Tomorrow, the Ninth Circuit will hear oral argument in Motorola’s appeal of Judge Robart’s RAND royalty rate determination as well as the jury verdict that Motorola breached its alleged RAND obligations to license its patents to Microsoft on RAND terms. Motorola also challenges whether the Ninth Circuit has jurisdiction over the appeal, arguing that exclusive jurisdiction lies in the Federal Circuit.
Below is a summary of the background of the dispute, the parties’ positions on appeal as well as those of several parties appearing as amicus curiae.
Motorola holds several patents on wireless Internet communications (“WiFi”) and video coding technologies that it declared essential to standards set by two standards-setting organizations: the International Telecommunications Union (ITU) H.264 standard governing video coding and the Institute of Electrical and Electronics Engineers (IEEE) 802.11 standard governing WiFi communications. It is undisputed that Motorola committed to license these patents on reasonable and non-discriminatory (RAND) terms by way of letters of assurance to ITU and IEEE.
On October 1, 2010, Microsoft sued Motorola in the International Trade Commission (ITC) alleging that Motorola’s smartphones infringed certain of Microsoft’s patents and also seeking an exclusion order barring Motorola’s importation from same. The same day, Microsoft sued Motorola for patent infringement in the Western District of Washington.
Prior to those suits being filed, Microsoft and Motorola had discussed a potential cross-license of certain of their patents considering the expiration of Motorola’s license to certain of Microsoft’s other patents. After Microsoft filed the lawsuits against Motorola, Microsoft again raised the possibility of a cross-license agreement. The parties scheduled a meeting for October 22, 2010 to resume cross-license discussions.
On October 21, 2010, the day before the meeting, Motorola sent Microsoft a letter offering to grant Microsoft a worldwide license to Motorola’s portfolio of alleged standard essential 802.11 patents at the rate of 2.25% per unit for each 802.11 compliant product subject to a grant back license under Microsoft’s 802.11 essential patents. On October 29, 2010, Motorola sent Microsoft a second letter offering a worldwide license to Motorola’s alleged standard essential H.264 patents under the same terms. In both letters, Motorola stated that “[i]f Microsoft is only interested in licensing some portion of [Motorola’s] portfolio, Motorola is willing to enter into such a license, also on RAND terms.” Motorola also requested in each letter that Microsoft respond within twenty (20) days.
Microsoft did not respond to either letter. On November 9, 2010, Microsoft filed the subject suit against Motorola in the Western District of Washington alleging that Motorola’s offered license rate on its alleged 802.11 and H.264 SEPs breached its obligations to ITU and IEEE to license such patents on RAND terms. Motorola then sued Microsoft in the Western District of Wisconsin alleging infringement of those same patents. The Western District of Wisconsin transferred Motorola’s action to the Western District of Washington, which then consolidated Motorola’s infringement claims with Microsoft’s contract-based action before Judge Robart.
In July of 2011, Motorola filed an action in Germany alleging that Microsoft’s Xbox and Windows infringe Motorola’s German patents essential to the H.264 standard. Motorola ultimately obtained an injunction against Microsoft from the German court prohibiting Xbox sales in that country. The German court granted the injunction after it rejected Microsoft’s assertions regarding Motorola’s obligations to ITU and IEEE. Microsoft then relocated its German distribution center to the Netherlands. Microsoft also sought and obtained an injunction from Judge Robart, which enjoined Motorola from enforcing the German injunction pending a determination of what a RAND royalty rate would be and whether Motorola breached its RAND obligations. Motorola appealed Judge Robart’s preliminary injunction decision to the Ninth Circuit. The Ninth Circuit ruled that it had appellate jurisdiction because Microsoft’s complaint “sounded in contract.” The Ninth Circuit also affirmed the injunction.
Judge Robart bifurcated the case to first hold a bench trial to determine a RAND royalty rate and then hold a jury trial to determine whether Motorola breached its obligations to offer its alleged 802.11 and H.264 SEPs on RAND terms. After the bench trial, Judge Robart issued a first-of-its-kind RAND royalty rate determination. As we previously detailed, Judge Robart set a RAND royalty rate for Motorola’s H.264 SEP portfolio at .555 cents per unit with a range of .555 cents to 16.389 cents per unit, and a RAND royalty rate for Motorola’s 802.11 SEP portfolio at 3.471 cents per unit, with a range of .8 cents to 19.5 cents per unit.
Thereafter, Judge Robart ruled that the RAND rate determination and related findings could be introduced at the jury trial on whether Motorola breached its obligations to IEEE and ITU. After a one week trial, the jury found that Motorola breached its RAND obligation, including the obligation to license its patents in good faith. Judge Robart then issued a Rule 54(b) final judgment on the RAND rulings and stayed the remainder of the consolidated cases (e.g., Motorola’s infringement claims) pending an appeal. Motorola noted its appeal of the Rule 54(b) RAND judgment to the Federal Circuit, but Microsoft moved to transfer it to the Ninth Circuit, which, as noted above, had previously ruled that it had appellate jurisdiction in the case in affirming Judge Robart’s injunction. The Federal Circuit, without addressing the substantive merits of whether the Federal Circuit or Ninth Circuit had appellate jurisdiction, agreed as a procedural matter in this particular case that the Ninth Circuit had jurisdiction based on the law of the case doctrine that the Ninth Circuit’s prior ruling of jurisdiction in the case controlled in this particular case. The case was transferred to the Ninth Circuit.
