Source: http://www.fosspatents.com/2013/04/
Timestamp: 2019-04-20 00:24:42+00:00

Document:
Based on current schedules, there will be two Apple v. Samsung trials in the Northern District of Calfornia over the next 12 months: a smaller one in November and another big one starting in March. At a case management conference held Monday afternoon local time, Judge Lucy Koh laid out a roadmap for resolving the post-trial issues in the first Apple v. Samsung case before her in order to enable an appeal from a final ruling, scheduling a limited retrial on damages for certain products (with respect to which the first jury's damages award was vacated) for November, reinstating $40 million in damages for the Galaxy S II AT&T (which won't have to be addressed by the second jury), and denying (for the time being) a stay pending reexaminations. I've seen a couple of media reports on this hearing, and The Recorder has the most detailed account.
In mid-March the parties' disagreement over the best way forward became apparent. Apple requested a prompt new damages trial on the 14 products with respect to which the first jury's damages award had been vacated. Samsung cited Seventh Amendment rights and requested that such a retrial also reevaluate the underlying merits, but before any such retrial would take place (no matter the scope), Samsung wanted to be able to appeal the ruling with respect to the other 14 products, arguing that the appeals court's decisions would help get the second trial right and could narrow the issues. One thing the parties agreed on was that Judge Koh's March 1 damages order couldn't be appealed directly. They disagreed on whether a partial final judgment under Rule 54(b) would be appealable: Samsung claimed so, but Apple doubted this and thought the most likely outcome would be an unproductive delay. Also, Samsung asked the judge to stay the case pending the reexaminations of two of the patents-in-suit, the '381 rubber-banding and '915 pinch-to-zoom API patents, the relevant claims of both of which have been found invalid on a non-final basis. Apple argued that these patents wouldn't be invalidated (if ever) until mid-2017 or later (including an appeal to the Federal Circuit).
There won't be an appeal before the retrial. The court denied Samsung's motion for a partial final judgment pursuant to Rule 54(b) and the related request for a stay pending appeal.
Instead, the new damages trial will take place on November 12, 13, 14, 15, and 18, 2013. Eight jurors will be selected, and for the purposes of their new damages verdict, the first jury's infringement findings will be law of the case, as the court rejected Samsung's argument that a new trial also has to re-evaluate liability issues.
As I pointed out right after the March 1 damages order and also stressed last month, the limited damages retrial is not just an opportunity for Samsung to bring the damages award down but also an opportunity for Apple to seek even more damages, as Samsung itself confirmed in a brief.
For the new trial Apple needs to find a new expert, who has to be a certified public accountant just like Terry Musika, the damages expert at the first trial. Mr. Musika died after the trial.
About a month ago the USPTO rejected most of the '381 rubber-banding claims, including the one at issue in this California case. Apple gets to respond to the "final" Office action, and the USPTO could reopen prosecution if it believes that Apple's arguments warrant another look. If it does not do so, Apple can only appeal to the PTAB (Patent Trial and Appeals Board) and thereafter to the Federal Circuit, and in that scenario Samsung can request and may win a stay.
In December the USPTO tentatively rejected the '915 (pinch-to-zoom API) patent, and Samsung believes a final Office action will issue this spring. If Apple then can't persuade the USPTO to reopen prosecution, Samsung is free to seek a stay.
The damages retrial will have to address only 13 -- not 14 -- products, and damages are now final (apart from the possibility of an appeal) with respect to 15 -- not 14 -- products. In late March Apple brought a conditional motion for reconsideration with respect to two accused products, the Samsung Galaxy S II AT&T and the Infuse 4G, claiming that the court had erroneously vacated damages (totaling $85 million) relating to these products. The motion was conditional in the sense that Apple didn't insist on its adjudication in the event of a prompt new damages trial -- it brought this motion only for the event that the Rule 54(b) judgment requested by Samsung would come down. While there won't be a partial final judgment, Judge Koh apparently decided to rule on the motion anyway. I guess that's because she's very committed to accuracy and she recognized her error with respect to the Galaxy S II AT&T; she declined to find an error with respect to the Infuse 4G. In my commentary on Apple's motion I said that the part concerning the S II AT&T "really look[ed] like an oversight on Judge Koh's part", and I later noted that Samsung couldn't even defend the decision to vacate damages with respect to the S II AT&T.
As a result of this correction of the March 1 order, the damages that have been finalized amount to approximately $650 million and the portion that has to be redetermined amounts to roughly $400 million. The replacement for the $400 million part could, as I stated before, exceed the original award. It could also be less. One parameter (damages periods for the relevant products) has changed in Samsung's favor, but the first jury awarded Apple only about 40% of what it asked for, so a higher award (which could more than make up for the shortened damages period) is a possibility.
Apple wants prejudgment interest and supplemental damages (damages covering the period between the jury trial and the final ruling), and it's undoubtedly entitled to both, but the court won't determine the amount (which won't be substantial compared to the overall set of issues in this case) until after the appeal from a final ruling following the second trial.
I guess Apple is reasonably happy with the overall outcome, even though it would have preferred the retrial to take place sooner than November. In my opinion the strategically most important thing here is something that neither the order nor any of the other reports I saw highlighted. If Samsung had obtained a partial final judgment, which it would have appealed immediately, it would have sought consolidation of that appeal with Apple's already-ongoing appeal of the denial of a permanent injunction.
