Source: http://www.groklaw.net/articlebasic.php?story=20130302164903635
Timestamp: 2019-04-20 23:12:48+00:00

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In the Seattle litigation between Microsoft and Motorola over how much Microsoft should pay for Motorola's FRAND patents, the presiding judge, Hon. James L. Robart, asked the parties to file short letter briefs by March 1st on how to interpret one section of the Google-MPEG LA license agreement, and they have now done so. As you will see, things have changed since Motorola revealed the terms of the Google-MPEG LA license. The judge now has questions about the language, after the January 28th hearing.
Does it cover Motorola as an affiliate of Google? Are all affiliates covered? Or only those specified by a licensee? And is the royalty cap provision in one section a stand-alone provision? Is there, in other words, a cap on how much Microsoft has to pay?
His request is related to his decision to reopen the trial that ended in November, now that Motorola has presented new evidence that didn't present at that trial. It didn't have to, by the way. The trial was to be held in parts, and November was part one. Now that the new arguments are on the table in connection with the next phase about exactly what the rate should be, however, the judge sees a need to go back and take another look, and I think you'll agree with him that what Motorola has presented changes the picture, and not in a way that favors Microsoft as much as before, which was trying for a low-ball figure. And that is now in question.
You can see what the trial was about by reading the trial briefs. As you will see, Microsoft's arguments back at the trial were essentially that while Motorola never joined MPEG LA, its standard-essential patents should be valued according to the pool's rates for other standard essential patents. Its other argument was that Google did join, and so when it brought Motorola under its wing, Motorola became an affiliate, and hence Motorola's patents were swept into the pool whether Motorola likes it or not. The judge seemed to be leaning in Microsoft's diretion, but once the Google-MPEG LA license agreement showed up, he's having to take another look. Motorola's evidence seems to have caught Microsoft by surprise, not just the judge, and its former position makes it look like it didn't present the full picture or didn't know it.
(Google-MPEG LA License § 3.1.7 (emphases added).) From the italicized language of Section 3.1.7, it appears to the court that Licensee and its Affiliates fall under the royalty cap prescribed therein only if the Affiliates are themselves licensee under the AVC Patent Portfolio and are identified by the Licensee in writing to the Licensing Administrator.
(2) whether Section 3.1.7 of the Google-MPEG LA License Agreement is a stand-alone royalty cap provision or whether the section affects other provisions of the license agreement, and in particular whether Section 3.1.7 has an affect Motorola’s obligation to license its standard essential patents as an Affiliate of Google.
As Matthew Rizzolo at The Essential Patent Blog pointed out earlier, this is a crucial issue because if the judge finds that the language of Section 3.1.7 means that royalty caps do *not* apply to Motorola’s patents, "that could dramatically increase the amount of RAND royalties owed by Microsoft to Motorola for H.264-essential patents."
Clearly, the judge may be shifting somewhat away from Microsoft's theory, and indeed by my reading, so is Microsoft, which now agrees with Motorola, and the judge's proposed interpretation, about the wording regarding the Enterprise License and when affiliates are covered. Microsoft now agrees that the agreement's language about affiliates means that "Affiliate (i) must itself be a Licensee under the AVC Patent Portfolio License, and (ii) must be identified by the Licensee in writing." But then Microsoft begins a tricky dance to try to get past what appears to have turned into a sinkhole position.
It all turns on the phrase "commensurate to the scope of the licenses which Licensee has selected hereunder” in section § 8.3 of the agreement. What does "scope" actually mean in the grant back context? Microsoft now claims it isn't seeking any grant-back rights associated with Google’s Enterprise License, and "so none of the provisions relating to Enterprise Licensees are relevant to the issues before the Court." Hmm. Now they tell us.
Microsoft argues in its latest letter brief that the grantback provision binds not just Google, but also all of its affiliates — and that this means that Motorola owes Microsoft a license to its H.264-essential patents at a capped, per patent rate prescribed by the agreement (which works approximately $2700 per patent per year).
Microsoft claims that the Enterprise License provision and its royalty terms are “irrelevant to the issues before the Court,” because it — unlike Google — is not a video content provider and does not need to invoke this license. According to Microsoft, the Enterprise License provision also does not affect the grantback provision, characterizing it simply as a standalone royalty cap provision that is designed for the convenience of any particular MPEG LA patent pool licensee.
