Microsoft v. Motorola developed a framework for courts to assess fair, reasonable and non-discriminatory (FRAND) terms for standard-essential patents.  Its roadmap and analysis will probably influence future FRAND cases in other U.S. and international jurisdictions.

In Microsoft v. Motorola, the U.S. District Court for the Western District of Washington became the first U.S. court to set fair, reasonable and non-discriminatory (FRAND or RAND) royalty rates and range for standard-essential patents (SEPs). The court’s analysis employed a modified version of the Georgia-Pacific factors, which courts use to calculate “reasonable royalty” damages in patent infringement actions.  The analysis is modified because FRAND royalties for SEPs differ from typical “reasonable royalty” damages.  Typical patent holders are not obligated to license their patents.  In contrast, SEP holders—in an effort to encourage widespread adoption of standard technologies that use their patents—contractually obligate themselves (via standard-setting organizations) to license their SEPs on FRAND terms.  The suit stems from Microsoft’s allegation that Motorola’s offers to license certain Wi-Fi and video compression SEPs were too high and therefore violated Motorola’s contractual FRAND commitments.

The Court’s FRAND-Specific Analysis

Microsoft v. Motorola is important because it developed a framework for courts to assess FRAND terms for SEPs.  Microsoft urged that the analysis should hinge on “the incremental value of the [patented] technology compared to the alternatives that could have been written into the standard [thereby focusing] on the period before the standard was adopted and implemented.”  Motorola, on the other hand, argued “that RAND terms and conditions can be determined by simulating a hypothetical bilateral negotiation under the RAND obligation.”  The court largely agreed with Motorola’s framework (having concluded that courts cannot practically implement Microsoft’s approach, and that it “lack[s] real-world applicability” because antitrust concerns often keep standard-setting organizations from engaging in prospective discussion of licensing terms).  However, the court nevertheless issued a very Microsoft-favorable ruling.

In setting forth the basic principles at issue, the court stated that “RAND royalt[ies] should be set at a level consistent with the [standard-setting organizations]’ goal of promoting widespread adoption of their standards,” and the proper methodology “address[es] the risk of royalty-stacking by considering the aggregate royalties that would apply if other SEP holders made royalty demands of the implementer.”  Fundamentally, “a RAND commitment should be interpreted to limit a patent holder to a reasonable royalty on the economic value of its patented technology itself, apart from the value associated with incorporation of the patented technology into the standard.”  So, “the court adopt[ed] a modified version of the Georgia-Pacific factors to recreate a hypothetical negotiation between the parties,” focusing its analysis on its conclusion 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.”  The following table summarizes the Georgia-Pacific factors and the Microsoft court’s modified application for FRAND cases:

Click here to view table.

Result

Motorola argued that it was entitled to a royalty rate of 2.25 percent of the net selling price of Microsoft’s Windows and Xbox products for both its H.264 and 802.11 SEP portfolios (i.e., $4.50 for each $200 Xbox).  Microsoft argued that the MPEG LA H.264 patent pool is the best indicator of a FRAND royalty rate for Motorola’s H.264 SEPs.  The court reached several Microsoft-favorable conclusions.  Importantly, it found that several of Motorola’s patents provided only minimal contribution to the standards and played only minor importance in the overall functionality of some of Microsoft’s products.  Also, the court concluded that “[b]ecause the characteristics of the MPEG LA H.264 pool [of which Microsoft and Google, Motorola’s parent, are members] closely align with all of the purposes of the RAND commitment, . . . the pool rate is a strong indicator of a RAND royalty rate for Motorola’s H.264 portfolio.”  And regarding Motorola’s 802.11 SEP portfolio,the court found that the Via Licensing 802.11 patent pool is an indicator of a FRAND royalty rate, albeit not a strong indicator because neither Microsoft nor Motorola were in the pool, and the pool had not been successful in encouraging widespread adoption of the standard.

The court ultimately favored Microsoft, holding that the FRAND royalty rate for Motorola’s H.264 SEP portfolio is 0.555 cents per unit, with the range set at 0.555 to 16.389 cents per unit for Windows and Xbox products.  For all other Microsoft products, the rate is 0.555 cents per unit.  The court set the FRAND royalty rate for Motorola’s 802.11 SEP portfolio at 3.471 cents per unit, with the range set at 0.8 to 19.5 cents per unit for Xbox products.  For all other Microsoft products, the royalty rate is 0.8 cents per unit.  In total, this is about $560,000 per year above Microsoft’s proposal, but about $4 billion below Motorola’s demand.

The case is slated to proceed to trial later in 2013 to determine whether Motorola’s 2.25 percent offer violated its FRAND obligations.  Assuming Motorola appeals, the applicable court of appeals could be at issue (as a breach of contract action in Washington, the U.S. Court of Appeals for the Ninth Circuit would normally hear the appeal, but because it centers on patent issues, it could end up at the U.S. Court of Appeals for the Federal Circuit).

Practical Impact – Why Microsoft v. Motorola Matters

Microsoft v. Motorola is precedential only in the Western District of Washington, but at 207 thorough and well-reasoned pages, it provides a valuable roadmap and will probably influence courts in other U.S. and international jurisdictions deciding future FRAND cases (if it is not overturned on appeal).  However, its application might not always be licensee-favorable.  Microsoft v. Motorola presented substantial and potentially unique evidence, for instance, of patent pools relating to the standards at issue, that the SEPs at issue were not particularly valuable as compared to other patents essential to the standards (particularly for the uses at issue), and of similar (low) valuation analyses commissioned by the patent holder.

In any event, both licensors and licensees of SEPs should take serious note of Microsoft v. Motorola.