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Ninth Circuit is the First Appeals Court to Rule on RAND/SEP Licensing

Introduction

In a decision written by Judge Marsha S. Berzon, a three-judge panel of the U.S. Court of Appels for the Ninth Circuit affirmed a first-of-its-kind district court judgment relating to royalty rates for standard-essential patents (SEP). As part of the standard setting process, many standards organizations require members who hold patents necessary to implement a given standard to commit to license those patents on reasonable and non-discriminatory terms (RAND). Because inclusion in a standard can increase the importance and value of a patent, parties often differ on what constitutes a reasonable royalty. In this case, district court Judge James Robarts of the U.S. District Court for the Western District of Washington established a multi-factor framework to determine the appropriate royalty rates and ranges for SEPs. Several other courts later employed similar approaches. Motorola’s appeal challenged the district court’s authority to determine the royalty rate at a bench trial. The company also contended that the district court mis-applied Federal Circuit precedent on patent damages. The Ninth Circuit rejected these arguments, finding that Motorola had consented to the bench trial and holding that Judge Robart’s “thoughtful and detailed analysis” was “consistent with the Federal Circuit’s recent approach.” Microsoft Corp. v, Motorola, Inc. et al; Case No 14-35393 (9th Cir, July 30, 2015) (Berzon, J.)

Procedural Background

The long-running patent dispute between Microsoft and Motorola spans several courts and countries. The crux of the conflict traces back to October 2010 when Microsoft sued Motorola for alleged infringement of certain smartphone patents. Thereafter, the parties explored a possible cross-licensing arrangement to resolve their dispute. Motorola sent letters proposing licenses for 802.11 and H.264 SEP portfolios, with a proposed royalty rate of 2.25 percent of the price of the end product, which Motorola represented was in keeping with its RAND commitments on the patents. Microsoft disagreed. Soon after, it filed suit in the Western District of Washington, alleging that Motorola had breached its RAND commitments to the Institute of Electrical and Electronic Engineers (IEEE) and the International Telecommunication Union (ITU), the standard-setting organizations that developed the 802.11 and H.264 standards. Motorola responded by filing suit in the U.S. District Court for the Western District of Wisconsin, seeking an injunction to prevent Microsoft from using its H.264 patents. The cases were consolidated before Judge Robart in the Western District of Washington. Motorola also brought patent-enforcement actions before the International Trade Commission and in Germany. Microsoft alleged in an amended complaint that the filing of these injunctive orders constituted a breach of contract on the grounds that a RAND commitment bars a patent holder from seeking injunctive relief.

The proceedings before Judge Robart slowly moved forward throughout 2011 and 2012. The district court held that the RAND commitment made by Motorola to the standard-setting organizations created an enforceable contract, which standard users like Microsoft are able to enforce as third-party beneficiaries. Judge Robart determined, however, that, in order for a jury to determine whether Motorola had breached its RAND commitment, it must first know what the [...]

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DOJ Issues Business Review Letter Pertaining to SSO Policy on Standard-Essential Patents and RAND Commitments

The Antitrust Division of the U.S. Department of Justice (DOJ) recently issued a business review letter stating that it would not challenge the Institute of Electrical and Electronics Engineers, Inc.’s (IEEE’s) proposed revisions to its patent policy. These patent policy revisions seek to address the “wide divergence” in expectations between holders of patents essential to an IEEE standard and the market participants seeking to implement such standards. The DOJ’s response looked favorably on the IEEE’s proposed revisions pertaining to RAND royalties and limitations on injunctive relief for standard-essential patent holders.

Read the full article.




Commitment Issues: Federal Jury Awards Damages for Breach of FRAND Obligation

by Stefan M. Meisner and Daniel Powers

In the long-running patent dispute between Microsoft and Motorola, a U.S. District Court jury in Seattle found that Motorola breached its commitment to license certain standard-essential patents on fair, reasonable and non-discriminatory (FRAND or RAND) terms.  The jury awarded Microsoft damages of approximately $14.5 million.

The litigation has witnessed numerous legal firsts.  In May, the district court became the first U.S. court to set FRAND royalty rates and ranges for standard-essential patents.  The dispute between Microsoft and Motorola centered on patents that covered wireless and video technology used in the Xbox game console.  Motorola sought a royalty calculated as a percentage of the net selling price of the product.  Microsoft claimed this method would have required it to pay approximately $4 billion per year and argued that royalties should instead be modeled on much lower rates charged by related patent pools, which would have resulted in approximately $1 million in royalties.  The court’s ruling established a broad, multi-factor analysis to be used to assess a reasonable rate range for standard-essential patents.  Applying this test, the court found that the reasonable rate was much closer to the rate proposed by Microsoft than the rate initially demanded by Motorola.

Building upon the earlier decision, the district court jury considered whether Motorola’s initial royalty demands were so unreasonable that they constituted a breach of Motorola’s contractual commitment to offer the patents on RAND terms.  Motorola argued its proposal was a first offer meant to be subject to additional negotiation; Microsoft countered that the initial offer was a sham designed to elicit Microsoft’s rejection.  The jury unanimously found that Motorola’s  actions breached the commitments made in two standards setting organizations.

In addition to legal costs, Microsoft sought $23 million in damages for the costs associated with relocating a distribution center to avoid the impact of a German injunction Motorola had obtained in related litigation.  The jury only granted about half the damages that Microsoft sought, but the penalty imposed on Motorola was still substantial.