For Apple's strategic purposes, looking even beyond Samsung, it's absolutely key to fight for the right to prevent direct competitors from infringement even if a patented feature cannot be proven (especially if there's an exacting standard of proof in place) to drive consumer demand. For example, Apple may very well infringment by Samsung of several more patents at the 2014 trial, and it will then again pursue an injunction. Apple wants that question resolved at the earliest opportunity. Samsung, as almost always, wants to stall, and consolidation would have come in handy in that regard. After Judge Koh's case management order, regardless of whatever may happen in those reexaminations and possibly affect the damages retrial, the denial-of-injunction appeal will be more or less resolved by the time Samsung can bring its own appeal, and consolidation is out of the question now. I believe the unresolved state of the injunctive-relief issue is actually the single biggest obstacle to a settlement between these parties. Once this is clarified, the parties will have valuable guidance and a settlement will be much more likely at that stage than before. Damages issues have to be addressed, and no one will leave money on the table, but injunctions are really the key issue in a strategic dispute of this nature and stature. Compared to the relevance of injunctions, damages are almost a distraction (especially when less than half of the accused products in a given case are at stake), and only a consolation prize for Apple should the denial be affirmed.
On Thursday Judge James L. Robart of the United States District Court for the Western District of Washington published his FRAND rate-setting decision in the Microsoft v. Motorola contract case (the court's findings of fact and conclusions of law, my blog post). It was easy to see that Microsoft won and Google (Motorola Mobility's parent company) lost. My second post on the decision lists 16 media reports that arrived at that conclusion, too. If someone initially demands $4 billion a year, still seeks hundreds of millions later in the game, and is awarded less than $2 million (i.e., less than a 20th of a percent of the initial demand), he obviously didn't win -- and he's also highly likely to lose the second trial over the breach-of-contract claim. In a round-up post I summarized Google's multiple major patent-related defeats during this month of April.
I've now taken a closer look at the rate-setting decision, which is the culmination of a truly impressive effort. The first thing I did was to create a table of contents because that's helpful when reading a 207-page document (that's the length of a book). I've shared my unofficial table of contents on Scribd because many of the professionals interested in FRAND patent issues read this blog and some of them may find the table of contents useful in their own analysis of Judge Robart's historic ruling.
"First, the owner of an SEP is under the obligation to license its patents on [F]RAND terms, whereas the owner of a patent uncommitted to [F]RAND has monopoly power over its patent and may choose to withhold licensing. Second, the hypothetical negotiation almost certainly will not take place in a vacuum: the implementer of a standard will understand that it must take a license from many SEP owners, not just one, before it will be in compliance with its licensing obligations and and able to fully implement the standard."
The second sentence relates to the concern commonly called "royalty-stacking". The two points I just quoted amount to this: yes, this is a negotiation, but it's a structurally unique one because both parties can't walk away the way they usually can. It almost reminds me of the theory of the "specificity of sports" in competition law (rival sports teams need each other, and even need each other to be reasonably competitive, to create a salable product, while a monopoly can work, at least for the monopolist, in all other industries). Here, Judge Robart basically established the "specificity of SEPs" principle with a view to FRAND licensing negotiations. There's no room for a Hobson's Choice approach here: the SEP owner can't just exclude someone from the market, and the implementer can't just work around the patent (which is an option in non-SEP negotiations). Both sides must be reasonable and work it out. And no deal can be analyzed in isolation but one must think about the wider implications (royalty-stacking). This second part is not nearly as unique as the first one.
"A [F]RAND royalty should be set at a level consistent with the SSOs' [standard-setting organizations'] goal of promoting widespread adoption of their standards."
"In the context of a dispute concerning whether or not a given royalty is [F]RAND, a proper methodology used to determine a [F]RAND royalty should therefore recognize and seek to mitigate the risk of patent hold-up that [F]RAND commitments are intended to avoid."
"Likewise, a proper methodogology for determining a [F]RAND royalty should address the risk of royalty stacking by considering the aggregate royalties that would apply if other SEP holders made royalty demands of the implementer."
"At the same time, a [F]RAND royalty should be set with the understanding that SSOs include technology intended to create valuable standards. [...] To induce the creation of valuable standards, the [F]RAND commitment must guarantee that holders of valuable intellectual property will receive reasonable royalties on that property."
"From an economic perspective, a [F]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."
At the Daubert stage (motions to exclude expert opinions) the parties already defended, and attacked each other's, proposed frameworks, with Google's Motorola arguing for Georgia-Pacific, which Microsoft described as "open-ended" and "unweighted", promoting (against Motorola's resistance) as a superior alternative an ex ante (pre-standardization) multilateral negotiation of the kind that is needed to form a patent pool. In his October 2012 Daubert ruling Judge Robart allowed both parties to present their theories at trial. At that point the question was not who made the better proposal -- it was just about whether a given approach would result in inherently unreliable testimony, providing not even a useful indication for what the FRAND royalty should be. Even Motorola's unwillingness to apply the Entire Market Value Rule (EMVR) -- seeking contrary to the EMVR a percentage of sales of multifunctional products -- was only met with skepticism, but not penalized, as even an EMVR-ignorant approach can theoretically result in an indication for a FRAND rate. The hurdle was low.
In the rate-setting decision Judge Robart "generally agree[d] with Motorola's approach" and criticized several "flaws" in Microsoft's approach, but found in paragraph 76 that "ex ante examination of the incremental contribution of the patented technology to the standard can be helpful in determining a [F]RAND rate in the context of a dispute over a [F]RAND rate". What happened then is that the court used Google's (Motorola's) proposed framework, the 15 Georgia-Pacific factors, with the "adjustments" and parameters described above, but it would still be a mistake to believe that Google prevailed on methodology. The fact of the matter is that Judge Robart elected to thread the needle: he incorporated Microsoft's approach into Motorola's by using pool rates as a (key) indicator of FRAND rates that the parties to a hypothetical bilateral negotation would consider.
The result -- only $560,000 per year above Microsoft's proposal, but roughly 4 billion below Motorola's initial demand -- indicates that Motorola didn't get what it wanted, and that's not a coincidence. The court adopted Georgia-Pacific, but not Google's denomination of it. Google wanted to capture hold-up value. Microsoft's proposed framework wouldn't have allowed this to happen -- but Judge Robart's threading of the needle has the very same effect in this case. I'll talk about the defensibility of this approach in case of an appeal by Google (which will definitely happen unless the parties settle before) in the next section and about the implications for other FRAND rate-setting cases in the third section.