In its letter brief, Motorola argues that the Enterprise License provision is not a standalone royalty cap. Motorola asserts that this provision (and the particular licenses selected by Google) “directly affect not only the scope of the grant back obligation under Section 8.3, but also affects the scope of any grant back license required under the grant back obligation because the grant back obligation must be commensurate in scope with the selected license.” The “commensurate to the scope” language is key here — essentially, Motorola argues that because the Google-MPEG LA agreement extends no rights to Motorola or Motorola’s products (because it was never identified by Google as a licensed affiliate under Section 3.1.7), the grantback provision does not confer any obligations on Motorola. Motorola asserts that its interpretation is further bolstered because such limited reciprocal cross-licensing is a common industry practice.
Motorola also acknowledges Microsoft’s arguments about the purported purpose of the grantback provision, but dismisses this view as contrary to the “plain meaning” of the words of the agreement. Motorola argues that in any event, Motorola is not a holding company or non-practicing entity, but is in fact an operating company — and that the court should not decide issues based on hypothetical concerns.
The issues arose during that January hearing, during the second half of the day's argument, over the terms of the Google-MPEG LA license agreement, which you can find here as PDF (and text, if you scroll down). I also did my best to explain it in that article. And here are the earlier briefs the parties filed on how they each viewed the agreement.
The Google License is a separate contract that ultimately derails Motorola’s excessive H.264 demands. It includes a “grant-back” provision that entitles Microsoft to a worldwide, nonexclusive license to all H.264 essential patents owned by Google and its “Affiliates.” Defendants Motorola Mobility LLC and General Instrument Corp. (“Defendants”) are Google’s Affiliates because they are wholly-owned subsidiaries. The “grant-back” provision in the Google License includes a specified per-patent royalty rate that is, by its terms, “presumed” to be fair and reasonable. Google agreed to these terms on behalf of itself and its Affiliates. Microsoft is therefore entitled to a license of Defendants’ H.264 essential patents at the royalty rate specified in the Google License.
I notice that there was no distinction made, and Microsoft didn't say it wasn't seeking a grant back from the patents covered by the Enterprise License. Now, after acknowledging the the judge has question one interpreted correctly, it says it isn't after that grant back.
As an initial matter, under the language of this provision, the grant back requirement only extends to those entities that were Affiliates at the time of "full execution" of the Agreement. At the time of the execution of the AVC Agreement in 2005, Motorola had not yet been acquired by Google and was not subject to its control. Thus, it was not an "Affiliate" at the time of "full execution" of the agreement and Section 8.3, therefore, has no applicability to Motorola and its patents.
That was, I assume, a panic flag for Microsoft, and it brought the caps to the fore, as well as what a royalty rate should be for past infringement, prior to Motorola being acquired by Google, and we see them shifting. In my experience, parties in litigation make changes in strategy only when they worry they are losing with the old one. When Microsoft agreed with the judge's question number one, it concedes that Motorola has won this point.
If you recall, Microsoft had introduced extrinsic evidence, at the judge's request, in the form of a Declaration of Lawrence A. Horn [PDF], MPEG LA’s President and CEO, and the judge accepted his declaration without allowing Motorola the chance to depose Mr. Horn. Motorola's position was that it is hearsay, but it rolled forward after the judge denied them the deposition.
There is no overlap between the Enterprise License and the license grants for AVC Products or OEM Licensees -- these licenses cover different types of products and have different terms. The Enterprise License, which Google elected to take, includes rights to stream H.264-encoded video over the Internet, relevant to a service like Google’s YouTube. In contrast, the grants for AVC Products and OEM Licensees (which Google also elected to take) concern software containing H.264-compliant video codecs, relevant to products like Google’s Android and Chrome operating systems. (See ECF No. 643 Ex. C (Feb. 28, 2011 email from Google to MPEG LA); Lo Dep. 40:21-41:16.) The AVC Products and OEM Licensee grants -- not the Enterprise License -- are the types of licenses pertinent to the Microsoft products for which it seeks a grant-back license.
