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Thursday, April 24 2014 @ 07:53 PM CDT

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Judge Robartís Opinion in Motorola vs. Microsoft and the Future of FRAND

Intellectual property Rights

Dollar closeup, courtesy of Jon Sullivan and Wikimedia CommonsPerhaps the most important term in any standards organization’s Intellectual Property Policy (IPR) policy is the acronym “RAND,” standing for “reasonable and non-discriminatory” (in Europe, they add an “F” – for “fair” - at the front end, yielding “FRAND,” but the meaning is the same). Virtually every other term in such a policy will appear in one of many variations from policy to policy, and these definitions can be quite lengthy and precise.  But the definition of F/RAND is always word for word the same – never is a different term used, nor is any additional elaboration provided to explain exactly what “fair” or “reasonable” are intended to mean.

The result is that when two parties – the owner of a patent claim that an implementer of a standard can’t avoid infringing (an “Essential Claim”) and a party that wants to implement the standard – can’t agree on what the boundaries of these words should be, a third party is needed to settle the dispute.

Until recently, surprisingly few such disputes found their way into the courts, meaning that there were very few judicial opinions to turn to for guidance on exactly what FRAND might mean, and therefore few reference points for Essential Claim licensors and licensees to use to reach agreement.

With the advent of the mobile platform wars, however, this state of affairs has changed, leading to uncertainties in the marketplace and attracting the attention of regulators on both sides of the Atlantic. They are urging standards organizations to become involved in facilitating resolution of such disputes (e.g., by including voluntary or mandatory arbitration clauses in IPR policies), so that the court system is not clogged with these typically complex, lengthy and difficult contests.

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Last week, the task of defining FRAND became incrementally easier, with the handing down by Justice James Robart of a 207 page opinion in a closely-watched dispute between Motorola and Microsoft, involving several patents that Google later acquired (along with the rights under the law suit) when it purchased Motorola Mobility. In that opinion, Robart sought to determine what, under all relevant circumstances, Google could fairly and reasonably charge Microsoft to infringe upon the Essential Claims in question when (for example) it builds and sells an Xbox.

You can find a number of good summaries of Judge Robart’s opinion on the Web already (a good example, by Jorge Contreras, can be found here), so I won’t repeat that exercise here. Suffice it to say that a busy judge and his clerks have spent an inordinate amount of time poring over the extensively briefed and argued record placed before him by the highly paid legal teams of two very large companies.

The result is a closely reasoned opinion that is based in part on pre-existing rulings, but in several significant aspects breaks new ground.  It is these new aspects that offer the greatest value, because they can be used as a reference by future parties seeking to reach agreement on FRAND terms, and by judges when the parties cannot.

But this begs the questions of whether the novel aspects of Judge Robart’s opinion will in fact be followed, and also whether they even should be.

Regarding the first question, there are hundreds of independent legal jurisdictions around the world, none of which are obligated to follow the rulings in the Motorola case (although they may choose to be influenced by it).

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Instead, Judge Robart’s opinion, assuming that it is not reversed in relevant aspects on any appeal that may follow, will only be binding in those courts in the same jurisdiction that are presented with similar situations. And that’s a very small slice of the global litigation pie.

Regarding the second question, it remains to be seen whether the concepts that Judge Robart developed will be adopted but future finders of law (e.g., whether the societal benefits of standards should be reflected in permissible royalty rates, and if so, whether the somewhat arbitrary multiplier that Robart chose is appropriate).

Similarly, other judges may disagree that the comparables that Robart used for determining the market value of Essential Claims should in fact be used at all, or at least not in all circumstances.

For example, Judge Robart concluded that the prices charged in standards-related patent pools should be relevant to the pricing of licenses in Essential Claims in one-on-one negotiations as well. A patent pool is most often formed when there are many holders of Essential Claims. When this situation arises, there can to two resulting negative impacts that could potentially prevent a new standard from becoming widely adopted. The first concern is that the simple act of negotiating license terms with scores of different parties may add up to more effort than seems to be worthwhile. The second is that the combined price to be paid may make the standard too expensive to implement at all.