After transfer, the parties and several non-parties appearing as amicus curiae filed briefs, discussed below.
Motorola’s Opening Brief.
Jurisdiction. In its opening brief, Motorola first argues that the Ninth Circuit cannot hear the appeal because jurisdiction “lies exclusively in the Federal Circuit,” because the district court transformed the case “into one necessarily involving resolution of substantial issues of patent law” after the Ninth Circuit affirmed Judge Robart’s injunction. While the Ninth Circuit “plausibly had appellate jurisdiction over the earlier interlocutory appeal form the anti-suit injunction in this case,” Motorola argues that “the current appeal requires transfer to the Federal Circuit” because Microsoft’s right to relief “‘necessarily depends on resolution of a substantial question of federal patent law, in that patent law is a necessary element of one of [Microsoft’s] well-pleaded claims.’” Specifically, Motorola argues that “by determining that it could set a RAND rate determined at a bench trial,” the district court, “for all intents and purposes,” held a “patent damages trial” which transformed the case into “one requiring the resolution of substantial questions of patent law.” As support, Motorola cites to “technical testimony concerning the essentiality and value of [its] patents, as well as Microsoft’s use of them,” evidence regarding infringement and validity, and “a patent infringement damages analysis” presented to the district court in connection with the RAND bench trial. Motorola argues that “[w]here a contract claim necessarily requires a court to ‘interpret the patents and then determine whether [the product at issue] infringes” the patents, then “‘patent law is a necessary element of [the] breach of contract claim.'” According to Motorola, while the Federal Circuit found the Ninth Circuit’s jurisdictional analysis “plausible” when it transferred the appeal, the Ninth Circuit “should hold that the underpinnings of that ruling no longer apply to the current appeal and transfer” it back to the Federal Circuit.
The RAND Ruling. If the Ninth Circuit concludes that it has jurisdiction, Motorola argues that the district court’s RAND ruling should be vacated. “In deciding to hold a RAND-rate bench trial before the good-faith jury trial, the district court held that it was necessary to determine a ‘true RAND royalty rate’ before the jury could resolve the question of whether Motorola breached its good-faith obligations under its RAND commitments.” According to Microsoft, “[t]hat premise was erroneous and fatally tainted not only the bench trial but also the jury trial that followed.”
Specifically, Motorola contends that “Microsoft’s entire breach case turned on whether Motorola had breached the covenant of good faith and fair dealing implied by its RAND commitments.” “Under Washington contract law, that determination involves a fact-intensive, multi-factored analysis by the finder of fact in which no one factor is a prerequisite and no one fact is dispositive over any other.” According to Motorola, “[t]he district court failed to cite a single precedent in Washington or any other jurisdiction to support the view that an abstract, advisory ‘true’ price is a prerequisite to a factfinder’s determination of good faith concerning a contractual negotiation.” “To the contrary, courts repeatedly reject arguments that a party has breached good faith in a contractual negotiation by offering a higher or lower price than is consistent with an abstract ‘true’ price.”
Motorola argues that since the RAND ruling itself is not a “prerequisite to determining Motorola’s liability for” breach, the ruling is an impermissible advisory opinion. This, according to Motorola, is especially so given that “Microsoft’s complaint sought only declaratory relief and damages for Motorola’s supposed breach of its RAND commitments and injunctive relief against Motorola enforcing its SEPs.” “Microsoft’s complaint never, even as amended, sought specific performance or a court-ordered license on RAND terms.”
Motorola contends that the Western District of Washington’s decision in Apple v. Motorola demonstrates that the RAND ruling is advisory. In Apple, the court “dismissed the case as seeking an impermissible advisory opinion where Apple sought to have the court determine a RAND rate but refused to commit to take a license at that rate.” According to Motorola, “Microsoft never included a request for specific performance or a license in its complaint,” and, therefore, “the court’s determination of a RAND rate was similarly advisory.”
In the alternative, Motorola argues that “[e]ven assuming that Microsoft [was] deemed to have constructively amended its complaint to seek a license at a RAND rate set by the court, mere establishment of such a rate would still be advisory as to any license remedy.” “SEP commitments to SSOs are not simply licenses with missing price terms, like a form lease agreement with a blank for the monthly rental amount.” According to Motorola:
[t]o the contrary, patent licenses arrived at between sophisticated technology companies through bilateral negotiations—including licenses involving SEPs—are complicated endeavors with myriad variables, including duration, cross-licenses, geographical and product scope, royalty caps, carve-outs, and other material terms apart from royalty rate. For just that reason, the SSO policies concerning the RAND commitments at issue here state that ‘[t]he detailed arrangements arising from patents (licensing, royalties, etc.,) are left to the parties concerned, as these arrangements might differ from case to case.’ The royalty rate resulting from such complex licensing negotiations depends upon the cross-license, duration, scope, cap, and other non-price terms. The district court’s treatment of the RAND rate as an independent, exogenous variable was therefore error, and the RAND Order is impermissibly advisory.
Assuming that the RAND ruling is not advisory, Motorola argues that the RAND rate set by the district court should be vacated on the merits because it is contrary to “governing Federal Circuit law.” First, Motorola contends that the district court failed to set a date for the hypothetical negotiation it relied upon in reaching the RAND rate. According to Microsoft, “[t]he district court purported to follow Federal Circuit patent damages law, relying upon the ‘hypothetical negotiation’ method of calculating such a royalty.” “Under this framework, however, ‘[t]he key element in setting a reasonable royalty after determination of infringement and validity is the necessity for return to the date when the infringement began.’” Motorola argues that, because the district court did not set a date for the hypothetical negotiation it used as a basis for the RAND rate, the RAND ruling should be vacated.
