have created. It's a problem Google pointed out some time back -- there are hundreds of thousands of patents that could be used to sue a single smartphone vendor, and if they all do it, you can't afford to make and sell the phone any more. The judge sees that problem very clearly in the RAND context, but he has not come up with a really fair solution.

Update 2: I woke up realizing I should explain a bit better. Here's why it's not a real solution to address only RAND patents. It's because even if you reduce the value of all the RAND patents in the world to zero, there are still hundreds of thousands of patents that a vendor of a smartphone has to tip the owners of or risk an injunction barring the sale of his phone. And every day, there are more and more software patents issuing -- here's a blog, Patently Apple, that lovingly publishes every one of Apple's patents as they issue, because he thinks it's wonderful, I guess, but I think his name is a bit derivative of Patently O. None of my business, but I do. Anyway, in due time there will be 350,000 software patents the vendors will have to deal with to sell one phone, then 450,000. Add on the design patents everyone is trying for now that Apple used them successfully, so far, against Samsung, and no one can safely make a phone that ordinary people can afford to buy. If the vendor pays off everyone who has a *legal right* under patent law to demand a royalty, a phone will have to cost a zillion dollars to make it worthwhile to offer it in the market, and you and I can't afford to buy it even if they did.

Did you see the solid gold iPhone with the black diamond for the home icon? Who buys that? It is worth $15 million. Not me, even if I could afford it, which I can't. I can think of better things to do with $15 million. There are children who don't have enough to eat, for example. Or give it to Groklaw and we'll cover all the copyright and patent trials that matter in the world for you. But I digress.

Here's my serious point, that courts are beginning to see that there is a software patent problem, a big one, and companies see it too, but none of them is ready to really solve the core problem, because the only way to do so is to get rid of software patents, which you could do, since they are unpatentable subject matter. Which it is. Here are some articles that hopefully will help you to understand why I say that, and why I believe it's inevitable that one happy day, software patents will be a nightmare we can wake up from.

A word to the wise in Europe, New Zealand, and the rest of the world: Look at the US and realize you don't have to duplicate our problems, but if you say software "per se" is not patentable, you will. Take out the "per se" and you will be safe. Realize that patents are now being used to try to kill Free and Open Source software, and if you wish to avoid falling back into a Microsoft-style monopoly, please pay attention to the US smartphone patent wars, and plan accordingly, because that is what these wars are really all about.

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