With a patent pool, the owners of the Essential Claims in question agree on several things. First, they agree on how much they think the market will bear for the pool of Essential Claims. Next, they agree on a mechanism (usually involving a third party) to determine whether each patent claim they assert is necessary really is, and if it is, what percentage of the combined license fee that patent claim should be entitled to receive. (You can read more about how a patent pool works in the standards context here).

Inherent in Judge Robart’s turning to patent pools for comparable pricing is a concern with so-called “patent stacking,” or the potential for a given standard to be priced out of the market if one or more owners of Essential Claims is unreasonable in its demands.

But in fact, such situations are likely to occur in only a very small number of circumstances involving either very complex technology (e.g., WiFi) and/or market niches where charging royalties is very much part of the reason why companies join standards organizations. And, in fact, standards-related patent pools are only very rarely formed, because the time, expense and consensus regarding need rarely arises. In other words, the marketplace has only very rarely found that royalty stacking was a serious enough concern to warrant the formation of a patent pool at all.

While not completely unknown, patent pools are particularly rare in the case of software standards. As a result, using a patent pool as a reference would not be of much relevance at all in such a case. Judge Robart would presumably agree with that conclusion. But other judges might not make that distinction, and in any event, once patent pools are removed as a reference, a hole opens up in the Robart analysis that would need to be filled through some other means.

The sum of the following points is that the marketplace is only incrementally better off after the issuance of Judge Robart’s opinion than it was before. As a result, courts and judges will still be taxed with adjudicating extremely complex situations, and litigants will still face highly speculative outcomes.

In the case of Motorola/Google, Motorola initially requested a royalty rate that Microsoft claimed would require it to pay as much as $4 billion a year for the use of the Essential Claims (a number that seemed absurd to me, as well as to many others). By the time litigation ensued, the demand had been lowered to $400 million – an order of magnitude reduction. The final number determined by Judge Robart was a mere $1.8 million per year.

Whether you pick $4 billion/$1.8 million or $400 million/$1.8 million as the range of legitimate disputer, that’s still an enormous disparity of expectation. Normally, businesses hate uncertainty, and are often willing to pay more in order to protect themselves from expensive litigation or ongoing risks to their business if, for example, they cannot gain access to a patent at all.

So why don’t companies simply agree on a definition for FRAND when they form a consortium, the way they do with so many other complex elements of a typical IPR policy?

For the last twenty-five years, I have tried to interest my consortium clients in addressing this issue head on, and have virtually never been successful in persuading them to even incrementally add to the definition of what FRAND should mean. To be fair, such a definition would likely never be able to resolve all sources of disagreement. But it could considerably decrease the likelihood of disputes arising, and it could also narrow the areas of contention if war erupts nonetheless.

Currently, I am unaware of any action being taken in this area. This seems quite unusual, given that quite a few standards organizations and committees in other organizations (e.g., the American Bar Association) are now discussing how an arbitration clause in an IPR policy could best be drafted, and then implemented in the marketplace. And it also seems strange that companies are content to allow courts to come up with, almost inevitably, a variety of different rule sets which may take many years to coalesce into a definition that industry could then use as a consistent guide.

Personally, I believe that there is an obvious need for the marketplace to reach consensus on a definition – or definitions – of FRAND that any given standards organization could add into its IPR policy. These definitions could also include, or reference, specific valuation methods taken from a list developed for that purpose (Judge Robart’s methodology providing an appropriate first entry on such a list). Where a standards organization decides to follow this path, its members could debate which formulation of FRAND and mechanism they wish to use, just as they already energetically spar with great energy in the case of other significant terms. In this way, they would get the results that they agree upon, rather than one that some future judge ultimately deems in retrospect to be most appropriate.

The result would seem to be a win-win for all concerned. Licensors and licensees could come to terms faster, and with far less likelihood of ending up in court instead. Moreover, they would be freed of replacing one long, expensive process (legal action) with another process than be almost as long and expensive, at least in its first act (arbitration). The burden of courts could also be largely eliminated.

And everyone could get back to the important work of developing the hundreds (and even thousands) of new standards that are needed each year in order to allow new products and services to reach the market, to permit the benefits of technology to reach farther and faster into the Third World, and for more and better jobs to be created.

I’d like that.  Wouldn’t you?

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