Motorola next argues that the RAND ruling relies on “speculative inferences from non-comparable pool rates.” Specifically, Motorola contends that the district court erred “in using, as its chief benchmark for the RAND rate the parties would supposedly set in a hypothetical negotiation, the royalty structure of two patent pools involving a subset of industry members—the MPEGLA pool for video streaming and the Via Licensing pool for WiFi.” “Neither pool includes the Motorola patents at issue here.” Motorola contends that “[w]hile patent pools might in some circumstances provide relevant data for a hypothetical SEP licensing negotiation,” the district court purportedly “failed to identify any basis in the bench trial record for treating the two pools used here as a proper basis for comparison in describing a license that would have resulted from a hypothetical bilateral negotiation between Microsoft and Motorola in 2010.”
Motorola contends further that the district court improperly set aside “as irrelevant actual licenses that Motorola had historically entered into for its SEPs, reasoning that they had arisen from settlement negotiations.” “Under patent damages law, ‘[a]ctual licenses to the patented technology are highly probative as to what constitutes a reasonable royalty for those patent rights because such actual licenses most clearly reflect the economic value of the patented technology in the marketplace.’” According to Motorola, “litigation settlements can be ‘the most reliable license’ to evaluate and should be considered as part of any damages analysis.”
As further support for its argument that the district court failed to credit Motorola’s historical licensing activities, Motorola cites to the Federal Circuit’s ruling in Apple v. Motorola, which involved Apple’s alleged infringement of one of Motorola’s cell phone patents, arguing:
the Federal Circuit recognized the industry practice of broad crosslicensing of entire portfolios, and acknowledged Motorola’s expert testimony that Motorola’s cross-licenses ‘show that Motorola has previously received a royalty rate of approximately 2.25% for a license to its entire SEP portfolio.’ The Federal Circuit held that the district court’s exclusion of such testimony was error because the expert there ‘construct[ed] a cost estimate typically relied upon when calculating patent damages—the cost to license the technology.’ This approach is generally reliable because the royalty that a similarly-situated party pays inherently accounts for market conditions at the time of the hypothetical negotiation. The Federal Circuit noted that ‘Apple’s royalties under these agreements were in a similar range.’ Moreover, ‘[t]hese licenses also typically included cross-license agreements,’ a factor the district court here explicitly refused to consider.
For these reasons, Motorola contends that the RAND order is erroneous and that the judgment of breach based on it should be reversed or, at a minimum, vacated “because fatally tainted by it.”
Jury Verdict. Motorola contends that no reasonable jury could find that it breached an alleged obligation of good faith to license its patents on RAND terms to Microsoft. “The unrebutted evidence shows that Motorola made its standard opening offer to Microsoft in order to begin a negotiation … and that Microsoft does not accept the opening offer ‘99 percent of the time.’” Motorola indicated that it was open to licensing only part of its portfolio and Microsoft itself has included a 20-day limit in its offer letters.
Motorola argues further that “[e]ven assuming that the purpose of the RAND commitment is to prevent hold-up, Microsoft’s expert could not opine on whether Motorola’s opening offers intended to hold up Microsoft, given that Microsoft was infringing Motorola’s patents and continued its unlicensed use.”
Motorola points to the district court’s holding that “an opening offer from an SEP holder does not need to be on RAND terms.” Therefore, according to Motorola, even if its opening rate was deemed to be “high,” that, by itself, is not sufficient evidence to show that it breached. “Moreover, a rate is only one term in a complex negotiation in which other terms (such as cross-licenses, scope definitions and volume-based caps) can make any given rate more or less RAND.” Thus, according to Motorola, “the opening rate set forth in Motorola’s letters, in the abstract, cannot be commercially unreasonable as a matter of law.”
At trial, Microsoft contended that Motorola breached its obligations of good faith by seeking injunctive relief against Microsoft for alleged patent infringement. On appeal, Motorola contends that “the record fails to support any reasonable conclusion that Motorola acted in bad faith by seeking injunctive relief.” “As the district court acknowledged, the RAND commitments at issue do not contractually bar SEP holders from seeking injunctive relief, and the undisputed evidence at trial showed that Microsoft sued Motorola three times before Motorola began to seek injunctive relief against Microsoft.” “On this record, Motorola’s actions seeking injunctive relief for Microsoft’s continued unlicensed use of its patents cannot plausibly be found to violate the reasonable expectations of the parties, to be commercially unreasonable, to depart from industry custom and practice, or to evince subjective bad faith.”
Damages. Finally, Motorola argues it was entitled to judgment as a matter of law on Microsoft’s damages claims. “The $14.52 million damages judgment consists of $11.49 million in damages for Microsoft’s costs to relocate its German distribution facility to the Netherlands after Motorola sought to enjoin xBox sales in Germany and $3.03 million in attorneys’ fees Microsoft incurred as a result of Motorola’s “conduct in seeking injunctive relief.” Motorola contends that, under the Noerr-Pennington doctrine, which generally insulates a party from damages as a result of invoking its legal rights in court, it cannot be held responsible for the $11.49 million re-location costs. Further, Motorola argues that, since Washington law does not allow attorneys’ fees as damages, the inclusion of them in the damage award must be vacated.