Judge Robart's rate-setting decision is the first of its kind, and the last high-profile decision in U.S. federal court that addressed the issue of FRAND royalties (and FRAND licensing negotiations) was Judge Posner's Apple v. Motorola ruling last June. Unless I missed something, I didn't see any reference to Judge Posner in Judge Robart's rate-setting decision. Both judges are equally aware of the relevant problems -- hold-up at the threat of injunctive relief, royalty demands capturing standardization value above and beyond the intrinsic value of a patent -- and committed to preventing abuse. But their styles are very different, and I mean this non-judgmentally: many roads lead to Rome.
Both judges denied Motorola injunctive relief. A difference between the two cases is that Judge Posner had to rule on a damages claim for alleged past infringement, while Microsoft asked for a rate determination. For patent damages there's plenty of precedential decisions -- not so for rate-setting. In the case before Judge Posner, Motorola was seeking hundreds of millions of dollars for a single cellular standard-essential patent; the initial royalty demand that gave rise to Judge Robart's case amounted to $4 billion annually and was later reduced to hundreds of millions. In Chicago, Motorola got nothing because its claim was thrown out with no chance for a do-over; in Seattle, it got 50% more than Microsoft deemed FRAND, but almost nothing compared to its original demand.
Judge Posner held that the FRAND value of an SEP must be determined ex ante, pre-standardization. The value of a "patent qua patent". He ridiculed the Georgia-Pacific framework, and Cisco, HP, Walmart and others support his skepticism of Georgia-Pacific in an amicus brief. Google's primary attack vector against the FRAND damages part of Judge Posner's ruling is that traditionally any patent damages based on a reasonable-royalties theory must be calculated as per the date when infringement began, not an earlier date. In that context I already expressed my view that the point in time when negotiations took (or would have taken) place doesn't matter as long as the intrinsic value of a patent is determined without post-standardization monopoly power. Each SEP has to be valued as though alternative technical solutions were still available (which they cease to be once a particular solution is prescribed by an industry standard). Judge Robart achieves this objective within his "modified"/"adjusted" set of Georgia-Pacific factors.
I believe it will be harder for Google to challenge Judge Robart's ruling on appeal. There's no single legal issue that Google can present -- apart from the jurisdictional question of whether the court can set a FRAND rate at all -- to get the ruling reversed or vacated. Applying Georgia-Pacific is a safe, conservative choice. If Judge Robart had adopted Microsoft's proposal, this would have been beneficial with a view to other FRAND rate-setting cases, but it would have required an appeals court to decide only one legal issue -- the reasonable-royalties framework -- differently in order for the whole ruling to be vacated, creating legal uncertainty for Microsoft as to what the outcome on remand would be. Here, even if Google prevailed on one or a couple of issues relating to the framework (which is unlikely since common sense dictates the application of Georgia-Pacific proposed by Judge Robart) and won a remand, the impact would most likely be rather limited. Maybe Google would get another few hundred grand. It wouldn't suddenly get hundreds of millions more.
If Judge Robart had determined that multilateral patent pool negotiations are the only or always the best way to arrive at FRAND rates, an appeals court might have disagreed and might have found that if a company elects not to participate in a pool, it should still be free to seek higher royalties through bilateral negotiations. But his decision uses pool rates only "under certain circumstances" and only as "indicators" of a FRAND rate. When major, sophisticated SEP holders agree to make their patents on a given standard available at certain rates, how can it not be an indicator of a FRAND rate?
Google can, and absent a settlement presumably will, challenge Judge Robart's application of the criteria he outlined -- for example, what weight he gave to certain findings. There's always something in a 207-page decision on a complex matter that someone can disagree with (in some cases even a reasonable person), but as a fact finder Judge Robart gets considerably more deference than as a developer or modifier of legal theories. There are numerous findings of fact in Motorola's favor -- far more than the dollar amount at which the court arrived suggests. Still, the result is far from what Google hoped to get out of this.
Another consideration with a view to an appeal is that Judge Robart's ruling is very business-like: focused on resolving a commercial dispute that only a court can put to rest. He's not trying to legislate or campaign from the bench. Undoubtedly he's aware of the economic dimension of this Microsoft-Google case in its own right and the wider implications of the issues it presents. He wouldn't have written a 207-page document and developed fairly complex theories (for example, footnote 23, starting on page 171, outlines the calculation performed by the court) for a small and unimportant case. But nothing in the decision suggests an agenda or any ambition other than someone doing his best to arrive at the right numbers, based on an appropriate but conservative methodology.
Microsoft managed to show that Motorola's H.264 and IEEE 802.11 SEPs aren't overly valuable in general, and particularly not for Microsoft's implementations of these standards. In October I reported on a Motorola expert's reference to a pirated Katy Perry video in a desperate attempt to talk up the commercial relevance of interlaced video, a technique invented in the 1940s. With respect to WiFi SEPs, Judge Robart's opinion mentions, in various footnotes, numerous patents other companies declared essential to IEEE 802.11 relating to the same techniques (for example, data modulation or encryption, concepts which the decision notes Motorola "did not invent") -- and even Google's Motorola had to concede that Microsoft uses, at best, 11 of Motorola's 24 WiFi SEPs at issue in this case. There may be other FRAND cases in which it's harder to counter a SEP holder's claims that its patents are far more valuable than the average patent declared essential to the same standard.
