September 01, 2013

In April 2013, Judge James L. Robart issued his Findings of Fact and Conclusions of Law (the “Order”) in the matter of Microsoft Corp. v. Motorola, Inc., No. 10-cv-1823 (W.D. Wash.). The Order is potentially groundbreaking in that it represents the first time a U.S. court determined reasonable and non-discriminatory (“RAND”) terms for a license to standard-essential patents (“SEPs”).1 More important than the terms (at least to parties other than Microsoft and Motorola) is that Judge Robart took great care (and 207 pages) to explain the assumptions, thought process, and methodology he used to arrive at his opinion. As such, the Order provides guidance and a potential road map for damages experts to use in assessing reasonable royalties in matters involving SEPs.

Case Background

Judge Robart’s Order relates to a breach of contract case between Microsoft and Motorola. Microsoft claimed that Motorola breached its RAND obligations by making unreasonable opening offers in negotiations to license Motorola patents essential to practice the 802.11 Standard (related to wireless local area networks, commonly known as “WLAN” or “Wi-Fi”) and the H.264 Standard (related to video coding technology).2 In a previous order, the Court found that Motorola’s RAND commitments required that Motorola’s opening offers to license its SEPs be made in good faith.3 Judge Robart reasoned that in order for a fact-finder to determine in a later trial whether Motorola’s opening offers were in good faith, “a fact-finder must be able to compare them with a reasonable RAND royalty rate and, because more than one rate could conceivably be RAND, a reasonable RAND royalty range.” As such, Judge Robart conducted a weeklong bench trial, the result of which is the Findings of Fact and Conclusions of Law in which he rendered his conclusions as to the RAND royalty rates and ranges for Motorola’s SEPs.

Goals of a RAND Royalty and the Methodology for Determining a RAND Royalty

  • Judge Robart first sought to identify the goals of a RAND royalty and issues that must be addressed when considering how to arrive at a RAND royalty. In doing so, he provided some background regarding standards, standard setting organizations (“SSOs”) and the RAND commitment. Most notably he indicated the following:
  • The ITU and ISO/IEC4 have a common patent policy that constitutes the “code of practice” with regard to patents. The sole objective of that patent policy is to ensure that a patent embodied fully or partially be accessible to everybody without undue constraints.5
  • The IEEE6 Operations Manual in place at the time Motorola made its initial RAND commitments with regard to the 802.11 Standard assured that technology would be made available at nominal competitive costs to all seeking to use it for compliance with an IEEE standard.7
  • The purpose of the RAND commitment is to encourage widespread adoption of the standard.8

In consideration of these issues, Judge Robart concluded the following:

  • A RAND royalty should be set at a level consistent with the SSOs’ goals of promoting widespread adoption of their standards.9
  • A proper methodology for determining a RAND royalty would mitigate the risk of patent hold-up. Hold-up refers to the ability of a holder of a SEP to demand more than the value of its patented technology and to attempt to capture the value of the standard itself.10
  • A proper methodology for determining a RAND royalty would address the risk of royalty stacking by considering the aggregate royalties that would apply if other SEP holders made royalty demands of the implementer.11

The Approach for Determining a RAND Royalty

Microsoft and Motorola each argued that a particular (and different) approach was most appropriate for determining a RAND royalty. Microsoft contended that the best approach would be to focus on the time period before the standard was adopted/implemented and would involve determining the incremental value of the technology as compared to the alternatives that could have been written into the standard. Motorola, on the other hand, maintained that it would be best to utilize the framework of a hypothetical, bilateral negotiation, but one that would take into account the RAND obligation.