Microsoft’s Response Brief
Jurisdiction. In its response brief, Microsoft argues that, as the Ninth Circuit previously concluded, jurisdiction is proper and that decision is the law of the case. “In asking this Court to come to a different conclusion, Motorola does not contend that Microsoft asserted a patent claim, nor does it deny that Microsoft sued for breach of contract.” “Instead, Motorola asserts that the district court (not Microsoft) ‘constructively’ (not actually) amended Microsoft’s complaint such that the bench trial was ‘for all intents and purposes’ a patent damages trial ‘requiring the resolution of substantial questions of patent law.’” According to Microsoft, “[t]his is both factually wrong and legally irrelevant.”
First, “[t]he district court did not determine damages for patent infringement.” According to Microsoft, “the court considered the value of Motorola’s patented technology to the extent relevant to the breach of contract claim.” “But that did not convert the contractual RAND royalty analysis into a determination of infringement damages under 35 U.S.C. § 284.” “As the court explained, any analysis ‘under a RAND obligation must be different than the typical [hypothetical negotiation] analysis historically conducted by courts in a patent infringement action.’” “The use of a hypothetical negotiation valuation framework is common in contexts beyond patent damages . . . and does not make this a patent case.” “Nor does the valuation of patented technology raise a substantial question of patent law, any more than would a case involving a corporate acquisition in which the price depended on the value of patents.” Microsoft contends that “this case did not require the district court to construe patent claims or address infringement.” Nor was there any dispute that “Microsoft’s products implemented the standards.” The district court “treated Motorola’s patents as essential even though ‘none of the terms comprising the claims” were construed by the district court.
The RAND Ruling. Microsoft contends that Motorola consented to the bench trial procedure to determine the RAND royalty rate. According to Microsoft, “Motorola apparently later regretted its agreement” and attempted to renege. “The district court rejected Motorola’s about-face, observing ‘isn’t it rather late in the game for Motorola to repudiate concessions made during oral argument and announce another new theory in the case?” “As the court carefully analyzed in a ruling before the jury trial, Motorola waived any right to have a jury determine the RAND royalty (or to have the jury decide breach with no such determination at all).”
Microsoft also argues that, waiver aside, Motorola’s argument mischaracterizes the RAND ruling “as dispositive of breach.” As noted above, Motorola argues that the breach analysis is fact-intensive, with no one fact being dispositive. Microsoft responds that the jury was instructed exactly in the manner that Motorola argues on appeal, in that “the size of the offer alone is not exclusively dispositive of whether Motorola has breached its duty of good faith and fair dealing.” Indeed, Microsoft points to the jury instructions’ requirement that “listed objective and subjective grounds to consider in deciding whether a breach occurred.”
Microsoft also argues that the RAND ruling was not an advisory opinion because “Motorola agreed that the court should assess RAND royalties (as terms of the relevant contracts) as a predicate to the jury trial on breach.” “Moreover, prior to the bench trial, Motorola successfully opposed Microsoft’s motion for summary judgment,” arguing that “the evidence (including Motorola’s prior licenses and licensing practices) showed that ‘Motorola’s offer plainly was reasonable.” “Motorola cannot now credibly argue that the court’s evaluation of the evidence it urged the court to evaluate produced an advisory opinion.”
Microsoft further argues that whether it sought specific performance “does not matter” to whether the court’s RAND ruling was advisory. “First, Microsoft’s request for relief was the same at the RAND royalty trial as it was months earlier when Motorola agreed to that procedure.” Second, Microsoft requested a declaration that Motorola’s offer was not on RAND terms, as well as a judicial accounting of RAND royalties for Motorola’s patents. “Each of those claims for relief required determining RAND royalties.”
Microsoft argues further that the alleged “complexity” and number of factors that go into a license negotiation identified by Motorola are irrelevant. “The RAND royalties are key contract terms, and the determination of those royalties informed the resolution of the dispute between the parties.” According to Microsoft, the “complex” terms identified by Motorola are “all subsumed in the RAND licensing commitment.” For example, the duration of any RAND license is the life of the patent. Cross-license considerations are “irrelevant” because standard-essential patents have value independent of the value of other standard-essential patents: “cross-licensing could affect the form, but not the value, of RAND compensation.” Moreover, according to Microsoft, RAND obligations bar “Motorola from varying royalties based on what patents a licensee holds.” For these reasons, Microsoft argues that the district court’s RAND ruling was not advisory.
On the merits, Microsoft first argues that, by making RAND licensing commitments, Motorola “waived any entitlement to ordinary patent damages for infringement, and agreed it would seek and accept only RAND royalties from any standard implementer.” Further, the district court, according to Microsoft, “did not simply adopt Federal Circuit damages law; rather, at Motorola’s urging, the court used a ‘modified form of the well-known Georgia-Pacific hypothetical negotiation.'” “Motorola’s complaints on appeal ignore what Motorola asked, and did not ask, the district court to do.”
With respect to Motorola’s claim that the district court failed to select the “correct date for the hypothetical negotiation,” Microsoft argues that “Motorola offers no reason why that inquiry would be required in this contract case” and, further, “Motorola itself never proposed a specific date,” and cannot now complain on appeal. “The court (consistent with the approach Motorola urged) considered a hypothetical negotiation in light of the RAND commitment–which includes the principle of not discriminating against any implementer at any time–and the evidence presented at trial.”