Judge Robart put a lot of effort into an analysis of Motorola's SEPs at issue in this case. He analyzed them and the fields of technology they relate to. He stopped short of full-fledged infringement (essentiality) and validity rulings but came pretty close to such findings in some cases. Other courts adjudicating other FRAND cases may be less willing to go into so much detail. Other license-seeking implementers than Microsoft may not be able to provide the court with the same quality and quantity of briefing and testimony in this regard. And there may be cases in which the number of SEPs at issue is far greater (for example, chip maker Marvell claims to own hundreds of WiFi SEPs; or think of a valuation of Qualcomm's cellular SEP portfolio), making it much harder or impossible for a court to provide such a granular analysis.
There are patent pools for both of the standards in question: MPEG LA's pool for H.264, and a Via Licensing pool (less successful than MPEG LA, but still useful as an "indicator") for IEEE 802.11. As I explained further above, the pool rates were merely used as an "indicator", but a fairly important one. In the MPEG LA case, what makes the pool rate even more useful as an indicator is, besides the fact that Motorola was considering joining and approved a couple of announcements of pool rates, that Google agreed to a grant-back clause. Judge Robart found that Microsoft is an intended third-party beneficiary of that commitment to reciprocity but didn't base his rate-setting decision on a strict application of the grant-back obligation. He did, however, note that "Google is a sophisticated, substantial technology firm", whose agreement to the grant-back clause "further corroborates that the MPEG LA H.264 pool arrangement is an appropriate benchmark for determining [F]RAND royalties in this case". It's only one of various reasons for which the court arrived at its conclusions, but it's certainly an interesting one -- and this indicator will be hard to replicate in other cases.
A unique and impactful circumstance relating to IEEE 802.11 is that Motorola had a consulting firm named InteCap perform a valuation analysis about ten years ago. Despite limited overlap between the WiFi SEPs it held then and the one it has now, and despite a need for the court to apply a more realistic share for Motorola of all WiFi SEPs, that valuation also provided some useful guidance that was fundamentally inconsistent with Motorola's royalty demand from Microsoft.
In other cases it may be necessary to assess in more detail the value of a standard relative to the other functionality of a product. Here, there were enough comparables that a particular percentage of, for example, the value of a video codec relative to a PC operating system didn't have to be determined.
That said, this FRAND determination provides enormously valuable guidance, and with case-specific and jurisdiction-related adjustments this approach can help solve many FRAND rate-setting problems going forward. This approach does not have a built-in guarantee that overcompensation of SEP holders will always be avoided. For example, I could imagine some problems if such a determination was left to a jury. The Georgia-Pacific factors, even with Judge Robart's FRAND-specific amendments, provide patentees with an opportunity to present even excessive demands to a jury. There was no jury trial in this rate-setting process, but juries may become involved with other processes of this kind.
There will be many more FRAND determinations soon. We're going to see innumerable citations to Judge Robart's rate-setting opinion. Rightly so.
April 2013 was a mensis horribilis for Google on the Android patent front. With nothing being scheduled for the last few days of the month that could bring good news for Google on the smartphone patent front, let's look at this month's major events relating to Android patents. Without a doubt, Google is on the losing track, and as BusinessInsider wrote in a headline today, "It's Becoming Clear Google Overpaid For Motorola". It's always been clear to me. I doubted the patent-related logic of this deal from the day it was announced -- on this blog (first reaction, follow-up) and in numerous interviews. But a lot of people just looked at the number of patents in play and thought that all "wireless" patents are automatically supervaluable and believed in "mutually assured destruction", while skeptics like me were considered to be deniers. Others figured it out long before yesterday's publication of a FRAND rate-setting decision concerning Motorola's standard-essential patents (SEPs) -- but most people still didn't. With all that has happened so far, the fact that Google is losing out on the smartphone patent front is now easier to see than it used to be.
I cover all major smartphone patent news involving disputes and dealings between major operating companies (and a few select cases involving non-practicing entities), no matter who wins or loses. During this month, Google lost most of the time, especially on several strategic issues, and won only a couple of little things of very limited value in Germany (which it didn't even win alone; it merely complemented other companies' successful defenses).
The patent can be worked around, but there will probably be a noticeable degradation of product quality.
Technically the decision was made on March 30 but the outcome became known only in April.
All of the non-SEPs Motorola asserted against Apple in U.S. federal court are at issue in this litigation. Apple doesn't appear to be scared of this case, but on the bottom line any delay -- a few months in this case -- is beneficial to Apple while Google desperately needs some leverage in order to stop Apple's patent assertions against Android.
Apple is now reasonably close to certain infringement findings involving Android and affecting the ecosystem beyond Samsung. Also, Samsung is unlikely to have leverage with its non-SEPs-in-suit, which isn't Google's fault but means Samsung can't solve the problem through its counterclaims.
This company manufactures more than 40 percent of the world's consumer electronics. It was the 20th Android patent license deal in total (the 19th that Microsoft announced, plus Apple did a deal with HTC), further exposing the absurdity of Google's claim of Android being "free".
The Mannheim Regional Court denied Google's Motorola injunctive relief over the only non-SEP it was hoping to enforce against Microsoft in Germany, a push notification patent it's enforcing against Apple as I'll mention further below. An injunction is what Google really wanted (it would have caused a certain degree of inconvenience to Microsoft's German email users), but it owes Microsoft a license under an ActiveSync license agreement. The patent will expire before an appeals court will rule on Google's request for an injunction. Google could theoretically seek damages for past infringement (for the period before Motorola was acquired by Google), but that part of the case has been stayed because of doubts that this patent is valid at all. Google will most likely get nothing out of this patent assertion.
The decision was made on April 19 and published on April 25. Motorola's initial royalty demand from Microsoft was $4 billion, annually, which means Microsoft would have had to pay the price of the whole Motorola Mobility deal ($12.5 billion) in the form of royalties for three years of allegedly using Motorola's patents in its implementations of the H.264 (video codec) and IEEE 802.11 (WiFi) standards. The court, however, determined that Google will only get a few cents per product (on some products even less than a cent), resulting in an annual FRAND royalty of approximately $1.8 million. And these patents will expire within a limited number of years, so Google won't even recover its litigation expenses at that rate. There's unanimous consensus in the media that Microsoft won and Google lost.
