How Apple botched its fair rate case against Motorola

November 6, 2012

I know Apple is a brilliantly managed company represented by brilliant outside counsel. But I cannot for the life of me figure out Apple’s endgame strategy in its breach-of-contract case against Motorola in federal court in Madison, Wisconsin.

Apple had a chance to mitigate Google’s leverage from Motorola’s standard-essential patents in the smartphone wars. Instead, it squandered more than 18 months of litigation, refusing on the eve of trial to agree to abide by the court’s determination of a fair and reasonable royalty rate for Motorola’s IP unless U.S. District Judge Barbara Crabb set a rate of no more than $1 per iPhone. As a result, Crabb dismissed Apple’s case Monday, on the day she was to have begun a bench trial on Apple’s breach-of-contract claim. Her ruling means Apple may not be able to bring similar claims against Motorola in any other U.S. court, which robs the iPhone maker of powerful leverage in the global smart device war.

From my reading of Crabb’s orders and Apple’s responses in the week leading to Monday’s dismissal, Apple must have known it was at extreme risk of this outcome. The chain of events began with Crabb’s 57-page decision on Oct. 29, which outlined the scope of the trial that was scheduled to begin the following week. Apple’s lawyers at Covington & Burling and Tensegrity Law Group should have been happy with Crabb’s ruling, which held that Apple could, indeed, compel Motorola to offer Apple a license for its standard-essential IP on fair and reasonable terms. Specific performance, as that relief is known, is extraordinary in a breach-of-contract case, Crabb acknowledged, but she said that the circumstances of this dispute, in which the two sides are manifestly incapable of negotiation, justify it. Crabb went on to say (like U.S. District Judge James Robartof Seattle in Microsoft’s parallel breach-of-contract case against Motorola) that she would first have todetermine a fair licensing rate for Motorola’s patents and would then decide whether Motorola breached its obligation to license the IP to Apple on reasonable terms. If she found Motorola in breach, she said, she might order it to offer its IP to Apple on the terms she set.

Motorola’s lawyers at Quinn Emanuel Urquhart & Sullivan responded to Crabb’s ruling by calling Apple’s bluff: If Apple wanted a contract to license Motorola’s IP, Quinn said, then Crabb should require Apple to begin paying the license fee she set as soon as she set it. (Remember, Apple has refused to pay Motorola licensing fees since the introduction of the iPhone.)

That’s when things went rotten for Apple. In a brief on Oct.31, Apple said it would not necessarily agree to abide by the licensing rate Crabb set but would only accept a rate that met certain conditions. “Apple is willing to pay the (fair and reasonable) rate this court sets going forward if that rate is less than or equal to $1 per unit for its worldwide sales of covered products,” the brief said. “To the extent the court sets the rate higher than $1 per unit, Apple reserves the right to exhaust all appeals and also reserves the right available to any party offered a license: the right to refuse and proceed to further infringement litigation.”

Quite understandably, Crabb had a lot of questions about Apple’s abrupt declaration that it wouldn’t abide by her decision if it didn’t like what she decided. In an order on Nov.2, the judge asked Apple to explain why she should go to the trouble of holding a trial to determine a reasonable licensing rate if the entire exercise would resolve nothing and would produce only “a bargaining chip” for Apple to use in future negotiations with Motorola. Clearly irritated by Apple’s position, Crabb reversed her previous ruling on specific performance and said she had considerable doubts about proceeding with the bench trial.

Apple’s attempt to salvage the case was truly baffling. In a brief submitted Sunday, it proposed that Crabb not only set a reasonable licensing rate for Motorola’s IP but also determine a corresponding rate for Apple’s standard-essential IP. Both sides, Apple said, would then be bound to pay each other court-determined licensing fees. That might have made sense in the abstract, but in reality this case had nothing to do with Apple’s standard-essential technology. Motorola hasn’t asserted an antitrust or breach-of-contract claim against Apple for failing to license its IP on fair and reasonable terms, and Apple certainly never made any claims about its own standard-essential technology in its complaint against Motorola. So to ask Crabb on the day before a long-awaited bench trial to decide an issue that was never litigated before her and has no factual record is just plain wacky. (To be fair, Apple did suggest deferring the trial to develop a record.)