With respect to Motorola’s attack on the licensing pools relied upon the district court, Microsoft argues that Motorola ignores the record evidence. “Motorola ignores the court’s basis for concluding that H.264 pool royalties were probative of RAND royalties: Motorola participated in the formation of that pool; Motorola argued for lower royalties in that context; and Motorola approved press releases announcing the pool’s licensing terms.” “Motorola did not object to the pool’s licensing model, which treated all standard-essential patents as equal when allocating royalties–a model adopted by other pools in which Motorola already participated.” “Despite Motorola’s last-minute withdrawal from the pool, … the court had ample basis to conclude that the pool royalties informed a RAND royalty.”
Microsoft argues further that “Motorola’s claim that there ‘was no evidence’ about the relative value or technical comparability of Motorola’s patents to those in the pools” ignores the record. The patents “are indisputably comparable in a key respect: all were declared essential to the same technical standards.”
Further, according to Microsoft, “the court did not simply apply the pool royalty to Motorola’s H.264 patents; it found that the RAND royalty for Motorola’s patents was substantially higher.” As Microsoft argued:
Despite finding the pool royalty of 0.185 cents per unit a strong indicator of a RAND royalty for Motorola’s H.264 patents, the court noted Motorola would receive that amount only if it were a pool participant–and because it was not a participant, the court presumed Motorola was not receiving value back from the pool (in the form of licenses to other members’ patents). … To compensate, the court set the RAND royalties for Motorola’s patents at three times what Motorola would have received as a pool participant.
Microsoft argues that Motorola had an opportunity to argue for an even greater increase over the pool royalty, but instead argued that the pool royalty should “be rejected out-of-hand.”
With respect to Motorola’s 802.11 RAND obligations, Microsoft argues that the district court considered evidence “independent of the 6-cent-per-unit royalty suggested by the Via pool.” “The court considered evidence concerning licensing in the 802.11 industry, which suggested a RAND royalty of 3-4 cents.” The district court also considered evidence (Motorola’s InteCap valuation) suggesting “even lower RAND royalties of 0.8 to 1.6 cents per unit.” In the end, according to Microsoft, the district court took the average of these indicators, the Via pool royalty that “Motorola wishes to discard being the most favorable to Motorola.”
Jury Verdict. Microsoft argues that Motorola only challenges the jury verdict on whether it breached its duty of good faith and dealing. “Contrary to Motorola’s assertion, … Microsoft also alleged that Motorola breached the contract directly, and the jury was instructed on direct breach.” As “Motorola did not move for [judgment as a matter of law] on this ground (and does not argue here),” the Ninth Circuit “cannot review the sufficiency of the evidence supporting a finding of direct breach.” According to Microsoft, the judgement should be affirmed on this ground alone.
Even if review were available, Microsoft argues that the evidence supported a finding of breach of the duty of good faith. “The jury saw Motorola’s multi-billion-dollar demands, … and heard that Motorola maintained its demand for 2.25% royalties as late as December 2012, … while still pursuing injunctions.” This, according to Microsoft, violated Motorola’s RAND obligations.
Microsoft also argues that Motorola’s offer letters breached its duty of good faith and fair dealing. The initial letters “were not opening offers, but by their terms demands open for just 20 days that sought Microsoft’s confirmation of acceptance.” “[T]he jury was instructed (without objection) that Microsoft had no obligation to negotiate in response to Motorola’s demands.”
Microsoft argues further that “Motorola’s demands failed to account for the dozens of other” holders of patents essential to the standards at issue. “If those entities each demanded 2.25%, as Motorola did, the aggregate royalties would far exceed the prices of standard-compliant products.” Because the district court found that Motorola’s patents “reflect only minimal contributions” to the standards, “the aggregate royalty burden suggested by Motorola’s demands is even more unreasonable–especially because Microsoft’s products comply with many other standards.”
With respect to Motorola’s requests for injunctive relief, Microsoft argues that its own patent infringement cases against Motorola regarding unrelated patents are irrelevant. “Motorola blames Microsoft for asserting unrelated patents against Motorola in earlier litigation…but that has nothing to do with whether Motorola’s conduct breached its RAND licensing commitments.” Microsoft also argues that its products were “unlicensed” because of Motorola’s refusal to grant RAND licenses, thus negating Motorola’s argument that Microsoft’s alleged “continued unlicensed use of Motorola’s patents” justified injunctive relief.
Damages. According to Microsoft, “Motorola cites no authority suggesting that Noerr-Pennington could immunize it from breach of contract liability for seeking injunctions on standard-essential patents.” Microsoft contends that the only other court to address this issue, the Western District of Wisconsin, in its ruling in Apple v. Motorola, held that Noerr-Pennington does not apply. Further, outside “of the RAND licensing context, courts have ruled that the ‘Noerr-Pennington doctrine does not shield [parties] from liability for failing to comply with [a] contract.'” Even if Noerr-Pennington applied, Microsoft argues that Motorola would still be liable under the “sham litigation” exception for filing suits that were not reasonably calculated to lead to a favorable outcome.
Microsoft argues further that the costs of relocation of its German facility and defense of Motorola’s injunctive actions are recoverable damages under Washington law. “The damages awarded were not fees incurred in this contract action, but those incurred in defense of injunctions Motorola sought.” Under Washington law, Microsoft contends that “[t]hose fees were foreseeable and flow directly from Motorola’s breach.” “Motorola is not free to impose litigation harms without facing consequences.”
Motorola’s Reply Brief.