In response to Question 1, Motorola submits that the Court's interpretation of Section 3.1.7 is correct. In response to Question 2, Section 3.1.7 is not a stand-alone royalty cap, and is relevant to the grant back obligations set forth in Section 8.3 of the agreement. Motorola notes, however, that nonparty Google Inc. is the "Licensee" under the Google-MPEG LA License; Motorola Mobility LLC is not a party to that agreement. As explained at the hearing, it is undisputed that although Google has in the past selected an Enterprise License under Section 3.1.7, Google did not take an Enterprise License in 2012. As explained below, the particular license selected by Google directly affects not only the scope of the grant back obligation under Section 8.3, but also affects the scope of any grant back license required under the grant back obligation because the grant back licenses must be commensurate in scope with the selected license.
Here the term, "its Affiliates which are licensees under the AVC Patent Portfolio License and are identified in writing to the Licensing Administrator by Licensee," is grammatically straighforward. The payment caps (i. e. , "shall pay") apply to the Licensee and Affiliates but only when those entities "are licensees" and "are identified in writing." In other words the royalty caps do not apply if the purported affiliate is neither a licensee nor identified to the Licensing Administrator. This definitial prerequisite to the applicability of the licensing caps is in accord with the remainder of the contract. The language in question is capable of no other meaning; indeed, Microsoft's MPEG LA witness, Mr. Horn, did not suggest in his declaration that MPEG LA or any MPEG LA licesee has ever suggested that Section 3.1.7 is ambiguous or capable of more than one meaning. Accordingly, the plain meaning applies and the Court's construction is correct.
The facts support the conclusion that a grant back "commensurate to the scope" of the license selected by Google cannot include a cross-license to unlicensed Google affiliates' patents. The clear intent of Section 8.3 is that the license grants for the MPEG LA Licensors and any pool Licensee should be reciprocal. But Motorola has obtained no license rights from MPEG LA under the Google-MPEG LA License, and thus has no duty of reciprocity to Microsoft or any other MPEG LA Licensor.
Re: Microsoft Corp. v. Motorola Mobility, Inc.
Motorola respectfully submits this response to the Court's February 21, 2013 order (Dkt. #654) regarding the construction of the Google-MPEG La License agreement.
(1) Is the court's understanding of the language of Section 3.1.7 of the Google-MPEG LA License correct?
(2) Is Section 3.1.7 of the Google-MPEG LA License Agreement a stand-alone royalty cap provision, or does the section affect other provisions of the license agreement, and in particular does Section 3.1.7 affect Motorola's obligation to license its standard essential patents as an Affiliate of Google?
See Dkt. 654 at 3.
The Court in its February 21, 2013 order correctly determined the plain meaning of this section is that a "Licensee and its Affiliates fall under the royalty cap presecribed therein only if the Affiliates are themselves licensee[s] under the AVC Patent Portfolio and are identified by the Licensee in writing to the Licensing Administrator." Dkt. 654 at 2. Motorola submits that the Court's interpretation is correct and consistent with the plain meaning of Section 3.1.7.
contract are ambiguous is a matter of law for the court to decide. Alexander & Alexander , 136 F.3d at 86.
Here the term, "its Affiliates which are licensees under the AVC Patent Portfolio License and are identified in writing to the Licensing Administrator by Licensee," is grammatically straighforward. The payment caps ( i. e. , "shall pay") apply to the Licensee and Affiliates but only when those entities " are licensees" and " are identified in writing." In other words the royalty caps do not apply if the purported affiliate is neither a licensee nor identified to the Licensing Administrator. This definitial prerequisite to the applicability of the licensing caps is in accord with the remainder of the contract. The language in question is capable of no other meaning; indeed, Microsoft's MPEG LA witness, Mr. Horn, did not suggest in his declaration that MPEG LA or any MPEG LA licesee has ever suggested that Section 3.1.7 is ambiguous or capable of more than one meaning. Accordingly, the plain meaning applies and the Court's construction is correct.
Though Microsoft will likely argue that Section 3.1.7 is a standalone royalty cap provision and has no relationship to the "scope" of the license granted to Google, its position is contrary to the plain meaning of the Google-MPEG LA License and contradicted by its own counsel's statements at oral argument.
