Controlling Royalties
California Lawyer

Controlling Royalties

August 2013

Illustration of Phil Foster

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Seattle's U.S. District Judge James L. Robart has drawn the first road map for negotiating patent licenses for technologies used as industry standards. His groundbreaking ruling may send patent trolls scurrying away from standard-setting patents, but it may have the added effect of unleashing a new wave of litigation.

That's partly because the methodology Judge Robart suggests in his 207-page epic, Microsoft Corp. v. Motorola, Inc. (2013 WL 2111217) (W.D. Wash.)), slashes Motorola's royalty claim from $4 billion a year to less than $2 million a year. Many manufacturers are likely to follow Microsoft's lead and try to renegotiate for better terms - and to sue if they fail. But it's also because Robart's new rules for determining reasonable and nondiscriminatory (RAND) royalties leave unanswered whether a patent holder can charge a direct competitor extra.

The dispute between Microsoft and Motorola Mobility (now owned by Google Inc.) centers on standard-essential patents (or SEPs). Imagine if each toaster brand used a different electric plug that required a different adaptor to fit into wall sockets. Manufacturers avert this chaos by adhering strictly to industry guidelines from standard-setting organizations, which lock in promises from SEP patent holders to share the technology at reasonable rates - RAND rates.

Despite these pledges, negotiating RAND royalties has been difficult. Since the 1990s, these must-have patents have fed a flood of infringement claims brought by nonpracticing entities often called patent trolls. Some patent holders have even been accused of staging "holdups" for exorbitant royalties as they try to sweep the value of the standard itself into the value of an SEP.

The Microsoft and Motorola brawl began over royalties for video coding and Wi-Fi technologies that Microsoft uses in its Xbox and other products. Microsoft sued for breach of contract, claiming Motorola violated RAND terms; Motorola responded one day later with an infringement claim, and that part of the case was transferred to Robart. Any appeal of the judge's methodology for negotiating RAND rates must wait until after the trial for Microsoft's breach-of-contract claim, tentatively set for this month.

But Robart did much more than deflate Motorola's royalty demand. Applying a 43-year-old precedent (Georgia-Pacific Corp. v. U.S. Plywood Corp., 318 F. Supp. 1116 (S.D.N.Y. 1970)), which set a 15-factor test for negotiating royalty terms, he adapted those factors to RAND. Robart wrote that RAND rates must promote adoption of a standard technology but also guarantee the patent holder a reasonable return - on the value of the technology alone, not on the fact that it's been elevated to an industry standard. He also took a cleaver to what's known as royalty stacking. When a product uses features protected by many patents, the licensing can become prohibitively expensive. So Robart declared that the number of licenses should be a factor in RAND negotiations.

That stacking analysis is one of the most important parts of Robart's ruling, says Jay Jurata, a partner and antitrust and IP litigator with Orrick, Herrington & Sutcliffe's Washington, D.C., office. Jurata says concern over royalty stacking is particularly relevant to Silicon Valley companies that depend on shared standards.

But don't cry for Motorola and Google. "The loss before Robart notwithstanding, the lawyers inside Motorola and Google know they can take the same decision and use it in dozens of other disputes to their advantage," says Eric Benisek, a litigator with the Lafayette IP boutique Vasquez Benisek & Lindgren. Benisek also says Robart's ruling may make trolls less likely to buy up SEP patents because it dramatically shrinks the royalties at stake.

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