Jurisdiction. After Microsoft submitted its response brief, the Federal Circuit issued its opinion in Ericsson v. D-Link Sys. Motorola cites this opinion in its reply brief in response to Microsoft’s argument that the district court did not conduct a patent damages analysis and that patent damages law does not apply to Microsoft’s contact claim. According to Motorola, Ericsson v. D-Link forecloses this argument because the Federal Circuit ruled therein that “‘[a]s with all patents, the royalty rate for SEPs must be apportioned to the value of the patented invention,” and the district court’s RAND Order “purported to perform this very type of analysis, determining the contribution of Motorola’s patents to the standards at issue.” “Such valuation amounts to determining damages for infringing patent use, a determination governed by Federal Circuit law even if the patents are subject to RAND or any other commitment related to the quantum of damages.” Accordingly, Motorola urges transfer of the appeal to the Federal Circuit.
Motorola also contends that it never consented to the bifurcated approach adopted by the district court. “The Seventh Amendment is not a game of ‘gotcha,’ and Microsoft cannot rely on one statement [at a status conference] to show Motorola’s consent when all of Motorola’s subsequent statements and actions showed otherwise.”
The RAND Ruling. With respect to its advisory opinion argument, Motorola contends that “Microsoft does not assert that the RAND Order finally determined any dispute between the parties but instead suggests . . . that the RAND Order was not advisory because royalty rates were relevant to the determination whether Motorola acted in good faith.” “Microsoft thus suggests that the RAND Order is imporant evidence,” but, according to Motorola, “a federal court is not an expert witness tasked with determining a RAND rate with no use or purpose other than as evidence for us in negotiation or at a” breach trial.
Motorola also argues that “[c]ontrary to Microsoft’s suggestion…, Federal Circuit patent damages law governs all claims involving valuation of patents–even SEPs subject to a RAND commitment.” Motorola again cites Ericsson as support for its argument that it is “‘unwise to create a new set of Georgia-Pacific-like factors for all cases involving RAND-encumbered patents” and that the Federal Circuit standards for patent damages apply in this case. According to Motorola, the district court defied these standards in the RAND ruling. In fact, Motorola contends that “[o]nce the district court adopted the Georgia-Pacific framework to value Motorola’s SEPs by means of a hypothetical-license reasonable royalty, it was requried to apply that framework in accordance with applicable Federal Circuit precedent.”
With respect to the date of the hypothetical negotiation, Motorola contends that “the district court did not state what date it used.” According to Motorola, the earliest date for the hypothetical negotiation applied by the district court is May 2012, the date that Google acquired Motorola. This is because the district court, as Motorola argues, used Google’s participation in the applied patent pools as a comparison for what Motorola may have done in the hypothetical negotiation. Motorola argues that this was error because “Federal Circuit law…requires the analysis to pre-date the circumstances of a lawsuit.”
Motorola next asserts that, “while Microsoft contends … that royalties arising out of settlement of litigation may be not be the best indicator of a reasonable royalty, that position does not support the district court’s disregard for the licenses Motorola entered into evidence during the bench trial.” Those licenses, according to Motorola, “were for the same patents at issue in this lawsuit and thus had direct probative value.”
With respect to the MPEGLA and Via patent pools considered by the district court, Motorola argues that “[t]here is no evidence that the pool rates at issue here correspond to a license fee arrived at after the bilateral negotiation contemplated by the [SSOs]; they result rather from particular business arrangements that do not distinguish among patents based on technical merit.” “Microsoft fails to show any patent-law precedent that would allow comparable valuation based on a supposed alignment between pool purposes and a RAND commitment to bilateral negotiation.
Finally, Motorola argues that Microsoft cites to no evidence showing that the pool rates “used by the district court have probative value.” Nor does Microsoft attempt to justify the algorithm used by the district court to arrive at the RAND ranges which, according to Motorola, “no expert advocated.”
Jury verdict. Motorola argues that Microsoft cannot rely on a straight breach theory to sustain the jury’s verdict since Microsoft “did not even introduce the SSO contracts in its affirmative defense” and because the district court found, prior to the jury trial, that “Microsoft could not prove direct breach of the RAND commitment.” According to Motorola, that decision is the law of the case. Because Microsoft did not cross-appeal that ruling, “it may not argue now that the evidence supports a finding of direct contract breach based on Motorola’s offer letters and pursuit of injunctions.”
Motorola argues further that “Microsoft cites no case finding breach of good faith based upon an opening offer alone–the sole basis for the initial complaint here.” Nor does Microsoft “cite any case finding breach of a RAND commitment based on an initial offer plus pursuit of injunctions after the suit was filed–as pleaded in the amended complaint.” “The evidence concerning the opening offers and the injunction requests, separately or together, is insufficient to support liability for breach of good faith.” Motorola’s initial offers were consistent with its ordinary practice to offer a license at 2.25 percent of the end unit. Motorola contends further that the evidence showed that Microsoft rejects any initial offer 99% percent of the time. This, according to Motorola, cannot constitute bad faith.
With respect to Motorola’s requests for injunctive relief, Motorola argues that the undisputed evidence, including Microsoft’s representation to the FTC that it was not aware of any instance in which a party had attempted to “extort above-RAND rates,” shows that Motorola was not using its request for injunctive relief to “pressure Microsoft to settle on supra-RAND terms.”
