Because so many SEP-related issues have arisen over the past year, we will periodically revisit some of the more important occurrences with a brief post.  The recent bench trial before Judge James L. Robart of the Western District of Washington between Microsoft and Motorola a may yield a groundbreaking opinion in the area of standard-essential patents, so this is a case that warrants a review.

The dispute between the parties originated back in the fall of 2010.  Microsoft sued Motorola in the U.S. District Court for the Western District of Washington and the U.S. International Trade Commission, accusing Motorola Android devices of infringing several Microsoft patents.  Motorola in turn sent two letters to Microsoft, offered Microsoft licenses to two of Motorola’s standard-essential patent portfolio – for the 802.11 WiFi standard and the H.264 video coding standard – at a rate of 2.25% of the net selling price of the end products that practice those standards.  Microsoft then filed a complaint in the W.D. Wash. against Motorola for breach of contract – specifically, Microsoft alleged that Motorola’s offers to Microsoft breached Motorola’s prior promises to the IEEE and the ITU to offer licenses to its 802.11 and H.264-essential patents on RAND terms.

In the two years that elapsed between the complaint and the trial, many interesting issues came to light.  Motorola moved to dismiss Microsoft’s claims on the grounds that they were not ripe and merely sought an advisory opinion.  However, Judge Robart allowed the breach of contract and promissory estoppel claims to move forward.  In the meantime, the parties continued to file patent infringement claims against each other in various venues, including multiple district courts, the ITC, and even Germany.  Some of the Motorola patents at issue included patents that were alleged to be essential to the 802.11 and H.264 standards, and therefore had been included in the October 2010 offers to Microsoft.  Therefore, there was some overlap in issues between the infringement actions and the breach of contract action.

This overlap had international implications.  On May 2, 2012, Motorola was awarded an injunction by a German court based on a finding that Microsoft products (Windows 7, Internet Explorer, Windows Media Player, and the Xbox) were infringing two Motorola H.264-essential patents.  Because injunctions in Germany are not self-enforcing, Motorola would need to post a bond and ask the court to enforce the injunction during the pendency of Microsoft’s appeal and invalidity proceedings involving the patents.  Microsoft, however, almost immediately moved for a temporary restraining order and preliminary injunction before Judge Robart in W.D. Wash., seeking to enjoin Motorola from enforcing any injunction in Germany pending the outcome of the RAND breach of contract action.  Judge Robart agreed and enjoined Motorola from enforcing the injunction in Germany, finding that allowing Motorola to enforce such an injunction before Microsoft had its day in court in W.D. Wash. would be inconsistent with Motorola’s RAND commitment.  Motorola appealed to the Ninth Circuit, which affirmed Judge Robart’s decision.

Although Judge Robart repeatedly expressed reservation and displeasure about his court being used as a pawn in a global business dispute between the parties, he took steps trying to make certain that the proceedings in his court would further resolution of this dispute.  For example, Motorola had criticized Microsoft for “trying to have it both ways” and using the court as a bargain chip – i.e., although Microsoft’s pleading sought the court to declare that Microsoft is entitled to a RAND license, Microsoft had not expressly sought a determination of precisely what a RAND royalty would be, nor had it promised to accept a license to Motorola’s patents at that RAND royalty.  In court filings and hearings, though, Microsoft insisted that it was in fact seeking a determination of a RAND royalty for Motorola’s patents and would agree to take a license at that RAND royalty.  Judge Robart acknowledged this stance and unequivocally stated that he would hold Microsoft to its promise.

Summary Judgment

Both Microsoft and Motorola filed multiple summary judgment motions in 2011 and 2012 in an attempt to narrow the issues for trial.  Microsoft sought rulings that Motorola had entered into binding contracts with the SSOs, that Microsoft was a third-party beneficiary of those contracts, and that Motorola’s offers of 2.25% had breached the contracts.  Motorola, for its part, sought rulings that Microsoft failed to satisfy a condition precedent by not negotiating with Motorola before filing its lawsuit, or that it repudiated its right to a RAND license by filing the lawsuit.  Motorola also challenged the court’s authority to create a RAND license between the parties ab initio, asking Judge Robart to instead order further negotiation.

Judge Robart denied Motorola’s motions, finding that Microsoft did not need to ask or negotiate for a license in order to have a right to receive a RAND license.  Similarly, Microsoft’s filing of a lawsuit to enforce its right to a RAND license did not represent a repudiation of that right.  Judge Robart also rejected Motorola’s claim that the court lacked authority to enforce the RAND promise by ordering the parties to enter into a license agreement, saying that Motorola’s position would lead to an illogical result where Microsoft was owed a duty by Motorola, but had no method of ensured Motorola complied with that duty.

