Today, Judge James L. Robart issued the non-confidential version of his Findings of Fact and Conclusions of Law in Microsoft Corp. v. Motorola, Inc., No. 10-cv-1823 (W.D. Wash.).  This marks the first time that a U.S. court has made a determination of RAND licensing terms for a standard-essential patent portfolio license between two parties.  The order itself is 207 (!) pages long, so it will take some time to review, and multiple posts to fully digest.  But we wanted to do a short post this evening, and will follow up with a more in-depth review tomorrow.

To recap, the SEP portfolios at issue here are (1) Motorola’s patents that are claimed to be essential to the IEEE 802.11 wireless networking standard, and (2) Motorola’s patents that are claimed to be essential to the ITU-T H.264 video coding standard.  Judge Robart, in fact, determined both a specific RAND royalty rate and a RAND royalty range for these portfolios, noting that “more than one rate could conceivably be RAND.”  Here are his findings:

  • The RAND royalty rate for Motorola’s H.264 SEP portfolio is 0.555 cents per unit; the upper bound of a RAND royalty range for Motorola’s H.264 SEP portfolio is 16.389 cents per unit; and the lower bound is 0.555 cents per unit. This rate and this range are applicable to both Microsoft Windows and Xbox products. For all other Microsoft products using the H.264 Standard, the royalty rate will be the lower bound of 0.555 cents.
  • The RAND royalty rate for Motorola’s 802.11 SEP portfolio is 3.471 cents per unit; the upper bound of a RAND royalty range for Motorola’s 802.11 SEP portfolio is 19.5 cents per unit; and the lower bound is 0.8 cents per unit. This rate and range is applicable to Microsoft Xbox products. For all other Microsoft products using the 802.11 Standard, the royalty rate will be the low bound of 0.8 cents per unit.

That’s about 4 cents/unit total — and even at the upper bounds, it’s about 36 cents/unit.  From a review of the parties’ post-trial briefs (Motorola, Microsoft), these RAND royalty rates are much closer to the ones urged by Microsoft than Motorola.  And obviously, they are much lower than the 2.25% rates offered by Motorola in its initial licensing letters (which work out to about $4.50 on a $199 Xbox).  Judge Robart apparently did not find Motorola’s prior licenses (many of which involved Motorola’s cellular SEP portfolios) to be good comparables for a license between Motorola and Microsoft involving 802.11 and H.264 patents.  Instead, he appears to have based much of his determinations on rates offered by patent pools (the MPEG LA AVC/H.264 pool and the Via Licensing 802.11 pool), as well as license rates charged by chip designer ARM Holdings.

“Economic Guideposts” for assessing RAND terms

Beyond the actual RAND royalty rate determinations, this order is also important for the precedent it sets in how to determine RAND terms for a patent portfolio.  On pp.25-26, Judge Robart lays out what he terms several “economic guideposts”:

  • The level of a RAND royalty should promote adoption of the standard;
  • The methodology for determining RAND terms should recognize and mitigate both the risk of “patent hold-up” and royalty stacking (the total royalties payable if other SEP holders made the same demands);
  •  RAND royalties should guarantee the patent holder a reasonable return on its IP-related investment; and
  • RAND royalties should be interpreted to limit the patent holder to a reasonable royalty on the economic value of the patented technology itself, apart from the value associated with the patent’s incorporation into an industry standard (similar to Judge Posner’s idea of the value of the “patent qua patent”)

One interesting thing about the findings is that while the ultimate RAND royalty appears to favor Microsoft, Judge Robart seems to have sided with Motorola as to the right approach to determine RAND royalties — simulating a hypothetical, bilateral negotiation between the parties (whereas Microsoft had suggested determining RAND on the basis of an ex ante, multilateral negotiation at the time of the standard’s adoption).

We will get into the meat of Judge Robart’s analysis tomorrow — given the importance (and length) of Judge Robart’s order, it’s certainly worth multiple posts.  Stay tuned for an update tomorrow, but in the meantime, happy reading.

And if you’d like to catch up on the history of the Microsoft-Motorola case, you can check out our lengthy “catching up on…” post on the case from January.  For those who want just a brief overview, here’s a handy timeline of notable occurrences in the dispute between the parties:

Timeline of Microsoft-Motorola Dispute 

October 1, 2010 Microsoft files ITC complaint against Motorola (Inv. No. 337-TA-744).
October 21, 2010 Motorola sends a letter to Microsoft, offering a license to its 802.11-essential patents in exchange for a 2.25% royalty.
October 29, 2010 Motorola sends a letter to Microsoft, offering a license to its H.264-essential patents in exchange for a 2.25% royalty.
November 9, 2010 Microsoft files a declaratory judgment complaint against Motorola, alleging breach of contractual RAND licensing obligations.
November/December, 2010 Motorola files infringement complaints against Microsoft in the ITC (Inv. No. 337-TA-752), the Western District of Wisconsin, and the Southern District of Florida, asserting a variety of 802.11- and H.264-essential patents (as well as several non-essential patents).  (The district court cases are later transferred to Washington).
June 1, 2011 Judge Robart dismisses several of Microsoft’s claims, but denies Motorola’s motion to dismiss the breach of contract and promissory estoppel claims.
July 2011 Motorola files patent infringement cases in Germany, accusing Microsoft of infringing two H.264-essential patents.
February 27, 2012 Judge Robart rules on summary judgment that Motorola is contractually bound by its RAND commitments and that Microsoft is a third-party beneficiary of these RAND contracts.
April 2012 German court rules that Microsoft infringes the two H.264-essential patents and awards Motorola an injunction; Microsoft files motion in Washington seeking to prevent Motorola from enforcing injunction, and court granted temporary restraining order pending decision on the merits.
May 14, 2012 Judge Robart issues preliminary injunction preventing Motorola from enforcing German injunction pending decision on RAND breach of contract issue.
June 6, 2012 Judge Robart denies the parties’ respective summary judgment motions regarding RAND breach of contract issues, putting the parties on a path toward trial.  He notes that Microsoft affirmatively represented that it will take a RAND license from Motorola and that he “will hold Microsoft to that statement.”
October 10, 2012 Judge Robart denies Motorola’s motion for partial summary judgment to dismiss Microsoft’s claim for the court to determine a RAND license agreement.  In his opinion, he notes that the trial will proceed in two phases: the November 2012 bench trial will first determine a “RAND royalty range and rate,” and the subsequent trial will compare Motorola’s offered rate to these figures in order to determine whether a breach of contract has occurred.
November 13-20, 2012 Judge Robart holds bench trial; parties present fact and expert testimony on what constitutes a RAND royalty for Motorola’s 802.11/H.264 SEPs.
November 29, 2012 Judge Robart grants summary judgment in favor of Microsoft, barring Motorola from seeking injunctive relief for its 802.11/H.264 SEPs.
December 2012 Parties submit their respective post-trial briefs [Microsoft, Motorola] on the issue of a RAND royalty rate.
January-March 2013 Judge Robart holds oral argument and the parties submit additional briefing and evidence regarding the effect Google’s H.264/AVC license with MPEG LA may have on the RAND royalty for Motorola’s H.264 patents.
April 19, 2013 Judge Robart issues a sealed order setting RAND terms and a methodology for determining RAND terms.
April 25, 2013 Judge Robart issues the public version of his order setting RAND terms and a methodology for determining RAND terms.
April-July, 2013 Parties expected to take additional limited discovery and potentially file summary judgment motions on the issue of breach of contract.
August 2013 If necessary, trial will take place in W.D. Wash. regarding breach of contract claim and any resulting damages.