Opinion ID: 2822000
Heading Depth: 5
Heading Rank: 1

Heading: The Hypothetical Agreement

Text: Neither the IEEE nor the ITU provide a specific formula for setting the terms of a RAND license. At trial, both parties offered expert testimony as to the appropriate method for calculating a RAND rate. After trial, Judge Robart invited the parties to submit post-trial briefs and proposed findings of fact and conclusions of law. He then considered each party’s submissions and adopted a framework sensitive to the circumstances and objectives of RAND agreements. The framework settled on was “generally [consistent] with Motorola’s approach.” Applying that approach, the district court sought to approximate the royalty rates upon which the parties would have agreed by setting up a hypothetical negotiation between the parties. In doing so, the 30 MICROSOFT CORP. V. MOTOROLA, INC. court carefully thought through the “factors an SEP owner and implementer would consider” in an actual negotiation directed at licensing a patent subject to RAND commitments. The court then discussed each of Motorola’s fifteen H.264 patents and eleven 802.11patents, considering the objective value each contributed to each standard, given the quality of the technology and the available alternatives as well as the importance of those technologies to Microsoft’s business. Finally, the court performed a meticulous analysis of the testimony of eighteen witnesses, including executives, economists, and technology experts, to sort out which evidence to rely upon in determining the RAND royalty rate. Generally, the court credited Motorola’s experts; where it did not, it provided reasoned explanations for not doing so. Motorola’s challenge to the district court’s exhaustive analysis centers on its interpretation of Georgia-Pacific Corp. v. U.S. Plywood Corp., 318 F. Supp. 1116 (S.D.N.Y. 1970), a patent-infringement case whose hypothetical agreement framework for determining infringement damages has since been widely adopted by district courts and “sanctioned” by the Federal Circuit. See LaserDynamics, Inc. v. Quanta Computer, Inc., 694 F.3d 51, 60 n.2 (Fed. Cir. 2012). Georgia-Pacific set out fifteen factors for courts to consider in arriving at a royalty rate the parties might have agreed upon in a hypothetical negotiation. See Lucent Techs., Inc. v. Gateway, Inc., 580 F.3d 1301, 1324–25 (Fed. Cir. 2009) (citing Georgia-Pacific, 318 F. Supp. at 1120). Factor fifteen directs courts to set the hypothetical negotiation at “the time the infringement began.” Georgia-Pacific, 318 F. Supp. at 1120; see Panduit Corp. v. Stahlin Bros. Fibre Works, Inc., 575 F.2d 1152, 1158 (6th Cir. 1978). MICROSOFT CORP. V. MOTOROLA, INC. 31 Motorola’s central RAND-rate merits contention is that Judge Robart’s analysis failed to meet Georgia-Pacific’s factor fifteen criterion, as interpreted and applied by the Federal Circuit, and so constituted error. Several portions of the court’s findings of fact and conclusions of law do indicate that the court did to an extent take into account the presentday value to Microsoft of Motorola’s patents. For example, the court noted that a third-party valuation of Motorola’s 802.11 SEPs was only somewhat probative because, at the time of the valuation, “Motorola’s 802.11 SEP portfolio” was much larger than the portfolio “as it exists today.” This partial present-day focus did not, however, render the district court’s RAND-rate determination invalid. First, the Federal Circuit has “never described the Georgia-Pacific factors as a talisman for royalty rate calculations.” Ericsson, 773 F.3d at 1230. Instead, outside the RAND context, the Federal Circuit has recognized that, although “courts often parrot all 15 factors to the jury,” some of the factors “clearly are not relevant” to every case. Id. And in the context of RAND agreements, the Federal Circuit in Ericsson cited Judge Robart’s opinion in support of the proposition that many of the Georgia-Pacific factors are “contrary to RAND principles.” Id. at 1229; see also id. at 1230. Ericsson recognized, for example, as did Judge Robart, that factor four—“‘[t]he licensor’s established policy and marketing program to maintain his patent monopoly by not licensing others to use the invention or by granting licenses under special conditions designed to preserve that monopoly’”—is contrary to the RAND purpose of preventing monopolies. Id. at 1230 (quoting Georgia-Pacific, 318 F. Supp. at 1120) (alteration in original). 32 MICROSOFT CORP. V. MOTOROLA, INC. Factor fifteen is another factor that merits modification in some RAND contract contexts. An element of Microsoft’s claim is that Motorola maintained its demand of a 2.25% royalty rate throughout the proceedings, and also pressed its injunction suits even after Motorola was on notice that its actions were in tension with its RAND obligations. Given Microsoft’s argument that Motorola’s breach was ongoing, the district court could reasonably have concluded that it was appropriate to include the present-day value of Motorola’s SEPs as a factor in calculating the RAND rate-and-range for use in the breach-of-contract proceeding. Second, Motorola never specifies the past date the district court should have used. In pointing to “the time the infringement began, ” Georgia-Pacific, and subsequent cases applying its framework, referred to the date of the manufacturer’s first unlicensed use of the patented technology. 