Judge Robart generally sided with Motorola’s approach but also noted that “comparison of the patented technology to the alternative that the SSO could have written into the standard is a consideration in determining a RAND royalty” as is “the value of the patented technology itself, which necessarily requires considering the importance and contribution of the patent to the standard.”12

Judge Robart reasoned that a hypothetical negotiation involving a RAND commitment would differ from the typical Georgia-Pacific analysis for at least two reasons. First, whereas a patent owner who is not subject to RAND commitment has the freedom to withhold a license or offer any terms of his choosing, a patent owner subject to a RAND commitment is obliged to license the patent and must do so under RAND terms. Second, both parties would understand that the licensee implementing the standard must take licenses from many SEP owners, not just the single licensor involved in the hypothetical negotiation.13 Judge Robart then elaborated as to how the Georgia-Pacific factors/analysis would be modified to account for the RAND commitment. Table 1 on the following page identifies each factor in its original form and explains how, if at all, each one would be modified if the patent at issue were subject to a RAND obligation.

Application of the Methodology to Motorola’s SEPs for the 802.11 Standard

The process Judge Robart utilized to determine the RAND rate for Motorola’s 802.11 SEPs generally involved five steps.14

  1. Examination of certain relevant background information related to the 802.11 Standard
  2. Evaluation of the relative technical value of the different portions of the standard
  3. Evaluation of the importance of Motorola’s SEPs to the 802.11 Standard and to Microsoft’s Xbox
  4. Evaluation of possible indicators of a RAND royalty rate
  5. Determination of the RAND rate considering the primary indicators of a RAND rate and the importance of Motorola’s 802.11 SEP portfolio to the standard and the product

1. Relevant Background Information Related to the 802.11 Standard

The background information discussed in the Order indicates that the 802.11 Standard is immense, complex, and the result of contributions from a great many participants. The current version of the standard is nearly 2,800 pages long.16 More than 1,000 companies participated in the standard-setting process, which required seven years to develop the first draft. Moreover, development of the standard dealt primarily with the implementation of well-known technologies rather than innovation. In fact, the majority of the technologies used in the standard were in the public domain (not covered by patents) and were the result of a long history of R&D done by companies, government agencies, and academic institutions.

Since 1994, approximately 92 companies have identified more than 350 patents and 30 patent applications as essential to the 802.11 Standard. Currently, approximately 59 companies, including communication industry leaders such as Atheros, Broadcom, Qualcomm, RIM, and Intel, have filed documentation indicating that one or more of their patents may be essential to the 802.11 Standard. A Microsoft expert testified that there are possibly thousands of essential patents to the 802.11 Standard at any one time.

2. Relative Technical Value of the Different Portions of the Standard

The Order distinguishes between core enabling features (those needed to build any 802.11 compliant device), advanced features (features that are important to some but not all 802.11 compliant devices) and peripheral features (related to technology areas that have not been proven and may or may not have future technological value). Core enabling features are considered more important/valuable than advanced and peripheral features. Core enabling features of an 802.11 communications network include: 1) network setup, 2) channel access management, 3) data modulation, and 4) security and encryption.17

3. Importance/Value of Motorola’s SEPs to the 802.11 Standard and to the Xbox

Motorola contended that 24 of its patents were essential to the 802.11 Standard.18 Motorola made this contention despite failing to offer any expert testimony indicating which claims of its SEPs cover aspects of the 802.11 Standard. Rather, Motorola offered only conclusory expert testimony that any 802.11 compliant device would infringe its SEPs. Motorola ultimately relied on attorney submissions from its proposed findings of fact and conclusions that each of the SEPs relate to corresponding portions of the standard.19 Considering this lack of evidence, Judge Robart found that the licensee at the hypothetical negotiation would view the patents with skepticism, diminishing their value at the hypothetical negotiation.20

The parties also offered conflicting expert testimony as to whether —at the time the standard was developed—there existed viable alternatives to Motorola’s patents and, if so, whether adoption of the alternatives would have degraded the performance of the standard. The existence of viable alternatives would render the patents less important to the standard and therefore less valuable. Judge Robart found that neither party demonstrated the presence or absence of viable alternatives to Motorola’s patents and therefore concluded that the parties to the hypothetical negotiation would simply have disagreed as to the technical contribution of the patents to the 802.11 Standard.22