Damages. Motorola argues that Apple v. Motorola, cited by Microsoft, actually supports Motorola’s argument that the Noerr-Pennington doctrine bars Microsoft’s claim for damages:
[W]hile the district court in [Apple v. Motorola] found that Noerr-Pennington did not bar enforcement of the RAND commitment, the court separately held that Apple’s asserted antitrust damages were barred by Noerr-Pennington because predicated solely upon ‘attorney fees and costs that it has incurred responding to the patent litigation initiated by Motorola.’ That holding applies equally to Microsoft’s damages here, which stem solely from Motorola’s protected litigation conduct. There is nothing in its RAND commitments precluding Motorola from seeking redress from the courts for infringement of its SEPs, as the district court held…and the Federal Circuit has affirmed.
Motorola argues further that Microsoft failed to show that the sham exception to Noerr-Pennington immunity was triggered here, having purportedly failed to show that Motorola’s claims lacked objective merit.
Finally, Motorola argues that “Microsoft points to no case permitting a party to obtain attorney fees as damages in a separate action when such recovery would not be permitted in the action in which the fees were incurred” and “the district court relied on no such rationale.” “Rather, the district court held that it was required to create a new exception to the American Rule [that each party is responsible for its own attorneys’ fees] despite the fact that Microsoft did not incur the attorney fees in the instant action.” Because, according to Motorola, the RAND commitment is not a covenant not to sue, Microsoft cannot claim as damages any attorney fees it incurred as a result of Motorola’s enforcement of its patents against it.
Microsoft’s Supplemental Submission
After the Federal Circuit issued its decision in Ericsson v. D-Link, Microsoft notified the Ninth Circuit of that decision pursuant to Fed. R. App. P. 28(j). Microsoft argues that “Ericsson is a patent infringement case, in which Ericsson asserted patents subject to contractual RAND licensing commitments, like Motorola’s patents here.” “D-Link argued that the jury was improperly instructed on the impact of those commitments on damages, and the Federal Circuit agreed, holding that” the district court erred by failing to instruct the jury adequately regarding Ericsson’s actual RAND commitment, failing to instruct the jury that any royalty for the patented technology must be apportioned from the value of the standard as a whole, and failing to instruct that the RAND royalty rate must be based on the value of the invention, not any value added by the standardization of that invention–while instructing the jury to consider irrelevant Georgia-Pacific factors. According to Microsoft, Ericsson “declined to adopt a uniform framework for evaluating RAND royalties, instead directing lower courts to ‘consider the facts of record when instructing the jury’ and ‘avoid rote reference to any particular damages formula.'” Microsoft argues that “[t]his refutes Motorola’s suggestion that RAND disputes should be subject to a ‘uniform’ standard.” Further, “[l]ike the district court here, the Federal Circuit found it ‘necessary to ensure that the royalty award is based on the incremental value that the patented invention adds to the product, not any value added by the standardization of that technology.”
Amicus Briefs in Support of Motorola
Nokia. Nokia filed an amicus brief in support of “reversal of the district court’s order to the extent that this order creates a methodology for the determination of a reasonable and non-discriminatory royalty rate in cases involving claims of infringement of standard-essential patents that applies to disputes outside the context of the present case.” According to Nokia, “[i]f the methodology used by the District Court to determine a RAND royalty rate for Motorola’s patents is applied outside the facts of this case, it will have a negative effect on the entire standardization process.” Neither the ITU nor IEEE policies “defines in specific detail what constitutes RAND royalty terms for a license to a patent declared essential to one of its standards.” Rather, the SSOs “instead emphasize the twin goals of the standardization process: ensuring adequate compensation for patent holders while preserving manufacturers’ access to essential patents.” “When determining RAND royalty rates or ranges for standard-essential U.S. patents, the Georgia-Pacific factors may be used to model a hypothetical negotiation between the parties without unduly favoring patent holders or equipment manufacturers.”
While Nokia takes no position on the underlying merits of the dispute, it argues that the modified Georgia-Pacific methodology adopted by the district court “fails to strike the proper balance between the goals of the” SSO policies at issue, “instead setting up a methodology which, if utilized in other cases, could harm the standardization process as a whole, potentially leading to fragmented standards and reduced interoperability among manufacturers.” This is because the district court assumed that royalty stacking and patent hold-up are present without requiring empirical evidence demonstrating that they actually are present, “while simultaneously ignoring the potential for ‘reverse hold-up.'” Further, Nokia argues that the district court approves an ex ante incremental value methodology for the valuation of standard-essential patents and also rejects proferred comparable licenses. According to Nokia, if the district court’s decision stands and is adopted by other district courts, future patent holders “will likely have reduced incentives to participate in the standardization process, which could have a chilling effect on the entire industry.”
Amicus Briefs in Support of Microsoft
Apple. Several entities filed amicus briefs in support of Microsoft and affirmance. Apple’s brief argues that, to determine the critical question of “what–and how much–is” a RAND rate, Judge Robart “applied several important principles inherent in the [RAND] commitment, and thus critical for resolving [RAND] disputes.” “They are based in the widely recognized precept that ‘a RAND commitment should be interpreted to limit a patent holder to a reasonable royalty on the economic value of its patented technology itself, apart from the value associated with incorporation of the patented technology into the standard’–that is, apart from hold-up value.'” According to Apple, Judge Robart’s analysis prevents implementers of standards from being caught in an alleged “thicket of SEPs” where numerous patent holders over-declare their patents to an industry standard and thereafter attempt to extract royalties from the implementers in an amount that discourages participation in the industry standard process.
Intel, Aruba Networks, Dell, H-P, Newegg, SAS Institute, Sierra Wireless, Vizio, and Xilinx also filed a joint amicus brief in support of Microsoft and affirmance. Collectively, they argue that they “have invested substantial time and resources in developing successful industry standards and implementing industry standards in their products.” “Those investments–and the incentives to make similar investments in the future–are threatened if the binding RAND commitments made during standard-setting can be evaded by patentees.”