On April 22 the U.S. trade agency found a Motorola sensor patent invalid, affirming (on slightly modified grounds) a preliminary ruling by an Administrative Law Judge. This was the sole remaining patent in the ITC case, and a U. S. import ban could have given Google some leverage over Apple. Google previously appealed the dismissal of three other patents from the case.
Google was an intervenor and its counsel made some good points complementing HTC's defenses, though I believe HTC, whose lead counsel against Nokia (Dr. Martin Chakraborty of Hogan Lovells) also has a great defensive track record on his own, would have won this case anyway. If Nokia had won, it would have been a major win for Nokia enabling it to force HTC and other Android device makers into a settlement, but there's an asymmetry here because Nokia only needs to prevail on a few of its 40 patent assertions against HTC. In fact, it brought the latest assertion against HTC a few days before this trial and decision. HTC and Google need to fend off dozens of Nokia patents, which is why the fact that the court gave short shrift to a single one of them is of limited importance and merely delays the inevitable, which is a license deal under which HTC pays Nokia (unless HTC gets a lot of leverage from its own assertions before Nokia does).
This is Microsoft's 20th deal, Apple has one with HTC, and Nokia and other third-party right holders will undoubtedly also collect royalties on Android. Also, this deal shows that a major Chinese device maker, unlike Google, respects Microsoft's intellectual property.
Motorola had been enforcing an injunction against the email service of Apple's iCloud for more than a year. The appeals court's decision paves the way for an Apple motion to lift the injunction. This is the only injunction Google's Motorola ever got to enforce against any of Google's rivals for more than a day. It never enforced anything against Microsoft (it won a couple of H.264 SEP injunctions in Germany but was barred by a U.S. court from enforcing them). It enforced an SEP injunction against Apple in early 2012 but only for about a day before it was lifted. This here is the only one it ever got to enforce for a significant period of time, and it will go away shortly.
By the way, March wasn't much better for Google with a preliminary ruling against Motorola's ITC complaint against the Xbox, Nokia's refusal to grant a license to its allegedly VP8-essential patents, Nokia's progress toward its first Android patent license deal, and a trial based on which Microsoft may very well win (in early June) a German injunction not only against Motorola but also its parent company, Google, with respect to Google Maps.
It's time Google gave up on litigation and focused on licensing based on a realistic assessment of what its own patents are worth and of how massive Android's infringement issues are.
In the previous post I published and reported on Judge Robart's historic FRAND rate-setting decision in the Microsoft v. Motorola FRAND rate-setting case in the Western District of Washington. After I did this post (I started at 4 AM my time) I went back to sleep again, but then I came up with the idea for this quick post.
There are many ways of looking at FRAND rates. There are numerous parameters. Judge Robart's findings of fact and conclusions of law span 207 pages. Expert reports in these cases are sometimes even longer.
One way of looking at it is, of course, Google's return on investment (ROI). Based on Motorola's original demand of more than $4 billion per year from Microsoft, it would have taken only about three years' worth of royalties for Microsoft to pay the $12.5 billion purchase price Google paid (in fact, way overpaid) for Motorola Mobility.
According to a chart Microsoft provided to AllThingsD and other media, the court-determined standard-essential patent (SEP) royalty rate for Motorola's H.264 (video codec) and IEEE 802.11 (WiFi) patents means an annual payment of slightly below $1.8 million.
At this level, it would take approximately 6,950 years -- almost seven millennia -- before Google's SEP royalty income from Microsoft would have paid for the overpriced, wasteful purchase of Motorola Mobility. Seven millennia. Not three years.
Of course, it will never happen with these patents, which will expire in a matter of years.
Apart from expiration, the discrepancy is even wider when considering the time value of money (a payment you get in the future is worth less than one you get today). Over the course of three years, financing costs would be negligible, especially in the current low-interest environment. But over the course of roughly 6,950 years, that factor does play a role in any amortization calculation. But I wanted to keep things simple, especially in the headline.
I have another perspective. Microsoft's position at the November 2012 trial was that Google can ask for $1,238,000. The court rate now comes down to an annual payment of $1,797,554. That's a differential of $559,554. This "upside" of 560 grand is certainly just a tiny fraction of what Google spent on this FRAND litigation alone. It will also take Google many years' worth of royalties (it won't have too many due to expiration) just to pay for this lawsuit -- and if Motorola is found to have breached its FRAND contract, which is a foregone conclusion the way I see it, it will be liable for damages that will add to (and probably exceed) its own litigation expenses.
It can, of course, appeal from a final ruling by the district court. The Ninth Circuit backed Judge Robart's approach last time (in connection with his preliminary injunction barring Google's Motorola Mobility from enforcement of SEP-based patent injunctions in Germany).
AllThingsD: "Court Denies Motorola the Billions It Wanted From Microsoft for Standards-Essential Patents"
ArsTechnica: "Court shreds power of Motorola’s standard-based patents"
BBC: "US judge slashes $4bn Google royalty claim on Xbox" "Google's claim that Microsoft owes it billions in patent payments has been rebuffed by a US judge."
BusinessInsider: "Microsoft Slapped Google Around In Court, And It's Becoming Clear Google Overpaid For Motorola"
Dow Jones Newswires/Wall Street Journal: "Seattle Judge Rules in Microsoft's Favor in Patent Suit Against Motorola" -- "Microsoft Corp. (MSFT) won a victory over Motorola Mobility Thursday [...]"
Engadget: "Washington court rules Motorola can get millions, not billions, from Microsoft for its patents"
Financial Times: "Microsoft wins round in Google patent fight" "A US judge has sided with Microsoft in the first round of a patent dispute against Google that is seen as having far-reaching implications for how technology companies put a price on innovations used by the rest of the industry."