Motorola only presented evidence associating its patents to Microsoft’s Xbox product. Motorola offered no evidence with regard to any other Microsoft product. As such, Judge Robart found that the license contemplated at the hypothetical negotiation would only have considered a license for the Xbox. Additionally, since Motorola only contended that the Xbox practiced 11 of the 24 patents, only those 11 would have been at issue in the hypothetical license. 23

Motorola argued that the 11 patents relate to five technology areas (functions) of the 802.11 Standard: 1) Channel Access Management; 2) Data Modulation (a/g/n); 3) Network Set Up; 4) Data Modulation (b/g); and 5) Security. Considering the evidence presented, Judge Robart evaluated the importance of the 11 Motorola patents to the relevant technology area of the 802.11 Standard. He also evaluated the importance of the patents to Xbox. The results of those evaluations are summarized in Table 2 on the previous page.

4I Possible Indicators of a RAND Royalty Rate

Judge Robart next evaluated the evidence presented by each party that might indicate a RAND royalty rate for the Motorola’s 802.11 SEPs. Motorola contended that the best indicators of a RAND royalty rate were: 1) a 2011 license agreement between MMI and VTech Telecommunications Ltd. (“the VTech License Agreement”); 2) a 2010 patent cross license agreement between Motorola and Research In Motion Limited (“the RIM License Agreement”); and 3) three agreements entered into by Symbol Technologies, Inc. (“the Symbol License Agreements”) prior to Motorola’s acquisition of Symbol. Pursuant to Georgia-Pacific Factor 1, Judge Robart evaluated the agreements as well as the circumstances that led to the agreements. He concluded that the VTech License Agreement and RIM License Agreement did not establish a RAND royalty rate and that the Symbol License Agreements were poor indicators of a RAND royalty rate.24

Microsoft suggested two different indicators of a RAND royalty rate: 1) the Via Licensing 802.11 Patent Pool (“the Via Patent Pool”); and 2) the royalty rate paid by its Wi-Fi chip supplier, Marvell Semiconductor, Inc. (“Marvell”) to Marvell’s supplier ARM Holdings (“ARM”) for patent licenses and know-how to make its 802.11-compliant chips (“the ARM Benchmark Rate”). Pursuant to Georgia-Pacific Factor 12, Judge Robart considered this evidence. He concluded that the VIA Patent Pool was an indicator of a RAND royalty rate for Motorola’s 802.11 SEPs.25 Considering the rates charged by the patent pool and the effect of the additional Motorola and Microsoft patents that hypothetically could have been added to the pool, Judge Robart concluded that royalty payments that Motorola would have received from Microsoft would have equated to a royalty rate of 6.114 cents per unit.26

After considering the proffered evidence related to the ARM Benchmark Rate, Judge Robart concluded that the 1% rate Marvell paid ARM represented “a reasonable ‘high ceiling’ royalty rate in semiconductor intellectual property licensing” and that this factor should be considered under Georgia-Pacific Factor 12.27 Considering that Marvell sells its chips for $3-$4, Judge Robart concluded that the ARM Benchmark Rate indicated a RAND rate of between 3 and 4 cents per chip for Motorola’s 802.11 SEPs.28

Pursuant to Georgia-Pacific Factor 12, Judge Robart also considered another possible indicator of a RAND royalty rate: a 2003 analysis by InteCap, Inc., a consulting firm, which developed a patent licensing valuation model for Motorola’s 802.11 SEPs (“the InteCap Analysis”). Considering that the InteCap Analysis utilized a methodology that exhibited certain characteristics of a RAND royalty rate, Judge Robart concluded that it was an appropriate indicator of a RAND royalty rate. Despite this conclusion, Judge Robart found that the InteCap Analysis overestimated the relative importance of Motorola’s 802.11 SEPs to the standard. As such, he reduced the rate by a factor of 25, concluding that the InteCap Analysis indicated a RAND royalty rate of between 0.8 and 1.6 cents per unit for Motorola’s 802.11 SEPs.29

Table 3 summarizes the results of Judge Robart’s evaluation of the indicators of value.