At the conclusion of a two-hour hearing Monday, Apple submitted yet another brief to Crabb, arguing that the judge could still issue a declaratory judgment that Motorola had breached its licensing obligations. Even if she chose to dismiss the case, Apple begged her to toss it without prejudice. Crabb nevertheless informed Apple and Motorola at the hearing that she was dismissing the case with prejudice, and followed through by noting that on the dismissal order she entered after Monday’s hearing.

So where does that leave Apple? Apple’s own Nov. 5 brief acknowledged that the dismissal could have a res judicata effect, barring Apple from asserting any other claim against Motorola for breaching standard-essential licensing obligations. There’s a chance Crabb will reconsider her decision to dismiss the case with prejudice, and Apple can always appeal her judgment. (An Apple representative didn’t respond to my email requesting comment and declined to comment yesterday on the case to my Reuters colleague Dan Levine.) The question of the res judicata effect of Crabb’s ruling, in other words, doesn’t yet have a clear answer. But at the very least, the dismissal of this case means Apple will have to spend a lot of time and money just to establish that it has the right to bring another breach-of-contract suit against Motorola. And if Crabb’s ruling is indeed the last word on Apple’s standard-essential licensing claims against Motorola, Apple will have lost immensely valuable leverage in cross-licensing negotiations.

The dismissal also means that Apple has lost control over the critical issue of the value of Motorola’s patents. Before last week, it seemed that both Apple, via the Wisconsin case, and Microsoft, via the Seattle litigation, would have the chance to put on expert testimony and other evidence about what Motorola should be permitted to charge licensees of its standard-essential patent portfolio. Apple lost that opportunity when it told Crabb it wouldn’t necessarily abide by her determination. (That raises a whole other set of questions about Apple’s faith in its own experts: If it truly believed Motorola’s IP is worth less than $1 per phone, why was it afraid to be bound by Crabb’s rate-setting?)

Finally, there’s the question of judicial goodwill. As Robart has said in Microsoft’s case against Motorola, judges don’t like to be used as pawns in device makers’ business strategies. Remember: Crabb gave Apple what it wanted when she said she would consider granting specific performance against Motorola. So for Apple to subsequently say, after 18 months of litigation, that it wouldn’t necessarily abide by her determination just isn’t seemly. This is the second hotly litigated dispute between Apple and Motorola to end abruptly on the eve of trial, following 7th Circuit Judge Richard Posner‘s dismissal of cross claims between the two last June. Posner’s ruling, as I’ve reported, concluded that litigation is not an economically viable way to resolve the worldwide smartphone war. Crabb’s ruling this week makes Posner’s pronouncement more prophetic than ever.

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Congratulations for an excellently researched and written article.

However, before agreeing with your mistaken conclusion, and your rather rash and probably deliberately derogatory title, meant to attract a few page reads, let me add one fact.

Judge Robard will be presiding over a bench trial regarding FRAND patents that involve Motorola (who else is abusing FRAND except Samsung and Google ?) and Microsoft. The case construction is significantly better for Microsoft than it was for Apple in terms of reaching a reasonable way to declarea FRAND patent’s value.

Conclusion: Why should Apple go ahead and be bound by Judge Crabbs FRAND abuse friendly judgement, when exactly the same matter will be adjudicated in a few weeks, by a clearly more favorable judge ? It will then be easy to simply appeal the case to request the exactly same terms, or even make an offer that complies with the Microsoft vs Motorola judgement, and let Motorola decline it.

I guess the writer has a pretty good self-image (that is, me really smart, rest of the world not quite so) if she thinks that the best lawyers in the country just bungle trials left and right worth billions of dollars. This was a clear strategical decision on part of Apple and they are willing to live with the consequences.

But hey, if this article can lower Apple’s stock a few more points, I am all for it.

Posted by chucktown | Report as abusive

Excellent article.

Allow me though to try to help a little in terms of figuring out Apple’s strategy.

The FRAND abuse bench trial presided by Judge Robard between Microsoft and Motorola you referred to in your article, (Samsung and Motorola are FRAND abusers, under antitrust scrutiny in both US and Europe) will offer a rate for FRAND patents based on pre-FRAND patent value.

Apple made a strategic decision not to be bound by Judge Crabbs’ FRAND friendly case construction and simply offer Motorola the same rate that Judge Robard will arrive to.

You are welcome.

Posted by chucktown | Report as abusive