PC Magazine: "Microsoft Wins Latest Round in Patent Royalty Fight With Motorola" "Google's Motorola was dealt a setback this week in its bid to land major royalty payments from Microsoft for sales of Windows and the Xbox."
Reuters: "Microsoft gets upper hand in first Google patent trial"
Slashgear: "Judge to Motorola: You're asking too much for patents"
TechEye: "Microsoft pays pocket change in Motorola patent dispute" "But district judge James Robart said a more appropriate payment would be $1.8 million, practically nothing [...] and much closer to Microsoft's calculation"
V3.co.uk: "Google loses out as Microsoft fends off Motorola patent claims" "Google's purchase of Motorola for it[s] arsenal of patents continues to appear a wasted investment after Microsoft fended off a challenge from the subsidiary in a Washington court, according to widespread reports."
The Verge: "Judge rules that Motorola's patents aren't worth the $4 billion a year it demanded from Microsoft"
ZDNet: "Microsoft, Motorola ruling: Google patents not worth billions" "A judge found in favor of Microsoft in a patent spat with Motorola, indicating that Google grossly overpaid for the smartphone maker, despite the patent protection it was given." "For the search turned mobile giant, it's a huge blow. It puts the company that Google bought for $12.5 billion — which has since increased to about $13 billion with restructuring costs and suchlike — worth a lot less than what it shelled out for back in 2011."
Finally, I'd like to mention that Apple, too, implements the standards in question. In addition, it will at some point get a license to Motorola's cellular SEPs. Those are obviously very different from the types of patents at issue in the Seattle case, but it's becoming clearer by the day that excessive royalty demands don't work if an implementer of a standard enforces the patentee's FRAND licensing commitment.
The United States District Court for the Western District of Washington has now, after the court and the parties reached an agreement on redactions of confidential business information, published the FRAND rate determination made last Friday, setting the royalties Google's Motorola Mobility can reasonably charge Microsoft for the use of Google's standard-essential patents (SEPs) in Microsoft's implementations of certain standards (the H.264 video codec standard and the IEEE 802.11 WiFi standard). This is a historic decision by Judge James L. Robart, the federal judge presiding over this contract litigation. No U.S. court has previously made a FRAND royalty determination at the request of an implementer of a standard (as opposed to a run-of-the-mill damages award for past infringement). We will now see many more FRAND determinations in the years ahead, also due to the proposed FTC-Google antitrust settlement.
H.264 patents: The range is 0.555 cents ($.00555) per unit to 16.389 cents ($.16389) per unit. The lower bound (half a cent per unit) is what Microsoft will have to pay, as the court found that "Motorola did not demosntrate that its H.264 SEP portfolio provided significant technological value to Microsoft's products". Dozens of major H.264 patent holders make their patents available through the MPEG LA AVC/H.264 pool at similar rates, which the court considered, besides the fact that Google as an MPEG LA licensee agreed to reciprocity, "an indicator of a [F]RAND royalty rate". The court also found that Microsoft is an intended third-party beneficiary of a grant-back obligation in Google's license agreement with MPEG LA.
IEEE 802.1 patents: The per-Xbox royalty will be 3.471 cents ($.03471) per unit for the Xbox and 0.8 cents ($.008) per unit for all other Microsoft products using the standard; the range is 0.8 cents ($.008) to 19.5 cents ($.195) per unit. A Via Licensing pool of IEEE 802.11 SEPs was considered less successful than MPEG LA's AVC/H.264 pool but its rates were still found to be reasonably indicative of a FRAND rate for patents reading on this standard.
In terms of what Google can expect to get per year, it appears that these per-unit rates correspond to an annual payment of less than $1.8 million -- again, Motorola originally wanted $4 billion. Microsoft's position at the trial was that Motorola can ask for approximately $1.2 million a year. The court's determination is 50% higher than that one, but less than a 20th of a percent of Motorola's initial demand.
Even if "only" compared to Motorola's reduced demands, which were made at the FRAND rate-setting trial in November 2012 and included the suggestion that royalties relating to the H.264 video codec could be capped at $100 million to $125 million per year (which Motorola didn't say initially) and Xbox-related royalties for IEEE 802.11 would be in the "1.15 percent to 1.73 percent" range, the wholly-owned Google subsidiary will now have to content itself with very, very little.
$12,500,000,000 certainly has a lot of zeroes, but $12,500,000,000 is a high price for a lot of zeroes. Zero enforceable injunctions against Microsoft in Germany. Zero enforceable injunctions against Apple in Germany if, as I predict, the push injunction against Apple is now lifted. Zero U.S. import bans (on Monday the ITC just tossed the sole remaining patent-in-suit in Motorola's case against Apple, and Google faces a high hurdle in its attempt to salvage its case against Microsoft after an Administrative Law Judge recommended its dismissal a month ago). Zero offensive wins in U.S. federal court.
The FRAND rate Judge Robart has set is not zero, technically speaking. But it's a whole lot closer to zero than to what Google's Motorola demanded (and to what Google paid for this patent portfolio).
Google may not have thought the deal through because it just wanted patents, desperately, after its losing bid for Nortel's far more valuable portfolio. Google was probably misguided by the number of patents the acquisition target held instead of understanding their very limited value. Last year an ITC judge already found that "Motorola was not interested in good faith negotiations and in extending a [F]RAND license" to Microsoft, but didn't say what Motorola is actually entitled to in light of its FRAND licensing obligation (the ITC doesn't make FRAND determinations and resolve contract disputes). Judge Robart has performed this complicated task. His findings of fact and conclusions of law are 207 pages long and contain some very sophisticated calculations. All the facts were on the table, and the result is that SEPs are not the answer to Android's patent infringement issues. Nor are Motorola's non-SEPs, which haven't given Google any serious leverage either.