5. Determination of a RAND Royalty Rate for Motorola’s 802.11 SEPs

To arrive at his opinion regarding the RAND Royalty rate for Motorola’s 802.11 SEPs, Judge Robart averaged the rates indicated by the Via Patent Pool, the ARM Benchmark Rate and the InteCap Analysis. In averaging the rates, he considered the midpoint of the rate indicated by the ARM Benchmark rate (3.5 cents per unit) and the lower end of the rate indicated by the InteCap Analysis (0.8 cents per unit). As such, he ultimately determined the RAND royalty rate for Motorola’s 802.11 SEPs to be 3.471 cents per unit.30

Table 4 summarizes the positions of the parties’ experts and the Court’s ultimate opinions regarding RAND rates for the SEPs at issue in the matter.

Conclusion

In summary, Judge Robart’s opinion provides useful information regarding at least one jurists approach to evaluating inputs relevant to the determination of a RAND royalty for the use of SEP technology.

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1 Standard setting organizations are voluntary membership organizations whose participants engage in the development of industry standards to permit interoperability across devices. These organizations typically have policy statements that require: (i) their members make reasonable efforts to disclose any patents that are essential to the standard. A patent is deemed essential if it is necessary to implement either an optional or mandatory provision of a standard, and (ii) that members commit to make available all such essential patents on fair, reasonable, and non-discriminatory terms to prevent owners from taking advantage of hold-up power by virtue of being essential to the standard.
2 In October 2010, Motorola offered to license Microsoft its 802.11 SEPs at a rate of 2.25% of the price of the end product utilizing the technology. Later the same month, Motorola offered the same rate for rights to its H.264 SEPs.
3 Order-5, citing 6/16/12 Order (Dkt. # 335) at 25. Note, in a later order, 10/10/12 Order (Dkt. # 465), the Court found that initial offers need not be on RAND terms so long as the terms of the license that eventually issues are RAND.
4 The ITU (International Telecommunication Union), ISO (International Organization of Standards), and IEC (International Electrotechnical Commission) were responsible for jointly developing the H.264 standard.
5 The Order, ¶ 26-27.
6 IEEE (Institute of Electrical and Electronics Engineers) is the SSO that developed the 802.11 Standard.
7 The Order, ¶ 47.
8 The Order, ¶ 51.
9 The Order, ¶ 70.
10 The Order, ¶ 71.
11 The Order, ¶ 72.
12 The Order, ¶ 80.
13 The Order, ¶ 92.
14 For the sake of brevity, I will only examine Judge Robart’s analysis of Motorola’s 802.11 SEP portfolio and not his analysis of Motorola’s H.264 SEP portfolio.
15 The Order, ¶ 95, 100-110.
16 The Order, ¶ 318.
17 The Order, ¶ 326.
18 The Order, ¶ 339.
19 The Order, ¶ 341.
20 The Order, ¶ 342.
21 The Order, ¶ 353-406.
22 The Order, ¶ 346.
23 The Order, ¶ 351.
24 Furthermore, Judge Robart found there to be royalty stacking concerns with the royalty rate (2.25% of the end product price) sought by Motorola based on these license agreements. He found that stacking concerns were heightened considering his previous conclusion that Motorola’s 802.11 SEP portfolio contributed minimally to the standard. He ultimately concluded that the royalty rate sought by Motorola did not fall within the range of RAND royalties (the Order, ¶ 457, 461).
25 The Order, ¶ 562.
26 The Order, ¶ 577.
27 The Order, ¶ 587.
28 The Order, ¶ 590.
29 The Order, ¶ 611.
30 The Order, ¶ 620.