As for Microsoft’s motions, Judge Robart found that Motorola’s promises to license its patents on RAND terms were enforceable contracts that could be enforced by Microsoft.  But because the SSO patent policies spoke in terms of promises to grant licenses on RAND terms, he denied Microsoft’s motion regarding breach of contract.  Judge Robart found that Motorola’s promises did not require it to make initial license offers on RAND terms – in fact, RAND terms generally could not be determined until a license agreement was finalized.  But Motorola’s contracts still required that all licensing offers must be made in good faith and could not be “blatantly unreasonable” when compared with true RAND terms and conditions.

The Trial(s)

Thus, in Judge Robart’s opinion, the issue remaining for trial was whether Motorola’s 2.25% initial offer was “blatantly unreasonable” when compared to what would constitute RAND terms and conditions for its patents.  Recognizing that the determination of whether a party has breached RAND licensing obligations (including what constitutes RAND terms and conditions for a standard-essential patent portfolio license) was a matter of first impression, Judge Robart found that the trial should proceed in two phases – a bench trial followed by a jury trial.  Beginning November 13, the parties would present their cases for what methods and evidence the court should use in determining RAND terms and conditions for each of the Motorola portfolios at issue.  Judge Robart would then issue a subsequent opinion outlining his findings regarding a “RAND royalty range and a RAND royalty rate for Motorola’s standard essential patents.”  Finally, a jury would then be empaneled in Spring 2013 to hear the parties’ positions as to whether Motorola’s initial licensing offers were so “blatantly unreasonable” as to constitute a breach of contract.

During the November 13-21 trial, the parties presented their respective positions via multiple fact and expert witnesses.  Because Judge Robart previously had denied the parties’ motions in limine, he heard a full panoply of evidence on what each party believes is the proper method for determining RAND terms generally, and how to determine specific RAND terms for Motorola’s patent portfolios at issue.  Unsurprisingly, the parties’ approaches were quite different:

Microsoft’s methodology could be characterized as a “multilateral ex ante simulation.”  Microsoft argued that the SSO patent policies were designed to alleviate royalty stacking and hold-up issues, and the only way to do so is to have full participation by all patent holders in a large negotiation – like a patent pool.  In fact, Microsoft argued that the best evidence of RAND royalty rates for Motorola’s portfolios are the rates charged by existing patent pools for patents that are essential to the same standards – the MPEG LA AVC/H.264 (for H.264) and Via Licensing 802.11 (for 802.11) pools.  To come to a RAND rate, Microsoft constructed a scenario where Motorola and other essential patent holders joined these pools (to create “expanded pools”), and were then allotted shares of the royalties that Microsoft would be expected to pay to expanded pools.

For its part, Motorola criticized Microsoft’s approach as largely based on theory and failing to take into account the technical merit and value of the specific Motorola patents at issue.  Motorola also argued that parties choose whether to join or not join patent pools for various reasons, and therefore pools cannot be used as analogues to a bilaterally-negotiated license agreement.  Motorola also claimed that in certain situations, multilateral negotiations may be used by implementers of standards-compliant products to drive down royalty rates.

Motorola’s approach, on the other hand, was presented as a modified Georgia-Pacific simulation of a hypothetical bilateral negotiation between the parties.  According to Motorola, the best evidence of a RAND royalty rate for its essential patent portfolios would be the rates paid by other companies for these very same patents.  Motorola claimed to have a long history of licensing its essential patents at or near 2.25% of the net selling price of the end product.  While the financial terms of the specific license agreements were confidential, Motorola presented evidence of its essential patent license agreements to the court during trial.

Unsurprisingly, Microsoft offered several criticisms of Motorola’s methodology.  First, it claimed that by using royalty rates embodied in ex post license agreements that were entered into well after the adoption of the standards, Motorola’s methodology would allow it to capture value that stems not from the patents themselves, but from their inclusion in the relevant standards.  Microsoft also argued that bilateral agreements alone fail to solve royalty stacking issues inherent with standard-essential patent licensing.  Furthermore, Microsoft said that the Georgia-Pacific framework is inherently vague and inappropriate for this exercise, particularly as applied by Motorola’s experts (e.g., the license agreements were not comparable).  Microsoft also claimed that Motorola’s specific patents are directed to trivial portions of the standard that are largely unused or irrelevant to Microsoft’s products.

The parties filed their post-trial briefs on December 14, and Judge Robart’s opinion is expected in January or February 2013.  The opinion will be the first to tackle a determination of a portfolio-wide RAND rate, and is likely to be eagerly anticipated by interested parties across SSOs and industries.  An appeal by Microsoft or Motorola (or both) is sure to follow.