The next step in the Seattle FRAND action, which Microsoft brought in November 2010 to enforce Motorola's FRAND licensing commitment, is a decision on Microsoft's claim that Google's Motorola breached its FRAND contract by making a blatantly unreasonable initial royalty demand. The court has already set a schedule for that process, envisioning a trial (which may or may not involve a jury) to begin on August 26, 2013. Motorola's counsel conceded last year that if the court found the initial royalty demand "blatantly unreasonable", this would constitute a breach of contract, entitling Microsoft to even further remedies (though Microsoft has already achieved its most important objective: it has enforced its entitlement to a license on FRAND terms, while Google is not entitled to injunctive relief against Microsoft over these patents). The breach-of-contract decision should be a fairly easy one -- frankly, it's hard to see why there's even a need for a trial to determine that the original $4 billion demand was far, far outside the FRAND range determined by the court, but it's too early to tell how this question may be resolved in the alternative to a trial. The outcome, however, is easy to predict, and will add to Google's SEP-related worries.
As far as patents are concerned, Google keeps losing all the way against Microsoft. Yesterday (by Asian and European time) Microsoft's patent agreement with China's ZTE -- the 20th company to have taken a royalty-bearing Android patent license -- became known. The previous week, Microsoft announced a similar license agreement with Foxconn parent Hon Hai, defeated Google's pursuit of an injunction over a push notification patent in Germany, and obtained a FRAND rate-setting decision relating to Google's (Motorola's) standard-essential patents. As I wrote in the context of yesterday's decision by a German appeals court to stay a Motorola v. Apple case over the aforementioned push notification patent, Motorola has nothing to show but a lot of zeroes, including zero enforceable injunctions against Microsoft. By contrast, Microsoft has already won three German injunctions against Motorola, will probably win a fourth one in early June, and won a U.S. import ban last year.
The first of Microsoft's German injunctions was ordered by the Landgericht München I (Munich I Regional Court) on May 24, 2012 and is based on EP1304891 on "communicating multi-part messages between cellular devices using a standardized interface". This morning the Oberlandesgericht München (Munich Higher Regional Court) rejected Google's (Motorola's) appeal. Now that the lower court's ruling has been affirmed by the appeals court, the injunction -- which forced Motorola out of the German Android device market for four months last year -- stays in force unless the infringement finding is overturned by the Bundesgerichtshof (Federal Court of Justice), which may not even hear a further appeal (apart from nullity cases, it only rules on legal issues of fundamental importance to the development of consistent case law, and the Munich-based appeals court did not allow a further appeal, which means that Motorola would have to appeal the decision not to allow an appeal on the merits), or the patent is invalidated by the Bundespatentgericht (Federal Patent Court), which won't adjudge Motorola's nullity (invalidation) complaint anytime soon (and the Federal Patent Court's decision can be appealed, as a matter of right, to the Federal Court of Justice).
For the sake of accuracy, one of the defendants, Motorola's (and other companies') "after-sales service partner" Bitronic, is currently under administration (comparable to Chapter 11 in the United States). For this formal reason, a final ruling with respect to Bitronic has not come down yet. Bitronic firstly needs to appoint a new counsel.
Today's affirmance ruling is yet another success for Microsoft's counsel in the Munich cases against Motorola, a team of Bardehle Pagenberg lawyers led by litigator Dr. Tilman Mueller-Stoy and patent attorney Peter Hess. Google's Motorola is represented against Microsoft by Quinn Emanuel's Dr. Marcus Grosch.
Google's inability to overturn this injunction on appeal does nothing to dissuade Android device makers from licensing Microsoft's Android- and Chrome-related patents. In a blog post published on Tuesday Microsoft's Corporate Vice President and Deputy General Counsel Horacio Gutierrez expressed hopes that "the few global companies who have yet to take a license" would "join the rest of the industry in the near future". One of them is Motorola, which I believe would have taken a license a long time ago if Google had not acquired it. Whoever else needs a license will certainly take note of Microsoft's successful enforcement of patents against Android in situations in which litigation can't be avoided despite Microsoft's efforts to conclude a license agreement.
There are still some commentators on the Internet who complain that Microsoft's announcements of license deals with companies like Hon Hai (Foxconn) and ZTE don't list the patents Microsoft claims are infringed by Android. Those commentators appear clueless and biased at the same time. They don't know -- and apparently don't even want to know -- how things work. If they weren't biased, they would at least take note of the fact that Microsoft has asserted more than two dozen patents against Motorola (most of them in the United States, and several more in Germany), and they would realize that Microsoft has already prevailed over Motorola on four patents. But the deniers don't want to know the facts. They also refuse to accept the fact that no announcement of such a license deal ever comes with a list of patents. These license deals frequently don't even list patents but instead refer to the licensor's entire patent portfolio to the extent it reads on particular products. That's in the licensee's best interest because there would always be the risk of an infringed patent being forgotten when the list is put together. Microsoft's patent holdings are fully transparent. The companies who have taken Android- and Chrome-related patent licenses from Microsoft include a number of very sophisticated companies that hold many patents themselves -- which is more than the deniers can say.
stayed Google's (Motorola's) appeal of an injunction over Apple's slide-to-unlock patent because the Bundespatentgericht (Federal Patent Court) declared this patent invalid on April 4. Apple can only revive this case through a successful appeal of the Federal Patent Court's nullity ruling to the Bundesgerichtshof (Federal Court of Justice). The BGH will probably rule on this patent in the second half of 2014 (if not later).
There's nothing special about the cases involving those two Apple patents, but I did want to report briefly for the sake of complete and up-to-date coverage of these cases.