Section 3.1.7 permits a Licensee to elect an "Enterprise License" for itself and its identified Affiliates, and sets out royalties to be paid under that Enterprise License. The identities of licensed Affiliates are plainly relevant to both the scope of the license granted to Google, and to any cross-license Google may be obligated to provide under Section 8.3. Accordingly, whether Google has elected an Enterprise License and identified Motorola as an Affiliate to be licensed under that Enterprise License is relevant to determining whether a grant back "commensurate to the scope" of the license selected by Google includes rights to Motorola's patents, and whether any required grant back license must also be an Enterprise License.
Section 3.1.7 is not a standalone section. Under Section 3.1.7, each year Google has the alternative to choose an Enterprise License for itself and any Google Affiliates who are themselves Licensees under the AVC Patent Portfolio and are identified by Google in writing to the Licensing Administrator, and pay capped royalties in lieu of paying the royalties due from Google individually under Articles 3.1.2, 3.1.3, 3.1.4 and 3.1.5 (and any individual Affiliate-Licensee). Thus, in years when Google selects an Enterprise License for itself and its identified Licensee-Affiliates, the scope of the license grant extends to both Google and its identified Affiliates.
2.9 No Sublicenses. Subject to Article 3.1.7, the sublicenses granted in Sections 2.1 and 2.7 of this Agreement do not include the right of the Licensee to grant any further sublicenses. The Licensing Administrator is willing to offer an AVC Patent Portfolio License to any Affiliate of Licensee.
(Emphasis added.) Thus, in years when Google does not select an Enterprise License under Section 3.1.7, the scope of the license grant extends only to Google, and not to any Affiliates.
8.3 Licensee Grant. Upon full execution of this Agreement, Licensee agrees to grant a worldwide, nonexclusive license and/or sublicense (commensurate to the scope of the licenses which Licensee has selected hereunder) under any and all AVC Essential Patent(s) that Licensee and its Affiliates, if any, have the right to license and/or sublicense, to any Licensor or any sublicensee of the Licensing Administrator desiring such a license and/or sublicense on fair and reasonable terms and conditions. For purposes of this Section 8.3 only, the Licensors' per patent share of royalties which are payable pursuant to Article 3 of this Agreement shall be presumed to be a fair and reasonable royalty rate for the aforementioned license and/or sublicense to be granted by the Licensee.
As noted above, nonparty Google is the "Licensee" under the Google-MPEG LA agreement. Thus, to the extent Section 8.3 imposes any obligation to offer cross-licenses, that obligation applies to Google, not Motorola.
Microsoft's counsel recognized at argument that the parenthetical "commensurate to the scope of the licenses which Licensee has selected hereunder" refers to whether Google as Licensee has selected the AVC patent portfolio license, the OEM AVC product license, or the Enterprise license. See 28 Jan. 2013 Hearing Tr. at 51:7-17. Microsoft's counsel further acknowledged that "[t]he licenses, "selected hereunder" that matter in this case are the AVC product license and the OEM license" -- Google has not selected an Enterprise License for this year. See id. at 53:18-21.
Because Google has not selected an Enterprise License under Section 3.1.7 and identified Motorola in writing as an Affiliate to be licensed under the Enterprise License, under the plain meaning of Sections 2.9, 3.1.7, and 8.3, the "scope of the licenses which Licensee has selected hereunder" does not include a license for Motorola and its products. Accordingly, under the plain meaning of the agreement, a grant back license commensurate to the scope of the license selected by Google cannot include a grant back for rights to Motorola's patents.
the Google-MPEG LA License in light of the facts of the case, and not any hypothetical or imagined harm.
This interpretation is also consistent with industry practice, and produces an equitable result. Cross-licensing is common among standards-essential patent owners, and permits both parties involved to obtain freedom of action for their products. But an unlicensed business should have no obligation to give up their patent rights to the MPEG LA Licensors unless and until it seeks to obtain protection for its own products under an MPEG LA license. Accordingly, whether Google, as an MPEG LA Licensee, has selected an Enterprise License under Section 3.1.7, and the identify of any Affiliates to be covered under that Enterprise License, is directly relevant to the Court's determination of the scope of the license selected by Google and any cross-license owed to MPEG LA's Licensors.
