For the first time ever, a federal district judge has decided what constitutes a reasonable license rate for a portfolio of standard-essential patents. U.S. District Judge James Robart ruled late Thursday that Motorola is entitled to royalties of a half cent per unit for Microsoft’s use of standard-essential video compression patents and 3.5 cents per unit for Motorola’s wireless communication patents. According to Microsoft, those terms would require it to pay Motorola a grand total of about $1.8 million a year in royalties – a far cry indeed from the billions Motorola requested in a royalty demand to Microsoft in 2010. It’s still to be determined at a trial this summer whether Motorola breached its obligation to license its essential technology to Microsoft on reasonable terms. But make no mistake: Robart’s ruling on reasonable royalties is a dreadful outcome for Motorola and its parent, Google.
In fact, there’s a good argument that the framework Robart used to determine a fair royalty rate is bad news for all patent holders that depend on license fees for essential technology. Until the smart device wars, when Microsoft and Apple balked at Motorola’s licensing demands, product makers generally considered themselves to be at the mercy of companies that developed essential technology adopted by international standard-setting boards. Robart’s ruling, if it is eventually upheld by the 9th Circuit Court of Appeals, gives so-called implementers like Microsoft and Apple not only the methodology to whittle down patent holders’ licensing demands but also a recourse if negotiations stall. Implementers now know they can go to court and ask a judge to decide a fair royalty based on the relative value of essential patents to their final product. We’ve already seen courts and regulators blunt the threat of injunctions by holders of standard-essential patents. Robart’s decision shifts the balance of power even further away from patent holders.
To understand why, let’s run quickly through the findings in the 207-page opinion. The judge said early on that he agreed with Motorola’s lawyers at Ropes & Gray and The Summit Law Group that the best way to set a fair royalty rate would be to consider a hypothetical bilateral negotiation. He rejected Microsoft’s proposed “incremental value” approach, which would have based the value of essential patents on the cost of adopting alternative technology. But that was just about the only positive aspect of the ruling for Motorola.
Robart proceeded to analyze the relative significance of Motorola’s patents to the two standard-essential technologies at issue in the case, one involving video compression and the other wireless communication. Motorola’s role in both, Robart found, was minor. Of the thousands of contributions to each technology, Motorola was responsible for 16 patents related to the video compression standard and 24 to the standard wireless communications technology. The company presented “scant evidence” at a bench trial last November that its patents were at the core of either standard, Robart said.
Nor, he found, was Motorola’s IP at the core of any Microsoft products. Motorola’s video compression patents, the judge said, involve technology that’s increasingly irrelevant in the marketplace. (Even Google doesn’t use the Motorola tech on its Android platform or at YouTube.) And the 11 Motorola wireless communications patents incorporated in Microsoft products are only minimally important, according to the judge. Those factors would undermine the value of Motorola’s IP in a hypothetical negotiation, Robart said.