Judging by their public statements, tensions appear to be on the rise between Nokia and HTC. The Rechtbank Amsterdam (Amsterdam District Court) issued a preliminary injunction on Monday against STMicroelectronics, stopping the supply of microphones to HTC that were meant to be built exclusively for Nokia until March 2014. The ruling was published yesterday (in Dutch), the same day that a German court gave short shrift to a Nokia v. HTC lawsuit targeting Google Play with a patent. Unlike the German case, the Dutch litigation was not about patent infringement. The ruling says that Nokia's European patent application covering this type of microphone is still pending, though a patent has already issued in the United States. The fact that a patent application can't give rise to an injunction is the reason why the court rejected Nokia's additional request for a recall of any shipments violating the exclusivity clause in the Nokia-STMicro agreement. Actually, a court-determined breach of such a contract is infinitely more problematic conduct on STMicro's part than an act of incidental patent infringement would constitute. Whether HTC had knowledge of the circumstances under which STMicro supplied those microphones is unknown. It may or may not have been a good-faith purchaser, and maybe this will be clarified in some other litigation at some point.
"Today, the District Court of Mannheim dismissed a complaint by Nokia that HTC had infringed the German part of patent EP 1 581 016 (the '016 patent) entitled 'A Communication Network Terminal for Accessing Internet', and awarded HTC its legal costs. In an almost unprecedented move, the Court handed down its judgment immediately after the hearing, indicating that Nokia's infringement case was so poor that the court required no time to deliberate further after hearing Nokia's oral arguments. Nokia claims to have spent €45bn on R&D in the last 20 years, but this investment has apparently not been supported by effective patent prosecution."
As I explained yesterday, the court felt that there were three reasonable defenses against infringement, the second one of which it considered very strong because Nokia's infringement contentions were based on a claim construction substantially broader than the one the court deemed appropriate. If a court feels very strongly about a finding of non-infringement, it can dismiss a case right away. It doesn't happen too frequently, but a clear case isn't necessarily a "poor" case.
Even if this particular case was considered "poor", it was a case about one patent of approximately 40 patents Nokia has already asserted against HTC, and the 45 billion euros Nokia spent on R&D resulted in the grant of north of 10,000 patent families, not just one patent. Nokia made a similar point in its own statement, which I'll quote further below.
"As with all of Nokia's patents asserted against HTC in Germany, HTC believes that this patent is invalid and will be continuing with the invalidity actions pending before the German Federal Patents Court and the English Patents Court."
Nokia is also challenging both patents HTC (including its wholly-owned subsidiary S3 Graphics) is asserting against it. Invalidity is a defense that these types of litigants routinely raise. And most patents are not valid in the form in which the patent office granted them. They are either invalid in their entirety or they can only be salvaged through amendments that have a narrowing effect. Still, it's unrealistic to assume that all of Nokia's asserted patents are invalid. Many probably are, but some probably aren't.
"To date, of the 24 infringement actions that Nokia has brought against HTC in Germany, two (EP 1329982 and EP 1474750) have been stayed because of concerns over validity, and three (EP 0812120, EP 1312974 and EP1581016) have now been dismissed outright. Together these decisions cast serious doubt on the strength of Nokia's patent portfolio and we remain confident that it poses little threat to HTC. HTC is delighted with this decision."
HTC has so far done a great job defending itself (as it did against Apple). In recent years it's become a really sophisticated defendant against patent cases, effectively addressing substantive issues and seizing and creating opportunities for delay. But the problem it faces is that Nokia can fail to win countless patent cases and needs to win only one highly impactful one, or a few that are collectively very impactful. In an attempt to win impactful rulings plaintiffs sometimes propose rather ambitious claim constructions.
"Nokia respectfully disagrees with yesterday's decision in Mannheim. But this was about just one of many Nokia patents in suit against HTC in Germany, the US and UK."
If Nokia agreed with the court, it would have withdrawn its complaint at the trial. The second sentence is similar to what I said further above: one can't judge Nokia's entire patent portfolio (or its investment in innovation over the last two decades) by the way in which one court (albeit a very patent-savvy court) adjudges one particular patent infringement allegation.
"In the last few weeks, Nokia has obtained two court injunctions relating to HTC products. The Mannheim Court ordered HTC to stop infringing Nokia's power saving patent, technology which gives Nokia smartphones longer standby times. The Amsterdam District Court has now stopped HTC from sourcing microphones it claimed as its own in the HTC One but which are exclusive to Nokia, built on our innovation. As a result, HTC has now confirmed to Nokia that it will stop using them."
You can read more about the power-saving patent injunction in this report on the ruling. It's a win for Nokia, though not a knockout blow. Non-standard-essential patents can be worked around, but workarounds frequently come with drawbacks.
"Rather than keeping score as if this were a football match, Nokia just wants to stop HTC from copying technologies that we have created over twenty years of market leading research and development. Though litigation is not Nokia's preferred option, it seems that HTC will only stop doing so when forced to by the courts."
I understand that Nokia isn't interested in its hit rate or drop-out rate as long as it achieves the desired outcome. I still think it's appropriate for HTC to count its defensive wins, though the conclusions it draws from these statistics go too far. Nokia used a football (soccer) analogy, and in low-scoring games it doesn't matter whether you try 10, 20 or 30 times before you score a goal: at the end of the day, you just have to score more than your rival.
Nokia has a patent portfolio of enormous breadth and depth and can always bring new assertions. For example, Nokia said in an earlier version of its statement that it most recently filed a patent infringement lawsuit against HTC in Mannheim, Germany over EP1579613 on a "method and apparatus for enabling a mobile station to adapt its revision level based on network protocol revision level". The patent is related to wireless standards, but hasn't been declared essential to any.
At some point these two companies will put their disagreements behind them and strike a license deal. It may take longer than Nokia originally hoped or thought (otherwise Nokia wouldn't have filed its latest infringement complaint against HTC almost a year after the original wave of assertions), but ultimately it will happen.

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