Section 3.1.7 is also relevant to determining to whom Google is obligated to license under Section 8.3 and what terms Google is obligated to offer. As an example, if Google has not selected an Enterprise License, Google is not obligated to grant an Enterprise License to Microsoft or any other MPEG LA Licensor. Thus, because Google did not select an Enterprise License, Microsoft is not entitled to a grant back license for its affiliates, nor may Microsoft enjoy the benefit of Section 3.1.7's enterprise royalty cap. Microsoft can only obtain a grant back license "commensurate to the scope" of the license chosen by Google -- which in this case, as Microsoft's counsel has acknowledged, does not include an Enterprise License covering Microsoft subsidiaries. See 28 Jan. 2013 Hearing Tr. 53:18-21.
1 Motorola further understands that the Court wants to understand the relevance of the Google-MPEG LA License to its determination of the RAND rate and range for Motorola's H.264-essential patents. Motorola respectfully submits that the Google-MPEG LA License itself is no more relevant than any other MPEG LA H.264/AVC License Agreement currently in the record.
As you can see, it makes perfect sense, and that leaves Microsoft in a pickle. What to say now? Microsoft's theories depended on facts that turned out not to be correct.
Microsoft respectfully submits this letter in response to the Court’s February 21, 2013 Minute Order (ECF No. 654), which requested letter briefs from the parties addressing two issues related to § 3.1.7 of the Google-MPEG LA License Agreement (“the Agreement”), concerning the royalties owed by Enterprise Licensees. Microsoft is not seeking any grant-back rights associated with Google’s Enterprise License and, as explained below, none of the provisions relating to Enterprise Licensees are relevant to the issues before the Court.
Google has taken three separate and distinct types of license offered by MPEG LA and described in Section 2 of the Agreement (titled “Licensing Administrator Grant”): (1) the “AVC Products” license (defined in § 2.1); (2) the “OEM Licensee” license (defined in § 2.6); and (3) the “Enterprise License” (defined in § 2.7). The Enterprise License consists of a combination of lesser-included license types relevant to video content providers (the Title-by-Title, Subscription, Free Television, and Internet Broadcast AVC Video licenses) defined in §§ 2.2-2.5.
and Chrome operating systems. (See ECF No. 643 Ex. C (Feb. 28, 2011 email from Google to MPEG LA); Lo Dep. 40:21-41:16.) The AVC Products and OEM Licensee grants -- not the Enterprise License -- are the types of licenses pertinent to the Microsoft products for which it seeks a grant-back license.
[a] Licensee and its Affiliates fall under the royalty cap prescribed therein only if the Affiliates are themselves licensees under the AVC Patent Portfolio and are identified by the Licensee in writing to the Licensing Administrator.
The Court’s understanding is correct. The language of § 3.1.7 italicized in the Court’s Minute Order -- “Affiiliates which are licensees under the AVC Patent Portfolio License and are identified in writing to the Licensing Administrator by Licensee” -- makes clear that in order to obtain the benefit of a royalty cap that covers both a Licensee and an Affiliate under the license grants covered by the Enterprise License option, collectively, the Affiliate (i) must itself be a Licensee under the AVC Patent Portfolio License, and (ii) must be identified by the Licensee in writing. For example, suppose Company A and Company B are both Enterprise Licensees, and both pay the full capped annual royalty pursuant to § 3.1.7. If Company A then acquires a 51% controlling interest in Company B, Company A must notify the Licensing Administrator that Company B is now an Affiliate, and then the combined entity need make only a single, capped payment -- half the amount that had been paid by the two separate companies. If Company A instead acquires a 51% controlling interest in Company C, which (for purposes of illustration) is not a Licensee, but distributes Title-by-Title, Subscription, Free Television, and Internet Broadcast AVC Video, Company C must take a license itself,2 Company A must notify the Licensing Administrator, and then the combined entity need only make the same single, capped payment under § 3.1.7.
