Microsoft, Google to do battle over patent royalty rates

A U.S. judge will decide on a fair royalty rate for Motorola's patents, which could have implications for other cases

Microsoft and Motorola Mobility will face off in court on Tuesday for the start of a patent trial that could help establish how royalty rates are calculated for standards-essential patents.

Microsoft sued Motorola's smartphone division, which is now part of Google, two years ago, claiming it demanded an unreasonable royalty rate for the use of its patents related to the 802.11 wireless and H.264 video standards.

Standards are important because they can lead to lower costs, by increasing manufacturing volumes, and increase competition, by making it easier for consumers to switch to a rival company's product.

But companies often own technology patents related to industry standards, complicating their implementation. To ease matters, patent holders agree to license these essential patents on "fair, reasonable and nondiscriminatory terms," which is what Motorola committed itself to do with the patents in this case, court records show.

Motorola now wants too much money for the use of the patents, Microsoft says. Motorola wants Microsoft to pay 2.25 percent of the price for each product that implements the standards, including its Xbox 360 game console and Windows OS.

Microsoft says that's far too much. For the 802.11 patents, for example, it says it should pay only $0.05 on each product it sells. It cites several arguments, including one based on a "stacking" theory, which says that if every company contributing patents charged as much as Motorola, the standard would be too expensive to use.

Since Microsoft and Motorola can't reach agreement, Judge James Robart, of the U.S. District Court in Seattle, has decided he has no choice but to step in and determine a royalty rate for them.

The trial will be in two parts. In the first, Robart will calculate a royalty rate for Motorola's patents. He'll make that decision on his own, without a jury. In the second part, expected to begin next week, a jury will use that rate to decide whether Motorola is in breach of contract by overcharging Microsoft.

It won't be the first time a judge has determined a FRAND royalty rate for patents, said Mark McKenna, a law professor at Notre Dame Law School. But Robart's decision nevertheless could set a precedent, both in a narrow sense and potentially in a broader sense too.

In the narrow sense, his decision will establish a royalty rate for Motorola's standards-essential patents that could be applied to other cases involving the same technology. For example, the 802.11 patents were part of a case that was dismissed last week between Motorola and Apple.

If the court orders Motorola to license the patents at a particular rate, Motorola should then turn to Apple and offer them the same rate, McKenna said. "Apple can then take or leave it."

In a broader sense, the case could establish a methodology for calculating royalty rates for standards-essential patents, which could then be used in other cases. That's less certain, however, since individual cases differ, in terms of the number of patent holders involved and the relative contribution of any one company's patents.

It's not clear that judges are in the best position to set royalty rates, particularly because they're often not experts in the area of technology involved. But standards bodies aren't necessarily the best choice, either.

"There are concerns that standards bodies tend to be dominated by the parties who hold the most standards-essential patents," McKenna said.

Google inherited this lawsuit when it bought Motorola Mobility last year, and a Google spokeswoman said the company declined to comment on it. Microsoft called it "an important issue for consumers and industry" and said it was glad of the chance to present its case.

In trial briefs filed last week, each company advances its own method for calculating the royalties. Motorola advocates for a "hypothetical license," or figuring out how much Microsoft would have had to pay if the companies had sat down to make a deal two years ago.

Microsoft prefers to look at royalty rates established by companies in other patent pools, such as the one established for the MPEG LA standard.

The outcome is unlikely to affect the prices consumers pay for Microsoft's products, said David Mixon, a partner with the law firm Bradley Arant Boult Cummings, which is not a party in the case. Even if Motorola were to score a big win, Microsoft probably would absorb the extra costs rather than pass them onto consumers, he said, given the price-sensitive markets it plays in.

Mixon doesn't think a big win for Motorola is likely, however. Using its hypothetical license theory probably would lead to an unfair royalty rate that would make the standards too costly to implement, he said.

"I imagine they'll settle on something closer to what Microsoft is advocating, but probably at a slightly higher rate than Microsoft is offering," Mixon said.

James Niccolai covers data centers and general technology news for IDG News Service. Follow James on Twitter at @jniccolai. James's e-mail address is james_niccolai@idg.com

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