According to them, “[t]he district court’s decisions here furthered the important goal of affirming the RAND commitment in two ways.” First, “the district court properly recognized that RAND licenses must be available to all implementers of an industry standard.” Holders of declared SEPs “cannot avoid licensing suppliers of components that provide standardization functionality in favor of licensing suppliers of higher-priced end products in an attempt to capture more than the value of the patented technology or to avoid the doctrine of patent exhaustion.” “Likewise, the district court correctly recognized that seeking injunctive relief is incompatible with the RAND commitment to license.” “The crippling threat of an injunction would allow SEP holders to extract unreasonable royalties from implementers of the standard.”
“Second, the district court properly considered the appropriate factors in setting a RAND royalty rate, including computing a royalty based on the value of the patented invention by:” starting the analysis with the smallest saleable component that implements the standard rather than the end product, focusing only on the contribution of the patent to the component at the time of standardization, and considering aggregate royalty demands that implementers of a standard face from others claiming to own patents essential to the same standard. “Further, the district court correctly excluded evidence of Motorola’s proffered licenses for its RAND-committed patents, as Motorola failed to demonstrate that those licenses reflected the actual value of its patents.”
T-Mobile also filed an amicus brief in support of Microsoft and affirmance. According to T-Mobile, it is “continuously subjected to lawsuits and licensing inquiries seeking compensation for licenses to” SEPs. “Many of these litigation and licensing inquiries come from patent holders that have never actively participated in the various standards bodies and have never offered products in the wireless mobile industry, yet they claim to hold patents that are essential to practicing industry standards.” “They assert these patents with no interest in advancing the policies or work of any standards organization.” Their “sole purpose is revenue generation” and, “[t]o this end, they often try to exploit the widespread adoption of the standards by seeking compensation that far outpaces the reasonable and nondiscriminatory (“RAND”) rate that binds their patents.” T-Mobile argues that the district court’s flexible Georgia-Pacific “framework will provide greater certainty for the marketplace and ensure that SEP owners fulfill their obligation to license at RAND rates” and that adoption of the district court’s methodology “will ensure that manufacturers, consumers, and patent owners will continue to enjoy the benefits of interoperability and widespread adoption of standards.”
Public Knowledge also filed an amicus brief in support of Microsoft and affirmance. Public Knowledge argued that RAND commitments are promises “made to the public, the beneficiary is the public, and the public is charged with enforcing the terms.” Therefore, it is “fully appropriate to interpret” the RAND contract “in view of the public interest.” According to Public Knowledge, that is “precisely what the district court did.” “First, the court considered the problem of patent hold-up, which simply describes a species of monopolistic imbalance of market power that occurs with technology standards.” “Second, it recognized the risk of royalty stacking, a problem of overvaluation of a single patent when that patent is but one of many covering a technology standard.” Public Knowledge argues that patent holdup and royalty stacking “account for significant public interest concerns at play with [RAND] commitments, and it was correct for the district court to account for them.”
Qualcomm’s Brief in Support of Neither Party.
Qualcomm, an SEP holder as well as manufacturer of WiFi chips, does not challenge the district court’s finding on the contributions of Motorola’s patents to the IEEE 802.11 and ITU H.264 standards and products at issue nor the actual rates and ranges the district court established. “Those findings may suggest that the patents at issue had little or no value under any measure.” Rather, Qualcomm identifies what it contends are manifest errors made by the district court in interpreting RAND commitments and devising its methodology that Qualcomm contends requires reversal or, if affirmed, a statement by the Ninth Circuit that the decision is “limited strictly to its facts.”
Qualcomm argues that the intellectual property rights (IPR) policies of IEEE and ITU require RAND terms to advance two equally important goals: “(i) allowing SEP owners to receive adequate compensation for their SEPs; and (ii) providing implementers access to SEPs included in standards.” According to Qualcomm, the district court’s “analysis did not accurately describe or properly balance these two objectives.” “Instead, it focused almost exclusively on the single goal of what it described as facilitating ‘widespread adoption” of standards.” Qualcomm contends that this both misstates the IPR’s policies’ goals of providing standard implementers with access to SEPs as well as ignores the “equally important ‘adequate compensation’ goal altogether.” “Driven by this one-sided view, the District Court improperly modified the Georgia-Pacific analysis…to disconnect its determination of a RAND royalty from the specific contracts at issue and the patent law principles they incorporate.”
Qualcomm also argues that the district court “gave near dispositive weight in interpreting the RAND commitments to theoretical risks of ‘royalty stacking’ and patent ‘hold-up.'” According to Qualcomm, this approach is inconsistent with the RAND commitments and the evidence presented and also “unfairly placed a thumb on the scale in favor of the implementer (and against the innovator).” This approach is also inconsistent with the holdings of other courts (e.g., Ericsson and CSIRO v. Cisco) that have rejected proposals to modify the Georgia-Pacific analysis “based on speculative risks of royalty stacking and hold-up, where there was no evidence that these risks had materialized.”
Based on these arguments, Qualcomm argues that, if the district court’s reasoning and methodology are applied in other cases, there will be “incalculable damage to innovation incentives and standards going forward.” “It would necessarily devalue all SEPs, regardless of the actual value each contributes to the success of the standardized products, and could form the basis for industrial policies that inhibit incentives to innovate and develop successful standards activities.”