However, as set out herein and at the January 28, 2013 hearing, the Enterprise License and its royalty terms are irrelevant to the issues before the Court. Microsoft is not a video content provider and therefore does not need, and has not taken, an Enterprise License from MPEG LA. Microsoft is not seeking any grant-back rights for such a license in this litigation.
whether Section 3.1.7 of the Google-MPEG LA License Agreement is a stand-alone royalty cap provision or whether the section affects other provisions of the license agreement, and in particular whether Section 3.1.7 has an effect on Motorola’s obligation to license its standard essential patents as an Affiliate of Google.
Section 3.1.7 of the Agreement is a stand-alone royalty cap provision. Rather than paying the volume-based royalties for the various licenses needed by video content providers, an Enterprise Licensee and its Affiliates can elect to pay the single capped amount specified in 3.1.7 “in lieu of the royalties specified” in §§ 3.1 .2-3.l.5. Section 3.1.7 does not affect other provisions of the Agreement. In particular, it has no effect on Motorola’s obligation under § 8.3 to license its standard-essential patents as an Affiliate of Google.
a. Section 3.1.7 is a stand-alone royalty cap provision.
As explained above, § 3.1.7 sets forth the “Royalties and Payments” owed by Enterprise Licensees, who have taken a combined license to all of the Title-by-Title, Subscription, Free Television, and Internet Broadcast AVC Video licenses (otherwise available under §§ 2.2-2.5 for the royalties and payments set forth in §§ 3.1.2-3.1.5). Section 3.1.7 provides for a royalty cap “in lieu of" the combined payment that would otherwise be due pursuant to the individual royalty requirements for each of those four licenses. Section 3.1.7 includes a limitation on the applicability of that royalty cap to Affiliates, but it imposes no other obligations and grants no other rights. While the annual royalties payable on account of the “Combined Sales of a Licensee and each of its Affiliates” under the AVC Products and OEM License grants are also capped (§§ 3.1.1, 3.1.6), there is no corresponding obligation (as there is in § 3.1.7) that the Licensee notify MPEG LA of the Affiliates covered by these royalty caps.
[Scope] can cover whether the licensee, Google, selects to have its affiliates licensed, or does not select to have them licensed. And it’s important here that Google never selected to have Motorola licensed.
Neither the 2009/2010 Enterprise-type license, or the 2011/2012 AVC product-type license, ever resulted in the selection by Google of a license for its affiliate, Motorola.
[U]nder the “commensurate” parenthetical, because Google did not elect to have a license extend to Motorola, the grant-back of a license by Google commensurately does not cover any grant-back of patent rights from Motorola.
No Sublicenses. Subject to Article 3.1.7, the sublicenses granted in Sections 2.1 through 2.7 of this Agreement do not include the right of the Licensee to grant any further sublicenses. The Licensing Administrator is willing to offer an AVC Patent Portfolio License to any Affiliate of Licensee.
Agreement § 2.9. While this provision cross-references § 3.1.7, as discussed above that section only applies to Affiliates which are themselves Licensees. Contrary to Motorola’s suggestion, the “scope” of the license Google selected cannot concern whether Google “selects to have its Affiliates licensed,” because the Agreement provides no ability for Google to make any such selection. Google can “select” any of the different licenses described in §§ 2.1-2.7 of the Agreement, but it cannot “select” any license for Motorola, or “select” to include Motorola in Google’s license. Section 3.1.7 would allow Google and Motorola to make a single, combined, capped royalty payment for an Enterprise License, but Motorola must first take its own license -- a license independent of Google’s license, and one the Agreement specifically declares that the “Licensing Administrator is willing to offer” (§ 2.9) -- in order to obtain that benefit. If Motorola did so, it would have its own grant back obligation.
Section 3.1.7 allows Google the option of bringing its licensed Affiliates under a single royalty cap for a specific subset of AVC license types. There is no basis in the language of the Agreement or its purposes to conceive of § 3.1.7 as allowing Google the option of holding AVC/H.264 standard-essential patents in a subsidiary to evade its grant-back obligations.
1 “Per-unit” rates are not applicable for Enterprise Licensees.
2 As explained further below, § 2.9 of the Agreement makes clear that Affiliates are not automatically licensed simply by virtue of their acquisition by a Licensee -- there is no right to sublicense, and the Affiliate must obtain its own license.

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