As we noted yesterday, Judge James L. Robart’s groundbreaking opinion in the Microsoft v. Motorola breach of contract case was the first to set RAND licensing terms for a standard-essential patent portfolio.  While much of the focus in the media has been on the amount of RAND royalties determined by the court, it’s the methodology for determining these royalties has the potential to be truly important for future cases

To determine RAND terms in this case, Judge Robart analyzed what would occur in a hypothetical negotiation between Motorola and Microsoft for the 802.11- and H.264-essential portfolios at issue.  As in many patent-related cases, the court here used the factors outlined in Georgia-Pacific Corp. v. U.S. Plywood Corp., 318 F. Supp. 1116 (S.D.N.Y. 1970) formed the basis for this hypothetical negotiation.  But to account for the unique considerations present in the standard-essential patent RAND licensing context, Judge Robart modified the G-P factors somewhat — noting 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.”  After the jump, we will take a closer look at Judge Robart’s modified Georgia-Pacific approach to determining RAND royalties.
Continue Reading Microsoft-Motorola follow-up: A look at Judge Robart’s modified Georgia-Pacific RAND methodology

Today, Judge James L. Robart issued the non-confidential version of his Findings of Fact and Conclusions of Law in Microsoft Corp. v. Motorola, Inc., No. 10-cv-1823 (W.D. Wash.).  This marks the first time that a U.S. court has made a determination of RAND licensing terms for a standard-essential patent portfolio license between two parties.  The order itself is 207 (!) pages long, so it will take some time to review, and multiple posts to fully digest.  But we wanted to do a short post this evening, and will follow up with a more in-depth review tomorrow.

To recap, the SEP portfolios at issue here are (1) Motorola’s patents that are claimed to be essential to the IEEE 802.11 wireless networking standard, and (2) Motorola’s patents that are claimed to be essential to the ITU-T H.264 video coding standard.  Judge Robart, in fact, determined both a specific RAND royalty rate and a RAND royalty range for these portfolios, noting that “more than one rate could conceivably be RAND.”  Here are his findings:

• The RAND royalty rate for Motorola’s H.264 SEP portfolio is 0.555 cents per unit; the upper bound of a RAND royalty range for Motorola’s H.264 SEP portfolio is 16.389 cents per unit; and the lower bound is 0.555 cents per unit. This rate and this range are applicable to both Microsoft Windows and Xbox products. For all other Microsoft products using the H.264 Standard, the royalty rate will be the lower bound of 0.555 cents.
• The RAND royalty rate for Motorola’s 802.11 SEP portfolio is 3.471 cents per unit; the upper bound of a RAND royalty range for Motorola’s 802.11 SEP portfolio is 19.5 cents per unit; and the lower bound is 0.8 cents per unit. This rate and range is applicable to Microsoft Xbox products. For all other Microsoft products using the 802.11 Standard, the royalty rate will be the low bound of 0.8 cents per unit.

That’s about 4 cents/unit total — and even at the upper bounds, it’s about 36 cents/unit.  From a review of the parties’ post-trial briefs (Motorola, Microsoft), these RAND royalty rates are much closer to the ones urged by Microsoft than Motorola.  And obviously, they are much lower than the 2.25% rates offered by Motorola in its initial licensing letters (which work out to about $4.50 on a $199 Xbox).  Judge Robart apparently did not find Motorola’s prior licenses (many of which involved Motorola’s cellular SEP portfolios) to be good comparables for a license between Motorola and Microsoft involving 802.11 and H.264 patents.  Instead, he appears to have based much of his determinations on rates offered by patent pools (the MPEG LA AVC/H.264 pool and the Via Licensing 802.11 pool), as well as license rates charged by chip designer ARM Holdings.

“Economic Guideposts” for assessing RAND terms

Beyond the actual RAND royalty rate determinations, this order is also important for the precedent it sets in how to determine RAND terms for a patent portfolio.  On pp.25-26, Judge Robart lays out what he terms several “economic guideposts”:

• The level of a RAND royalty should promote adoption of the standard;
• The methodology for determining RAND terms should recognize and mitigate both the risk of “patent hold-up” and royalty stacking (the total royalties payable if other SEP holders made the same demands);
•  RAND royalties should guarantee the patent holder a reasonable return on its IP-related investment; and
• RAND royalties should be interpreted to limit the patent holder to a reasonable royalty on the economic value of the patented technology itself, apart from the value associated with the patent’s incorporation into an industry standard (similar to Judge Posner’s idea of the value of the “patent qua patent”)

One interesting thing about the findings is that while the ultimate RAND royalty appears to favor Microsoft, Judge Robart seems to have sided with Motorola as to the right approach to determine RAND royalties — simulating a hypothetical, bilateral negotiation between the parties (whereas Microsoft had suggested determining RAND on the basis of an ex ante, multilateral negotiation at the time of the standard’s adoption).

We will get into the meat of Judge Robart’s analysis tomorrow — given the importance (and length) of Judge Robart’s order, it’s certainly worth multiple posts.  Stay tuned for an update tomorrow, but in the meantime, happy reading.

And if you’d like to catch up on the history of the Microsoft-Motorola case,
Continue Reading Microsoft-Motorola Update: Washington court sets RAND royalty for Motorola 802.11 and H.264 patent portfolios