Later this summer, the second phase of the Microsoft v. Motorola RAND breach of contract trial will take place in Judge James L. Robart’s courtroom in Seattle, WA.  A jury will decide whether Motorola breached its SSO-related RAND licensing obligations by offering what Microsoft deems “blatantly unreasonable” licensing terms for its 802.11- and H.264-essential patents, and then following up with patent infringement suits.

In a prior summary judgment order, Judge Robart already concluded that in order to be permissible under its RAND obligations, Motorola’s license offers “must comport with the implied duty of good faith and fair dealing inherent in every contract.”  He noted that this inquiry is heavily fact-intensive, and best left to the jury to decide.  To this end, Judge Robart recently requested that both Microsoft and Motorola present background briefing on the parameters of what is required by the duty of good faith and fair dealing in contractual disputes.  This week, the parties complied with this request:

Both parties acknowledge that the issue of good faith and fair dealing is complicated — but understandably, the parties also differ quite a bit in their views on what should be considered.  After the jump, we’ll take a brief look at the filings.

Microsoft’s Position

Microsoft’s overall theme is that outright dishonesty or subjective bad faith isn’t necessary to breach the duty of good faith and fair dealing — it notes that a “smoking gun” showing bad faith will rarely be uncovered.  Rather, Microsoft contends that commercially unreasonable conduct or actions that frustrate the purpose of a contract (including actions contrary to the “reasonable expectations” of a counterparty) are breaches of the duty of good faith.  Essentially, Microsoft urges the court to take a step back and focus on “objective factors” to evaluate good faith.

As applied to the RAND licensing context, Microsoft argues that if dishonesty or subjective bad faith was required, blissfully ignorant or mistaken patent owners could demand exorbitantly high royalties without ever breaching the RAND commitment (the “kind heart and empty head” defense).  According to Microsoft, commercially unreasonable offers made in the RAND context violate the duty of good faith.  Additionally, Microsoft asserts that offers made above what a potential licensee’s “reasonable expectations” as to a RAND royalty rate would be constitute a breach of the duty of good faith.

Motorola’s Position

Motorola agrees that the inquiry is fact intensive, but has both subjective and objective prongs that must be balanced.  Motorola argues that the subjective intent of the party making an offer must be considered, and the role of industry practices or customs also play a role.  Motorola also contends that reciprocity in good faith is required, even for third-party beneficiaries (such as Microsoft here).  And Motorola argues that no court has found a breach of the duty of good faith and fair dealing based solely on an opening offer that was too high or too low.

In the particular RAND-related context of this case, Motorola’s argument is that its open offers (of 2.25% of the end product price of Microsoft’s products) was made in good faith and was based on its historical licensing program, as well as customary industry practices.  Motorola contends that the duty of good faith and fair dealing also requires the counterparty to a RAND license negotiation to “come to the table” in good faith and negotiate, not to file suit based on self-serving reasons (as it has accused Microsoft of doing here).  Finally, Motorola asserts that no court or tribunal has found RAND obligations contractually bar patent owners from seeking injunctive relief as a remedy for infringement, even citing the ITC’s recent Samsung-Apple decision.

You can be sure that this issue will continue to be hashed out as the parties get closer to trial (Judge Robart even apparently noted that “the real fight” will be with jury instructions).  So stay tuned…