318 F. Supp. at 1120; see also Lucent Techs., 580 F.3d at 1324. But, as Motorola acknowledges, the “infringement” at issue in this case is Motorola’s breach of contract, not Microsoft’s use of Motorola’s patents. Motorola mentions both “the date Motorola sent the [offer] letters” and “the time right before Microsoft’s first [patent] infringement began” as possible hypothetical negotiation dates the court could have used, without specifying which is correct. Motorola did not mention either date in putting forth its version of the hypothetical negotiation analysis in its posttrial brief. To assume the correct date would have been the date the breach of contract began is of no help, as the alleged breach of contract was not tied to any specific date. The jury could have found a breach of contract based on Motorola’s offer letters, its seeking a number of injunctions, or its overall course of conduct. MICROSOFT CORP. V. MOTOROLA, INC. 33 Third, it would have been impracticable for the court to consider only such evidence as could pinpoint the value of Motorola’s patents to Microsoft at a precise point in time. Both parties introduced volumes of data—as to, for example, the parties’ market share and the valuation of similar patents—all meant to approximate the value of Motorola’s patents. Notably, Motorola itself urged the district court to rely on several studies and reports, from 2011 and 2012, that would not have been available to the parties at an earlierdated hypothetical negotiation, and one of the “historical licenses” Motorola asked the court to consider—and now argues the court erred in failing to consider—dates from December 2011. As the data presented was not pinpointed to a past date, the district court’s approximation from that data also could not be tied to a specific historical moment. Finally, Motorola has not shown—nor has it even argued—that it was prejudiced by the court’s analysis. See Brown & Williamson Tobacco Corp. v. Philip Morris Inc., 229 F.3d 1120, 1131 (Fed. Cir. 2000). As Motorola acknowledges, the purpose of the hypothetical agreement approach is to take account of the situation of the parties and of the value each places on the patents in question. Motorola has pointed to just one material change in the parties’ positions since the dispute began that could be relevant to the court’s analysis: In 2012, Google bought Motorola.14 Judge Robart considered Google’s broad commercial interests, not just Motorola’s, when he estimated as part of his RAND-rate analysis the likely benefits from inclusion in the patent pools. But Motorola has not explained how it was prejudiced by consideration of Google’s interests. In fact, Microsoft maintains, persuasively, that Motorola benefitted from the 14 Google sold Motorola in 2014. 34 MICROSOFT CORP. V. MOTOROLA, INC. court’s conflation of Google and Motorola, as Google, a “sophisticated, substantial technology firm[] with [a] vast array[] of technologically complex products,” would obtain more value from the pool than would Motorola as an independent entity. In sum, given the need for flexibility in determining a royalty rate for a RAND-encumbered patent, see Ericsson, 771 F.3d at 1230–31, and given that Motorola has not shown that the court’s consideration of the companies’ circumstances at the time of the bench trial prejudiced it, see Brown & Williamson Tobacco Corp., 229 F.3d at 1131, the district court’s RAND order properly applied the hypothetical agreement approach. b. Patent Pools and Historical Licenses as Indicators In addition to challenging the district court’s legal analysis, Motorola objects to the court’s factual conclusions that (a) the rates charged by two patent pools are relevant indicators of the RAND rate for Motorola’s patents; and (b) Motorola’s historical licenses are not. Motorola’s argument is that the district court gave too much weight to the former evidence and not enough to the latter, leading to a decision “fatal[ly]” unsupported by the evidence in the record. Patent pools are collections of two or more SEP owners that package and license their SEPs collectively. Royalties are distributed amongst the contributors to the patent pool on a per-patent basis, generally by valuing each patent in the pool equally. Typically, pool members contributing their patents to the pool also become licensees of the pool’s patent package. MICROSOFT CORP. V. MOTOROLA, INC. 35 For Motorola’s 802.11 portfolio, the court regarded the VIA Licensing 802.11 pool as somewhat probative of the RAND rate and range. The 802.11 pool did not achieve widespread use of the covered standard. But it was designed with that objective in mind and was otherwise a reasonably reliable indicator of the RAND royalty rate. For Motorola’s H.264 portfolio, the court found the royalty rate charged by the MPEG LA H.264 patent pool a reliable indicator of the RAND rate. That pool’s objectives mirrored the objectives of RAND agreements, namely “includ[ing] advanced technology to create valuable standards, while at the same time . . . ensuring widespread adoption.” In both instances, the court credited testimony from Motorola’s experts that patent pools generally license at lower rates than might be achieved in a bilateral agreement, because a company receives value from pool membership that goes beyond royalty payments—principally, grant-back licenses and promotion of the standard. To account for those benefits, the court multiplied the pool rates by three. Motorola contends that a rate set by a pool arrangement is too different from the rate that might have been agreed upon bilaterally by the parties to serve as an appropriate RAND-rate indicator, even if the pool rate is multiplied by three. For the 802.11 patents, however, the district court used the pool rate just as one relevant data point in its overall analysis. The RAND rate the court ultimately settled on was an amalgamation of a number of considerations, the pool rate evidence being the most favorable to Motorola. As to the H.264 patent, the district court provided a reasoned