When Judge Robart issued his summary judgment order last week in the Microsoft-Motorola case, we noted that he ordered the parties to submit further briefing on Microsoft’s allegation that Motorola breached its RAND obligations to Microsoft (at least in part) by failing to offer a RAND license to Microsoft’s WiFi chip supplier, Marvell Semiconductor:

As the court understands it, Microsoft will argue to the jury that Motorola failed to grant a license to Marvell, and if Motorola had granted such a license, Motorola would then be precluded from seeking a license from Microsoft for the SEPs at issue. This argument requires a legal basis. The argument is premised on the notion that, legally, Motorola’s ability to seek a license from Microsoft would be exhausted by granting a license to Marvell. This issue is not explored in the parties’ summary judgment briefing. Thus, the parties may provide three-page letter briefs no later than August 16, 2013, on the legal grounds for Microsoft’s assertion that a Motorola-Marvell license would preclude Motorola from seeking a license from Microsoft. Additionally, no later than August 16, 2013, the parties may propose jury instructions on this issue.

On Friday, the parties submitted letter briefs in response to this order (links below).  As we alluded to in last week’s post, this issue raises some interesting questions on what types of behavior and licensing restrictions are proper during FRAND licensing negotiations — questions that we’ll get into after the jump.

Under the Supreme Court’s 2008 holding in Quanta Computer v. LG Electronics, a patent holder’s rights are exhausted by the authorized sale of a product that substantially embodies the patented invention (this is sometimes known as the “first sale doctrine”).  Microsoft focuses its letter on the issue of patent exhaustion, arguing that Marvell’s 802.11 chips substantially embodied Motorola’s 802.11-essential patents and would exhaust Motorola’s patent rights under the Supreme Court’s Quanta standard.  Even if additional components are required to provide 802.11 functionality to devices including the chips, Microsoft claims, the chips’ only reasonable and intended use is to allow consumer devices to access WiFi networks; therefore, Microsoft would not need a separate license if Motorola and Marvell were to consummate a RAND license to Motorola’s 802.11 portfolio.  Microsoft does not expressly address the propriety of a defensive suspension clause — a clause that allows a licensor to terminate a license upon the occurance of a certain event, like being sued for patent infringement by a licensee or licensee’s customer — but at least alludes to an assertion that such a clause is improper.  To wit, Microsoft states that “Motorola’s RAND licensing commitment bars it from imposing any conditions limit[ing] [Marvell's] authority to sell products substantially embodying the patents” (quotation marks omitted).

Microsoft also submits to the court a jury instruction on patent exhaustion, which states in pertinent part that:

A RAND license agreement between Motorola nd Marvell would have authorized Marvell to make its 802.11-enabling chips and to sell those chips to any party.  Marvell’s 802.11-enabling chips substantially embody Motorola’s 802.11 standard essential patents.  Accordingly, if Motorola had granted Marvell a RAND license to Motorola’s 802.11 standard essential patents, Motorola’s patent rights would have been exhausted and it would not have been entitled to any royalties from Microsoft.

For its part, Motorola notes in its letter brief that Microsoft had yet to submit any jury instructions on this issue, so it reserved the right to respond to any instructions eventually proffered by Microsoft (and it will likely respond in the coming days).

As to what is addressed in Motorola’s letter, there are three particular issues: (1) the applicability of patent exhaustion; (2) the ability of Motorola to require a “defensive suspension” clause in a license with Marvell; and (3) Microsoft’s standing to allege a RAND breach based on Motorola’s course of dealing with Marvell.

Motorola does not appear to take issue with Microsoft’s claim that Marvell’s chips “substantially embody” its 802.11-essential patents, instead arguing that the scope of a hypothetical RAND license between Motorola and Marvell might be of a different geographic or territorial scope than a license between Motorola and Microsoft — therefore, not all of Marvell’s chip sales to Microsoft would be “authorized” under a hypothetical Motorola-Marvell license, rendering patent exhaustion inapplicable.  Further along those lines, Motorola argues that RAND commitments do not preclude it from including a defensive suspension provision or other restrictions that would render any Marvell sales to Microsoft as “unauthorized” (presumably, because Microsoft “fired the first shot” in the parties’ overall dispute by filing ITC and district court infringement actions).  Motorola claims that these provisions are common in both RAND and non-RAND licensing, even citing a Microsoft document and asserting that Microsoft itself has acknowledged the permissibility of including these restrictions.

Finally, Motorola argues that there is no basis for Microsoft to argue that an SEP holder’s RAND commitment entitles an implementer (Microsoft) to a license from a supplier (Marvell) via the supplier’s license agreement with the SEP holder (Motorola).  Motorola claims that if Marvell believes Motorola has violated its RAND commitment to Marvell, then Marvell should have to bring that claims — and that Microsoft lacks standing to do so.

The parties’ arguments raise a host of questions — some that come to mind include:

  • Is the patent exhaustion doctrine triggered by the licensed sale of a standards-compliant component (such as a chip) to an end product manufacturer? (I.e., is it fair to say that these chips “substantially embody” the patented invention?  This may be a highly fact-specific question to be evaluated on a case-by-case basis.)
  • Given that (most) RAND commitments are “irrevocable,” is a defensive suspension clause proper to include in a RAND license?
  • If a defensive suspension clause in a RAND license is permissible, should its scope be limited to the particular standard (or standards) in the license?  (While we’re not aware of any particular language limiting defensive suspension clauses, allowing unlimited scope could grant an SEP holder a de facto license to a licensee’s entire portfolio — and most SSOs appear to limit reciprocal licensing obligations, i.e., “reciprocity,” to only the particular standard or standards at issue).
  • Does a RAND obligation require a standard-essential patent holder to negotiate a RAND license with a supplier that will cover all of the supplier’s downstream customers, or may an SEP holder place restrictions on what might otherwise constitute “authorized” sales?  (Could an SEP holder place a cap on the amount of licensing standards-compliant devices sold by a supplier, or restrict sales to only to certain customers, etc.?  Some restrictions might be viewed as more reasonable than others.)
  • When there is a dispute over whether a standard-essential patent holder has complied with its RAND commitment as to a license with a component supplier, who has standing to take action to enforce that RAND commitment?  (I.e., is it the supplier, the supplier’s customer(s), the SSO — or some subset of these parties?)

Perhaps some of these will be answered by Judge Robart.  But regardless of whether they are or not, we are likely to see these (and others) arise in future cases.