On July 30, 2015, the U.S. Court of Appeals for the Ninth Circuit issued its decision inMicrosoft Corp. v. Motorola, Inc., No. 14-35393, upholding a jury’s award of $14.52 million to Microsoft after determining that Motorola had breached its commitment to license its standard essential patents on reasonable and non-discriminatory terms.

Background

Standard-setting organizations ("SSOs") create standards in the design and manufacture of technology products so that companies can produce products that are compatible with other products that comply with the standard. Standards set by SSOs often incorporate patented technology.  Patents that are required to be practiced to accomplish provisions of the standard are referred to as standard essential patents ("SEPs"). To encourage widespread adoption of their standards, SSOs request that owners of SEPs commit to licensing their patents to users of the standard on reasonable and non-discriminatory terms ("RAND," which is interchangeable with "FRAND," meaning "fair, reasonable, and non-discriminatory"). If an SEP owner declines to commit to licensing on RAND terms, the SSO may decide to draft the standard in a way that doesn't incorporate that owner's SEP.  

Motorola owned patents essential to the H.264 standard in video coding technology and the 802.11 standard in wireless communications (commonly known as "WiFi"), and committed to the organizations setting those standards (i.e., the relevant SSOs) that they would license their SEPs on RAND terms.  Microsoft’s Windows operating system incorporates the H.264 standard, and Microsoft’s Xbox video game console incorporates both the H.264 standard and the 802.11 standard.

Proceedings Below

In November of 2010, Microsoft sued Motorola for breach of contract, alleging that Motorola broke its RAND commitment when Motorola offered to license its SEPs to Microsoft at a rate of 2.25% of the price of the end product.  Among other actions, Motorola immediately sued Microsoft for patent infringement and sought to enjoin Microsoft from using its H.264 patents.  Both actions were consolidated in the Western District of Washington.

The district court determined that RAND commitments create enforceable contracts which Microsoft can enforce as a third-party beneficiary. The court interpreted these commitments to require that Motorola's initial offers to license SEPs be made in good faith. To determine whether the offer was made in good faith, a fact-finder must be able to compare it to a RAND royalty rate. Because the parties disagreed as to what constituted a RAND royalty rate, the district court held a bench trial in November of 2012 to determine the RAND royalty rate for Motorola's SEPs.

In April of 2013, Judge Robart of the Western District of Washington issued a 207-page opinion providing a methodology for calculating the RAND rate by modifying the Georgia-Pacific factors to recreate a hypothetical negotiation between the parties, taking into account the circumstances of standard essential patents. Using this methodology, the court concluded that the RAND royalty rate for Motorola's video coding SEPs should be 0.555 cents per unit, while the RAND royalty rate for its WiFi SEPs should be 3.471 cents per unit. In comparison, Motorola's offer of 2.25% of the price of the end product was in effect far higher, amounting to a few dollars per unit.

In September of 2013, a jury found that, based on the district court’s RAND determinations, Motorola had breached its RAND obligations and must pay damages to Microsoft in the amount of $14.52 million. Motorola filed an appeal to the Federal Circuit in November of 2013. In May of 2014, the Federal Circuit granted Microsoft’s motion to transfer the appeal to the Ninth Circuit.

The Ninth Circuit’s Opinion

As an initial matter, the Ninth Circuit affirmed its jurisdiction over this case, finding it to be a straight breach of contract action where the mode of calculating contract damages was at issue, rather than a patent dispute.

Turning to the merits, the Ninth Circuit found that the district court had the authority to decide the RAND rate.  The Ninth Circuit held that Motorola’s consent to a bench trial determination of the RAND royalty rate for its SEPs waived any argument that the court lacked authority to decide the RAND rate itself.  The Ninth Circuit also did not agree that the district court’s RAND analysis violated Federal Circuit patent damages law, reiterating that this was not a patent law action, and even so, the district court properly adapted guidance from Federal Circuit’s patent law methodology to the current context. 

The Ninth Circuit also turned aside Motorola’s argument that the district court’s analysis failed to meet one of the Georgia-Pacific factors, which directed courts to set the hypothetical negotiation at “the time the infringement began.”  Among other considerations, the Ninth Circuit noted that the Federal Circuit has recognized that some Georgia-Pacificfactors are not always relevant to every case, and here, the district court could have reasonably concluded that it was appropriate to include the present-day value of Motorola’s SEPs as a factor in calculating the RAND rate.

The Ninth Circuit additionally concluded that the district court’s RAND determination was not based on legal error or on a clearly erroneous view of the facts in light of the evidence.  Additionally, the Ninth Circuit found that the record provided a substantial basis on which the jury reached a verdict for Microsoft.  In particular, the Ninth Circuit rejected Motorola’s objections that the court gave weight to evidence of the rates charged by two patent pools as indicators of the RAND rate for Motorola’s patents while giving little weight to evidence of Motorola’s past licenses.  The Ninth Circuit noted that for the 802.11 patents, the district court used a number of considerations to determine the RAND rate, with the pool rate evidence being the most favorable to Motorola.  As to the H.264 patents, the pool patents and Motorola’s patents were essential to the same technical standards and Motorola had not provided evidence that its patents were more valuable than other patents in the pool.  The Ninth Circuit also found that the district court properly rejected evidence of Motorola’s past licenses as too contextually dissimilar. 

The Ninth Circuit also found that the damages award was proper, rejecting Motorola’s argument that the Noerr-Pennington doctrine precluded any award and that Washington state law precluded recovery of attorneys’ fees for defending a separate lawsuit.  The Ninth Circuit agreed with the district court that where injunctive action taken to enforce a RAND-encumbered patent violates the duty of good faith and fair dealing, Washington law would allow damages to include costs incurred in defending against the injunctive action. 

Accordingly, the Ninth Circuit affirmed the judgment of the district court that Motorola breached its RAND commitment and upheld the jury award to Microsoft.