explanation for its conclusion that the H.264 pool was a reliable indicator: The pool’s patents and Motorola’s 36 MICROSOFT CORP. V. MOTOROLA, INC. patents were essential to the same technical standards, and Motorola provided no evidence that its patents were more valuable than the other patents in the pool. If anything, the record indicates that Motorola’s patents were on average less valuable than other H.264 patents. Many of the Motorola patents apply only to interlaced rather than (the more advanced) progressive video. Motorola offered some evidence suggesting that interlaced video coding was still valuable to Microsoft, but it did not show that support for interlaced video was more important to Microsoft than other video-coding capabilities. Motorola therefore was not prejudiced by the court’s assumption that its patents were of roughly equal value to those in the pool, as they probably were worth less. Instead of the patent pools, Motorola argues, the court should have considered several licensing agreements that included licenses to Motorola’s H.264 and 802.11 patent portfolios as probative of the RAND rate. The agreements Motorola put forth provided for royalty rates close or equal to the 2.25% it offered Microsoft. Georgia-Pacific suggests that the royalties a patent owner receives in other licensing agreements for the patents at issue can be relevant in determining a hypothetical royalty agreement. See 318 F. Supp. at 1120. In the current context, however, it was not clear error to reject the past licenses as too contextually dissimilar to be useful to the RAND rate calculation. The district court found Motorola’s license with VTech Communications, Inc. not probative of a RAND rate for Motorola’s 802.11 and H.264 patents because those portfolios were licensed as part of a broader agreement that settled MICROSOFT CORP. V. MOTOROLA, INC. 37 infringement claims Motorola held against VTech for use of its cell phone patents. VTech indicated in an email to Motorola that its interest in taking a license was to avoid a potential infringement lawsuit, and it paid only trivial royalties to Motorola under the 802.11 and H.264 licenses—an amount totaling a tiny fraction of the value of the broader agreement. The district court reasonably concluded that the 802.11 and H.264 VTech licenses were not reliable indicators of the RAND royalty rate. In Motorola’s RIM agreement, the 802.11 and H.264 SEPs were packaged with several other patents. Motorola and RIM entered into a broad cross-licensing agreement whereby, in exchange for a license to the Motorola SEPs RIM used in its mobile devices, RIM provided Motorola a license to its own SEPs, paid Motorola a large lump sum, and agreed to pay as a royalty rate a percentage of the net sales price of any mobile device it sold, subject to an annual royalty cap. The royalty rate represented a blended rate for all the Motorola patents included in RIM’s products, including nonstandard-essential patents. The district court concluded that, for that reason, it would be impracticable to isolate, or apportion the value of the 802.11 and H.264 SEPs, particularly given the evidence that Motorola’s cell phone patent portfolio was highly valuable and likely dictated the terms of the agreement. In fact, an earlier agreement between Motorola and RIM provided for the same royalty rate but did not include rights to Motorola’s 802.11 and H.264 patents, suggesting that the value of the 802.11 and H.264 patents was zero or negligible. Finally, the RIM agreement was subject to a royalty cap and was, like the VTech agreement, entered into to resolve an ongoing infringement dispute between the parties, further diminishing its trustworthiness as an indicator of a free-standing RAND rate. 38 MICROSOFT CORP. V. MOTOROLA, INC. Lastly, the district court also reasonably concluded that Motorola’s three license agreements with Symbol Technologies were not relevant. Two of the agreements were formed under threat of litigation, included monetary caps, and provided licenses for Motorola patents that expired before Motorola and Microsoft’s hypothetical agreement would have occurred. The third agreement also included patents that expired before October 2010, and it required a total payment amount much less than what Motorola would have obtained in seeking a 2.25% royalty rate from Microsoft. The district court provided reasonable explanations for giving the Motorola bilateral licenses little to no weight. Motorola does not address any of those explanations. Nor does its citation of the Federal Circuit’s recent opinion in Apple Inc. v. Motorola, Inc. afford it any help. See 757 F.3d 1286 (Fed. Cir. 2014), overruled on other grounds by Williamson v. Citrix Online, LLC, No. 2013-1130, 2015 WL 3687459 (Fed. Cir. June 16, 2015). That case holds only that licenses should be considered when comparable; it does not in any respect impugn the district court’s reasoning as to why the proffered licenses were not comparable. Id. at 1323. In sum, in determining the RAND rate and range for each SEP portfolio, the district court engaged in a thoughtful and detailed analysis, giving careful consideration to the parties’ briefing and evidentiary submissions, and to the testimony. Although Motorola criticizes the district court’s approach, it provides no alternative other than strict adherence to the Georgia-Pacific factors, without accounting for the particulars of RAND agreements—a rigid approach disapproved of by the Federal Circuit in Ericsson. See 771 F.3d at 1230–31. We conclude that the court’s RAND MICROSOFT CORP. V. MOTOROLA, INC. 39 determination was not based on a legal error or on a clearly erroneous view of the facts in light of the evidence. See Teva Pharm., 135 S. Ct. at 841.