The jury verdict suggests patent holders should approach licensing negotiations for standard-essential patents with due care.  While the facts in the case may present an extreme example, opening royalty rate offers that are viewed as unreasonable may nonetheless expose patent holder to claims of breach of the RAND obligation.  More importantly, the case establishes that damages may extend beyond legal costs and can be substantial.




FTC Testifies Before Congress on Impact of Patent Hold-up on Competition and Standard-Essential Patents

by Karne Newburn

On July 30, 2013, Suzanne Munck, Chief Counsel for Intellectual Property at the Federal Trade Commission (FTC), testified before the Senate Committee on the Judiciary, Subcommittee on Antitrust, Competition Policy and Consumer Rights, on the impact of patent hold-up on competition, and standard-essential patents (SEPs).  The hearing covered standard-essential patent disputes and antitrust law. 

Ms. Munck’s testimony focused on SEPs that a patent holder has committed to license on reasonable and non-discriminatory (RAND) terms.  The hold-up, in this context, is the potential that a SEP holder violates its RAND commitment, and then uses the leverage acquired from the standard setting process to negotiate higher royalties or other favorable terms after the standard’s adoption than it could have beforehand.  She explained that patent hold-up is harmful because it can deter innovation, discourage the adoption of standards, reduce the value of standard setting and pass on excess costs to consumers.

To mitigate the threat of patent hold-up she testified that the FTC has “advocated for remedies in district courts and at the International Trade Commission (ITC),” submitted statements to the Federal Circuit and the ITC expressing its concerns, and pursued enforcement actions related to standard setting activity.  Specifically related to enforcement, she commented on the FTC’s ability to use its Section 5 authority when someone claims infringement for intellectual property that is unenforceable or expired, or when someone threatens to sue without any intent to sue.

Ms. Munck concluded with the following remarks: “[T]he Commission believes that competition and intellectual property laws work together to promote innovation.  Voluntary consensus-based standard setting facilitates this purpose; however, including patented technology in a standard creates the potential for patent-hold up.  The Commission will continue to advocate before the federal courts and the ITC for policies that mitigate the potential for patent hold-up, and will bring enforcement actions where appropriate.” 




Western District of Washington Sets FRAND Royalty Rates and Range for SEPs

by Nick Grimmer and Stefan Meisner

Last week in Microsoft v. Motorola, the U.S. District Court Western District of Washington became the first U.S. court to set fair, reasonable, and non-discriminatory (FRAND or RAND) royalty rates and range for standard-essential patents (SEPs).  See Findings of Fact and Conclusions of Law, Microsoft v. Motorola, 2:10-cv-01823-JLR (W.D. Wash. Apr. 25, 2013). The suit stems from Microsoft’s allegation that Motorola’s offers to license certain Wi-Fi and video compression SEPs was too high and therefore violated Motorola’s contractual RAND commitments.   This issue is arising with greater frequency in antitrust/IP matters when patent licensing is involved with licensors who are standards setting organizations as well.

Microsoft v. Motorola is important because it is the first thoroughly reasoned decision by a U.S. federal district court that developed a framework for courts to assess FRAND terms for SEPs.  In setting forth the basic principles at issue, the court stated that “a 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.” Id. at 25-26.  So, the court focused its analysis on its conclusion that “the parties in a hypothetical negotiation would set RAND royalty rates by looking at the importance of the SEPs to the standard and the importance of the standard and the SEPs to the products at issue.” Id. at 7.  The court’s analysis employed a modified-version of the Georgia-Pacific factors, which courts use to calculate “reasonable royalty” damages in patent infringement actions.  Of note, the court modified the first Georgia-Pacific factor (the royalties received by the patentee for the patent(s) at issue) to include consideration only of certain types of royalties, i.e., those “comparable to RAND licensing circumstances,” including both “license agreements where the parties clearly understood the RAND obligation, and … patent pools.” Id. at 35-36 (emphasis added).  Another of the court’s noteworthy modifications to the Georgia-Pacific factors is that the fourth factor (the licensor’s policy and marketing program to maintain its patent monopoly via selective licensing), “is inapplicable in the RAND context because the licensor has made a commitment to license on RAND terms and may no longer maintain a patent monopoly by not licensing to others.”  Id. at 36.  Finally, as relates to the final factor (a hypothetical negotiation), the court concluded that “reasonable parties in search of a reasonable royalty rate under the RAND commitment would consider the fact that, to induce the creation of valuable standards, the RAND commitment must guarantee that holders of valuable intellectual property will receive reasonable royalties on that property.” Id. at 40.

Concluding that several of Motorola’s patents provided only minimal contribution to the standards and played only minor importance in the overall functionality of some of Microsoft’s products, and that the characteristics of a similar patent pool (of which Microsoft and Google, Motorola’s parent, are members) “closely align with all of the purposes of [...]

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FTC Hosts Workshop on Preventing Patent “Hold-Ups” in Standard-Setting

by Stefan M. Meisner and James B. Camden

The FTC recently hosted a workshop on preventing patent “hold-ups” in standard-setting.  Panelists addressed and evaluated the three main tools currently used by SSOs to prevent patent hold-ups: patent disclosure rules, ex ante disclosure of licensing terms by patent holders, and RAND commitments.  The FTC has yet to formally comment on the workshop, but may prepare a report discussing the issues raised in this project.

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